SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Commission File No.: 000-21557
ACI TELECENTRICS, INC.
(Name of Small Business Issuer as specified in its charter)
MINNESOTA 41-1572571
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3100 WEST LAKE STREET, SUITE 300, MINNEAPOLIS, MINNESOTA 55416
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (612) 928-4700
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, no par value per share
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B 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-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $22,943,014.
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of March 22, 2000 was approximately $3,698,406 based upon the
average of the closing bid and asked prices of the Registrant's Common Stock on
such date.
There were 5,767,121 shares of Common Stock, no par value, outstanding as of
March 22, 2000.
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DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference pursuant to Rule 12b-23: Portions of the
Registrant's Proxy Statement for its 2000 Annual Meeting of Shareholders are
incorporated by reference into Items 9, 10, 11 and 12 of Part III, respectively.
Transitional Small Business Disclosure Format (check one). Yes [ ] No [X]
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I N D E X
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Description Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS................................................1
ITEM 2. DESCRIPTION OF PROPERTY................................................3
ITEM 3. LEGAL PROCEEDINGS......................................................3
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................4
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...............5
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................5
ITEM 7. FINANCIAL STATEMENTS..................................................11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..............................................27
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.....................27
ITEM 10. EXECUTIVE COMPENSATION...............................................27
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...........................................................27
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................27
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.....................................28
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
ACI Telecentrics, Inc. (the "Company") was incorporated under the name
Automated Communications, Incorporated under Minnesota law on January 13, 1987
and changed its name to ACI Telecentrics, Inc. on July 26, 1996. The Company
provides telephone based sales and marketing services, broadly defined as
teleservices. As of December 31, 1999, the Company operated 592 outbound
workstations in ten call centers located in Minnesota, North Dakota, South
Dakota, Nebraska, Indiana and California.
Prior to August 1, 1997, the Company had focused primarily on the
telecommunications, publishing and financial services industries. On August 1,
1997, the Company acquired all of the outstanding common stock of Encyclopaedia
Britannica Communications Corporation ("EBCC"), which operated call centers in
Lombard, Illinois and Merrillville, Indiana. With the acquisition of EBCC, the
Company began to offer services to the insurance industry. In the
telecommunications industry, the Company markets long distance and a variety of
network services to the customers of Regional Bell Operating Companies. In the
publishing industry, the Company's telemarketing programs assist newspaper,
magazine, and book publishers in acquiring new subscribers, soliciting
subscription renewals, and cross-selling products. In the financial services
industry, the Company conducts telemarketing projects for banks and financial
services companies in the areas of insurance; credit card customer acquisition,
retention and renewal; credit card enhancement services; account generation and
retention; and customer service. In the insurance industry, the Company markets
specified insurance products for its insurance company clients.
INDUSTRY AND MARKET
The Company believes that the telemarketing sector of marketing
expenditures will continue to grow and that the trend towards outsourcing
telemarketing programs will continue. Many companies choose to use telemarketing
for customer retention, customer service and customer care programs in addition
to the traditional sales programs. The telecommunications and financial services
industries, which ACI already serves, are undergoing deregulation or
consolidation, which provides the Company with additional growth opportunities
as these businesses search for low cost solutions for their marketing, sales and
customer support needs. In 1999, businesses within the telecommunications,
publishing, financial services and insurance industries accounted for most of
the Company's revenues. The industries targeted by the Company and the principal
services provided are described below.
TELECOMMUNICATIONS. The Company entered the telecommunications segment of the
market in 1987. ACI currently provides clients telemarketing services for
network services, long distance, caller ID and enhanced CPE products.
PUBLISHING. ACI provides telemarketing services to publishers, including
subscription renewals, subscription sales, and customer services. The Company's
program managers work closely with publishing clients to develop individually
tailored programs to enhance their marketing and sales efforts.
FINANCIAL SERVICES. The Company entered the financial services segment of the
market in 1988. ACI provides telemarketing services for the credit card and non
credit card financial segments as well as fee-based segments such as membership
clubs. Types of telemarketing services performed for these clients include
customer acquisition, activation and retention, selling of discounted travel and
shopping clubs, debit card acquisition or upgrade, home equity loan lead
generation and pre-approved lines of credit.
INSURANCE. ACI provides insurance companies with a wide range of telemarketing
services, including upgrading current policies, acquiring new customers and
retaining current customers.
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SALES AND MARKETING
ACI's marketing strategy emphasizes customized marketing solutions
tailored to meet the individual client's needs. The Company currently has three
sales directors. The Company attracts clients through its sales force by direct
prospecting by our sales force, encouraging referrals from existing clients who
are satisfied with the Company's quality service and gaining business through
other divisions of companies who are current clients.
PRINCIPAL CUSTOMERS
In 1999, the Company's three largest clients and the percentage of 1999
revenues attributable to such clients were Discover Financial Services, one of
the top credit card issuers in the nation (21.8%), MemberWorks, one of the
nation's largest providers of consumer membership programs (20.0%) and GTE, one
of the nations largest telephone operating companies (16.4%).
COMPETITION
The telemarketing industry is highly competitive, but also continues to
be highly fragmented. The Company competes with both in-house telemarketing
organizations as well as other independent out-source telemarketing operations.
In-house telemarketing organizations provide a variety of services to their
organizations and comprise the majority of the telemarketing industry.
Independent telemarketing organizations range from numerous small,
single-facility operations to large, multi-facility operations such as SITEL
Corporation, APAC Teleservices Inc., TeleSpectrum Worldwide, Inc., and West
Telemarketing Corporation. The Company also competes with other forms of
marketing such as direct mail, television and radio. The Company believes that
the primary competitive factors in the telephone-based marketing industry are
reputation for quality service, marketing results, technological expertise,
price, and the ability to design customized marketing programs which address the
needs of clients. The Company believes that most of its competitors are, like
ACI, highly dependent on a small number of clients for a large percentage of
their business.
GOVERNMENT REGULATION
The telemarketing industry is subject to a significant amount of
federal and state regulation. The federal Telephone Consumer Protection Act of
1991 (the "TCPA") prohibits telemarketers from using automated telephone dialing
equipment to call certain types of telephone numbers, such as hospital emergency
room telephone numbers. In addition, the TCPA prohibits the initiation of
telephone calls to any residential telephone line using an artificial or
prerecorded voice to deliver a message without the prior consent of the called
party. The federal Telemarketing and Consumer Fraud and Abuse Prevention Act of
1994 (the "TCFAPA") broadly authorizes the Federal Trade Commission (the "FTC")
to issue regulations prohibiting misrepresentation in telemarketing sales. In
August 1995, the FTC issued regulations under the TCFAPA which, among other
things, prohibit initiating an outbound telephone call to a person that has
stated that he or she does not wish to receive an outbound call on behalf of the
seller whose goods or services are being offered, prohibit calls at any time
other than between 8:00 a.m. and 9:00 p.m. local time, require a telemarketer to
make certain disclosures to the person receiving the call, and prohibit
misrepresentations regarding the cost, terms, restrictions, or performance of
products or services offered by phone. To the best of the Company's knowledge,
its telemarketing procedures comply with all state and federal rules.
A number of states have enacted or are considering legislation to
regulate telemarketing. For example, telephone sales in certain states cannot be
final unless a written contract is delivered to and signed by the buyer and may
be cancelled within three business days. At least one state provides that
telemarketers may not require payment by credit card, and several other states
impose license or bond requirements upon telemarketers. From time to time bills
are introduced in the U.S. Congress or state legislatures which could further
regulate certain aspects of the telemarketing business. The Company cannot
predict whether any such proposed legislation will become law or what effect
such laws would have on the business of the Company.
Several of the industries served by the Company are subject to varying
degrees of government regulation, particularly the financial services industry.
Clients in these industries are obligated to provide the Company with scripts
for the Company's telemarketers which comply with applicable industry
regulations. Although compliance with these regulations is generally the
responsibility of the Company's clients, the Company could be subject to a
variety of enforcement or private actions for its failure or the failure of its
clients to comply with such regulations as the same
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relate to telemarketing operations. In addition, the Company is required to
employ licensed insurance agents to make sales of insurance products in the
states where such employees are licensed, and the Company is required to be
licensed as an insurance agency in certain states.
PERSONNEL
The Company had approximately 857 full and part time employees as of
December 31, 1999. None of the Company's employees are subject to a collective
bargaining agreement and the Company believes its relationship with its
employees is good.
ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES
The Company's corporate headquarters is located in Minneapolis,
Minnesota in a leased facility consisting of approximately 12,000 square feet of
office space. The lease expires on July 31, 2000.
The Company also leases ten call center facilities in the Midwest and
California. Information related to those call centers is as follows:
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YEAR OPENED/ NUMBER OF
LOCATION ACQUIRED TERM EXPIRES WORKSTATIONS
- -------- ------------ ---- ------- ------------
<S> <C> <C> <C> <C>
Twin Valley, MN 1993 5 yr 8/03 40
Valley City, ND 1995 5 yr 6/00 48
Devils Lake, ND 1996 Month to Month N/A 36
Redfield, SD 1997 5 yr 8/01 48
Pierre, SD 1997 5 yr 4/02 40
Chadron, NE 1997 10 yr 7/07 60
Valentine, NE 1998 10 yr 11/07 32
Ogallala, NE 1998 10 yr 1/08 48
Merrillville, IN 1997 Month to Month N/A 96
Redding, CA 1999 5 yr 8/04 144
---
Total outbound workstations at December 31, 1999 592
===
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is its property the subject of, any
material pending legal proceeding.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders of the
Company during the fourth quarter of 1999.
EXECUTIVE OFFICERS OF THE COMPANY
The name and ages of all of the Company's executive officers and the
positions held by them are listed below.
Name Age Position
---- --- --------
Rick N. Diamond 37 Chairman of the Board, Chief Executive Officer,
Secretary, and Director
Gary B. Cohen 38 President and Director
Dana A. Olson 38 Chief Operating Officer
Lois J. Dirksen 44 Vice President - Sales
Russell E. Jackson 51 Chief Financial Officer
RICK N. DIAMOND is co-founder of the Company and has served as the
Chief Executive Officer and a director of the Company since its inception in
1987. Mr. Diamond holds a B.A. degree from the University of Wisconsin and J.D.
degree from Washington University in St. Louis, Missouri. Prior to and since
founding the Company, he has been active in community and business affairs.
GARY B. COHEN is co-founder of the Company and has served as the
Company's President and as a director since its inception in 1987. Mr. Cohen
holds a B.S. degree from the University of Minnesota. Prior to and since
founding the Company, he has been active in community and business affairs.
DANA A. OLSON joined ACI in September 1990, serving as shift manager
before becoming Operations Manager in April 1991 and Vice President of
Operations in March 1994. Mr. Olson was named Chief Operating Officer June 1,
1998. Mr. Olson attended Mankato State University, majoring in Business
Administration.
LOIS J. DIRKSEN joined ACI as a Vice President in May 1995 and became
Vice President of Sales in August 1996. Prior to joining the Company, Ms.
Dirksen was Vice President of Sales for Rezound International, a publisher of
audio books, from April 1994 to May 1995 and Director of Direct Response for
Minnesota Mutual from March 1990 to April 1994. Ms. Dirksen holds a B.S. degree
in Political Science from Arizona State University.
RUSSELL E. JACKSON joined ACI as Corporate Controller in March 1998.
Mr. Jackson was named Chief Financial Officer in August 1999. Prior to joining
the Company, Mr. Jackson was Chief Financial Officer for Health Outcomes
Management, Inc., a developer and supplier of computer software and services for
healthcare providers. Mr. Jackson is a graduate of National American University
and holds a Bachelor of Arts degree in Accounting.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since June 11, 1999, the Company's Common Stock has been traded on the
over the counter markets of the National Association of Securities Dealer's
Electronic Bulletin Board under the symbol ACIT. On June 10, 1999, Nasdaq
informed the Company that it was being delisted from the Nasdaq SmallCap Market
where the Company's Common Stock had been traded since October 21, 1996. Prior
to October 21, 1996, the Company's Common Stock was not publicly traded. The
following table sets forth the high and low bid prices for the Company's Common
Stock as reported by OTC Bulletin Board and Nasdaq. The bid quotations represent
interdealer prices without retail mark-ups, mark-downs or commissions and may
not necessarily represent actual transactions.
Year Ended December 31, 1999 High Low
- ---------------------------- ---- ---
First Quarter $1.31 $0.50
Second Quarter 2.00 0.69
Third Quarter 1.12 0.62
Fourth Quarter 1.00 0.75
Year Ended December 31, 1998 High Low
- ---------------------------- ---- ---
First Quarter $3.13 $2.06
Second Quarter 2.38 0.50
Third Quarter 1.38 0.25
Fourth Quarter 0.59 0.25
On March 22, 2000, the fair market value of the Company's Common Stock
was $13,610,406 based on the average of the closing bid and asked prices on that
date. As of March 22, 2000, the Company had approximately 148 shareholders of
record. The Company estimates that an additional 420 stockholders own stock held
for their accounts at brokerage firms and financial institutions (commonly known
as "in street name").
The Company has not paid cash dividends on its Common Stock since its
initial public offering of stock. The Board of Directors presently intends to
retain earnings for use in the Company's business and does not anticipate paying
cash dividends on Common Stock in the foreseeable future. Any future
determinations as to the payment of dividends will depend on the financial
condition of the Company and such other factors as are deemed relevant by the
Board of Directors. The Company's bank line of credit prohibits the payment of
cash dividends without the bank's consent.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
ACI provides telephone-based sales and marketing services primarily to
the telecommunications, publishing, insurance and financial services industries.
The Company operates ten call centers in five Midwest states and California,
which as of December 31, 1999 had 592 outbound calling workstations. The Company
had approximately 857 full and part-time employees as of December 31, 1999.
Revenues from telemarketing services are recognized as these services
are performed and are generally based on an hourly rate. Certain telemarketing
service revenues are performance based. Cost of services includes compensation
and commissions for telephone sales representatives, payroll taxes and other
benefits associated with such personnel, telephone expenses and other direct
costs associated with providing services to customers. Selling,
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general and administrative expenses include administrative, sales, marketing,
occupancy, depreciation and other indirect costs.
RESULTS OF OPERATIONS
The following table sets forth items from the Company's Statements of
Operations as percentages of net revenue:
YEARS ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Net telemarketing revenue 100.0% 100.0% 100.0%
Cost of services 59.0 55.8 55.0
Selling, general and administrative expenses 37.0 53.3 47.3
Restructuring costs -- 0.4 2.5
Operating income (loss) 4.0 (9.5) (4.8)
Other income (expense) (0.4) (0.2) 1.1
Income (loss) before income taxes 3.6 (9.7) (3.7)
Income tax expense (benefit) 1.3 (3.7) (1.4)
Net income (loss) 2.3 (6.0) (2.3)
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUE. Revenues for the year ended December 31, 1999, were
$22,943,014, an increase of $7,907,492 or 52.6% when compared to 1998 revenues
of $15,035,522. The Company derived 8.8% of its 1999 revenues from outsourcing
compared to 7.2% in 1998.
Financial services clients provided 50.9% of total 1999 revenue
compared to 16.5% of revenues during 1998. Other industry segments for 1999
included telecommunications (22.2%), publishing (14.3%) and insurance (11.2%).
During 1999, the Company's largest client represented 21.8% of total revenue.
During 1998, the Company's largest client represented 19.1% of total revenue.
In 1999, billable telemarketing hours increased 57.4% when compared to
1998, however, net revenue per billable telemarketing hour decreased by 1.9%.
During 1999, the Company opened one call center in Redding, California. As of
December 31, 1999, the Company operated 592 outbound call center workstations
compared to 482 outbound call center workstations at December 31, 1998.
COST OF SERVICES. Cost of services increased 61.2% to $13,536,871 in
1999 from $8,395,597 in 1998. The increase in the cost of services percentage is
primarily attributable to the increase in telemarketing service representative
("TSR") labor and benefit costs. As a percentage of revenue, TSR labor and
benefit cost increased to 41.2% of revenue in 1999 from 37.4% of revenue in
1998. Outsourcing costs, which are primarily costs associated with the
utilization of other telemarketing companies for telemarketing, increased by
81.7% to $1,605,340 from $883,762. Outsourcing costs increased to 7.0% of total
revenue in 1999 compared to 5.9% in 1998. Outsourced telemarketing services had
a cost of 79.4% compared to 57.0% for internally generated telemarketing. Long
distance telephone costs for telemarketing operations in 1999 increased by 23.7%
to $2,205,787 from $1,782,713, however, as a percentage of total revenue, long
distance telephone costs decreased from 11.9% in 1998 to 9.6% in 1999, primarily
as the result of a rate decrease negotiated with the Company's long distance
carrier, effective August 1, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling general and
administrative expenses for 1999 increased by $476,982, or 6.0% to $8,486,362,
compared to $8,009,380 in 1998. As a percentage of revenue, selling, general,
and administrative expenses decreased to 37.0% in 1999 compared to 53.3% in
1998. The absolute dollar increase in expenses can be attributed to expenses
associated with the opening of a new call center in September 1999, an increase
in personnel costs, approximately $142,000 in year 2000 expenses and
approximately $173,000 of costs related to exploring strategic alternatives.
These increases were partially offset by a decrease in expenses associated with
the closing of the Lombard, Illinois inbound call center in May of 1998.
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OPERATING INCOME (LOSS). As a result of the factors discussed above,
the Company recorded operating income of $919,781 compared to an operating
loss of $1,434,455 in 1998. The Company's closed inbound call center in Lombard,
IL accounted for approximately $356,000 ($221,000 on an after tax basis) of the
1998 operating loss.
OTHER INCOME AND EXPENSES, NET. Other expenses were $83,652 in 1999
compared to $21,516 in 1998. Net interest expense of $77,931 compared to net
interest expense of $20,264 in 1998 was the result of an increase in borrowing
activity under the Company's line of credit, an increase in equipment lease
financing and lower cash investment balances producing lower interest income.
INCOME TAX EXPENSE (BENEFIT). The Company recorded income tax expense
of $309,000 in 1999 compared to an income tax benefit of $550,210 in 1998. The
1999 expense was recorded at 37.0%, which is estimated to be the effective rate
for federal and state taxes verses 37.8%% used in 1998 to record the income tax
benefit.
NET INCOME (LOSS). Net income for 1999 was $527,129, or $.09 per share
on a basic and fully diluted basis compared to a net loss of $905,761 or $.16
per share in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE. Revenues for the year ended December 31, 1998, were
$15,035,522, a decrease of $218,371 or 1.4% when compared to 1997 revenue of
$15,253,893. The Company derived 7.2% of its 1998 revenues from outsourcing
compared to 4.2% in 1997. Revenues for 1998 were adversely impacted by a loss in
volume from the Company's largest client from the prior year. During 1997 this
client represented over $9 million in revenue compared to less than $1 million
in 1998.
Telecommunications clients provided 43.2% of total 1998 revenue
compared to 65.2% of revenues during 1997. Other industry segments for 1998
included publishing (22.2%), insurance (11.2%) and financial services (16.5%).
During 1998, the Company's largest client represented 19.1% of total revenue
compared to 60.8% of total revenue in 1997. This decrease in reliance on any one
client is primarily the result of the Company's effort to diversify its customer
base so that no one client represents more than 20% of total revenue.
In 1998, billable telemarketing hours decreased 7.3% when compared to
1997, however, net revenue per billable telemarketing hour increased by 6.3%
from 1997. During 1998, the Company opened call centers in Valentine and
Ogallala, Nebraska and closed its Lombard, Illinois inbound call center. As of
December 31, 1998, the Company operated 482 outbound call center workstations
compared to 361 outbound and 27 inbound call center workstations at December 31,
1997.
COST OF SERVICES. Cost of services increased 0.1% to $8,395,597 in 1998
from $8,388,921 in 1997. The increase in the cost of services percentage is
primarily attributable to the increase in use of outsourcing services during
1998. Outsourcing costs, which are primarily costs associated with the
utilization of other telemarketing companies for telemarketing, increased by
78.1% to $883,762 from $496,298 and were 5.9% of revenue in 1998 compared to
3.3% in 1997. Outsourced telemarketing services had a cost of 81.5% compared to
53.8% for internally generated telemarketing. Long distance telephone costs for
telemarketing operations in 1998 increased by 4.9% to $1,782,713 from
$1,699,819. These increased costs were partially offset by an 8.2% decline in
telemarketing service representative ("TSR") labor and benefit costs. As a
percentage of revenue, TSR labor and benefit cost decreased from 40.2% of
revenue in 1997 to 37.4% in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling general and
administrative expenses for 1998 increased by $798,092, or 11.1% to $8,009,380,
compared to $7,211,288 in 1997. As a percentage of revenue, selling, general,
and administrative expenses increased to 53.3% in 1998 compared to 47.3% in
1997. Approximately $408,000 or 51.1% of the increase is related to call center
expenses, the majority of which was related to two new call centers opened in
1998 and the full year effect of the Company's Indiana call center acquired
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in August 1997. The balance relates primarily to the effect of increased
personnel costs added during the third and fourth quarters of 1997 which had
full year effect in 1998.
OPERATING LOSS. As a result of the factors discussed above, the Company
experienced an operating loss of $1,434,455 compared to an operating loss of
$734,879 in 1997. The Company's closed inbound call center in Lombard, IL
accounted for approximately $356,000 ($221,000 on an after tax basis) of the
1998 operating loss.
OTHER INCOME AND EXPENSES, NET. Other expenses were $21,516 in 1998
compared to income of $167,834 in 1997. Interest was a net expense amount of
$20,264 compared to a net income amount of $167,834 in 1997. 1997 net interest
income was the result of the earnings from cash raised in the company's initial
public offering ("IPO") in October 1996.
INCOME TAX BENEFIT. The Company recorded an income tax benefit of
$550,210 in 1998 compared to an income tax benefit of $215,500 in 1997. The 1998
benefit was recorded at 38.1%, which is estimated to be the effective rate for
federal and state taxes verses 38.0% in 1997.
NET LOSS. The net loss for 1998 was $905,761, or $.16 per share
compared to $351,545 or $.06 per share in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents of
$199,295 compared to $1,300,681 and $659,042 at December 31, 1998 and 1997,
respectively. Cash used by operating activities was $1,455,757 in 1999 compared
to cash generated by operating activities of $88,010 in 1998 and cash used by
operating activities of $730,130 in 1997. Included in cash used by operating
activities in 1999 is $3,149,942 of changes in working capital components
related to the growth of the Company offset by depreciation and amortization of
$1,098,936 and other non-cash charges of $62,399. Cash provided by operating
activities in 1999 was primarily from net income of $527,129. Cash used by 1998
operating activities primarily include the net loss of $905,761. In 1998, cash
was provided by changes in working capital components of $707,957. Cash flows
used in operating activities in 1997 were accounted for by the net loss of
$351,545 and changes in working capital components of $1,269,483. These were
offset by depreciation and amortization of $696,937 and other non-cash items of
$193,961.
Net cash used by investing activities in 1999 was $261,061 compared to
net cash generated by investing activities of $160,514 in 1998 and net cash used
of $3,578,914 in 1997. The primary use of cash by investing activities in 1999
was expenditures for property and equipment of $307,303 related to opening a new
call center and upgrading calling systems. These expenditures were partially
offset by the proceeds from the sale of assets. The primary source of cash from
investing activities in 1998 was $493,345 in proceeds from previously restricted
investments. During 1998, the proceeds from previously restricted investments
were partially offset by purchases of property and equipment of $355,264. The
primary uses of cash in 1997 were expenditures for property and equipment of
$1,626,180 related to new call centers, upgrading the technology in current call
centers, and the acquisition of fixed assets in the EBCC acquisition totaling
$1,429,845. In addition, $493,345 was escrowed as restricted cash related to the
EBCC acquisition.
Net cash provided by financing activities in 1999 was $615,432,
compared to net cash provided of $393,115 in 1998 and cash used by financing
activities of $37,727 in 1997. Net cash provided by financing activities in 1999
consisted of net borrowings from the revolving line of credit totaling $850,000
plus proceeds of $8,086 from the issuance of common stock in the Employee Stock
Purchase Plan and exercise of stock options. These proceeds were offset by
repayments of long-term debt and capital leases of $242,654 in 1999. Sources of
cash provided by financing activities during 1998 were the receipt of $450,000
of public sector grants, $80,952 proceeds from the sale and leaseback of
property and equipment and $27,299 related to the issuance of common stock in
the Employee Stock Purchase Plan. Proceeds for 1998 were partially offset by
repayments of long-term debt and capital leases of $165,136. Financing
activities in 1997 were limited to $53,010 in repayments of long-term debt
partially offset by $15,283 related to the issuance of common stock in the
Employee Stock Purchase Plan. As a result, net cash and cash equivalents
decreased $1,101,386 in 1999, increased $641,639 in 1998 and decreased
$4,346,771 in 1997.
8
<PAGE>
The Company has historically used cash from operating activities, bank
borrowings, capital leases and public and private sector financing in connection
with the opening of call centers as its primary sources of liquidity. The public
and private sector (grants/financings) included low interest rate loans,
forgivable loan arrangements, and reimbursement for certain expenses and
leasehold improvements. In 1999, the Company financed its activities with
borrowings against its line of credit and the financing of $644,821 of asset
purchases through capital leases. In November 1997 the Company's Board of
Directors authorized a $2 million revolving line of credit which became
effective in January 1998. At December 31, 1999, the Company had outstanding
borrowings of $850,000 under the line of credit with an available credit line of
$1,150,000. The Company's line of credit expires on April 30, 2001.
Management is currently negotiating an increase to its revolving line
of credit arrangement. The Company believes that funds available at December 31,
1999 together with funds which should be generated from future operations,
amounts available under the renegotiated revolving line of credit arrangement
and funds obtained through equipment financing leases will be sufficient to
finance its current and future business operations including working capital
requirements although there can be no guarantee that these funds will be
available at terms acceptable to the Company, if at all.
In connection with the opening of a new call center in Sherbrooke,
Quebec, Canada in April 2000 the Company has entered into a seven year building
lease commitment totaling $180,000 per year, which is cancelable after four
years. In addition, the Company has a commitment of approximately $860,000 for
capital expenditures for computer equipment related to the opening of the
Sherbrooke call center.
OUTLOOK
Certain of the statements contained in the Letter to Shareholders and
repeated in this section are "forward-looking statements" within the meaning of
the federal securities laws. The following forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed or implied by such statements.
Management believes that total marketing expenditures by US companies
directed towards telemarketing will continue to grow and that the trend for
these companies will be towards outsourcing their telemarketing programs to
companies like ACI. In addition, the Company believes that Internet-based online
customer service support is the next step in consumer contact and may be a
growth opportunity in 2000. The Company anticipates that the demand for its
traditional telemarketing services will continue to grow in 2000 along with
growth resulting from the Company's expansion into the Internet customer service
business. In order to meet this increased demand for traditional telemarketing
services and Internet-based customer service, the Company has signed a lease to
open a new 100 seat call center during April 2000 in Sherbrooke, Quebec, Canada.
In addition, the Company may open one additional call center with 100 to 200
seats to meet the anticipated demand. The Company plans to equip these call
centers with a new technology that will enable the Company to provide outbound,
inbound and Internet-based consumer contact services from the same teleservices
equipment. In 2000, the Company expects to spend approximately $4,000,000, on
capital expenditures to equipment these call centers and develop the Internet
customer service business applications. The Company intends to finance the
majority of its capital expenditure needs through equipment financing leases
however, there is no assurance that equipment financing leases will be available
at terms acceptable to the Company.
There is no assurance that the Company's marketing efforts will
generate new business or that businesses will continue to outsource their
telemarketing needs. As is common in the telemarketing industry, the Company's
projects are often not subject to formal contracts, the agreements with its
clients do not assure that ACI will generate a specific level of revenue, do not
designate ACI as the client's exclusive service provider, and are terminable by
the client on relatively short notice and without penalty. In addition, the
amount of revenues ACI generates from a particular client generally is dependent
upon their customers' interest in, and use of, the client's products or
services. While the Company anticipates an increase in demand for its services
in 2000, there is no assurance that the
9
<PAGE>
Company, due to the current low unemployment levels, will be able to hire and
train sufficient telemarketing sales representatives to fully utilize the
capacity to meet anticipated increased demands for the Company's services.
During 1999, the Company reduced its selling, general and
administrative expenses to 37.0% of revenue compared to 53.3% in 1998. These
reductions are a result of the Company's sales effort and an effort to improve
its processes to contain costs and increase the efficiency of the organization.
However, there can be no assurance that containment of these costs can be
continued or that further efficiencies can be realized.
YEAR 2000 COMPLIANCE
During 1999, the Company completed the necessary conversions and
modification to ensure that the Company's internal information systems were Year
2000 compliant. To date, the Company has not experienced any significant Year
2000 related problems with its internal information systems. In addition, the
Company has not experienced any significant Year 2000 related problems with any
of its customers and suppliers.
Total costs to upgrade the Company's internal information systems were
not material to the operations of the Company. During the fourth quarter of 1998
and the first quarter of 1999, the Company, as part of equipment and software
enhancements to its call processing technology and capabilities, also upgraded
its call processing software to be year 2000 compliant in all nine (9) of its
then existing call centers. Total costs for the equipment and software
enhancements, including year 2000 compliance, were approximately $147,500. These
costs were capitalized. The Company expensed additional Y2K costs of
approximately $142,000.
The Company believes the Company, its customers and suppliers have
become Year 2000 compliant. However, the Company cannot assure that any future
problems associated with Year 200 compliance will not have an impact on its
operations. Such an impact could affect the Company's results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies
to record derivatives on the balance sheet as assets or liabilities measured at
fair value. Gains or losses resulting from the change in values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. Management has not completed its
review of the effect of the adoption of this standard.
INFLATION
Inflation has not had a material impact on operating results, and the
Company does not expect it to have a significant impact in the future. However,
there can be no assurance that the Company's business will not be affected by
inflation in the future.
QUARTERLY RESULTS
The telemarketing industry tends to be slower in the first and third
quarters of the year because client marketing and customer service programs are
typically slower in the post-holiday and summer months. The Company has
experienced and expects to continue to experience quarterly variations in
revenues and operating income principally as a result of the timing of clients'
telemarketing campaigns, the commencement of new contracts, changes in the
Company's revenue mix and the additional selling, general and administrative
expenses to acquire and support such new business.
10
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Company are included herein:
Independent Auditors' Report
Consolidated Balance Sheets -December 31, 1999 and 1998
Consolidated Statements of Operations - December 31, 1999, 1998
and 1997
Consolidated Statements of Cash Flows - December 31, 1999, 1998
and 1997
Consolidated Statements of Shareholders' Equity - December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements - December 31, 1999,
1998 and 1997
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of ACI Telecentrics, Inc.
We have audited the accompanying consolidated balance sheets of ACI
Telecentrics, Inc. and subsidiary as of December 31, 1999 and 1998 and the
related consolidated statements of operations, shareholders' equity and cash
flow for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1999 and 1998 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, MN
April 13, 2000
12
<PAGE>
ACI TELECENTRICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 199,295 $ 1,300,681
Trade receivables, less allowance for doubtful accounts of
$140,000 at both dates 5,413,351 1,456,431
Income tax receivable (Note 10) 20,312 --
Deferred income taxes (Note 10) 539,000 365,000
Prepaid expenses 141,742 111,117
Other current assets 66,595 131,667
------------ ------------
TOTAL CURRENT ASSETS 6,380,295 3,364,896
Property and equipment, net of accumulated depreciation (Note 3) 2,701,923 2,824,381
OTHER ASSETS:
Goodwill, less accumulated amortization of $169,000
and $99,000, respectively (Note 2) 881,783 951,858
Deferred taxes -- 137,000
Other 57,434 63,676
------------ ------------
TOTAL OTHER ASSETS 939,217 1,152,534
------------ ------------
TOTAL ASSETS $ 10,021,435 $ 7,341,811
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit (Note 4) $ 850,000 $ --
Trade accounts payable 872,542 482,628
Accrued compensation 461,584 134,498
Accrued expenses 161,786 70,230
Income taxes payable (Note 10) -- 15,713
Current portion of long-term debt and capital lease obligations (Notes 4 and 6) 452,998 356,980
------------ ------------
TOTAL CURRENT LIABILITIES 2,798,910 1,060,049
LONG-TERM LIABILITIES:
Long-term debt and capital lease obligations, less current portion (Note 4) 523,160 257,711
Deferred capital lease liabilities, less current portion (Note 6) 280,000 473,201
Deferred income taxes (Note 10) 323,000 --
------------ ------------
TOTAL LONG-TERM LIABILITIES 1,126,160 730,912
COMMITMENTS AND CONTINGENCIES (NOTES 2, 5 AND 9)
SHAREHOLDERS' EQUITY (NOTE 8):
Common stock, no par value; 15,000,000 shares authorized;
5,756,267 and 5,731,471 shares issued and outstanding, respectively 6,638,531 6,620,145
Undesignated stock, no par value; 5,000,000 shares authorized;
none issued and outstanding -- --
Accumulated deficit (542,166) (1,069,295)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 6,096,365 5,550,850
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,021,435 $ 7,341,811
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
13
<PAGE>
ACI TELECENTRICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TELEMARKETING REVENUES $ 22,943,014 $ 15,035,522 $ 15,253,893
COST OF SERVICES 13,536,871 8,395,597 8,388,921
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 8,486,362 8,009,380 7,211,288
RESTRUCTURING COSTS (Note 11) -- 65,000 388,563
------------ ------------ ------------
Total costs 22,023,233 16,469,977 15,988,772
------------ ------------ ------------
OPERATING INCOME (LOSS) 919,781 (1,434,455) (734,879)
OTHER INCOME (EXPENSE):
Interest income 15,633 39,012 181,604
Interest expense (93,564) (59,276) (13,770)
Other, net (5,721) (1,252) --
------------ ------------ ------------
Total other income (expense) (83,652) (21,516) 167,834
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 836,129 (1,455,971) (567,045)
INCOME TAX EXPENSE (BENEFIT) 309,000 (550,210) (215,500)
------------ ------------ ------------
NET INCOME (LOSS) $ 527,129 $ (905,761) $ (351,545)
============ ============ ============
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ .09 $ (.16) $ (.06)
============ ============ ============
BASIC SHARES USED IN COMPUTING
NET INCOME (LOSS) PER SHARE 5,749,614 5,723,176 5,707,500
============ ============ ============
DILUTED SHARES USED IN COMPUTING
NET INCOME (LOSS) PER SHARE 5,765,264 5,723,176 5,707,500
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
<PAGE>
ACI TELECENTRICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 527,129 $ (905,761) $ (351,545)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,098,936 940,911 696,937
Provision for losses on accounts receivable -- (54,964) 121,964
Amortization of deferred capital lease liabilities (233,901) (181,400) (61,400)
Deferred income taxes 286,000 (575,210) (133,202)
Restructuring costs -- 65,000 388,563
Equity based compensation 10,300 -- --
Loss on disposal of assets 5,721 36,513 --
Changes in operating assets and liabilities:
Trade receivables (3,956,920) 967,856 (1,210,836)
Prepaid expenses (30,625) (89,339) 67,001
Other current assets 65,072 (3,439) (7,089)
Accounts payable, accrued compensation
and accrued expenses 808,556 (714,368) 490,175
Income taxes (36,025) 602,211 (730,698)
----------- ----------- -----------
Net cash provided by (used in) operating activities (1,455,757) 88,010 (730,130)
CASH FLOWS UTILIZED IN INVESTING ACTIVITIES:
Purchases of property and equipment (307,303) (355,264) (1,626,180)
Decrease (increase) in other assets 6,242 22,433 (29,544)
Proceeds from (purchase of) restricted investments -- 493,345 (493,345)
Proceeds from sale of assets 40,000 -- --
Payments for business acquired -- -- (1,429,845)
----------- ----------- -----------
Net cash provided by (used in) investing activities (261,061) 160,514 (3,578,914)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 8,086 27,299 15,283
Proceeds from revolving line of credit 3,800,000 2,100,000 --
Payments on revolving line of credit (2,950,000) (2,100,000) --
Proceeds from deferred grants -- 450,000 --
Repayments on long-term debt and capital leases (242,654) (165,136) (53,010)
Proceeds from sale and leaseback of equipment -- 80,952 --
----------- ----------- -----------
Net cash provided by (used in) financing activities 615,432 393,115 (37,727)
----------- ----------- -----------
NET INCREASE (DECREASE) CASH AND
CASH EQUIVALENTS (1,101,386) 641,639 (4,346,771)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,300,681 659,042 5,005,813
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 199,295 $ 1,300,681 $ 659,042
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
15
<PAGE>
ACI TELECENTRICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1996 5,705,000 $ 6,577,563 $ 188,011 $ 6,765,574
Issuance of common stock under the
Employee Stock Purchase Plan 3,583 15,283 -- 15,283
Net loss -- -- (351,545) (351,545)
----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1997 5,708,583 6,592,846 (163,534) 6,429,312
Issuance of common stock under the
Employee Stock Purchase Plan 22,888 27,299 -- 27,299
Net loss -- -- (905,761) (905,761)
----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1998 5,731,471 6,620,145 (1,069,295) 5,550,850
Proceeds from stock options exercised 1,000 500 -- 500
Equity based compensation -- 10,300 -- 10,300
Issuance of common stock under the
Employee Stock Purchase Plan 23,796 7,586 -- 7,586
Net income -- -- 527,129 527,129
----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1999 5,756,267 $ 6,638,531 $ (542,166) $ 6,096,365
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
16
<PAGE>
ACI TELECENTRICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS - ACI Telecentrics, Incorporated
(ACI) provides telephone-based sales and marketing services primarily to
the telecommunications, publishing, insurance, and financial services
industries. ACI was established in 1987 in Minneapolis, Minnesota. Since
that time, the Company has opened additional call center locations in
Twin Valley, Minnesota; Valley City and Devils Lake, North Dakota;
Redfield and Pierre, South Dakota; Chadron, Valentine and Ogallala,
Nebraska and Redding, California. Prior to June 1996, all of the call
centers were operated as affiliated corporations through common
ownership. Effective June 28, 1996, Automated Communications
Incorporated and its affiliated companies were merged to form ACI
Telecentrics, Incorporated. These financial statements include the
results of operations of all companies for all periods presented. As
described in Note 2, on August 1, 1997, the Company acquired all of the
outstanding common stock of Encyclopaedia Britannica Communications
Corporation (EBCC), which had call centers in Lombard, Illinois and
Merrillville, Indiana. As described in Note 11, the Lombard, Illinois
operations have subsequently been closed. Operations of EBCC are
included from August 1, 1997. The acquisition was accounted for as a
purchase.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary, ACI
Telecentrics of Illinois, Inc. (formerly EBCC) after elimination of
intercompany transactions. This wholly owned subsidiary was dissolved on
December 31, 1998 and operations assumed by ACI. Consolidated operations
are included for 1998 and 1997.
REVENUE RECOGNITION - Revenues from telemarketing services are
recognized as services are provided, primarily based on hours incurred.
Performance based revenues are recognized when sales are verified.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities 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. Actual
results could differ from those estimates.
CASH EQUIVALENTS - Short-term investments, generally with a maturity of
three months or less from the date of purchase, are classified as cash
equivalents.
GOODWILL - Goodwill is amortized on a straight-line basis over 15 years.
The Company periodically assesses the recoverability of the cost of its
goodwill based on a review of projected undiscounted cash flows of the
related assets acquired.
PROPERTY AND EQUIPMENT - Property and equipment are carried at cost.
Depreciation is based on the straight-line method over estimated useful
lives of the assets ranging from three to ten years.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS - In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", the Company periodically reviews its
intangibles and property and equipment to determine potential impairment
by comparing the carrying value of the assets with estimated future cash
flows expected to result from the use of assets. Should the sum of the
expected future cash flows be less than the carrying value, the Company
would recognize an impairment loss. To date, management has determined
that no impairment of long-lived assets exists.
17
<PAGE>
RESTRICTED INVESTMENTS - Restricted investments at December 31, 1997,
consisted of U.S. Treasury Bills carried at amortized cost. The carrying
value approximated fair value due to the short-term maturities and the
market rate of interest (See Note 2).
FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS - The estimated fair
value of long-term debt and capital lease obligations approximates its
carrying value due to variable rates of interest or fixed rates which
approximate current market rates. The fair value of all other financial
instruments, other than investments as discussed above, approximates the
carrying value due to the short-term nature of the financial
instruments.
INCOME TAXES - Prior to October 21, 1996, the effective date of the
initial public offering, the Company was a Subchapter S Corporation. As
a result, any income tax liability was the sole responsibility of the
individual stockholders, and no provision for income taxes or income tax
liability was recorded in the financial statements.
Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. Income tax expense (benefit) is the tax payable (receivable)
for the period and the change in deferred income tax assets and
liabilities during the period.
SEGMENT INFORMATION - In 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for reporting operating segment information based
upon how the Company manages its operations. The Company manages its
business as one operating segment.
COMPREHENSIVE INCOME - In 1998, the Company also adopted Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income", which establishes standards for the reporting of comprehensive
income and its components. Comprehensive income is defined as the change
in equity during the period of a business enterprise resulting from
transactions and other events and circumstances from non-owner sources.
Implementation of SFAS 130 did not have an effect on the Company's
financial statements because comprehensive income (loss) is the same as
the Company's net income (loss).
NEW ACCOUNTING PRONOUNCEMENTS - In June, 1998, the Financial Accounting
Standards Board (FASB) issued Statement on Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities measured at
fair value. Gains or losses resulting from the change in values of those
derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. Management has
not completed its review of the effect of the adoption of this standard.
2. BRITCOM ACQUISITION
On August 1, 1997, the Company acquired all of the outstanding common
stock of EBCC, a provider of inbound and outbound telemarketing
services. The acquisition was accounted for using the purchase method of
accounting, and accordingly, the consolidated financial statements
include results of operations from the date of acquisition. The initial
purchase price consisted of (i) $1,250,000 cash paid at closing; and
(ii) four quarterly payments (each an "Earn-Out Payment," cumulatively
the "Total Earn-Out Payment"). The total amount of the "Earn-Out
Payment" depended on the amount of revenues generated by certain EBCC
clients and prospective clients during the period from January 1, 1998
through December 31, 1998 (the "Earn-Out Revenues"). In accordance with
the purchase agreement, the Company placed in escrow, and provided the
seller with a $500,000 security interest in, a Treasury Bill owned by
the Company as a guaranty of payment for any "Earn-Out Payment"
installments required pursuant to the original purchase agreement.
Revenues generated by certain EBCC clients did not reach the minimum
threshold in 1998, and no additional payments under the Stock Purchase
Agreement were made. As a result, the seller released its security
interest and the escrow balance was returned to the Company in 1998. The
aggregate purchase price and related costs was approximately $1,430,000.
The excess of purchase price over net assets acquired is being amortized
over 15 years using the straightline method.
The following unaudited pro forma financial information for the Company
gives effect to the EBCC acquisition as if it had occurred at the
beginning of 1997. This pro forma summary does not necessarily
18
<PAGE>
reflect the results of operations that would have been achieved if the
businesses had constituted a single entity during such periods and is not
necessarily indicative of results which may be obtained in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------------------------------
<S> <C>
Net revenues $ 18,639,272
Net income (loss) (772,485)
Basic and diluted income (loss) per share $ (.14)
Shares used in computing basis and diluted
pro forma net income (loss) per share 5,707,500
============
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1999 1998
----------------------------------
<S> <C> <C>
Furniture $ 1,161,088 $ 985,915
Equipment 4,469,976 4,093,395
Leasehold Improvements 109,313 129,122
------------ ------------
5,740,377 5,208,432
Less accumulated depreciation and amortization 3,038,454 2,384,051
------------ ------------
Net property and equipment $ 2,701,923 $ 2,824,381
============ ============
</TABLE>
For the years ended December 31, 1999 and 1998, the Company had
equipment under capitalized leases totaling $1,162,102 and $513,615,
respectively. Related accumulated depreciation of the equipment under
capitalized leases totaled $302,429 and $129,895 at December 31, 1999
and 1998, respectively. Amortization of equipment under capital leases
is included in depreciation expense.
4. LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND REVOLVING LINE OF CREDIT
Long-term debt and capitalized lease obligations consists of the
following at December 31:
<TABLE>
<CAPTION>
1999 1998
--------------------------------
<S> <C> <C>
Promissory Notes - monthly payments of $3,345, including
interest at 6%, due June 15, 1999; secured by assets of the
Company and guaranteed by the two majority stockholders $ -- $ 19,718
Promissory Note (Note 6) - monthly payments of
$967, including interest at 6%, due May 1, 2001 -- 25,198
Capitalized leases 825,458 378,375
------------- -------------
825,458 423,291
Less current portion 302,298 165,580
------------- -------------
Long-term debt and capitalized lease obligations $ 523,160 $ 257,711
============= =============
</TABLE>
Maturities of capitalized lease obligations are as follows:
<TABLE>
<CAPTION>
CAPITALIZED LEASE
YEAR ENDING DECEMBER 31: OBLIGATIONS
------------------------------------------------------------------------------------------------------
<S> <C>
2000 $ 373,077
2001 273,443
2002 213,287
2003 68,593
2004 41,991
Thereafter --
-------------
Total 970,391
Less amounts representing interest 144,933
-------------
Present value of net minimum lease payments $ 825,458
=============
</TABLE>
19
<PAGE>
On January 30, 1998, the Company entered into a $2,000,000 revolving
line of credit agreement, which accrues interest at the prime rate or
LIBOR rate plus 2 3/4% on outstanding borrowings (8.5% at December 31,
1999). The borrowing base includes, and is secured by, certain accounts
receivable and furniture and equipment. The loan agreement also contains
provisions requiring compliance with certain financial covenants
including prohibiting the payment of cash dividends without the bank's
consent. Effective April 30, 1999, the Company and its lending
institution executed an "Amended and Restated Revolving Credit Loan
Agreement" that amended certain loan covenants and other loan
provisions. The loan expires on April 30, 2001. As of December 31, 1999,
the Company was in compliance with all covenants. At December 31, 1999,
the Company had outstanding borrowings of $850,000 under the revolving
line of credit with an available credit line of $1,150,000.
5. LEASES
The Company has various operating leases for its corporate office and
ten call centers. The Company also leases, under capital lease
arrangements, certain computer equipment and office fixtures utilized in
its corporate office and call centers. Several of the operating leases
contain renewal provisions.
At December 31, 1999, future minimum lease payments under operating
leases that have initial noncancelable lease terms in excess of one
year, not including shared operating costs, are as follows:
YEAR ENDING DECEMBER 31: OPERATING LEASES
-----------------------------------------------------------------------
2000 $ 438,816
2001 343,463
2002 293,987
2003 276,492
2004 223,261
Thereafter 394,100
------------
Total $ 1,970,119
Rent expense incurred on all operating leases was approximately
$571,000, $541,000 and $454,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
6. GRANT AGREEMENTS
One of the Company's strategies is to locate its call centers in small,
rural communities in the Midwest. These communities often provide
advantageous economic incentives for locating facilities in these areas.
These incentives include grants, low interest loans, favorable facility
leases, funds for employee training and equipment subsidies.
In July 1995, in connection with the opening of the Valley City, North
Dakota facility, the Company received assistance from Valley City
Development Corporation, including $25,000 to reimburse start-up costs,
approximately $150,000 in leasehold improvements, and a $107,000
equipment lease for which the lease payments will be forgiven on a
monthly basis over the life of the lease if the Company continues
operating in Valley City.
In April 1996, the Company opened a call center in Devils Lake, North
Dakota. The Company received assistance from Devils Lake Community
Development Corporation, including $25,000 for reimbursement of
20
<PAGE>
start-up costs, $150,000 in equipment leases which will be forgiven over
five years, $150,000 in leasehold improvements, and a 6%, $50,000 loan.
In September 1996, the Company opened a call center in Redfield, South
Dakota. The Company received a $500,000 assistance grant from the
Redfield Industrial Development Corporation including $200,000 of
leasehold improvements and $300,000 for equipment.
During 1997, the Company executed three Memoranda of Understandings with
the Nebraska Department of Economic Development and three Nebraska
communities. Under the agreements, the Company agreed to open call
centers in the three communities (Chadron, Valentine and Ogallala) in
1997 and 1998. The aggregate amount of the grants received from the
three communities and state was $700,000. All grants are forgivable over
a five year period from the date of the grant. Grant amounts received
are as follows: Valentine $200,000, Ogallala $200,000 and Chadron
$300,000 of which the Company received $200,000 cash ($150,000 in 1997
and $50,000 in 1998) and received a 8 1/2%, two year $100,000 note
receivable that requires the City of Chadron to make monthly principal
and interest payments.
Reimbursement of start-up costs for the Valley City and Devils Lake call
centers was offset against the corresponding expense. Payments received
by the Valley City, Devils Lake call centers for leasehold improvements
and by the Redfield call center for equipment reduced the values of the
recorded assets. The Devils Lake and Valley City equipment leases and
the $700,000 Nebraska grants are recorded as deferred liabilities in the
consolidated balance sheets, and are being amortized as a reduction of
administrative expenses when amounts are forgiven. Amortization of
deferred grant liabilities was approximately $233,900, $181,000 and
$61,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. Included for 1999 is $60,000 associated with the City of
Devils Lake waiving the remaining balance on a deferred grant liability.
The schedule of future grant forgiveness amounts is as follows:
2000 $ 150,700
2001 140,000
2002 120,000
2003 20,000
In most cases, the Company is obligated to continue operating the call
center for a period of five years from when the call center was opened.
Certain loans and leases are guaranteed by the two majority shareholders
of the Company.
7. SIGNIFICANT CUSTOMERS AND CREDIT CONCENTRATIONS
Revenues and year-end accounts receivable from major customers were as
follows as of and for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- --------------------- --------------------
Revenue Receivable Revenue Receivable Revenue Receivable
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Customer A 22% 32% 2% 4% 0% 0%
Customer B 20 31 0 3 0 0
Customer C 16 11 19 0 1 0
Customer D 6 1 15 20 7 1
Customer E 4 8 5 2 61 42
Customer F 1 0 11 0 0 0
</TABLE>
The Company does not require collateral to support customer receivables.
Historically, the Company has not experienced write-offs related to
these major customers.
21
<PAGE>
8. SHAREHOLDERS' EQUITY
DIVIDENDS: No dividends were paid in 1999, 1998 or 1997. The Company's
bank line of credit prohibits the payment of cash dividends without the
bank's consent.
EMPLOYEE STOCK PURCHASE PLAN: Effective June 30, 1996, the Company
adopted the 1996 Employee Stock Purchase Plan (the Stock Purchase Plan),
which allows participants to purchase common stock at 85% of the common
stock's fair market value at the commencement or termination of two
six-month phases each year. Employees must have six months of service to
be eligible to participate in the Stock Purchase Plan. The Board of
Directors has reserved 100,000 shares of common stock for issuance under
the Stock Purchase Plan. The Company issued 23,796, 22,888 and 3,583
shares under the plan in 1999, 1998 and 1997, respectively.
STOCK OPTIONS: Effective June 30, 1996, the Company adopted the 1996
Stock Option Plan (the Stock Option Plan), which authorized the grant of
up to 280,000 shares of the Company's common stock in the form of
incentive stock options and nonqualified stock options to employees and
investors. On April 30, 1997, the shareholders approved an increase to
430,000 shares available for grant under the Stock Option Plan. The
Stock Option Plan requires that the exercise price of all options
granted be the fair market value of the Company's common stock on the
date of grant.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
SHARES UNDER WEIGHTED AVERAGE
OPTION PRICE PER SHARE
-----------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1996 266,000 $ 4.67
Granted in 1997 51,250 5.31
Canceled in 1997 (37,375) 5.05
--------------- -------------
Balance December 31, 1997 279,875 4.74
Granted in 1998 332,500 1.53
Canceled in 1998 (338,125) 4.26
-------------- -------------
Balance at December 31, 1998 274,250 1.45
-------------- -------------
Granted in 1999 55,250 0.89
Exercised in 1999 (1,000) 0.50
Canceled in 1999 (36,000) 1.47
-------------- -------------
Balance at December 31, 1999 292,500 $ 1.34
============== =============
Shares exercisable at December 31, 1997 166,475 $ 4.46
============== =============
Shares exercisable at December 31, 1998 12,500 $ 0.31
============== =============
Shares exercisable at December 31, 1999 231,250 $ 1.33
============== =============
</TABLE>
On May 12, 1998, the Company's Board of Directors approved the repricing
of all outstanding incentive and nonqualified stock options, totaling
300,000 shares, to the then current fair market value of $1.50.
22
<PAGE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
RANGE OF NUMBER WEIGHTED WEIGHTED AVERAGE NUMBER WEIGHTED
EXERCISE OF SHARES AVERAGE REMAINING OF SHARES AVERAGE
PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.00 - 0.50 28,250 $ 0.417 5.9 20,375 $ 0.385
$0.51 - 0.99 2,500 0.810 9.9 2,500 0.810
$1.00 - 1.49 35,000 1.087 8.3 35,000 1.087
$1.50 226,750 1.500 8.4 173,375 1.500
-----------------------------------------------------------------------------------
292,500 $ 1.340 8.1 231,250 $ 1.332
</TABLE>
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation." The Company
has elected to continue following the accounting guidance of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" for measurement and recognition of stock-based transactions
with employees. No compensation cost has been recognized for options
issued under the Stock Option Plan because the exercise price of all
options granted was at least equal to the fair value of the common stock
on the date of grant. Had compensation cost for the stock options been
determined based on the fair value at the grant date, consistent with
the provisions of SFAS No. 123, the Company's 1999, 1998 and 1997 pro
forma net (loss) income and per share amounts would have been as
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) applicable
to common stock, as reported $ 527,129 $ (905,761) $ (351,545)
============== ============= =============
Net income (loss) applicable to common
stock, pro forma $ 350,744 $ (1,025,974) $ (406,770)
============== ============= =============
Basic and diluted earnings (loss)
per share, as reported $ .09 $ (.16) $ (.06)
============== ============= =============
Basic and diluted earnings (loss) per share, pro forma $ .06 $ (.18) $ (.07)
============== ============= =============
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions and results:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 112% 102% 39%
Risk free interest rate 5.5% 4.7% 5.8%
Expected life of options 8.1 Years 9.1 Years 10 Years
Fair value of options on grant dates $1.34 $1.30 $3.27
</TABLE>
During 1999 the Company issued options for 5,000 shares of common stock
at a price of $1.00 per share and an additional option for 5,000 shares
of common stock at a price of $1.06 per share in connection with
services performed. The options expire in 2001 and are immediately
exercisable. Expense of $10,300 was recorded in 1999.
STOCK WARRANTS: On October 21, 1996, warrants to purchase 140,000 shares
of Common Stock (the "Underwriter's Warrants") were issued in connection
with the initial public offering. The Underwriter's Warrants may be
exercised in whole or in part through October 20, 2001, at an exercise
price of $6.00 per share. No warrants have been exercised to date.
23
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS Each of the two majority shareholders has entered
into an employment agreement dated June 30, 1996, with the Company
providing for a minimum annual base salary of $175,000. These agreements
have an initial term of three years with automatic one year extensions,
unless terminated in writing. The agreements require the Company to pay
premiums for life insurance intended to fund the buy/sell agreements to
which the two majority shareholders are parties, as described below. If
employment is terminated by either party the two majority shareholders
will receive 12 months' salary and health benefits. These agreements
require each of the two majority shareholders to vote his shares for
election of the other to serve on the Company's Board of Directors. Each
of these agreements include confidentiality protections and prohibits
each of the two majority shareholders from competing with the Company
for a period equal to the period during which the Company is obligated
to make severance payments.
NEW CALL CENTER In connection with the opening of a new call center in
Sherbrooke, Quebec, Canada in April 2000 the Company has entered into a
seven year building lease commitment totaling $180,000 per year. This
lease is cancelable after four years. In addition, the Company has a
commitment of approximately $860,000 for capital expenditures for
computer equipment related to the opening of the Sherbrooke call center.
BUY/SELL AGREEMENTS Each of the two majority shareholders has entered
into a Buy/Sell Agreement (the Agreement) with the Company and each
other. Under this agreement, the Company may have the option to purchase
shares from the two shareholders.
10. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31
consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 10,000 $ -- $ (82,298)
State 13,000 25,000 --
-------------- ------------- ------------
23,000 25,000 (82,298)
Deferred 286,000 (575,210) (133,202)
-------------- ------------- ------------
Total income tax expense (benefit) $ 309,000 $ (550,210) $ (215,500)
============== ============= ============
</TABLE>
Differences between the provisions for income taxes at the federal
statutory rate and the recorded provision are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) at federal
statutory rate 34.0% (34.0%) (34.0%)
State income tax (benefit), net of
federal benefit (cost) 2.9% (4.5%) (4.4%)
Other 0.1% 0.7% 0.4%
-------------- ----------- ----------
Effective income tax expense (benefit) 37.0% (37.8%) (38.0%)
============== ============= ===========
</TABLE>
Net deferred tax assets (liabilities) at December 31, 1999, 1998 and
1997 are comprised of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current deferred tax assets (liabilities):
Allowance for doubtful accounts $ 52,000 $ 55,000 $ 59,000
Contributions carryover -- 8,000 --
Benefit of NOL carryforwards and credits 508,000 336,000 --
Other, net (21,000) (34,000) (27,000)
-------------- ------------- --------------
Income tax expense (benefit) 539,000 365,000 32,000
Non-current deferred tax assets (liabilities):
Excess of tax over book depreciation (323,000) (341,000) (282,000)
Benefit of NOL carryforwards -- 478,000 130,000
Other, net -- -- 46,790
-------------- ------------- --------------
Total income tax expense (benefit) (323,000) 137,000 (105,210)
--------------- ------------- --------------
Total deferred tax assets (liabilities) $ 216,000 $ 502,000 $ (73,210)
============== ============= ==============
</TABLE>
24
<PAGE>
Realization of deferred tax assets associated with the net operating
loss carryforwards is dependent upon generating sufficient taxable
income prior to their expiration. Management believes that it is more
likely than not that all of these net operating loss carryforwards will
be used, thus no valuation allowance has been established.
As of December 31, 1999 and 1998, the Company had federal net operating
loss carryforwards of approximately $985,000 and $1,581,000,
respectively. The net operating loss carryforwards will expire beginning
in 2012. In addition, at December 31, 1999 the Company had tax credits
of approximately $120,000, which expire beginning in 2017.
11. RESTRUCTURING COSTS
In December 1997, in connection with management's plans to reduce costs
and improve operating efficiencies, the Company transferred the outbound
calling services performed at its Lombard call center to various other
call centers. As a result, the Company recorded a restructuring charge
of $388,563, as detailed below, all charges of which remained in accrued
liabilities at December 31, 1997. During 1998, $379,281 of these amounts
were paid and $9,282 remained in accrued liabilities at December 31,
1998. During 1999, the remaining accrued liabilities of $9,282 were paid
and no accrued liabilities remained unpaid at December 31, 1999. The
principal actions in the plan involved the consolidation of the outbound
call center operations in Lombard, Illinois into existing ACI call
centers in Merrillville, Indiana and Pierre, South Dakota.
The major components of the restructuring charges are as follows:
Occupancy costs $ 178,700
Write down of furniture and equipment 128,200
Severance and related costs 41,700
Other 39,963
--------------
$ 388,563
==============
In June 1998, the Company recorded an additional restructuring charge of
$65,000, all of which has been paid at December 31, 1998, to cover
various expenses associated with the closing of its Lombard inbound call
center operations.
The major components of the restructuring charges are as follows:
Write down of furniture and equipment $ 40,000
Other 25,000
--------------
$ 65,000
==============
12. RETIREMENT PLAN
Effective January 1, 1998, the Company established a 401(k) pension plan
covering substantially all of its employees who are at least 21 years of
age, have completed at least six months continuous employment and work
more than 1,000 hours per year. Participants may elect to defer from 1%
to 15% of their salary and are 100% vested in their own contributions.
The plan allows for the Company to make discretionary matched
contributions. These contributions, if any, vest to the employee at the
rate of 20% per year of employment so that the employee would be fully
vested in the Company's discretionary contribution upon attaining five
years of employment of greater than 1000 hours per year. The Company's
discretionary contributions to the plan are determined annually by the
Board of Directors. Total discretionary contributions contributed by the
Company were $8,534 and $0, respectively, for the years ended December
31, 1999 and 1998.
13. EARNINGS (LOSS) PER SHARE (SFAS 128)
25
<PAGE>
Basic earnings per share are computed by dividing earnings available to
common shareholders by the weighted average number of shares outstanding
during the year. Diluted earnings per share are computed after giving
effect to the exercise of all dilutive outstanding options and warrants.
Both basic and diluted earnings per share for 1999 were the same,
because the exercise price of substantially all options and warrants was
in excess of the weighted average market price during the year. Basic
and diluted earnings per share for 1998 and 1997 were the same due to
net losses; the impact of the potential common shares outstanding would
have been anti-dilutive. For the reasons discussed above, options and
warrants for 401,750, 414,250 and 419,875 shares were excluded from the
calculation of diluted shares outstanding in 1999, 1998 and 1997,
respectively. The following table reconciles the denominators used in
computing basic and diluted earnings per share:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average common shares outstanding 5,749,614 5,723,176 5,707,500
Effect of dilutive stock options and warrants 15,650 ----- -----
-------------- ------------- --------------
5,765,264 5,723,176 5,707,500
============== ============= ==============
</TABLE>
14. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The Company paid cash for interest and income taxes as follows:
Interest $ 93,564 $ 59,300 $ 13,800
Income taxes (refunds received) 28,450 (575,301) 648,400
Non-cash investing and financing activities included:
Equipment acquired through capital leases 644,821 372,774 -----
Deferred grants receivable $ ----- $ 100,000 $ 150,000
</TABLE>
26
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has not changed its independent auditors nor has the
Company had any disagreements with its independent auditors on matters of
accounting or financial disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by Item 9 regarding the Company's executive
officers is set forth in Part I of this report. The information required by Item
9 concerning the directors of the Company is incorporated by reference from the
Company's definitive proxy statement for its 2000 Annual Meeting of Shareholders
under the caption "Election of Directors." The Company's proxy statement will be
filed pursuant to Rule 14a within 120 days after the close of the fiscal year
for which this report is filed.
The information required by Item 9 relating to compliance with Section
16(a) of the Exchange Act is incorporated herein by reference from the Company's
definitive proxy statement for its 2000 Annual Meeting of Shareholders under the
caption "Compliance with Section 16(a)of the Exchange Act". The Company's proxy
statement will be filed pursuant to Rule 14a within 120 days after the close of
the fiscal year for which this report is filed.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein by reference
to the section labeled "Executive Compensation" which appears in the
Registrant's definitive Proxy Statement for its 2000 Annual Meeting of
Shareholders. The Company's proxy statement will be filed pursuant to Rule 14a
within 120 days after the close of the fiscal year for which this report is
filed.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated herein by reference
to the section labeled "Principal Shareholders and Management Shareholdings"
which appears in the Registrant's definitive Proxy Statement for its 2000 Annual
Meeting of Shareholders. The Company's proxy statement will be filed pursuant to
Rule 14a within 120 days after the close of the fiscal year for which this
report is filed.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated by reference to the
section labeled "Certain Transactions" which appears in the Registrant's
definitive Proxy Statement for its 2000 Annual Meeting of Shareholders. The
Company's proxy statement will be filed pursuant to Rule 14a within 120 days
after the close of the fiscal year for which this report is filed.
27
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. Exhibits are numbered in accordance with Item 601 of
Regulation S-B. See "Exhibit Index" immediately following the signature
page of this Form 10-KSB.
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K during the
fourth quarter of the year ending December 31, 1999.
28
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACI TELECENTRICS, INC.
Dated: April 14, 2000 By: /s/ RICK N. DIAMOND
-------------------
Rick N. Diamond, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act 1934, this
Report has been signed by the following persons on behalf of the Company, in the
capacities, and on the dates, indicated.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints RICK
N. DIAMOND and GARY B. COHEN as true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any or all
amendments to this Annual Report on Form 10-KSB and to file the same, with all
exhibits thereto, and other documents in connection thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
SIGNATURE AND TITLE DATE
- ------------------- ----
/s/ RICK N. DIAMOND April 14, 2000
- ----------------------------------------------
Rick N. Diamond, Chief Executive Officer
and Director (principal executive officer)
/s/ GARY B. COHEN. April 14, 2000
- ----------------------------------------------
Gary B. Cohen, President and Director
/s/ Russell Jackson April 14, 2000
- ----------------------------------------------
Russell Jackson, Chief Financial Officer
(principal financial and accounting officer)
/s/ DOUGLAS W. FRANCHOT April 14, 2000
- ----------------------------------------------
Douglas W. Franchot, Director
/s/ PHILLIP T. LEVIN April 14, 2000
- ----------------------------------------------
Phillip T. Levin, Director
/s/ SEYMOUR LEVY.. April 14, 2000
- ----------------------------------------------
Seymour Levy, Director
/s/ THOMAS F. MADISON April 14, 2000
- ----------------------------------------------
Thomas F. Madison, Director
29
<PAGE>
ACI TELECENTRICS, INC.
EXHIBIT INDEX TO FORM 10-KSB
Exhibit
Number Description
- ------ -----------
3.1 Restated Articles of Incorporation (Incorporated by reference to
Exhibit 3.1 to Registration Statement on Form SB-2, SEC File No.
333-05370)
3.2 Restated Bylaws (Incorporated by reference to Exhibit 3.2 to
Registration Statement on Form SB-2, SEC File No. 333-05370)
4.1 Form of Stock Certificate (Incorporated by reference to Exhibit
4.1 to Registration Statement on Form SB-2, SEC File No.
333-05370)
4.2 Articles of Incorporation (filed as Exhibit 3.1)
4.3 Bylaws (filed as Exhibit 3.2)
10.1 1996 Stock Option Plan (Incorporated by reference to Exhibit 10.1
to Registration Statement on Form SB-2, SEC File No. 333-05370)**
10.2 1996 Employee Stock Purchase Plan (Incorporated by reference to
Exhibit 10.2 to Registration Statement on Form SB-2, SEC File No.
333-05370)**
10.3 Employment Agreement with Rick N. Diamond, dated June 30, 1996
(Incorporated by reference to Exhibit 10.3 to Registration
Statement on Form SB-2, SEC File No. 333-05370)**
10.4 Employment Agreement with Gary B. Cohen, dated June 30, 1996
(Incorporated by reference to Exhibit 10.4 to Registration
Statement on Form SB-2, SEC File No. 333-05370)**
10.5 Buy/Sell Agreement by and among Automated Communications,
Incorporated, Rick N. Diamond and Gary B. Cohen, dated June 30,
1996 (Incorporated by reference to Exhibit 10.5 to Registration
Statement on Form SB-2, SEC File No. 333-05370)**
10.6 Installment Note by Twin Valley Communications, Incorporated in
favor of Northwest Minnesota Initiative Fund, dated June 15, 1994
(including documents related thereto) (Incorporated by reference
to Exhibit 10.7 to Registration Statement on Form SB-2, SEC File
No. 333-05370)
10.7 Promissory Note by Twin Valley Communications, Incorporated in
favor of City of Twin Valley, dated June 15, 1994 (including
documents related thereto) (Incorporated by reference to Exhibit
10.8 to Registration Statement on Form SB-2, SEC File No.
333-05370)
10.8 Note by Automated Communications, Incorporated in favor of Twin
Valley State Bank, dated September 13, 1993 (including documents
related thereto) (Incorporated by reference to Exhibit 10.10 to
Registration Statement on Form SB-2, SEC File No. 333-05370)
10.9 Loan Commitment Agreement by and between Twin Valley
Communications, Incorporated and Northwest Regional Development
Commission, dated June 15, 1994 (including documents related
thereto) (Incorporated by reference to Exhibit 10.11 to
Registration Statement on Form SB-2, SEC File No. 333-05370)
10.10 Lease Agreement by and between ACKY-3100 Lake Limited Partnership
and Automated Communications, Incorporated, dated June 13, 1995
(Incorporated by reference to Exhibit 10.12 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
30
<PAGE>
10.11 Sublease by and between Valley City-Barnes County Development
Corporation and Valley City Communications, Incorporated, dated
April 24, 1995 (Incorporated by reference to Exhibit 10.13 to
Registration Statement on Form SB-2, SEC File No. 333-05370)
10.12 Sublease by and between Forward Devils Lake Corporation and
Devils Lake Communications, Incorporated, dated January 2, 1996
(Incorporated by reference to Exhibit 10.14 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.13 Lease by and between Twin Valley-Ulen Telephone Company, Inc. and
Twin Valley Communications, Incorporated, dated September 1, 1993
(Incorporated by reference to Exhibit 10.15 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.14 Amended and Restated Equipment Lease (with Purchase Option) by
and between Valley City-Barnes County Development Corporation and
Valley City Communications, Incorporated, dated June 15, 1995
10.15 Vehicle Lease Agreement by and between Lupient Leasing and
Automated Communications, Incorporated, dated December 15, 1995
(Incorporated by reference to Exhibit 10.22 to Registration
Statement on Form SB-2, SEC File No. 333-05370)**
10.16 Equipment Lease by and between Forward Devils Lake Corporation
and Devils Lake Communications, Incorporated, dated May 1, 1996
(Incorporated by reference to Exhibit 10.24 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.17 Lease Agreement by and between Sanwa Leasing Corporation and
Automated Communications, Incorporated, dated July 20, 1995
(Incorporated by reference to Exhibit 10.25 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.18 Agreement for telemarketing services with Cy DeCosse, Inc.
(Incorporated by reference to Exhibit 10.27 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.19 Agreement for telemarketing services with CIDCO, Inc.
(Incorporated by reference to Exhibit 10.28 to Registration
Statement on Form SB-2, SEC File No. 333-05370)
10.20 Lease Agreement by and between Redfield Industrial Development
Corporation and ACI Telecentrics, Incorporated, dated November
26, 1996
10.21 Stock Purchase Agreement dated August 1, 1997, by and among ACI
Telecentrics Incorporated and Encyclopaedia Britannica, Inc.
(Incorporated by reference to Exhibit 2.1 to Form 8-K, SEC File
No. 000-21557)
10.22 Lease Agreement by and between Kay Barth and ACI Telecentrics,
Incorporated dated April 13, 1997. (Incorporated by reference to
Exhibit 10.31 to Form 10-KSB for the year ended December 31,
1998)
10.23 Lease Agreement by and between C. H. Young, Trustee, and Mary M.
Young, Trustee and ACI Telecentrics dated September 5, l997.
(Incorporated by reference to Exhibit 10.32 to Form 10-KSB for
the year ended December 31, 1998)
10.24 Lease Agreement by and between Wilkinson Development, Inc. and
ACI Telecentrics, Incorporated dated September 9, 1997.
(Incorporated by reference to Exhibit 10.33 to Form 10-KSB for
the year ended December 31, 1998)
10.25 Memorandum of Understanding for Project #97-ED-008 between the
Nebraska Department of Economic Development, the City of Chadron
Nebraska, Dawes County Nebraska and ACI Telecentrics,
Incorporated. (Incorporated by reference to Exhibit 10.34 to Form
10-KSB for the year ended December 31, 1998)
31
<PAGE>
10.26 Memorandum of Understanding for Project # 97-ED-014 between
Nebraska Department of Economic Development, the City of Ogallala
Nebraska and ACI Telecentrics, Incorporated. (Incorporated by
reference to Exhibit 10.35 to Form 10-KSB for the year ended
December 31, 1998)
10.27 Memorandum of Understanding for project # 97-ED-015 between
Nebraska Department of Economic Development, the City of
Valentine Nebraska and ACI Telecentrics, Incorporated.
(Incorporated by reference to Exhibit 10.36 to Form 10-KSB for
the year ended December 31, 1998)
10.28 Lease Agreement by and between Pierre Economic Development
Corporation and ACI Telecentrics, Incorporated originally dated
May 5, 1997 and amended March 4, 1998. (Incorporated by reference
to Exhibit 10.37 to Form 10-KSB for the year ended December 31,
1998)
10.29 $2 million revolving line of credit loan between National City
Bank and ACI Telecentrics, Inc. (Incorporated by reference to
Exhibit 10.38 to Form 10-QSB for the quarter ended March 31,
1998)
10.30 Amendment to Terminate Sublease between ACI Telecentrics, Inc.
and Forward Devils Lake Corporation dated April 1, 1999.
(Incorporated by reference to Exhibit 10.39 to Form 10-QSB for
the quarter ended June 30, 1999
10.31 Amended and Restated Revolving Credit Loan Agreement between ACI
Telecentrics, Inc. and National City Bank dated as of April 30,
1999. (Incorporated by reference to Exhibit 10.40 to Form 10-QSB
for the quarter ended June 30, 1999)
10.32* Lease Agreement by and between Lease Finance Group, Inc. and ACI
Telecentrics, Inc. dated October 19, 1999
10.33* Lease Agreement by and between DNS Investments, Inc. and ACI
Telecentrics, Inc. dated August 3, 1999
23* Consent of Deloitte & Touche LLP, independent public accountants
24* Power of Attorney (included on signature page of this Report)
27* Financial Data Schedule
- ---------------------
* Filed herewith
** Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to the Form 10-KSB
32
Exhibit 10.32
LEASE AGREEMENT Lease No. 3184
For and in consideration of the mutual covenants and promises hereinafter set
forth, the individual, company or other legal person identified on the signature
page of this Lease as the lessor ("Lessor") and the individual, company or other
legal person identified on the signature page of this Lease as the lessee
("Lessee") hereby agree as follows:
LEASE. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor,
all machinery, equipment, motor vehicles and other property described in any
schedule or schedules executed by the parties, concurrently herewith or
hereafter, which schedules state they are subject to this Lease (collectively,
the "Schedules"). All machinery, equipment, motor vehicles and other property
described in any Schedule and all replacement parts, additions, repairs and
accessories incorporated in, or attached or affixed to, any such property is
collectively referred to in this Lease as the "Equipment."
2. TERM OF LEASE. This lease shall commence on the date it is executed and,
unless sooner terminated by Lessor as provided in Section 19, shall continue
until the total number of "Payments" shown on each Schedule shall have been made
and all amounts Lessee is required to pay under Section 15 (if any) have been
paid.
3. RENT. As rent for the Equipment described on each Schedule, Lessee agrees to
pay to Lessor the sum of (x) the rent payments shown under "Rent Payment" on
that Schedule, multiplied by the total number of "Payments" shown on that
Schedule, plus (y) any additional rent specified on that Schedule, plus (z)
"Interim Rent" amounts payable with respect to the period between the
Commencement Date and the first Rent Payment Due Date, based on a 30-day month
and the number of days between the Commencement Date and the first Rent Payment
Due Date. Payments are to be made on each and every Rent Payment Due Date shown
on the Schedule until the total number of payments have been made. The first
rent payment with respect to each Schedule is due upon (i) Lessee's execution of
a delivery receipt, if the Equipment described in that Schedule is motor
vehicles, or (ii) upon Lessee's acceptance (as described in Section 9) of any
Equipment other than motor vehicles described in that Schedule. Rent shall be
paid on the dates specified in the Schedule at the office of Lessor or to such
other person or at such other place as Lessor may from time to time designate in
writing. In addition to the rent payments described above, Lessee shall pay the
amount of any personal property taxes or other taxes and all maintenance,
insurance and other costs and expenses with respect to the Equipment (including
amounts, if any, required to be paid under Sections 14 and 16 of this Lease). If
Lessee fails to make any such payment or pay any other expense required to be
paid by Lessee pursuant to this Lease, Lessor, at its option, may pay such
expense, which shall constitute additional rent and be due and payable from
Lessee to Lessor upon demand thereof.
4. LATE CHARGE. The Payments described in Section 3 shall be paid when due to
the person entitled to those payments. In the event Lessee's rental payments or
any sum required to be paid to Lessor shall become past due, Lessee agrees to
pay to Lessor, not later than one month thereafter, an amount equal to 5 % of
the scheduled lease payment or twenty dollars ($20.00), whichever is greater,
but only to the extent allowed by law.
5. ESTIMATED COST. The rent payments specified in each Schedule have been
computed on the basis of the total cost of the Equipment to Lessor, as estimated
at the time that Schedule is executed. Total cost includes the cost to Lessor of
purchasing and delivering the Equipment to Lessee, transportation, installation,
and all other charges with respect to the Equipment. Lessee hereby authorizes
Lessor to correct the rent payments to reflect any difference between the actual
cost of the Equipment and the estimated cost.
6. SECURITY DEPOSIT. Lessee has deposited or will deposit with Lessor the sum
shown as "Security Deposit", if any, on each Schedule as a security deposit and
not as advance rent. Lessor may, at its option, apply any security deposit to
cure any default by Lessee under the Lease, in which event Lessee shall promptly
pay a sufficient amount to Lessor to restore the security deposit to the full
amount specified on the Schedule. Upon termination of this Lease, Lessor shall
return any remaining balance of the security deposit, if any, to Lessee if, and
only if, Lessee has fulfilled all of its obligations under the Lease.
7. SELECTION OF EQUIPMENT AND SUPPLIER. Lessee has selected the Equipment and
the supplier of the Equipment. Lessor agrees to order the Equipment from the
supplier in accordance with Lessor's customary practices, and Lessor shall not
be obligated to lease the Equipment to Lessee unless the supplier fills the
order. Lessor will have no liability because of any delay by the supplier in
filling the order. Lessee will accept the Equipment if delivered in good repair
and authorizes Lessor to add to the Schedules any serial numbers or other
identification of the Equipment when known. Any delay, in the delivery of the
Equipment will not affect the validity of this Lease.
8. WARRANTIES. LESSOR MAKES NO WARRANTIES, EXPRESS OR IMPLIED, AS TO THE
CONDITION, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF, THE ABSENCE
OR ANY CLAIM OF INFRINGEMENT OR THE LIKE WITH RESPECT TO, OR ANY OTHER MATTER
CONCERNING, THE EQUIPMENT AND EXPRESSLY DISCLAIMS ANY SUCH WARRANTIES OR ANY
OTHER WARRANTIES IMPLIED BY LAW. LESSEE HEREBY WAIVES ANY CLAIM IT MIGHT HAVE
AGAINST LESSOR FOR ANY LOSS, DAMAGE OR EXPENSE CAUSED BY THE EQUIPMENT OR BY ANY
DEFECT THEREIN, OR BY THE USE OR MAINTENANCE OF, OR SERVICING OR ADJUSTMENT TO,
THE EQUIPMENT AND, AS TO LESSOR, LEASES THE EQUIPMENT AS-IS AND WITH ALL FAULTS
AND WITHOUT WARRANTY OF ANY KIND. LESSOR WILL NOT BE LIABLE FOR ANY LOSS OR
INTERRUPTION OF OR DAMAGE TO LESSEE'S BUSINESS ON ACCOUNT OF ANY MECHANICAL
FAILURE OR DELAY IN CONNECTION WITH THE FURNISHING OR USE OF THE EQUIPMENT.
Lessee acknowledges that Lessor is not a dealer or manufacturer of equipment of
any kind and is not the seller of the Equipment, and that each unit of Equipment
is of a type, size, design and capacity selected solely by Lessee. Lessee also
acknowledges that Lessor supplies the Equipment without any obligation to
install, test, erect, service or maintain the Equipment. If the Equipment is not
properly installed, does not operate as represented or warranted by the
manufacturer or seller thereof, or is unsatisfactory for any reason, Lessee
shall make any claim on account thereof solely against the manufacturer or
seller and no such occurrence shall relieve Lessee of any of its obligations
under this Lease. The only warranty applicable to any Equipment is the
manufacturer's warranty, if any (in the case of new Equipment), and Lessor makes
no warranty to Lessee beyond that contained in the manufacturer's warranty, if
any. Lessee acknowledges receipt of the manufacturer's warranty with respect to
any new Equipment. So long as Lessee is not in default under this Lease, Lessor
assigns to Lessee any manufacturer's, seller's or other warranty, whether
express or implied, on the Equipment and any claim that Lessor may have as owner
of the Equipment against the manufacturer or supplier or any other person. All
claims or actions on any warranty shall be made or prosecuted by Lessee, at its
sole expense, and Lessor shall have no obligation whatsoever to make any claim
on such warranty. Any recovery in cash or cash equivalents under such warranty
shall be made payable jointly to Lessee and Lessor. At Lessor's option, all cash
proceeds or cash equivalents from such warranty recovery may be used to repair
or replace the Equipment. Lessee shall continue to pay rent to Lessor as
specified in this Lease, notwithstanding any claim for breach of warranty.
9. INSPECTION AND ACCEPTANCE BY LESSEE. Upon delivery of the Equipment, Lessee
shall promptly make all necessary inspections and tests of the Equipment in
order to determine whether the Equipment conforms to specifications and is in
good condition and repair. Lessee shall promptly notify Lessor in writing of any
defect or other objection to the type or condition of the Equipment. If Lessee
fails to notify Lessor in writing of any defect in or objection to the Equipment
within ten (10) days after delivery of the Equipment to Lessee, it shall
conclusively be established, as between Lessor and Lessee, that Lessee has fully
inspected the Equipment and that Lessee is satisfied with and has accepted the
Equipment as in good condition and repair for all purposes of this Lease. If
Lessee determines that the Equipment is in good condition and repair before the
expiration of ten (10) days after the Equipment is delivered, and in all events
prior to placing the Equipment in service, Lessee shall execute and deliver to
Lessor a certificate of acceptance in a form satisfactory to Lessor. Lessee's
acceptance of any Equipment with knowledge of a nonconformity cannot be revoked
because of such nonconformity.
10. LOCATION AND RIGHT OF INSPECTION. The Equipment shall be delivered to and,
with the exception of motor vehicles, at all times be located at the address of
Lessee shown on this Lease, or at such other place as shall be mutually agreed
upon in writing between Lessor and Lessee. Any motor vehicles included in
Equipment are leased principally for use in the United States, and will not be
used outside of the United States and Canada. Lessor shall at any and all times
during business hours have the right to enter into and upon the premises where
the Equipment is located for the purpose of inspecting the Equipment or
observing its use. Lessee shall not move any equipment other than motor vehicles
from the location to which said Equipment is delivered except with the prior
written consent of Lessor. Lessee shall promptly advise Lessor of any
circumstances with respect to location of the Equipment which may in any manner
affect Lessor's title thereto.
11. USE. The Equipment shall be kept by Lessee in its possession and control.
Lessee shall use the Equipment with due care, and shall comply with all laws,
ordinances or regulations applicable to the use, operation or maintenance of the
Equipment and the requirements of any insurer. Lessee shall put the Equipment
only to the use contemplated by the manufacturer. Lessee shall use any motor
vehicles included in the Equipment only in the course of Lessee's own business,
and shall permit any such vehicles to be operated only by Lessee's agents or
employees or members of Lessee's immediate family who, in each case, are legally
licensed to operate such vehicles. No driver of any motor vehicle included in
the Equipment shall have the authority to act on behalf of Lessor without prior
written authorization from Lessor. If Lessor as owner of any motor vehicle
included in the Equipment receives a notice of a parking or traffic violation
which involves the payment of a fine or penalty, Lessor may (but is not required
to) pay the fine or penalty. If Lessor does so, Lessee will immediately repay
Lessor the amount of fine or penalty and an additional $10 handling and
administrative fee. If any Equipment is confiscated by any public authority, or
if Lessor suffers any
<PAGE>
damage because of Lessee's use of the Equipment for an illegal purpose, Lessee
shall pay to Lessor the amount of any such damage and, in the case of
confiscation, the Stipulated Loss Value determined in accordance with the
relevant Schedule(s) and Lessor may, at its option, terminate this Lease.
12. INDEMNITY. Lessee shall hold Lessor harmless from, and pay to Lessor the
amount of, any fines, penalties or other amounts for which Lessor is held liable
as a result of, and any legal expenses Lessor has arising out of, the use,
condition, ownership or operation of any items of Equipment, including any
claims made under the strict liability doctrine, and as a result of any lien,
encumbrance or claim made on the Equipment by anyone, including Lessee's
employees and agents. Lessee shall indemnify Lessor against and hold Lessor
harmless from, any and all claims, actions, damages (including reasonable
attorneys' fees), obligations, liabilities and liens (including any of the
foregoing arising or imposed without Lessee's fault or negligence, or in
connection with latent or other defects, or any claim for patent, trademark or
copyright infringement or under the doctrine of "strict liability"), imposed or
incurred by or asserted against Lessor or its successors or assigns, arising out
of the manufacture, purchase, lease, possession, operation, condition, return or
use of the Equipment by operation of law or by Lessee's failure to comply with
the terms of this Lease. Upon written notice by Lessor of the assertion of any
claim hereby indemnified against, Lessee shall assume full responsibility for
the defense thereof. This section shall survive termination of this Lease.
13. ALTERATIONS, REPAIRS AND MAINTENANCE. Lessee will, at its expense, keep and
maintain the Equipment in good working order, supply and install all replacement
parts and accessories when required to maintain the Equipment in good working
order, which parts and accessories shall be and become the sole property of
Lessor, and furnish all gasoline, oil, repairs, parts, tires, tubes, batteries,
accessories, service, maintenance and all other items of a similar nature
necessary for the operation of the Equipment. Lessee shall not, without the
prior written consent of Lessor, make any alterations, modifications, additions,
subtractions or improvements to, or mark the Equipment, but if so authorized by
Lessor, any such alterations, modifications, additions or improvements shall
become the property of Lessor and shall be deemed to be a part of the Equipment.
Lessee shall pay all costs required to repair all damage to, or alter, the
Equipment or any accessories, or to make the Equipment conform to any federal,
state or municipal requirements. Lessee shall follow any maintenance program
required or recommended by the manufacturer of the Equipment to make sure that
its warranty remains valid.
14. LICENSING, REGISTRATION AND TAXES. If the Equipment or use of the Equipment
requires licensing by or registration with any governmental authority, Lessee
shall, at its expense, obtain and maintain such license or registration
continuously during the term of this Lease. As additional rent, Lessee shall pay
when due all federal, state or local license and registration fees, assessments,
sales, use, heavy vehicle use, property and other taxes (excluding any tax
measured by Lessor's net income), together with any penalties or interest
applicable thereto, now or hereafter imposed by any governmental authority upon
any item of the Equipment or the rent payable hereunder or by reason of the use,
operation or maintenance of the Equipment. Lessee shall pay all such fees or
taxes whether they are payable by or assessed to Lessor or Lessee but, if under
law or custom such payments shall be made only by Lessor, Lessee shall promptly
notify Lessor and shall reimburse Lessor, upon demand, for all payments thereof
made by Lessor. If by law any such registration, license fee or tax is billed to
Lessor, Lessee, at its expense, will do any and all things required to be done
by Lessor in connection with the licensing or registration procedure and the
levy or assessment of any tax, including the billing or payment thereof. Upon
request, Lessee shall provide Lessor with proof of payment of any such fee or
tax.
15. PURCHASE. Upon the payment of the total number of rent payments specified in
any Schedule under this Lease, Lessee shall (a) Cure any default under this
lease, (b) If there is a dollar amount specified on the "Purchase Option" line
on the Schedule, have the option, upon not less than sixty (60) days prior
written irrevocable notice, to purchase all of the equipment described in that
Schedule for the amount specified, plus applicable sales tax, (c) If the words
"Fair Market Value" appear on the "Purchase Option" line on the Schedule, have
the option, upon not less than sixty (60) days prior written irrevocable notice,
to purchase all of the equipment described in that Schedule for the Fair Market
Value, as defined below, plus applicable sales tax, and (d) If there is a dollar
amount specified on the "Purchase Agreement" line on the Schedule, be required
(and Lessee hereby irrevocably agrees) to purchase all of the Equipment
described in that Schedule for the amount specified, plus applicable sales tax.
Any purchase of any Equipment pursuant to the preceding sentence shall be "as
is, where is", with all faults and without any warranty whatsoever (and Lessor
shall convey the Equipment to Lessee by Bill of Sale containing a disclaimer of
warranties similar to Section 8 above). For purposes of this Lease, "Fair Market
Value" means the Fair Market Value of the Equipment to as determined either (i)
by written agreement of Lessor and Lessee, (ii) at Lessee's expense, by a
professional appraiser acceptable to Lessor , or (iii) if the Fair Market Value
cannot be determined by either of the preceding methods, as determined by Lessor
in a commercially reasonable manner. Lessor may require payment of the Purchase
Option or Purchase Agreement amount at any time not more than thirty (30) days
prior to the expiration of the lease term with respect to the relevant schedule.
16. INSURANCE. Lessee, at its expense, shall procure, maintain and pay for (a)
with respect to any Equipment other than motor vehicles, insurance against the
loss or theft of or damage to the Equipment, for the "Stipulated Loss Value"
determined in accordance with the relevant Schedule(s), naming Lessor and its
assigns as loss payee, (b) comprehensive general liability insurance providing
coverage for bodily injury and property damage with combined single limits of at
least $1 million not subject to an annual aggregate, naming Lessor and its
assigns as an additional insured, and endorsed to act as primary insurance with
respect to Lessor, (c) in the case of motor vehicles included in the Equipment,
comprehensive and collision damage coverage for the actual cash value of the
motor vehicle(s) and with a deductible not greater than the insurance deductible
specified in the Schedule, naming Lessor and its assigns as loss payee, (d) in
the case of motor vehicles included in the Equipment, motor vehicle liability
insurance covering bodily injury or property damage arising out of the
ownership, maintenance or use of the vehicle with combined single limits of at
least $1 million and naming Lessor and its assigns as additional insured, and
endorsed to act as primary insurance with respect to Lessor, and (e) any other
insurance required by Lessor or any governmental authority. All such insurance
shall be in form and amount, and provided by an insurer, satisfactory to Lessor.
Lessee shall deliver the policies of insurance or duplicates thereof or
certificates of insurance to Lessor at the time the lease is signed or prior to
the delivery of the Equipment and thereafter thirty (30) days prior to each
policy renewal. Each insurer shall agree by endorsement upon the policy or
policies issued by it or by independent instrument furnished to Lessor that the
insurer will provide thirty (30) days prior written notice to Lessor of any
cancellations or non-renewal of the policy or any material change in policy
conditions. Lessee shall comply with all restrictions (including any
geographical limitations) contained in any insurance policies. All insurance
policies shall provide that the insurance shall not be invalidated as to Lessor
by any act, omission or neglect of Lessee. Lessee shall notify Lessor
immediately in writing of any accident involving the Equipment regardless of the
amount of damage, and shall cooperate fully with Lessor and all insurance
companies in the investigation, prosecution and defense of claims. The proceeds
of any insurance, at the option of Lessor, shall be applied (aa) toward the
replacement, restoration or repair of the Equipment, or (bb) toward payment of
the obligations of Lessee under this Lease. Lessee hereby appoints Lessor as
Lessee's attorney-in-fact to make claim for, receive payment of, and execute and
endorse all documents, checks or drafts for loss or damage under any such
insurance or pay said fees, assessments, charges and taxes, as the case may be.
In that event Lessee shall reimburse Lessor for the cost thereof upon demand,
and failure to repay the same shall constitute an Event of Default under this
Lease.
17. LOSS AND DAMAGE. Lessee hereby assumes and shall bear the entire risk of
loss, theft, damage or destruction of all or any item of the Equipment from any
cause whatsoever; and no loss, theft, damage or destruction of all or any item
of the Equipment shall relieve Lessee of its obligation to pay rent or of any
other obligation under this Lease, which shall continue in full force and
effect, notwithstanding such loss, theft, damage or destruction. This risk of
loss shall pass to Lessee on the earlier of (i) delivery of the Equipment to a
carrier for shipment to Lessee; (ii) tender of the Equipment to Lessee; or (iii)
acknowledgment by a bailee who holds the Equipment of Lessee's right to
possession of the Equipment. In the event of damage to any item of Equipment,
Lessee shall immediately place the same in good repair (ordinary wear and tear
excepted). If Lessor determines that any item of Equipment is lost, stolen,
destroyed or damaged beyond repair, Lessee, at the option of Lessor, will (a)
replace the same with similar equipment in good repair, or (b) pay Lessor in
cash all of the following: (aa) all amounts then owed by Lessee to Lessor under
this Lease, and (bb) the Stipulated Loss Value of said item of Equipment,
determined as of that date in accordance with the Schedule(s), less any proceeds
of insurance thereon received by Lessor. Upon Lessor's receipt of such payment,
Lessee shall be entitled to whatever interest Lessor may have in said item of
Equipment, in its then condition and location, without warranties, express or
implied, and this Lease shall be terminated with respect to such item.
18. DEFAULTS. The occurrence of any one or more of the following events shall
constitute an Event of Default under this Lease:
(a) Lessee shall fail to make any rent or other payment when due; or
(b) Lessee shall fail to perform or observe any other covenant, condition
or agreement to be performed or observed by it under this Lease and
such failure shall continue for a period of ten (10) days after
written notice thereof is delivered to Lessee by Lessor; or
(c) Any representation or warranty made by Lessee in this Lease or in any
document or certificate furnished to Lessor in connection with or pursuant to
this Lease (including but not limited to financial statements) shall have been
false in any material respect when made or furnished; or
(d) Lessee shall become insolvent or bankrupt or make an assignment for
the benefit of creditors or consent to the appointment of a trustee or receiver,
or a trustee or receiver shall be appointed for Lessee or for a substantial part
of its property without its consent and shall not be dismissed for a period of
thirty (30) days, or bankruptcy, reorganization or insolvency proceedings shall
be instituted by or against Lessee and, if instituted against Lessee shall no be
dismissed for a period of thirty (30) days, or Lessee dies, is dissolved,
terminates its existence or its business is discontinued; or
(e) Lessee attempts to remove, sell, transfer, encumber, part with
possession of or sublet all or any item of the Equipment; or
(f)Lessee is liquidated or dissolved, or commences any acts relative
thereto, or, without the prior written consent of Lessor, (i) Lessee sells or
otherwise disposes of all or substantially all of the assets of Lessee, (ii)
Lessee merges or consolidates with any other person, or (iii) if Lessee is a
corporation. ownership, control, or power to vote fifty percent(50%) or more of
the outstanding shares of any class of voting securities of Lessee is
transferred by the current holders, in one or more transactions: or
<PAGE>
(g) Any indebtedness of Lessee (including but not limited to indebtedness
to Lessor or any of its affiliates) is not paid when due, or Lessee defaults
under any bond, debenture, note or other evidence of indebtedness of Lessee or
under any indenture or other instrument under which any such evidence of
indebtedness has been issued or by which it is governed and payment of such
indebtedness is accelerated.
19. REMEDIES. Upon the occurrence and during the continuation of any Event of
Default, Lessor shall have all the rights and remedies provided by
applicable law and by this Lease. In addition to the rights and remedies
provided by applicable law, Lessor may, at its option, declare this Lease to
be in default. Upon declaring this Lease to by in default, Lessor, at its
sole discretion, may exercise any one or more of the following remedies:
(a) terminate this Lease; or
(b) declare immediately due and payable, without notice or demand to
Lessee, the sum of (i) the accrued and unpaid rent payments for the period
ending on the date of default; (ii) the present value of any and all rent
payments for the period from the date of default throughout the scheduled
expiration of this lease; (iii) any purchase agreement amount specified on the
Purchase Agreement line on the relevant Schedule(s); (iv) if and only if Lessee
has previously exercised an option to purchase pursuant to Section 15 hereof,
any purchase option amount specified on the Purchase Option line on the relevant
Schedule(s); and (v) any other sums then payable under the Lease; or
(c) cause Lessee, upon written demand of Lessor and at Lessee's expense,
to return promptly any or all items of Equipment to Lessor in accordance with
all of the terms of Section 22 hereof, or Lessor, at its option, may take
possession of any or all items of Equipment without demand or notice where the
same may be located without any court order or process of law and remove the
same without liability for injuries suffered through or loss caused by such
repossession, and such repossession shall not constitute termination of this
Lease unless Lessor expressly terminates this Lease in writing, and Lessee
waives any and all rights to notice and judicial hearing with respect to the
repossession or attachment of the Equipment by Lessor in the event of default
under this Lease by Lessee; or
(d) sell or lease any or all items of Equipment at public or private sale
or lease at such time(s) as Lessor may determine and, if notice thereof is
required by law, any notice in writing of such sale or lease by Lessor to Lessee
not less than ten (10) days prior to the date thereof shall constitute
reasonable notice thereof to Lessee; or otherwise dispose of, hold, use,
operate, or keep idle such Equipment, all as Lessor, at its sole discretion, may
determine and all free and clear of any rights of Lessee and without any duty to
account to Lessee for such action or inaction or for any proceeds with respect
thereto; or
(e) exercise any other right or remedy which may be available to Lessor
under the Uniform Commercial Code or any other applicable law or proceed by
appropriate court action to enforce the terms of this Lease, to recover
possession of the Equipment, to recover damages for the breach of this Lease or
to rescind this Lease as to any or all Equipment. Lessor may elect, whether
before or after recovering possession of the Equipment, by written notice to
Lessee, to cause Lessee to pay Lessor as liquidated damages for loss of a
bargain and not as a penalty, and in lieu of all other sums due to Lessor for
the remaining term of this Lease (except any indemnification obligation under
Section 12, which shall survive the payment of the Stipulated Loss Value) on the
date specified in such notice, an amount equal to the rent payment or payments
and other payments under the Lease that are due and payable as of the date of
the written notice, plus a sum equal to the Stipulated Loss Value of the
Equipment, determined as of the date of the written notice in accordance with
the Schedule(s), reduced by any net proceeds of the disposition of the Equipment
which were previously received by the Lessor. In the event Lessor collects the
liquidated damages specified in the preceding sentence and has not previously
sold or re-leased the Equipment, Lessor shall appoint Lessee as Lessor's agent
to dispose of the Equipment at the best price obtainable on an "as is, where is"
basis and Lessee shall be entitled to the proceeds of such sale of the Equipment
to the extent they do not exceed the Stipulated Loss Value and shall pay any
excess to Lessor. Lessee shall pay Lessor all costs and expenses, including
attorneys' fees, incurred by Lessor in exercising any of its rights or remedies
under this Lease or in enforcing any of the terms or conditions of this Lease.
Lessee shall continue to be liable for all indemnities under this Lease and for
all legal fees and other costs and expenses resulting from an event of Default
or the exercise of Lessor's remedies, including placing any Equipment in the
condition required by Section 22 of this Lease, notwithstanding Lessor's
exercise of any right or remedy under this Lease. Except as expressly provided
above, no remedy is exclusive, but each shall be cumulative and in addition to
any other remedy referred to above or otherwise available to Lessor at law or in
equity. The repossession or subsequent sale or lease by Lessor of any item of
Equipment shall not bar an action for a deficiency as herein provided and the
bringing of any action or the entry of judgment against Lessee shall not bar
Lessor's right to repossess any or all items of Equipment. No express or implied
waiver by Lessor of any default shall constitute a waiver of any other default
by Lessee or a waiver of any of Lessor's rights. To the extent permitted by
applicable law, Lessee hereby waives any rights now or hereafter conferred by
statute or otherwise which may require Lessor to sell, lease or otherwise use
any Equipment in mitigation of Lessor's damages as set forth in this Section 19
or may otherwise limit or modify any of Lessor's rights or remedies under this
Section 19.
LESSEE AGREES THAT ANY ACTION BY LESSEE OR LESSOR CONCERNING THE LEASE SHALL BE
VENUED IN THE COURTS OF THE STATE OF MINNESOTA, AND LESSEE HEREBY SUBMITS TO THE
PERSONAL JURISDICTION OF THE COURTS OF MINNESOTA. BOTH FEDERAL AND STATE, IN ANY
ACTION WITH RESPECT TO THIS LEASE AND AGREES THAT ANY STATE COURT ACTION SHALL
BE VENUED IN THE DISTRICT COURT OF HENNEPIN COUNTY, MINNESOTA. LESSOR AND LESSEE
EACH IRREVOCABLY WAIVE THE RIGHT TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS LEASE OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
20. ASSIGNMENT. Lessee shall not assign, pledge or hypothecate this Lease in
whole or in part, nor any interest in this Lease, nor shall Lessee sublet or
lend any item of the Equipment, nor pledge, mortgage or otherwise encumber the
Equipment or permit it to be encumbered, without the prior written consent of
Lessor. Lessee's interest herein may not be assigned or transferred by operation
of the law. Consent to any of the foregoing acts shall not be deemed to be
consent to any subsequent similar act. Lessor may assign this Lease or mortgage
the Equipment or both in whole or in part, without notice to Lessee. If Lessee
is given notice of such assignment, it shall acknowledge receipt of that notice
in writing. Each assignee or mortgagee from Lessor shall have all of the rights,
but none of the obligations, of Lessor under this Lease. Lessee shall not assert
against any assignee and/or mortgagee any defense, counterclaim or offset that
Lessee may have against Lessor. Upon receipt from Lessor of written notice of
assignment, Lessee will pay to the assignee any portion of the rent assigned to
the assignee. Lessee's obligation to pay rent to the assignee shall be absolute
and unconditional and shall not be subject to any defense or offset and said
obligations shall continue until Lessee receives a written notice from the
assignee that all indebtedness secured by such assignment has been paid in full.
Notwithstanding any assignment, Lessor warrants that Lessee shall quietly enjoy
use of the Equipment, subject to the terms and conditions of this Lease. Subject
to this Section 20, this Lease inures to the benefit of and is binding upon the
heirs, legatees, personal representatives, successors and assigns of Lessor and
Lessee.
21.OWNERSHIP. The Equipment is and shall at all times remain the sole and
exclusive property of Lessor. Lessee shall have no right, title or interest
therein or thereto except as expressly set forth in this Lease. Lessee has no
right, title or interest in the property except as Lessee. The Equipment shall
remain personal property regardless of whether it becomes affixed or attached to
real property, or permanently rests upon any real property or any improvement
thereon. Lessee shall not attach the Equipment to any personal or real property
so as to cause the property to become an accession or fixture thereto or take
any action which would confer upon any person having an interest in such real or
personal property an interest in the Equipment. Lessee agrees to execute all
such agreements and other documents, and to obtain the execution thereof, in
recordable form, by all parties having an interest in any real property to which
any of the Equipment is affixed, as Lessor may, from time to time, reasonably
request with respect to the identity of the Equipment as personal property, and
Lessee further consents to the recordation of all such agreements and documents.
Lessee shall affix to the Equipment and maintain thereon such labels, plates or
decals as may be provided by Lessor, or conspicuously mark the Equipment with
such language as Lessor may reasonably request, to the effect that such
Equipment is owned by Lessor. Lessor is hereby authorized at Lessee's expense to
cause this Lease or any financing statement in respect thereto, showing the
interest of Lessor in the Equipment. to be filed or recorded with any
governmental office deemed appropriate by Lessor. A carbon, photographic or
other reproduction of this Lease or any financing statement filed pursuant to
this Lease may be filed by Lessor as a financing statement. Lessee shall execute
all documents requested by Lessor to effect any filing.
22. SURRENDER. Upon expiration of this Lease with respect to each unit of
Equipment, Lessee shall (unless Lessee shall have exercised an option, or have
been required, to purchase such unit of Equipment and shall have paid all
amounts payable pursuant to Section 15 with respect thereto) return each unit of
Equipment to Lessor free of all advertising or insignia placed thereon by
Lessee, and in good condition, repair and working order (ordinary wear and tear
resulting from the proper use of the Equipment excepted). Absence or
malfunctioning of a catalytic converter or other pollution control equipment
with respect to any motor vehicle included in the Equipment shall not be
considered ordinary wear and tear. Lessee shall return the Equipment, in
accordance with Lessor's instructions, either (a) by delivering the Equipment at
Lessee's sole cost and expense, to any location selected by Lessor, within the
county to which the Equipment was moved with Lessor's consent, to the nearest
office of Lessor, or the location identified on the relevant Schedule for return
of the Equipment (whichever of the foregoing is selected by Lessor at its sole
discretion); or (b) by loading the Equipment on board any carrier designated by
Lessor and shipping the same, freight collect, to a destination selected by
Lessor. If Lessee fails to return a unit of Equipment to Lessor at the
expiration of this Lease, Lessee shall pay rent at the rate stated on the
Schedule until the Equipment is returned to Lessor. This provision shall not be
construed to be right of renewal, or to authorize Lessee to retain the Equipment
after the expiration of the Lease.
23. NO OFFSET; IRREVOCABLE AND INDEPENDENT PROMISES. Upon Lessee's acceptance of
any Equipment, Lessee's promises to pay rent and perform all other obligations
with respect to such Equipment shall become irrevocable and independent, and
shall not be subject to cancellation, termination, modification, repudiation,
excuse or substitution without the consent of Lessor or any assignee. Lessee
hereby waives any and all existing and future claims and offsets against any
rent or other payments due hereunder, and agrees to pay the rent and other
amounts due hereunder regardless of any offset or claim which may be asserted by
Lessee or on its behalf against Lessor or any other person. This is a net lease
and rent
<PAGE>
due under this Lease shall not be subject to abatement for any reason
whatsoever. Lessee hereby further acknowledges that the manufacturer or vendor
of the Equipment and their agents and employees were at no time and are not now
the agents or under the supervision of Lessor, and that Lessor was not and is
not the agent of the manufacturer or vendor.
24. WAIVERS. No waiver of Lessee's obligations, conditions or covenants shall be
deemed to take place unless the waiver is in writing and signed by Lessor.
Failure to exercise any remedy which Lessor may have under this Lease or any
acquiescence in the default of Lessee by Lessor shall not constitute a waiver of
any obligation of Lessee, including the obligation as to which Lessee is in
default; and Lessor shall be entitled to pursue any remedy available to it under
this Lease until Lessee has rendered complete performance of all obligations
under this Lease.
25. FINANCIAL AND OTHER REPORTS. During the term of this Lease, Lessee shall
furnish Lessor with annual financial statements within one hundred twenty (120)
days after the end of Lessee's fiscal year, and Lessee shall provide Lessor such
other financial information as Lessor may from time to time request, including,
without limitation, any reports filed with federal or state regulatory agencies.
Lessee hereby warrants and represents that all financial statements previously
delivered or to be delivered to Lessor by or on behalf of Lessee, and any
statements and data submitted in writing to Lessor in connection with this
Lease, are or will be true and correct and did or will fairly present the
financial condition of Lessee for the periods involved.
26. MASTER LEASE. In the event Lessor shall hereafter lease to Lessee additional
Equipment, the Equipment shall be described on a Schedule executed by the
parties which shall refer to this Lease. Each Schedule shall, in addition to
describing the Equipment to be leased thereunder, set forth the term of the
Lease with respect to that Equipment, the amount of rent, the manner of payment
of the rent, the number of rent payments, the commencement of the rent payments,
the amount of any security deposit and the stipulated loss value with respect to
that Equipment, whether Lessee has the option, or shall be required, to purchase
the Equipment and at what price, and may include other provisions. Each such
Schedule when executed by the parties shall be deemed to be a part of this
Lease, and all of the provisions of this Lease, except such provisions as may be
explicitly amended by a Schedule, shall govern such Schedule(s), it being
understood and agreed that this Lease shall be the Master Lease.
27. CROSS DEFAULT. Lessee hereby agrees that any default by Lessee in the
payment of rent or performance of any other term or condition of any lease
between Lessor and Lessee, or under any Schedule, whether previously or
hereafter entered into, shall at the option of Lessor constitute an Event of
Default in all Leases or Schedules, including this Lease between Lessor and
Lessee, and that thereupon the provisions of Section 19 above shall be
applicable.
28. NOTICES. All notices required or permitted under this Lease shall be
sufficient if delivered personally or mailed to the party receiving the notice
at the address set forth below that party's signature, or at such other address
as either party may designate in writing delivered to the other party from time
to time. Any such notice shall be effective upon delivery or forty-eight (48)
hours after it has been deposited in the United States mail, duly addressed and
postage prepaid.
29. MISCELLAN'EOUS. LESSEE ACKNOWLEDGES, AND AGREES THAT THIS LEASE IS INTENDED
AS A "FINANCE LEASE" AS DETERMINED IN MINN. STAT. SECTION 336.2A-103(l)(G), AND
THAT LESSOR IS ENTITLED TO ALL BENEFITS, PRIVILEGES AND PROTECTIONS OF A LESSOR
UNDER A FINANCE LEASE. This Lease contains the entire agreement between the
parties and embodies any oral representations, negotiations or agreement made in
connection herewith. If more than one party executes this Lease as Lessee, all
obligations to be performed by Lessee shall be the joint and several liability
of all such parties. Wherever the context permits, Lessee's representations,
warranties and covenants under this Lease shall survive the delivery and return
of the Equipment. Any provision of this Lease which may be determined by
competent authority to be prohibited or unenforceable in any jurisdiction shall,
as to such jurisdiction, be ineffective, to the extent of such prohibition or
unenforceability, without invalidating the remaining provisions of this Lease,
and any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provisions in any other jurisdiction. To
the extent permitted by applicable law, Lessee hereby waives any provision of
law which renders any provision of this Lease prohibited or unenforceable in any
respect. No term or provision of this Lease may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which the enforcement of the change, waiver, discharge or termination is
sought. To the extent that payments hereunder do constitute interest, the
parties agree that any interest to be paid the Lessor shall in no contingency
exceed the maximum amount permissible under applicable law. If under any
circumstances whatsoever, interest would otherwise be payable to Lessor at a
rate in excess of that permitted under applicable law, then the interest payable
to Lessor shall be reduced to the maximum amount permitted under applicable law,
and if under any circumstance Lessor shall ever receive anything of value deemed
interest by applicable law which would exceed interest at the highest lawful
rate, any amount equal to any excessive interest shall be applied to the
reduction of the principal amount of the obligation owing to Lessor and not to
the payment of interest, or if such excessive interest exceeds the unpaid
principal amount of such obligation, such excess shall be refunded to the
Lessee. All interest paid or agreed to be paid to Lessor shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full period until payment in full of the principal amount of the
obligations owing to the Lessor so that the rate of interest thereon for such
full period shall not exceed the maximum amount permitted by applicable law.
Nothing herein contained shall give or convey to Lessee any right, title or
interest in and to any Equipment leased hereunder except as Lessee.
NOTWITHSTANDING THE PRECEDING SENTENCE, LESSEE ACKNOWLEDGES THAT FOR INCOME TAX
PURPOSES ONLY, LESSOR IS TREATING LESSEE AS OWNER OF THE EQUIPMENT AND THAT
LESSEE HAS NEITHER SOUGHT NOR RECEIVED TAX ADVICE FROM LESSOR AS TO THE
AVAILABILITY TO LESSEE OF ANY TAX BENEFITS WITH RESPECT TO THE EQUIPMENT. In the
event this lease is construed by a court as a security agreement rather than as
a lease (which is hereby declared contrary to the intent of the parties), Lessee
hereby grants Lessor a first priority security interest in the Equipment free
and clear of any other liens, encumbrances or security interests and agrees to
execute any financing statements, fixture filings or other instruments necessary
or expedient for filing, recording or perfecting the interest and title of
Lessor and any assignee of Lessor at the request of Lessor, and all costs
incurred in connection therewith (including, without limitation, filing fees and
taxes) shall be paid by Lessee. The captions in this Lease are for convenience
of reference only and shall not define or limit any of the terms or provisions
hereof. As used in this Lease, the term "Lease' shall include all exhibits and
schedules related to this Lease. The neuter includes the masculine or feminine,
the singular includes the plural. and the word "Lessor" includes all assignees
of Lessor. THIS LEASE SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL LAWS (BUT NOT THE LAW OF CONFLICTS) OF THE STATE
OF MINNESOTA, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE.
Time is of the essence hereof. Lessee's obligations hereunder shall survive the
expiration or earlier termination thereof. This Lease shall not become effective
or binding until executed by Lessor at its place of business in Eden Prairie,
Minnesota. Lessee shall promptly notify Lessor of any changes in Lessee's
address. Lessee warrants and agrees that the Equipment is leased and will be
used for business purposes only and that the Equipment will not be used for
personal, family or household purposes.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease the 19th day of
October 1999.
ACI TELECENTRICS, INC., LESSEE LEASE FINANCE GROUP, INC., LESSOR
By: /s/ Russell Jackson By: /s/ Kathleen Hanson
------------------- -------------------
Title: CFO Title: Vice President- Operations
--- --------------------------
Address: Suite 300 Address: Suite 203
3100 West Lake Street 7700 Equitable Drive
Minneapolis, MN 55416 Eden Prairie. MN 55344
<PAGE>
SCHEDULE TO LEASE AGREEMENT
LESSOR: LEASE FINANCE GROUP, INC. LEASE NO. 3184
-------------------------------- -------------------
LESSEE: ACI TELECENTRICS, INC. SCHEDULE NO. 1
-------------------------------- ------
EQUIPMENT
Computer Equipment, per attached Schedule "A"
Location of Equipment (if other than
Lessee's address on the Lease): See Exhibit "A" County:
--------------------------- ---------
INITIAL LEASE TERM RENT PAYMENT RENT PAYMENT DUE DATE
36 Months $ 12,800.48 per month, The ___ tenth _X_ twentieth
36 Payments (plus applicable taxes) day of each month
PAYMENT APPLIES TO: STIPULATED LOSS VALUE:
1st Payment $ 25,600.96 YEAR YEAR YEAR
Taxes _____% $ $405,834 1 $____ 4 $______ 7
Administrative Fee $ 50.00 $318,301 2 $____ 5 $______ 8
Other $ 0.00 $206,896 3 $____ 6 $______ 9
Security Deposit $ 0.00
Total $ 25,650.96
Amount Received $ 0.00 CHECK APPLICABLE LINE
Amount Due $ 25,650.96 ___ Purchase Option $ ________
_X_ Purchase Agreement $ ________
Other Terms: "1st Payment" refers to the first and thirty-sixth
lease payments, to be due at lease inception.
Rent Payments shall commence upon Lessee's acceptance of the Equipment and shall
be made on each Rent Payment Due Date thereafter until the total number of
Payments has been made. Lessor hereby leases to Lessee and Lessee hereby leases
from Lessor the Equipment described above on the terms and conditions set forth
above and pursuant to and subject to all terms and conditions of the Lease
Agreement between Lessor and Lessee dated October 19, 1999.
ACCEPTED DATED AS OF October 19, 1999
-------------------------
LEASE FINANCE GROUP, INC. (LESSOR) ACI TELECENTRICS, INC. (LESSEE)
By:/s/ Kathleen Hanson By:/s/ Russell Jackson
--------------------------------- -------------------
Title: Vice President-Operations Title: CFO
--------------------------- ---
By: By:
-------------------------------- -------------------------------
Title: Title:
---------------------------- -----------------------------
<PAGE>
SCHEDULE TO LEASE AGREEMENT
LESSOR: LEASE FINANCE GROUP, INC. LEASE NO. 3184
-------------------------------------- ------------------
LESSEE: ACI TELECENTRICS, INC. SCHEDULE NO. 2
-------------------------------------- ----------
EQUIPMENT
Office Furniture and Equipment, per attached Schedule "A"
Location of Equipment (if other than
Lessee's address on the Lease): 2951 Churn Creek Road County: Shasta
-------------------------------- -------
Redding, CA 96002
- --------------------------------------------------------------------------------
INITIAL LEASE TERM RENT PAYMENT RENT PAYMENT DUE DATE
60 Months $ 5,248.78 per month, The ____ tenth _X_ twentieth
60 Payments (plus applicable taxes) day of each month
PAYMENT APPLIES TO: STIPULATED LOSS VALUE:
1st Payment $ 10,497.56 Year Year Year
Taxes % $ $ 251,882 1 $ 153,105 4 $ 7
Administrative Fee $ 50.00 $ 227,188 2 $ 106,186 5 $ 8
Other $ 0.00 $ 192,616 3 $ 6 $ 9
Security Deposit $ 0.00
Total $ 10,547.56
Amount Received $ 0.00 CHECK APPLICABLE LINE
Amount Due $ 10,547.56 ___ Purchase Option $ ______
_X_ Purchase Agreement $ ______
Other Terms: "lst Payment" refers to the first and sixtieth
lease payments, to be due at lease inception.
Rent Payments shall commence upon Lessee's acceptance of the Equipment and shall
be made on each Rent Payment Due Date thereafter until the total number of
Payments has been made. Lessor hereby leases to Lessee and Lessee hereby leases
from Lessor the Equipment described above on the terms and conditions set forth
above and pursuant to and subject to all terms and conditions of the Lease
Agreement between Lessor and Lessee dated October 19,1999.
ACCEPTED DATED AS OF October 19, 1999
-------------------------
LEASE FINANCE GROUP, INC. (LESSOR) ACI TELECENTRICS, INC (LESSEE)
By: /s/ Kathleen Hansen By: /s/ Russ Jackson
-------------------------------------- -----------------
Title: Vice President-Operations Title: CFO
-------------------------------- ---
By: By:
--------------------------------- ---------------------------------
Title: Title:
---------------------------- ----------------------------
<PAGE>
SCHEDULE A (MULTIPLE EQUIPMENT/MULTIPLE LOCATIONS) PAGE 1 OF 1
--- --
- --------------------------------------------------------------------------------
LOCATION OF EQUIPMENT
Equip. Cost Rental Amount
Street: 3100 West Lake Street, Suite 300 $ 9,643.91 $ 310.26
City: Minneapolis Tax % Tax Amount
7% Up Front
State: MN
Zip 55416 TOTAL $ 310.26
Manufacturer/
Description: See Exhibit "A"
- --------------------------------------------------------------------------------
LOCATION OF EQUIPMENT
Equip. Cost Rental Amount
Street: 2951 Churn Creek Road $ 388,232.68 $ 12,490.22
City: Redding Tax % Tax Amount
7.25% Up Front
State: CA
Zip 96002 TOTAL $ 12,490.22
Manufacturer/
Description: See Exhibit "A"
This Schedule is attached to and made a part of that
Lease No. 3184 dated the 19th
day of October, 1999, between the
Lessee and LEASE FINANCE GROUP, INC.
This Schedule A is hereby verified as correct by the Lessee.
LESSEE: ACI TELECENTRICS, INC.
----------------------
By: /s/ Russell Jackson
-------------------
Title: CFO
---
Exhibit 10.33
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only AUGUST
03, 99 is made by and between DNS INVESTMENTS, INC., LOCATED AT 102 MT. VIEW
AVE, SAN RAFAEL, CA 94901 ("LESSOR") and ACI TELECENTRICS, INC., A MINNESOTA
CORPORATION ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY").
1.2 PREMISES: That certain real property, including all improvements therein
or to be provided by Lessor under the terms of this Lease, and commonly known as
2951 CHURN CREEK ROAD, located in the County of SHASTA, State of CALIFORNIA,
and generally described as (describe briefly the nature of the property and, if
applicable, the "PROJECT", if the property is located within a Project) a 15,000
square foot single story retail building located in the Four corners Shopping
Center ("PREMISES"). (See also Paragraph 2)
1.3 TERM: FIVE years and -0- months ("ORIGINAL TERM") commencing SEPTEMBER
01, 1999 ("COMMENCEMENT DATE") and ending AUGUST 31, 2004 ("EXPIRATION DATE").
(See also Paragraph 3)
1.4 EARLY POSSESSION: UPON EXECUTION OF THE LEASE ("EARLY POSSESSION DATE").
(See also Paragraphs 3.2 and 3.3)
1.5 BASE RENT: $7,500.00 per month ("Base Rent"), payable on the first day of
each month commencing SEPTEMBER 01, 1999 (See also Paragraph 4) [x] If this box
is checked, there are provisions in this Lease for the Base Rent to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $ 15,000.00 as Base Rent for the period
SEPTEMBER AND OCTOBER, 1999
1.7 SECURITY DEPOSIT: $ 7,500.00 ("SECURITY DEPOSIT"). (See also Paragraph 5)
1.8 AGREED USE: TELEMARKETING CALL CENTER (See also Paragraph 6)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY" unless otherwise stated
herein. (See also Paragraph 8)
1.10 REAL ESTATE BROKERS: (See also Paragraph 15)
(a) REPRESENTATION: The following real estate brokers (collectively, the
"BROKERS") and brokerage relationships exist in this transaction (check
applicable boxes):
__________________________________ represents Lessor exclusively ("LESSOR'S
BROKER");
__________________________________ represents Lessee exclusively ("LESSEE'S
BROKER"); or [x] COLDWELL BANKER COMMERCIAL C & C PROPERTIES
represents both Lessor and Lessee ("DUAL AGENCY").
(b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by both
Parties, Lessor shall pay to the Broker the fee agreed to in their separate
written agreement (or if there is no such agreement, the sum of __% of the total
Base Rent for the brokerage services rendered by said Broker).
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by ____________ ("GUARANTOR"). (See also Paragraph 37)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through 57 and Exhibits A AND B all of which
constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of size set forth in this Lease, or that may have been
used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom clean and
free of debris on the Commencement Date or the Early Possession Date, whichever
first occurs ("START DATE"), warrants that the existing electrical, plumbing,
fire sprinkler, lighting, heating, ventilating and air conditioning systems
("HVAC"), loading doors, if any, and all other such elements in the Premises,
other than those constructed by Lessee, shall be in good operating condition on
said date and that the structural the roof, bearing walls and foundation of any
buildings on the Premises (the "BUILDING") shall be free of material defects. If
a non-compliance with said warranty exists as of the Start Date, Lessor shall,
as Lessor's sole obligation with respect to such matter, except as otherwise
provided in this Lease, promptly after receipt of written notice from Lessee
setting forth with specificity the nature and extent of such non-compliance,
rectify same at Lessor's expense. If, after the Start Date, Lessee does not give
Lessor written notice of any non-compliance with this warranty within: (i) one
year as to the surface of the roof and the structural portions of the roof,
foundations and bearing walls, (ii) six (6) months as to the HVAC systems, (iii)
thirty (30) days as to the remaining systems and other elements of the Building,
correction of such non-compliance shall be the obligation of Lessee at Lessee's
sole cost and expense.
2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises comply
with all applicable laws, covenants or restrictions of record, building codes,
regulations and ordinances ("APPLICABLE REQUIREMENTS") in effect on the Start
Date. Said warranty does not apply to the use to which Lessee will put the
Premises or to any Alterations or Utility Installations (as defined in Paragraph
7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for
determining whether or not the zoning is appropriate for Lessee's intended use,
and acknowledges that past uses of the Premises may no longer be
<PAGE>
allowed. If the Premises do not comply with said warranty, Lessor shall, except
as otherwise provided, promptly after receipt of written notice from Lessee
setting forth with specificity the nature and extent of such non-compliance,
rectify the same at Lessor's expense. If Lessee does not give Lessor written
notice of a non-compliance with this warranty within six (6) months following
the Start Date, correction of that non-compliance shall be the obligation of
Lessee at Lessee's sole cost and expense. If the Applicable Requirements are
hereafter changed (as opposed to being in existence at the Start Date, which is
addressed in Paragraph 6.2(e) below) so as to require during the term of this
Lease the construction of an addition to or an alteration of the Building, the
remediation of any Hazardous Substance, or the reinforcement or other physical
modification of the Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall
allocate the cost of such work as follows:
1997 - AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION PAGE 1 Initials
Coldwell Banker Commercial 2120 Churn Creek Rd. Redding CA 96002
Phone@ (530)221-9628
Fax (530)221-1282
(b) If such Capital Expenditure is not the result of the specific and unique use
of the Premises by Lessee (such as, governmentally mandated seismic
modifications), then Lessor and Lessee shall allocate the obligation to pay for
such costs pursuant to the provisions of Paragraph 7.1 (c); provided, however,
that if such Capital Expenditure is required during the last two years of this
Lease or if Lessor reasonably determines that it is not economically feasible to
pay its share thereof, Lessor shall have the option to terminate this Lease upon
ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor,
in writing, within ten (10) days after receipt of Lessor's termination notice
that Lessee will pay for such Capital Expenditure. If Lessor does not elect to
terminate, and fails to tender its share of any such Capital Expenditure, Lessee
may advance such funds and deduct same, with Interest, from Rent until Lessor's
share of such costs have been fully paid. If Lessee is unable to finance
Lessor's share, or if the balance of the Rent due and payable for the remainder
of this Lease is not sufficient to fully reimburse Lessee on an offset basis,
Lessee shall have the right to terminate this Lease upon thirty (30) days
written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning Capital Expenditures
are intended to apply only to non-voluntary, unexpected, and new Applicable
Requirements. If the Capital Expenditures are instead triggered by Lessee a
result of an actual or proposed change in use, change in intensity of use, or
modification to the Premises then, and in that event, Lessee shall be fully
responsible for the cost thereof, and Lessee shall not have any right to
terminate this Lease.
2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been advised by
Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements), and their suitability for Lessee's intended use, (b) Lessee has
made such investigation as it deems necessary with reference to such matters and
assumes all responsibility therefor as the same relate to its occupancy of the
Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Lease. In addition, Lessor acknowledges that: (a)
Broker has made no representations, promises or warranties concerning Lessee's
ability to honor the Lease or suitability to occupy the Premises, and (b) it is
Lessor's sole responsibility to investigate the financial capability and/or
suitability of all proposed tenants.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises
prior to the Commencement Date, the obligation to pay Base Rent shall be abated
for the period of such early possession. All other terms of this Lease
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall, however, be in effect
during such period. Any such early possession shall not affect the Expiration
Date.
3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not, however,
be obligated to pay Rent or perform its other obligations until it receives
possession of the Premises. If possession is not delivered within sixty (60)
days after the Commencement Date, Lessee may, at its option, by notice in
writing within ten (10) days after the end of such sixty (60) day period, cancel
this Lease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is not received by Lessor within said ten (10)
day period, Lessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Lessee by the Start Date and Lessee
does not terminate this Lease, as aforesaid, any period of rent abatement that
Lessee would otherwise have enjoyed shall run from the date of delivery of
possession and continue for a period equal to what Lessee would otherwise have
enjoyed under the terms hereof, but minus any days of delay caused by the acts
or omissions of Lessee. If possession of the Premises is not delivered within
four (4) months after the Commencement Date, this Lease shall terminate unless
other agreements are reached between Lessor and Lessee, in writing.
3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender possession of
the Premises to Lessee until Lessee complies with its obligation to provide
evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee
shall be required to perform all of its obligations under this Lease from and
after the Start Date, including the payment of Rent, notwithstanding Lessor's
election to withhold possession pending receipt of such evidence of insurance.
Further, if Lessee is required to perform any other conditions prior to or
concurrent with the Start Date, the Start Date shall occur but Lessor may elect
to withhold possession until such conditions are satisfied.
4. RENT.
4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease (except for the Security Deposit) are deemed to be rent
("Rent").
4.2 PAYMENT. Lessee shall cause payment of Rent to be received by Lessor in
lawful money of the United States, without offset or deduction (except as
specifically permitted in this Lease), on or before the day on which it is due.
Rent for any period during the term hereof which is for less than one (1) full
calendar month shall be prorated based upon the actual number of days of said
month. Payment of Rent shall be made to Lessor at its address stated herein or
to such other persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount then due shall
not be a waiver of Lessor's rights to the balance of such Rent, regardless of
Lessor's endorsement of any check so stating.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the
Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise
Default's under this Lease, Lessor may use, apply or retain all or any portion
of said Security Deposit for the payment of any amount due Lessor or to
reimburse or compensate Lessor for any liability, expense, loss or damage which
Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or
any portion of said Security Deposit, Lessee shall within ten (10) days after
written request therefor deposit monies with Lessor sufficient to restore said
Security Deposit to the full amount required by this Lease. If the Base Rent
increases during the term of this Lease, Lessee shall, upon written request from
Lessor, deposit additional monies with Lessor so that the total amount of the
Security
<PAGE>
Deposit shall at all times bear the same proportion to the increased Base Rent
as the initial Security Deposit bore to the initial Base Rent. Should the Agreed
Use be amended to accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right to increase the
Security Deposit to the extent necessary, in Lessor's reasonable judgment, to
account for any increased wear and tear that the Premises may suffer as a result
thereof. If a change in control of Lessee occurs during this Lease and following
such change the financial condition of Lessee is, in Lessor's reasonable
judgment, significantly reduced, Lessee shall deposit such additional monies
with Lessor as shall be sufficient to cause the Security Deposit to be at a
commercially reasonable level based on said change in financial condition.
Lessor shall not be required to keep the Security Deposit separate from its
general accounts. Within fourteen (14) days after the expiration or termination
of this Lease, if Lessor elects to apply the Security Deposit only to unpaid
Rent, and otherwise within thirty (30) days after the Premises have been vacated
pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the
Security Deposit not used or applied by Lessor. No part of the Security Deposit
shall be considered to be held in trust, to bear interest or to be prepayment
for any monies to be paid by Lessee under this Lease.
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PAGE 2
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the Agreed Use, or
any other legal use which is reasonably comparable thereto, and for no other
purpose. Lessee shall not use or permit the use of the Premises in a manner that
is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to neighboring properties, Lessor shall not
unreasonably withhold or delay its consent to any written request for a
modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which notice
shall include an explanation of Lessor's objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as
used in this Lease shall mean any product, substance, or waste whose presence,
use, manufacture, disposal, transportation, or release, either by itself or in
combination with other materials expected to be on the Premises, is either: (i)
potentially injurious to the public health, safety or welfare, the environment
or the Premises, (ii) regulated or monitored by any governmental authority, or
(iii) a basis for potential liability of Lessor to any governmental agency or
third party under any applicable statute or common law theory. Hazardous
Substances shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, and/or crude oil or any products, by-products or fractions thereof.
Lessee shall not engage in any activity in or on the Premises which constitutes
a Reportable Use of Hazardous Substances without the express prior written
consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, so long as such use
is in compliance with all Applicable Requirements, is not a Reportable Use, and
does not expose the Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may condition its consent to any Reportable Use upon receiving such
additional assurances as Lessor reasonably deems necessary to protect itself,
the public, the Premises and/or the environment against damage, contamination,
injury and/or liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of protective
modifications (such as concrete encasements) and/or increasing the Security
Deposit.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises, other than as previously consented to by Lessor, Lessee
shall immediately give written notice of such fact to Lessor, and provide Lessor
with a copy of any report, notice, claim or other documentation which it has
concerning the presence of such Hazardous Substance.
(c) LESSEE REMEDIATION. Lessee shall not cause or permit any Hazardous
Substance to be spilled or released in, on, under, or about the Premises
(including through the plumbing or sanitary sewer system) and shall promptly, at
Lessee's expense, take all investigatory and/or remedial action reasonably
recommended, whether or not formally ordered or required, for the cleanup of any
contamination of, and for the maintenance, security and/or monitoring of the
Premises or neighboring properties, that was caused or materially contributed to
by Lessee, or pertaining to or involving any Hazardous Substance brought onto
the Premises during the term of this Lease, by or for Lessee, or any third
party.
(d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, harmless from
and against any and all loss of rents and/or damages, liabilities, judgments,
claims, expenses, penalties, and attorneys' and consultants' fees arising out of
or involving any Hazardous Substance brought onto the Premises by or for Lessee,
or any third party (provided, however, that Lessee shall have no liability under
this Lease with respect to underground migration of any Hazardous Substance
under the Premises from adjacent properties). Lessee's obligations shall
include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by Lessee, and the cost
of investigation, removal, remediation, restoration and/or abatement, and shall
survive the expiration or termination of this Lease. NO TERMINATION,
CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY LESSOR AND LESSEE SHALL
RELEASE LESSEE FROM ITS OBLIGATIONS UNDER THIS LEASE WITH RESPECT TO HAZARDOUS
SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN WRITING AT THE TIME OF
SUCH AGREEMENT.
(e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns shall
indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages, including the cost
of remediation, which existed as a result of Hazardous Substances on the
Premises prior to the Start Date or which are caused by the gross negligence or
willful misconduct of Lessor, its agents or employees. Lessor's obligations, as
and when required by the Applicable Requirements, shall include, but not be
limited to, the cost of investigation, removal, remediation, restoration and/or
abatement, and shall survive the expiration or termination of this Lease.
(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Start Date, unless such
remediation measure is required as a result of Lessee's use (including
"Alterations", as defined in Paragraph 7.3(a) below) of the Premises, in which
event Lessee shall be responsible for such payment. Lessee shall cooperate fully
in any such activities at the request of Lessor, including allowing Lessor and
Lessor's agents to have reasonable access to the Premises at reasonable times in
order to carry out Lessor's investigative and remedial responsibilities.
(g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition occurs
during the term of this Lease, unless Lessee is legally responsible therefor (in
which case Lessee shall make the investigation and remediation thereof required
by the Applicable Requirements and this Lease shall continue in full force and
effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13),
Lessor may, at Lessor's option, either (i) investigate and remediate such
Hazardous Substance Condition, if required, as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) if the estimated cost to remediate such condition exceeds twelve
(12) times the then monthly Base Rent or $100,000, whichever is greater, give
written notice to Lessee, within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's
desire to terminate this Lease as of the date sixty (60) days following the date
of such notice. In the event Lessor elects to give a termination notice,
<PAGE>
Lessee may, within ten (10) days thereafter, give written notice to Lessor of
Lessee's commitment to pay the amount by which the cost of the remediation of
such Hazardous Substance Condition exceeds an amount equal to twelve (12) times
the then monthly Base Rent or $100,000, whichever is greater. Lessee shall
provide Lessor with said funds or satisfactory assurance thereof within thirty
(30) days following such commitment. In such event, this Lease shall continue in
full force and effect, and Lessor shall proceed to make such remediation as soon
as reasonably possible after the required funds are available. If Lessee does
not give such notice and provide the required funds or assurance thereof within
the time provided, this Lease shall terminate as of the date specified in
Lessor's notice of termination.
6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise
provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within ten (10) days after receipt of Lessor's written request, provide
Lessor with copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving the failure of
Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined in
Paragraph 30 below) and consultants shall have the right to enter into Premises
at any time, in the case of an emergency, and otherwise at reasonable times, for
the purpose of inspecting the condition of the Premises and for verifying
compliance by Lessee with this Lease. The cost of any such inspections shall be
paid by Lessor, unless a violation of Applicable Requirements, or a
contamination is found to exist or be imminent, or the inspection is requested
or ordered by a governmental authority. In such case, Lessee shall upon request
reimburse Lessor for the cost of such inspections, so long as such inspection is
reasonably related to the violation or contamination.
Initials
PAGE 3
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) IN GENERAL. Subject to the provisions of Paragraph 2.2 (Condition),
2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2
(Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee
shall, at Lessee's sole expense, keep the Premises, Utility Installations, and
Alterations in good order, condition and repair including, but not limited to,
all equipment or facilities, such interior plumbing, heating, ventilating,
air-conditioning, electrical, lighting facilities, fixtures, walls (interior),
ceilings, windows, doors, plate glass, signs, located in, the Premises. Lessee,
in keeping the Premises in good order, condition and repair, shall exercise and
perform good maintenance practices. Lessee's obligations shall include
restorations, replacements or renewals when necessary to keep the Premises and
all improvements thereon or a part thereof in good order, condition and state of
repair. Lessee shall, during the term of this Lease, keep the interior
appearance of the Building in a first-class condition.
(b) SERVICE CONTRACTS. See paragraph 51 below.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" refers
to all floor and window coverings, air lines, power panels, electrical
distribution, security and fire protection systems, communication systems,
lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises.
The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can
be removed without doing material damage to the Premises. The term "ALTERATIONS"
shall mean any modification of the improvements, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED
ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or
Utility Installations made by Lessee that are not yet owned by Lessor pursuant
to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations to the Premises without Lessor's prior written consent. Lessee
may, however, make non-structural Utility Installations to the interior of the
Premises (excluding the roof) without such consent but upon notice to Lessor, as
long as they are not visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, and the cumulative cost
thereof during this Lease as extended does not exceed $50,000 in the aggregate
or $10,000 in any one year.
(b) CONSENT. Any Alterations or Utility installations that Lessee shall
desire to make and which require the consent of the Lessor shall be presented to
Lessor in written form with detailed plans. Consent shall be deemed conditioned
upon Lessee's: (i) acquiring all applicable governmental permits, (ii)
furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility. If Lessee shall contest the validity of any such
lien, claim or demand, then Lessee shall, at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof. If Lessor shall require, Lessee shall furnish a surety bond in an
amount equal to one and one-half times the amount of such contested lien, claim
or demand, indemnifying Lessor against liability for the same. If Lessor elects
to participate in any such action, Lessee shall pay Lessor's attorneys' fees and
costs.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require removal or elect
ownership as hereinafter provided, all Alterations and Utility Installations
made by Lessee shall be the property of Lessee, but considered a part of the
Premises. Lessor may, at any time, elect in writing to be the owner of all or
any specified part of the Lessee Owned Alterations and Utility Installations.
Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned
Alterations and Utility Installations shall, at the expiration or termination of
this Lease, become the property of Lessor and be surrendered by Lessee with the
Premises.
<PAGE>
(b) REMOVAL. By delivery to Lessee of written notice from Lessor not
earlier than ninety (90) and not later than thirty (30) days prior to the end of
the term of this Lease, Lessor may require that any or all Lessee Owned
Alterations or Utility Installations be removed by the expiration or termination
of this Lease. Lessor may require the removal at any time of all or any part of
any Lessee Owned Alterations or Utility Installations made without the required
consent.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the
Expiration Date or any earlier termination date, with all of the improvements,
parts and surfaces thereof broom clean and free of debris, and in good operating
order, condition and state of repair, ordinary wear and tear excepted. "Ordinary
wear and tear" shall not include any damage or deterioration that would have
been prevented by good maintenance practice. Lessee shall repair any damage
occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee
Owned Alterations and/or Utility Installations furnishings, and equipment as
well as the removal of any storage tank installed by or for Lessee, and the
removal, replacement, or remediation of any soil, material or groundwater
contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and
shall be removed by Lessee. The failure by Lessee to timely vacate the Premises
pursuant to this Paragraph 7.4(c) without the express written consent of Lessor
shall constitute a holdover under the provisions of Paragraph 26 below.
Initials
PAGE 4
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance required under
Paragraph 8 except to the extent of the cost attributable to liability insurance
carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence.
Premiums for policy periods commencing prior to or extending beyond the Lease
term shall be prorated to correspond to the Lease term.
See paragraphs 50 & 51 below.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a Commercial
General Liability Policy of Insurance protecting Lessee and Lessor against
claims for bodily injury, personal injury and property damage based upon or
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an occurence basis
providing single limit coverage in an amount not less than $2,000,000 per
occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF PREMISES
ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT"
for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall
not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance carried by Lessee shall be primary to and not contributory with any
similar insurance carried Lessor, whose insurance shall be considered excess
insurance only.
(b) CARRIED BY LESSOR. Lessor may maintain liability insurance as
described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance
required to be maintained by Lessee. Lessee shall not be named as an additional
insured therein.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor, with loss payable to Lessor,
any groundlessor, and to any Lender(s) insuring loss or damage to the Premises.
The amount of such insurance shall be equal to the full replacement cost of the
Premises, as the same shall exist from time to time, or the amount required by
any Lenders, but in no event more than the commercially reasonable and available
insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations, Trade Fixtures, and Lessee's personal
property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor.
If the coverage is available and commercially appropriate, such policy or
policies shall insure against all risks of direct physical loss or damage
(except the perils of flood and/or earthquake unless required by a Lender),
including coverage for debris removal and the enforcement of any Applicable
Requirements requiring the upgrading, demolition, reconstruction or replacement
of any portion of the Premises as the result of a covered loss. Said policy or
policies shall also contain an agreed valuation provision in lieu of any
coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located. If
such insurance coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence, and Lessee shall be liable for such deductible
amount in the event of an Insured Loss.
(b) RENTAL VALUE. The Insuring Party shall obtain and keep in force a
policy or policies in the name of Lessor, with loss payable to Lessor and any
Lender, insuring the loss of the full Rent for one (1) year. Said insurance
shall provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide for
one full year's loss of Rent from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any coinsurance clause,
and the amount of coverage shall be adjusted annually to reflect the projected
Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee
shall be liable for any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a larger building, or
of a group of buildings owned by Lessor which are adjacent to the Premises, the
Lessee shall pay for any increase in the premiums for the property insurance of
such building or buildings if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance coverage
on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.
(b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss of income
and extra expense insurance in amounts as will reimburse Lessee for direct or
indirect loss of earnings attributable to all perils commonly insured against by
prudent lessees in the business of Lessee or attributable to prevention of
access to the Premises as a result of such perils.
(c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation
that the limits or forms of coverage of insurance specified herein are adequate
to cover Lessee's property, business operations or obligations under this Lease.
8.5 INSURANCE POLICIES. Insurance required herein shall be by companies duly
licensed or admitted to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, as set forth in the most current issue of "Best's Insurance
Guide", or such other rating as may be required by a Lender. Lessee shall not do
or permit to be done anything which invalidates the required insurance policies.
Lessee shall, prior to the Start Date, deliver to Lessor certified copies of
policies of such insurance or certificates evidencing the existence and amounts
of the required insurance. No such policy shall be cancelable or subject to
modification except after thirty (30) days prior written notice to Lessor.
<PAGE>
Lessee shall, at least thirty (30) days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand. Such policies shall be for a term of at least one year, or the length of
the remaining term of this Lease, whichever is less. If either Party shall fail
to procure and maintain the insurance required to be carried by it, the other
Party may, but shall not be required to, procure and maintain the same.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages against the other, for loss of or damage to its
property arising out of or incident to the perils required to be insured against
herein. The effect of such releases and waivers is not limited by the amount of
insurance carried or required, or by any deductibles applicable hereto. The
Parties agree to have their respective property damage insurance carriers waive
any right to subrogation that such companies may have against Lessor or Lessee,
as the case may be, so long as the insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's gross negligence or willful misconduct,
Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor
and its agents, Lessor's master or ground lessor, partners and Lenders, from and
against any and all claims, loss of rents and/or damages, liens, judgments,
penalties, attorneys' and consultants' fees, expenses and/or liabilities arising
out of, involving, or in connection with, the use and/or occupancy of the
Premises by Lessee. If any action or proceeding is brought against Lessor by
reason of any of the foregoing matters, Lessee shall upon notice defend the same
at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be defended or indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury
or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under
no circumstances be liable for injury to Lessee's business or for any loss of
income or profit therefrom.
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9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, which can reasonably be repaired in thirty (30) days or less from
the date of the of the damage or destruction. Lessor shall notify Lessee in
writing within five (5) days from the date of damage or destruction as to
whether or not the damage is Partial or Total.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the
Premises, other than Lessee Owned Alterations and Utility Installations and
Trade Fixtures, which cannot reasonably be repaired in thirty (30) days or less
from the date of the damage or destruction. Lessor shall notify Lessee in
writing within five (5) days from the date of the damage or destruction as to
whether or not the damage is Partial or Total.
(c) "INSURED LOSS" shall mean damage or destruction to improvements on the
Premises, other than Lessee Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any deductible amounts
or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of Applicable Requirements, and without
deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery
of a condition involving the presence of, or a contamination by, a Hazardous
Substance as defined in Paragraph 6.2(a), in, on, or under the Premises.
9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is an
Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage
(but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in proceeds (except as to
the deductible which is Lessee's responsibility) as and when required to
complete said repairs. In the event, however, such shortage was due to the fact
that, by reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, the party responsible for making the repairs shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect. If such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to: (i) make
such restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall
not be entitled to reimbursement of any funds contributed by Lessee to repair
any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be
some insurance coverage, but the net proceeds of any such insurance shall be
made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is not
an Insured Loss occurs, unless caused by a negligent or willful act of Lessee
(in which event Lessee shall make the repairs at Lessee's expense), Lessor may
either: (i) repair such damage as ____ soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) terminate ____ this Lease by giving written notice to Lessee within thirty
(30) days after receipt by Lessor of knowledge of the occurrence of such damage.
Such termination shall be effective sixty (60) days following the date of such
notice. In the event Lessor elects to terminate this Lease, Lessee shall have
the right within ten (10) days after receipt of the termination notice to give
written notice to Lessor of Lessee's commitment to pay for the repair of such
damage without reimbursement from Lessor. Lessee shall provide Lessor with said
funds or satisfactory assurance thereof within thirty (30) days after making
such commitment. In such event this Lease shall continue in full force and
effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall terminate ten (10) days
following such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.
<PAGE>
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of
this Lease there is damage for which the cost to repair exceeds one (1) month's
Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease
effective sixty (60) days following the date of occurrence of such damage by
giving written termination notice to Lessee within thirty (30) days after the
date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at
that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof needed to make the repairs on or before the earlier of (i) the
date which is ten days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date upon which
such option expires. If Lessee duly exercises such option during such period and
provides Lessor with funds (or adequate assurance thereof to cover any shortage
in insurance proceeds, Lessor shall, at Lessor's commercially reasonable
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during such period, then this Lease shall
terminate on the date specified in the termination notice and Lessee's option
shall be extinguished.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) ABATEMENT. In the event of Premises Partial Damage or Premises Total
Destruction or a Hazardous Substance Condition for which Lessee is not
responsible under this Lease, the Rent and all other concomitant expenses,
payable by Lessee for the period required for the repair, remediation or
restoration of such damage shall be abated in proportion to the degree to which
Lessee's use of the Premises is impaired, but not to exceed the proceeds
received from the Rental Value insurance. All other obligations of Lessee
hereunder shall be performed by Lessee, and Lessor shall have no liability for
any such damage, destruction, remediation, repair or restoration except as
provided herein.
(b) REMEDIES. If Lessor shall be obligated to repair or restore the
Premises and does not commence, in a substantial and meaningful way, such repair
or restoration within ninety (90) days after such obligation shall accrue,
Lessee may, at any time prior to the commencement of such repair or restoration,
give written notice to Lessor and to any Lenders of which Lessee has actual
notice, of Lessee's election to terminate this Lease on a date not less than
sixty (60) days following the giving of such notice. If Lessee gives such notice
and such repair or restoration is not commenced within thirty (30) days
thereafter, this Lease shall terminate as of the date specified in said notice.
If the repair or restoration is commenced within said thirty (30) days, this
Lease shall continue in full force and effect. "COMMENCE" shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.7 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant to
Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made
concerning advance Base Rent and any other advance payments made by Lessee to
Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security
Deposit as has not been, or is not then required to be, used by Lessor.
9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall include any form of assessment; real estate, general,
special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises, Lessor's right to other income therefrom, and/or Lessor's business
of leasing, by any authority having the direct or indirect
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power to tax and where the funds are generated with reference to the Building
address and where the proceeds so generated are to be applied by the city,
county or other local taxing authority of a jurisdiction within which the
Premises are located. The term "REAL PROPERTY TAXES" shall also include any tax,
fee, levy, assessment or charge, or any increase therein, imposed by reason of
events occurring during the term of this Lease, including but not limited to, a
change in the ownership of the Premises.
10.2 See addendum paragraph 54.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's
liability shall be an equitable proportion of the Real Property Taxes for all of
the land and improvements included within the tax parcel assessed such
proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency, all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessee's property within ten (10) days
after receipt of a written statement.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign, transfer,
mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet all or any
part of Lessee's interest in this Lease or in the Premises without Lessor's
prior written consent, which consent shall not be unreasonably withheld.
(b) A change in the control of Lessee shall not constitute an assignment
requiring consent.
(c) The involvement of Lessee or its assets in any transaction, or series
of transactions (by way of merger, sale, acquisition, financing, transfer,
leveraged buy-out or otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's ______ assets occurs, which results or
will result in a reduction of the Net Worth of Lessee by an amount greater than
twenty-five percent (25%) of such Net Worth as it was represented at the time of
the execution of this Lease or at the time of the most recent assignment to
which Lessor has consented, or as it exists immediately prior to said
transaction or transactions constituting such reduction, whichever was or is
greater, shall be considered an assignment of this Lease to which Lessor may
withhold its consent. "NET WORTH OF LESSEE" shall mean the net worth of Lessee
(excluding any guarantors) established under generally accepted accounting
principles.
(d) An assignment or subletting without consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable
Breach without the necessity of any notice and grace period. If Lessor elects to
treat such unapproved assignment or subletting as a noncurable Breach, Lessor
may either: (i) terminate this Lease, or (ii) upon thirty (30) days written
notice, increase the monthly Base Rent to one hundred ten percent (110%) of the
Base Rent then in effect. Further, in the event of such Breach and rental
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to one hundred ten percent
(110%) of the price previously in effect, and (ii) all fixed and non-fixed
rental adjustments scheduled during the remainder of the Lease term shall be
increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.
<PAGE>
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be
limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting shall
not: (i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, or (iii) alter the primary liability of Lessee for
the payment of Rent or for the performance of any other obligations to be
performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's obligations from any
person other than Lessee pending approval or disapproval an assignment. Neither
a delay in the approval or disapproval of such assignment nor the acceptance of
Rent or performance shall constitute a waiver or estoppel of Lessor's right to
exercise its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not constitute
a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor may proceed
directly against Lessee, any Guarantors or anyone else responsible for the
performance of Lessee's obligations under this Lease, including any assignee or
sublessee, without first exhausting Lessor's remedies against any other person
or entity responsible therefore to Lessor, or any security held by Lessor.
(e) Each request for consent to an assignment or subletting shall be in
writing, accompanied by information relevant to Lessor's determination as to the
financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises if an any, together with a fee of $1,000
or ten percent (10%) of the current monthly Base Rent applicable to the portion
of the Premises which is the subject of the proposed assignment or sublease,
whichever is greater, as consideration for Lessor's considering and processing
said request. Lessee agrees to provide Lessor with such other or additional
information and/or documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by reason of
accepting such assignment or entering into such sublease, be deemed to have
assumed and agreed to conform and comply with each and every term, covenant,
condition and obligation herein to be observed or performed by Lessee during the
term of said assignment or sublease, other than such obligations as are contrary
to or inconsistent with provisions of an assignment or sublease to which Lessor
has specifically consented to in writing.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following
terms and conditions shall apply to any subletting by Lessee of all or any part
of the Premises and shall be deemed included in all subleases under this Lease
whether or not expressly incorporated therein:
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(a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest
in all Rent payable on any sublease, and Lessor may collect such Rent and apply
same toward Lessee's obligations under this Lease; provided, however, that until
a Breach shall occur in the performance of Lessee's obligations, Lessee may
collect said Rent. Lessor shall not, by reason of the forgoing or any assignment
of such sublease, nor by reason of the collection of Rent, be deemed liable to
the sublessee for any failure of Lessee to perform and comply with any of
Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor stating
that a Breach exists in the performance of Lessee's obligations under this
Lease. to pay to Lessor all Rent due and to become due under the sublease.
Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to
Lessor without any obligation or right to inquire as to whether such Breach
exists, notwithstanding any claim from Lessee to the contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its option, require
sublessee to attorn to Lessor, in which event Lessor shall undertake the
obligations of the sublessor under such sublease from the time of the exercise
of said option to the expiration of such sublease; provided, however, Lessor
shall not be liable for any prepaid rents or security deposit paid by such
sublessee to such sublessor or for any prior Defaults or Breaches of such
sublessor.
(c) Any matter requiring the consent of the sublessor under a sublease
shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part of the
Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to
comply with or perform any of the terms, convenants, conditions or rules under
this Lease. A "BREACH" is defined as the occurrence of one or more of the
following Defaults, and the failure of Lessee to cure such Default within any
applicable grace period:
(a) The abandonment of the Premises; or the vacating of the Premises
without providing a commercially reasonable level of security, or where the
coverage of the property insurance described in Paragraph 8.3 is jeopardized as
a result thereof, or without providing reasonable assurances to minimize
potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any Security
Deposit required to be made by Lessee hereunder, whether to Lessor or to a third
party, when due, to provide reasonable evidence of insurance 'or surety bond, or
to fulfill any obligation under this Lease which endangers or threatens life or
property, where such failure continues for a period of three (3) business days
following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written evidence of
compliance with Applicable Requirements, (ii) the service contracts, (iii) the
rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement,' (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) any document requested under Paragraph 42 (easements),
or (viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraph 13.1 (a), (b) o@ (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making of any
general arrangement or assignment for the benefit of creditors; (ii) becoming a
"DEBTOR" as defined in 11 U.S.C. ss. 1 01 or any successor statute thereto
(unless, in the case of a petition filed against Lessee, the same is dismissed
within sixty (60) days); (iii) the appointment of a trustee or receiver to take
possession of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where possession is not restored to Lessee
within thirty (30) days; or (iv) the attachment, execution or other judicial
seizure of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within
thirty (30) days; provided, however, in the event that any provision of this
subparagraph (e) is contrary to any applicable law, such provision shall be of
no force or effect, and not affect the validity of the remaining provisions.
(f) The discovery that any financial statement of Lessee or of any
Guarantor given to Lessor was materially false.
<PAGE>
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory basis, and
Lessee's failure, within sixty (60) days following written notice of any such
event, to provide written alternative assurance or security, which, when coupled
with the then existing resources of Lessee, equals or exceeds the combined
financial resources of Lessee and the Guarantors that existed at the time of
execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties or
obligations, within ten (10) days after written notice (or in case of an
emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach:
(a) Terminate Lessee's right to possession of the Premises by any lawful
means, in which case this Lease shall terminate and Lessee shall immediately
surrender possession to Lessor. In such event Lessor shall be entitled to
recover from Lessee: (i) the unpaid Rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Breach of this Lease shall not waive Lessor's right
to recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any unpaid Rent and damages as are recoverable
therein, or Lessor may reserve the right to recover all or any part thereof in a
separate suit. If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession and recover the
Rent as it becomes due, in which event Lessee may sublet or assign, subject only
to reasonable limitations. Acts of maintenance, efforts to relet, and/or the
appointment of a receiver to protect the Lessor's interests, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under the laws or
judicial decisions of the state wherein the Premises are located. The expiration
or termination of this Lease and/or the termination of Lessee's right to
possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises.
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13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or other
charges, or for the giving or paying by Lessor to or for Lessee of any cash or
other bonus, inducement or consideration for Lessee's entering into this Lease,
all of which are concessions are hereinafter referred to as "INDUCEMENT
PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful
performance of all of the terms, covenants and conditions of this Lease. Upon
Breach of this Lease by Lessee, any such Inducement Provision shall
automatically be deemed deleted from this Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement Provision
shall be immediately due and payable by Lessee to Lessor, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or
the cure of the Breach which initated the operation of this paragraph shall not
be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
of Rent will cause Lessor to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within five (5) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to five percent (5%) of each such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of such late
payment. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent the exercise of any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of Base Rent, then notwithstanding any
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 INTEREST. Any monetary payment due Lessor hereunder, other than late
charges, not received by Lessor, when due as to scheduled payments (such as Base
Rent) or within thirty (30) days following the date on which it was due for
non-scheduled payment, shall bear interest from the date when due, as to
scheduled payments, or the thirty-first (31st) day after it was due as to
non-scheduled payments. The interest ("INTEREST") charged shall be equal to the
prime rate reported in the Wall Street Journal as published closest prior to the
date when due plus four percent (4%), but shall not exceed the maximum rate
allowed by law. Interest is payable in addition to the potential late charge
provided for in Paragraph 13.4.
13.6 BREACH BY LESSOR.
(a) NOTICE OF BREACH. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph, a reasonable time
shall in no event be less than thirty (30) days after receipt by Lessor, and any
Lender whose name and address shall have been furnished Lessee in writing for
such purpose, of written notice specifying wherein such obligation of Lessor has
not been performed; provided, however, that if the nature of Lessor's obligation
is such that more than thirty (30) days are reasonably required for its
performance, then Lessor shall not be in breach if performance is commenced
within such thirty (30) day period and thereafter diligently pursued to
completion. In the event of partial or total destruction then the provisions of
paragraph 9 above will control.
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that neither
Lessor nor Lender cures said breach within thirty (30) days after receipt of
said notice, or if having commenced said cure they do not diligently pursue it
to completion, then Lessee may elect to cure said breach at Lessee's expense and
offset from Rent an amount equal to the greater of one month's Base Rent or the
Security Deposit, and to pay an excess of such expense under protest, reserving
Lessee's right to reimbursement from Lessor. Lessee shall document the cost of
said cure and supply said documentation to Lessor.
<PAGE>
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of exercise of said power
(collectively "CONDEMNATION"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building portion of the
premises, or more than twenty-five percent (25%) of the land area portion of the
premises not occupied by any building, is taken by Condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in proportion
to the reduction in utility of the Premises caused by such Condemnation.
Condemnation awards and/or payments shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any compensation for Lessee's
relocation expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefor. In the event that this Lease is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.
15. BROKERS' FEE.
15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee and
Lessor each represent and warrant to the other that it has had no dealings with
any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finder's fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.
16. EPISCOPAL CERTIFICATES.
(a) Each Party (as "RESPONDING PARTY") shall within ten (10) days after
written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "ESTOPPEL CERTIFICATE" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
(b) If the Responding Party shall fail to execute or deliver the Estoppel
Certificate within such ten day period, the Requesting Party may execute an
Estoppel Certificate stating that: (i) the Lease is in full force and effect
without modification except as may be represented by the Requesting Party, (ii)
there are no uncured defaults in the Requesting Party's performance, and (iii)
if Lessor is the Requesting Party, not more than one month's rent has been paid
in advance. Prospective purchasers and encumbrancers may rely upon the
Requesting Party's Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said Certificate.
(c) If Lessor desires to finance, refinance, or sell the Premises, or any
part thereof, Lessee and all Guarantors shall deliver to any potential lender or
purchaser designated by Lessor such financial statements as may be reasonably
required by such lender or purchaser, including but not limited to Lessee's
financial statements for the past three (3) years. All such financial statements
shall be received by Lessor and such lender or purchaser in confidence and shall
be used only for the purposes herein set forth.
Initials
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17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, and subject to the provisions of Paragraph
20 below, the original Lessor under this Lease, and all subsequent holders of
the Lessor's interest in this Lease shall remain liable and responsible with
regard to the potential duties and liabilities of Lessor pertaining to Hazardous
Substances as outlined in Paragraph 6 above.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. DAYS. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17 above,
the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor, the individual partners of Lessor or its or their
individual partners, directors, officers or shareholders, and Lessee shall look
to the Premises, and to no other assets of Lessor, for the satisfaction of any
liability of Lessor with respect to this Lease, and shall not seek recourse
against the individual partners of Lessor, or its or their individual partners,
directors, officers or shareholders, or any of their personal assets for such
satisfaction.
21. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. The liability (including court costs and Attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.
23. NOTICES.
<PAGE>
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by courier) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail, return
receipt requested, shall be deemed given on the date of delivery shown on the
receipt card, or if no delivery date is shown, the postmark thereon. If sent by
regular mail the notice shall be deemed given forty-eight (48) hours after the
same is addressed as required herein and mailed with postage prepaid. Notices
delivered by United States Express Mail or overnight courier that guarantee next
day delivery shall be deemed given twenty-four (24) hours after delivery of the
same to the Postal Service or courier. Notices transmitted by facsimile
transmission or similar means shall be deemed delivered upon telephone
confirmation of receipt, provided a copy is also delivered via delivery or mail.
If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed
received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by
Lessee may be accepted by Lessor on account of monies or damages due Lessor,
notwithstanding any qualifying statements or conditions made by Lessee in
connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this
Lease to be observed or performed by Lessee are both covenants and conditions.
In construing this Lease, all headings and titles are for the convenience of the
parties only and shall not be considered a part of this Lease. Whenever required
by the context, the singular shall include the plural and vice versa. This Lease
shall not be construed as if prepared by one of the parties, but rather
according to its fair meaning as a whole, as if both parties had prepared it.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon. the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lessor's Lender") shall have no liability or obligation to
perform any of the obligations of Lessor under this Lease. Any Lender may elect
to have this Lease and/or any Option granted hereby superior to the lien of its
Security Device by giving written notice thereof to Lessee, whereupon this Lease
and such Options shall be deemed prior to such Security Device, notwithstanding
the relative dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3,
Lessee agrees to attorn to a Lender or any other party who acquires ownership of
the Premises by reason of a foreclosure of a Security Device, and that in the
event of such foreclosure, such new owner shall not: (i) be liable for any act
or omission of any prior lessor or with respect to events occurring prior to
acquisition of ownership; (ii) be subject to any offsets or defenses which
Lessee might have against any prior lessor, or (iii) be bound by prepayment of
more than one (1) month's rent. Any new owner shall be responsible for assuming
all Lessor's responsibilities under this lease.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "NON-DISTURBANCE-AGREEMENT" ) from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within sixty (60) days after the execution of this Lease,
Lessor shall use its commercially reasonable
Initial
PAGE 10
efforts to obtain a Non-Disturbance Agreement from the holder of any
pre-existing Security Device which is secured by the Premises, In the event that
Lessor is unable to provide the Non-Disturbance Agreement within said sixty (60)
days, then Lessee may, at Lessee's option, directly contact Lessor's lender and
attempt to negotiate for the execution and delivery of a Non-Disturbance
Agreement.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents: provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such
fees may be awarded in the same suit or recovered in a separate suit, whether or
not such action or proceeding is pursued to decision or judgment. The term,
"PREVAILING PARTY" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be, whether
by compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fees award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be
entitled
<PAGE>
to attorneys' fees, costs and expenses incurred in the preparation and service
of notices of Default and consultations in connection therewith, whether or not
a legal action is subsequently commenced in connection with such Default or
resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall
have the right to enter the Premises at any time in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchase, lenders, or lessees, and making such alterations, repairs,
improvements or additions to the Premises as Lessor may deem necessary upon 24
hours notification, except in case of emergency. All such activities shall be
without abatement of rent or liability to Lessee. Lessor may at any time place
on the Premises any ordinary "FOR SALE" signs and Lessor may during the last six
(6) months of the term hereof place on the Premises any ordinary "FOR LEASE"
sign. Lessee may at any time place on or about the Premises any ordinary "FOR
SUBLEASE" sign.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted any auction
upon the Premises without Lessor's prior written consent. Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether to
permit an auction.
34. SIGNS Except for ordinary "For Sublease" signs, Lessee shall not place any
sign upon the Premises without Lessor's prior written consent. All signs must
comply with all Applicable Requirements.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs
and expenses (including but not limited to architects', attorneys', engineers'
and other consultants' fees) incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent, including but not limited to consents
to an assignment, a subletting or the presence or use of a Hazardous Substance,
shall be paid by Lessee upon receipt of an invoice and supporting documentation
therefor. Lessor's consent to any act, assignment or subletting shall not
constitute an acknowledgment that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent. The failure to specify herein any particular
condition to Lessor's consent shall not preclude the imposition by Lessor at the
time of consent of such further or other conditions as are then reasonable with
reference to the particular matter for which consent is being given. In the
event that either Party disagrees with any determination made by the other
hereunder and reasonably requests the reasons for such determination, the
determining party shall furnish its reasons in writing and in reasonable detail
within ten (10) business days following such request.
37. GUARANTOR.
37.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty in the
form most recently published by the American Industrial Real Estate Association,
and each such Guarantor shall have the same obligations as Lessee under this
Lease.
37.2 DEFAULT. It shall constitute a Default of the Lessee if any Guarantor
fails or refuses, upon request to provide: (a) evidence of the execution of the
guaranty, including the authority of the party signing on Guarantor's behalf to
obligate Guarantor, and in the case of a corporate Guarantor, a certified copy
of a resolution of its board of directors authorizing the making of such
guaranty, (b) current financial statements, (c) a Tenancy Statement, or (d)
written confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.
39. OPTIONS.
39.1 DEFINITION. "Option" shall mean: (a) the right to extend the term of
or renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in
this Lease is personal to the original Lessee, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the original
Lessee is in full possession of the Premises and, if requested by Lessor, with
Lessee certifying that Lessee has no intention of thereafter assigning or
subletting.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option: (i) during the
period commencing with the giving of any notice of Default and continuing until
said Default is cured, (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee), (iii) during the
time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has
been given three (3) or more notices of separate Default, whether or not the
Defaults are cured, during the twelve (12) month period immediately preceding
the exercise of the Option.
(b) The period of time within which an Option may be exercised shall not
be extended or enlarged by reason of Lessee's inability to exercise an Option
because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or effect,
notwithstanding Lessee's due and timely exercise of the Option, if, after such
exercise and prior to the commencement of the extended term, (i) Lessee fails to
pay Rent for a period of thirty (30) days after such Rent becomes due without an
y necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee
three (3) or more notices of separate Default during any twelve (12) month
period, whether or not the Defaults are cured, or (iii) if Lessee commits a
Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety and care of said properties, including the care and cleanliness of the
grounds and including the parking, loading and unloading of vehicles, and that
Lessee will pay its fair share of common expenses incurred in connection
therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
Initials
PAGE 11
<PAGE>
42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay, and all cost of collection.
44. AUTHORITY. If either Part hereto is a corporation, trust, limited liability
company, partnership, or similiar entity each individual executing this Lease on
behalf of such entity represents and warrants that he or she is duly authorized
to execute and deliver this Lease on its behalf. Each party shall, within thirty
(30) days after request, deliver to the other party satisfactory evidence of
such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. MULTIPLE PARTIES. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation
and/or the Arbitration of all disputes between the Parties and/or Brokers
arising out of this Lease IS [X] IS NOT attached to this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
- --------------------------------------------------------------------------------
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:
1.SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2.RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE
PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE
PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL
INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY
OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
- --------------------------------------------------------------------------------
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signature.
Executed at: San Rafael, California Executed at: Minneapolis, MN
----------------------- -------------------------
on: on: 8-10-99
-------------------------------- --------------------------------
By LESSOR: BY LESSEE:
DNS Investments, Inc. ACI Telecentrics, Inc.
------------------------------------ --------------------------------------
By: By:
--------------------------------- -----------------------------------
Name Printed: Raymond S. Bregante Name Printed: Rick Diamond
Title: Chief Financial Officer Title: CEO
----------------------------- -------------------------------
By: By:
--------------------------------- -----------------------------------
Name Printed: Name Printed:
-----------------------
<PAGE>
Title: Title:
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Address: 102 Mountain View Ave Address: 3100 West Lake St., Suite 300
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San Rafael, CA 94901 Minneapolis, MN 55416
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Telephone: (415) 457-4040 Telephone: (612) 928-4700
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Facsimile: (415) 457-3186 Facsimile: (612) 928-4701
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Federal ID No. Federal ID No.
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NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Please Writ or call us to make sure that you are utilizing the
most current form. We can be reached at the American Industrial Real Estate
Association, 700 South Flower, Suite 600, Los Angeles, CA 90017. (213) 687-8777
Fax (213) 687-8616.
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ADDENDUM TO LEASE
This is an addendum to the AIR Standard Industrial/Commercial Single-Tenant
Lease-Net dated August 3, 1999 by and between DNS Investments, Inc. (Lessor) and
ACI Telecentrics, Inc. (Lessee).
50. PRORATIONS: Notwithstanding the provisions of paragraphs 8.1, Payment for
Insurance, and 10.1 (a) Payment of Taxes, Tenant shall pay its pro-rata share
(which shall be 57.7%) of these expenses in the same manner as provided for
operating expense reimbursement in paragraph 51 below.
51. COMMON AREA EXPENSES: Notwithstanding the provisions of paragraph 7.1 and
7.2 above, Lessor shall have the obligation to maintain the common areas, as
defined below, in good order, condition and repair. Lessee shall pay its
pro-rata share of these operating expenses.
(a) "Operating Expenses" is defined, for purposes of this Lease, as all costs
incurred by Lessor, if any, for the operation, repair and maintenance of the
common areas in neat, clean, good order and condition by Lessor, if any, for:
(1)The common areas, including common hallways, loading and unloading areas,
trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped
areas, striping, bumpers, common area lighting facilities, heating
facilities, fences, gates, elevators and bathrooms.
(2) Trash disposal services
(3) Tenant directories
(4) Fire detection systems maintenance and repair
(5) Security services
(6) HVAC maintenance
(7) Roof maintenance
(8) Exterior painting on building
(9) Any other service to be provided by Lessor that is elsewhere in this
Lease stated to be an "Operating Expense".
Lessor and Lessee agree that Lessor will not commence any roof maintenance or
exterior painting of the premises without first obtaining written approval from
Lessee (except in the case of emergency roof repairs).
(b) The inclusion of the services set forth in above in the definition of
Operating Expenses shall not be deemed to impose an obligation upon Lessor to
provide those services unless the property already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to provide
the same or some of them.
(c) Lessee's share of Operating Expenses
(1) Square Footage. For the purposes of allocating Operating Expenses it
is determined that the Lessee's premises is 15,000 rentable sq. ft. and
the total square footage at the execution of the lease is 26,000 square
feet.
(2) Lessee's Share of Operating Expenses Defined. Lessee's Share of
Operating Expenses shall be a percentage based on Lessee's rentable square
feet divided by the total square footage of the area serviced or
potentially serviced by the Operating Expense(s), unless the Operating
Expense is solely for Lessee's benefit.
(d) Lessee's share of utilities and operating expenses shall be payable by
Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time of Lessee's share of annual
operating expenses and the same shall be payable monthly or quarterly, as Lessor
shall designate, during each twelve-month period of the lease term, on the same
day as the base rent is due hereunder. In the event that Lessee pays lessor's
estimate of Lessee's share of operating expenses as aforesaid, Lessor shall
deliver to Lessee within sixty (60) days after the
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expiration of each calendar year a reasonably detailed statement showing
Lessee's share of the actual operating expenses incurred during the preceding
year. If Lessee's payments under this paragraph during said preceding exceed
Lessee's share as indicated on said statement, Lessee shall be entitled to
credit the amount of such overpayment against Lessee's share of operating
expense next falling due. If Lessee's payments under this paragraph during said
preceding year were less than Lessee's share as indicated on said statement,
Lessee shall pay to Lessor the amount of the deficiency within ten (10) days
after delivery by Lessor to Lessee of said statement.
52. SIGNS: In addition to the provisions of paragraph 34 above, Lessor agrees to
allow Lessee the right, subject to the approval of the City of Redding and
obtaining appropriate permits, an eyebrow sign on the front of the building
located in the same place as the prior tenants sign. The actual design is still
subject to Lessors approval, which will not be unreasonably withheld.
53. OPTION TO EXTEND THE LEASE:
(a) Lessor hereby grants to Lessee one (1) individual five (5) year option to
extend the term of the Lease (the "Option") on the same terms and conditions
contained in this Lease except the base rent, and said extension is to begin
upon expiration of the original term (i.e. August 31, 2004). Lessee must give
Lessor written notice to exercise the option on or prior to one hundred eighty
(180) days from the expiration of the original term.
(b) Base rent for the first year of the option shall be the fair market value of
the premises ("FMV") as determined by Lessor's broker. Such determination shall
be made on or before one hundred eighty (180) days prior to the commencement of
the option, and Lessor shall notify Lessee of the FMV, in writing. In the event
Lessee disagrees with the FMV, then within twenty (20) days after receipt of
lessor's notice of FMV, Lessee must so notify Lessor in writing (the "Notice").
Each party must then appoint a real estate broker within ten (10) days of
receipt of the Notice to Lessor, and notify the other party of the name of the
broker and his or her qualifications, in writing. If a party does not appoint a
real estate broker within ten (10) days after the other party has given notice
of the name of its broker, a single broker appointed shall be the sole broker
and shall set the FMV. The parties shall split the cost of the sole broker. If
the two (2) brokers are appointed by the parties as stated herein, they shall
meet promptly and attempt to set the FMV for the applicable option. The parties
shall each bear the costs of their own broker. If they are unable to agree
within thirty (30) days of their appointment, they shall elect a third broker
meeting the qualifications stated herein within ten (10) days after the last day
the two brokers were given to set the FMV. If they are unable to agree on the
third broker, either of the parties can apply to the arbitrator as defined under
paragraph 52(d) of the Lease for the selection of the third broker, by giving
ten (10) days written notice to the other party. Each of the parties shall bear
one half of the cost of appointing the third broker and of paying the third
broker's fee. All brokers appointed herein shall have a minimum of five (5)
years experience in commercial real estate brokerage in Redding and the third
broker shall be a person who has not previously acted in any capacity for either
party. Within thirty (30) days after the selection of the third broker, a
majority of the brokers shall set the FMV. If a majority of the brokers are
unable to set the FMV within the stipulated period of time, the third brokers
opinion of value shall be the FMV. The parties agree to abide by the decision
reached as specified above. Such decisions rendered by the brokers shall be
final and conclusive and may be entered in any court having jurisdiction thereof
as a basis of judgment. The brokers shall base their opinions upon a five (5)
year lease term, and shall consider the same use for the premises. After the FMV
has been set, the brokers shall immediately notify the parties, and the parties
shall immediately execute an amendment to the Lease stating the FMV,
(c) In the event the rent for the option period has not been agreed to by the
start date of that option period, Lessee shall pay rental rate that has been
determined by Lessor until the rental rate for the option period has been
mutually agreed upon. Should the option term rent determined to be less than the
rent paid during this period, then the Lessor shall credit future rent to Lessee
against any overpayments made. Should the option term rent determined to be
greater than the rent paid during this period, then the Lessee shall pay Lessor
the difference within ten (10) days after agreement on the option term rental
rate has been determined.
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54. REAL ESTATE TAXES: Paragraph 10.2 of the Lease shall read as follows:
10.2(a) PAYMENT OF TAXES: Lessee shall pay the real property taxes, as defined
in paragraph 10. 1, applicable to the premises during the term of this Lease.
All such payments shall be made at least ten (10) days after they have been
billed to Lessee by Lessor. If any such taxes shall cover any period of time
prior to or after the expiration or earlier termination of the term hereof,
Lessee's share of such taxes shall be equitably prorated to cover only the
period of time within the tax fiscal year this Lease is in effect.
(b) ADVANCE PAYMENT: In order to insure payment when due and before delinquency
of any or all real property taxes, Lessor reserves the right, at Lessor's
option, to estimate the current real property taxes applicable to the premises
and to require such current years real property taxes to be paid in advance to
Lessor by Lessee prior to the applicable delinquency date. All moneys paid to
Lessor under this paragraph may be intermingled with other moneys' of Lessor and
shall not bear interest. In the event of a breach by Lessee in the performance
of the obligations of Lessee under this Lease, then any balance of funds paid to
Lessor under the provisions of this paragraph may, subject to proration as
provided in paragraph 10.2(a), at the option of Lessor, be treated as an
additional security deposit under paragraph 5.
55. TENANT IMPROVEMENTS: Lessor agrees to allow Lessee to make tenant
improvements to the premises as shown in Exhibit B attached. All improvements
will be performed by licensed contractors and properly permitted by the City of
Redding. Lessee will be responsible for contracting and supervising the work and
hereby agrees to indemnify Lessor for any and all claims arising out of such
work performed. Lessor agrees to contribute up to one hundred fifty thousand
dollars ($150,000.00) towards the cost of these improvements and said
contribution shall be amortized over the initial sixty (60) month term including
ten percent (10%) interest. In addition to the base rent in paragraph 1.5 above,
this monthly amortization of tenant improvement cost shall be $3,172.84 per
month and shall be paid concurrent with the monthly base rent. Lessor shall pay
contractors directly for the work upon receipt of invoices, Notice of Completion
from the City of Redding and Lien Releases from the contractors involved.
56. PARKING: All parking in the shopping center is parking-in-common. There are
currently 75 parking spaces allocated to the premises. Lessor has land available
to add additional parking spaces and may improve this area with asphalt overlay
and restore the area to provide an additional 30 parking spaces for tenant's
use. In the event that additional parking is required by the City of Redding or
by the Lessee, who shall notify the Lessor in writing, then all work to be
performed by Lessor and to be completed not later than 90 days after receipt of
written notification from Lessee. Lessor agrees to notify Lessee, in writing,
within 10 days after receiving any written notice from the City of Redding to
add additional parking spaces. Lessor shall amortize the cost, including ten
percent (10%) interest, of any such additional parking over the remaining term
of Lessee's lease and such cost shall be construed as additional rent under the
terms of paragraph 4.1 above.
57. BROKER DISCLOSURE: Both parties acknowledge that Coldwell Banker Commercial,
C & C Properties, who represented both parties in this transaction, is an
independently owned and operated franchisee of Coldwell Banker Real Estate
Corporation.
Initials:
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-17281, No. 333-17283, and 333-44249 of ACI Telecentrics Incorporated on Form
S-8 of our report dated April 13, 2000 appearing in this Annual Report on Form
10-KSB of ACI Telecentrics, Incorporated for the year ended December 31, 1999.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, MN
April 13, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 199,295
<SECURITIES> 0
<RECEIVABLES> 5,553,351
<ALLOWANCES> 140,000
<INVENTORY> 0
<CURRENT-ASSETS> 6,380,295
<PP&E> 5,740,377
<DEPRECIATION> 3,038,454
<TOTAL-ASSETS> 10,021,435
<CURRENT-LIABILITIES> 2,798,910
<BONDS> 0
0
0
<COMMON> 6,638,531
<OTHER-SE> (542,166)
<TOTAL-LIABILITY-AND-EQUITY> 10,021,435
<SALES> 22,943,014
<TOTAL-REVENUES> 22,943,014
<CGS> 13,536,871
<TOTAL-COSTS> 22,023,233
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,652
<INCOME-PRETAX> 836,129
<INCOME-TAX> 309,000
<INCOME-CONTINUING> 527,129
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 527,129
<EPS-BASIC> .09
<EPS-DILUTED> .09
</TABLE>
