<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 27, 1998 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period from __________ to __________
Commission file number: 000-21959
APEX PC SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Washington 91-1577634
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
20031 142nd Avenue, N.E.
Woodinville, Washington 98072
(Address of Principal Executive Offices) (Zip Code)
425-402-9393
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant has (1) filed all reports,
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
[X]Yes [_] No
As of April 30, 1998, the number of outstanding shares of the Company's
Common Stock was 13,452,928.
1
<PAGE>
APEX PC SOLUTIONS, INC.
FORM 10-Q
MARCH 27, 1998
INDEX
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations (unaudited) for the
Quarters Ended March 27, 1998 and March 28, 1997 3
Consolidated Balance Sheets at March 27, 1998 (unaudited)
and December 31, 1997 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Quarters Ended March 27, 1998 and March 28, 1997 5
Notes to Consolidated Financial Statements (unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-12
Part II Other Information
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on form 8-K 13
Signatures 14
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APEX PC SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 27, MARCH 28,
1998 1997
---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales $15,703,657 $11,586,883
Cost of sales 8,327,476 6,382,677
---------- ----------
Gross profit 7,376,181 5,204,206
---------- ----------
Research and development 646,370 441,794
Sales and marketing 1,210,236 885,727
General and administrative 1,057,703 780,781
---------- ----------
Total operating expenses 2,914,309 2,108,302
---------- ----------
Income from operations 4,461,872 3,095,904
Interest income (expense), net 566,856 (240,403)
Other income - 146,324
---------- ----------
Income from operations before income taxes and
Extraordinary item 5,028,728 3,001,825
Provision for income taxes 1,684,624 1,025,500
---------- ----------
Income before extraordinary item 3,344,104 1,976,325
Extraordinary item -- loss on early extinguishment of debt,
net of applicable income tax benefit of $72,511 - (140,763)
---------- ----------
Net income $ 3,344,104 $ 1,835,562
---------- ----------
---------- ----------
Per share amounts:
Basic:
Income before extraordinary item $ 0.25 $ 0.22
Extraordinary item - (0.01)
---------- ----------
Net income $ 0.25 $ 0.21
---------- ----------
---------- ----------
Diluted:
Income before extraordinary item $ 0.24 $ 0.18
Extraordinary item - (0.01)
---------- ----------
Net income $ 0.24 $ 0.17
---------- ----------
---------- ----------
Weighted average shares used in computing net income per share:
Basic 13,437,982 8,837,027
---------- ----------
---------- ----------
Diluted 13,965,831 10,634,477
---------- ----------
---------- ----------
</TABLE>
See notes accompanying these consolidated financial statements.
3
<PAGE>
APEX PC SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 27, DECEMBER 31,
1998 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,910,310 $11,824,978
Investments 34,062,551 27,878,683
Accounts receivable, net of allowance for doubtful
accounts 10,338,922 9,843,716
Inventories 3,011,906 2,918,119
Interest receivable 518,070 378,730
Prepaid expenses 505,393 243,741
Deferred tax assets 569,000 554,664
---------- ----------
Total current assets 58,916,152 53,642,631
---------- ----------
Property and equipment, at cost:
Leasehold improvements 145,937 145,937
Furniture and office equipment 497,935 500,281
Computer and other equipment 659,331 655,581
---------- ----------
1,303,203 1,301,799
Less accumulated depreciation 518,565 432,847
---------- ----------
784,638 868,952
---------- ----------
Investments 742,858 741,538
---------- ----------
Other assets 107,825 17,672
---------- ----------
Total assets $60,551,473 $55,270,793
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,034,913 $ 326,619
Accrued wages and commissions 442,328 791,062
Accrued warranty costs 745,000 745,000
Accrued income taxes 1,594,953 -
Other accrued expenses 538,974 634,765
---------- ----------
Total current liabilities 4,356,168 2,497,446
Deferred taxes 39,000 35,000
---------- ----------
Total liabilities 4,395,168 2,532,446
---------- ----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, 1,000,000 shares authorized; no shares
issued and outstanding - -
Common stock, no par value; 100,000,000 shares
authorized; 13,438,159 and 13,434,384 shares issued
and outstanding, respectively 62,078,642 62,014,406
Deferred compensation (158,513) (168,131)
Retained earnings (deficit) (5,763,824) (9,107,928)
---------- ----------
Total shareholders' equity 56,156,305 52,738,347
---------- ----------
Total liabilities and shareholders' equity $60,551,473 $55,270,793
---------- ----------
---------- ----------
</TABLE>
See notes accompanying these consolidated financial statements.
4
<PAGE>
APEX PC SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 27, MARCH 28,
1998 1997
------------ ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net cash provided by operating activities $ 4,207,688 $3,152,325
------------ ----------
Cash flows from investing activities:
Purchases of investments (16,568,702) -
Maturities of investments 10,383,514 -
Purchases of property and equipment (1,404) (94,891)
------------ ----------
Net cash used in investing activities (6,186,592) (94,891)
------------ ----------
Cash flows from financing activities:
Repayments of long-term debt and capital lease - (25,601,095)
Proceeds from initial public offering of common stock - 28,876,161
Proceeds from issuance of common stock and exercise of
Common stock options 64,236 -
Redemption of Series B redeemable preferred stock (1,000,000)
------------ ----------
Net cash provided by financing activities 64,236 2,275,066
------------ ----------
Net increase (decrease) in cash and cash equivalents (1,914,668) 5,332,500
Cash and cash equivalents at beginning of period 11,824,978 2,118,887
------------ ----------
Cash and cash equivalents at end of period $ 9,910,310 $7,451,387
------------ ----------
------------ ----------
</TABLE>
See notes accompanying these consolidated financial statements.
5
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles and reflect all
adjustments consisting of normal recurring adjustments which, in the
opinion of management, are necessary for a fair presentation of the results
for the periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for the full fiscal year or
for any future period. 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 and assumptions.
The accompanying consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of Apex PC
Solutions, Inc. ("Apex" or the "Company") for the year ended December 31,
1997 and the notes thereto contained in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997, on file with the Securities
and Exchange Commission.
The Company reports its annual results based on years ending December
31. The Company reports its quarterly results for the first three interim
periods ending on the last Friday of March, June and September and for the
fourth interim period ending on December 31.
The financial statements of the Company are consolidated and include
the accounts of the Company and its wholly-owned subsidiary, Apex PC
Solutions, Ltd. (a foreign sales corporation). Significant intercompany
transactions and balances have been eliminated.
The Company has evaluated the impact of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" and has
determined that its current reporting is in compliance with the statement.
The Company has also evaluated the impact of Statement of Financial
Accounting No. 131, "Disclosures About Segments of an Enterprise and
Related Information" and has determined that its current reporting is in
compliance with the statement, and has also determined that the
Company's operations consist of only one segment.
Note 2. Inventories
Inventories consisted of the following at:
<TABLE>
<CAPTION>
MARCH 27, DECEMBER 31,
1998 1997
------- ------
<S> <C> <C>
Raw materials $1,110,048 $ 979,438
Work-in-process 975,196 908,815
Finished goods 1,161,662 1,264,866
---------- ----------
3,246,906 3,153,119
Less reserve for obsolescence (235,000) (235,000)
---------- ----------
$3,011,906 $2,918,119
---------- ----------
---------- ----------
</TABLE>
NOTE 3. Leveraged Recapitalization and Initial Public Offering
In December 1995, the Company effected a leveraged recapitalization
(the "Leveraged Recapitalization") pursuant to which (i) the Company
redeemed from one of its shareholders Common Stock representing a 50%
voting interest in the Company prior to the Leveraged Recapitalization for
approximately $12.5 million in cash and a Class B Subordinated Promissory
6
<PAGE>
Note in the principal amount of $10.0 million, and (ii) the Company sold to
a group of entities affiliated with TA Associates, Inc. (The "TA Group")
Common Stock and Series A Redeemable and Convertible Preferred Stock
representing a 50% voting interest in the Company after the Leveraged
Recapitalization for $2.5 million and sold to the TA Group Class A
Subordinated Promissory Notes in the aggregate principal amount of
$10.0 million. The subordinated promissory notes issued by the Company in
connection with the Leveraged Recapitalization were repaid upon
consummation of the Company's initial public offering in February 1997 (the
"IPO"). In connection with the Leveraged Recapitalization, Kevin J. Hafer,
the Company's President and Chief Executive Officer, received 200,000
shares of the Company's Series B Redeemable Preferred Stock. This Series B
Redeemable Preferred Stock was fully vested on January 1, 1997. The
Company Redeemed 80,000 Shares of such Series B Redeemable Preferred Stock
on January 1, 1997 for $5.00 per share (an aggregate of $400,000) and
redeemed the balance of such shares for $5.00 per share (an aggregate of
$600,000) upon the consummation of the Company's IPO. In connection with
the Leveraged Recapitalization, the Company incurred approximately $5.6
million of long-term bank indebtedness in December 1995, which was repaid
using the net proceeds of the Company's IPO.
Note 4. Follow-On Offering
A follow-on public offering of 4.6 million shares of the Company's
Common Stock (including 600,000 shares sold pursuant to the underwriters'
over-allotment option) was completed in August 1997, at a price of $26 per
share. Of the total, 1,250,000 shares were offered by the Company and
3,350,000 shares were offered by certain selling shareholders. The Company
plans to use the approximately $30.3 million in net proceeds for general
corporate purposes.
Note 5. Extraordinary Item
Because of the early retirement of the long-term bank indebtedness and
subordinated promissory notes upon consummation of the Company's IPO, the
Company's statement of operations in the first quarter of 1997 reflects an
extraordinary loss for the write-off of deferred financing costs of
approximately $141,000, net of applicable income taxes.
Note 6. Other Income
Other income in the Quarter ended March 28, 1997 includes
approximately $136,000 received by the Company in the first quarter of
1997 in connection with the Leveraged Recapitalization.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE INFORMATION CONTAINED IN THIS ITEM 2 - "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONTAINS
FORWARD-LOOKING STATEMENTS AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS RELATING TO FUTURE NET SALES, FUTURE GROSS MARGINS,
FUTURE RESEARCH AND DEVELOPMENT EXPENDITURES, FUTURE SALES AND MARKETING
EXPENDITURES, FUTURE GENERAL AND ADMINISTRATIVE EXPENDITURES, BACKLOG AND FUTURE
LIQUIDITY AND CAPITAL RESOURCES. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THIS ITEM 2 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997, ON FILE WITH THE SECURITIES
AND EXCHANGE COMMISSION.
7
<PAGE>
OVERVIEW
The Company designs, manufactures and markets stand-alone switching systems
and integrated server cabinet solutions for the client/server computing market.
The Company's switching products, including OUTLOOK, OUTLOOK(4) , VIEWPOINT, and
EL-40LC, enable network administrators to access multiple servers from one or
more centralized keyboard, monitor and mouse configurations ("consoles"),
consolidate hardware and provide direct hardwired connections between the switch
and the attached servers to facilitate access to servers even when the network
is down. The Company also offers integrated server cabinet solutions to
consolidate and store heterogeneous servers and related hardware in one or more
cabinets to facilitate more efficient physical access and safer performance of
hardware maintenance tasks.
The Company markets and sells its products through a direct sales force and
various distribution channels. A substantial portion of the Company's sales are
concentrated among a limited number of original equipment manufacturers which
purchase the Company's switching systems on a private-label basis. For the
quarter ended March 27, 1998, sales to the Company's private-label OEM customers
represented 55% of the Company's net sales. The Company's private-label OEM
business is subject to risks such as contract termination, reduced or delayed
orders, adoption of competing products developed by third parties for the OEM or
by the OEM's internal development team, and change in corporate ownership,
financial condition, business direction or product mix by the OEM, any of which
could have a material adverse effect on the Company's results of operations.
The Company has experienced, and may continue to experience, significant
reductions or delays in orders from its private-label OEM customers which have
had and may in the future have a material adverse effect on the Company's
quarterly sales and operating results. The failure of any of the Company's
private-label OEMs to continue to place orders at current or anticipated levels
would likely have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's business and results of operations are becoming more
dependent upon the Company's sales of branded switching products to other
manufacturers of servers and related networking products, who integrate and sell
Apex-brand switches with their own products ("Apex-brand OEMs"). The Company
does not have contracts with any of these customers, who are obligated to
purchase products from the Company only pursuant to binding purchase orders and
could cease doing business with the Company at any time. The Company's business
with these customers is subject to risks such as short order cycles and
difficulty in predicting sales, reductions or delays in orders, adoption of
competing products developed by third parties of the customer or by the
customer's own internal development team, and change in corporate ownership,
financial condition, business direction or product mix of the customer. The
loss of, or material decline in orders from, certain of these customers could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company has experienced substantial fluctuations in its operating
results, on a quarterly and an annual basis, and the Company expects such
fluctuations to continue in the future. The Company's operating results are
affected by a number of factors, including: the volume and timing of orders,
particularly from private-label OEM and other large customers; the timing of
shipments; the timing of new product introductions and enhancements by the
Company and its competitors; changes in product or distribution channel mixes;
changes in pricing policies or price reductions by the Company; competition and
price reductions by the Company's competitors; the availability and cost of
supplies and components; sales and marketing expenses related to entering into
new markets, introducing new products and retaining current OEM and other large
customers; seasonal customer demand; and fluctuations in sales of servers due to
changes in economic conditions or capital spending levels.
The Company is currently experiencing increased price competition in both
the market for stand-alone switching systems and the market for integrated
server cabinet systems and expects that pricing pressures will increase in the
future. Increased competition could result in price reduction and loss of
market share which would adversely affect the Company's business, financial
condition and results of operations.
8
<PAGE>
In general, the Company's sales cycle varies substantially and may be
lengthy, making revenues difficult to forecast. The Company has experienced
period to period variability in sales to each of its private-label OEM customers
and expects this pattern to continue in the future. Although the Company's
private-label OEM customers typically place orders for products up to several
months prior to scheduled shipment dates, these orders are subject to
cancellation up to four to six weeks prior to the scheduled shipment date. The
Company generally must plan production, order components and undertake its
manufacturing activities prior to the time that these orders become firm. In
addition, the Company's private-label OEM customers have in the past requested,
and will likely continue to request from time to time, that the Company delay
shipment dates or cancel orders for products that are subject to firm orders.
Accordingly, sales to private-label OEMs for future quarters are difficult to
predict. Moreover, any cancellation, rescheduling or reduction of orders by OEM
customers in the future could materially adversely affect the Company's
operating results. If the Company succeeds in increasing branded sales (i.e.,
sales to customers other than private-label OEMs) as a percentage of net sales,
the Company's quarterly sales and operating results will become more dependent
upon the volume and timing of branded product orders received during the
quarter. Because many customers of the Company's branded products (including
resellers) typically place orders shortly before their requested shipment date,
revenues from branded sales are difficult to forecast. The failure of the
Company to accurately forecast the timing and volume of orders for branded
products during any given quarter could adversely affect the Company's operating
results for such quarter and, potentially, for future periods.
With recent industry-wide initiatives to reduce all channel inventories and
to shorten lead times, trends with Apex's major customers are, generally, to
reduce the number of weeks of forward-committed firm orders. As a result of
this factor, which currently is affecting the Company's business with certain
private-label and Apex-brand OEMs, the Company believes that its sales are
becoming more difficult to predict.
Gross margins may vary significantly from period to period depending on a
number of factors, including: the ratio of private-label OEM sales to branded
sales, as private-label OEM sales typically have lower gross margins than
branded sales; product mix, including the percentage of integrated server
cabinet solution sales, which generally have lower gross margins than sales of
stand-alone switching systems; raw materials and labor costs; new product
introductions by the Company and its competitors; and the level of outsourcing
of manufacturing and assembly services by the Company. The Company expects that
its gross margins will decline in the future primarily due to increased
competition and the introduction of new technologies that may affect the prices
of the Company's products. The Company expects that its operating results will
be affected by seasonal trends and by general conditions in the server market.
The Company believes that it has experienced and will continue to experience
some degree of seasonality due to customer buying cycles. The Company believes
that the third and fourth quarters generally have higher net sales levels due to
customer budgeting and procurement cycles, which correspondingly may depress net
sales in other quarters. Because the Company's business and operating results
depend to a significant extent on the general conditions in the server market,
any adverse change in the server market due to adverse economic conditions,
declining capital spending levels or other factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
On February 24, 1998 the Company signed an agreement for a five-year lease
of approximately 117,000 square feet in an industrial office building being
built in Redmond, Washington for scheduled occupancy in February 1999. The
initial base rent under the lease, portions of which will be allocable to cost
of sales and to general and administrative expense, is approximately $90,000
per month, plus taxes, insurance and maintenance. Consequently, beginning in
1999, the Company's gross margin and net income may be adversely affected by the
Company's increased rent expense.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected unaudited statement of operations
data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 27, MARCH 28,
1998 1997
---------- ---------
<S> <C> <C>
Net sales........................................ 100.0% 100.0%
Cost of sales.................................... 53.0 55.1
----- -----
Gross margin..................................... 47.0 44.9
----- -----
Operating expenses:
Research and development.................... 4.1 3.8
Sales and marketing......................... 7.7 7.6
General and administrative.................. 6.8 6.8
----- -----
Total operating expenses............... 18.6 18.2
----- -----
Income from operations........................... 28.4 26.7
Interest income (expense), net................... 3.6 (2.1)
Other income..................................... - 1.3
----- -----
Income before income taxes and
extraordinary item............................. 32.0 25.9
Provision for income taxes...................... 10.7 8.9
----- -----
Income before extraordinary item................ 21.3 17.0
Extraordinary item -- loss on early
extinguishment of debt, net of applicable
income tax benefit......................... - (1.2)
----- -----
Net income...................................... 21.3% 15.8%
----- -----
----- -----
</TABLE>
NET SALES. The Company's net sales consist of sales of stand-alone
switching systems and integrated cabinet solutions. Net sales increased 36% to
$15.7 million for the first quarter of 1998 from $11.6 million for the first
quarter of 1997, due to increased demand for Apex-brand products. Apex-brand
product sales increased 138% to $7.0 million in the first quarter of 1998 from
$3.0 million a year ago. Private-label OEM sales and sales of Apex-brand
products represented 55% and 45%, respectively, of net sales for the first
quarter of 1998, compared to 74% and 26%, respectively, of net sales for the
first quarter of 1997. Any cancellation, rescheduling or reduction of orders by
certain of the Company's private-label OEM customers or other major customers
could materially adversely affect the Company's future operating results.
GROSS MARGIN. Gross margin is affected by a variety of factors, including:
the ratio of OEM sales to branded sales, as OEM sales typically have lower gross
margins than branded sales; product mix, including the percentage of integrated
server cabinet solution sales, which generally have lower gross margins than
sales of stand-alone switching systems; raw materials and labor costs; new
product introductions by the Company and its competitors; and the level of
outsourcing of manufacturing and assembly services by the Company. Gross
margin increased to 47.0% for the first quarter of 1998 from 44.9% for the
first quarter of 1997 due primarily to shifts in the Company's product mix to a
larger percentage of higher-margin Apex-brand product sales, and to cost
efficiencies at higher levels of production. The Company expects that increased
competition may affect pricing and therefore erode the Company's gross margins
in the future.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
include compensation for engineers and materials costs and are expensed as they
are incurred. Research and development expenses increased to $646,000 for the
first quarter of 1998 from $442,000 for the first quarter of 1997. As a
percentage of net sales, research and development expenses increased to 4.1%
for the first quarter of 1998 from 3.8% for the first quarter of 1997. The
increase in absolute dollars and as a percentage of net sales was due primarily
to increased project spending and, to a lesser extent, increased compensation
expense associated with increased staffing levels. The Company believes that
the timely development of innovative products and enhancements to existing
products is essential to maintaining its competitive
10
<PAGE>
position and, therefore, expects research and development expenditures to
increase in absolute dollars.
SALES AND MARKETING EXPENSES. Sales and marketing expenses include
advertising, promotional material, trade show expenses and sales and marketing
personnel costs, including sales commissions and travel. Sales and marketing
expenses increased to $1.2 million for the first quarter of 1998 from $886,000
for the first quarter of 1997. As a percentage of net sales, sales and
marketing expenses increased to 7.7% for the first quarter of 1998 from 7.6%
for the first quarter of 1997. The increase in absolute dollars and as a
percentage of net sales was due primarily to increased advertising and trade
show expenses, including expenses relating to market entry and advertising
strategies for Europe and increased compensation expense associated with
increased staffing levels. The Company expects sales and marketing expenditures
to increase in absolute dollars as it continues its efforts to increase branded
sales and international sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include personnel costs for administration, finance, human resources and general
management, as well as rent, utilities and legal and accounting expenses, and
provision for Washington State's gross receipts tax. General and administrative
expenses increased to $1.1 million for the first quarter of 1998 from $781,000
for the first quarter of 1997. As a percentage of net sales, general and
administrative expenses remained constant at 6.8%. The increase in absolute
dollars was due primarily to increased costs relating to the Company's being
publicly held and, to a lesser extent, increased occupancy costs associated with
the expansion of facilities in mid 1997. The Company expects general and
administrative expenses to increase in absolute dollars to support the growth of
the operations and sales functions.
INTEREST INCOME (EXPENSE), NET. Net interest income was $567,000 for the
first quarter of 1998, compared to net interest expense of $240,000 for the
first quarter of 1997. This $807,000 net change resulted from the elimination
of all indebtedness incurred in the Leveraged Recapitalization, as well as the
elimination of all long-term bank indebtedness, using the proceeds of the
Company's February 1997 IPO, and to interest earned on the approximately $30.3
million of net proceeds from the Company's follow-on offering completed in
August 1997.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
$1.7 million for the first quarter of 1998, from $1.0 million for the first
quarter of 1997. The effective federal tax rate declined to approximately 33.5%
for the first quarter of 1998 from approximately 34% for the first quarter of
1997 due primarily to the benefits associated with implementing a foreign sales
corporation.
NET INCOME. Net income increased 82% to $3.3 million for the first quarter
of 1998 from $1.8 million for the first quarter of 1997 due primarily to
increased net sales and related gross profits and, to a lesser extent, to
decreased net interest expense. As a percentage of net sales, net income
increased to 21.3% for the first quarter of 1998 from 15.8% for the first
quarter of 1997 due to the same factors.
BACKLOG
As of March 27, 1998, the Company's backlog was $10.6 million, compared to
$7.9 million at December 31, 1997 and $6.0 million at the end of the first
quarter of 1997. Backlog consists of purchase orders with delivery dates
scheduled within the next six months. None of the Company's customers is
obligated to purchase products from the Company except pursuant to binding
purchase orders. Generally, purchase orders are subject to cancellation up to
eight weeks prior to the scheduled shipment date. Because of the timing of
orders and the possibility of customer changes to delivery schedules, the
Company's backlog as of any particular date may not be representative of actual
sales for any succeeding period. Moreover, with recent industry-wide
initiatives to reduce all channel inventories and shorten lead times, the
Company views backlog as a less important indicator of future results than may
have been the case through 1996.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 27, 1998 the Company's principal sources of liquidity consisted
of approximately $44.0 million in cash, cash equivalents and current
investments, an increase of $4.3 million from the December 31, 1997 balances. In
addition, the Company has a combined line of credit and letter of credit
facility with a bank with aggregate borrowing capacity of $5.0 million at prime.
Under the line of credit, the Company may borrow up to a specified amount based
upon its accounts receivable. Under the letter of credit arrangement, the bank
will issue commercial letters of credit up to an aggregate of $5.0 million (less
any amounts outstanding under the line of credit). The combined line of credit
and letter of credit facility had a maturity date of April 30, 1998. In April
1998, this facility was renewed with an aggregate borrowing capacity of $5.0
million, under the same terms and provides a final maturity date of April 30,
1999. There were no borrowings under the line of credit and the letter of
credit facility from January 1, 1996 through April 30, 1998, and all $5.0
million was available
Cash generated from operating activities increased to $4.2 million for the
first quarter of 1998 compared to $3.2 million for the first quarter of 1997.
This increase in cash flow was primarily due to increased net income and an
increase in accrued income taxes, partially offset by increases in
accounts receivable.
In February 1997, the Company consummated its IPO. The net proceeds to
the Company from the IPO were approximately $28.4 million, after deducting
$325,399 in offering expenses and approximately $190,000 of directors and
officers insurance premium. Of that amount, $20.0 million was used to repay
the indebtedness evidenced by the Class A and Class B Subordinated Promissory
Notes issued in the Leveraged Recapitalization, approximately $5.6 million
was used to repay long-term bank debt incurred by the Company in December
1995, and $600,000 was used to redeem shares of Series B Redeemable Preferred
Stock. See Note 3 to Consolidated Financial Statements. After application of
the net proceeds of the IPO to the foregoing items, and payment of IPO
expenses (including $190,000 of directors and officers insurance premium
which was expensed in 1997 as a period cost), the remaining proceeds from the
IPO were approximately $2.2 million. Further, in August 1997 the Company
completed a follow-on offering, which yielded net proceeds of approximately
$30.3 million.
The Company believes that existing cash and investment balances, cash
generated from operations and the funds available to it under credit facilities,
together with the remaining proceeds from the IPO and the follow-on offering,
will be sufficient to fund its operations for at least the next 12 months.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On February 25, 1998, the Company filed complaints for patent infringement
against Cybex Computer Products Corporation and Rose Electronics (cause numbers
C98-246Z and C98-245Z, respectively) in United States District Court for the
Western District of Washington at Seattle in connection with United States
Patent Number 5,721,842, which was issued to the Company on February 24, 1998.
The complaints allege that the products manufactured and sold by Cybex Computer
Products Corporation and Rose Electronics embody the inventions claimed in U.S.
Patent Number 5,721,842, and seek injunctive relief, damages, attorneys' fees,
interest and costs.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.17 Lease Agreement dated February 24, 1998, by and between the Company
and OPUS NORTHWEST, L.L.C.
11.1 Statement re: Computation of Net Income Per Share
27.1 Financial Data Schedule
ITEMS 2, 3, 4 and 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
APEX PC SOLUTIONS, INC.
(Registrant)
Date: May 11, 1998 /s/ Kevin J. Hafer
-------------------------
Kevin J. Hafer
President and Chief Executive Officer
Date: May 11, 1998 /s/ Douglas A. Bevis
--------------------------
Douglas A. Bevis
Vice President, Chief Financial Officer
14
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Willows Phase II
Redmond, WA
NET LEASE AGREEMENT
This NET LEASE AGREEMENT ("Lease") is made as of the 24th day of
February, 1998, by and between OPUS NORTHWEST, LLC, a Delaware limited
liability company ("Landlord"), and APEX PC SOLUTIONS, INC., a Washington
corporation ("Tenant").
GRANT
Landlord, in consideration of the rents to be paid and the covenants to be
observed and performed by Tenant, hereby leases to Tenant, and Tenant hereby
leases from Landlord, each upon and subject to the terms and conditions set
forth herein, all of Building D (the "Building") shown and designated on the
Site Plan attached as EXHIBIT A (the "Site Plan") and containing approximately
116,641 square feet of rentable floor area consisting of approximately 27,597
square feet of office space (including approximately 13,307 square feet in the
mezzanine), 2,204 square feet of mezzanine shell space for future office growth
(the "Mezzanine Shell Space") and 86,840 square feet of warehouse space
approximately as shown in the Floor Plan attached as EXHIBIT A-1 (the
"Premises", sometimes referred to herein as the "Initial Premises"). The
Premises are located on the property described in EXHIBIT B (the "Land", which
together with the Premises, constitutes the "Project"), which is a part of the
property known as Willows Commerce Park Phase II (the "Park"), which is shown on
the Site Plan and situated in the City of Redmond, County of King, State o1f
Washington. Tenant is also hereby granted the non-exclusive license to use, in
common with Landlord and other tenants of the Project and their respective
officers, directors, employees, agents and customers, all Common Areas (as
defined in Section 5.3) of the Project as the same may exist from time to time,
and all areas in the Park designated by Landlord from time to time for the
common use of all occupants of the Park.
SECTION 1. LEASE TERM
1.1. LEASE TERM. The initial lease term ("Initial Term") shall commence on
the Commencement Date (as defined in Section 2.2), and shall continue for 60
full calendar months plus the part of the month, if any, from the Commencement
Date through the last day of the month in which the Commencement Date occurs.
Any reference to the Lease Term, Term of this Lease or similar reference shall
be a reference to the Initial Term together with any Renewal Term and any
extensions to or modifications of the Initial Term.
1.2. OPTIONS TO RENEW. Tenant shall have the right, subject to all
provisions of this Section 1.2, to extend the Initial Term for two consecutive
and successive periods of 3 years (each of which is a "Renewal Term" and both of
which are sometimes collectively the "Renewal Terms"), provided that: (a) this
Lease is in full force and effect; (b) Tenant is not in default under this
Lease, subject to any notice required and any applicable grace or cure period,
at the time of exercise of the right of renewal or at the time set for
commencement of the applicable Renewal Term and has not been in default, beyond
the expiration of any cure periods, more than 3 times during the 3 years before
exercise of the right to renew; (c) Tenant exercises its right to each of the
Renewal Terms by giving Landlord written notice of its election at least 180
days before the first day of the Renewal Term being exercised; and (d) each
Renewal Term shall be upon the same terms, covenants and conditions as provided
in this Lease, except that the monthly Fixed Rent shall be the Fixed Rent for
the Renewal Term as set forth in Section 3.1.1. Tenant's failure to exercise
its option for the first Renewal Term shall automatically waive its option for
the second Renewal Term.
1.3. RIGHT OF FIRST OPPORTUNITY. Before and during the Lease Term, Tenant
shall have a right of first opportunity (each, a "Right of First Opportunity")
to lease rentable area in Building B before it is leased and as portions of it
become available from time to time upon the expiration or termination of a lease
to another tenant (each such portion being referred to herein as an "Additional
Space") on such terms and conditions that Landlord is prepared to accept in view
of market conditions at the time for comparable space in projects like the
Project. Before entering into a lease for Additional Space and when Landlord
has reason to believe Additional Space will become available, Landlord shall
give written notice thereof to Tenant. The notice shall contain a proposal to
add the Additional Space to the leased Premises and to otherwise amend the Lease
provision relating to Fixed Rent and such other provisions as Landlord proposes
in connection with the Additional Space. Tenant shall thereafter have 10
business days in which to deliver notice to Landlord indicating that it will or
will not lease the Additional Space on the terms set forth in Landlord's notice.
Tenant's failure to deliver such notice to Landlord within such 10-day period
shall be deemed to be a rejection, and Landlord shall be free to lease the
Additional Space as it sees fit. The Right of First Opportunity shall apply
only with respect to an entire Additional Space, and may not be exercised with
respect to only a portion of it.
SECTION 2. CONSTRUCTION OF IMPROVEMENTS
2.1. LANDLORD'S IMPROVEMENTS. Landlord agrees to furnish at Landlord's
sole cost and expense all of the material, labor, and equipment for the
construction of the Base Building Shell and Sitework and Tenant Improvements
specified in the Outline Specifications attached hereto as EXHIBIT C, the Space
Plan (as defined below) and the Final Plans and Specifications (as defined
below) ("Landlord's Improvements"). Landlord's Improvements shall be
constructed in a good and workmanlike manner in accordance with the Outline
Specifications, the Space Plan, the Final Plans and Specifications and the
Applicable Laws, rules and regulations, including the building code, as they are
presently interpreted and enforced by the governmental bodies having
jurisdiction thereof (collectively, "Applicable Laws"). Landlord represents and
warrants to Tenant that the construction of the Project and the Landlord's
Improvements is not subject to the development moratorium currently in effect in
the City of Redmond. Landlord agrees, at its cost, to cause a space plan to be
prepared in
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<PAGE>
accordance with the Outline Specifications and the Applicable Laws and to submit
the same to Tenant for its approval, which shall be granted or denied within
three (3) business days after Landlord submits the space plan to Tenant. The
space plan shall be approved by Landlord and Tenant affixing thereon the
signature or initials of a Designated Representative (as defined in Section 2.3)
of each of them. A copy of the approved space plan (the "Space Plan") shall be
deemed attached to each party's copy of this Lease as EXHIBIT C-1. Landlord
agrees, at its cost, to cause plans and specifications to be prepared in
accordance with the Outline Specifications, the Space Plan and the applicable
laws and to submit the same to Tenant for its approval. If Tenant objects to
any portion of the submitted plans and specifications, it shall notify Landlord
within 10 days after receipt of such plans and specifications. The plans and
specifications shall be approved by Landlord and Tenant affixing thereon the
signature or initials of a Designated Representative of each of them. The plans
and specifications approved by Landlord and Tenant (the "Approved Plans and
Specifications") shall be the permit plans submitted by Landlord to the City of
Redmond with Landlord's application for permits to construct the Building.
Landlord shall promptly notify Tenant's Designated Representatives of any
changes to the Approved Plans and Specifications that are required by the City
of Redmond. The Approved Plans and Specifications, as revised as required by
the City of Redmond, shall be the "Final Plans and Specifications" and shall be
deemed attached to each party's copy of this Lease as EXHIBIT D. Such EXHIBIT D
shall be in lieu of and shall replace EXHIBIT C and EXHIBIT C-1, except as to
nonconstruction matters contained in EXHIBIT C and EXHIBIT C-1 such as
allowances and exclusions not expressly and specifically superseded by
EXHIBIT D. The signature or initials of a Designated Representative of a party
shall be deemed conclusive evidence of the approval of such party. Tenant also
agrees that it will not act in an arbitrary or capricious manner with respect to
the approval of the space plan and the plans and specifications. When Landlord
requests Tenant to specify details or layouts, Tenant shall specify same,
subject to the provisions of the Outline Specifications, so as not to delay
completion of the Landlord's Improvements. Tenant shall be responsible for
Landlord's increased cost of labor and materials, if any, and loss of rent,
arising out of delay in the completion of the Premises caused by Tenant's
failure to comply in a timely manner with the requirements of this Section 2.1.
Tenant shall have a turnkey build out allowance (the "Allowance") of Thirty
Dollars ($30) per rentable square foot of the office portion of the Premises
($827,910) and One Dollar and 65/100s ($1.65) per rentable square foot of the
warehouse portion of the Premises ($173,000) ($1,000,910 total) for the Cost of
Construction of all of Landlord's Improvements to the Initial Premises, as shown
on the Outline Specifications, Space Plan and Final Plans and Specifications
other than the Base Building Shell and Sitework ("Tenant Improvements"). "Cost
of Construction" shall mean (a) all costs (including sales and excise taxes)
incurred in the design or construction of the Tenant Improvements, including the
contractor's fee; (b) premiums for Builder's Risk and Indemnification Insurance
directly related to the construction of the Tenant Improvements; and (c) costs
of obtaining building permits, water, sewer and utility tap fees. Landlord
shall deliver to Tenant a preliminary budget for the Cost of Construction of the
Tenant Improvements as soon as reasonably possible after approval of the Space
Plan. If the final Cost of Construction of the Tenant Improvements exceeds the
Allowance, Tenant shall pay said excess to Landlord as Additional Rent within 10
days after Landlord notifies Tenant of the amount of the excess, which notice
shall be accompanied by reasonable documentation of the excess; provided,
however, that Tenant shall have the option to have up to a maximum of $250,000
of the excess amortized, with interest at the rate of 10%, over the Initial Term
of this Lease and pay such amount (the "Amortized Amount") as Additional Rent on
the first day of each calendar month of the Initial Term.
2.2. POSSESSION OF PREMISES. The "Commencement Date" of this Lease is the
earlier of: (a) the date two days after the date Landlord's Improvements are
substantially complete and ready for occupancy by Tenant (subject to Punch List
items correction of which does not materially interfere with Tenant's use and
enjoyment of the Premises); or (b) the date Tenant occupies any of the Premises.
The target Commencement Date is February 1, 1999. The Landlord's Improvements
shall be deemed to be substantially complete and ready for occupancy on the date
that the municipality having jurisdiction thereof issues a temporary or
permanent certificate of occupancy permitting Tenant to occupy the Premises for
the purposes set forth in Section 4 or takes such other action as may be
customary to permit occupancy or use thereof; provided, however, that the
issuance of a certificate of occupancy or the taking of such other customary
action shall not be a condition to payment of Rent or commencement of the Lease
Term if failure to secure such certificate or action is caused by the act or
omission of Tenant. Landlord shall give Tenant at least sixty (60) days advance
notice of the date Landlord anticipates that the Landlord's Improvements will be
substantially complete and ready for occupancy (subject to Punch List items
correction of which does not materially interfere with Tenant's use and
enjoyment of the Premises). Landlord shall not be liable for any damages
arising from delay in putting Tenant in possession of the Premises provided
that: (a) if the Commencement Date is delayed until after February 15, 1999,
Tenant shall be entitled to a one (1) day abatement of Fixed Rent and Additional
Rent due after the Commencement Date for each day of delay after February 15,
1999; and (b) if the Commencement Date is delayed until after May 1, 1999,
Tenant shall have the right to terminate this Lease upon written notice given to
Landlord on or before May 1, 1999. Tenant shall have access to the Premises
approximately thirty (30) days before the estimated date of substantial
completion in order to install its fixtures and computer and telephone cabling
and otherwise set up its space, provided that Tenant and its installers shall
coordinate their activities with and in no manner interfere with the work of
Landlord's contractors and subcontractors. Such access shall not be deemed to
constitute Tenant's occupancy of the Premises for the purpose of determining the
Commencement Date. However, all terms and provisions of this Lease shall apply
during such access, except those having to do with the payment of Fixed Rent or
Additional Rent. When the actual Commencement Date is determined, the parties
shall enter into a memorandum specifying the Commencement Date and expiration
date of this Lease.
2.3. REPRESENTATIVES. "Designated Representative" means any person
authorized to speak and act on behalf of Landlord or Tenant and upon whom the
other shall fully and unconditionally be entitled to rely for any and all
purposes of this Lease until such designation has been revoked or changed in
accordance with the applicable provisions of this Section 2.3. Landlord hereby
appoints Harry DeMarre, Bart Brynestad and Mike Ruhl as its Designated
Representatives. Tenant hereby appoints Mary Flynn and Sam Saracino as its
Designated
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Representatives. Either party may change or revoke the authority of
a Designated Representative by notice to the other, but no such change or
revocation shall affect any approval or consent given by a party's Designated
Representative before the other party receives notice of such change or
revocation.
2.4. CONSTRUCTION GUARANTY. Landlord guarantees the Landlord's
Improvements against defective workmanship and/or materials for a period of one
year from the date of substantial completion of Landlord's Improvements.
Landlord agrees, at its sole cost, to repair or replace any defective item
occasioned by poor workmanship and/or materials during said one-year guaranty
period. Performance of such one-year guaranty shall be Landlord's sole and
exclusive obligation with respect to defective workmanship and/or materials.
Tenant's right to enforce such one-year guaranty shall be Tenant's sole and
exclusive remedy with respect to such defective workmanship and/or materials in
limitation of any contract, warranty or other rights, whether express or
implied, that Tenant may otherwise have under applicable law. Upon expiration
of the one-year guaranty of Landlord against defective workmanship and
materials, Landlord shall assign to Tenant any warranties or guaranties of
workmanship or materials given to Landlord by subcontractors or materialmen for
a period longer than the one-year guaranty period described above. Landlord
makes no warranty or representation that any of such warranties or guaranties
will be assignable. To the extent that any such warranties or guaranties are
not assignable, Landlord agrees to cooperate with Tenant in the enforcement
thereof by Tenant, at Tenant's sole cost. Landlord also agrees to cooperate
with Tenant in the enforcement by Tenant, at Tenant's sole cost, of any service
contracts that provide service, repair or maintenance for a period longer than
such one-year guaranty period, on any item incorporated in the Building that is
to be maintained by Tenant.
2.5. TENANT'S ACCEPTANCE OF PREMISES. If on the date the Landlord's
Improvements are substantially complete there should remain items of
construction or finish work to be completed which do not materially interfere
with Tenant's use, occupancy or enjoyment of the Premises, Landlord and Tenant
shall, within 10 business days from the date the Landlord's Improvements are
substantially complete, prepare a written list (the "Punch List") of such
uncompleted items. Landlord agrees to complete the Punch List item(s) within 30
days after the Punch List is delivered to Landlord, provided that if the nature
of any items on the list is such that they cannot be completed within 30 days,
then within such longer period of time as is reasonably necessary to complete
the same, provided Landlord commences the completion within the 30 day period
and thereafter diligently pursues completion. If the Landlord does not complete
any Punch List items within the time required by the previous sentence, Tenant
shall have the right to complete the items and offset the cost of completion
against the Fixed Rent and Additional Rent next due under this Lease within the
limits set forth in Section 18.30. If there is any dispute as to work performed
or required to be performed by Landlord, the existence of any Punch List items
or the completion thereof in accordance with the terms of the Lease, such
dispute shall be decided by Landlord's architect (which is J.P.C., Inc.), whose
decision shall be presumed to be valid. Subject to the preceding, Tenant's
acceptance of possession shall conclusively be deemed to establish that the
Premises have been completed. Tenant waives any claim as to matters not listed
in the Punch List, provided, however, Tenant's failure to include in the Punch
List any incomplete item, the incompleteness of which was not reasonably
discoverable by the date the Punch List was prepared, shall not constitute a
waiver by Tenant with respect to such incomplete item. Tenant shall promptly
furnish to Landlord written notice if Tenant discovers any such incomplete item.
Tenant's sole and exclusive remedy with respect to any incomplete item shall be
the right to cause Landlord to complete such item substantially in accordance
with the Final Plans and Specifications pursuant to Section 2.4.
2.6. FLOOR AREA. The number of rentable square feet of floor area in the
entire Premises, the office portion of the Premises and the warehouse portion of
the Premises shall be determined by Landlord and Tenant based upon the Space
Plan and as part of the process of approving the Space Plan. Once the square
footages have been determined, Landlord and Tenant shall enter into an agreement
amending this Lease to specify the square footages, the Fixed Rent, the
Allowance and the Security Deposit.
SECTION 3. FIXED RENT
3.1. FIXED RENT. Tenant shall pay Landlord, without previous demand therefor
and without any right of setoff or deduction whatsoever (except as otherwise
specifically permitted in this Lease), at the office of Landlord at: Opus
Northwest, L.L.C., Attn: John Solberg, Vice President, 200 - 112th Avenue N.E.,
Suite 205, Bellevue, WA 98004, or at such other place or account as Landlord
may from time to time designate in writing, rent for the Term of this Lease in
the following amounts (the "Fixed Rent"):
<TABLE>
<CAPTION>
INITIAL TERM: RENEWAL TERM
------------- -------------
<S> <C> <C> <C>
Month 1 and 2 $ -0- First See Section 3.1.1
Months 3 - 36 $90,150 Second See Section 3.1.1
Months 37 - 60 $99,165
</TABLE>
payable monthly, in advance, commencing on the Commencement Date and continuing
on the first day of each month thereafter during the balance of the Lease Term.
Fixed Rent for any partial calendar month shall be prorated.
3.1.1. RENEWAL TERM FIXED RENT. The monthly Fixed Rent during each
Renewal Term shall be 95% of the market rate for a 3 year term for comparable
space leased on comparable terms in the Redmond, Washington area ("Market Rent")
but in no event less than one hundred percent (100%) of the Fixed Rent payable
in the period immediately preceding the Renewal Term. Landlord shall give
Tenant notice of Landlord's estimation of Market Rent within 10 days after
receiving Tenant's notice exercising its option to renew. If Tenant disagrees
with such estimate, it shall notify Landlord in writing thereof within 10 days
of the Tenant's receipt of its notice. If
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Tenant fails to notify Landlord that it disagrees with the estimation within
said 10-day period, Tenant shall be deemed to have agreed to the Market Rent
proposed by Landlord. If there is a disagreement on such estimation, the
parties shall promptly meet to attempt to resolve their differences. If the
differences as to Market Rent are not resolved within 25 days of the date Tenant
receives the Landlord's initial estimate of Market Rent, then the parties shall
submit the matter to appraisal in accordance with the next paragraph so that
Market Rent is determined before the first day of the Renewal Term, or Tenant
may give Landlord written notice within 3 business days after expiration of the
25-day period that Tenant withdraws the notice exercising its right of renewal
and this Lease shall expire as of the expiration of the then-existing Term.
If the parties are unable to reach agreement on Market Rent during the
period specified in the immediately preceding paragraph, then Landlord or Tenant
(the "Moving Party") may give notice to the other demanding appraisal and naming
an appraisal company. The recipient of such notice (the "Recipient") shall,
within 10 days after receiving the Moving Party's notice, give notice to the
Moving Party naming an appraisal company selected by the Recipient. Each
appraiser shall be a member of the American Institute of Appraisers and shall
have not less than 10 years experience in the appraisal of properties like the
Project in the Puget Sound area, including Redmond. If the Recipient fails to
notify the Moving Party of the name of the appraisal company it has selected
within said 10 day period, the appraisal company selected by the Moving Party
shall determine the Market Rent for the Renewal Term. The appraiser(s) shall
determine the Fixed Rent for the Renewal Term, which shall be the monthly amount
per square foot that a willing, comparable tenant would pay and a willing,
comparable landlord would accept, in an arms-length lease for comparable space
in a comparable building in a comparable Project for a comparable period of
time, giving consideration to the rent rates per square foot, the standard of
measurement by which square footage is measured, the type and extent of
liability under any escalation clauses and all other applicable conditions of
tenancy (which is a more detailed description of the Market Rate). The Market
Rate shall not be less than 100% of the Fixed Rent payable in the period
immediately preceding the Renewal Term. The appraiser(s) shall render a
decision in writing to Landlord and Tenant simultaneously within 10 days of
their appointment. Any decision in which the appraiser appointed by Landlord
and the appraiser appointed by Tenant concur shall be binding and conclusive
upon the parties.
If the two appraisers are unable to agree upon a determination of Market
Rent within 20 days after appointment of the appraiser(s), they shall appoint a
third appraiser, who shall be an impartial person with qualifications similar to
those required of the first two appraisers. If the initial two appraisers are
unable to agree upon such appointment within 5 days after expiration of the 20
day period, the third appraiser shall be selected by the parties themselves, if
they can agree, within a further period of 10 days. If the parties do not so
agree, then either party, on behalf of both, may request appointment of such a
qualified person by the then presiding judge of the King County Superior Court
acting in his private non-judicial capacity. The other party shall not raise
any question as to such Judge's full power and jurisdiction to entertain the
application for and make the appointment, and the parties agree to indemnify the
presiding judge against all claims arising out of the presiding judge's
appointment of an appraiser. If the Market Rent cannot be determined by
agreement between the two appraisers selected by Landlord and Tenant, or
settlement between the parties during the course of appraisal, the Market Rent
shall be determined by the three appraisers in accordance with the following
procedure. Each of the two appraisers originally selected by the parties shall
prepare a written statement of his determination of the Market Rent, supported
by the reasons therefor, with counterpart copies for each party and the third
appraiser. The appraisers shall arrange for a simultaneous exchange of their
Market Rent determinations. The role of the third appraiser shall be to select
which of the two proposed determinations most closely approximates his
determination of the Market Rent. The third appraiser shall have no right to
propose a middle ground or any modification of either of the two proposed Market
Rents. The appraisers shall attempt to decide the issue within 10 days after
the appointment of the third appraiser. The Market Rent chosen by the third
appraiser shall constitute the decision of the appraisers and be final and
binding upon the parties.
In the event of a failure, refusal or inability of any appraiser to act,
his successor shall be appointed by him, but in the case of the third appraiser,
his successor shall be appointed in the manner described above for appointment
of the third appraiser. The appraisers shall have the right to consult experts
and competent authorities with factual information or evidence pertaining to a
determination of Market Rent, but any such consultation shall be made in the
presence of both parties with full right on their part to cross-examine. The
appraiser(s) shall render the determination of Market Rent in writing, with
counterpart copies to each party. The appraisers shall have no power to modify
the provisions of this Lease. Each party shall pay the fees and expenses of its
respective appraiser and both shall share equally the fees and expenses of the
third appraiser, if any. Each party shall pay the attorneys' fees and expenses
of its counsel and the fees and expenses of any witnesses called by that party.
Time is of the essence in connection with the establishment of Market Rent. If
the Market Rent for a Renewal Term is not determined before the first day of the
Renewal Term, the Tenant shall continue to pay Fixed Rent in the amount payable
during the immediately preceding period until the Fixed Rent for the Renewal
Term is determined. Within 10 business days after the Fixed Rent for the
Renewal Term has been determined, the Tenant shall pay to the Landlord the
excess, if any, of the Fixed Rent due at the rate set by the appraiser(s) over
the Fixed Rent actually paid during any expired portion of the Renewal Term.
3.2. ADDITIONAL RENT. Tenant shall fully and timely pay or discharge
any and all charges, insurance premiums, utility charges, maintenance, repair
or replacement expenses and any other amount to be paid by Tenant under the
terms of this Lease as additional rent (sometimes collectively referred to as
"Additional Rent"). If the Tenant fails to pay or discharge any item of
Additional Rent within the cure period specified in Section 11.2, Landlord
may, but shall not be obligated to, pay or discharge the same. The Tenant
shall immediately reimburse Landlord for all costs so incurred by Landlord,
together with interest at the Agreed Rate (as defined in Section 3.3) from
the date of Landlord's expenditure until the date Landlord receives Tenant's
reimbursement. The term "Rent" means the aggregate of Fixed Rent and
Additional Rent.
3.3. DELINQUENT PAYMENTS. Any installment of Fixed Rent or Additional
Rent or any other charges payable by Tenant under the provisions hereof which
is not paid when due shall bear interest from the date due until
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<PAGE>
it has been paid at an annual rate equal to (the "Agreed Rate") 5% in excess of
the published "prime rate" announced as such by Seattle-First National Bank,
N.A., it's successors or assigns, including by merger or other operation of law,
but in no event greater than the maximum lawful rate Landlord may charge Tenant.
In addition, any installment of Fixed Rent or Additional Rent or any other
charges payable by Tenant under the provisions hereof which is not paid when due
and which remains unpaid 10 days thereafter shall be subject to a late payment
fee of 5% of the unpaid amount. Landlord, however, waives such fee and interest
if the amount due is paid to Landlord within 3 days of telephone notice to Mary
Flynn at the Premises, provided that such waiver shall occur no more than one
time in any 12 month period.
3.4. SECURITY DEPOSIT. Contemporaneously with the execution hereof,
Tenant shall pay to Landlord the sum of Ninety Thousand One Hundred and Fifty
($90,150) (the "Security Deposit"). The Security Deposit shall be held by
Landlord without liability for interest as security for the performance by
Tenant of Tenant's obligations under this Lease. Upon the occurrence of any
Event of Default by Tenant (as defined in Section 12), Landlord may, from
time to time, without prejudice to any other remedy, use the Security Deposit
to the extent necessary to pay any arrearages of Fixed Rent or Additional
Rent, to pay any amount which Landlord may spend or become obligated to spend
by reason of such Event of Default or to compensate Landlord for any other
loss, damage or liability which Landlord may suffer by reason of such Event
of Default. Following any such application of the Security Deposit, Tenant
shall pay to Landlord on demand the amount so applied in order to restore the
Security Deposit to its original amount. Provided there exists no Event of
Default hereunder, any remaining balance of the Security Deposit shall be
returned promptly by Landlord to Tenant upon expiration or earlier
termination of this Lease. If Landlord transfers its interest in the
Premises during the Lease Term, Landlord may assign the Security Deposit to
the transferee and thereafter shall have no further liability for the return
of the Security Deposit.
SECTION 4. USE OF PREMISES
The Premises shall be used for general office, engineering, research and
development, assembly of electronic products, light industrial and warehouse
uses (the "Permitted Use") and no other use. Tenant shall not use or occupy the
same, or knowingly permit them to be used or occupied, contrary to any
applicable statute, rule, order, ordinance, requirement or regulation, or in any
manner which would: (a) violate any certificate of occupancy affecting the
same; (b) cause structural injury to the improvements or overload the floors;
(c) cause the value or usefulness of the Premises, or any portion thereof,
substantially to diminish (reasonable wear and tear excepted); (d) constitute a
public or private nuisance or waste; or (e) increase the cost of any insurance
maintained by Landlord relating to the Premises, unless the increased cost is
paid by Tenant. Tenant agrees that it will promptly, upon discovery of any such
use, take all necessary steps to compel the discontinuance of such use. Tenant
shall comply with any recorded covenants, conditions, and restrictions affecting
the Premises and the Building which are recorded during the Lease Term. Such
recorded covenants, conditions and restrictions shall not unreasonably interfere
with Tenant's rights and obligations under the Lease.
SECTION 5. OPERATING EXPENSES AND TAXES
5.1. DEFINITIONS.
"OPERATING EXPENSES" shall mean all costs of operating, maintaining,
repairing and replacing the Common Area and shall include: all sums expended
for lighting, cleaning, sealing, striping, inspecting, painting and removing
snow, ice, debris and surface water; all insurance costs incurred by Landlord in
connection with the Project, including liability insurance, insurance against
all risks of physical loss (including earthquake and flood if required by
Landlord's Mortgagee, as defined in Section 16.1) or other casualties, rental
loss, workmen's compensation and employer's liability insurance, and any
"deductible" cost incurred in connection with any covered loss; all costs
incurred by Landlord in connection with transportation management for the
Project including surcharges levied upon or assessed against parking spaces or
areas, payments to or for public transit, shuttles, car pooling facilities or a
transportation manager or otherwise, as required by governmental authorities
having jurisdiction over the Project; costs incurred by Landlord in connection
with complying with applicable federal, state or local environmental laws,
regulations, rules, ordinances or other legal requirements not applicable or
required at the Commencement Date; costs of providing security guards, if any;
acquisition costs (rental fees and/or purchase price amortized over the useful
life thereof) or, in lieu of acquisition costs, the annual depreciation (over
the useful life applicable thereto) of machinery and equipment used in
connection with the maintenance or operation of the Common Areas; costs of any
capital improvements to the Project which are for the purpose of reducing energy
costs or Operating Expenses; costs of service and maintenance contracts; costs
of inspecting, repairing and maintaining equipment used in the maintenance or
operation of the Common Area; reasonable costs paid or incurred by Landlord for
professional and other services (including consultants, attorneys, appraisers
and experts) in connection with contesting or attempting to lower Taxes or
resist increased Taxes; a pro rata share (based upon the ratio of the rentable
floor area of the Building compared to the rentable floor area of all buildings
in the Park) of all costs incurred by Landlord in connection with operating,
maintaining and repairing any areas or facilities used in common by the Project
and other portions of the Park pursuant to covenants affecting the Project
hereafter recorded in the records of King County, Washington; and a property
management fee equal to 4% of Tenant's Fixed Rent. Operating Expenses shall not
include: (1) any capital improvement to the Project other than replacements
required for normal maintenance and repair, except as specifically set forth
above; (2) repairs, restoration or other work occasioned by fire, windstorm or
other insured casualty, except for any applicable deductible; (3) expenses
incurred in leasing or procuring tenants, such as leasing commissions,
advertising expenses or expenses for renovating space for new or existing
tenants; (4) legal expenses incident to the negotiation or enforcement by
Landlord of the terms of any lease; (5) interest or principal payments on any
Mortgage (as defined in Section 16.1) or other indebtedness of Landlord; (6) the
initial expense of constructing the Landlord's Improvements and the Common Area
improvements or expenses for constructing or reconstructing the exterior of the
buildings in the Project; (7) any structural change or improvement to
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the Premises or the Project that was expressly required as of the date hereof
under governmental law, regulation or ordinance (as the same are presently
interpreted and enforced) but which Landlord failed to construct as part of the
initial development of the Project; (8) fines, penalties, and interest; (9)
wages, salaries, fees and fringe benefits paid to administrative or executive
personnel, officers, partners, members or managers of Landlord, unless and only
to the extent they are directly engaged in management of the Park or Building;
(10) Landlord's expenses related to compliance with environmental laws and
regulations applicable to Hazardous Materials not released or permitted to be
released by Tenant or Tenant's employees, agents or invitees; (11) any property
management fee in excess of 4% of Tenant's Fixed Rent. Operating Expenses
shared by Tenant will be offset by any revenues generated by parking facilities
at the Project and any Operating Expenses that are charged exclusively to
individual tenants including Tenant. Any capital expense included in Operating
Expenses as permitted by this Section 5.1 shall be amortized on a straight line
basis over the useful life of the improvement, replacement, expansion, addition,
alteration or repair that is the subject of the expense and only the amortized
portion attributable to a particular Lease Year shall be included in the
Operating Expenses for that Lease Year. In the calculation of any expenses
hereunder, no expense shall be charged more than once. Landlord agrees to keep,
for a period of at least 3 years, books and records showing the Operating
Expenses in accordance with a system of accounts and accounting practices
consistently maintained on a year-to-year basis.
"LEASE YEAR" shall mean, in the case of the first Lease Year, that period
from the Commencement Date to the first succeeding December 31. Thereafter,
"Lease Year" shall mean each successive 12 calendar month period following the
expiration of the first Lease Year, except that if this Lease terminates or
expires on any day other than December 31, the last Lease Year shall be the
period from the end of the preceding Lease Year to such termination or
expiration date.
"TAXES" shall mean all taxes and assessments (general and special, ordinary
and extraordinary, foreseen as well as unforeseen, of any kind whatsoever)
against the land, buildings or improvements comprising the Project and all other
governmental charges that are levied or assessed by any lawful authority during
each calendar year, excluding any net income tax, estate tax, transfer tax or
inheritance tax. Taxes shall not include any fine, penalty, interest, or cost
attributable to delinquent payment thereof.
"TENANT'S SHARE" shall mean one hundred percent (100%); provided, however,
that if Landlord incurs Operating Expenses for the Project and portions of the
Park outside the Project (the "Larger Area"), then Tenant's Share, with respect
to such Operating Expenses shall mean the fraction numerator of which is the
number of square feet of rentable floor area of the Premises as certified by
Landlord's architect and the denominator of which is number of square feet of
rentable floor area of all buildings in the Larger Area (including the Project)
at the time.
5.2. PAYMENT. Tenant shall pay to Landlord Tenant's Share of Taxes and
Operating Expenses, as Additional Rent, in monthly installments on or before
the first day of each calendar month, in advance, in an amount estimated by
Landlord from time to time. Landlord's initial estimate is $0.189 per square
foot per month. Landlord shall, on or about March 31 of each calendar year,
submit to Tenant a statement of estimated Operating Expenses and Taxes for
such Lease Year and Tenant's Share thereof, whereupon Tenant shall pay
Landlord any deficit over Tenant's first quarter payments within 30 days of
receipt of Landlord's statement, and any overpayment by Tenant shall be
credited to the next installments of Tenant's Share of Operating Expenses or
Taxes. Landlord may from time to time revise such estimate by notice to
Tenant, whereupon subsequent payments by Tenant shall be based upon such
revised estimate until Tenant receives the next estimate. To the extent that
property taxes (or taxes in lieu thereof) or assessments are payable in
installments, Tenant's contribution shall be based on the annual installment
due as if such tax or assessment were spread over the maximum period of time
permitted.
Within 90 days after the end of each Lease Year, Landlord shall furnish
Tenant with a statement (the "Annual Statement") of the actual amount of
Tenant's Share of Operating Expenses and Taxes for such period describing the
Operating Expenses in sufficient detail to permit reasonable review by Tenant
and with an explanation of the calculation of the amount payable by Tenant. A
copy of Landlord's real property tax statement shall be enclosed with the Annual
Statement. If the total of the monthly installments paid by Tenant for such
Lease Year does not equal Tenant's Share as shown on the Annual Statement, (a)
Tenant shall promptly pay Landlord any deficiency or (b) Tenant shall be
entitled to offset any excess against Tenant's Share of Operating Expenses or
Taxes due within 30 days thereafter. Landlord shall promptly refund to Tenant
any portion of the excess that exceeds the Operating Expenses and Taxes due
within 30 days or, if this Lease has terminated, the entire excess.
If Tenant is not satisfied with any Annual Statement furnished by Landlord,
upon 10 days' written notice given within 2 years after receiving the statement,
Tenant shall have the right to audit Landlord's books and records pertaining to
Operating Expenses and Taxes for the Lease Year to which such Annual Statement
relates. Landlord shall make such books and records as are reasonably necessary
to conduct such audit available to Tenant for examination at the Landlord's
office during ordinary business hours. Tenant shall keep all of the information
disclosed in the course of the audit confidential and shall require its
consultants to agree in writing directed to Landlord to keep all such
information confidential. Tenant agrees that such audits may not be conducted
on a contingency basis and that Landlord's records relating to a particular
Lease Year may be audited only once. If the audit discloses a discrepancy in
the reported Operating Expenses and Taxes which, after taking into account any
credit given by Landlord pursuant to the final sentence of the preceding
paragraph, result in Tenant having overpaid Tenant's Share of the aggregate of
Operating Expenses and Taxes by more than the greater of Two Thousand Dollars
($2,000), or 4% of the actual amount of Tenant's Share of the aggregate of
Operating Expenses and Taxes, the Landlord shall promptly pay to Tenant the
reasonable cost of said audit (up to $3,000).
5.3. COMMON AREA MAINTENANCE. "Common Area" shall mean the entire area
of the Project designed for the common use or benefit of the tenants of the
Project and other persons entitled to use the same, including parking
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lots, landscaped and vacant areas, roads, walks, curbs, corridors, stairs and
ramps, common utility facilities, storm water detention facilities (whether
located within or outside of the Project), the roof membrane and exterior
surfaces of the buildings located in the Project. Landlord shall operate and
maintain the Common Area, or shall cause the same to be operated and maintained,
in first-class condition and in compliance with all applicable laws, ordinances
and regulations. Landlord shall have the right: (a) to change the location and
arrangement of parking areas and other Common Areas; (b) to establish and change
the level of parking surfaces; (c) to close all or any portion of the Common
Area to such extent as may, in the opinion of Landlord's counsel, be necessary
to make repairs or alterations or prevent a dedication thereof or the accrual of
any rights by any person or the public therein; and (d) to do and perform such
other acts in and to said area and improvements as, in the exercise of good
business judgment, Landlord shall determine to be advisable with a view to the
improvement of the convenience and use thereof, provided that no such changes
will materially affect visibility or access to the Premises, materially reduce
available parking or involve relocation of the Premises. If such an affect or
reduction occurs, rental and other payments payable hereunder shall be
proportionately abated during the period of such affect or reduction. If
Landlord exercises any right set forth in the preceding sentence, Landlord shall
use reasonable efforts to minimize material adverse interference with Tenant's
operation of the Premises for the Permitted Use. Tenant shall not, without the
prior written consent of the Landlord, solicit business or display merchandise
within the Common Area, distribute handbills therein or take any action which
would interfere with the rights of other persons to use the Common Area.
5.4. OTHER TAXES. Tenant shall pay, as Additional Rent, any tax or
excise on rents, gross receipts tax, transaction privilege tax or other tax,
however described, which is levied or assessed by any lawful authority
against Landlord with respect to the Fixed Rent, Additional Rent or other
charges accruing under this Lease. If it shall not be lawful for Tenant so
to reimburse Landlord, the monthly Fixed Rent payable to Landlord shall be
increased so that after imposition of any such tax or charge Landlord
receives the same net rental that it received before the imposition thereof.
5.5. TENANT PARKING. Landlord agrees to make available to Tenant 240
parking stalls in the Project on an unassigned basis and in common with all
occupants of the Project.
SECTION 6. INSURANCE
6.1. LANDLORD'S CASUALTY INSURANCE. Landlord shall keep the
improvements in the Project insured in an amount equivalent to their full
insurable replacement cost (with a deductible not greater than $10,000
without the prior written consent of Tenant, except for earthquake and flood
insurance) against loss or damage by fire and such other risks as are
customarily covered with respect to buildings and improvements similar to the
Project in construction, general location, use, occupancy and design, and
such other risks as Landlord may deem appropriate.
6.2. LIABILITY INSURANCE COVERAGE. Tenant, at its sole cost, shall
carry commercial general liability insurance covering the Premises and
Tenant's use of the Premises with a combined single limit not less than Five
Million Dollars ($5,000,000), per occurrence, coverage on an occurrence
basis, with a deductible of not more than Ten Thousand Dollars ($10,000.00).
Such insurance shall: (a) name Landlord, its managing agent and Mortgagee as
additional insureds; (b) specifically insure (by contractual liability
endorsement) Tenant's obligations under Section 10 of this Lease; (c) be
primary to any liability insurance maintained by Landlord, its managing agent
or Mortgagee; (d) protect each of the insureds under a severability of
interest clause as if each were separately insured under separate policies;
and (e) include employer's liability and Washington stop gap coverage.
6.3. TENANT'S CASUALTY AND BUSINESS INSURANCE. Tenant, at its sole
cost, shall keep all of its inventory, equipment, furniture, fixtures and
personal property located at the Premises insured in an amount equivalent to
the full insurable replacement cost against loss or damage by fire and such
other risks as are customarily covered with respect to a tenant's machinery,
equipment, furniture, fixtures, personal property and business located in a
building similar to the Project in general location, use, occupancy and
design, including sprinkler leakage, windstorms, hail, explosions, vandalism,
theft, malicious mischief, civil commotion and such other coverage capable of
being covered by a special extended coverage insurance policy. Tenant, at
its sole cost, shall also carry business interruption and extra expense
insurance in a sufficient amount to protect Tenant against any additional
costs and lost income associated with interruption of its business from the
Premises for a period not less than one year.
6.4. GENERAL PROVISIONS. All policies required under Section 6.2 and
Section 6.3 shall be written by companies licensed in the state in which the
Premises are located and reasonably acceptable to Landlord (having a
financial rating of at least "VIII" and a general policyholder's rating of
"A", as rated in the most current Best's Key Rating Guide Property-Casualty).
Each policy shall not be canceled or materially changed without at least 45
days prior written notice to Landlord. Certificates of insurance for each
insurance policy required under Section 6.2 and Section 6.3, in a form
reasonably acceptable to Landlord, shall be delivered to Landlord before the
Tenant has access to or possession of any portion of the Premises. Not less
than 20 days before the expiration of each policy, a new certificate
evidencing the continuation of such insurance shall be delivered to Landlord.
6.5. BLANKET INSURANCE COVERAGE. Nothing in this Section 6 shall
prevent Tenant from maintaining insurance of the kinds and in the amounts
required by Section 6.2 or Section 6.3 under a blanket insurance policy or
policies covering other properties owned or operated by Tenant as well as the
Premises; provided, however, that (a) each policy contains the various
provisions and coverages required by this Section 6 and (b) the certificate
for such policy includes a statement from the insurer setting forth the
coverages maintained and the amounts exclusively allocated to the Premises.
Certificates of such insurance reasonably satisfactory to Landlord shall be
delivered to Landlord as described in Section 6.4.
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6.6. RELEASE AND WAIVER OF SUBROGATION. Notwithstanding any other
provision of this Lease, Landlord and Tenant each hereby waives, releases and
discharges the other, its agents and employees from all claims whatsoever
arising out of loss, claim, expense, damage or destruction covered or coverable
by insurance required under Section 6.1 or Section 6.3 or covered by other
insurance it may carry (a "Loss"), notwithstanding that such Loss may have been
caused by the other, its agents or employees. Landlord and Tenant each hereby
agrees to look to its insurance coverage only upon such Loss. Landlord's policy
or policies of insurance described in Section 6.1 shall contain a waiver of
subrogation clause as to Tenant. Tenant's policy or policies of insurance
required by Section 6.3 shall contain a waiver of subrogation clause as to
Landlord.
SECTION 7. UTILITIES
Before the Commencement Date, Tenant shall pay for all utilities and
services used by Tenant, its agents, or contractors at the Premises. During
the Lease Term, Tenant shall pay, when due, all charges for utilities or
services furnished to the Premises. If any utilities are provided to the
Premises by Landlord, Landlord's charges for utilities shall not exceed the
cost of such services to Landlord. Extra or after-hours services shall be
available on demand. If any utility is jointly metered with another user or
users, Tenant shall pay an equitable portion of the charges therefor, as
reasonably determined by Landlord, within 10 days after receiving an invoice
therefor from Landlord. Landlord shall not be liable in damages or otherwise,
nor shall there be an abatement of Rent, if any utility or other service to
the Premises is interrupted or impaired by fire, accident, riot, strike, act
of God, the making of necessary repairs or improvements, or by any other
cause beyond Landlord's control. In the event utility services to the
Premises are interrupted for 3 consecutive days or more due to negligence of
Landlord, and if Tenant as a result thereof cannot operate its business from
the standpoint of prudent business management, then the Fixed and Additional
Rent payable by Tenant under the Lease shall abate from the time of
interruption until service is restored. In the event of a significant (I.E.,
30 days or longer) or permanent interruption of service due to Landlord's
negligence, Tenant shall have the option to terminate this Lease, effective
as of such interruption by giving written notice to Landlord within 30 days
after the interruption.
SECTION 8. REPAIRS AND ALTERATIONS
8.1. TENANT'S REPAIRS. Except for the one-year guaranty against
defective materials and workmanship provided for in Section 2.4, the
completion of incomplete items provided for in Section 2.5 and the
performance of Landlord's obligations under Section 8.2, and subject to
Section 13 and Section 14, Tenant agrees, at its sole cost, to maintain the
Premises, all parts thereof, all loading docks contiguous thereto and all
Tenant's signs in good order, condition and repair, ordinary wear and tear
excepted, including keeping the inside of all glass in doors and windows of
the Premises clean, promptly replacing any broken door or door closers and
any cracked or broken glass with glass of like kind and quality. Tenant, at
its sole cost, shall also: keep any garbage removed on a regular basis and
temporarily stored in the Premises or in exterior dumpsters approved by
Landlord; maintain, repair, and replace the mechanical systems (including
HVAC) and all utility lines serving the Premises, including those beneath the
slab and within the exterior or demising walls; keep all mechanical apparatus
free of vibration and noise which may be transmitted beyond the Premises; and
maintain a contract with a licensed and bonded mechanical contractor
reasonably acceptable to Landlord for the repair and maintenance of the
heating, ventilating and air conditioning equipment serving the Premises in
accordance with the recommendations of manufacturers and suppliers. When
used in this Section 8, the term "repair" shall include making all necessary
replacements, renewals, alterations and additions. All repairs shall be at
least equal in quality to the original work and shall be made by Tenant in
accordance with all applicable laws, ordinances and regulations. If Tenant
fails to perform any of its obligations under this Section 8.1 within the
cure period specified in Section 11.2, Landlord may, in addition to
exercising any other remedies provided herein, perform such repairs or
maintenance. Any sums expended by Landlord in performing such repairs or
maintenance shall be due and payable, together with interest thereon at the
Agreed Rate from the date of expenditure by Landlord to the date of repayment
by Tenant, within 10 days after Tenant's receipt of Landlord's written
request for reimbursement, which request shall be accompanied by reasonable
evidence of such costs.
8.2. LANDLORD'S REPAIRS. Landlord shall keep (or cause to be kept) the
structural portions of the Building, including the foundations, the exterior
surfaces of the exterior walls, the roof and, to the extent Tenant or other
Tenants are not obligated to maintain the same, all utility systems, lines
and conduits located within the Project but outside the exterior walls of the
Premises in good repair, ordinary wear and tear excepted. If the need for
repair results from the business activity being conducted within the
Premises, or from the acts or omissions of Tenant, its officers, directors,
employees, agents, contractors or invitees, Tenant shall reimburse Landlord
for the reasonable costs so incurred by Landlord. Landlord shall commence
repairs required under this Section 8.2 as soon as reasonably practicable
after receiving written notice from Tenant of the necessity for such repairs.
Landlord shall have no liability for any damage or injury arising out of any
condition or occurrence causing a need for such repairs, unless the damage or
injury was caused solely by Landlord's negligence. If Landlord fails to make
repairs required under this Section 8.2, Tenant shall promptly deliver to
Landlord, and to any Mortgagee (provided that Tenant has received notice of
the identity and address of any such Mortgagee) notice that such specified
repairs must be performed within 30 days. If Landlord or such Mortgagee
fails to perform the specified repairs within the 30-day period (or, if the
repair cannot with due diligence be accomplished within such period, fails to
commence the repair within such period and thereafter diligently complete the
repair), Tenant may perform said repair in a good and workmanlike manner.
Landlord shall reimburse Tenant for the reasonable costs so incurred by
Tenant within 10 days after Landlord's receipt of Tenant's written request
for reimbursement, which request shall be accompanied by reasonable evidence
of such costs and final lien waivers. If Landlord does not reimburse Tenant
within 30 days after request therefor, Tenant shall have the right to offset
any costs to be reimbursed against Fixed Rent within the limits described in
Section 18.30.
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8.3. TENANT'S CHANGES AND ALTERATIONS. Tenant may make any
modifications, improvements, alterations or additions to the Premises
("Work") that do not affect the exterior appearance of the Building or the
structural, electrical or mechanical systems of the Premises or the Project
and that do not in the aggregate cost more than $50,000 in any 12 month
period without obtaining Landlord's consent, provided Tenant: (a) notifies
Landlord at least 10 days before beginning such Work; (b) delivers to
Landlord a copy of the plans for such Work, if Tenant has arranged to have
plans prepared therefor; and (c) delivers to Landlord copies of any necessary
permits. Tenant shall not perform any other Work without Landlord's prior
written consent, which consent shall not be unreasonably withheld. Along
with any request for Landlord's consent and before commencement of any Work
or delivery of any materials to the Premises or the Project, Tenant shall
furnish Landlord with names and addresses of contractors and copies of any
plans and specifications, contracts and necessary permits and licenses.
Unless Landlord, in its written consent states that upon expiration or
termination of the Lease Term, Landlord will require Tenant to remove all or
any of the proposed Work and restore the Premises, Landlord shall not have
the right to require removal thereof as set forth in Section 18.15. All such
Work shall be performed in a good and workman like manner by a licensed and
bonded contractor and in compliance with all applicable laws, ordinances and
regulations. Tenant hereby agrees to defend and hold Landlord harmless from
any and all claims and liabilities of any kind connected in any way with said
Work. Tenant shall pay the cost of all such Work, and the cost of painting,
restoring or repairing the Premises and the Project occasioned by such Work.
8.4. MECHANIC'S LIENS. Tenant shall not suffer or permit any
mechanic's lien or other lien to be filed against all or any portion of the
Premises or the Project because of work, labor, services, equipment or
materials supplied or claimed to have been supplied to the Premises at the
request of Tenant, or anyone holding all or any portion of the Premises
through Tenant. If any such lien is filed against all or any portion of the
Premises, Tenant shall give Landlord immediate notice of the filing and shall
cause the lien to be discharged within 10 days after Landlord's demand,
provided that Tenant may contest in good faith by appropriate legal
proceedings the validity of any lien or claim of lien so long as (a)Tenant is
not then in default under this Lease beyond any applicable cure period, (b)
Tenant first deposits with Landlord a bond or other security reasonably
satisfactory to Landlord in the amount reasonably required by Landlord, (c)
foreclosure of the lien is stayed pending the contest; and (d) Tenant pays
any judgment rendered for the lien claimant or other third party within ten
(10) days after the entry of the judgment. If Tenant fails to discharge such
lien within such period or contest such lien as permitted in this Section
8.4, in addition to any other right or remedy Landlord may have, after five
days prior written notice to Tenant, Landlord may, but shall not be obligated
to, discharge the same by paying to the claimant the amount claimed to be due
or by procuring the discharge in any other manner that is now or may in the
future be permitted by law. Any amount paid by Landlord, together with all
costs, fees and expenses in connection therewith (including Landlord's
reasonable Attorneys' Fees as defined in Section 18.20), together with
interest thereon at the Agreed Rate, shall be repaid by Tenant to Landlord on
demand by Landlord. Tenant shall indemnify and defend Landlord against all
losses, costs, damages, expenses (including reasonable Attorneys' Fees),
liabilities, penalties, claims, demands and obligations, reslting from such
lien.
SECTION 9. COMPLIANCE WITH LAWS
9.1. GENERALLY. Tenant shall, at Tenant's sole cost, promptly comply
with: (a) any and all present and future laws, ordinances, orders, rules,
regulations and requirements ("Laws") of all federal, state, municipal and
other governmental bodies having jurisdiction over the Premises and/or the
use of the Premises (except Tenant shall not be required to (i) make
structural alterations to the exterior of the Premises that are required by
future Laws and not due to the Tenant's use of the Premises, alterations or
improvements constructed by Tenant or Tenant's employees or (ii) correct any
failure of Landlord to construct the Landlord's Improvements in accordance
with Applicable Laws as required by Section 2.1 of this Lease); and (b) all
easements, restrictions, reservations or covenants, if any, set forth in
EXHIBIT B, hereafter created by Tenant or requested or consented to, in
writing, by Tenant.
9.2. COMPLIANCE WITH HAZARDOUS MATERIALS LAWS. Tenant shall comply
with all federal, state and local laws, ordinances, codes, regulations,
orders and decrees, as they now exist or are hereafter amended, including all
policies, interpretations, guidelines, directions, or recommendations
("Hazardous Materials Laws") relating to industrial hygiene, environmental
protection or the use, analysis, generation, manufacture, storage, presence,
release, disposal or transportation of any petroleum products, flammable
explosives, asbestos, urea formaldehyde, polychlorinated biphenyls,
radioactive materials or waste, or other hazardous, toxic, contaminating or
polluting materials, substances or wastes, including any materials defined as
"hazardous substances," "hazardous wastes," "hazardous materials" or "toxic
substances" (collectively, "Hazardous Materials") under any such Hazardous
Materials Laws.
Tenant shall at its own expense procure, maintain in effect and comply
with all conditions of any and all permits, licenses and other governmental
and regulatory approvals required for Tenant's use of the Premises, including
discharge of (appropriately treated) materials or waste into any sanitary
sewer system serving the Premises. Tenant shall operate the Premises in a
manner designed to prevent the release of any Hazardous Materials. If any
release of any quantity of Hazardous Materials occurs in, on, under or about
the Premises of which Tenant is or becomes aware, Tenant shall promptly
notify all appropriate governmental agencies and Landlord. Tenant shall
promptly and fully investigate, remediate and remove all Hazardous Materials
released by Tenant, its employees, agents or invitees, in accordance with all
applicable governmental requirements and shall restore the affected portions
of the Project. Tenant shall promptly provide Landlord with copies of all
reports, analyses and correspondence in Tenant's possession relating to such
release and the remediation thereof. Upon expiration or earlier termination
of this Lease, Tenant shall cause all Hazardous Materials located in, on,
under or about the Premises as a result of the acts or omissions of Tenant to
be removed from the Premises and transported for use, storage or disposal in
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compliance with all applicable Hazardous Materials Laws. Tenant shall not take
any remedial action in response to the presence of any Hazardous Materials in,
on, about or under the Premises or any Improvements situated in the Project, nor
enter into any settlement agreement, consent decree or other compromise with
respect to any claims relating to the Premises or the Project without first
notifying Landlord of Tenant's intention to do so and affording Landlord ample
opportunity to appear, intervene or otherwise protect Landlord's interest with
respect thereto. At the expiration or earlier termination of this Lease, Tenant
shall remove all tanks or fixtures which were placed on the Premises (except for
any placed by Landlord) during the term of this Lease and which contain, have
contained or are contaminated with, Hazardous Materials.
Tenant shall notify Landlord in writing immediately upon receiving notice
of: (a) any enforcement, clean-up, removal or other governmental or regulatory
action affecting the Premises instituted, completed or threatened pursuant to
any Hazardous Materials Laws; (b) any claim made or threatened by any person
against Tenant, Landlord or the Premises, relating to damage, contribution, cost
recovery, compensation, loss or injury resulting from or claimed to result from
any Hazardous Materials in, on, or about the Premises; and (c) any reports made
to any environmental agency arising out of or in connection with any Hazardous
Materials in, on or about the Premises or with respect to any Hazardous
Materials removed from the Premises. Tenant shall also provide to Landlord, as
promptly as possible, and in any event within five business days after Tenant
first receives or sends the same, copies of all claims, reports, complaints,
notices, warnings or asserted violations relating in any way to the Premises or
Tenant's use thereof. Upon written request of Landlord, Tenant shall promptly
deliver to Landlord copies of hazardous waste manifests, if Tenant is required
by applicable law to obtain such manifests, reflecting the legal and proper
disposal of all such Hazardous Materials removed or to be removed from the
Premises. All such manifests shall list the Tenant or its agent as a
responsible party and in no way shall attribute responsibility for any such
Hazardous Materials to Landlord.
9.3. HAZARDOUS MATERIALS REPRESENTATION BY LANDLORD. To Landlord's
knowledge, Landlord is not aware of any Hazardous Materials which exist or
are located on or in the Premises, except as may be disclosed in that certain
environmental site assessment prepared by Terra Associates, Inc., dated
November 20, 1996, as its Project No. T-1285-10. Further, Landlord
represents to Tenant that, to the best of its knowledge, Landlord has not
caused the generation, storage or release of Hazardous Materials upon the
Premises, except in accordance with Hazardous Materials Laws and prudent
industry practices regarding construction of the Premises.
9.4. INDEMNIFICATION. Tenant shall defend (with counsel reasonably
acceptable to Landlord) and indemnify Landlord and Landlord's officers,
directors, partners, managers, members, employees, agents, successors and
assigns against any and all claims, liabilities, damages (except for
consequential damages), costs, penalties, forfeitures, losses, obligations,
investigation costs, remediation and removal costs, natural resource damages
and expenses (including Attorneys' Fees) arising in whole or in part,
directly or indirectly, from (a) the presence or release of Hazardous
Materials, in, on, under, upon or from the Premises as a result of acts or
omissions of Tenant or its employees, agents or invitees; (b) the
transportation or disposal of Hazardous Materials to or from the Premises by,
at the request or with the permission of Tenant, its employees, agents or
invitees; (c) the violation of any Hazardous Materials Laws by Tenant, its
employees or agents; (d) the failure of Tenant, its employees or agents to
comply with the terms of this Section 9 or (e) the use, storage, generation
or disposal of Hazardous Materials in, on or from the Premises by any person
other than Landlord, other tenants of the Project or their respective
employees, agents or invitees during the Term of this Lease. Landlord shall
indemnify Tenant against any and all liabilities, damages (except for
consequential damages), losses, costs or claims, including attorneys' fees
incurred in connection therewith, arising from or related to the release of
Hazardous Materials in, on, under, upon or from the Building by Landlord or
Landlord's employees or agents or the existence of any Hazardous Materials on
the Premises before the Commencement Date. Landlord shall promptly and fully
investigate, remediate and remove all Hazardous Materials released by
Landlord, its employees, agents or invitees, in accordance with applicable
governmental requirements and shall restore the affected portions of the
Project. The respective rights and obligations of Landlord and Tenant under
this Section 9 shall survive the expiration or earlier termination of this
Lease.
9.5. ENVIRONMENTAL SITE ASSESSMENTS. Upon request by Landlord prior to
the exercise of any Renewal Term extension option and/or prior to vacating
the Premises, and otherwise during the Lease Term if Landlord has reasonable
cause to believe Tenant may not be in compliance with the terms of Section
9.2, Tenant shall obtain and submit to Landlord an environmental site
assessment complying with the most recent ASTM standards from an
environmental consulting company reasonably acceptable to Landlord and
Tenant, which assessment shall contain sufficient information for Landlord to
determine whether or not Tenant has complied with this Section 9. If any
such assessment discloses that Tenant is in compliance with its obligations
under this Section 9, Landlord shall pay the reasonable cost of such
assessment, not to exceed $4,000.
9.6. DISCOVERY OF HAZARDOUS MATERIALS. If (a) Hazardous Materials are
discovered upon the Premises; (b) Landlord has been given written notice of
the discovery of such Hazardous Materials; and (c) pursuant to the provisions
of this Section 9 Tenant is not obligated to pay the cost of compliance with
Hazardous Materials Laws, Landlord may voluntarily, but shall not be
obligated to, agree with Tenant to take all action necessary to bring the
Premises into compliance with Hazardous Materials Laws at Landlord's sole
cost. If Landlord fails to notify Tenant in writing within 30 days of the
notice to Landlord of the discovery of such Hazardous Materials that Landlord
intends to voluntarily take such action as is necessary to bring the Premises
into compliance with Hazardous Materials Laws, Tenant may, (1) bring the
Premises into compliance with Hazardous Materials Laws at Tenant's sole cost;
or (2) provided such Hazardous Materials endanger persons or property in, on,
or about the Premises or interfere with Tenant's use of the Premises, give
the Landlord, within 20 days after the expiration of the 30 day period,
notice that it intends to terminate the Lease on a stated date, which shall
not be less than 30 days following the date Tenant gives Landlord such notice.
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9.7. AMERICANS WITH DISABILITIES ACT. Landlord's obligations with
respect to the Project include compliance with the Americans with Disabilities
Act of 1990, and all regulations and rules promulgated thereunder (the "ADA") as
existing, interpreted and enforced as of the Commencement Date. All such
compliance with the ADA shall be at Landlord's sole cost and expense, except
that Tenant shall be solely responsible for any costs resulting from (a) new
regulations or amendments to, or interpretations of, the ADA which become
effective after Tenant has accepted delivery of the Premises from Landlord and
which pertain to the Premises rather than the Common Area; (b) any special
requirements needed for the Project or the Premises to comply with ADA that are
caused by Tenant's specific use, requirements or configuration of the Premises;
(c) any requirements related to reasonable accommodations for any of Tenant's
current or prospective employees; and (d) operation of Tenant's business in
compliance with the ADA. If Landlord is required to make any improvement or
modification to the Project to comply with the requirements of any amendments or
regulations to or interpretations of the ADA that become effective after the
Commencement Date, the cost of such improvement and/or modification (amortized
over its useful life) shall be included in Operating Expenses.
SECTION 10. INDEMNIFICATION
10.1. TENANT'S INDEMNITY. Tenant shall defend (using legal counsel
reasonably acceptable to Landlord) and indemnify Landlord, its Mortgagees,
agents and employees from any claims, expenses (including Attorneys' Fees or
damages of any kind arising in connection with (a) the occupancy or use of the
Premises by Tenant, its agents, customers, employees, contractors, subtenants or
assignees; (b) Tenant's breach of its obligations under this Lease; or (c) any
grossly negligent or wrongful act or omission of Tenant, its agents, customers,
employees, contractors, subtenants or assignees. The provisions of this Section
10.1 shall survive expiration or termination of this Lease and shall include all
claims against Landlord by any employee or former employee of Tenant, and Tenant
agrees that the provisions of any industrial insurance act, including Title 51
of the Revised Code of Washington, or any other employee benefit act shall not
operate to release or immunize Tenant from its obligations under this Section
10.1.
10.2. LANDLORD'S INDEMNITY. Landlord shall defend (using legal counsel
reasonably acceptable to Tenant) and indemnify Tenant, its agents and employees
from any claims, expenses (including Attorneys' Fees) or damages of any kind
arising in connection with any breach by Landlord of its obligations under this
Lease and any grossly negligent or wrongful act or omission of Landlord, its
agents, customers, employees or contractors including Landlord's acts or
omissions in the Common Areas. The provisions of this Section 10.2 shall
survive expiration or termination of this Lease and shall include, but not be
limited to, all claims against Tenant by any employee or former employee of
Landlord, and Landlord agrees that the provisions of any industrial insurance
act, including Title 51 of the Revised Code of Washington, or any other employee
benefit act shall not operate to release or immunize Landlord from its
obligations under this Section 10.2.
10.3. LIMITATION ON INDEMNITIES. In compliance with RCW 4.24.115 as in
effect on the date of this Lease, all provisions of this Lease pursuant to which
a party agrees to indemnify another party against liability for damages arising
out of bodily injury to persons or damage to property ("Damages") in connection
with the construction, alteration, repair, addition to, subtraction from,
improvement to or maintenance of any improvement attached to the Property
("Indemnities") shall be limited by the provisions of this Section 10.3. None
of such Indemnities shall apply to damages caused by or resulting from the sole
negligence of the indemnitee, its agents or employees. To the extent that any
such Damages are caused by or result from the concurrent negligence of (a) the
indemnitee or its agents or employees and (b) the indemnitor or its agents or
employees, the Indemnities shall apply only to the extent of the indemnitor's
negligence. If RCW 4.24.115 is hereafter amended to eliminate or modify the
limitations on indemnities set forth therein, this Section 10.3 shall
automatically and without further act by either party be deemed amended to
remove any of the limitations contained in this Section 10.3 that are no longer
required by then-applicable law.
10.4. PERSONAL PROPERTY DAMAGE. It is the intention of the parties
that each party to this Lease insure its personal property to the extent it
desires. Accordingly, notwithstanding the other provisions of this Section 10,
to the extent permitted by applicable law, Tenant and Landlord each release the
other and their agents and employees from, and waive all claims for damage to
personal property sustained by it or any occupant of the Premises. Each party
agrees to look to its insurance coverage only, if any, in the event of such
loss. All property belonging to Landlord, Tenant or any other occupant of the
Premises that is in, on or about the Premises shall be there at the risk of
Landlord, Tenant or such other occupant only.
SECTION 11. DEFAULTS OF TENANT
11.1. EVENTS OF DEFAULT. The occurrence of any of the following
("Events of Default") shall constitute default and breach of this Lease by
Tenant:
(a) If Tenant fails to pay any installment of Fixed Rent or
Additional Rent, when and as the same shall become due and payable;
(b) If Tenant or its guarantor makes any general assignment
or arrangement for the benefit of creditors; the filing by or against
Tenant or Tenant's guarantor of a petition to have Tenant or Tenant's
guarantor adjudged a bankrupt, or a petition for reorganization or
arrangement under any law relating to bankruptcy or insolvency; the
appointment of a trustee or receiver to take possession of all or any
part of the Tenant's or Tenant's guarantor's assets or of Tenant's
interest in this Lease (Tenant shall immediately notify Landlord upon
the occurrence of any event described in this Section 11.1(b)); or
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(c) If Tenant fails to keep, observe or perform any other
obligation, term, covenant or condition contained in this Lease, other than
those referred to in Section 11.1(a) or 11.1(b).
11.2. RIGHT TO CURE. Tenant shall have the right to cure an Event of
Default referred to in Section 11.1(a) by making the required payment within 7
days after receiving written notice of default from Landlord. Tenant shall have
the right to cure an Event of Default referred to in Section 11.1(b) by securing
the dismissal of a petition filed against Tenant or Tenant's guarantor, or by
securing the restoration of possession to Tenant or Tenant's guarantor, within
60 days. Tenant shall have the right to cure an Event of Default referred to in
Section 11.1(c) within 30 days after receiving written notice of such default
from Landlord; provided that if such failure cannot with due diligence be cured
within 30 days, Tenant shall have the right to cure the default if Tenant
commences such cure promptly and within the 30 day period and thereafter
diligently and prosecutes such cure to completion.
11.3. REMEDIES FOR DEFAULT BY TENANT. Upon Tenant's failure to cure an
Event of Default, Landlord may exercise one or more of the following remedies in
addition to any other remedies available under the laws of the State of
Washington:
(a) Landlord may terminate the Lease by notice to Tenant.
Unless and until Landlord gives Tenant written notice stating specifically
that Landlord has elected to terminate the Lease pursuant to this Section
11.3(a), no termination of Tenant's right to possession of the Premises,
acts of maintenance, efforts to relet the Premises, the reletting of the
Premises or the appointment of a receiver to protect Landlord's interest
under this Lease shall constitute a termination of this Lease. Termination
shall be without prejudice to Landlord's right to recover damages for the
default.
(b) Landlord may terminate Tenant's right to possession of the
Premises, retake possession if necessary and relet the Premises upon any
reasonable terms. If Landlord terminates Tenant's right to possession,
Landlord has the affirmative duty to mitigate its damages by reletting all
or a portion of the Premises upon reasonable terms and conditions. All
Rent received by Landlord from such reletting shall be applied first to the
payment of any amounts other than Rent due hereunder from Tenant to
Landlord; second, to the payment of any costs of such reletting and of
alterations and repairs; third, to the payment of Rent due and unpaid; and
the residue, if any, shall be held by Landlord and applied to the payment
of future Rent as it becomes due under the terms of this Lease. Upon a
reletting of the Premises, Landlord shall not be required to pay Tenant any
sums received by Landlord in excess of amounts payable in accordance with
this Lease.
(c) Whether or not the Lease is terminated or possession is
retaken, Landlord may recover all damages caused by the Event of Default.
Landlord may, in one action, recover accrued damages plus damages
attributable to the remaining Lease Term equal to the present value of the
difference between the aggregate Fixed Rent and Additional Rent under this
Lease for the remaining portion of the Lease Term and the Rent received or
to be received by Landlord during the same period. In the computation of
present value, a discount at the rate of 6% per annum shall be employed.
Landlord's damages shall include all of Landlord's reasonable expenses in
connection with any reletting or attempt to relet, including all costs of
retaking possession of the Premises, brokerage commissions, costs of
preparing and altering the Premises and reasonable Attorneys' Fees.
SECTION 12. INSOLVENCY
Landlord and Tenant (as either debtor or debtor-in-possession) agree that
if a petition is filed by or against Tenant (each a "Petition") under any
chapter of Title 11 of the United States Code as it now exists or is hereafter
amended (the "Bankruptcy Code"), and is not dismissed within 60 days: (a)
Tenant shall perform each and every obligation of Tenant under this Lease, until
such time as this Lease is either rejected or assumed; (b) adequate protection
for the performance of Tenant's post-Petition but pre-assumption or
pre-rejection obligations under this Lease shall be provided within 30 business
days after the filing and shall be in the form of a security deposit to be held
by the court or an independent escrow agent approved by the court, in an amount
equal to all amounts then payable by Tenant to Landlord under the terms of the
Lease during a one-month period; (c) Tenant shall give Landlord at least 30 days
prior written notice of any abandonment of the Premises; (d) if Tenant abandons
the Premises, Tenant stipulates to the entry, without notice to any party, of an
ex parte order modifying the stay to permit Landlord to take reasonable steps to
secure the Premises, including changing the locks, putting lights on timers and
covering the windows; (e) if Tenant has failed to timely and fully perform any
of its obligations under this Lease before the filing of the Petition, whether
or not Landlord has given Tenant written notice of said failure and whether or
not any time period for performance or cure set forth in Section 11 has expired
before the filing of the Petition, Tenant shall be deemed to have been in
default on the date the Petition was filed; (f) Tenant shall provide Landlord
with 30 days prior written notice of the proposed assumption or assignment of
this Lease, which notice shall set forth (1) the compensation for pecuniary loss
to be provided to Landlord, (2) the adequate assurance of prompt cure and future
performance to be provided to Landlord, (3) the name, address, state and federal
tax identification numbers, and any other federal, state or local registration
numbers, of any proposed assignee and (4) all of the terms and conditions of any
proposed assignment; (g) prompt cure of defaults shall mean cure within 30 days
after assumption; (h) adequate assurance of future performance of this Lease
after assumption by Tenant or any proposed assignee will require that Tenant or
the proposed assignee deposit with Landlord as security for such future
performance, an amount equal to 3 months of Fixed Rent and Additional Rent; and
(i) if this Lease is to be assigned, adequate assurance of future performance by
the proposed assignee shall also require that (1) the assignee demonstrate that
it has the business experience and financial ability to perform the Tenant's
obligations under this Lease and operate the Premises in the manner contemplated
by this Lease, (2) the Premises will remain a single space and no physical
changes of any kind will be made to the Premises without
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complying with the applicable provisions of this Lease and (3) the assignee
assumes any obligations of Tenant to pay for improvements to the Premises
constructed by Landlord, which obligations are contained in any agreement or
instrument other than this Lease. Tenant shall do all other things of benefit
to Landlord that are otherwise permitted under the Bankruptcy Code.
SECTION 13. DAMAGE AND RESTORATION
13.1. LANDLORD'S REPAIR OBLIGATIONS. If any of the Premises, Common
Areas or Project is damaged by fire or other casualty for which Landlord is
carrying or required by this Lease to carry insurance, Landlord shall proceed
with reasonable diligence to repair such damage at its expense unless Landlord
or Tenant elects to terminate this Lease as permitted by Section 13.2. If the
damage is an insured loss, as long as Landlord is diligently pursuing collection
of the insurance proceeds, repair shall commence upon receipt of the proceeds,
provided that repair shall commence within 90 days after the damage. Landlord
shall not be obligated to repair Tenant's personal property, equipment or
improvements installed by Tenant. Landlord's obligation to repair under this
Section 13.1 shall be limited to the extent of the insurance proceeds (including
the applicable deductible as if it were proceeds available to Landlord)
available to Landlord for such restoration, which shall be determined without
regard to whether Landlord's Mortgagee obtains such proceeds and does not make
them available to Landlord. Tenant agrees that it will proceed with reasonable
diligence at its sole cost to rebuild, repair and/or replace its signs, fixtures
and equipment.
13.2. TERMINATION RIGHTS. Notwithstanding the terms of Section 13.1, if
any damage or destruction to the Premises cannot in Landlord's reasonable
judgment be repaired within 180 days after the date of damage, Landlord shall
give Tenant notice thereof within 30 days after the date of damage, and either
Tenant or Landlord may terminate this Lease by delivering written notice to the
other within 30 days after the date Tenant receives Landlord's notice. If the
damage or destruction is in fact not repaired within 180 days after the date of
damage, Tenant shall have the right to terminate this Lease by written notice to
Landlord given within 190 days after the date of damage. In addition, if
(a) the cost to repair any damage to the Premises exceeds 50% of the insurable
replacement cost of the Premises or (b) the portion of the damage that is
uninsurable through reasonable insurance policies typically maintained by
landlords in the greater Seattle-Bellevue-Renton metropolitan area exceeds
$100,000, Landlord may elect not to repair such damage. If Landlord elects not
to repair the damage, Landlord shall so notify Tenant within 30 days after the
date of damage, and Landlord and Tenant shall each have the right to terminate
this Lease by written notice to the other given within 30 days after the date of
Landlord's notice that it elects not to repair.
Notwithstanding the above, if the cost to repair damage to the
Premises that occurs during the last 24 months of the Lease Term exceeds 30% of
the insurable replacement cost of the Premises, either party shall have the
option to terminate this Lease as of the date of such damage by giving written
notice to the other party within 60 days after the date of damage, unless Tenant
exercises an available Renewal Term extension option within 10 days after
receiving Landlord's notice. If the cost to repair damage to the Project
exceeds 50% of the insurable replacement cost of the Project, whether or not
such damage can be repaired within 180 days, Landlord may, by giving written
notice to the Tenant within 30 days after the date of such damage, terminate
this Lease as of a date specified in the notice, which date may not be more than
30 days after the date of the notice.
13.3. RENT APPORTIONMENT AND ABATEMENT. If the Premises are damaged,
Fixed Rent and Additional Rent shall be abated by the same percentage as the
percentage of the Premises damaged from the date of damage to the date the
damage is repaired or this Lease is terminated.
SECTION 14. CONDEMNATION
14.1. GENERAL RIGHTS UPON CONDEMNATION. If the entire Project or the
entire Premises are taken under the power of eminent domain exercised by any
governmental or quasi-governmental authority (a "Condemning Authority"), or are
conveyed in lieu thereof (a "Condemnation"), this Lease shall automatically
terminate as of the date that possession and use are transferred to the
Condemning Authority (the "Condemnation Date"). The Landlord shall have the
exclusive right to grant possession and use to the Condemning Authority.
Landlord shall give Tenant written notice (a "Condemnation Notice") specifying
the extent of the taking and the anticipated Condemnation Date promptly after it
receives such information. If (a) more than 35% of the Premises or so much of
Premises as would materially adversely impact the economic viability of
businesses being operated in the Premises or more than 20% of the Common Areas
are taken by Condemnation (a "Partial Condemnation") or (b) in Landlord's
reasonable judgment, the portion of the Premises not taken by Condemnation
cannot be restored to a condition reasonably satisfactory for Tenant's use
within 180 days after the Condemnation Date, either Landlord or Tenant shall
have the right to terminate this Lease by giving written notice to the other
within 60 days after the date of the Condemnation Notice. If more than 30% of
the Buildings in the Project are taken by Condemnation and Landlord elects not
to repair, restore, alter or reconstruct the same, Landlord may elect to
terminate this Lease by giving written notice to Tenant within 60 days after the
date of the Condemnation Notice. Any such termination shall be effective as of
the Condemnation Date. If this Lease is terminated pursuant to this Section
14.1, Landlord and Tenant shall be released from any liability arising after the
termination date, but all Fixed Rent, Additional Rent and other amounts payable
under this Lease shall be paid to the termination date. If this Lease will not
terminate, the Fixed Rent shall be reduced pro-rata based upon the percentage of
the Tenant's floor area condemned, and Tenant's Share shall be recalculated.
Landlord shall make such repairs and alterations necessary to restore the
portion of the Premises not condemned to a condition reasonably satisfactory for
Tenant's use; provided that at least 3 years of the Lease Term remain and that
Landlord's obligation shall be limited to the amount of the Condemnation Award
available therefor after deducting all costs of obtaining the Condemnation
Award. Within 60 days after the amount of the Condemnation Award available for
restoration is known, Landlord shall give Tenant
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reasonable notice of the repairs and alterations Landlord anticipates making to
restore the portion of the Premises not condemned. If Tenant reasonably
determines that the anticipated repairs and alterations are insufficient to
restore such portion of the Premises to a condition reasonably satisfactory for
Tenant's use, Tenant shall have the right to terminate this Lease by giving
notice to Landlord within 10 days after receiving Landlord's notice describing
the repairs and alterations.
14.2. AWARD. Landlord shall be entitled to receive the entire award in
any condemnation proceeding ("Condemnation Award"), including any award for the
value of any unexpired portion of the Term of this Lease. Tenant shall have the
right to claim and recover from the Condemning Authority, but not from Landlord,
a portion of the condemnation award equal to the lesser of (a) the unamortized
cost of the Tenant's Improvements and affected signs (collectively the "Tenant's
Fixed Improvements") or (b) the fair market value attributed to the Tenant's
Fixed Improvements in the condemnation proceeding. Tenant shall have the right
to claim and recover from the Condemning Authority, but not from Landlord, such
compensation as may be separately recoverable by Tenant for Tenant's moving
expenses or the taking of Tenant's personal property other than the Tenant's
leasehold interest; provided that such compensation may not reduce the amount
awarded to Landlord.
SECTION 15. ASSIGNMENT, SUBLETTING, ETC.
15.1. PERMITTED SUBLETTING AND ASSIGNING BY TENANT. Provided that
Tenant is not be in default beyond any applicable cure period at the time, and
subject to other applicable provisions of this Lease, Tenant shall have the
right to sublet the Premises (in whole or in part) to any person, or to assign
this Lease to a Successor Corporation or a Related Corporation for so long as it
remains a Related Corporation of Tenant. "Related Corporation" means a
corporation, limited liability company, partnership or other business entity,
which, directly or indirectly, is owned by or under common ownership with
Tenant. "Successor Corporation" means a corporation, limited liability company,
partnership or other business entity into or with which Tenant is merged or
consolidated or to which all or substantially all of the assets and goodwill of
Tenant are transferred, which assumes substantially all of the liabilities of
Tenant and has a net worth (determined in accordance with generally accepted
accounting principles) at least equal to the net worth of Tenant immediately
prior thereto.
15.2. RESTRICTION ON TRANSFER. Except as permitted by Section 15.1,
Tenant shall not assign, mortgage, pledge or otherwise encumber or transfer this
Lease, or any interest herein, or in any manner assign, mortgage, pledge, or
otherwise encumber or transfer its interest or estate in all or any portion of
the Premises (each a "Transfer") without obtaining Landlord's prior written
consent in each and every instance, which consent shall not be unreasonably
withheld. For purposes of this Section 15, a change in control of Tenant,
however effected, including by operation of law, shall be deemed to be an
assignment of this Lease. For the purposes of this Section 15.2, the term
"control" shall mean the possession of the power to direct or cause the
direction of the management and policies of Tenant, whether through ownership of
voting securities, by contract or otherwise. The change in control provisions
of this Section 15.2, however, shall not apply to any Tenant corporation the
outstanding voting stock of which is listed on a national securities exchange or
actively traded over-the-counter. In determining whether or not to grant its
consent to a Transfer request, Tenant agrees that failure to satisfy any one of
the following factors, or any other reasonable factor, will be reasonable
grounds for denying Tenant's request: (a) the financial strength of the
proposed subtenant/assignee, as evidenced by audited financial statements,
certified by an independent certified public accountant (or, if such audited
statements are unavailable, financial statements may be certified by the chief
financial officer of any such proposed subtenant/assignee), is not sufficient to
reasonably assure Landlord that it can perform the Tenant's covenants and
obligations under this Lease or is not at least equal to that of Tenant as of
the date of this Lease; (b) the use of the Premises by the proposed
subtenant/assignee will violate any agreements affecting the Premises, the
Landlord or the Project, or will constitute a nuisance, disturb or endanger
occupants of the Project, interfere with their use of their respective premises,
or tend to injure the reputation of the Project; or (c) a sublease would be to
any person or entity which is (or immediately prior to such subletting was) an
occupant of the Project.
15.3. TRANSFER REQUIREMENTS. Any transfer permitted under the terms of
Section 15.1 or consented to by Landlord under the terms of Section 15.2 or
Section 15.4 shall comply with the following requirements:
(a) Any assignment of this Lease shall transfer to the assignee
all of Tenant's right, title and interest in this Lease and all of Tenant's
estate or interest in the Premises.
(b) Any assignee shall assume, by written, recordable
instrument, the due performance of all of Tenant's obligations under this
Lease and such assumption agreement shall state that the same is made by
the assignee for the express benefit of Landlord as a third party
beneficiary. A copy of the assignment and assumption agreement, both in
form and content reasonably satisfactory to Landlord, fully executed and
acknowledged by assignee, together with a certified copy of a properly
executed corporate resolution (if the assignee is a corporation)
authorizing the execution and delivery of such assumption agreement, shall
be sent to Landlord at least 10 days before the effective date of the
assignment.
(c) In the case of a subletting, a copy of any sublease fully
executed and acknowledged by Tenant and the sublessee shall be mailed to
Landlord at least 10 days before the effective date of the subletting.
(d) Any assignment or subletting shall be subject to all the
provisions, covenants and conditions of this Lease. Tenant-assignor, any
guarantor or guarantors of this Lease and the assignee or assignees shall
remain liable under this Lease, as it may be amended from time to time,
without notice to the assignor or any guarantor.
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<PAGE>
(e) Unless the transfer is permitted by Section 15.1, Tenant
shall reimburse Landlord for any and all reasonable costs of Landlord,
including reasonable attorneys' fees paid or payable to outside counsel,
occasioned by such assignment or subletting.
15.4. RESTRICTION FROM FURTHER ASSIGNMENT. Except as permitted by
Section 15.1, notwithstanding any consent by Landlord to any Transfer, no
sublessee shall assign its sublease or further sublease all or any portion of
the Premises, and no assignee shall further assign its interest in this Lease or
its interest or estate in all or any portion of the Premises, or sublease all or
any portion of the Premises, without Landlord's prior written consent in each
and every instance. Landlord and Tenant agree that, in determining whether or
not to grant its consent, Landlord may consider any reasonable factor, including
the factors described in Section 15.2, and failure to satisfy any one of the
factors will be reasonable grounds for denying the request.
15.5. LANDLORD'S TERMINATION RIGHTS. Except for transfers permitted by
Section 15.1, notwithstanding anything contained in this Lease to the contrary,
if Tenant desires to assign its entire interest in this Lease, or its interest
or estate in the entire Premises, Tenant shall give written notice of its
intention to do so to Landlord 60 days or more before the effective date of such
proposed assignment or subletting. Landlord may, at any time within 30 days
after receiving such notice from Tenant, cancel this Lease by giving Tenant
written notice of its intention to do so, in which event such cancellation shall
become effective upon the date specified by Landlord, which date shall not be
less than 30 days nor more than 90 days after its receipt by Tenant. Landlord
may enter into a direct lease with the proposed sublessee or assignee or with
any other persons without obligation or liability to Tenant, its assignees,
sublessees or their respective successors, assigns, agents or brokers.
15.6. SHARING OF EXCESS RENT. Except for transfers permitted by Section
15.1 to a Related Corporation or Successor Corporation, if Tenant assigns any of
its interest in this Lease or sublets all or any portion of the Premises, Tenant
shall pay to Landlord (in addition to all other amounts payable by Tenant under
this Lease) 50% of the net rents and other consideration payable by such
assignee or subtenant in excess of the Rent and other amounts otherwise payable
by Tenant from time to time under this Lease, after deducting all of Tenant's
reasonable expenses in connection with such assigning or subletting, including
all brokerage commissions, legal expenses, reasonable Attorneys' Fees,
alteration costs, and expenses of preparing the Premises. The additional amount
payable by Tenant shall be determined by application of the rental rate per
square foot for the Premises or any portion thereof sublet. The additional
amount shall be paid to Landlord immediately upon receipt by Tenant. If any
part of the consideration received by Tenant for an assignment or subletting
will be payable other than in cash, then the payment to Landlord shall be in
cash for its share of non-cash consideration based upon its fair market value.
This Section 15.6, however, shall not apply to Tenant's receipts, during the
Initial Term, from the first sublease or subleases (including renewals of any
such sublease or subleases, but not beyond the expiration of the Initial Term)
of portions of the Building shown on the Floor Plan as "Special Sublease Area".
SECTION 16. SUBORDINATION, NONDISTURBANCE, NOTICE TO MORTGAGEE
16.1. SUBORDINATION BY TENANT. This Lease and all rights of Tenant
herein, and all interest of Tenant in the Premises shall be subject and
subordinate to the lien of any Mortgage which at any time may be placed upon all
or any portion of the Project by Landlord; provided that so long as Tenant is
not in default under this Lease beyond any applicable cure period, Lease shall
remain in full force and effect for the Lease Term. For the purposes of this
Lease, the term "Mortgage" means any mortgage, deed of trust, sale and leaseback
used for financing purposes, or other security instrument; any replacements,
renewals, amendments, modifications, extensions or refinancings thereof; and
each and every advance made under any Mortgage. For the purposes of this Lease,
the term "Mortgagee" means the beneficial owner of any encumbrance created by a
Mortgage and, in the case of a sale and leaseback, the leaseback lessor. In
order to confirm such subordination, Tenant agrees at any time, and from time to
time on demand of Landlord, to execute and deliver to Landlord any instruments,
releases or other documents that may be reasonably required for the purpose of
confirming the subordination, including an instrument in the form of EXHIBIT E.
So long as Tenant is not in default in the performance of any of Tenant's
obligations under this Lease, beyond any applicable cure period such
subordination agreement shall not interfere with Tenant's right to quiet
enjoyment under this Lease.
16.2. ATTORNMENT. If any Mortgagee succeeds to the rights of Landlord
under this Lease or to ownership of the Premises, whether through possession,
foreclosure or the delivery of a deed to the Premises, upon the written request
of such Mortgagee, Tenant shall attorn to and recognize such Mortgagee as
Tenant's landlord under this Lease, and shall promptly execute and deliver any
instrument that such Mortgagee may reasonably request to evidence such
attornment; provided that any person to whom Tenant is asked to attorn agrees in
writing reasonably satisfactory to Tenant that, so long as Tenant is not in
default under this Lease beyond any applicable cure period, this Lease shall
remain in full force and effect for the Lease Term.
SECTION 17. SIGNS
Tenant may, at its sole cost, erect signs on the exterior or interior of
the Building, provided that such sign or signs (a) do not cause any structural
or other damage to the Building; (b) do not violate applicable governmental
laws, ordinances, rules or regulations; (c) do not violate any existing
restrictions affecting the Premises; (d) are in accordance with the sign
standards for the Project set forth on EXHIBIT F attached hereto; and (e) are
approved in advance by Landlord (which approval shall not be unreasonably
withheld or delayed) and the City of Redmond, Washington. Tenant, upon vacating
the Premises or removing or altering its signs for any reason, shall repair,
paint
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<PAGE>
and/or replace the Building surfaces where its signs were attached. Landlord
shall, at its cost, provide a monument sign for the Project and allow Tenant, at
Tenant's sole cost, to install its panel thereon.
SECTION 18. MISCELLANEOUS PROVISIONS
18.1. ACCESS TO PREMISES. Tenant shall permit Landlord and its
authorized representatives to enter the Premises at all reasonable times after
reasonable notice (except in case of emergency) for the purpose of inspecting
the Premises, making any changes to Building systems, making any repairs
required or permitted by the terms of this Lease or conducting any reasonable
test or environmental audit of the Premises or Tenant's operation or use of the
Premises to determine Tenant's compliance with this Lease. Landlord may, during
the progress of any such work, store necessary materials, tools and equipment at
the Premises. Landlord shall not be liable for, and the obligations of Tenant
shall not be affected by, inconvenience, disturbance, loss of business or other
damage caused by Landlord in connection therewith, provided that Landlord makes
reasonable efforts to avoid interfering with the conduct of Tenant's business.
18.2. EXHIBITION OF PREMISES. Landlord shall have the right during
normal business hours at any time during the Lease Term, after reasonable
notice, to enter the Premises to exhibit the same for the purpose of mortgaging
or selling the Project and, during the final 6 months of the Lease Term to
exhibit the Premises to prospective Tenants. Landlord shall have the right to
display on the exterior of the Building, in a manner that does not unreasonably
interfere with Tenant's business, signs indicating that the Premises are for
sale and, during the final 6 months of the Lease Term, signs indicating that the
Premises are for rent.
18.3. ESTOPPEL CERTIFICATES. Landlord and Tenant shall, each without
charge at any time and from time to time, within 15 business days after written
request by the other party, execute and deliver to the requesting party or any
person whom the requesting party may designate, an estoppel certificate
certifying: (a) that this Lease (and all guaranties, if any) is unmodified and
in full force and effect (or, if there have been modifications, that the same is
in full force and effect, as modified, and stating the modifications); (b) the
dates to which the Fixed Rent or Additional Rent have been paid in advance; (c)
whether or not there are then existing any breaches or defaults by such party or
the other party known by such party and specifying such breach or default, if
any; (d) whether or not there are then any setoffs or defenses against the
enforcement of any term of this Lease (or of any guaranties) (and, if so,
specifying the same and the steps being taken to remedy the same); and (e) such
other statements or certificates as Landlord or any Mortgagee may reasonably
request. It is the intention of the parties that any statement delivered
pursuant to this Section 18.3 may be relied upon by any persons dealing with
Landlord, Tenant or the Premises.
18.4. NOTICES. All notices, demands and requests which may be or are
required to be given by either party to the other shall be in writing and shall
be sent by United States certified mail, postage prepaid or by an independent
overnight courier service, addressed to Landlord at Opus Northwest, L.L.C.,
Attn: John Solberg, Vice President, 200 112th Avenue NE, Suite 205, Bellevue, WA
98004, with a copy to each of Opus U.S. Corporation, Attn: Legal Department, 800
Opus Center, 9900 Bren Road East, Minnetonka, MN 55343 and Tousley Brain PLLC,
Attn: Russell F. Tousley, P.S., 56th Floor, Key Tower, 700 Fifth Avenue,
Seattle, WA 98104-5056, and addressed to Tenant, before the Commencement Date,
at Apex PC Solutions, Inc., 20031 142nd Avenue NE, Woodinville, WA 98072; and to
Tenant, after the Commencement Date, to Apex P.C. Solutions, Inc., Attn: Mary
Flynn at the Premises with a copy to Jayanne Hino, Esq., Davis Wright Tremaine
LLP, 2600 Century Square, 1501 Fourth Avenue, Seattle, Washington, 98101-1688 or
to such other address which is not a post office box as either party may from
time to time designate by written notice to the other. Any notice, demand or
request which is given as described shall be deemed to be given on the date it
is delivered by courier (or refused by the intended recipient) or 3 days after
it is deposited in the mail.
18.5. ANNUAL REPORTS. Upon request by Landlord at any time more than
135 days after the end of Tenant's applicable fiscal year, Tenant shall promptly
deliver to Landlord a copy of Tenant's annual report for such fiscal year.
18.6. LANDLORD'S CONTINUING OBLIGATIONS. The term "Landlord," as used
in this Lease so far as obligations on the part of Landlord are concerned, shall
mean only the owner or owners of fee title to the Premises at the time in
question, and upon any transfer, the then grantor shall be automatically freed
and relieved after the date of such transfer of all liability for the
performance of any obligations on the part of the landlord contained in this
Lease thereafter to be performed, provided that any funds in the hands of such
landlord or the then grantor at the time of such transfer, in which Tenant has
an interest, shall be turned over to the grantee, and any amount then due and
payable to Tenant by Landlord or the then grantor under any provision of this
Lease shall be paid to Tenant and provided further that the transferee assumes
Landlord's obligations under this Lease. The Landlord's obligations contained
in this Lease shall, subject to the aforesaid, be binding on Landlord's
successors and assigns, during and in respect of their respective successive
periods of ownership. Nothing herein contained shall be construed as (a)
relieving Landlord of its obligations under Section 2 of this Lease or (b)
releasing Landlord from any obligation to complete the cure of any breach by
Landlord of which Landlord had notice during the period of its ownership of the
Premises.
18.7. LANDLORD'S LIMITED LIABILITY. Tenant recognizes that Landlord is
a limited liability company. Tenant expressly agrees, anything herein to the
contrary notwithstanding, that each and all of the representations and
agreements made by Landlord are intended to bind only that portion of Landlord's
property leased hereunder. No personal liability or personal responsibility is
assumed by, nor shall at any time be asserted or enforced against, any of the
members, managers, shareholders, partners, directors, officers, employees or
agents of Landlord on
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<PAGE>
account of any agreements of Landlord contained in this Lease. If Landlord
fails to perform any obligation of Landlord under this Lease and as a result
Tenant recovers a money judgment against Landlord, such judgment shall be
satisfied only out of the proceeds of sale received upon execution of such
judgment and levied against the right, title and interest of Landlord in the
Project and all rents and profits therefrom. Any claim which Tenant may have
against Landlord for default in performance of any of Landlord's obligations
herein contained shall be deemed waived unless suit is brought thereon within 6
months of the date Tenant receives notice of the consummation of Landlord's sale
or conveyance of its interest in the Project; provided, however, that nothing
herein contained shall be construed as (a) relieving Landlord of its obligations
under Section 2 of this Lease (b) or releasing Landlord from any obligation to
complete the cure of any breach by Landlord of which Landlord had notice during
the period of its ownership of the Premises.
18.8. RULES AND REGULATIONS. Tenant shall perform, observe and comply
with all reasonable nondiscriminatory rules and regulations, not inconsistent
with the terms of the Lease, established by Landlord for the Project from time
to time, including the Rules and Regulations attached as EXHIBIT G. Such rules
and regulations shall be uniformly applied to all tenants of the Project.
18.9. SEVERABILITY. If any covenant, condition, provision, term or
agreement of this Lease shall, to any extent, be held invalid or unenforceable,
the remaining covenants, conditions, provisions, terms and agreements of this
Lease shall not be affected thereby, but each covenant, condition, provision,
term or agreement of this Lease shall be valid and in force to the fullest
extent permitted by law.
18.10. SUCCESSORS AND ASSIGNS. Subject to provisions of this Lease
limiting assignment or sublease by Tenant, the covenants contained in this Lease
shall bind and inure to the benefit of Landlord, its successors and assigns, and
Tenant and its permitted successors and assigns.
18.11. RELATIONSHIP OF PARTIES. This Lease does not create the
relationship of principal and agent, partnership, joint venture, association or
any other relationship between Landlord and Tenant, other than that of landlord
and tenant.
18.12. PRIOR AGREEMENTS. This Lease, together with the attached exhibits
and the written agreements concurrently or hereafter executed and/or delivered
pursuant to or in connection with this Lease, embody the entire agreement
between the parties relating to the subject matter hereof, and supersede all
prior agreements and understandings between the Landlord and Tenant, if any,
relating to the subject matter hereof. Tenant acknowledges that neither
Landlord nor any agent of Landlord has made any representation or warranty not
contained in this Lease with respect to the Premises, the Building or the
suitability or fitness of either for the conduct of Tenant's business or for any
other purpose.
18.13. NO WAIVER. No failure by Landlord or by Tenant to insist upon the
performance of any of the terms of this Lease or to exercise any right or remedy
available for a breach thereof, and no acceptance by Landlord of full or partial
rent from Tenant or any third party during the continuance of any such breach,
shall constitute a waiver of any such breach or of any of the terms of this
Lease. None of the terms of this Lease to be kept, observed or performed by
Landlord or by Tenant, and no breach thereof, shall be waived, altered or
modified except by a written instrument executed by the waiving party. No
express waiver shall waive any default other than the default specified in the
express waiver. An express waiver waives the specified default only for the
time and to the extent therein stated.
18.14. NO MERGER. There shall be no merger of this Lease or the
leasehold estate created by this Lease with any other estate or interest in the
Premises by reason of the fact that the same person or entity may acquire, hold
or own directly or indirectly, (a) this Lease, the leasehold interest created by
this Lease or any interest therein and (b) any such other estate or interest in
the Premises, or any portion thereof. No such merger shall occur unless and
until all persons and entities having an interest (including a security
interest) in (i) this Lease or the leasehold estate created thereby and (ii) any
such other estate or interest in the Premises, or any portion thereof, shall
join in a written instrument expressly effecting such merger and duly record the
same.
18.15. SURRENDER OF PREMISES. At the expiration of the term of this
Lease, Tenant shall surrender the Premises in the same condition it was in upon
delivery of possession on the Commencement Date, reasonable wear and tear and
insured casualty excepted, shall surrender all keys to the Premises to Landlord
at the place then fixed for the payment of Fixed Rent and shall inform Landlord
of all combinations on any locks, safes and vaults. Tenant shall at such time
remove all of its personal property and any fixtures, alterations and
improvements installed by Tenant which Landlord directs Tenant to remove (other
than Landlord's Improvements and subject to the terms of Section 8.3). Tenant
shall repair any damage to the Premises caused by such removal. Any and all
such property, alterations and improvements not so removed shall, at Landlord's
option, become the exclusive property of Landlord or be disposed of by Landlord,
at Tenant's cost, without further notice to or demand upon Tenant. Tenant
agrees that its failure to remove any such property, alterations or improvements
within 30 days after the expiration or earlier termination of this Lease shall
be conclusive evidence of Tenant's intention to abandon the same. If the
Premises is not surrendered as set forth above, Tenant shall indemnify, defend
and hold Landlord harmless against loss or liability resulting from the delay by
Tenant in so surrendering the Premises, including, without limitation, any claim
made by any succeeding occupant based upon such delay. Tenant's obligation to
observe or perform this covenant shall survive the expiration or other
termination of this Lease.
18.16. HOLDING OVER. If Tenant fails to surrender possession of the
Premises upon termination or expiration of this Lease, and if Tenant obtains
Landlord's written consent to Tenant's continued occupancy, Tenant's occupancy
shall be deemed to be a month to month tenancy, subject to all the terms of this
Lease that can
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apply to a month to month tenancy, except that Fixed Rent shall be escalated to
125% of the rate payable by Tenant during the calendar month immediately
preceding such termination or expiration (the "Latest Rent") and Landlord may
terminate such month to month tenancy upon 20 days notice to Tenant. If Tenant
fails to surrender possession of the Premises upon termination or expiration of
this Lease, and if Tenant does not obtain Landlord's written consent to Tenant's
continued occupancy, Tenant shall be deemed a trespasser and shall be liable to
Landlord for all damages sustained by Landlord as a result thereof, together
with Fixed Rent at a rate equal to 150% of the Latest Rent.
18.17. FORCE MAJEURE. Whenever a period of time is herein prescribed for
action to be taken by either party, said party shall not be liable or
responsible for, and there shall be excluded from the computation of any such
period of time, any delays due to ("force majeure"): strikes, riots, acts of
God, delay caused by the failure of a governmental agency to issue a building or
occupancy permit despite diligent pursuit thereof, shortages of labor or
materials because of priority or similar regulations or order of any
governmental or regulatory body, war, or any other causes of any kind which are
beyond the reasonable control of said party. Lack of funds or inability to
obtain financing shall not be an event of force majeure.
18.18. LANDLORD APPROVALS. Any approval by Landlord or Landlord's
architects and/or engineers of any of Tenant's drawings, plans and
specifications which are prepared in connection with any construction at the
Premises shall not be construed as a representation or warranty of Landlord as
to the adequacy or sufficiency of such drawings, plans and specifications, or
the improvements to which they relate.
18.19. SURVIVAL. All obligations (together with interest on monetary
obligations at the Agreed Rate) accruing before expiration of the Lease Term
shall survive the expiration or other termination of this Lease.
18.20. ATTORNEYS' FEES. Upon any litigation or other proceeding between
the parties hereto, declaratory or otherwise, arising out of this Lease, the
prevailing party shall recover from the nonprevailing party all costs, damages
and expenses, including attorneys', paralegals' clerical and consultants' fees
and charges actually expended or incurred in connection therewith, including for
appeals or any bankruptcy proceeding (collectively "Attorneys' Fees"). In
addition, if Landlord engages counsel to enforce the terms of this Lease,
including for the purpose of preparing a delinquency notice, Tenant shall be
required to reimburse Landlord for all Attorneys' Fees incurred before the
subject default is considered cured.
18.21. QUIET ENJOYMENT. Landlord warrants and represents that Tenant,
provided it complies with its obligations hereunder, shall have quiet enjoyment
of the Premises during the Lease Term without disturbance by Landlord or any
person claiming by, through or under Landlord.
18.22. BROKERS. Tenant represents that Tenant has dealt directly only
with Gary Bullington of Cushman Wakefield of Washington ("Tenant's Brokers"), as
broker, in connection with this Lease. Landlord represents that Landlord has
dealt directly only with Brian Adams of CB Commercial ("Landlord's Broker"), as
broker, in connection with this Lease. Tenant shall defend and indemnify
Landlord against any and all claims of brokers, finders or any like third party
claiming any right to commission or compensation by or through acts of Tenant in
connection with this Lease other than the Tenant's Brokers. Landlord shall be
responsible for payment of a commission to Landlord's Broker and shall cause
Landlord's Broker to share its commission with Tenant's Broker, all such
payments to be made in accordance with written agreements between Landlord and
Landlord's Broker or Tenant's Broker, and shall defend and indemnify Tenant
against any and all claims of brokers, finders or any like third party claiming
any right to commission or compensation by or through acts of Landlord in
connection with this Lease.
18.23. PREPARATION OF LEASE; GOVERNING LAW. Landlord and Tenant have
negotiated this Lease, have had an opportunity to be advised by legal counsel
respecting the provisions contained herein and have had the right to approve
each and every provision hereof. Therefore, this Lease shall not be construed
against either Landlord or Tenant as a result of the preparation of this Lease
by or on behalf of either party. This Lease shall be governed by the laws of
the State of Washington. Any suit arising from or relating to this Lease shall
be brought in the county in which the Premises are located, and the parties
hereto waive the right to be sued elsewhere.
18.24. WORDS AND PHRASES. Words and phrases used in the singular shall
be deemed to include the plural and vice versa. Nouns and pronouns used in any
particular gender shall be deemed to include any other gender. When the word
"including" is used in this Lease, it shall mean "including, but not limited
to." Whenever words such as "herein," "hereunder," etc., are used in this
Lease, they shall mean and refer to this Lease in its entirety and not to any
specific section, paragraph or other part of this Lease. The word "person"
includes any natural person, corporation, firm, partnership, limited
partnership, limited liability company, trust, estate, unincorporated
organization, or other legal or business entity, however designated or
constituted. "Business day" means days when national banks are open in Seattle,
Washington and Minneapolis, Minnesota. The caption of each section of this
Lease is for convenience of reference only, and in no way defines, limits or
describes the scope or intent of such section.
18.25. TIME IS OF THE ESSENCE. Time is of the essence with respect to
the performance of every provision of this Lease in which time of performance is
a factor.
18.26. JOINT AND SEVERAL LIABILITY. All parties signing this Lease as
Tenant shall be jointly and severally liable for all obligations of Tenant.
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<PAGE>
18.27. NO ORAL AMENDMENTS. This Lease may be modified or amended only by
an agreement in writing signed by the parties hereto. No receipt of money by
Landlord from Tenant or any other person after termination of this Lease, the
service of any notice, the commencement of any suit or final judgment for
possession of the Premises, shall reinstate, continue or extend the Term of this
Lease, affect any such notice, demand or suit, or imply consent for any action
for which Landlord's consent is required, unless specifically agreed to in
writing by Landlord. Any amounts received by Landlord may be allocated to any
specific amounts due from Tenant to Landlord as Landlord determines.
18.28. NET LEASE. Landlord and Tenant each agree it is their intention
that: (a) this Lease shall be interpreted and construed as a net lease; (b) all
Fixed Rent and Additional Rent shall be paid by Tenant to Landlord without
abatement, deduction, suspension or setoff, except as otherwise specifically
provided in this Lease; (c) the obligations of Landlord and Tenant are separate
and independent covenants; (d) all costs or expenses of any kind, general or
special, ordinary or extraordinary, foreseen or unforeseen, that may be
necessary or required in and about the Premises or any portion thereof, during
Tenant's possession or authorized use thereof shall be paid by Tenant, except as
specifically provided otherwise in this Lease; (e) all provisions of this Lease
are to be interpreted and construed in light of the intentions expressed in this
Section 18.28; and (f) the Fixed Rent specified in Section 3.1 shall be net to
Landlord.
18.29. WAIVER OF JURY TRIAL. Landlord and Tenant each unconditionally
waives any right to trial by jury to resolve any claim asserted in connection
with any matter arising in connection with this Lease, the Premises, the Project
or use or occupancy of the Premises.
18.30. BLANKET LIMITATIONS ON TENANT'S RENTAL OFFSET RIGHTS.
Notwithstanding any provision of this Lease allowing Tenant to offset amounts
against, or deduct amounts from, its payment of Fixed or Additional Rent or
other sums to be paid Landlord under this Lease, (a) Tenant shall have no right
whatsoever to, and shall not, make the offset or deduction, if a bona fide
dispute exists between Landlord and Tenant as to the matter or matters forming
the basis of Tenant's claim that it has a right hereunder to make the offset or
deduction until such time as the parties otherwise agree or until Tenant
receives the final unappealable order of a court of competent jurisdiction
establishing Landlord's liability to Tenant in connection with such matter or
matters, and (b) Tenant's right to offset amounts against Rent shall be limited
to twenty-five percent (25%) of Fixed Rent.
18.31. EXHIBITS. All exhibits enumerated in this Section 18.31 and/or
now or hereafter attached to this Lease are incorporated into this Lease in full
by this reference. Each party agrees to perform any obligations to be performed
by it pursuant to the provisions of all such exhibits.
EXHIBITS:
--------
Exhibit A: Site Plan of the Project
Exhibit A-1: Floor Plan
Exhibit B: Legal Description
Exhibit C: Outline Specifications
Exhibit C-1: Space Plan
Exhibit D: Final Plans and Specifications
Exhibit E: Form of Subordination Agreement
Exhibit F: Sign Standards
Exhibit G: Rules and Regulations
IN WITNESS WHEREOF, each of the parties hereto has caused this Lease to be
duly executed as of the day and year first above written.
LANDLORD:
OPUS NORTHWEST, L.L.C.,
a Delaware limited liability company
By: /s/ John Solberg
-------------------------------------
John Solberg, Vice President
TENANT:
APEX PC SOLUTIONS, INC.,
a Washington corporation
By: /s/ Kevin Hafer
-------------------------------------
Its President and CEO
----------------------------------
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<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that JOHN SOLBERG
is the person who appeared before me, and said person acknowledged that he
signed this instrument, on oath stated that he was authorized to execute the
instrument and acknowledged it as the Vice President of OPUS NORTHWEST, L.L.C.,
a Delaware limited liability company, to be the free and voluntary act of such
party for the uses and purposes mentioned in the instrument.
Dated: _________________________, 1998.
--------------------------------------
(Signature of Notary Public)
--------------------------------------
(Printed Name of Notary Public)
My Appointment expires
----------------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that
_________________________ is the person who appeared before me, and said person
acknowledged that he/she signed this instrument, on oath stated that he/she was
authorized to execute the instrument and acknowledged it as the
______________________________________ of APEX PC SOLUTIONS, INC., a Washington
corporation, to be the free and voluntary act of such party for the uses and
purposes mentioned in the instrument.
Dated: ____________________, 1998.
--------------------------------------
(Signature of Notary Public)
--------------------------------------
(Printed Name of Notary Public)
My Appointment expires
----------------
20
<PAGE>
EXHIBIT A
TO
NET LEASE AGREEMENT
WILLOWS COMMERCE PARK
SITE PLAN OF THE PROJECT
A-1
<PAGE>
EXHIBIT A-1
TO
NET LEASE AGREEMENT
WILLOWS COMMERCE PARK
FLOOR PLAN
A-1:1
<PAGE>
EXHIBIT B
TO
NET LEASE AGREEMENT
WILLOWS COMMERCE PROJECT
LEGAL DESCRIPTION
Landlord and Tenant acknowledge that the legal description set forth below
is for two lots that the Building would currently straddle, but that Landlord
will be adjusting the lot lines to cause the Building to be located entirely
upon one lot. Promptly after the lot line adjustment is recorded, Landlord and
Tenant will execute an amendment to this Lease revising the legal description
set forth on this Exhibit B. For all purposes of this Lease, the "Project"
shall thereafter mean the property described on the revised Exhibit B.
B-1
<PAGE>
EXHIBIT C
TO
NET LEASE AGREEMENT
WILLOWS COMMERCE PARK
OUTLINE SPECIFICATIONS
OUTLINE SPECIFICATIONS FOR BASE BUILDING SHELL AND SITEWORK
GENERAL NOTES:
* Approximately 116,000 SF of gross building area.
* Approximately 350,000 SF of gross site area.
* Roof bays at approximately 50 X 30.
* Assumes June 1, 1998 construction start.
* Building height is 24' clear minimum.
DIVISION 2 - SITEWORK:
* Strip entire site 6" and haul off site.
* Cut/fill with native material.
* Over-excavation of continuous footings 2'-0" below subgrade and 2'-0" past
edge of footing; replace with structural fill.
* Asphalt: 2" Class B over 12" cement treated base.
* Storm sewer includes tight-line roof drains, catch basins, storm sewer
piping, detention ponds and bio-filtration as required by the City of
Redmond.
* Sanitary sewer PVC sewer piping, man holes, and connection to City of
Redmond sewer system.
* 2" Domestic water connection and 1 1/2" meter from the fireline to the
pipe stub up inside the building.
* Fire water service includes ductile iron fire line, fire hydrant
assemblies, fire department connection and detector check valve (placed
outside the building) as required by the City of Redmond Fire Department.
* Plain finished concrete sidewalks as required by the City of Redmond for
pedestrian circulation.
* Miscellaneous site improvements (trash enclosures, bollards, signs, etc.).
DIVISION 3 - CONCRETE:
* Perimeter footings at 2'-0" wide by 1'- 0" deep bearing on 2500 psf
subgrade.
* Interior footings at poured monolithic with slab.
* Slab on grade: 5-1/2", unreinforced sealed concrete (vapor under fully
heated space) for a design floor load of 300 pounds per SF.
* Plain-faced tilt-up panels ranging from 5-1/2" to 7-1/4" thick with 1/2"
reveals.
DIVISION 5 - METALS:
* 6x6x1/4 tube steel columns top set installed.
* Roof hatch and ladder.
* Interior pipe bollards excluded.
* Angle iron casing at dock doors.
DIVISION 6 - CARPENTRY:
* Composite wood and steel roof structure with 50 X 30 bays.
* Steel open web truss girders.
* Steel open web trusses.
* 2x4 stiffeners.
* 7/16" OSB sheathing.
DIVISION 7 - THERMAL AND MOISTURE PROTECTION:
* Malarkey NM3 3-ply built-up roofing system.
* Batt roof insulation.
* Single dome 4'x8' fusible-link smoke vents for entire warehouse area.
DIVISION 8 - DOORS & WINDOWS:
* 6 each 9'x10' overhead doors, uninsulated 26 Ga.
* 2 each 12'x14' overhead doors, uninsulated 26 Ga.
* Aluminum anodized storefront windows.
* Hollow metal doors and frames as required for exiting.
C-1
<PAGE>
DIVISION 9 - FINISHES:
* Exterior painting: one (1) coat acrylic latex over primer, three (3)
colors with breaks at reveals and panel joints.
DIVISION 11 - EQUIPMENT:
* Dock bumpers as required on dock high doors.
DIVISION 15 - MECHANICAL:
PLUMBING
* 2" waterline stubbed into building with a hose bib.
* Sanitary sewer stubbed into the building office area.
* Interior roof drains at entrances tightlined to storm system.
* Exterior downspouts tightlined to storm system at all areas except for
entrances.
FIRE PROTECTION
* Sprinkler system is a high density system providing .39 gallons over 5,600
SF of building area and includes installation of fire protection monitoring
system as defined by NFPA 13.
HEATING
* Freeze protection only with gas fired unit heaters.
DIVISION 16 - ELECTRICAL:
* One (1) 800 amp, 277/480 volt, three-phase main service.
* One (1) 100 amp, 277/480 volt three phase house panel.
* One (1) 50 amp, 110/240 volt single phase house panel.
* HPS wall packs on the building exterior and light poles throughout the
parking lot as required to provide .5 foot candles at the edge of paving.
* One (1) telephone terminal board.
* Two (2) 4" telephone conduits only from telephone vault to building.
OUTLINE SPECIFICATIONS FOR TENANT IMPROVEMENT
DIVISION 6 - WOOD & PLASTICS
* Furring at exterior walls with 3-1/2" metal studs.
* Full height wall at mezzanine perimeter with 3-1/2" metal studs (if
applicable).
* 3-1/2" metal stud interior partitions, 9 foot in height with insulation as
shown on the drawings.
* 6" metal stud GWB ceiling supports.
* Plastic laminate cabinet lowers.
* Plastic laminate cabinet uppers. (open shelves)
* Plastic laminate countertops.
DIVISION 7 - THERMAL/MOISTURE PROTECTION
* R-30 unfaced type insulation over suspended ceiling.
* R-13 unfaced type 1 with independent visqueen vapor barrier over stud
framing at exterior furring and mezzanine separation wall.
* Sound batt insulation at rest rooms, conference rooms and executive office
walls.
DIVISION 8 - DOORS AND WINDOWS
* Single doors to be 3 feet by 7 feet x 1-3/4 inch solid core prefinished oak
doors with prefinished wood jambs and casing. Double doors to be 6 feet by
7 feet x 1-3/4 inch solid core prefinished oak doors with prefinished wood
jambs and casing. Hardware to be Schlage grade commercial. Finish to be
US626D brushed chrome.
* Relights with prefinished wood stops and casing.
DIVISION 9 - FINISHES
* All interior walls to receive 5/8 inch GWB taped with smooth finish.
* Suspended ceiling to consist of Chicago Metallic Corporation #1800, 2 foot
x 4 foot grid system or equal (non-rated) and Armstrong "Cortega Minaboard"
ceiling tile or equal (non-rated).
C-2
<PAGE>
* Sheet vinyl at rest room floors.
* Vinyl composition tile at lunchroom.
* Carpeting - 26 oz. glue down.
* Rest room wet walls to receive plastic laminate wainscot to 48 inches AFF.
* Office walls to receive one coat of latex wall primer, one finish coat of
flat wall paint. Bathroom walls to receive one finish coat of enamel
paint.
DIVISION 10 - SPECIALTIES
* Toilet partitions to be floor mounted and head railed braced plastic
laminate construction.
* Toilet Accessories:
One soap dispenser per lavatory.
One sanitary cover dispenser in each stall.
Toilet paper dispenser in each stall.
Handicap grab bars provided in each handicap stall.
One mirror at each lavatory.
One surface mounted paper towel dispenser per lavatory.
DIVISION 15 - MECHANICAL
PLUMBING:
* Floor mount flush tank water closets.
* Counter top lavatory.
* Urinals.
* Lunchroom sinks.
* Janitor sink(s).
* One hot water heater.
FIRE PROTECTION:
* Fire sprinkler system to meet NFPA-13 requirements with semi-recessed
heads.
15.8 HVAC:
* Office HVAC system to be multi-package roof top units with ducting to
provide heating and cooling to office area. Includes multiple zones.
* Exhaust fan per rest room and lunchroom with ducting through the roof.
DIVISION 16 - ELECTRICAL
* 200 amp, 480 volt, 3-phase service including meter, fused disconnect, 200
amp MLO panel, 45 KVA step down transformer, 125 amp main circuit breaker.
* Convenience power, voice and date stubs (mud rings and pull strings) per
standard office.
* Office lighting provided by standard 2 x 4, 3 lamp fluorescent fixtures
spaced to provide 60 - 65 footcandles.
OUTLINE SPECIFICATIONS FOR PRODUCTION WAREHOUSE IMPROVEMENTS
* Heat to 60* approximately 86,840 square feet
* Insulation of warehouse walls with R-11 insulation.
* Insulation under roof deck with R-21 batt, approximately 86,840 square
feet.
* Upgrade electrical with additional 800 amps of 480 volt 3-phase power.
(For a total of 1,600 amps of 480 volts in Building D).
* Upgrade production area lighting to 50 f.c.
C-3
<PAGE>
EXHIBIT C-1
TO
NET LEASE AGREEMENT
WILLOWS COMMERCE PARK
SPACE PLAN
[To be created pursuant to Section 2.1]
C:1-1
<PAGE>
EXHIBIT D
TO
NET LEASE AGREEMENT
WILLOWS COMMERCE PARK
FINAL PLANS AND SPECIFICATIONS
[To be determined in accordance with Section 2.1]
D-1
<PAGE>
EXHIBIT E
TO
NET LEASE AGREEMENT
WILLOWS COMMERCE PARK
FORM OF SUBORDINATION AGREEMENT
Recorded at the Request of
and after Recording Return to
_____________________________
_____________________________
_____________________________
_____________________________
Grantor:________________________________________________________________________
Grantee:________________________________________________________________________
Abbreviated Legal Description:__________________________________________________
________________________________________________________________________________
Assessor's Tax Parcel ID No.:___________________________________________________
Project Name,
City, State
SUBORDINATION, NONDISTURBANCE
AND ATTORNMENT AGREEMENT
This SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT (this
"Agreement") is made and entered into as of the ______ day of _______________,
199___, by and between ______________________________________, a
________________________________________ ("Landlord"), whose address is
_____________________________________________________________________________ a
______________________________________________________ ("Tenant"), whose address
is _______________________________________________________________________, and
___________________________________, a __________________________
("Beneficiary"), whose address is ____________________________
_______________________________.
Tenant is the present lessee under a lease dated _____________________,
199___ (as now or hereafter amended, the "Lease"), made by Opus Northwest,
L.L.C., a Delaware limited liability company, as Landlord, demising all or a
portion of the Premises. As a condition precedent to Beneficiary's disbursement
of loan proceeds, Beneficiary has required that Tenant subordinate the Lease and
its interest in the Premises in all respects to the lien of the Deed of Trust.
NOW, THEREFORE, in consideration of the sum of $1.00 and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by each party hereto, it is hereby agreed as follows:
1. SUBORDINATION. The Lease, and the rights of Tenant in, to or under
the Lease and the Premises, including but not limited to any option in favor of
Tenant to renew or extend the term of the lease and/or purchase the Premises or
any other property encumbered by the Deed of Trust and any claim to condemnation
awards by Tenant, except with respect to the unamortized cost of trade fixtures
and improvements owned by Tenant which are not removable, are hereby subjected
and subordinated and shall remain in all respects and for all purposes subject,
subordinate and junior to the lien of the Deed of Trust, and to the rights and
interest of the from time-to-time holder of the Deed of Trust, as fully and with
the same effect as if the Deed of Trust had been duly executed, acknowledged and
recorded, and the indebtedness secured thereby had been fully disbursed prior to
the execution of the Lease or possession of the Premises by Tenant, or its
predecessors in interest.
2. RELIANCE BY BENEFICIARY. The parties are executing this instrument in
order to induce Beneficiary to disburse the indebtedness secured by the Deed of
Trust, and the parties agree that the disbursement by Beneficiary of all or any
part of the indebtedness shall constitute conclusive reliance by Beneficiary
upon this instrument and the provisions hereof and the subordination effected
hereby.
E-1
<PAGE>
3. TENANT NOT TO BE DISTURBED. So long as no Event of Default (as
defined in the Lease) (beyond any period given Tenant to cure such default) by
Tenant then exists, Tenant's possession of the Premises and any extensions or
renewal rights therefor in the Lease, shall not be diminished or interfered with
by Beneficiary, and Tenant's occupancy of the Premises shall not be disturbed by
Beneficiary for any reason whatsoever during the term of the Lease and any such
extensions or renewals thereof, and Beneficiary will not join Tenant as a party
defendant in any action or proceeding foreclosing the Deed of Trust unless such
joinder is necessary to foreclose the Deed of Trust and then only for such
purpose and not for the purpose of terminating the Lease.
4. TENANT TO ATTORN TO BENEFICIARY. If the interests of Landlord shall
be transferred to and owned by Beneficiary by reason of foreclosure or other
proceedings brought by it in lieu of or pursuant to a foreclosure, or by any
other manner, and Beneficiary succeeds to the interest of the Landlord under the
Lease, Tenant shall be bound to Beneficiary under all of the terms, covenants,
and conditions of the Lease for the balance of the term thereof remaining and
any extensions or renewals thereof which may be effected in accordance with any
option therefor in the Lease, with the same force and effect as if Beneficiary
were the landlord under the Lease; and Tenant will attorn to and recognize
Beneficiary, as its landlord, said attornment to be effective and self-operative
immediately upon Beneficiary succeeding to the interest of the Landlord without
the execution of any further instruments on the part of any of the parties
hereto.
5. BENEFICIARY NOT BOUND BY CERTAIN ACTS OF LANDLORD. If Beneficiary or
any other person holding by or through Beneficiary as a result of foreclosure of
the Deed of Trust or conveyance in lieu thereof ("New Owner") shall succeed to
the interest of Landlord under the Lease, neither Beneficiary nor New Owner
shall (1) be liable for any act or omission of any prior landlord (including
Grantor) except to the extent Beneficiary or New Owner has received notice of
default under the Lease and has failed to cure the same within the time limits
prescribed therein and in the Lease; (2) be subject to any offsets or defenses
which Tenant might have against any prior landlord (including Grantor) except to
the extent Beneficiary or New Owner has received notice of default under the
Lease and has failed to cure the same within the time limits prescribed therein
and in the Lease; (3) be bound by any rent or additional rent which Tenant might
have paid for more than 30 days in advance; (4) be obligated for repayment of
any security deposit which has not been previously paid to Beneficiary; or
(5) be bound by any amendment or modification of the Lease made subsequent to
the date of this Agreement without Beneficiary's consent.
6. ASSIGNMENT OF RENTS. Landlord and Tenant acknowledge that Beneficiary
is entitled, pursuant to an Assignment of Leases and Rents executed by Landlord
in favor of Beneficiary, to collect and receive all rent payable under the Lease
directly from Tenant. Landlord hereby directs Tenant, and Tenant hereby agrees,
to pay all of said rent directly to Beneficiary upon Tenant's receipt of a
written direction by Beneficiary to pay said rent to Beneficiary. Until Tenant
receives such a direction from Beneficiary, Tenant will pay all of said rent to
Landlord in accordance with the provisions of the Lease. Landlord agrees that,
upon Tenant's receipt of such a direction from Beneficiary, Tenant will not be
required to determine whether Landlord is in default under the Loan Documents,
and Landlord will credit all of such rent paid to Beneficiary against Tenant's
obligations pursuant to the Lease.
7. SUCCESSORS AND ASSIGNS. This Agreement and each and every covenant,
agreement and other provisions hereof shall be binding upon the parties hereto
and their heirs, administrators, representatives, successors and assigns,
including without limitation each and every from time-to-time holder of the
Lease or any other person having an interest therein and shall inure to the
benefit of the parties and their respective heirs, successors and assigns.
8. CHOICE OF LAW. This Agreement is made and executed under and in all
respects is to be governed and construed by the laws of the State where the
Premises are situate.
9. CAPTIONS AND HEADINGS. The captions and headings of the various
sections of this Agreement are for convenience only and are not to be construed
as confining or limiting in any way the scope or intent of the provisions
hereof. Whenever the context requires or permits, the singular shall include
the plural, the plural shall include the singular and the masculine, feminine
and neuter shall be freely interchangeable.
10. NOTICES. Any notice which any party to the Lease may desire or may be
required to give to any other party shall be in writing and sent by certified
mail, or equivalent, to the addresses as set forth above, or to such other
places any party hereto may by notice in writing designate. Beneficiary, upon
succeeding to the interest of Landlord under the Lease, shall not be bound by
any notice given by Tenant to any prior landlord (including Grantor) unless a
copy of the notice was sent to Beneficiary.
Notwithstanding anything herein or in the Lease to the contrary and so long as
Beneficiary has any interest in the Premises, Landlord shall not be in default
under any provision of the Lease unless written notice specifying such default
is mailed to Landlord and to Beneficiary. Lessee agrees that Beneficiary shall
have the right to cure such default on behalf of Landlord within 30 calendar
days after receipt of such notice. Tenant further agrees not to invoke any of
its remedies under the Lease until said 30 days have elapsed, or during any
period that Beneficiary is proceeding to cure such default with due diligence,
not to exceed 90 days.
IN WITNESS WHEREOF, the parties hereto have each caused this Agreement to
be executed as of the date first above.
E-2
<PAGE>
TENANT:
-----------------------------------
a
----------------------------------
By:
--------------------------------
Its
------------------------------
BENEFICIARY:
-----------------------------------
a
----------------------------------
By:
--------------------------------
Its
------------------------------
LANDLORD:
-----------------------------------
a
----------------------------------
By:
--------------------------------
Its
------------------------------
[ADD ACKNOWLEDGMENTS]
E-3
<PAGE>
SCHEDULE A
TO
SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT
LEGAL DESCRIPTION
[Insert Legal Description]
E-A:1
<PAGE>
EXHIBIT F
TO
NET LEASE AGREEMENT
WILLOWS COMMERCE PARK
SIGN STANDARDS
1. Exterior Tenant identification signage shall not exceed 30" in height nor
12' in length.
2. All signage shall be non-lighted and non-illuminated.
3. Signage shall be on no pylons without Landlord's approval.
4. No more than one exterior Tenant identification sign is permitted for each
tenant.
5. Color and location of all signage shall be approved by Landlord.
6. Numbers and door identification signage for Tenant shall not exceed 8" and
color and location of such signage shall be subject to Landlord's approval.
7. Tenant shall be responsible for removal of the signage and repair to the
Building upon termination or expiration of this Lease.
F-1
<PAGE>
EXHIBIT G
TO
NET LEASE AGREEMENT
WILLOWS COMMERCE PARK
RULES AND REGULATIONS
Landlord hereby establishes the following rules and regulations for the
conduct of Tenant, its employees, agents, contractors, and invitees in the
Common Areas of Willows Commerce Park (the "Park"):
1. REFUSE
A. All trash, rubbish, waste material and other garbage shall be kept
within the Premises or the compactor in the loading area or truck well
until the day of removal, such removal to be at the expense of Tenant
on a regular basis as reasonably determined by Landlord.
B. Tenant shall not burn any trash in or about the Premises or anywhere
within the Project.
C. If Tenant's trash is of a deteriorating nature, creating offensive
odors, Tenant shall utilize and maintain at its cost refrigerated
facilities as reasonably required by the Landlord.
D. If Landlord considers necessary, or otherwise consents in writing to,
the placing of Tenant's trash outside the Premises, such trash shall
be placed by Tenant in containers approved by Landlord but provided at
Tenant's expense and kept at the location referred on the Site Plan.
Trash containers shown on the approved plans and specifications shall
be deemed approved.
E. All compactors that may contain liquids shall be equipped with a drain
and a connection to the sanitary sewer per Sewer Utility regulations.
No self-contained compactor shall exceed 25 cubic yards. No
disconnect compactor shall exceed 30 cubic yards gross weight of
truck, and compactor shall not exceed DOT legal weight limits.
2. SUSPENSION AND FURNISHINGS
A. Tenant shall not hang or suspend from any part of the roof structure
any equipment, fixtures, signs or displays which are not first
authorized by Landlord, which will not be unreasonably withheld.
B. Tenant will not locate furnishings or cabinets adjacent to mechanical
or electrical access panels or over air conditioning outlets so as to
prevent operating personnel from servicing such units as routine or
emergency access may require. Cost of moving such furnishings for
Landlord's access will be at Tenant's cost.
3. ELECTRICAL EQUIPMENT
If, after the Commencement Date of the Initial Term, Tenant requires any
electrical equipment which might overload the electrical facilities in the
Premises, Tenant shall submit to Landlord plans and specifications for work
required to install and supply additional electrical facilities or
equipment to prevent such overloading, and shall obtain Landlord's written
approval (which shall not be unreasonably withheld) to perform such work,
which shall meet all the applicable regulations or requirements of any
government or other competent authority, the Association of Insurance
Underwriters and Landlord's insurers, all at the sole cost of Tenant.
4. PLUMBING
No plumbing facilities shall be used for any purpose other than that for
which they were designed, and no foreign substance of any kind shall be
thrown therein, and the expense of any breakage, stoppage or damage
resulting from a violation of this provision by Tenant or by any person for
whom Tenant is responsible shall be borne by Tenant. Specifically, Tenant
shall not dispose of the following items in sinks or commodes: plastic
products (plastic bags, straws, boxes); sanitary napkins; tea bags, cooking
fats, cooking oils; any meat scraps or cutting residue; petroleum products
(gasoline, naphtha, kerosene, lubricating oils); paint products (thinner,
brushes); or any other item which the same are not designed to receive.
5. HVAC OPERATION
A. Tenant shall operate or permit to be operated its own heating,
ventilating or air-conditioning equipment, if any, in such manner that
there will be no direct or indirect appropriation of heating or
cooling from other portions of the Project.
B. Tenant shall not leave open any doors or windows to the exterior of
the Project which would adversely affect the performance of any
heating, ventilating or air-conditioning equipment in the Project.
C. This paragraph 5 shall not apply if the HVAC system for the Premises
is entirely self-contained and not shared with any other tenant.
6. PARKING AREAS AND ROADWAYS
A. Tenant shall not load or unload long-haul delivery trucks or
truck-trailers, whether disconnected or not, in the parking areas.
All such unloading shall be done at Tenant's loading dock or other
area specified by Landlord as Tenant's receiving area. This paragraph
does not apply to incidental deliveries, such as Federal Express or
the United States post office.
B. If any portion of the Project is open for business at the time, then
Tenant shall cause all long-haul delivery trucks or truck-trailers,
whether disconnected or not, and construction vehicles and workers to
enter and leave the Project by service drives shown on the Site Plan
or other routes designated by Landlord at the time. Such trucks and
vehicles shall be parked only in areas designated by Landlord.
G-1
<PAGE>
C. Tenant shall not allow delivery trucks or truck-trailers, whether
disconnected or not, to park in any other area of the Project that
might interfere with access to other tenants' loading docks or
receiving areas.
D. Tractor trailers which must be unhooked or parked must use steel
plates under dolly wheels to prevent damage to the asphalt paving
surface. In addition, wheel blocking must be available for use.
Tractor trailers are to be removed from the loading areas after
unloading. No parking or storing of such trailers will be permitted
in the Project.
7. NO SOLICITATION
Tenant, or Tenant's employees and agents, shall not solicit business in the
Parking Areas or other Common Areas and shall not distribute any handbills
or other advertising matter therein.
8. PESTS
Should the Premises become infested with rodents, vermin or the like on or
after 90 days after the Commencement Date, Tenant shall forthwith remedy
the same and shall use, at Tenant's cost, such pest extermination
contractor as Landlord may direct and at such intervals as Landlord may
require as being necessary by reason of the conditions in the Premises.
9. NOTICE OF ACCIDENT, DEFECTS
Tenant shall give immediate notice to Landlord in case of fire or accident
in the Premises or of defects therein or to any fixtures or equipment
thereon.
10. EMERGENCY CONTACTS
Tenant shall provide Landlord with the names, addresses and telephone
numbers of 2 authorized employees of Tenant who may be contacted by
Landlord upon an emergency relative to the Premises.
11. PERMITS, LICENSES
Tenant alone shall be responsible for obtaining, from the appropriate
governmental authority or other regulatory body having jurisdiction,
whatever permits, licenses or approvals as may be necessary for the
operation of its business.
12. FURTHER RULES AND REGULATIONS
Landlord reserves the right to modify or rescind any of these rules and
regulations (as to some or all occupants of the Project) and to make such
other and further rules and regulations as it deems in its sole reasonable
judgment shall from time to time be necessary or advisable for the
operation of the Project, which rules and regulations shall, subject to
Section 18 of the Lease, be binding upon Tenant upon its notification of
said rules and regulations.
G-2
<PAGE>
EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE
APEX PC SOLUTIONS, INC.
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 27, MARCH 28,
1998 1997
---- ----
<S> <C> <C>
Income before extraordinary item $ 3,344,104 $ 1,976,325
Extraordinary item -- loss on early extinguishment
of debt, net of applicable income tax benefit of $72,511 - (140,763)
----------- -----------
Net income $ 3,344,104 $ 1,835,562
----------- -----------
----------- -----------
Per share amounts:
Basic:
Income before extraordinary item $ 0.25 $ 0.22
Extraordinary item - (0.01)
----------- -----------
Net income $ 0.25 $ 0.21
----------- -----------
----------- -----------
Diluted:
Income before extraordinary item $ 0.24 $ 0.18
Extraordinary item - (0.01)
----------- -----------
Net income $ 0.24 $ 0.17
----------- -----------
----------- -----------
Weighted average shares used in computing net
income per share:
Basic:
Weighted average common shares 13,437,982 8,837,027
Effect of nominal shares - -
----------- -----------
Weighted average shares use in computing
basic net income per share 13,437,982 8,837,027
----------- -----------
----------- -----------
Diluted:
Weighted average common shares 13,437,982 8,837,027
Potential additional common shares (treasury
stock method):
Stock options 527,849 445,726
Series A preferred stock 1,351,724
Effect of nominal shares - -
----------- -----------
Weighted average shares use in computing diluted
net income per share 13,965,831 10,634,477
----------- -----------
----------- -----------
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 27, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-27-1998
<CASH> 9,910,310
<SECURITIES> 34,062,551
<RECEIVABLES> 10,674,825
<ALLOWANCES> 335,903
<INVENTORY> 3,011,906
<CURRENT-ASSETS> 58,916,152
<PP&E> 1,303,203
<DEPRECIATION> 518,565
<TOTAL-ASSETS> 60,551,473
<CURRENT-LIABILITIES> 4,356,168
<BONDS> 0
0
0
<COMMON> 62,078,642
<OTHER-SE> (5,922,337)
<TOTAL-LIABILITY-AND-EQUITY> 60,551,473
<SALES> 15,703,657
<TOTAL-REVENUES> 15,703,657
<CGS> 8,327,476
<TOTAL-COSTS> 8,327,476
<OTHER-EXPENSES> 2,914,309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (566,856)
<INCOME-PRETAX> 5,028,728
<INCOME-TAX> 1,684,624
<INCOME-CONTINUING> 3,344,104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,344,104
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.24
</TABLE>
