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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the period from _____ to _________.
Commission File No. 0-23221
TEKGRAF, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 58-2033795
- -------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6000 Lake Forrest Drive, Suite 110 30328
Atlanta, Georgia ----------
- ---------------------------------------- (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (404) 252-0201
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Former Address: 2979 Pacific Drive, Suite B Norcross, Georgia 30071
(Former name, former address and former fiscal year, if changed since last
report):
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes: X No: __
Indicate the number of shares outstanding of each of the issuer's
class of common stock, as of the latest practical date:
Class Outstanding at May 14, 1998
----- -----------------------------------
Class A Common Stock, $.001 par value 2,994,998 shares
Class B Common Stock, $.001 par value 3,333,333 shares
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TEKGRAF, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
Table of Contents
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and March 31, 1998 1
Consolidated Statements of Income for the three months ended March 31, 1997 and
March 31, 1998 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and March 31, 1998 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Securities Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Report on Form 8-K 13
SIGNATURES
Index of Exhibits
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Tekgraf, Inc. Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,600,339 $ 4,303,619
Accounts receivable, less allowance for
doubtful accounts of $205,000 and $221,000 at
December 31, 1997 and March 31, 1998, respectively 9,217,843 9,313,269
Inventories, net 4,700,615 6,777,021
Prepaid expenses and other assets 368,770 356,295
Prepaid income taxes 103,163
Deferred income taxes 62,832 84,892
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Total current assets 22,950,399 20,938,259
------------ ------------
Property and equipment 531,922 630,895
Less accumulated depreciation (187,219) (229,689)
------------ ------------
344,703 401,206
Goodwill, net 6,555,773 6,442,089
Other assets 52,633 46,648
Deferred income taxes 48,840 48,840
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Total assets $ 29,952,348 $ 27,877,042
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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Tekgraf, Inc. Consolidated Balance Sheets, Continued
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current debt $ 23,474 $ 15,591
Due to acquisition stockholders 180,289 180,289
Note payable, stockholders 90,000 90,000
Due to stockholders and related entities 246,956
Accounts payable 8,345,388 6,675,595
Accrued expenses 928,121 782,256
Income taxes payable 70,100
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Total current liabilities 9,884,328 7,743,731
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Debt, less current maturities 12,788 12,788
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9,897,116 7,756,519
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Commitments and contingencies
Stockholders' equity:
Class A Common Stock, $.001 par value,
31,666,667 shares authorized; 2,100,000
shares issued and outstanding at December 31, 1997
and March 31, 1998 2,100 2,100
Class B Common Stock, $.001 par value, 3,333,333
shares authorized; 3,333,333 shares issued and
outstanding at December 31, 1997 and March 31, 1998 3,333 3,333
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; no shares issued at December 31, 1997
and March 31, 1998
Due from acquisition stockholders (149,863) (149,863)
Additional paid-in capital 20,584,028 20,555,094
Retained earnings (deficit) (384,366) (290,141)
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Total stockholders' equity 20,055,232 20,120,523
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Total liabilities and stockholders' equity $ 29,952,348 $ 27,877,042
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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Tekgraf, Inc. Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months
Ended March 31,
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1997 1998
(Unaudited)
<S> <C> <C>
Net sales $ 3,130,610 $ 16,871,281
Cost of goods sold 2,519,472 14,041,156
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Gross profit 611,138 2,830,125
Operating expenses:
Selling, general and administrative 363,220 2,527,864
Depreciation 10,367 45,676
Amortization 120,603
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Income from operations 237,551 135,982
Other income/expense, net 6,407 118,006
Interest expense 25,000 3,808
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Income before provision for income
taxes and minority interest 218,958 250,180
Provision for income taxes 85,400 146,000
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Income before minority interest 133,558 104,180
Minority interest 23,948 9,955
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Net income $ 109,610 $ 94,225
============ ============
Basic and diluted weighted
average shares outstanding 1,084,266 5,266,666
============ ============
Basic and diluted net income per share $ .10 $ .02
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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Tekgraf, Inc. Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31,
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1997 1998
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 109,610 $ 94,225
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Provision for doubtful accounts receivable 16,000
Provision/writedown of inventory 91,000
Depreciation 10,367 45,676
Amortization 120,603
Deferred taxes (800) (22,060)
Minority interest 23,948 9,955
Changes in assets and liabilities:
Accounts receivable (91,280) (111,426)
Inventories (68,867) (2,167,406)
Prepaid expenses and other assets (17,524) 1,586
Accounts payable and accrued expenses 104,736 (1,844,592)
Income taxes 86,200 (173,263)
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Total adjustments 46,780 (4,033,927)
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Net cash provided by (used in) operating activities 156,390 (3,939,702)
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Cash flows from investing activities:
Purchase of property and equipment (4,898) (102,179)
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Net cash used in investing activities (4,898) (102,179)
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Cash flows from financing activities:
Repayment of debt (7,883)
Repayment of advance from
stockholders and related entities (117,110) (246,956)
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Net cash used in financing activities (117,110) (254,839)
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Increase (decrease) in cash and cash equivalents 34,382 (4,296,720)
Cash and cash equivalents, beginning of period 633,027 8,600,339
------------ ------------
Cash and cash equivalents, end of period $ 667,409 $ 4,303,619
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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Tekgraf, Inc. Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accounting and reporting policies of Tekgraf, Inc. ("Tekgraf" or the
"Company") conform to generally accepted accounting principles and are
unaudited but reflect all adjustments which, in the opinion of management, are
necessary for the fair presentation of the consolidated financial position,
results of operations and cash flows for the interim periods presented. All
adjustments reflected in the interim financial statements are of a normal
recurring nature. Such financial statements should be read in conjunction with
the financial statements and notes thereto and the report of independent
accountants included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997. The year end balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. The results of operations for the
three months ended March 31, 1998 are not necessarily indicative of the results
to be expected for the full year.
2. Net Income Per Common Share
Basic and diluted net income per common share are computed by dividing net
income by the weighted average number of common shares and common share
equivalents outstanding during the period. There were no common stock
equivalents during either of the periods presented. At March 31, 1998, the
basic and diluted weighted average shares exclude the escrow shares and was
determined as follows:
<TABLE>
<S> <C>
Shares outstanding from beginning of period 5,433,333
Weighted average escrow shares (166,667)
---------
Basic and diluted weighted average shares 5,266,666
=========
</TABLE>
3. 1997 Acquisitions
Effective June 2, 1997, the Company completed the acquisition of 100% of the
outstanding common stock of G&R Marketing, Inc., Microsouth, Inc., tekgraf,
inc., Computer Graphics Distributing Company, Intelligent Products Marketing,
Inc., and IG Distribution, Inc. (collectively, the "Subsidiaries") in exchange
for the issuance of 2,192,000 shares of class B common stock of the Company
(the "Acquisitions"). The Subsidiaries are regional distributors and marketers
of computer graphics hardware and software. The Acquisitions were recorded
under the purchase method of accounting and accordingly, the results of
operations have been included in the Company's statement of income from the
acquisition date.
The following unaudited pro forma summary combines the consolidated results of
the Company and the Subsidiaries as if the Acquisitions had occurred as of
January 1, 1997, after giving effect to certain adjustments, including
elimination of revenue and expenses related to affiliated entities of the
Subsidiaries which were not acquired by the Company, adjustments in
compensation levels that have been contractually agreed to, elimination of
amortization related to negative goodwill, elimination of pro rata interest
expense incurred on capital to be contributed by the pre-combination
stockholders of the Company, related income tax effects, elimination of
transactions between the Subsidiaries, and amortization of intangible assets.
In addition, the earnings per share amounts give effect to the combination and
subsequent recapitalization that the Company completed during November 1997 and
the weighted average shares outstanding exclude 166,667 escrow shares. The pro
forma summary does not
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purport to represent what the Company's results of operations would have
actually been if the Acquisitions had occurred as of January 1, 1997 or to
project the Company's results of operations for any future period.
<TABLE>
<CAPTION>
For the three
months ended
March 31, 1997
--------------
<S> <C>
Net sales $ 17,599,318
Gross profit 2,887,842
Income from operations 868,365
Income before taxes 858,658
Net income 478,383
Basic and diluted income per share $ 0.09
Weighted average shares outstanding 5,266,000
</TABLE>
4. Income Taxes
The Company's effective tax rate was 39.0% and 58.4% for the three months
ended March 31, 1997 and 1998, respectively. The difference between the
Company's effective and statutory tax rates for 1998 resulted primarily due to
the amortization of non-deductible goodwill and, for both periods, due to state
taxes net of the federal benefit.
5. Subsequent Events
Acquisitions
On April 1, 1998, the Company acquired Computer Graphics Technology, Inc., a
South Carolina corporation ("CGT"), by merging CGT into a wholly-owned
subsidiary of the Company. The Company paid $500,000 in cash and issued an
aggregate of 330,000 unregistered shares of the Company's Class A Common Stock
to the holders of all of the outstanding shares of stock of CGT as
consideration in this acquisition.
On May 1, 1998, the Company acquired Martec, Inc., a California corporation
("Martec"), by merging Martec into a wholly-owned subsidiary of the Company.
The Company paid $500,000 in cash and issued an aggregate of 300,000
unregistered shares of the Company's Class A Common Stock to the holder of all
of the outstanding shares of stock of Martec as consideration in this
acquisition.
On May 8, 1998, the Company acquired New England Computer Graphics, Inc., a
Massachusetts corporation ("NECG"), by merging NECG into a wholly-owned
subsidiary of the Company. The Company paid $415,000 in cash and issued an
aggregate of 264,998 unregistered shares of the Company's Class A Common Stock
to the holders of all of the outstanding shares of stock of NECG as
consideration in this acquisition.
The purchase prices for the acquisitions described above are subject to
adjustment based on certain net asset value and profitability guarantees. In
order to secure these guarantees, a total of $325,000 of the cash consideration
and 192,251 of the unregistered shares of the Class A Common Stock were placed
in escrow. In addition to these escrowed amounts, a total of 192,250 shares was
placed in escrow to secure the various representations, warranties and other
provisions of the respective agreements. The acquisitions will be accounted for
as purchases. The acquired entities are regional distributors and marketers of
computer graphics hardware and software.
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Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). These forward-looking statements appear in a
number of places in this report and include all statements that are not
historical fact and that relate to the intent, belief or current expectations
of the Company, its directors or its officers with respect to, among other
things: (i) the Company's financing plans, including the Company's ability to
obtain financing in the future; (ii) trends affecting the Company's financial
condition or results of operations; (iii) the Company's growth strategy and
operating strategy; (iv) the Company's anticipated capital needs and capital
expenditures; (v) projected outcomes and any effects on the Company of any
litigation or investigations concerning the Company; and (vi) the potential
impact of changes to, additions of or losses of distribution agreements with
manufacturers. Investors are cautioned that any such forward-looking statements
are not guarantees of future performance and that actual results, performance
or developments could differ materially for those implied by such
forward-looking statements as a result of known and unknown risks and other
factors, including those described from time to time in the Company's filings
with the Securities and Exchange Commission under the heading "Risk Factors"
and elsewhere, which should be read in conjunction with this document. Among
such factors are risks relating to acquisitions, competition and pricing
pressures, dependence on acquiring and maintaining distribution arrangements
with manufacturers, dependence on certain suppliers and economic conditions.
Overview
The Company was incorporated in Georgia in February 1993 and in December 1994,
completed the acquisition of a 60% interest in Prisym Technologies, Inc. of
Georgia. In June 1997, Crescent completed the acquisitions of 100% interests in
Microsouth, Inc., G&R Marketing, Inc., tekgraf, inc., Computer Graphics
Distributing Company, Intelligent Products Marketing, Inc. and IG Distribution,
Inc. These acquisitions have been accounted for using the purchase method of
accounting. Subsequent to the acquisitions, the Company completed a merger
pursuant to which it reincorporated in the State of Delaware and effected a
recapitalization pursuant to which each share of common stock of the Georgia
entity was exchanged for 400 shares of Class B Common Stock of the Delaware
entity. In November 1997, the Company completed its initial public offering of
2,100,000 shares of its Class A Common Stock.
In connection with the acquisitions listed above, a total of 2,192,000 shares
of Class B common stock of the Company was issued.
Results of Operations
Net sales. Net sales increased $13.74 million, or 439%, to $16.87 million for
the quarter ended March 31, 1998 compared to $3.13 million for the quarter
ended March 31, 1997. Of the increase, $12.8 million was attributable to the
acquisitions that occurred on June 2, 1997. The remaining $930,000 of the
increase was due to increased market penetration and internal growth.
Gross Profit. Gross profit increased $2.22 million, or 363%, to $2.83 million
for the three months ended March 31, 1998 compared to $611,000 for the same
period in 1997. Gross margin decreased to 16.77% for the first quarter of 1998
compared to 19.52% for the same period in 1997. The decreases were primarily
attributable to the differing product mixes.
SG&A Expenses. SG&A expenses increased $2.16 million, or 596%, to $2.53 million
for the three months ended March 31, 1998 compared to $363,000 for the same
period in 1997. The acquisitions accounted for
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$1.50 million of the increase, and costs associated with the internal growth,
costs of operating as a public company and additional infrastructure costs
accounted for the remainder.
Income from Operations. Operating income decreased $102,000 to $136,000 for the
first quarter of 1998 compared to $238,000 for the corresponding 1997 quarter.
In addition to the costs described above, income from operations for 1998 was
reduced by $121,000 related to the amortization of goodwill and increased
depreciation of $35,000.
Provision for Income Taxes. The Company's effective tax rate was 39% and 58.4%
for the three months ended March 31, 1998 and 1997, respectively. The
difference between the Company's effective and statutory rates for 1998
resulted primarily due to the amortization of non-deductible goodwill and, for
both periods, due to state taxes net of the federal benefit.
Pro Forma Combined Financial Information
The acquisitions described previously have had a significant impact on the
comparisons of operating results for 1998 and 1997, due to the fact that the
operating results are included only for the period January 1, 1998 through
March 31, 1998. Therefore, in addition to the historical comparisons of the
quarters ended March 31, 1998 and March 31, 1997, the Company has included here
the pro forma statement of income for the quarter ended March 31, 1997 as if
the acquisitions had occurred as of January 1, 1997, giving effect to certain
adjustments, including the elimination of revenue and expenses related to
affiliated entities of the acquisitions which were not acquired by the Company,
adjustments in compensation levels that have been contractually agreed to,
elimination of amortization of negative goodwill, elimination of the pro rata
interest expense incurred on capital to be contributed by the pre-combination
stockholders of the Company, related income tax effects, elimination of
transactions between the acquisition companies, and amortization of the
intangible assets.
The 1997 unaudited pro forma data below also gives no effect to any
efficiencies or additional costs that might have occurred, if any, had the
companies actually been combined for the entire period presented. Additionally,
the 1997 unaudited pro forma data does not take into account the additional
interest that might have been earned or interest expense that that might have
been saved from the proceeds of the Offering. The pro forma statement of income
data is not intended to be indicative of future operations, but rather for a
better understanding of the Company on a comparative basis. A discussion and
analysis of the pro forma results, given the above qualifications, is not
considered meaningful and is therefore not presented. All amounts are presented
in thousands.
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<TABLE>
<CAPTION>
Quarter ended
March 31,
1997 1998
------------ ------------
Unaudited
Statement of Income Data: (Pro forma (historical)
Combined)
<S> <C> <C>
Net sales $ 17,599 $ 16,871
Cost of goods sold 14,711 14,041
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Gross profit 2,888 2,830
Operating expenses:
Selling, general and
Administrative 1,916 2,528
Depreciation and amortization 103 166
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Operating income 869 136
Other income 73 118
Interest expenses 83 4
------------ ------------
Income before taxes and minority interest 859 250
Provision for income taxes 356 146
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Income before minority interest 503 104
Minority interest 24 10
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Pro forma net income/Net income $ 478 $ 94
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</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
In November 1997, the Company consummated an initial public offering of
2,100,000 units consisting of 2,100,000 shares of Class A common stock and
2,100,000 redeemable warrants at a combined price of $6 per unit. The net
proceeds of the sale, after deducting underwriter discounts, etc., were
approximately $10.4 million. Additionally, certain stockholders of the Company
contributed an aggregate of $870,000 to the capital of the Company.
Proceeds from the initial public offering were also used to repay bank debt of
$2 million, debt to a related entity of $2 million and debt to a stockholder of
$125,000. In conjunction with the repayment of the bank debt, the Company
terminated the line of credit facilities with the related banks.
The Company will make purchase price adjustments during the second quarter of
1998 for either excess net asset values contributed or for net asset values
that were less than originally estimated to the stockholders of the acquisition
companies.
Since inception, the Company has financed its operations through a combination
of cash flow from operations, bank borrowings and equity capital and the net
proceeds from the Company's initial public offering. The Company's capital
requirements have arisen primarily in connection with acquisitions and the
purchase of fixed assets.
A key element of the Company's strategy is to continue to expand through
acquisitions of companies engaged in the distribution and/or marketing of
computers and/or computer hardware, software and peripherals.
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The Company believes that its available funds, together with the cash flow
expected to be generated from operations and anticipated credit facilities,
will be adequate to satisfy its current and planned operations for at least the
next 12 months.
SUBSEQUENT EVENTS - Acquisitions
On April 1, 1998, the Company acquired Computer Graphics Technology, Inc., a
South Carolina corporation ("CGT"), by merging CGT into a wholly-owned
subsidiary of the Company. The Company paid $500,000 in cash and issued an
aggregate of 330,000 unregistered shares of the Company's Class A Common Stock
to the holders of all of the outstanding shares of stock of CGT as
consideration in this acquisition.
On May 1, 1998, the Company acquired Martec, Inc., a California corporation
("Martec"), by merging Martec into a wholly-owned subsidiary of the Company.
The Company paid $500,000 in cash and issued an aggregate of 300,000
unregistered shares of the Company's Class A Common Stock to the holder of all
of the outstanding shares of stock of Martec as consideration in this
acquisition. See "Part II - Other Information -- Item 5."
On May 8, 1998, the Company acquired New England Computer Graphics, Inc., a
Massachusetts corporation ("NECG"), by merging NECG into a wholly-owned
subsidiary of the Company. The Company paid $415,000 in cash and issued an
aggregate of 264,998 unregistered shares of the Company's Class A Common Stock
to the holders of all of the outstanding shares of stock of NECG as
consideration in this acquisition. See "Part II - Other Information -- Item 5."
The purchase prices for the acquisitions described above are subject to
adjustment based on certain net asset value and profitability guarantees.
Accordingly, a total of $325,000 of the cash consideration and 192,251 of the
unregistered shares of the Class A Common Stock were placed in escrow to secure
these guarantees. In addition to these escrowed amounts, a total of 192,250
shares was placed in escrow to secure the various representations, warranties
and other provisions of the respective agreements. The acquisitions will be
accounted for as purchases. The acquired entities are regional distributors and
marketers of computer graphics hardware and software.
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARD
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS
130 establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements.
The impact of the adoption of this Standard had no impact on the Company's
financial statements and financial statement presentation.
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YEAR 2000
The Company has adopted a plan to facilitate a smooth transition of the
systems, products and vendors which Tekgraf relies on into the twentieth
century. Additionally, for the software products sold to customers, all
products are licensed from the suppliers, and while there is no guarantee, the
suppliers claim that where applicable, the software is Year 2000 compliant.
Substantially all of Tekgraf's software systems are licenses from outside
vendors or will be once the management information project is completed
(anticipated to be fourth quarter 1998). Tekgraf's primary exposure emanates
from the ability of its technology vendors to implement the necessary changes
for Year 2000 compliance. Management believes it will be successful in the
achievement of its plans and does not believe that the execution of the plan
will have a material adverse effect on future operating results.
Other Information
The Company is aware of recent published reports to the effect that the
District Attorney's office in New York County is conducting an investigation
into various activities of D.H. Blair & Co., Inc. a member of the selling group
with respect to the Company's IPO. The Company believes this negative publicity
may have had a material adverse impact on the market price of the Company's
securities, reputation and acquisition strategy and is consulting with its
advisers to redress these issues.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in certain claims arising in the normal course of
business. In the opinion of management of the Company, although the outcomes of
the claims are uncertain, they are not likely to have, in the aggregate, an
adverse material effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
quarter ended March 31, 1998.
Item 5. Other Information
(a) Acquisitions.
On May 1, 1998, Tekgraf acquired Martec by virtue of the merger of Martec with
and into Tekgraf Sub II, Inc., a Georgia corporation which is a wholly-owned
subsidiary of the Company ("Tekgraf Sub II"). The merger was effectuated
pursuant to an Agreement and Plan of Merger (the "Martec Merger Agreement"),
dated March 25, 1998, by and among the Company, Tekgraf Sub II, Martec, and
Mark Lewis (the "Martec Shareholder"). As consideration, the Company delivered
an aggregate of 300,000 unregistered shares of the Company's Class A Common
Stock and $500,000 in cash to the Martec Shareholder. These amounts remain
subject to adjustment based on certain net asset value and profitability
guarantees made by Martec and the Martec Shareholder in the Martec Merger
Agreement. These guarantees are secured by $150,000
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of the cash consideration and 60,000 of the shares issued, which amounts were
placed in escrow in accordance with an Escrow Agreement by and among the
Company, Martec, the Martec Shareholder, Mark Lewis (as the Shareholder
Representative), and First Union National Bank (as Escrow Agent). In order to
secure various other representations, warranties and provisions contained in
the Martec Merger Agreement, another 60,000 of the shares issued were placed in
escrow pursuant to a Pledge, Security and Escrow Agreement by and among the
Company, Martec, the Martec Shareholder, Mark Lewis (as the Indemnification
Representative), and First Union National Bank (as Escrow Agent). Immediately
after the merger, the name of Tekgraf Sub II was changed to "Media Graphics
Distribution, Inc."
The purchase price was determined by direct negotiations among the Company,
Martec and the Martec Shareholder in the months preceding the signing of the
Martec Merger Agreement. The Company used proceeds from its initial public
offering of Class A Common Stock and Warrants, which occurred in November 1997,
to fund the cash component of the purchase price. Martec's assets consist
primarily of accounts receivable, inventory and cash. As part of the merger,
Tekgraf Sub II assumed all of the liabilities of Martec, consisting primarily
of accounts payable, a bank note and accrued expenses.
On May 8, 1998, Tekgraf acquired NECG by virtue of the merger of NECG with and
into Tekgraf Sub III, Inc., a Georgia corporation which is a wholly-owned
subsidiary of the Company ("Tekgraf Sub III"). The merger was effectuated
pursuant to an Agreement and Plan of Merger (the "NECG Agreement of Merger"),
dated March 25, 1998, by and among the Company, Tekgraf Sub III, NECG, and
Robert Shumaker, Thomas Gust, A. Lowell Nerenberg, Scott Barker, David Boston,
William Rychel and Thomas Mills (the "NECG Shareholders"). As consideration, the
Company delivered an aggregate of 264,998 unregistered shares of the Company's
Class A Common Stock and $415,000 in cash to the NECG Shareholders. These
amounts remain subject to adjustment based on certain net asset value and
profitability guarantees made by NECG and the NECG Shareholders in the NECG
Agreement of Merger. These guarantees are secured by $75,000 of the cash
consideration and 66,251 of the shares issued, which amounts were placed in
escrow in accordance with an Escrow Agreement by and among the Company, NECG,
the NECG Shareholders, David Boston (as the Shareholder Representative), and
First Union National Bank (as Escrow Agent). In order to secure various other
representations, warranties and provisions contained in the NECG Agreement of
Merger, another 66,250 of the shares issued were placed in escrow pursuant to a
Pledge, Security and Escrow Agreement by and among the Company, NECG, the NECG
Shareholder, David Boston (as the Indemnification Representative), and First
Union National Bank (as Escrow Agent). Immediately after the merger, the name of
Tekgraf Sub III was changed to "New England Computer Graphics, Inc."
William M. Rychel, a director and stockholder of the Company, owned
approximately 14% of the outstanding common stock of NECG, and Scott Barker,
Thomas Gust, and A. Lowell Nerenberg, all of whom are stockholders of the
Company, owned approximately 21.9%, 14% and 28%, respectively, of the
outstanding common stock of NECG. The acquisition of NECG was approved by the
unanimous vote of the disinterested directors of the Company.
The purchase price was determined by direct negotiations among the Company,
NECG and the NECG Shareholders in the months preceding the signing of the NECG
Agreement of Merger. The Company used proceeds from its initial public offering
of Class A Common Stock and Warrants, which occurred in November 1997, to fund
the cash component of the purchase price. NECG's assets consist primarily of
accounts receivable, inventory and cash. As part of the merger, Tekgraf Sub III
assumed all of the liabilities of NECG, consisting primarily of accounts
payable, a bank note, debt owed to shareholders and accrued expenses.
The acquisitions described above will be accounted for as purchases and it is
intended that they will be treated as tax-free reorganizations under Section
368 (a) (2) (D) of the Internal Revenue Code to the full extent permitted by
that section.
12
<PAGE> 15
Media Graphics Distribution, Inc. (the surviving entity of the above-referenced
merger), which is headquartered in Torrance, California, is a computer graphics
distribution company focused on Southern California. New England Computer
Graphics, Inc., which is headquartered in Boston Massachusetts, is a computer
graphics distribution company focused on the Northeastern United States and
Toronto, Canada.
(b) Financial Statements.
(a) Financial statements of business acquired.
Not applicable
(b) Pro forma financial information.
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Plan of Merger between Crescent Computers, Inc. and Tekgraf,
Inc., dated June 20, 1997 (Filed as Exhibit 2.1 to the Company's
Registration Statement on Form S-1, No. 333-33449 and incorporated
herein by reference (the "Registration Statement")).
3.1 Certificate of Incorporation dated June 17, 1997 (Filed as
Exhibit 3.1 to the Registration Statement and incorporated herein
by reference).
3.2 Bylaws. (Filed as Exhibit 3.2 to the Registration Statement and
incorporated herein by reference).
10.1 1997 Stock Plan of the Company (Filed as Exhibit 10.1 to the
Registration Statement and incorporated herein by reference).
10.2 Employment Agreement dated June 2, 1997 between Crescent
Computers, Inc. and Phillip C. Aginsky (Filed as Exhibit 10.2 to
the Registration Statement and incorporated herein by reference).
10.3 Employment Agreement dated June 2, 1997 between Crescent
Computers, Inc. and Dan I. Bailey (Filed as Exhibit 10.3 to the
Registration Statement and incorporated herein by reference).
10.4 Employment Agreement dated June 2, 1997 between Crescent
Computers, Inc. and William M. Rychel (Filed as Exhibit 10.4 to
the Registration Statement and incorporated herein by reference).
10.5 Form of Employment Agreement between Crescent Computers, Inc. and
Regional Sales Directors (Filed as Exhibit 10.5 to the
Registration Statement and incorporated herein by reference).
10.6 Employment Agreement dated February 26, 1998, between Tekgraf,
Inc. and W. Jeffrey Camp. (Filed as Exhibit 10.6 to the Company's
Annual Report on Form 10-K, filed March 31, 1998, and
incorporated herein by reference (the "Form 10-K")).
13
<PAGE> 16
10.7 Stock Purchase Agreement dated May 1, 1997, by and among Crescent
Computers, Inc. and its shareholders and Microsouth, Inc. and its
shareholders, as amended (Filed as Exhibit 10.6 to the
Registration Statement and incorporated herein by reference).
10.8 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and tekgraf, Inc. and its
shareholders, as amended (Filed as Exhibit 10.7 to the
Registration Statement and incorporated herein by reference).
10.9 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and G&R Marketing, Inc. and
its shareholders, as amended (Filed as Exhibit 10.8 to the
Registration Statement and incorporated herein by reference).
10.10 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and Computer Graphics
Distributing Company and its shareholders, as amended (Filed as
Exhibit 10.9 to the Registration Statement and incorporated
herein be reference).
10.11 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and Intelligent Products
Marketing, Inc. and its shareholders and IG Distributing, Inc.
and its shareholders, as amended (Filed as Exhibit 10.10 to the
Registration Statement and incorporated herein by reference).
10.12 Escrow Agreement dated August 1997 (Filed as Exhibit 10.11 to the
Registration Statement and incorporated herein by reference).
10.13 Indemnification Agreement dated 1997 (Filed as Exhibit 10.12 to
the Registration Statement and incorporated herein by reference).
10.14 [Intentionally omitted].
10.15 Lease Agreement dated September 4, 1993 between Crescent
Computers, Inc. and TCW Realty Fund II (Filed as Exhibit 10.14 to
the Registration Statement and incorporated herein by reference).
10.16 Leases for property located at 7020 Koll Center Parkway by and
between Patrician Associates, Inc., Koll Bernal Avenue Associates
and Intelligent Products Marketing, Inc., as amended (Filed as
Exhibit 10.15 to the Registration Statement and incorporated
herein by reference).
10.17 Industrial Space Lease dated November 13, 1991 between G&R
Technologies and American National Bank and Trust Company of
Chicago (Filed as Exhibit 10.16 to the Registration Statement and
incorporated herein by reference).
10.18 Commercial Lease Agreement dated March 29, 1991 between Computer
Graphics Distributing Company and Girard Associates II Limited
Partnership (Filed as Exhibit 10.17 to the Registration Statement
and incorporated herein by reference).
10.19 Lease Agreement dated May 1, 1992 between Microsouth, Inc. and
ASC North Fulton Associates Joint Venture (Filed as Exhibit 10.18
to the Registration Statement and incorporated herein by
reference).
10.20 Lease Agreement dated March 1998 between Tekgraf, Inc. a Texas
corporation and Connecticut General Life Insurance Company,
(Filed as Exhibit 10.19 to the Registration
14
<PAGE> 17
Statement and incorporated herein by reference), as amended
(amendment filed as Exhibit 1020(a) to the Form 10-K and
incorporated herein by reference).
10.21 Lease Agreement, dated March 1, 1998, by and between Computer
Graphics Technology and Southridge Equities. (Filed as Exhibit
10.1 to the Company's Current Report on Form 8-K, filed April 16,
1998, and incorporated herein by reference (the "Form 8-K")).
10.22 Standard Industrial/Commercial Multi-Tenant Lease, dated May 9,
1995, between Sanwa Bank California, as Lessor, and Martec, Inc.,
as Lessee, as orally extended by the parties.
10.23 Commercial Lease, dated January 1, 1997, between Woodland Park
Realty Trust No. 2, as Lessor, and New England Computer Graphics,
as Lessee.
10.24 Industrial Lease Agreement, dated July 25, 1997, between 2725312
Canada Inc., as Landlord, and New England Computer Graphics,
Inc., as Tenant.
10.25 Voting Agreement dated as of August 7, 1997 between Tekgraf, Inc.
and A. Lowell Nerenberg and Edward H.L. Mason (Filed as Exhibit
10.21 to the Registration Statement and incorporated herein be
reference).
10.26 Agreement and Plan of Merger by and among Tekgraf, Inc., a
Delaware corporation, Tekgraf Sub I, Inc., a Georgia corporation,
and Computer Graphics Technology, Inc., a South Carolina
corporation, and its Shareholders, dated March 23, 1998. (Filed
as Exhibit 10.22 to the Form 10-K and incorporated herein by
reference). **
10.27 Escrow Agreement, dated April 1, 1998, by and among Tekgraf,
Inc., a Delaware corporation, Tekgraf Sub I, Inc., a Georgia
corporation, Computer Graphics Technology, Inc., a South Carolina
corporation, Scott C. Barker, Robert Shumaker, and Thomas Mills
(as the "Company Shareholders"), Scott C. Barker (as the
"Shareholder Representative"), and First Union National Bank (as
the "Escrow Agent"). (Filed as Exhibit 2.2 to the Form 8-K and
incorporated herein by reference).
10.28 Pledge, Security and Escrow Agreement, dated April 1, 1998, by
and among Tekgraf, Inc., a Delaware corporation, Tekgraf Sub I,
Inc., a Georgia corporation, Computer Graphics Technology, Inc.,
a South Carolina corporation, Scott C. Barker, Robert Shumaker,
and Thomas Mills (as the "Company Shareholders"), Scott C. Barker
(as the "Indemnification Representative"), and First Union
National Bank (as the "Escrow Agent"). (Filed as Exhibit 2.3 to
the Form 8-K and incorporated herein by reference).
10.29 Agreement and Plan of Merger, dated March 25, 1998, by and among
Tekgraf, Inc., a Delaware corporation, Tekgraf Sub II, Inc., a
Georgia corporation and Martec, Inc., a California corporation,
and its shareholder. (Filed as Exhibit 10.23 to the Form 10-K and
incorporated herein by reference). **
10.30 Escrow Agreement, dated May 1, 1998, by and among Tekgraf, Inc.,
a Delaware corporation, Tekgraf Sub II, Inc., a Georgia
corporation, Martec, Inc., a California corporation, Mark Lewis
(as the "Company Shareholder"), Mark Lewis ( as the "Shareholder
Representative"), and First Union National Bank (as the" Escrow
Agent").
10.31 Pledge, Security and Escrow Agreement, dated May 1, 1998, by and
among Tekgraf, Inc., a Delaware corporation, Tekgraf Sub II,
Inc., a Georgia corporation, Martec, Inc., a California
corporation, Mark Lewis (as the "Company Shareholder"), Mark
Lewis (as the "Indemnification Representative"), and First Union
National Bank (as the "Escrow Agent").
15
<PAGE> 18
10.32 Agreement and Plan of Merger, dated March 25, 1998, by and among
Tekgraf, Inc., a Delaware corporation, Tekgraf Sub III, Inc., a
Georgia corporation, and New England Computer Graphics, Inc., a
Massachusetts corporation, and its shareholders. (Filed as
Exhibit 10.24 to the Form 10-K and incorporated herein by
reference.)**
10.33 First Amendment to Agreement and Plan of Merger, dated March 30,
1998, by and among Tekgraf, Inc., Tekgraf Sub III, Inc., New
England Computer Graphics, Inc. and its Shareholders. (Filed as
Exhibit 10.25 to the Annual Report on Form 10-K and incorporated
herein by reference.)
10.34 Escrow Agreement, dated May 8, 1998, by and among Tekgraf, Inc.,
a Delaware corporation, Tekgraf Sub III, Inc., a Georgia
corporation, New England Computer Graphics, Inc., a Massachusetts
corporation, Robert Shumaker, Thomas Gust, A. Lowell Nerenberg,
Scott Barker, David Boston, William Rychel and Thomas Mills (as
the "Company Shareholders"), David Boston ( as the "Shareholder
Representative"), and First Union National Bank (as the" Escrow
Agent").
10.35 Pledge, Security and Escrow Agreement, dated May 8, 1998, by and
among Tekgraf, Inc., a Delaware corporation, Tekgraf Sub III,
Inc., a Georgia corporation, New England Computer Graphics, Inc.,
a Massachusetts corporation, Robert Shumaker, Thomas Gust, A.
Lowell Nerenberg, Scott Barker, David Boston, William Rychel and
Thomas Mills (as the "Company Shareholders"), David Boston (as
the "Indemnification Representative"), and First Union National
Bank (as the "Escrow Agent").
11.1 Statements of Computation of Earnings Per Share
21.1 Subsidiaries
27.1 Financial Data Schedule
99.1 Press release dated May 13, 1998.
99.2 Press release dated May 14, 1998.
** The Company will furnish supplementally a copy of any omitted schedule
or exhibit to the Securities and Exchange Commission upon request, as
provided in Item 601 (b) (2) of Regulation S-K.
(b) Reports Filed on Form 8-K
On April 16, 1998, the Company filed a Current Report on Form 8-K, pursuant to
Item 2 thereof, concerning the completion of its acquisition of Computer
Graphics Technology, Inc. on April 1, 1998.
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEKGRAF, INC.
Date: May 15, 1998
By: /s/ Phillip C. Aginsky
----------------------------------------
Phillip C. Aginsky, Chairman
and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 1998
By: /s/ W. Jeffrey Camp
----------------------------------------
W. Jeffrey Camp, Chief
Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE> 20
TEKGRAF, INC.
Index of Exhibits
The following exhibits are filed as part of the Report.
Exhibit
Number Description Page
2.1 Plan of Merger between Crescent Computers, Inc. and Tekgraf, Inc.,
dated June 20, 1997 (Filed as Exhibit 2.1 to the Company's
Registration Statement on Form S-1, No. 333-33449 and incorporated
herein by reference (the "Registration Statement")).
3.1 Certificate of Incorporation dated June 17, 1997 (Filed as Exhibit
3.1 to the Registration Statement and incorporated herein by
reference).
3.2 Bylaws. (Filed as Exhibit 3.2 to the Registration Statement and
incorporated herein by reference).
10.1 1997 Stock Plan of the Company (Filed as Exhibit 10.1 to the
Registration Statement and incorporated herein by reference).
10.2 Employment Agreement dated June 2, 1997 between Crescent
Computers, Inc. and Phillip C. Aginsky (Filed as Exhibit 10.2 to
the Registration Statement and incorporated herein by reference).
10.3 Employment Agreement dated June 2, 1997 between Crescent
Computers, Inc. and Dan I. Bailey (Filed as Exhibit 10.3 to the
Registration Statement and incorporated herein by reference).
10.4 Employment Agreement dated June 2, 1997 between Crescent
Computers, Inc. and William M. Rychel (Filed as Exhibit 10.4 to
the Registration Statement and incorporated herein by reference).
10.5 Form of Employment Agreement between Crescent Computers, Inc. and
Regional Sales Directors (Filed as Exhibit 10.5 to the
Registration Statement and incorporated herein by reference).
10.6 Employment Agreement dated February 26, 1998, between Tekgraf,
Inc. and W. Jeffrey Camp. (Filed as Exhibit 10.6 to the Company's
Annual Report on Form 10-K, filed March 31, 1998, and
incorporated herein by reference (the "Form 10-K")).
10.7 Stock Purchase Agreement dated May 1, 1997, by and among Crescent
Computers, Inc. and its shareholders and Microsouth, Inc. and its
shareholders, as amended (Filed as Exhibit 10.6 to the
Registration Statement and incorporated herein by reference).
10.8 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and tekgraf, Inc. and its
shareholders, as amended (Filed as Exhibit 10.7 to the
Registration Statement and incorporated herein by reference).
10.9 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and G&R Marketing, Inc. and
its shareholders, as amended (Filed as Exhibit 10.8 to the
Registration Statement and incorporated herein by reference).
10.10 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and Computer Graphics
Distributing Company and its shareholders, as amended (Filed as
Exhibit 10.9 to the Registration Statement and incorporated
herein be reference).
10.11 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and Intelligent Products
Marketing, Inc. and its shareholders and IG Distributing, Inc.
and its shareholders, as amended (Filed as Exhibit 10.10 to the
Registration Statement and incorporated herein by reference).
10.12 Escrow Agreement dated August 1997 (Filed as Exhibit 10.11 to the
Registration Statement and incorporated herein by reference).
10.13 Indemnification Agreement dated 1997 (Filed as Exhibit 10.12 to
the Registration Statement and incorporated herein by reference).
10.14 [Intentionally omitted].
10.15 Lease Agreement dated September 4, 1993 between Crescent
Computers, Inc. and TCW Realty Fund II (Filed as Exhibit 10.14 to
the Registration Statement and incorporated herein by reference).
10.16 Leases for property located at 7020 Koll Center Parkway by and
between Patrician Associates, Inc., Koll Bernal Avenue Associates
and Intelligent Products Marketing, Inc., as amended (Filed as
Exhibit 10.15 to the Registration Statement and incorporated
herein by reference).
10.17 Industrial Space Lease dated November 13, 1991 between G&R
Technologies and American National Bank and Trust Company of
Chicago (Filed as Exhibit 10.16 to the Registration Statement and
incorporated herein by reference).
10.18 Commercial Lease Agreement dated March 29, 1991 between Computer
Graphics Distributing Company and Girard Associates II Limited
Partnership (Filed as Exhibit 10.17 to the Registration Statement
and incorporated herein by reference).
10.19 Lease Agreement dated May 1, 1992 between Microsouth, Inc. and
ASC North Fulton Associates Joint Venture (Filed as Exhibit 10.18
to the Registration Statement and incorporated herein by
reference).
<PAGE> 21
10.20 Lease Agreement dated March 1998 between Tekgraf, Inc. a Texas
corporation and Connecticut General Life Insurance Company,
(Filed as Exhibit 10.19 to the Registration Statement and
incorporated herein by reference), as amended (amendment filed as
Exhibit 1020(a) to the Form 10-K and incorporated herein by
reference).
10.21 Lease Agreement, dated March 1, 1998, by and between Computer
Graphics Technology and Southridge Equities. (Filed as Exhibit
10.1 to the Company's Current Report on Form 8-K, filed April 16,
1998, and incorporated herein by reference (the "Form 8-K")).
10.22 Standard Industrial/Commercial Multi-Tenant Lease, dated May 9,
1995, between Sanwa Bank California, as Lessor, and Martec, Inc.,
as Lessee, as orally extended by the parties.
10.23 Commercial Lease, dated January 1, 1997, between Woodland Park
Realty Trust No. 2, as Lessor, and New England Computer Graphics,
as Lessee.
10.24 Industrial Lease Agreement, dated July 25, 1997, between 2725312
Canada Inc., as Landlord, and New England Computer Graphics,
Inc., as Tenant.
10.25 Voting Agreement dated as of August 7, 1997 between Tekgraf, Inc.
and A. Lowell Nerenberg and Edward H.L. Mason (Filed as Exhibit
10.21 to the Registration Statement and incorporated herein be
reference).
10.26 Agreement and Plan of Merger by and among Tekgraf, Inc., a
Delaware corporation, Tekgraf Sub I, Inc., a Georgia corporation,
and Computer Graphics Technology, Inc., a South Carolina
corporation, and its Shareholders, dated March 23, 1998. (Filed
as Exhibit 10.22 to the Form 10-K and incorporated herein by
reference). **
10.27 Escrow Agreement, dated April 1, 1998, by and among Tekgraf,
Inc., a Delaware corporation, Tekgraf Sub I, Inc., a Georgia
corporation, Computer Graphics Technology, Inc., a South Carolina
corporation, Scott C. Barker, Robert Shumaker, and Thomas Mills
(as the "Company Shareholders"), Scott C. Barker (as the
"Shareholder Representative"), and First Union National Bank (as
the "Escrow Agent"). (Filed as Exhibit 2.2 to the Form 8-K and
incorporated herein by reference).
10.28 Pledge, Security and Escrow Agreement, dated April 1, 1998, by
and among Tekgraf, Inc., a Delaware corporation, Tekgraf Sub I,
Inc., a Georgia corporation, Computer Graphics Technology, Inc.,
a South Carolina corporation, Scott C. Barker, Robert Shumaker,
and Thomas Mills (as the "Company Shareholders"), Scott C. Barker
(as the "Indemnification Representative"), and First Union
National Bank (as the "Escrow Agent"). (Filed as Exhibit 2.3 to
the Form 8-K and incorporated herein by reference).
10.29 Agreement and Plan of Merger, dated March 25, 1998, by and among
Tekgraf, Inc., a Delaware corporation, Tekgraf Sub II, Inc., a
Georgia corporation and Martec, Inc., a California corporation,
and its shareholder. (Filed as Exhibit 10.23 to the Form 10-K and
incorporated herein by reference). **
10.30 Escrow Agreement, dated May 1, 1998, by and among Tekgraf, Inc.,
a Delaware corporation, Tekgraf Sub II, Inc., a Georgia
corporation, Martec, Inc., a California corporation, Mark Lewis
(as the "Company Shareholder"), Mark Lewis ( as the "Shareholder
Representative"), and First Union National Bank (as the" Escrow
Agent").
10.31 Pledge, Security and Escrow Agreement, dated May 1, 1998, by and
among Tekgraf, Inc., a
<PAGE> 22
Delaware corporation, Tekgraf Sub II, Inc., a Georgia
corporation, Martec, Inc., a California corporation, Mark Lewis
(as the "Company Shareholder"), Mark Lewis (as the
"Indemnification Representative"), and First Union National Bank
(as the "Escrow Agent").
10.32 Agreement and Plan of Merger, dated March 25, 1998, by and among
Tekgraf, Inc., a Delaware corporation, Tekgraf Sub III, Inc., a
Georgia corporation, and New England Computer Graphics, Inc., a
Massachusetts corporation, and its shareholders. (Filed as
Exhibit 10.24 to the Form 10-K and incorporated herein by
reference.)**
10.33 First Amendment to Agreement and Plan of Merger, dated March 30,
1998, by and among Tekgraf, Inc., Tekgraf Sub III, Inc., New
England Computer Graphics, Inc. and its Shareholders. (Filed as
Exhibit 10.25 to the Annual Report on Form 10-K and incorporated
herein by reference.)
10.34 Escrow Agreement, dated May 8, 1998, by and among Tekgraf, Inc.,
a Delaware corporation, Tekgraf Sub III, Inc., a Georgia
corporation, New England Computer Graphics, Inc., a Massachusetts
corporation, Robert Shumaker, Thomas Gust, A. Lowell Nerenberg,
Scott Barker, David Boston, William Rychel and Thomas Mills (as
the "Company Shareholders"), David Boston ( as the "Shareholder
Representative"), and First Union National Bank (as the" Escrow
Agent").
10.35 Pledge, Security and Escrow Agreement, dated May 8, 1998, by and
among Tekgraf, Inc., a Delaware corporation, Tekgraf Sub III,
Inc., a Georgia corporation, New England Computer Graphics, Inc.,
a Massachusetts corporation, Robert Shumaker, Thomas Gust, A.
Lowell Nerenberg, Scott Barker, David Boston, William Rychel and
Thomas Mills (as the "Company Shareholders"), David Boston (as
the "Indemnification Representative"), and First Union National
Bank (as the "Escrow Agent").
11.1 Statements of Computation of Earnings Per Share.
21.1 Subsidiaries.
27.1 Financial Data Schedule.
99.1 Press release dated May 13, 1998.
99.2 Press release dated May 14, 1998.
<PAGE> 1
EXHIBIT 10.22
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1. PARTIES: This Lease ("LEASE"), dated for reference purposes only,
May 9, 1995, is made by and between SANWA BANK CALIFORNIA, a California
corporation ("LESSOR") and MARTEC Inc., a California corporation ("LESSEE"),
(collectively the "PARTIES," or individually a "PARTY").
1.2. (a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 370 Amapola Ave., #113 & #212, located
in the City of Torrance, County of Los Angeles, State of California, with zip
code 90501, as outlined on Exhibit A attached hereto ("PREMISES"). The
"BUILDING" is that certain building containing the Premises and generally
described as (describe briefly the nature of the Building): The Premises contain
approx. 7893 rentable sq. ft. and are located in a Project containing a 1 and 2
story building with approx. 95,224 sq. ft. In addition to Lessee's rights to use
and occupy the Premises as hereinafter specified, Lessee shall have
non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as
hereinafter specified, but shall not have any rights to the roof, exterior walls
or utility raceways of the Building or to any other buildings in the Industrial
Center. The Premises, the Building, the Common Areas, the land upon which they
are located, along with all other buildings and improvements thereon, are herein
collectively referred to as the "INDUSTRIAL CENTER." (Also see Paragraph 2.)
1.2. (b) PARKING: 18 unreserved vehicle parking spaces ("UNRESERVED
PARKING SPACES"); and 13 reserved vehicle parking spaces ("RESERVED PARKING
SPACES"). (Also see Paragraph 2.6.) See Exhibit A.
1.3. TERM: 3 years and 0 months ("ORIGINAL TERM") commencing May 1,
1995 ("COMMENCEMENT DATE") and ending April 30, 1998 ("EXPIRATION DATE"). (Also
see Paragraph 3.)
1.4. EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). (Also see
Paragraphs 3.2 and 3.3.)
1.5. BASE RENT: $5,525.00 per month ("BASE RENT"), payable on the 1st.
day of each month commencing May 1, 1995. (Also see Paragraph 4.) (See Adden.
Par. 2)
[X] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum Para. 1, attached hereto.
1.6. (a) BASE RENT PAID UPON EXECUTION: $0 as Base Rent for the period
N/A.
<PAGE> 2
1.6. (b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: N/A percent
( %) ("LESSEE'S SHARE") as determined by prorata square footage of the Premises
as compared to the total square footage of the Building or |X| other criteria as
described in Addendum Par. 3.
1.7. SECURITY DEPOSIT: $0 ("SECURITY DEPOSIT"). (Also see Paragraph 5.)
1.8. PERMITTED USE: Computer sales and distribution. ("PERMITTED USE")
(Also see Paragraph 6.)
1.9. INSURING PARTY. Lessor is the "INSURING PARTY." (Also see
Paragraph 8).
1.10. (a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[X] Crane Realty Services represents Lessor exclusively ("LESSOR'S
BROKER");
[ ] _____________________________represents Lessee exclusively ("LESSEE'S
BROKER"); or
[ ] _____________________________represents both Lessor and Lessee ("DUAL
AGENCY").
(Also see Paragraph 15.)
1.10. (b) PAYMENT TO BROKERS. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there is no
separate written agreement between Lessor and said Broker(s), the sum of $ N/A )
for brokerage services rendered by said Broker(s) in connection with this
transaction.
1.11. GUARANTOR. The obligations of the Lessee under this Lease are to
be guaranteed by N/A ("GUARANTOR"). (Also see Paragraph 37.)
1.12. ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 1 through 7, and Exhibits A through B, all of which
constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1. LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is
not subject to revision whether or not the actual square footage is more or
less.
<PAGE> 3
2.2. CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement Date,
Lessor shall, except as otherwise provided in this Lease, promptly after receipt
of written notice from Lessee setting forth with specificity the nature and
extent of such non-compliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
thirty (30) days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3. COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within six (6) months following the
Commencement Date and setting forth with specificity the nature and extent of
such non-compliance, take such action, at Lessor's expense, as may be reasonable
or appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined in Paragraph 2.4).
2.4. ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it
has been advised by the Broker(s) to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical and fire
sprinkler systems, security, environmental aspects, seismic and earthquake
requirements, and compliance with the Americans with Disabilities Act and
applicable zoning, municipal, county, state and federal laws, ordinances and
regulations and any covenants or restrictions of record (collectively,
"APPLICABLE LAWS") and the present and future suitability of the Premises for
Lessee's intended use; (b) that Lessee has made such investigation as it deems
necessary with reference to such matters, is satisfied with reference thereto,
and assumes all responsibility therefore as the same relate to Lessee's
occupancy of the Premises and/or the terms of this Lease; and (c) that neither
Lessor, nor any of Lessor's agents, has made any oral or written representations
or warranties with respect to said matters other than as set forth in this
Lease.
2.5. LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately prior to the date
set forth in
<PAGE> 4
Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event,
Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of
the Premises with said warranties.
2.6. VEHICLE PARKING. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than
full-size passenger automobiles or pick-up trucks, herein called "PERMITTED SIZE
VEHICLES." Vehicles other than Permitted Size Vehicles shall be parked and
loaded or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong
to or are controlled by Lessee or Lessee's employees, suppliers, shippers,
customers, contractors or invitees to be loaded, unloaded, or parked in areas
other than those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited
activities described in this Paragraph 2.6, then Lessor shall have the right,
without notice, in addition to such other rights and remedies that it may have,
to remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease,
provide the parking facilities required by Applicable Law.
2.7. COMMON AREAS--DEFINITION. The term "COMMON AREAS" is defined
as all areas and facilities outside the Premises and within the exterior
boundary line of the Industrial Center and interior utility raceways within the
Premises that are provided and designated by the Lessor from time to time for
the general non-exclusive use of Lessor, Lessee and other lessees of the
Industrial Center and their respective employees, suppliers, shippers,
customers, contractors and invitees, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways
and landscaped areas.
2.8. COMMON AREAS--LESSEE'S RIGHTS. Lessor hereby grants to Lessee,
for the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common Areas as they
exist from time to time, subject to any rights, powers, and privileges reserved
by Lessor under the terms hereof or under the terms of any rules and regulations
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be deemed
to include the right to store any property, temporarily or permanently, in the
Common Areas. Any such storage shall be permitted only by the prior written
consent of Lessor or Lessor's designated agent, which consent may be revoked at
any time. In the event that any unauthorized storage shall occur then Lessor
shall have the right, without notice, in addition to such other rights and
remedies
<PAGE> 5
that it may have, to remove the property and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
2.9. COMMON AREAS--RULES AND REGULATIONS. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and management
of the Common Areas and shall have the right, from time to time, to establish,
modify, amend and enforce reasonable Rules and Regulations with respect thereto
in accordance with Paragraph 40. Lessee agrees to abide by and conform to all
such Rules and Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center.
2.10. COMMON AREAS--CHANGES. Lessor shall have the right, in
Lessor's sole discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises remains
available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common
Areas; (e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Industrial Center as
Lessor may, in the exercise of sound business judgment, deem to be appropriate.
3. TERM.
3.1. TERM. The Commencement Date, Expiration Date and Original Term
of this Lease are as specified in Paragraph 1.3.
3.2. EARLY POSSESSION. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the
Early Possession Date but prior to the Commencement Date, the obligation to pay
Base Rent shall be abated for the period of such early occupancy. All other
terms of this Lease, however, (including but not limited to the obligations to
pay Lessee's Share of Common Area Operating Expenses and to carry the
<PAGE> 6
insurance required by Paragraph 8) shall be in effect during such period. Any
such early possession shall not affect nor advance the Expiration Date of the
Original Term.
3.3. DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by the
Commencement Date, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of said sixty (60) day period, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would have otherwise enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. RENT.
4.1. BASE RENT. Lessee shall pay Base Rent and other rent or
charges, as the same may be adjusted from time to time, to Lessor in lawful
money of the United States, without offset or deduction, on or before the day on
which it is due under the terms of this Lease. Base Rent and all other rent and
charges for any period during the term hereof which is for less than one full
month shall be prorated based upon the actual number of days of the month
involved. Payment of Base Rent and other charges shall be made to Lessor at its
address stated herein or to such other persons or at such other addresses as
Lessor may from time to time designate in writing to Lessee.
4.2. COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor
during the term hereof, in addition to the Base Rent, Lessee's Share (as
specified in Paragraph 1.6(b)) of all Common Area Operating Expenses, as
hereinafter defined, during each calendar year of the term of this Lease, in
accordance with the following provisions: SEE ADDENDUM PARA 3.
(A) "COMMON AREA OPERATING EXPENSES" are defined, for purposes
of this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
<PAGE> 7
(i) The operation, repair and maintenance, in
neat, clean, good order and condition, of the following:
(aa) The Common Areas, including parking
areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways,
parkways, driveways, landscaped areas, striping, bumpers, irrigation systems,
Common Area lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant
directories.
(cc) Fire detection and sprinkler
systems.
(ii) The cost of water, gas, electricity and
telephone to service the Common Areas.
(iii) Trash disposal, property management
and security services and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and
repair of Common Areas.
(v) Any increase above the Base Real Property
Taxes (as defined in Paragraph 10.2(b)) for the Building and the Common Areas.
(vi) Any "Insurance Cost Increase" (as defined in
Paragraph 8.1).
(vii) The cost of insurance carried by Lessor with
respect to the Common Areas.
(viii) Any deductible portion of an insured loss
concerning the Building or the Common Areas.
(ix) Any other services to be provided by Lessor
that are stated elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property
Taxes that are specifically attributable to the Building or to any other
building in the Industrial Center or to the operation, repair and maintenance
thereof, shall be allocated entirely to the Building or to such other building.
However, any Common Area Operating Expenses and Real Property Taxes that are not
specifically attributable to the Building or to any other building or to the
operation, repair and maintenance thereof, shall be equitably allocated by
Lessor to all buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and
services set forth in Subparagraph 4.2(a) shall not be deemed to impose an
obligation upon Lessor to either have said improvements or facilities or to
provide those services unless the Industrial Center already
<PAGE> 8
has the same, Lessor already provides the services, or Lessor has agreed
elsewhere in this Lease to provide the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses
shall be payable by Lessee within ten (10) days after a reasonably detailed
statement of actual expenses is presented to Lessee by Lessor. At Lessor's
option, however, an amount may be estimated by Lessor from time to time of
Lessee's Share of annual Common Area Operating Expenses and the same shall be
payable monthly or quarterly, as Lessor shall designate, during each 12-month
period of the Lease term, on the same day as the Base Rent is due hereunder.
Lessor shall deliver to Lessee within sixty (60) days after the expiration of
each calendar year a reasonably detailed statement showing Lessee's Share of the
actual Common Area Operating Expenses incurred during the preceding year. If
Lessee's payments under this Paragraph 4.2(d) during said preceding year exceed
Lessee's Share as indicated on said statement, Lessee shall be credited the
amount of such over payment against Lessee's Share of Common Area Operating
Expenses next becoming due. If Lessee's payments under this Paragraph 4.2(d)
during said preceding year were less than Lessee's Share as indicated on said
statement, Lessee shall pay to Lessor the amount of the deficiency within ten
(10) days after delivery by Lessor to Lessee of said statement.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's
execution hereof the Security Deposit set forth in Paragraph 1.7 as security for
Lessee's faithful performance of Lessee's obligations under this Lease. If
Lessee fails to pay Base Rent or other rent or charges due hereunder, or
otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may
use, apply or retain all or any portion of said Security Deposit for the payment
of any amount due Lessor or to reimburse or compensate Lessor for any liability,
cost, expense, loss or damage (including attorneys' fees) which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefore deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. Lessor shall not be required
to keep all or any part of the Security Deposit separate from its general
accounts. Lessor shall, at the expiration or earlier termination of the term
hereof and after Lessee has vacated the Premises, return to Lessee (or, at
Lessor's option, to the last assignee, if any, of Lessee's interest herein),
that portion of the Security Deposit not used or applied by Lessor. Unless
otherwise expressly agreed in writing by Lessor, no part of the Security Deposit
shall be considered to be held in trust, to bear interest or other increment for
its use, or to be prepayment for any monies to be paid by Lessee under this
Lease.
6. USE.
6.1. PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the
Permitted Use set forth in Paragraph 1.8, or any other legal use which is
reasonably comparable thereto, and for no other purpose. Lessee shall not use or
permit the use of the Premises in a manner that is
<PAGE> 9
unlawful, creates waste or a nuisance, or that disturbs owners and/or occupants
of, or causes damage to the Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or
delay its consent to any written request by Lessee, Lessee's assignees or
subtenants, and by prospective assignees and subtenants of Lessee, its assignees
and subtenants, for a modification of said Permitted Use, so long as the same
will not impair the structural integrity of the Improvements on the Premises or
in the Building or the mechanical or electrical systems therein, does not
conflict with uses by other lessees, is not significantly more burdensome to the
Premises or the Building and the Improvements thereon, and is otherwise
permissible pursuant to this Paragraph 6. If Lessor elects to withhold such
consent, Lessor shall within five (5) business days after such request give a
written notification of same, which notice shall include an explanation of
Lessor's reasonable objections to the change in use.
6.2. HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or effect,
either by itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety or
welfare, the environment, or the Premises; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Lessor to
any governmental agency or third party under any applicable statute or common
law theory. Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products or by-products
thereof. Lessee shall not engage in any activity in or about the Premises which
constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances
without the express prior written consent of Lessor and compliance in a timely
manner (at Lessee's sole cost and expense) with all Applicable Requirements (as
defined Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and
(iii) the presence in, on or about the Premises of a Hazardous Substance with
respect to which any Applicable Laws require that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may, without Lessor's prior consent, but upon notice to
Lessor and in compliance with all Applicable Requirements, use any ordinary and
customary materials reasonably required to be used by Lessee in the normal
course of the Permitted Use, so long as such use is not a Reportable Use and
does not expose the Premises or neighboring properties to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may (but without any obligation to do so) condition its consent to any
Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor
such additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefor, including but
not limited to the installation (and, at Lessor's option, removal
<PAGE> 10
on or before Lease expiration or earlier termination) of reasonably necessary
protective modifications to the Premises (such as concrete encasements) and/or
the deposit of an additional Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises or the Building, other than as previously consented
to by Lessor, Lessee shall immediately give Lessor written notice thereof,
together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding given
to, or received from, any governmental authority or private party concerning the
presence, spill, release, discharge of, or exposure to, such Hazardous Substance
including but not limited to all such documents as may be involved in any
Reportable Use Involving the Premises. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including, without limitation, through the plumbing or sanitary sewer
system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend
and hold Lessor, its agents, employees, lenders and ground lessor, if any, and
the Premises, harmless from and against any and all damages, liabilities,
judgments, costs, claims, liens, expenses, penalties, loss of permits and
attorneys' and consultants' fees arising out of or involving any Hazardous
Substance brought onto the Premises by or for Lessee or by anyone under Lessee's
control. Lessee's obligations under this Paragraph 6.2(c) shall include, but not
be limited to, the effects of any contamination or injury to person, property or
the environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement.
6.3. LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at
Lessee's sole cost and expense, fully, diligently and in a timely manner, comply
with all "APPLICABLE REQUIREMENTS," which term is used in this Lease to mean all
laws, rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including
but not limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any
<PAGE> 11
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable Requirements.
6.4. INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents,
employees, contractors and designated representatives, and the holders of any
mortgages, deeds of trust or ground leases on the Premises ("LENDERS") shall
have the right to enter the Premises at any time in the case of an emergency,
and otherwise at reasonable times, for the purpose of inspecting the condition
of the Premises and for verifying compliance by Lessee with this Lease and all
Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be
entitled to employ experts and/or consultants in connection therewith to advise
Lessor with respect to Lessee's activities, including but not limited to
Lessee's installation, operation, use, monitoring, maintenance, or removal of
any Hazardous Substance on or from the Premises. The costs and expenses of any
such inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND
ALTERATIONS.
7.1. LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Condition),
2.3 (Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations, 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair (whether or not such portion of
the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities specifically serving the Premises,
such as plumbing, electrical, lighting facilities, boilers, fired or unfired
pressure vessels, fire hose connections if within the Premises, fixtures,
interior walls, interior surfaces of exterior walls, ceilings, floors, windows,
doors, plate glass, and skylights, but excluding any items which are the
responsibility of Lessor pursuant to Paragraph 7.2 below. Lessee, in keeping the
Premises in good order, condition and repair, shall exercise and perform good
maintenance practices. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition and state of
repair.
(b) [Omitted intentionally.]
<PAGE> 12
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
7.2. LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs
2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building
Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's
Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject
to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition
and repair the foundations, exterior walls, structural condition of interior
bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (if
located in the Common Areas) or other automatic fire extinguishing system
including fire alarm and/or smoke detection systems and equipment, fire
hydrants, parking lots, walkways, parkways, driveways, landscaping, fences,
signs and utility systems serving the Common Areas and all parts thereof, as
well as providing the services for which there is a Common Area Operating
Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the
exterior or interior surfaces of exterior walls nor shall Lessor be obligated to
maintain, repair or replace windows, doors or plate glass of the Premises.
Lessee expressly waives the benefit of any statute now or hereafter in effect
which would otherwise afford Lessee the right to make repairs at Lessor's
expense or to terminate this Lease because of Lessor's failure to keep the
Building, Industrial Center or Common Areas in good order, condition and repair.
7.3. UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" is used in this Lease to refer to all air lines, power panels,
electrical distribution, security, fire protection systems, communications
systems, lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES"
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "ALTERATIONS" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be
made any Alterations or Utility Installations in, on, under or about the
Premises without Lessor's prior written consent. Lessee may, however, make
non-structural Utility Installations to the interior of the Premises (excluding
the roof) without Lessor's consent but upon notice to Lessor, so long as they
are not visible from the outside of the Premises, do not involve puncturing,
relocating or removing the roof or any existing walls, or changing or
interfering with the fire sprinkler or fire detection systems and the cumulative
cost thereof during the term of this Lease as extended does not exceed
$2,500.00.
(b) CONSENT. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written
<PAGE> 13
form with detailed plans. All consents given by Lessor, whether by virtue of
Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned
upon: (i) Lessee's acquiring all applicable permits required by governmental
authorities; (ii) the furnishing of copies of such permits together with a copy
of the plans and specifications for the Alteration or Utility Installation to
Lessor prior to commencement of the work thereon; and (iii) the compliance by
Lessee with all conditions of said permits in a prompt and expeditious manner.
Any Alterations or Utility Installations by Lessee during the term of this Lease
shall be done in a good and workmanlike manner, with good and sufficient
materials, and be in compliance with all Applicable Requirements. Lessee shall
promptly upon completion thereof furnish Lessor with as-built plans and
specifications therefor. Lessor may, (but without obligation to do so) condition
its consent to any requested Alteration or Utility Installation that costs
$2,500.00 or more upon Lessee's providing Lessor with a lien and completion bond
in an amount equal to one and one-half times the estimated cost of such
Alteration or Utility Installation.
(c) LIEN PROTECTION. Lessee shall pay when due all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on, or about the Premises, and Lessor shall have
the right to post notices of non-responsibility in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense, defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises. If Lessor shall require,
Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount
equal to one and one-half times the amount of such contested lien claim or
demand, indemnifying Lessor against liability for the same, as required by law
for the holding of the Premises free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4. OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their
removal and to cause Lessee to become the owner thereof as hereinafter provided
in this Paragraph 7.4, all Alterations and Utility Installations made to the
Premises by Lessee shall be the property of and owned by Lessee, but considered
a part of the Premises. Lessor may, at any time and at its option, elect in
writing to Lessee to be the owner of all or any specified part of the
Lessee-Owned Alterations and Utility Installations. Unless otherwise instructed
per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee-Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease, notwithstanding
that their installation may have been
<PAGE> 14
consented to by Lessor. Lessor may require the removal at any time of all or any
part of any Alterations or Utility Installations made without the required
consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises
by the end of the last day of the Lease term or any earlier termination date,
clean and free of debris and in good operating order, condition and state of
repair, ordinary wear and tear excepted. Ordinary wear and tear shall not
include any damage or deterioration that would have been prevented by good
maintenance practice or by Lessee performing all of its obligations under this
Lease. Except as otherwise agreed or specified herein, the Premises, as
surrendered, shall include the Alterations and Utility Installations. The
obligation of Lessee shall include the repair of any damage occasioned by the
installation, maintenance or removal of Lessee's Trade Fixtures, furnishings,
equipment, and Lessee-Owned Alterations and Utility Installations, as well as
the removal of any storage tank installed by or for Lessee, and the removal,
replacement, or remediation of any soil, material or ground water contaminated
by Lessee, all as may then be required by Applicable Requirements and/or good
practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall
be removed by Lessee subject to its obligation to repair and restore the
Premises per this Lease.
8. INSURANCE; INDEMNITY. See Addendum 3.
8.1. PAYMENT OF PREMIUM INCREASES.
(a) As used herein, the term "INSURANCE COST INCREASE" is
defined as any increase in the actual cost of the insurance applicable to the
Building and required to be carried by Lessor pursuant to Paragraphs 8.2(b),
8.3(a) and 8.3(b), ("REQUIRED INSURANCE"), over and above the Base Premium, as
hereinafter defined, calculated on an annual basis. "Insurance Cost Increase"
shall include, but not be limited to, requirements of the holder of a mortgage
or deed of trust covering the Premises, increased valuation of the Premises,
and/or a general premium rate increase. The term "Insurance Cost Increase" shall
not, however, include any premium increases resulting from the nature of the
occupancy of any other lessee of the Building. If the parties insert a dollar
amount in Paragraph 1.9, such amount shall be considered the "BASE PREMIUM." If
a dollar amount has not been inserted in Paragraph 1.9 and if the Building has
been previously occupied during the twelve (12) month period immediately
preceding the Commencement Date, the "Base Premium" shall be the annual premium
applicable to such twelve (12) month period. If the Building was not fully
occupied during such twelve (12) month period, the "Base Premium" shall be the
lowest annual premium reasonably obtainable for the Required Insurance as of the
Commencement Date, assuming the most nominal use possible of the Building. In no
event, however, shall Lessee be responsible for any portion of the premium cost
attributable to liability insurance coverage in excess of $1,000,000 procured
under Paragraph 8.2(b).
(b) Lessee shall pay any Insurance Cost Increase to Lessor
pursuant to Paragraph 4.2. Premiums for policy periods commencing prior to, or
extending beyond, the term of this Lease shall be prorated to coincide with the
corresponding Commencement Date or Expiration Date.
<PAGE> 15
8.2. LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "INSURED CONTRACT"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be named
as an additional insured therein.
8.3. PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and to any Lender(s), insuring against loss or
damage to the Premises. Such insurance shall be for full replacement cost, as
the same shall exist from time to time, or the amount required by any Lender(s),
but in no event more than the commercially reasonable and available insurable
value thereof if, by reason of the unique nature or age of the improvements
involved, such latter amount is less than full replacement cost. Lessee-Owned
Alterations and Utility Installations, Trade Fixtures and Lessee's personal
property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage
is available and commercially appropriate, Lessor's policy or policies shall
insure against all risks of direct physical loss or damage (except the perils of
flood and/or earthquake unless required by a Lender or included in the Base
Premium), including coverage for any additional costs resulting from debris
removal and reasonable amounts of coverage for the enforcement of any ordinance
or law regulating the reconstruction or replacement of any undamaged sections of
the Building required to be demolished or removed by reason of the enforcement
of any building, zoning, safety or land use laws as the result of a covered
loss, but not including plate glass insurance. Said policy or policies shall
also contain an agreed valuation provision in lieu of any co-insurance clause,
waiver of subrogation, and inflation guard protection causing an increase in the
annual property insurance coverage amount by a factor of not less than the
adjusted U.S. Department
<PAGE> 16
of Labor Consumer Price Index for All Urban Consumers for the city nearest to
where the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and any Lender(s), insuring the loss of the full rental
and other charges payable by all lessees of the Building to Lessor for one year
(including all Real Property Taxes, insurance costs, all Common Area Operating
Expenses and any scheduled rental increases). Said insurance may provide that in
the event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the completion
of repairs or replacement of the Premises, to provide for one full year's loss
of rental revenues from the date of any such loss. Said insurance shall contain
an agreed valuation provision in lieu of any co-insurance clause, and the amount
of coverage shall be adjusted annually to reflect the projected rental income,
Real Property Taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the next 12-month period. Common Area Operating Expenses
shall include any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any increase in
the premiums for the property insurance of the Building and for the Common Areas
or other buildings in the Industrial Center if said increase is caused by
Lessee's acts, omissions, use or occupancy of the Premises.
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party,
Lessor shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4. LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned
Alterations and Utility Installations in, on, or about the Premises similar in
coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a).
Such insurance shall be full replacement cost coverage with a deductible not to
exceed $1,000 per occurrence. The proceeds from any such insurance shall be used
by Lessee for the replacement of personal property and the restoration of Trade
Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request
from Lessor, Lessee shall provide Lessor with written evidence that such
insurance is in force.
8.5. INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, or such other rating as may be required by a Lender, as set
forth in the most current issue of "Best's Insurance Guide." Lessee shall not do
or permit to be done anything which shall invalidate the insurance policies
referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor,
within seven (7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the existence
and amounts of, the insurance
<PAGE> 17
required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or
subject to modification except after thirty (30) days' prior written notice to
Lessor. Lessee shall at least thirty (30) days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand.
8.6. WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages (whether in contract or in tort) against
the other, for loss or damage to their property arising out of or incident to
the perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7. INDEMNITY. Except for Lessor's negligence and/or breach of
express warranties, Lessee shall indemnify, protect, defend and hold harmless
the Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, involving, or in connection
with, the occupancy of the Premises by Lessee, the conduct of Lessee's business,
any act, omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by reason
of any of the foregoing matters, Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified.
8.8. EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or any
other person in or about the Premises, whether such damage or injury is caused
by or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from any
other cause, whether said injury or damage results from conditions arising upon
the Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not. Lessor
shall not be liable for any damages arising from any act or neglect of any other
lessee of Lessor nor from the failure by Lessor to enforce the provisions of any
other
<PAGE> 18
lease in the Industrial Center. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1. DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction
to the Premises, other than Lessee-Owned Alterations and Utility Installations,
the repair cost of which damage or destruction is less than fifty percent (50%)
of the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is fifty percent
(50%) or more of the then Replacement Cost of the Premises (excluding
Lessee-Owned Alterations and Utility Installations and Trade Fixtures)
immediately prior to such damage or destruction. In addition, damage or
destruction to the Building, other than Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building, the cost of
which damage or destruction is fifty percent (50%) or more of the then
Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations
and Trade Fixtures of any lessees of the Building) of the Building shall, at the
option of Lessor, be deemed to be Premises Total Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible amounts
or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence
or discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2. PREMISES PARTIAL DAMAGE--INSURED LOSS. If Premises Partial
Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense,
repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations
and Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect. In the event, however, that there is a
shortage of insurance proceeds and such shortage is due to the fact that, by
reason of the unique nature of the improvements in the Premises, full
replacement cost
<PAGE> 19
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, Lessor shall complete them as soon as reasonably possible and this
Lease shall remain in full force and effect. If Lessor does not receive such
funds or assurance within said period, Lessor may nevertheless elect by written
notice to Lessee within ten (10) days thereafter to make such restoration and
repair as is commercially reasonable with Lessor paying any shortage in
proceeds, in which case this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within such ten (10) day period,
and if Lessor does not so elect to restore and repair, then this Lease shall
terminate sixty (60) days following the occurrence of the damage or destruction.
Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3. PARTIAL DAMAGE--UNINSURED LOSS. If Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a negligent or willful act
of Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the repair of such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.4. TOTAL DESTRUCTION. Notwithstanding any other provision hereof,
if Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
<PAGE> 20
9.5. DAMAGE NEAR END OF TERM. If at any time during the last six
(6) months of the term of this Lease there is damage for which the cost to
repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor
may, at Lessor's option, terminate this Lease effective sixty (60) days
following the date of occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within thirty (30) days after the date of
occurrence of such damage. Provided, however, if Lessee at that time has an
exercisable option to extend this Lease or to purchase the Premises, then Lessee
may preserve this Lease by (a) exercising such option, and (b) providing Lessor
with any shortage in insurance proceeds (or adequate assurance thereof) needed
to make the repairs on or before the earlier of (i) the date which is ten (10)
days after Lessee's receipt of Lessor's written notice purporting to terminate
this Lease, or (ii) the day prior to the date upon which such option expires. If
Lessee duly exercises such option during such period and provides Lessor with
funds (or adequate assurance thereof) to cover any shortage in insurance
proceeds, Lessor shall, at Lessor's expense repair such damage as soon as
reasonably possible and this Lease shall continue in full force and effect. If
Lessee fails to exercise such option and provide such funds or assurance during
such period, then this Lease shall terminate as of the date set forth in the
first sentence of this Paragraph 9.5.
9.6. ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii)
Hazardous Substance Condition for which Lessee is not legally responsible, the
Base Rent, Common Area Operating Expenses and other charges, if any, payable by
Lessee hereunder for the period during which such damage or condition, its
repair, remediation or restoration continues, shall be abated in proportion to
the degree to which Lessee's use of the Premises is impaired, but not in excess
of proceeds from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other charges, if
any, as aforesaid, all other obligations of Lessee hereunder shall be performed
by Lessee, and Lessee shall have no claim against Lessor for any damage suffered
by reason of any such damage, destruction, repair, remediation or restoration,
unless caused by the gross negligence or willful misconduct of Lessor.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after the receipt of such notice, this Lease
shall continue in full force and effect. "Commence" as used in this Paragraph
9.6 shall mean either the unconditional authorization of the preparation of the
required plans, or the beginning of the actual work on the Premises, whichever
occurs first.
<PAGE> 21
9.7. HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but subject
to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000 whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8. TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment
made by Lessee to Lessor and so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9. WAIVER OF STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent it is inconsistent
herewith.
10. REAL PROPERTY TAXES.
10.1. PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2(a), applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any increases in such amounts over the
Base Real Property Taxes shall be included in the calculation of Common Area
Operating Expenses in accordance with the provisions of Paragraph 4.2. See
Addendum 3.
<PAGE> 22
10.2. REAL PROPERTY TAX DEFINITIONS.
(a) As used herein, the term "REAL PROPERTY TAXES" shall
include any form of real estate tax or assessment, general, special, ordinary or
extraordinary, and any license fee, commercial rental tax, improvement bond or
bonds, levy or tax (other than inheritance, personal income or estate taxes)
imposed upon the Industrial Center by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage, or other improvement
district thereof, levied against any legal or equitable interest of Lessor in
the Industrial Center or any portion thereof, Lessor's right to rent or other
income therefrom, and/or Lessor's business of leasing the Premises. The term
"REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring, or
changes in Applicable Law taking effect, during the term of this Lease,
including but not limited to a change in the ownership of the Industrial Center
or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Parties.
(b) As used herein, the term "BASE REAL PROPERTY TAXES" shall
be the amount of Real Property Taxes, which are assessed against the Premises,
Building or Common Areas in the calendar year during which the Lease is
executed. In calculating Real Property Taxes for any calendar year, the Real
Property Taxes for any real estate tax year shall be included in the calculation
of Real Property Taxes for such calendar year based upon the number of days
which such calendar year and tax year have in common.
10.3. ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall
not include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4. JOINT ASSESSMENT. If the Building is not separately assessed,
Real Property Taxes allocated to the Building shall be an equitable proportion
of the Real Property Taxes for all of the land and improvements included within
the tax parcel assessed, such proportion to be determined by Lessor from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available. Lessor's reasonable determination
thereof, in good faith, shall be conclusive.
10.5. LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency
all taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings equipment and all other
<PAGE> 23
personal property to be assessed and billed separately from the real property of
Lessor. If any of Lessee's said property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee's property
within ten (10) days after receipt of a written statement setting forth the
taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity, telephone,
security gas and cleaning of the Premises, together with any taxes thereon. If
any such utilities or services or not separately metered to the Premises or
separately billed to the Premises, Lessee shall pay to Lessor a reasonable
proportion to be determined by Lessor of all such charges jointly metered or
billed with other premises in the Building, in the manner and within the time
periods set forth in Paragraph 4.2(d).
12. ASSIGNMENT AND SUBLETTING.
12.1. LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law
assign, transfer, mortgage or otherwise transfer or encumber (collectively,
"assign") or sublet all or any part of Lessee's interest in this Lease or in the
Premises without Lessor's prior written consent given under and subject to the
terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale, acquisition,
financing, refinancing, transfer, leveraged buy-out or otherwise), whether or
not a formal assignment or hypothecation of this Lease or Lessee's assets
occurs, which results or will result in a reduction of the Net Worth of Lessee,
as hereinafter defined, by an amount equal to or greater than twenty-five
percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the
time of full execution and delivery of this Lease or at the time of the most
recent assignment to which Lessor has consented, or as it exists immediately
prior to said transaction or transactions constituting such reduction, at
whichever time said Net Worth of Lessee was or is greater, shall be considered
an assignment of this Lease by Lessee to which Lessor may reasonably withhold
its consent. "NET WORTH OF LESSEE" for purposes of this Lease shall be the net
worth of Lessee (excluding any Guarantors) established under generally accepted
accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this
Lease without Lessor's specific prior written consent shall, at Lessor's option,
be a Default curable after notice per Paragraph 13.1, or a non-curable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a non-curable Breach, Lessor
shall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days' written notice ("LESSOR'S NOTICE"), increase the monthly Base Rent
for the
<PAGE> 24
Premises to the greater of the then fair market rental value of the Premises, as
reasonably determined by Lessor, or one hundred ten percent (110%) of the Base
Rent then in effect. Pending determination of the new fair market rental value,
if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice,
with any overpayment credited against the next installment(s) of Base Rent
coming due, and any underpayment for the period retroactively to the effective
date of the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and rental adjustment, (i) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to the then fair market value as reasonably
determined by Lessor (without the Lease being considered an encumbrance or any
deduction for depreciation or obsolescence, and considering the Premises at its
highest and best use and in good condition) or one hundred ten percent (110%) of
the price previously in effect, (ii) any index-oriented rental or price
adjustment formulas contained in this Lease shall be adjusted to require that
the base index be determined with reference to the index applicable to the time
of such adjustment, and (iii) any fixed rental adjustments scheduled during the
remainder of the Lease term shall be increased to the same ratio as the new
rental bears to the Base Rent in effect immediately prior to the adjustment
specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2. TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not (i) be effective without the express written assumption by
such assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due. Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting
shall not constitute a consent to any subsequent assignment or subletting by
Lessee or to any subsequent or successive assignment or subletting by the
assignee or sublessee. However, Lessor may consent to subsequent sublettings and
assignments of the sublease or any amendments or modifications thereto without
notifying Lessee or anyone else liable under this Lease or the sublease and
without obtaining their consent, and such action shall not relieve such persons
from liability under this Lease or the sublease.
<PAGE> 25
(d) In the event of any Default or Breach of Lessee's
obligation under this Lease, Lessor may proceed directly against Lessee, any
Guarantors or anyone else responsible for the performance of the Lessee's
obligations under this Lease, including any sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not limited
to the intended use and/or required modification of the Premises, if any,
together with a non-refundable deposit of $1,000 or ten percent (10%) of the
monthly Base Rent applicable to the portion of the Premises which is the subject
of the proposed assignment or sublease, whichever is greater, as reasonable
consideration for Lessor's considering and processing the request for consent.
Lessee agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed,
for the benefit of Lessor, to have assumed and agreed to conform and comply with
each and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph
12.2(c) shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any
assignment or subletting, may require that the amount and adjustment schedule of
the rent payable under this Lease be adjusted to what is then the market value
and/or adjustment schedule for property similar to the Premises as then
constituted, as determined by Lessor.
12.3. ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease of all or
a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may
collect such rent and income and apply same toward Lessee's obligations under
this Lease; provided, however, that until a Breach (as defined in Paragraph
13.1) shall occur in the performance of Lessee's obligations under this Lease,
Lessee may, except as otherwise provided in this Lease, receive, collect and
enjoy the
<PAGE> 26
rents accruing under such sublease. Lessor shall not, by reason of the foregoing
provision or any other assignment of such sublease to Lessor, nor by reason of
the collection of the rents from a sublessee, be deemed liable to the sublessee
for any failure of Lessee to perform and comply with any of Lessee's obligations
to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor stating
that a Breach exists in the performance of Lessee's obligations under this
Lease, to pay to Lessor the rents and other charges due and to become due under
the sublease. Sublessee shall rely upon any such statement and request from
Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against such sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by said
sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of
its obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of such
sublease; provided, however, Lessor shall not be liable for any prepaid rents or
security deposit paid by such sublessee to such sublessor or for any other prior
defaults or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall
further assign or sublet all or any part of the Premises without Lessor's prior
written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
<PAGE> 27
13. DEFAULT; BREACH; REMEDIES.
13.1. DEFAULT; BREACH. Lessor and Lessee agree that if an attorney
is consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "DEFAULT" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease. A
"BREACH" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be made by
Lessee hereunder as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which endangers
or threatens life or property, where such failure continues for a period of
three (3) days following written notice thereof by or on behalf of Lessor to
Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of
this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's
obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the
execution of any document requested under Paragraph 42 (easements), or (viii)
any other documentation or information which Lessor may reasonably require of
Lessee under the terms of this lease, where any such failure continues for a
period of ten (10) days following written notice by or on behalf of Lessor to
Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions
or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof
that are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1(a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee if
Lessee commences such
<PAGE> 28
cure within said thirty (30) day period and thereafter diligently prosecutes
such cure to completion.
(e) The occurrence of any of the following events: (i) the
making by Lessee of any general arrangements or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section
101 or any successor statute thereto (unless, in the case of a petition filed
against Lessee, the same is dismissed within sixty (60) days); (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this Subparagraph 13.1(e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement of
Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was
materially false.
(g) If the performance of Lessee's obligations under this
Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such event,
to provide Lessor with written alternative assurances of security, which, when
occupied with the then existing resources of Lessee, equals or exceeds the
combined financial resources of Lessee and the Guarantors that existed at the
time of execution of this Lease.
13.2. REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its own
option, may require all future payments to be made under this Lease by Lessee to
be made only by cashier's check. In the event of a Breach of this Lease by
Lessee (as defined in Paragraph 13.1), with or without further notice or demand,
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall
<PAGE> 29
immediately surrender possession of the Premises to Lessor. In such event Lessor
shall be entitled to recover from Lessee: (i) the worth at the time of the award
of the unpaid rent which had been earned at the time of termination; (ii) the
worth at the time of award of the amount by which the unpaid rent which would
have been earned after termination until the time of award exceeds the amount of
such rental loss that the Lessee proves could have been reasonably avoided;
(iii) the worth at the time of award of the amount by which the unpaid rent for
the balance of the term after the time of award exceeds the amount of such
rental loss that the Lessee proves could be reasonably avoided; and (iv) any
other amount necessary to compensate Lessor for all the detriment proximately
caused by the Lessee's failure to perform its obligations under this Lease or
which in the ordinary course of things would be likely to result therefrom,
including but not limited to the cost of recovering possession of the Premises,
expenses of reletting, including necessary renovation and alteration of the
Premises, reasonable attorneys' fees, and that portion of any leasing commission
paid by Lessor in connection with this Lease applicable to the unexpired term of
this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the immediately preceding sentence shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco or the Federal Reserve Bank District in which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Default or Breach of this Lease shall not waive
Lessor's right to recover damages under this Paragraph 13.2. If termination of
this Lease is obtained through the provisional remedy of unlawful detainer,
Lessor shall have the right to recover in such proceeding the unpaid rent and
damages as are recoverable therein, or Lessor may reserve the right to recover
all or any part thereof in a separate suit for such rent and/or damages. If a
notice and grace period required under Subparagraph 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by Subparagraph 13.1(b), (c) or (d). In such
case, the applicable grace period under the unlawful detainer statute shall run
concurrently after the one such statutory notice, and the failure of Lessee to
cure the Default within the greater of the two (2) such grace periods shall
constitute both an unlawful detainer and a Breach of this Lease entitling Lessor
to the remedies provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in
effect (in California under California Civil Code Section 1951.4) after Lessee's
Breach and recover the rent as it becomes due, provided Lessee has the right to
sublet or assign, subject only to reasonable limitations. Lessor and Lessee
agree that the limitations on assignment and subletting in this Lease are
reasonable. Acts of maintenance or preservation, efforts to relet the Premises,
or the appointment of a receiver to protect the Lessor's interest under this
Lease, shall not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity
<PAGE> 30
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises.
13.3. INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by
Lessor for free or abated rent or other charges applicable to the Premises, or
for the giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "INDUCEMENT PROVISIONS" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor, as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of
such acceptance.
13.4. LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or deed of trust covering the
Premises. Accordingly, if any installment of rent or other sum due from Lessee
shall not be received by Lessor or Lessor's designee within ten (10) days after
such amount shall be due, then, without any requirement for notice to Lessee,
Lessee shall pay to Lessor a late charge equal to six percent (6%) of such
overdue amount. The parties hereby agree that such late charge represents a fair
and reasonable estimate of the costs Lessor will incur by reason of late payment
by Lessee. Acceptance of such late charge by Lessor shall in no event constitute
a waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5. BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by any Lender(s) whose name and address shall have been furnished to
Lessee in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after such
notice are reasonably
<PAGE> 31
required for its performance, then Lessor shall not be in breach of this Lease
if performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under
the power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than ten percent (10%) of
the floor area of the Premises, or more than twenty-five percent (25%) of the
portion of the Common Areas designated for Lessee's parking, is taken by
condemnation, Lessee may, at Lessee's option, to be exercised in writing within
ten (10) days after Lessor shall have given Lessee written notice of such taking
(or in the absence of such notice, within ten (10) days after the condemning
authority shall have taken possession) terminate this Lease as of the date the
condemning authority takes such possession. If Lessee does not terminate this
Lease in accordance with the foregoing, this Lease shall remain in full force
and effect as to the portion of the Premises remaining, except that the Base
Rent shall be reduced in the same proportion as the rentable floor area of the
Premises taken bears to the total rentable floor area of the Premises. No
reduction of Base Rent shall occur if the condemnation does not apply to any
portion of the Premises. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution of value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any compensation, separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above Lessee's Share of
the legal and other expenses incurred by Lessor in the condemnation matter,
repair any damage to the Premises caused by such condemnation authority. Lessee
shall be responsible for the payment of any amount in excess of such net
severance damages required to complete such repair.
15. BROKERS' FEES.
15.1. PROCURING CAUSE. The Broker(s) named in Paragraph 1.10 is/are
the procuring cause of this Lease.
15.2. ADDITIONAL TERMS. Unless Lessor and Broker(s) have otherwise
agreed in writing, Lessor agrees that: (a) if Lessee exercises any Option (as
defined in Paragraph 39.1) granted under this Lease or any Option subsequently
granted, or (b) if Lessee acquires any rights to the Premises or other premises
in which Lessor has an interest, or (c) if Lessee remains in possession of the
Premises with the consent of Lessor after the expiration of the term of this
Lease after having failed to exercise an Option, or (d) if said Brokers are the
procuring cause of any other lease or sale entered into between the Parties
pertaining to the Premises and/or any adjacent property in which Lessor has an
interest, or (e) if Base Rent is increased, whether by agreement or operation of
an escalation clause herein, then as to any of
<PAGE> 32
said transaction, Lessor shall pay said Broker(s) a fee in accordance with the
schedule of said Broker(s) in effect at the time of the execution of this Lease.
15.3. ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease, whether such transfer is by agreement or by operation of
law, shall be deemed to have assumed Lessor's obligation under this Paragraph
15. Each Broker shall be an intended third party beneficiary of the provisions
of Paragraph 1.10 and of this Paragraph 15 to the extent of its interest in any
commission arising from this Lease and may enforce that right directly against
Lessor and its successors.
15.4. REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each
represent and warrant to the other that it has had no dealings with any person,
firm, broker or finder other than as named in Paragraph 1.10(a) in connection
with the negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings of actions of
the indemnifying Party, including any costs, expenses, and/or attorneys' fees
reasonably incurred with respect thereto.
16. TENANCY AND FINANCIAL STATEMENTS.
16.1. TENANCY STATEMENT. Each Party (as "RESPONDING PARTY") shall
within three (3) working days after written notice from the other Party (the
"REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a
statement in writing in a form similar to the then most current "TENANCY
STATEMENT" form published by the American Industrial Real Estate Association,
plus such additional information, confirmation and/or statements as may be
reasonably requested by the Requesting Party.
16.2. FINANCIAL STATEMENT. If Lessor desires to finance, refinance,
or sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises. In the
event of a transfer of Lessor's title or interest in the Premises or in this
Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit)
any unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease
<PAGE> 33
thereafter to be performed by the Lessor. Subject to the foregoing, the
obligations and/or covenants in this Lease to be performed by the Lessor shall
be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10) days
following the date on which it was due, shall bear interest from the date due at
the prime rate charged by the largest state chartered bank in the state in which
the Premises are located plus four percent (4%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential late charge provided
for in Paragraph 13.4.
20. TIME OF ESSENCE. Time if of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains
all agreements between the Parties with respect to any matter mentioned herein,
and no other prior or contemporaneous agreement or understandings shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that it
has made, and is relying solely upon, its own investigation as to the nature,
quality, character and financial responsibility of the other Party to this Lease
and as to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. Each Broker shall be an intended third party beneficiary
of the provisions of this Paragraph 22.
23. NOTICES.
23.1. NOTICE REQUIREMENTS. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
messenger or courier service) or may be sent by regular, certified or registered
mail or U.S. Postal Service Express Mails, with postage prepaid, or by facsimile
transmission during normal business hours, and shall be deemed sufficiently
given if served in a manner specified in this Paragraph 23. The addresses noted
adjacent to a Party's signature on this Lease shall be that Party's address for
delivery or mailing of notice purposes. Either Party may by written notice to
the other specify a different address for notice purposes, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for the purpose of mailing or delivering notices to Lessee. A
copy of all notices required or permitted to be given to Lessor hereunder shall
be concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
<PAGE> 34
23.2. DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail, the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantees next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the United States Postal Service or courier. If any
notice is transmitted by facsimile transmission or similar means, the same shall
be deemed served or delivered upon telephone or facsimile confirmation of
receipt of the transmission thereof, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday or a Sunday or a legal
holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or any term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of
any provision hereof. Any payment given Lessor by Lessee may be accepted by
Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to two hundred percent
(200%) of the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be construed
as a consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed
or performed by Lessee are both covenants and conditions.
<PAGE> 35
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1. SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will given any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default pursuant
to Paragraph 13.5. If any, Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall
given written notice thereof to Lessee, this Lease and such Options shall be
deemed prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2. ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not; (i)
be liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership, (ii) be subject to any offsets or
defenses which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
30.3. NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's subordination of this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises.
30.4. SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effEctive without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. ATTORNEYS' FEES. If any party or Broker brings an action or proceeding
to enforce the terms hereof or declare rights hereunder, the Prevailing Party
(as hereafter defined) in any such proceeding, action, or appeal thereon, shall
be entitled to reasonable attorneys' fees.
<PAGE> 36
Such fees may be awarded in the same suit or recovered in a separate suit,
whether or not such action or proceeding is pursued to decision or judgment. The
term "PREVAILING PARTY" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be, whether
by compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fee award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse all attorneys' fees reasonably incurred. Lessor shall be entitled to
attorneys' fees, costs and expenses incurred in preparation and service of
notices of Default and consultations in connection therewith, whether or not a
legal action is subsequently commenced in connection with such Default or
resulting Breach. Broker(s) shall be intended third party beneficiaries of this
Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at any time place on or about the
Premises or Building any ordinary "For Sale" signs and Lessor may at any time
during the last one hundred eighty (180) days of the term hereof place on or
about the Premises any ordinary "For Lease" signs. All such activities of Lessor
shall be without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the
Premises or the Building, except that Lessee may, with Lessor's prior written
consent, install (but not on the roof) such signs as are reasonably required to
advertise Lessee's own business so long as such signs are in a location
designated by Lessor and Lessee shall be subject to the provisions of Paragraph
7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a
<PAGE> 37
written election to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to an
act by or for the other Party, such consent shall not be unreasonably withheld
or delayed. Lessor's actual reasonable costs and expense (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited consents to an assignment a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgement that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a wavier of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this
Lease are acknowledged by Lessee as being reasonable. The failure to specify
herein any particular condition to Lessor's consent shall not preclude the
impositions by Lessor at the time of consent of such further or other conditions
as are then reasonable with reference to the particular matter for which consent
is being given.
37. GUARANTOR.
37.1. FORM OF GUARANTY. If there are to be any Guarantors of this Lease
per Paragraph 1.11, the form of the guaranty to be executed by each such
Guarantor shall be in the form most recently published by the American
Industrial Real Estate Association, and each such Guarantor shall have the same
obligations as Lessee under this lease, including but not limited to the
obligation to provide the Tenancy Statement and information required in
Paragraph 16.
37.2. ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute a
Default of the Lessee under this Lease if any such Guarantor fails or refuses,
upon reasonable request by Lessor to give: (a) evidence of the due execution of
the guaranty called for by this Lease, including the authority of the Guarantor
(and of the party signing on Guarantor's behalf) to obligate such Guarantor on
said guaranty, and resolution of its board of directors authorizing the making
of such guaranty, together with a certificate of incumbency showing the
signatures of the persons authorized to sign on its behalf, (b) current
financial statements of Guarantor as
<PAGE> 38
may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d)
written confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises
and the performance of all of the covenants, conditions and provisions on
Lessee's part to be observed and performed under this Lease, Lessee shall have
quiet possession of the Premises for the entire term hereof subject to all of
the provisions of this Lease.
39. OPTIONS.
39.1. DEFINITION. As used in this Lease, the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase other property of Lessor, or the right of first offer to purchase other
property of Lessor.
39.2. OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to
Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1
hereof, and cannot be voluntarily or involuntarily assigned or executed by any
person or entity other than said original Lessee while the original Lessee is in
full and actual possession of the Premises and without the intention of
thereafter assigning or subletting. The Options, if any, herein granted to
Lessee are not assignable, either as a part of an assignment of this Lease or
separately or apart therefrom, and no Option may be separated from this Lease in
any manner, by reservation or otherwise.
39.3. MULTIPLE OPTIONS. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later option cannot be exercised unless
the prior Options to extend or renew this Lease have been validly exercised.
39.4. EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary; (i) during
the period commencing with the giving of any notice of Default under Paragraph
13.1 and continuing until the noticed Default is cured, or (ii) during the
period of time any monetary obligation due Lessor from Lessee is unpaid (without
regard to whether notice thereof is given Lessee), or (iii) during the time
Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during the twelve (12) month period immediately preceding the exercise of the
Option, whether or not the Defaults are cured.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
<PAGE> 39
(c) All rights of Lessee under the provisions of an Option
shall terminate and be of no further force or effect, notwithstanding Lessee's
due and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of
Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to given notice thereof to Lessee), or (ii)
Lessor gives to Lessee three (3) or more notices of separate Defaults under
Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults
are cured, and (iii) if Lessee commits a Breach of this Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep
and observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupations
or tenants of the Building and the Industrial Center and their invitees.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS
Lessor reserves the right, from time to time, to grant, without the consent or
joinder of Lessee, such easements, rights of way, utility raceways, and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights of way, utility
raceways, dedications, maps and restrictions do not reasonably interfere with
the use of the Premises by Lessee. Lessee agrees to sign any documents
reasonably requested by Lessor to effectuate any such easement rights
dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general
or limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
<PAGE> 40
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed as offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if
more that one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
<PAGE> 41
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR
YOUR ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD
BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE
POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR
HAZARDOUS SUBSTANCES. NO PRESENTATION OR RECOMMENDATION IS
MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY
THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR
EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION OF WHICH IT
RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF
THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN
CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS
LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Los Angeles, California Executed at: Torrance, California
-------------------------- ------------------------
on: 6/1/95 on:
----------------------------------- ---------------------------------
<PAGE> 42
BY LESSOR: BY LESSEE:
SANWA BANK CALIFORNIA MARTEC Inc.
- ------------------------------------ ----------------------------------------
a California corporation a California corporation
- ----------------------------------- ----------------------------------------
By: /s/ William A. McCloskey, V.P. By: /s/ Mark C. Lewis
------------------------------- ------------------------------------
Name Printed: William A. McCloskey Name Printed: Mark C. Lewis
--------------------- -----------------------------------
Title: Vice-President Title: President
--------------------------- --------------------------------
By: By:
--------------------------- -----------------------------------
Name Printed: Name Printed:
---------------------- ---------------------------
Title Title:
--------------------------- ----------------------------------
Address: Address:
--------------------------- -------------------------------
- ------------------------------------ ----------------------------------------
Telephone: ( ) Telephone: ( )
------------------ -----------------------
Facsimile: ( ) Facsimile: ( )
------------------ -----------------------
<PAGE> 43
BROKER: BROKER:
Executed at: Executed at:
----------------------- ----------------------------
on: on:
--------------------------- ------------------------------------
By: By:
--------------------------- ------------------------------------
Name Printed: Name Printed:
----------------------- ---------------------------
Title: Title:
--------------------------- --------------------------------
Address: Address:
--------------------------- --------------------------------
Telephone: ( ) Telephone: ( )
------------------ ----------------------
Facsimile: ( ) Facsimile: ( )
------------------ ----------------------
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are
utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 345 S. Figueroa St., M-1, Los Angeles, CA 90071. (213)
687-8777.
<PAGE> 44
SITE PLAN
EXHIBIT "A"
GROUND FLOOR
[DIAGRAM]
<PAGE> 45
SITE PLAN
EXHIBIT "A"
SECOND FLOOR
[DIAGRAM]
<PAGE> 46
RULES AND REGULATIONS FOR
STANDARD OFFICE LEASE
Dated: May 9, 1995
--------------------------------------------------
By and Between: SANWA BANK CALIFORNIA AS LESSOR AN MARTEC, INC. AS LESSEE
--------------------------------------------------------------
GENERAL RULES
1. Lessee shall not suffer or permit the obstruction of any Common
Areas, including driveways, walkways and stairways.
2. Lessor reserves the right to refuse access to any persons Lessor in
good faith judges to be a threat to the safety, reputation, or property of the
Office Building Project and its occupants.
3. Lessee shall not make or permit any noise or odors that annoy or
interfere with other lessees or person having business within the Office
Building Project.
4. Lessee shall not keep animals or birds within the Office Building
Project, and shall not bring bicycles, motorcycles or other vehicles into areas
not designated as authorized for same.
5. Lessee shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.
6. Lessee shall not alter any lock or install new or additional locks
or bolts.
7. Lessee shall be responsible for the inappropriate use of any toilet
rooms, plumbing or other utilities. No foreign substances of any kind are to be
inserted therein.
8. Lessee shall not deface the walls, partitions or other surfaces of
the premises or Office Building Project.
9. Lessee shall not suffer or permit any thing in or around the
Premises or Building that causes excessive vibration or floor loading in any
part of the Office Building Project.
10. Furniture, signification freight and equipment shall be moved into
or out of the building only with the Lessor's knowledge and consent, and subject
to such reasonable limitations, techniques and timing, as may be designed by
Lessor. Lessee shall be responsible for any damage to the Office Building
Project arising from any such activity.
PAGE 1 OF 4 PAGES
<PAGE> 47
11. Lessee shall not employ any service or contractor for services or
work to be performed in the Building, except as approved by Lessor.
12. Lessor reserves the right to close and lock the Building on
Saturdays, Sundays and legal holidays, and on other days between the hours of 6
p.m. and 8 a.m. of the following day. If Lessee uses the Premises during such
periods, Lessee shall be responsible for securely locking any doors it may have
opened for entry.
13. Lessee shall return all keys at the termination of its tenancy and
shall be responsible for the cost of replacing any keys that are lost.
14. No window coverings, shades or awnings shall be installed or used
by Lessee.
15. No Lessee, employee or invitee shall go upon the roof of the
Building.
16. Lessee shall not suffer or permit smoking or carrying of lighted
cigars or cigarettes in areas reasonably designated by lessor or by applicable
governmental agencies as non-smoking areas.
17. Lessee shall not use any method of heating or air conditioning
other than as provided by Lessor.
18. Lessee shall not install, maintain or operate any vending machines
upon the Premises without Lessor's written consent.
19. The Premises shall not be used for lodging or manufacturing,
cooking or food preparation.
20. Lessee shall comply with all safety, fire protection and evacuation
regulations established by Lessor or any applicable governmental agency.
21. Lessor reserves the right to waive any one of these rules or
regulations, and/or as to any particular Lessee, and any such waiver shall not
constitute a waiver of any other rule or regulation or any subsequent
application thereof to such Lessee.
22. Lessee assumes all risks from theft or vandalism and agrees to keep
its Premises locked as may be required.
23. Lessor reserves the right to make such other reasonable rules and
regulations as it may from time to time deem necessary for the appropriate
operation and safety of the Office Building Project and its occupants. Lessee
agrees to abide by these and such rules and regulations.
PAGE 2 OF 4 PAGES
<PAGE> 48
PARKING RULES
1. Parking areas shall be used only for parking by vehicles no longer
than full size, passenger automobiles herein called "Permitted Size Vehicles."
Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized
Vehicles."
2. Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or
invitees to be loaded, unloaded, or parked in areas other than those designated
by Lessor for such activities.
3. Parking stickers or identification devices shall be the property of
Lessor and be returned to Lessor by the holder thereof upon termination of the
holder's parking privileges. Lessee will pay such replacement charge as is
reasonably established by lessor for the loss of such devices.
4. Lessor reserves the right to refuse the sale of monthly
identification devices to any person or entity that willfully refuses to comply
with the applicable rules, regulations, laws and/or agreements.
5. Lessor reserves the right to relocate all or a part of parking
spaces from floor to floor, within one floor, and/or to reasonably adjacent
offsite location(s), and to reasonably allocate them between compact and
standard size spaces, as long as the same complies with applicable laws,
ordinances and regulations.
6. Users of the parking areas will obey all posted signs and park only
in the areas designated for vehicle parking.
7. Unless otherwise instructed, every person using the parking area is
required to park and lock his own vehicle. Lessor will not be responsible for
any damage to vehicles, injury to persons or loss of property, all of which
risks are assumed by the party using the parking area.
8. Validation, if established, will be permissible only by such method
or methods as Lessor and/or its licensee may establish at rates generally
applicable to visitor parking.
9. The maintenance, washing, waxing or cleaning of vehicles in the
parking structure or Common Area is prohibited.
10. Lessee shall be responsible for seeing that all of its employees,
agents and invitees comply with the applicable parking rules, regulations, laws
and agreements.
PAGE 3 OF 4 PAGES
<PAGE> 49
11. Lessor reserves the right to modify these rules and/or adopt such
other reasonable and non-discriminatory rules and regulations as it may deem
necessary for the proper operation of the parking area.
12. Such parking use as is herein provided is intended merely as a
license only and no bailment is intended or shall be created hereby.
PAGE 4 OF 4 PAGES
<PAGE> 50
ADDENDUM
TO
STANDARD INDUSTRIAL LEASE - MULTI-TENANT
THIS ADDENDUM TO STANDARD INDUSTRIAL LEASE - MULTI-TENANT ("Addendum") is made
and entered into as of this 9th day of May, 1995, by and between SANWA BANK
CALIFORNIA, a California corporation ("Lessor"), and MARTEC, Inc., a California
corporation, ("Lessee"), with reference to that certain Standard Industrial
Lease - Multi-Tenant dated as of May, 9, 1995, by and between Lessor and Lessee
("Lease"). The promises, covenants, agreements and declarations made and set
forth herein are intended to and shall have the same force and effect as if set
forth at length in the body of the Lease. To the extent that any terms or
provisions of this Addendum are inconsistent with any terms or provision of the
Lease, the terms and provisions of this Addendum shall prevail and control for
all purposes. Unless otherwise defined herein, all terms used in this Addendum
defined in the Lease shall have the same meaning as is ascribed to such terms in
the Lease.
1. BASE RENT. Commencing on the first day of the thirteenth (13th)
month of the Term, and continuing on the first (1st) day of each month
thereafter through and including the twenty fourth (24th) month of the Term, the
Base Rent shall be $5,722.00 per month; and
Commencing on the first day of the twenty fifth (25th) month of the
Term, and continuing on the first (1st) day of each month thereafter through and
including the thirty fifth) month of the Term, the Base Rent shall be $5,920.00
per month; and, Base Rent for the thirty sixth (36th) month shall be $1,850.00.
2. BASE RENT CREDIT. Notwithstanding anything to the contrary in this
Lease, provided Lessee is not in default of any of the terms, covenants and
conditions of this Lease, Lessee shall be credited with the payment of Base Rent
in the amount of $5,525.00 for the 1st month of the Lease Term and in the amount
of $5,525.00 for the 2nd month of the Lease Term. No such Base Rent credit shall
reduce the amount of additional rent which is otherwise payable under other
provisions of this Lease.
3. COMMON AREA EXPENSES. Notwithstanding anything to the contrary
contained in Paragraph 4.2 of the Lease, Lessee shall be responsible for
Lessee's share i.e. 8.29% of the following operating expenses only:
A) Operation, repair and maintenance of heating, ventilation and
air conditioning system,
B) Trash disposal services,
C) Security services,
<PAGE> 51
D) Increases in insurance premiums as provided in Paragraph 8,
E) Increases in real property taxes as provided in Paragraph 10
Lessee's share shall not exceed $300.00 per month during the Lease Term.
4. LESSOR'S LEASE UNDERTAKINGS. Notwithstanding anything to the contrary
contained in this Lease, it is expressly understood by and between Lessor and
Lessee that (a) the recourse of Lessee or its successors and assigns against
Lessor with respect to the alleged default or breach by or on the part of Lessor
of any representation, warranty, covenant, undertaking or agreement contained in
this Lease (collectively, "Lessor's Lease Undertakings") shall extend only to
Lessor's interest in the real estate of which the Premises are a part ("Lessor's
Real Estate") and not to any other assets of Lessor or its directors, officers,
shareholders, employees, agents, constituent partners, beneficiaries, trustees
or representatives, and (b) except to the extent of Lessor's interest in
Lessor's Real Estate, no personal liability or personal responsibility of any
sort with respect to any of Lessor's Lease Undertakings or any alleged default
or breach thereof is assumed by, or shall at any time be asserted or enforceable
against Lessor, its directors, officers, shareholders, employees, agents,
constituent partners, beneficiaries, trustees or representatives.
5. TERMINATION OF ALL OTHER EXISTING LEASES BETWEEN LESSOR AND LESSEE FOR
THE PREMISES. Any and all existing leases (other than this Lease) for the
Premises, or any portion thereof, shall be and hereby are terminated as of
commencement date of the Term.
6. CONFIDENTIALITY AGREEMENT. It is expressly understood and agreed that
the terms and conditions of this Lease shall be held in the strictest confidence
by Lessor and Lessee and shall not be disclosed to any of the other tenants in
the Building.
7. CONDITION OF PREMISES. Lessee shall accept the Premises in their "as
is" condition, except that Lessor shall touch up the painted walls in Premises
at a cost not to exceed $1,000 and shall repair the carpet around wood inlay
areas. Further, Lessor shall continue to make such carpet repairs during the
term of the Lease.
LESSOR'S INITIALS /s/ MCL
-------
LESSEE'S INITIALS /s/ WAM
-------
<PAGE> 1
EXHIBIT 10.23
COMMERCIAL LEASE
1. Parties. Woodland Park Realty Trust No. 2, Lessor, which expression
shall include ALL heirs, successors, and assigns where the context so
admits, does hereby lease to New England Computer Graphics, Unit # 6,
Westford, MA 01886 LESSEE, which expression shall include ALL
successors, executors, administrators, and assigns where the context
so admits, and the LESSEE hereby leases the following described
premises:
2. Premises. Unit No. 62 Park Drive, Woodland Park Condominium, Park
Drive, Westford, Massachusetts in its present AS IS condition unless
otherwise described in Exhibit A together with the right to use in
common, with others entitled thereto, the parking areas serving the
entire Woodland Park Condominium, subject to regulation by the
Trustees of the Condominium as to the parking of vehicles and the
number of parking spaces allotted to each unit.
3. Term. The term of this lease shall be for Three Years, commencing on
January 1, 1997 (the "Term Commencement Date") and ending on December
31, 2000.
4. Rent. The Lessee shall pay to the LESSOR rent ("the Base Rent") at the
rate of Thirty Seven Thousand Five Hundred Twenty Six & 04/100 Dollars
($37,526.04) per year, payable in advance in monthly installments of
$3,127.17.
5. Security Deposit. Upon the execution of this lease, the LESSEE shall
pay to the Lessor the amount of 0.00 Dollars ($0.00) which shall be
held as a security for the LESSEE's performance as herein provided and
refunded to the LESSEE at the end of this lease subject to the
LESSEE's satisfactory compliance with the conditions hereof.
6. [Deleted]
7. Utilities. The LESSEE shall pay, as they become due, all bills for
electricity and other utilities (whether they are used for furnishing
heat or other purposes) that are furnished to the leased premises and
presently separately metered.
LESSOR shall have no obligation to provide utilities or equipment than
the utilities and equipment within the premises as of the commencement
date of this lease. In the event LESSEE required additional utilities
or equipment, the installation and maintenance thereof shall be the
LESSEE's sole obligation, provided that such installation shall be
subject to the written consent of the LESSOR.
8. Use of Leased Premises. The LESSEE shall use the leased premises only
for the purpose of office, storage, and as defined by the Town of
Westford Zoning By-Laws.
9. Compliance with Laws. The LESSEE acknowledges that no trade or
occupation shall be conducted in the leased premises or use made
thereof which will be unlawful, improper, noisy or offensive, or
contrary to any law or any municipal by-law or ordinance in force in
the city or town in which the premises are situated.
10. Fire Insurance. The LESSEE shall not permit any use of the leased
premises which will make voidable any insurance on the property of
which the leased premises are a part, or on the contents of said
property or which shall contrary to any law or regulation from time to
time established by New England Fire Insurance Rating Association, or
any similar body succeeding to its powers. The LESSEE shall on demand
1
<PAGE> 2
reimburse the LESSOR, and all tenants, all extra insurance premiums
caused by the LESSEE's use of the premises.
11. Maintenance.
A. LESSEE's Obligations. The LESSEE agrees to maintain the
leased premises in good condition, damage by fire and other
casualty only excepted, and whenever necessary, to replace
plate glass and other glass therein, acknowledge that the
leased premises are now in good order and the glass whole.
The LESSEE shall not permit the leased premises to be
overloaded, damaged, stripped, or defaced, nor suffer any
waste. LESSEE shall obtain written consent of LESSOR before
erecting any sign on the premises.
B. LESSOR's Obligation. The LESSOR agrees to maintain the
structure of the building of which the leased premises are a
part in the same condition as it is at the commencement of
the term or as it may be put in during the terms of this
lease, reasonable wear and tear, damaged by fire and other
casualty only excepted, unless such maintenance is required
because of the LESSEE or those for whose conduct the LESSEE
is legally responsible.
12. Alterations - Additions. The LESSEE shall not make structural
alterations or additions to the leased premises, but may make
non-structural alterations provided the LESSOR consents thereto in
writing, which consent shall not be unreasonably withheld or delayed.
All such allowed alterations shall be at LESSEE's expense and shall be
in quality at least equal to the present construction. LESSEE shall
not permit any mechanics' liens, or similar liens, to remain upon the
leased premises for labor and material furnished to LESSEE or claimed
to have been furnished to LESSEE in connection with the work of any
character performed or claimed to have been performed at the direction
of LESSEE and shall cause any such lien to be released of record
forthwith without cost to LESSOR. Any alterations or improvements made
by the LESSEE shall become the property of the LESSOR at the
termination of occupancy as provided herein.
13. Assignment - Subleasing. The LESSEE shall not assign or sublet the
whole or any part of the leased premises without LESSOR's prior
written consent. Notwithstanding such consent, LESSEE shall remain
liable to LESSOR for the payment of all rent and for the full
performance of the covenants and conditions of this lease.
14. Subordination. This lease shall be subject and subordinate to any and
all mortgages, deeds of trust and other instruments in the nature of a
mortgage, now or at any time hereafter, a lien or liens on the
property of which the leased premises are a part and the LESSEE shall,
when requested, promptly execute and deliver such written instruments
as shall be necessary to show the subordination of this lease to said
mortgages, deeds of trust or other such instruments in the nature of a
mortgage.
15. LESSOR's Access. The LESSOR or agent of the LESSOR may, at reasonable
times, enter to view the leased premises and may remove placards and
signs not approved and affixed as herein provided, and make repairs
and alterations as LESSOR should elect to do and may show the leased
premises to others, and at any time within three (3) months before the
expiration of the term, may affix to any suitable part of the leased
premises a notice for letting or selling the leased premises or
property of which the leased premises are a part and keep the same so
affixed without hindrance or molestation.
16. Indemnification and Liability. The LESSEE shall save the LESSOR
harmless from all loss and damage occasioned by use or escape of water
or by the bursting of pipes, or by any nuisance made or suffered on
the leased premises, unless such loss is caused by the neglect of the
LESSOR. The removal of snow and ice from the sidewalks bordering upon
the leased premises shall be Woodland Park Condominium Trusts'
responsibility.
2
<PAGE> 3
17. LESSEE's Liability Insurance. The LESSEE shall maintain with respect
to the leased premises and the property of which the leased premises
are a part, comprehensive public liability insurance in the amount of
$2,000,000.00 with property damage insurance in limits of $200,000.00
in responsible companies qualified to do business in Massachusetts and
in good standing therein insuring the LESSOR as well as LESSEE against
injury to persons or damage to property as provided. The LESSEE shall
deposit with the LESSOR certificates for such insurance at or prior to
the commencement of the term, and thereafter within thirty (30) days
prior to the expiration of any such policies. Woodland Park Realty
Trust II must be named additionally insured. All such policies shall
not be cancelled without at least ten (10) days prior written notice
to each assurance named therein.
18. Fire, Casualty - Eminent Domain. Should a substantial portion of the
leased premises, or of the property of which they are a part, be
substantially damaged by fire or other casualty, or be taken by
eminent domain, the LESSOR may elect to terminate this lease. When
such fire, casualty, or taking renders the leased premises
substantially unsuitable for their intended use, a just and
proportionate abatement of rent shall be made, and the LESSEE may
elect to terminate this lease if:
A. The LESSOR fails to give written notice within thirty (30)
days of intention to restore leased premises, or
B. The LESSOR fails to restore the leased premises to a
condition substantially suitable for their intended use
within ninety (90) days of said fire, casualty or taking.
The LESSOR reserves, and the LESSEE grants to the LESSOR, all rights
which the LESSEE may have for damages or injury to the leased premises
for any taking by eminent domain, except for damage to the LESSEE's
fixtures, property or equipment.
19. Default and Bankruptcy. In the event that:
A. The LESSEE shall default in the payment of any installment of
rent or other sum herein specified and such default shall
continue for ten (10) days after written notice thereof; or
B. The LESSEE shall default on the observance of performance of
any other of the LESSEE's covenants, agreements, or
obligations hereunder and such default shall not be corrected
within thirty (30) days after written notice thereof; or
C. The LESSEE shall be declared bankrupt or insolvent according
to law, or, if any assignment shall be made of LESSEE's
property for the benefit of creditors, then the LESSOR shall
have the right thereafter, while such default continues, to
re-enter and take complete possession of the leased premises,
to declare the term of this lease ended, and remove the
LESSEE's effects, without prejudice to any remedies which
might be otherwise used arrears of rent or other default. The
LESSEE shall indemnify the LESSOR against all loss of rent
and other payments which the LESSOR may incur by reason of
such termination during the residue of the term. If the
LESSEE shall default, after reasonable notice thereof, in the
observance or performance of any conditions or covenants on
LESSEE's part to be observed or performed under or by virtue
of any of the provisions in any article of this lease, the
LESSOR, without being under any obligation to do so and
without thereby waiving such default, may remedy such default
for the account and at the expense of the LESSEE. If the
Lessor makes any expenditures or incurs any for the payment
of money in connection therewith, including but not limited
to, reasonable attorney's fees in instituting prosecuting or
defending any action or proceeding, such sums paid or
obligations insured, with interest at the rate of eighteen
(18) per cent per annum and costs, shall be paid to the
LESSOR by the LESSEE as additional rent.
3
<PAGE> 4
20. Notice. Any notice from the LESSOR to the LESSEE relating to the
leased premises or to the occupancy thereof, shall be deemed duly
served, if left at the leased premises addressed to the LESSEE, or if
mailed to the leased premises, registered or certified mail, return
receipt requested, postage prepaid, addressed to the LESSEE. Any
notice from the LESSEE to the LESSOR relating to the leased premises
or the occupancy thereof, shall be deemed duly served, if mailed to
the LESSOR by registered or certified mail, return receipt requested,
postage prepaid, addressed to the LESSOR at such address as the LESSOR
may from time to time advise in writing. All rent notices shall be
paid and sent to the LESSOR at 4 Park Drive, Westford, Massachusetts
01886.
21. Surrender. The LESSEE shall at the expiration or other termination
of this lease remove all LESSEE's goods and effects from the leased
premises, (including, without hereby limiting the generality of the
foregoing, all signs and lettering affixed or painted by the LESSEE,
either inside or outside the leased premises). LESSEE shall deliver to
the LESSOR the leased premises and all keys, locks, thereto, and other
fixtures connected therewith and all alterations and additions made to
or upon the leased premises, in good condition, damage by fire or
other casualty only excepted. In the event of the LESSEE's failure to
remove any of the LESSEE's property from the premises, LESSOR is
hereby authorized, without liability to LESSEE for loss or damage
thereto, and at the sole risk of LESSEE, to remove and store any of
the property at LESSEE's expense, or to retain same under LESSOR's
control or to sell at public or private sale, to apply the net
proceeds of such sale to the payment of any sum due hereunder, or to
destroy such property.
22. [Deleted].
23. No Hazard Waste. LESSEE Covenants that LESSEE shall not cause or
permit the discharge of oil, hazardous waste or hazardous materials
upon the Premises during the Term, and LESSEE shall indemnify and hold
harmless LESSOR against any and all loss, damage, cost or expense
(including reasonable attorney's fees) incurred by LESSOR by reason of
discharge of such materials on or under the Premises by LESSEE or any
parts on the Premises at the request of LESSEE (including any and all
invitees, solicitors, etc.)
24. Authority to Sign. No employee or agent of LESSOR or LESSOR's broker,
if any, has the authority to make or lease or any other warranty
representation, agreement or undertaking prior to or after the signing
of the lease. The submission of this document for examination and
negotiation does not constitute an offer to lease or a reservation of
or option for the Demised Premises, and this document will become
effective and binding only upon execution and delivery by LESSOR and
an officer of LESSEE. All negotiation, considerations, representations
and understandings between the parties, and no act or omission of any
employee or agent of the parties or any broker, if any shall alter,
change or modify any of the provision of this lease.
25. Compliance with Condominium Documents. The lease is subject in every
respect to the Master Deed of the Condominium, the Declaration of
Trust of the Condominium Trust, and the By-laws and rules and
regulations thereof, as the same have been amended most recently prior
to the execution of the lease. Any failure by the LESSEE to comply in
all respects with the provisions of the Master Deed of the
Condominium, the Declaration of Trust of the Condominium Trust, the
rules and regulations thereto, shall constitute a material default in
this lease.
26. Other Provisions. It is also understood and agreed that:
--------------------------------------------------------------
--------------------------------------------------------------
4
<PAGE> 5
IN WITNESS WHEREOF, the said parties hereto set their hands and seals
on this _____ day of _____________ 19_____.
The Woodland Park Realty
Trust No. 2
/s/ David L. Boston, President /s/ Robert J. Walker
- --------------------------------- ---------------------------------------
LESSEE Robert J. Walker, Trustee
LESSOR
- --------------------------------- ------------------------------
LESSEE
-----------------------------------------
Broker(s)
5
<PAGE> 6
EXHIBIT A
Work to be performed by Lessor.
As per plan.
7
<PAGE> 7
EXHIBIT B
Installments and interest on assessments for public betterments or public
improvements; expenses of any proceedings for abatement of taxes and
assessments with respect to any Fiscal Year or fraction of a Fiscal Year;
premium for insurance; compensation and all fringe benefits, workman's
compensation, insurance premiums and payroll taxes paid by operating,
maintaining, or cleaning of the exterior of the Building; water, sewer,
electric, gas, telephone, and other utility, but not including the cost to
LESSOR of electricity furnished for lighting, electrical facilities, equipment,
machinery, fixtures and appliances used by LESSEE in LESSEE's space (other than
Building heating, ventilating, and air conditioning equipment); payments to
independent contractors under service contracts for cleaning, operating,
managing, maintaining and repairing the Building and common areas (which at
reasonable rates consistent with the type if occupancy and the services
rendered); the Building's pro rata share (as reasonably determined by the
LESSOR) of the cost of operating, maintaining and repairing the common area and
facilities within Woodland Park Condominiums (such as, but not limited to, snow
plowing and/or removal, landscaping, common area and street lighting, common
septic system, security and management); and all other reasonable and necessary
expenses paid in connection with the operation, cleaning, maintenance, and
repair of the Building and common areas, and properly chargeable against
income, it being agreed that if LESSOR installs a new or replacement capital
item for the purpose of reducing LESSOR's Operating Costs, the cost thereof as
reasonable amortized by LESSOR, with legal interest on the unamortized amount,
shall be included in LESSOR's Operating Costs.
8
<PAGE> 1
EXHIBIT 10.24
INDUSTRIAL
LEASE AGREEMENT
7490 PACIFIC CIRCLE
MISSISSAUGA, ONTARIO
BETWEEN
2725312 CANADA INC.
(THE LANDLORD)
AND
NEW ENGLAND COMPUTER GRAPHICS INC.
(THE TENANT)
LEASE COMMENCEMENT: AUGUST 1, 1997
1
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
DEFINITIONS.....................................................................1
ADDITIONAL RENT...........................................................1
ALTERATIONS...............................................................1
ARCHITECT.................................................................1
BUILDING..................................................................1
BUSINESS TAX..............................................................2
CAPITAL TAX...............................................................2
CHANGE OF CONTROL.........................................................2
COMMENCEMENT DATE.........................................................2
COMMON AREAS..............................................................2
GROSS RENTABLE AREA.......................................................2
GROSS RENTABLE AREA OF THE BUILDING.......................................2
INCLUDING" AND "INCLUDES".................................................2
INDEMNIFIER...............................................................2
LANDS 3
LEASEHOLD IMPROVEMENTS....................................................3
MORTGAGE..................................................................3
MORTGAGEE.................................................................3
NET RENT..................................................................3
OFFER TO LEASE............................................................3
OPERATING COSTS...........................................................3
PERSON....................................................................4
PREMISES..................................................................4
PROPERTY..................................................................5
PROPORTIONATE SHARE.......................................................5
RENT......................................................................5
RENTAL YEAR...............................................................5
RULES AND REGULATIONS.....................................................5
SALES TAX.................................................................5
STRUCTURAL REPAIRS........................................................5
TAXES 5
TENANT....................................................................5
TERM 5
TRANSFER..................................................................6
TRANSFEREE................................................................6
TERM AND USE....................................................................6
GRANT AND PREMISES........................................................6
TERM......................................................................6
CONSTRUCTION OF PREMISES..................................................6
USE.......................................................................6
TENANT'S COVENANTS AS TO USE AND OCCUPANCY................................6
ENVIRONMENTAL.............................................................7
RENT 7
COVENANT TO PAY...........................................................7
NET RENT..................................................................7
ADDITIONAL RENT...........................................................8
RENTAL DEPOSIT............................................................8
</TABLE>
-i-
<PAGE> 3
-i-
<PAGE> 4
<TABLE>
<S> <C>
SECURITY DEPOSIT....................................................... 8
PAYMENT OF TAXES AND OPERATING COSTS................................... 8
RENT & ADDITIONAL RENT PAST DUE........................................ 9
NET LEASE.............................................................. 9
UTILITIES.............................................................. 9
HEATING, VENTILATING AND (IF APPLICABLE) AIR-CONDITIONING UNITS........10
MAINTENANCE, REPAIRS AND COMMON AREAS...........................................10
TENANT'S OBLIGATIONS...................................................10
LANDLORD'S OBLIGATIONS.................................................10
APPROVAL OF TENANT'S ALTERATIONS.......................................11
REPAIR WHERE TENANT AT FAULT...........................................11
REMOVAL OF IMPROVEMENTS AND FIXTURES...................................11
LIENS..................................................................12
NOTICE BY TENANT.......................................................12
NO LANDLORD'S LIABILITY................................................12
CONTROL OF PROPERTY BY LANDLORD.................................................12
ALTERATIONS BY LANDLORD................................................12
RIGHT OF EXAMINATION...................................................13
RIGHT TO SHOW PREMISES.................................................13
ENTRY NOT FORFEITURE...................................................13
INSURANCE AND INDEMNITY.........................................................13
TENANT'S INSURANCE.....................................................13
LANDLORD'S INSURANCE...................................................14
INDEMNIFICATION OF THE LANDLORD........................................15
LOSS OR DAMAGE.........................................................15
INCREASE IN INSURANCE PREMIUMS.........................................15
CANCELLATION OF INSURANCE..............................................15
ASSIGNMENT AND SUBLETTING.......................................................16
TRANSFERS..............................................................16
LANDLORD'S RIGHT TO TERMINATE..........................................16
CONDITIONS OF TRANSFER.................................................17
CHANGE OF CONTROL......................................................17
NO ADVERTISING.........................................................17
ASSIGNMENT BY THE LANDLORD.............................................17
DAMAGE, DESTRUCTION AND EXPROPRIATION...........................................17
LANDLORD'S OPTION......................................................17
DAMAGE TO PREMISES.....................................................18
LANDLORD'S PLANS.......................................................18
ARCHITECT'S CERTIFICATE................................................18
DEFAULT................................................................19
DEFAULT AND REMEDIES...................................................19
DISTRESS...............................................................20
</TABLE>
-ii-
<PAGE> 5
<TABLE>
<S> <C>
COSTS 20
ALLOCATION OF PAYMENTS.................................................20
SURVIVAL OF OBLIGATIONS................................................20
ADDITIONAL RENT DEEMED RENT............................................20
LANDLORD'S RIGHT TO PERFORM............................................20
STATUS STATEMENT; ATTORNMENT AND SUBORDINATION..................................21
STATUS STATEMENT.......................................................21
SUBORDINATION..........................................................21
ATTORNMENT.............................................................21
EXECUTION OF DOCUMENTS.................................................21
GENERAL PROVISIONS..............................................................21
QUIET ENJOYMENT........................................................21
RULES AND REGULATIONS..................................................21
DELAY 22
OVERHOLDING............................................................22
WAIVER ................................................................22
REGISTRATION...........................................................22
NOTICES................................................................22
SUCCESSORS & ASSIGNS...................................................22
JOINT AND SEVERAL LIABILITY............................................23
CONSENT................................................................23
SIGNS..................................................................23
ACCORD AND SATISFACTION................................................23
OCCUPANCY PERMIT.......................................................23
SCHEDULES..............................................................23
ENTIRE AGREEMENT.......................................................23
</TABLE>
SCHEDULE "A" LEGAL DESCRIPTION AND SITE PLAN
SCHEDULE "B" RULES AND REGULATIONS
SCHEDULE "C" SPECIAL PROVISIONS (IF ANY)
-iii-
<PAGE> 6
INDUSTRIAL
LEASE AGREEMENT
7490 PACIFIC CIRCLE
THIS LEASE is dated the 25th day of July, 1997.
BETWEEN: 2725312 CANADA INC. (HEREINAFTER CALLED
THE "LANDLORD")
Suite 500
10 Carlson Court
Etobicoke, Ontario
M9W 6L2
OF THE FIRST PART
AND: NEW ENGLAND COMPUTER (HEREINAFTER CALLED
GRAPHICS, INC. THE "TENANT")
7490 Pacific Circle
Unit 1
Mississauga, Ontario
L5T 2A2
OF THE SECOND PART
1. DEFINITIONS
In this lease and in the schedules attached to this lease:
ADDITIONAL RENT
"Additional Rent" means all sums of money required to be paid by the
Tenant under this lease (except Net Rent).
ALTERATIONS
"Alterations" means all repairs, replacements, alterations or
additions to the Premises by or on behalf of the Tenant.
ARCHITECT
"Architect" means the architect from time to time named by the
Landlord.
BUILDING
"Building" means the industrial building located on the Lands and
municipally known as:
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7490 PACIFIC CIRCLE (HEREINAFTER CALLED
THE "BUILDING")
Mississauga, Ontario
BUSINESS TAX
"Business Tax" means all business taxes attributable to the business
of the Tenant or any other occupant of the Premises.
CAPITAL TAX
"Capital Tax" means the amount imputed by the Landlord to the Property
for taxes, rates, duties and assessments imposed from time to time
upon the Landlord and payable by the Landlord on account of the
capital invested in the Property.
CHANGE OF CONTROL
"Change of Control" means, in the case of any corporation or
partnership, the change in the effective control of such corporation
or partnership unless such change occurs as a result of trading in the
shares of a corporation listed on a recognized stock exchange in
Canada or the United States.
COMMENCEMENT DATE
"Commencement Date" means the commencement of the Term under Section
2.2.
COMMON AREAS
"Common Areas" means those areas, facilities, and improvements
designated from time to time by the Landlord for the common use of all
tenants.
GROSS RENTABLE AREA
"Gross Rentable Area" means, with respect to rentable premises in the
Building, the area in square feet of all space in such premises, and
measured from the exterior face of all exterior walls, doors and
windows, to the centre line of partitions separating rentable premises
from each other and to the outside of partitions separating rentable
premises from interior enclosed corridors in the Building (if any).
Such area of rentable premises shall include all areas such as
enclosed vestibules and enclosed or roofed shipping and receiving
areas, whether or not recessed within the boundary line of exterior
walls and a proportionate share of any interior Common Areas, as well
as any mezzanine or second floor space.
GROSS RENTABLE AREA OF THE BUILDING
"Gross Rentable Area of the Building" means the sum of the aggregate
Gross Rentable Area of all premises in the Building which are leased
or designated for lease.
"INCLUDING" AND "INCLUDES"
"Including" and "includes" means, where the context permits,
"including, without limitation" and "includes, without limitation",
respectively.
INDEMNIFIER
"Indemnifier" means the Person, if any, who has executed or agreed to
execute an Indemnity Agreement.
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LANDS
"Lands" means the lands situated in the City of Mississauga, Regional
Municipality of Peel in the Province of Ontario, on which the Building
is located, as more particularly described in Schedule "A", as such
lands may be expanded or reduced from time to time.
LEASEHOLD IMPROVEMENTS
"Leasehold Improvements" means leasehold improvements in the Premises
determined according to common law.
MORTGAGE
"Mortgage" means an encumbrance given by the Landlord against the
Landlord's interest in the Lands or Property.
MORTGAGEE
"Mortgagee" means the holder of, or secured party under, any Mortgage.
NET RENT
"Net Rent" means the annual rent payable by the Tenant under Section
3.2.
OFFER TO LEASE
"Offer to Lease" means the agreement between the Landlord and Tenant
with respect to the Premises, dated the 22nd day of July, 1997.
OPERATING COSTS
"Operating Costs" means the total of all costs paid or payable by the
Landlord or by others in maintaining, operating and managing the
Property, calculated as if the Building were 100% occupied by tenants
during the Term including, without limitation and without duplication,
the aggregate of:
the total annual costs of insurance carried in respect of the
Property;
cleaning, snow removal, garbage and waste collection and disposal,
landscaping and parking areas,
lighting, electricity and public utilities servicing the Common Areas
and all utilities not separately metered to tenants;
policing, security and supervision, accounting and auditing, a
reasonable rental value for office space used by on-site
employees, and related expenses;
amounts paid to third parties and salaries of personnel employed to
maintain the Lands and operate and maintain the Building,
including contributions and premiums for fringe benefits,
unemployment insurance, and workers' compensation insurance,
pension plan contributions and uniforms;
the cost of equipment and signs, including Building directory board
and identification and the repair and maintenance thereof;
the cost of building supplies and materials used by the Landlord in
the maintenance and repair of the Common Areas;
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all repairs and replacements to and maintenance and operation of the
Building and Common Areas, including the Heating, Ventilating and
Air-Conditioning System ("HVAC"), where applicable, preventative
maintenance and inspection, engineering, service contracts, legal
and consulting services and all repairs and/or replacements
relating to the elevators, if any, located in the Building;
depreciation or amortization of the costs, including repair and
replacement, of the maintenance, cleaning and operating equipment
and facilities, roof, HVAC, master utility meters and all other
fixtures, equipment and facilities that are part of Common Areas
unless they are charged fully in the Rental Year in which they
are incurred, all in accordance with generally accepted
accounting principles;
interest calculated at 2% above the prime rate, announced by the
Landlord's bank, upon the undepreciated or unamortized part of
the costs referred to in (i) above;
Capital Tax;
all costs incurred in contesting or appealing Taxes or related
assessments, including legal, appraisal and other professional
fees, administration and overhead costs; and
a management fee equal to 4% of the net rent and additional rent to
the Landlord, or at the Landlord's option 15% of additional Rent
(Realty Taxes plus Operating Costs)
To the extent that any Operating Costs should be allocated, in the
reasonable opinion of the Landlord, to a particular tenant or group of
tenants, the Landlord may so allocate and the Tenant will pay those
costs, as so allocated.
Operating Costs shall not include:
(a) All amounts which otherwise would be included in Operating
Costs which are recovered by the Landlord from tenants as a
result of any act, omission, default or negligence of such
tenants;
(b) Such of the Operating Costs as are recovered from insurance
proceeds;
(c) Interest on debt and capital retirement of debt;
(d) Tenant inducement payments, leasehold improvement allowances
and rent-free periods, if any, granted to the tenants of the
Building; and
(e) Brokerage fees and commissions and other similar costs
incurred by the Landlord in leasing premises in the Building.
1.2. PERSON
"Person" means any person, firm, partnership or corporation, or any
group or combination of persons, firms, partnerships or corporations.
1.3. PREMISES
"Premises" means the premises leased to the Tenant under Section 2. 1.
1.4. PROPERTY
"Property" means the Lands and Building.
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1.5. PROPORTIONATE SHARE
"Proportionate Share" means a fraction which has as its numerator the
Gross Rentable Area of the Premises and as its denominator the Gross
Rentable Area of the Building.
1.6. RENT
"Rent" means the aggregate of Net Rent and Additional Rent.
1.7. RENTAL YEAR
"Rental Year" means a period of 12 consecutive full calendar months,
the first Rental Year beginning on the Commencement Date if such date
is the first day of a calendar month; if not, then the first Rental
Year shall commence upon the first day of the calendar month next
following the month in which the Commencement Date occurs. Each
succeeding Rental Year shall commence upon the anniversary date of the
first Rental Year.
1.8. RULES AND REGULATIONS
"Rules and Regulations" means the rules and regulations under Section
11.2.
1.9. SALES TAX
"Sales Tax" means any sales tax, goods and services tax, value added
tax, or any other tax imposed on the Landlord with respect to Rent, or
in respect of the rental of the Premises, whether characterized as a
sales tax, goods and services tax, value added tax, business transfer
tax or otherwise.
1.10. STRUCTURAL REPAIRS
"Structural Repairs" means repairs to the foundation, wall and roof
support columns, roof joists and the roof deck of the Building.
1.11. TAXES
"Taxes" means all taxes, levies, charges, school and local improvement
rates and assessments whatsoever (including municipal and other
property taxes) assessed or charged against the Property or any part
of it (including Common Areas) or against the Landlord on account of
its ownership of the Property by any lawful taxing authority and
including any amounts assessed or charged in substitution for or in
lieu of any such taxes, but excluding only such taxes as capital gains
taxes, corporate, income, profit or excess profit taxes to the extent
such taxes are not levied in lieu of any of the foregoing against the
Property or the Landlord in respect thereof. Taxes shall in every
instance be calculated on the basis of the Building being assessed as
fully leased and operational.
1.12. TENANT
"Tenant" includes every Person mentioned as Tenant in this lease.
1.13. TERM
"Term" means the term of this lease under Section 2.2 and all renewals
and extensions.
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1.14. TRANSFER
"Transfer" means an assignment of this lease or a sublease of any part
of the Premises; any transaction whereby the rights of the Tenant are
transferred or by which any right of use of any part of the Premises
is conferred upon anyone; any encumbrance of this lease or other
arrangement under which either this lease or the Premises become
security; and includes any transaction whatsoever (including
expropriation, receivership proceedings, seizure by legal process and
transfer by operation of law), which has changed the identity of the
Person having lawful use of any part of the Premises.
1.15. TRANSFEREE
"Transferee" means the Person to whom a Transfer is or is to be made.
ARTICLE 2
2. TERM AND USE
2.1. GRANT AND PREMISES
The Landlord leases the Premises to the Tenant for the Term. The
Premises are shown outlined on the site plan attached as Schedule "A"
and are presently known as 7490 PACIFIC CIRCLE Unit No. 1 of the
Building. The Gross Rentable Area of the Premises is approximately Two
Thousand Nine Hundred and Sixty-Three (2,963) square feet.
2.2. TERM
The Term of this lease is Three (3) years commencing on August 1, 1997
and expiring on July 31, 2000.
2.3. CONSTRUCTION OF PREMISES
(Deleted intentionally)
2.4. USE
The Tenant shall use and occupy the Premises only for the operation of
sales and distribution of computer graphics hardware, software and
related products and for no other purpose. The Tenant, shall comply
with all laws, rules and regulations of authorities and with any
certificate of occupancy. The Tenant shall not use or permit to be
used any part of the Premises for any dangerous, noxious, or offensive
business and will not cause or maintain any nuisance in the Premises
and no machinery shall be used on the Premises which shall cause any
undue vibration in the Premises, and if the Landlord shall complain
that any machinery or operation thereof in the Premises is a nuisance,
the Tenant will immediately cease such nuisance. The Tenant has
satisfied itself that the contemplated use of the Premises complies
with all relevant governmental authorities.
2.5. TENANT'S COVENANTS AS TO USE AND OCCUPANCY
The Tenant shall, at its cost, comply with all provisions of law
including, without limiting the generality of the foregoing, the
requirements of all governmental laws, by-laws or regulations now or
hereafter in force (whether or not same shall require alterations).
The Tenant will further comply with all police, fire, health and
sanitary regulations imposed by any governmental authorities or made
by any insurers.
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2.6. ENVIRONMENTAL
(a) The Tenant will not bring upon, permit or use any substance,
defined or designated as a hazardous or toxic waste,
hazardous or toxic material, a hazardous, toxic or
radioactive substance or other similar term, by any
applicable governmental law, regulation, by-law or ordinance
now or hereafter in effect, or any substance or material, the
use or disposition of which is regulated by any such law,
regulation, by-law or ordinance (hereinafter called "Toxic
Materials") in, on or under the Premises or the Lands and the
Tenant will promptly comply with all laws, by-laws and
ordinances, and with all orders, decrees or judgments of
governmental authorities or courts having jurisdiction,
relating to the use, collection, storage, treatment, control,
removal or clean up of Toxic Materials in, on, under the
Premises or the Lands if the Premises or the Lands become
contaminated with Toxic Materials as a result of operations
or activities on the Premises or the Lands or incorporated in
any Leasehold Improvements. The Landlord may, enter upon the
Premises and take such actions and incur such costs to effect
such compliance as it deems advisable and the Tenant shall
reimburse the Landlord on demand for the full amount of all
costs incurred in connection with such compliance.
(b) Indemnity: The Tenant shall indemnify and save harmless the
Landlord, its directors, employees, officers, shareholders
and any other Person for whom it is or they are in law
responsible, from and against all losses, costs, damages,
liabilities, expenses, fees, fines, penalties and charges
whatsoever incurred with respect to or as a result of any
breach by the Tenant of its covenant aforesaid or otherwise
arising out of the use made of the Premises by the Tenant or
any other occupant thereof. The liability of the Tenant shall
not be affected by or limited to contaminants within the
knowledge or control of the Tenant and the Tenant's liability
shall extend to all contaminants on or in the Premises,
Building or Lands created during the Term, no matter how
caused, except those created or caused by the Landlord or
those for whom it is in law responsible. The foregoing
obligations of indemnification and all of the other
obligations of the Tenant under this Section 2.6 shall
survive the expiration or early termination of this lease and
shall remain in full force and effect until complied with.
Failure by the Tenant to comply with its obligations under
this Section 2.6 shall constitute a default under this lease.
If the Tenant fails to comply with any of its obligations
under this Section 2.6, the Landlord may (but shall not be
obliged to) comply with same at the Tenant's sole cost and
the Tenant shall pay such cost, together with an additional
sum of 15% of such cost for the Landlord's overhead, to the
Landlord forthwith on demand.
ARTICLE 3
3. RENT
3.1. COVENANT TO PAY
The Tenant shall pay Rent from the Commencement Date without prior
demand and without any deduction, abatement, set-off or compensation.
If the first or last Rental Year of the Term comprises less than 12
calendar months, then Net Rent and Additional Rent for such Rental
Years shall be pro-rated on a per diem basis, based upon a period of
365 days. The Tenant shall deliver post-dated cheques to the Landlord.
prior to each Rental Year for Net Rent and estimated Additional Rent
as required by the Landlord.
3.2. NET RENT
The Tenant shall pay Net Rent for each year of the Term as set out
below, which shall be payable in each year of the Term in equal
monthly instalments in advance on the first day of each calendar month
of each year of the Term:
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<TABLE>
<CAPTION>
RENTAL ANNUAL MONTHLY RATE PER
PERIOD RENTAL RENTAL SQ. FT.
<S> <C> <C> <C>
August 1, 1997 to $16,296.50 $1,358,04 $5.50
July 31, 2000
</TABLE>
The Landlord may, at its option, re-measure the Gross Rentable Area of
the Premises, with appropriate adjustments being made if necessary, in
which case the Landlord and Tenant shall sign an acknowledgement as to
the revised Gross Rentable Area of the Premises, as well as the
revised Net Rent payable. The decision of the Landlord as to such
re-measurements shall be final and binding.
3.3. ADDITIONAL RENT
Except as otherwise provided in this lease, all Additional Rent shall
be payable by the Tenant to the Landlord within 5 business days after
demand.
3.4. RENTAL DEPOSIT
The Landlord acknowledges receipt of a cheque in the amount of Two
Thousand Two Hundred and Eleven Dollars and Thirty-Six Cents
($2,211.36) from the Tenant, to be applied as a deposit against Rent
accruing due in the first month of the Term.
3.5. SECURITY DEPOSIT
The Landlord acknowledges receipt of a cheque in the amount of Two
Thousand Two Hundred and Eleven Dollars and Thirty-Six Cents
($2,211.36), to be held by the Landlord, without interest, as security
deposit (the "Security") for the performance by the Tenant of the
terms of this lease. In the event of default by the Tenant under this
lease, the Landlord may at its option, without prejudice to any of its
other rights, apply all or part of the Security to compensate it for
any loss as a result of such default. If all or any part of the
Security is so applied, the Tenant shall, on demand, restore the
Security to its original amount. On termination of this lease, if the
Tenant is not then in default, the Security will be returned to the
Tenant. If the Landlord sells its interest in the Premises, it may
deliver the Security to the purchaser, and the Landlord will be
released from any further liability with respect to the Security or
its return to the Tenant.
3.6. PAYMENT OF TAXES AND OPERATING COSTS
(a) The Tenant shall pay to the Landlord the Tenant's
Proportionate Share of Operating Costs.
(b) The Tenant shall pay to the Landlord, when due, all Taxes in
respect of the Premises, including any Taxes charged in
respect of any Common Areas. In addition, the Tenant shall
pay its Proportionate Share of Taxes, if any, separately
charged against Common Areas. The Tenant's obligation to pay
Taxes in respect of the Premises shall be determined on the
basis of a separate bill, if available. If the relevant
taxing authority does not issue a separate bill for Taxes in
connection with the Premises, then the Tenant's obligation in
respect of Taxes shall be computed by applying the relevant
tax rate to a separate assessment of the Premises, if any. If
there is neither a separate bill for Taxes for the Premises
nor a separate assessment of the Premises, then Taxes charged
in respect of the Premises shall be determined by the
Landlord, acting reasonably, on the basis of then current
established principles of assessment used by the relevant
assessing authorities.
(c) Notwithstanding any other provision of this lease, if Taxes
in respect of the Building, Lands or Premises shall be
increased by reason of any installations made in or
alterations made to the Premises, the Tenant shall pay the
entire amount of such increase. If the Tenant designates that
Taxes shall go to support separate schools, the Tenant shall
pay to the Landlord the difference
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between the rate for separate and public schools as
Additional Rent, forthwith upon presentation of an invoice
therefor, in addition to the amounts otherwise payable by the
Tenant hereunder.
(d) The Tenant shall pay when due all Business Tax and Sales Tax.
Sales Tax shall be deemed to be a tax and not Additional
Rent, but the Landlord shall have the same remedies as it has
in respect of a default in the payment of Additional Rent.
(e) The Landlord may, at the Tenant's cost, contest any Taxes and
appeal any Tax assessments; withdraw any such contest or
appeal; and agree with the taxing authorities on any
settlement or compromise with respect to Taxes. The Tenant
will co-operate with the Landlord in respect of any such
contest or appeal and will provide the Landlord with all
relevant information, documents and consents required. The
Tenant will not contest any Taxes.
(f) The amount of Taxes and Operating Costs payable to the
Landlord may be estimated by the Landlord for such period
(not to exceed 12 months) as the Landlord determines from
time to time, and the Tenant agrees to pay to the Landlord
the amounts so estimated in equal instalments in advance on
the first day of each month during such period.
Notwithstanding the foregoing, the Landlord may charge the
Tenant for Taxes over 9 months and when bills for all or any
portion of such amounts are received, the Landlord may bill
the Tenant for the Tenant's Proportionate Share thereof and
the Tenant shall pay the Landlord such amounts so billed
after crediting against such amount any monthly payments of
estimated Taxes and Operating Costs previously made by the
Tenant.
(g) Within a reasonable period of time after the end of the
period for which estimated payments have been made, the
Landlord shall submit to the Tenant a statement setting forth
the actual amounts payable by the Tenant on account of Taxes
and Operating Costs, with adjustments (if any) to be made
forthwith.
3.7. RENT & ADDITIONAL RENT PAST DUE
If the Tenant fails to pay, when the same is due and payable, any
Rent, such unpaid amount shall bear interest from the due date thereof
to the date of payment at 18% per annum.
3.8. NET LEASE
This lease is a completely carefree net lease to the Landlord, except
as expressly set out in this lease. The Landlord is not responsible
for any expenses of any nature arising from or relating to the
Premises or their use or occupancy, or their contents or the business
carried on therein. The Tenant shall pay all charges of every nature
and kind relating to the Premises except as expressly set out in this
lease.
3.9. UTILITIES
The Tenant shall pay to the Landlord, or as it directs, all gas,
electricity, water, steam and other utility charges applicable to the
Premises as separately metered (which meters the Tenant shall pay for)
or on the basis of the Tenant's Proportionate Share. The Landlord
shall be entitled to allocate to the Premises an additional charge, as
determined by the Landlord's engineer, for any excess supply of
utilities to the Premises. Charges for utilities shall be payable in
equal instalments in advance on the first day of each month.
3.10. HEATING, VENTILATING AND (IF APPLICABLE) AIR-CONDITIONING UNITS
The Landlord warrants that the heating and air-conditioning (if any)
units located in the Premises (the "Units") will be in good working
order on the Commencement Date. The Tenant shall 30 days prior to the
expiration of the Term provide the Landlord with a certificate from a
recognized, reputable heating and air-
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conditioning contractor approved by the Landlord, stating that the
Units are in good working order, reasonable wear and tear only
excepted. If such certificate is not provided, the Landlord may use
the Security towards payment for any repairs necessary to put the
Units into good working order. The Tenant shall, throughout the Term,
at its cost, keep in force a maintenance contract for the Units with a
heating and air-conditioning contractor acceptable to the Landlord and
the Tenant shall produce a copy of such contract to the Landlord
within 30 days of the Commencement Date. Notwithstanding the foregoing
the Landlord may, at its option, take out any such preventative
maintenance contract, in which case the Tenant shall pay, as
Additional Rent all costs incurred by the Landlord. The Landlord
acknowledges that, as of the Commencement Date, it will keep in force
the preventative maintenance contract for the Units.
ARTICLE 4
4. MAINTENANCE, REPAIRS AND COMMON AREAS
4.1. TENANT'S OBLIGATIONS
The Tenant covenants that at its cost:
(a) it shall repair, maintain and keep the Premises (including,
without limitation Leasehold Improvements, the Units and all
plate glass) in good condition and repair and in accordance
with all laws, directions, rules and regulations of all
governmental agencies having jurisdiction and without
limitation, will make all repairs and replacements to all of
the Premises, including replacement to all equipment and base
building facilities and all Structural Repairs unless
specifically excepted herein. The Tenant covenants to heat
the Promises to a temperature sufficient to prevent all
pipes, plumbing fixtures and equipment from bursting or
suffering damage;
(b) it shall keep all entrance-ways and all steps and platforms
leading thereto and the Lands clear of all snow, ice and
debris;
(c) it shall repair the Premises according to notice in writing
from the Landlord; and
(d) upon the expiration or earlier termination of the Term, the
Tenant will peaceably surrender and deliver up the Premises
to the Landlord in a good state of repair and maintenance,
excepting only reasonable wear and tear not inconsistent with
the maintenance of the Building.
4.2. LANDLORD'S OBLIGATIONS
The Landlord covenants that it will at its cost make:
(a) structural repairs to the Premises caused by or resulting
from inherent structural defects or weaknesses; and
(b) repairs to be performed by the Landlord pursuant to Section
8.2 to the extent of the insurance proceeds available.
4.3. APPROVAL OF TENANT'S ALTERATIONS
(a) No Alterations shall be made to the Premises without the
Landlord's prior written approval. All Alterations shall be
performed:
(i) by contractors and workmen approved by the Landlord;
(ii) in a good and workmanlike manner;
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(iii) in accordance with drawings and specifications
approved by the Landlord;
(iv) in accordance with all applicable laws and
regulations; and
(v) subject to such indemnification against liens as the
Landlord reasonably requires.
The Landlord's reasonable cost of supervising all such work
and to have such plans and specifications reviewed by the
Architect shall be paid by the Tenant.
(b) If any Alterations affect the structure of the Building or
any of the base building systems, such work shall at the
option of the Landlord be performed by the Landlord at the
Tenant's cost as per (a) above, together with a sum equal to
15% of said cost representing the Landlord's overhead.
(c) The Tenant shall not place anything on or make any openings
in the roof without the prior written consent of the
Landlord, which consent may be withheld or given on such
terms as the Landlord may determine. On termination of this
lease, the Tenant shall repair any damage caused to the
Building as a result of having placed anything on or having
made openings in or having attached anything to the roof and
shall restore the roof to its former condition, all to the
satisfaction of the Landlord.
4.4. REPAIR WHERE TENANT AT FAULT
Notwithstanding any other provisions of this lease, if the Building or
any part thereof is damaged as a result of the act or omission of the
Tenant or those for whom it is in law responsible, the cost of the
resulting repairs, plus a sum equal to 15% of such cost representing
the Landlord's overhead, shall be paid by the Tenant to the Landlord.
4.5. REMOVAL OF IMPROVEMENTS AND FIXTURES
All Leasehold Improvements shall immediately upon their placement
become the Landlord's property without compensation to the Tenant.
Except as otherwise agreed by the Landlord in writing, no Leasehold
Improvements or trade fixtures of the Tenant shall be removed from the
Premises either during or at the expiration or sooner termination of
the Term except that:
(a) the Tenant may, during the Term, in the usual course of its
business, remove its trade fixtures in order to replace or
upgrade them, provided that the Tenant is not in default
under this lease; and
(b) the Tenant shall, at the expiration or earlier termination of
the Term, at its cost, remove all of its trade fixtures and
such of the Leasehold Improvements as the Landlord shall
require to be removed, and to restore the Premises to the
Landlord's then current standards for the Building to the
extent required by the Landlord. The Tenant shall at its cost
repair any damage caused to the Building by such removal. If
the Tenant does not remove its trade fixtures as aforesaid,
they shall, at the option of the Landlord, become its
property and may be removed and disposed of by the Landlord
in such manner as it deems advisable.
4.6. LIENS
The Tenant shall promptly pay for all materials supplied and work done
in respect of the Premises so as to ensure that no lien is registered
against the Lands. The Tenant shall discharge any lien within 5
business days from the Landlord's notice, failing which the Landlord
may at its option discharge the same, with all costs, including
solicitor's fees (on a solicitor/client basis) incurred by the
Landlord to be paid by the Tenant to the Landlord within 5 business
days after demand.
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4.7. NOTICE BY TENANT
The Tenant shall notify the Landlord of any damage in any part of the
Premises or the Property, which comes to the attention of the Tenant.
4.8. NO LANDLORD'S LIABILITY
The Landlord is not liable for any damage caused to the Tenant by
reason of failure of any equipment or facilities serving the Building
or the Property, interruption or discontinuance of any utility
services or delays in the performance of any work for which the
Landlord is responsible. The Landlord may stop, interrupt or reduce
any services, systems or utilities provided to, or serving, the
Building or the Premises, for the purpose of performing repairs,
alterations or maintenance or to comply with laws or regulations or
binding requirements of its insurers or for causes beyond the
Landlord's reasonable control or as a result of the Landlord
exercising any rights reserved to it pursuant to this lease. The
Landlord shall not be in breach of its covenant for quiet enjoyment or
liable for any loss, costs or damages, whether direct or indirect,
incurred by the Tenant due to any of the foregoing, but the Landlord
shall use reasonable efforts to restore the services, utilities or
systems so stopped, interrupted or reduced.
ARTICLE 5
5. CONTROL OF PROPERTY BY LANDLORD
5.1. ALTERATIONS BY LANDLORD
The Landlord may:
(a) alter, add to, subtract from, construct improvements to,
re-arrange, build additional storeys on and construct
additional facilities in, adjoining or proximate to the
Property;
(b) relocate the facilities and improvements in or comprising the
Property or erected on the Lands;
(c) do such things on or in the Property as required to comply
with any laws, by-laws, regulations, orders or directives
affecting the Lands or any part of the Property; and
(d) do such other things on or in the Property as the Landlord,
in the use of good business judgment determines to be
advisable, provided that notwithstanding anything contained
in this Section 5.1 access to the Premises shall be available
at all times. The Landlord shall not be in breach of its
covenant for quiet enjoyment or liable for any loss, costs or
damages, whether direct or indirect, incurred by the Tenant
due to any of the foregoing.
5.2. RIGHT OF EXAMINATION
The Landlord may at all reasonable times enter the Premises to examine
them and to make such repairs, alterations or improvements thereto as
the Landlord considers necessary. The Landlord reserves to itself the
right to use the exterior walls, the roof, and the right to install,
maintain, use and repair pipes, ducts, conduits, vents, wires and
other installations leading in, through, over, or under the Premises
and for this purpose, the Landlord may take all material into and upon
the Premises which is required therefor. The Tenant shall not unduly
obstruct any pipes, conduits or mechanical or other electrical
equipment so as to prevent reasonable access thereto. The Landlord
shall exercise its rights under this Section 5.2, to the extent
possible in the circumstances, in such manner so as to minimize
interference with the Tenant's use and enjoyment of the Premises.
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5.3. RIGHT TO SHOW PREMISES
The Landlord and its agents have the right to enter the Premises at
all reasonable times to show the Premises to prospective purchasers or
Mortgagees and, during the last six months of the Term (or the last
six months of any renewal term if this lease is renewed), to show them
to prospective tenants.
5.4. ENTRY NOT FORFEITURE
No entry into the Premises by the Landlord pursuant to a right granted
by this lease shall constitute a breach of any covenant for quiet
enjoyment, or (except where expressed by the Landlord in writing or
otherwise intended) shall constitute a re-entry or forfeiture.
ARTICLE 6
6. INSURANCE AND INDEMNITY
6.1. TENANT'S INSURANCE
(a) The Tenant will, throughout the Term, at its cost take out
and maintain, in the names of the Tenant, the Landlord, and
the Mortgagee, when applicable, as their respective interests
may appear, the following insurance, which will contain the
Mortgagee's standard mortgage clause and will contain a
waiver of any subrogation rights which the Tenant's insurers
may have against the Landlord and against those for whom it
is in law responsible:
(i) insurance upon all property owned by the Tenant or
for which the Tenant is legally liable, and which is
located in the Premises including, without
limitation, alterations, trade fixtures, and
Leasehold Improvements, as well as inventory in an
amount of at least 90% of the full replacement cost;
with coverage against at least the perils of fire
and standard extended coverage, including sprinkler
leakages (where applicable), flood and collapse;
(ii) broad form boiler and machinery insurance on a
blanket repair and replacement basis with limits for
each accident in an amount of at least 90% of the
full replacement cost of all boilers, pressure
vessels, heating and air-conditioning equipment and
miscellaneous electrical apparatus owned or operated
by the Tenant or by others (other than the Landlord)
on behalf of the Tenant;
(iii) standard business interruption insurance;
(iv) comprehensive general liability insurance, including
personal injury liability, contractual liability,
non-owned automobile liability, employers' liability
and owners' and contractors' protective insurance
coverage with respect to the Premises and the
Tenant's use of the Common Areas. Such policies
shall (1) be written on a comprehensive basis with
inclusive limits of not less than S2,000,000.00 for
bodily injury to any one or more Persons, or
property damage, and such higher limits as the
Landlord, acting reasonably, requires from time to
time; and (2) contain a severability of interests
clause and a cross-liability clause;
(v) Tenant's legal liability insurance for the actual
cash value of the Premises, including loss of use
thereof;
(vi) standard owner's form automobile policy providing
third party liability insurance with $2,000,000.00
inclusive limits, and accident benefits insurance,
covering all licensed vehicles owned or operated by
or on behalf of the Tenant; and
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(vii) any other of insurance as the Tenant or the
Landlord, acting reasonably, requires from time to
time in form, in amounts and for insurance risks
against which a prudent tenant would insure.
(b) All policies:
(i) will be taken out with insurers acceptable to the
Landlord, acting reasonably;
(ii) will be in a form satisfactory from time to time to
the Landlord, acting reasonably;
(iii) will be non-contributing with, and will apply only
as primary and not as excess to any other insurance
available to the Landlord or the Mortgagee; and
(iv) will not be invalidated as respects the interests of
the Landlord and of the Mortgagee by reason of any
breach or violation of any warranties,
representations, declarations or conditions
contained in the policies. All policies will contain
an undertaking by the insurers to notify the
Landlord and the Mortgagee in writing by registered
mail at least thirty (30) days before any material
change, cancellation or termination of them.
(c) Certificates of insurance will be delivered to the Landlord
before the Tenant obtains possession of the Premises for any
purpose. Each certificate will contain an acknowledgment, to
be signed by the Tenant's insurers, that the insurers have
read this lease and that they agree to the terms of this
lease. No review or approval of any insurance certificate by
the Landlord diminishes its rights or the Tenant's
obligations in this lease.
(d) If the Tenant fails to take out or keep in force any required
insurance or should any of that insurance not be approved by
the Landlord, and should the Tenant not commence to
diligently rectify (and afterwards to proceed diligently to
rectify) the situation within 48 hours after notice by the
Landlord, the Landlord may, without obligation, effect such
insurance at the Tenant's cost and all costs of the Landlord
will be immediately paid by the Tenant to the Landlord as
Additional Rent, together with a fee of 15% representing the
Landlord's overhead. This right is without prejudice to the
other rights and remedies of the Landlord under this lease.
6.2. LANDLORD'S INSURANCE
The Landlord will carry the following:
(a) insurance on the Building (excluding foundations and
excavations) and the machinery, boilers, and equipment
contained in it and owned by the Landlord (excluding any
property with respect to which the Tenant or other occupants
are required to insure under Section 6.1 or similar Sections)
against damage by fire and extended perils coverage in those
reasonable amounts and with those reasonable reductions that
would be carried by a prudent owner of a reasonably similar
project, having regard to size, age and location, but shall
be insured for the full replacement cost;
(b) comprehensive public liability and property damage insurance
with respect to the Landlord's operations in the Premises, in
the Building and on the Lands, in those reasonable amounts
for personal and bodily injury or death and damage to
property of others; and
(c) those other forms of insurance which the Landlord considers
advisable.
Despite this Section 6.2, and regardless of any contribution by the
Tenant to the costs of insurance premiums, (i) the Tenant is not
relieved of any liability arising from or contributed to by its
negligence or its willful act or omissions, and (ii) no insurable
interest is conferred upon the Tenant under any policies of
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insurance carried by the Landlord and the Tenant has no right to
receive any proceeds of any such insurance policies.
6.3. INDEMNIFICATION OF THE LANDLORD
Notwithstanding any other provision of this lease, the Tenant shall
indemnify the Landlord and save it harmless from and against any and
all loss (including loss of Rent), claims, actions, damages, liability
and expense in connection with loss of life, personal injury, damage
to property or any other loss or injury whatsoever arising from or out
of this lease, or any occurrence in, upon or at the Premises, or the
occupancy or use by the Tenant of the Premises or any part thereof, or
occasioned wholly or in part by any act or omission of the Tenant or
by anyone permitted to be on the Premises by the Tenant. If the
Landlord shall, without fault on its part, be made a party to any
litigation commenced by or against the Tenant, then the Tenant shall
protect, indemnify and hold the Landlord harmless and shall pay all
expenses and reasonable legal fees incurred (on a solicitor/client)
basis or paid by the Landlord in connection with such litigation. The
Tenant shall also pay all expenses and legal fees (on a
solicitor/client basis) that may be incurred or paid by the Landlord
in enforcing the terms of this lease, unless a court shall decide
otherwise.
6.4. LOSS OR DAMAGE
The Landlord shall not be liable for any death or injury arising from
or out of any occurrence in, upon, at or relating to the Property or
damage to property of the Tenant or of others located on the Premises
or elsewhere in the Property, nor shall it be responsible for any loss
of or damage to any property of the tenant or others from any cause,
whether or not any such death, injury, loss or damage results from the
negligence of the Landlord, its agents, employees, contractors, or
others for whom it may, in law, be responsible. Without limitation,
the Landlord shall not be liable for any injury or damage to Persons
or property resulting from any cause whatsoever. All property of the
Tenant shall be so kept at the risk of the Tenant only and the Tenant
releases and agrees to indemnify the Landlord and save it harmless
from any claims arising out of any damage to the same, including any
subrogation claims by the Tenant's insurers.
6.5. INCREASE IN INSURANCE PREMIUMS
No article shall be kept in the Premises which is prohibited by any
insurance policy against the Building. If anything is done in the
Building which increased the insurance with respect to the Building,
the Tenant shall pay any such increase in premium. In determining
whether increased premiums result from the use of the Premises, a
schedule issued by the Landlord's insurer shall be final and binding.
6.6. CANCELLATION OF INSURANCE
If any insurance policy upon the Building or any part thereof shall be
cancelled or threatened to be cancelled or the coverage thereunder
reduced by reason of the use of the Premises, and if the Tenant fails
to remedy such condition within 48 hours after notice, the Landlord
may, at its option, at the Tenant's cost, either:
(a) re-enter the Premises forthwith; or
(b) enter upon the Premises and remedy the condition giving rise
to such cancellation, threatened cancellation or reduction.
The Landlord shall not be liable for any damage or injury caused to
any property located on the Premises as a result of any such entry.
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ARTICLE 7
7. ASSIGNMENT AND SUBLETTING
7.1. TRANSFERS
The Tenant shall not permit any Transfer without the prior written
consent of the Landlord, which consent shall not be unreasonably
withheld, but shall be subject to the Landlord's rights under Section
7.2. Notwithstanding any statutory provision to the contrary, the
Landlord may take into account the following factors in deciding
whether to grant or withhold its consent:
(a) whether such Transfer is breach of any covenants or
restrictions made or granted by the Landlord;
(b) whether in the Landlord's opinion, the financial background,
business history and capability of the proposed Transferee is
satisfactory; and
(c) if the Transfer is to an existing tenant of the Landlord.
Consent by the Landlord to any Transfer if granted shall not
constitute a waiver of the necessity for such consent to any
subsequent Transfer. This prohibition against Transfer shall include a
prohibition against any Transfer by operation of law and no Transfer
shall take place by reason of the failure of the Landlord to give
notice as required by Section 7.2.
7.2. LANDLORD'S RIGHT TO TERMINATE
If the Tenant intends to effect a Transfer, the Tenant shall give
written notice to the Landlord specifying the identity of the proposed
Transferee and provide such financial, business or other information
relating to the Transferee and its principals as the Landlord
requires, together with copies of any Transfer documents. The Landlord
shall, within 30 days after having received such notice and all
requested information, notify the Tenant either that:
(a) it consents or does not consent to the Transfer; or
(b) it elects to cancel this lease as to the whole or part, as
the case may be, of the Premises affected by the proposed
Transfer, in preference to giving such consent.
If the Landlord elects to terminate this lease, it shall stipulate in
its notice the termination date, which date shall be no less than 30
days nor more than 90 days following the giving of such notice of
termination. If the Landlord elects to cancel this lease, the Tenant
may notify the Landlord within 10 days thereafter of the Tenant's
intention either to refrain from such Transfer or to accept the
cancellation. If the Tenant fails to deliver such notice within such
period of 10 days or notifies the Landlord that it accepts the
Landlord's termination, this lease will as to the whole or affected
part of the Premises, as the case may be, be terminated on the date of
termination stipulated by the Landlord in its notice. If the Tenant
advises the Landlord it intends to refrain from such Transfer, then
the Landlord's election to terminate this lease shall become void in
such instance.
7.3. CONDITIONS OF TRANSFER
(a) Any consent by the Landlord shall be subject to the Tenant
and Transferee executing an agreement with the Landlord
agreeing that the Transferee will be bound by all of the
terms of this lease as if such Transferee had originally
executed this lease as tenant.
(b) Notwithstanding any Transfer, the Tenant shall be jointly and
severally liable with the Transferee under this lease and
shall not be released from performing any of the terms of
this lease.
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(c) If the net rent and additional rent to be paid by the
Transferee exceeds the Net Rent and Additional Rent, such
excess shall be paid to the Landlord. If the Tenant receives
from any Transferee, either directly or indirectly, any
consideration other than rent or additional rent for such
Transfer, the Tenant shall forthwith pay to the Landlord such
consideration.
(d) The Tenant will pay all legal costs and the Landlord's
administration fee to review or prepare any Transfer
documents.
(e) The Landlord's consent to any Transfer shall be subject to
the condition that if the net rent and additional rent
payable by the Transferee shall not be less than the Net Rent
and Additional Rent payable by the Tenant under this lease as
at the effective date of the Transfer.
7.4. CHANGE OF CONTROL
If the Tenant is at any time a corporation or partnership, any actual
or proposed Change of Control in such corporation or partnership shall
be deemed to be a Transfer and subject to all of the provisions of
this Article 7. The Tenant shall make available to the Landlord or its
representatives all of its corporate or partnership records, as the
case may be, for inspection at all reasonable times, in order to
ascertain whether there has been any Change of Control.
7.5. NO ADVERTISING
The Tenant shall not advertise or permit to be advertised that the
Premises are available for Transfer unless the complete text of any
such advertisement is first approved in writing by the Landlord. No
such advertisement shall contain any reference to the rental rate of
the Premises.
7.6. ASSIGNMENT BY THE LANDLORD
The Landlord shall have the unrestricted right to sell, lease, convey
or otherwise dispose of the Property or any part thereof and this
lease, including the right to mortgage this lease. To the extent that
the purchaser or assignee from the Landlord assumes the obligations of
the Landlord under this lease, the Landlord shall thereupon and
without further agreement be released of all liability under this
lease.
ARTICLE 8
8. DAMAGE, DESTRUCTION AND EXPROPRIATION
8.1. LANDLORD'S OPTION
If the Premises are at any time damaged or destroyed as a result of
fire or other perils in respect of which the Landlord is required to
insure against, and if as a result of such occurrences:
(a) 50% or more of the Premises are rendered wholly unfit for
occupancy;
(b) the cost of repairing or rebuilding the Premises exceeds 25%
or more of the replacement cost thereof; and
(c) in the opinion of the Architect the Premises cannot be
repaired with reasonable diligence within 180 days of the
happening of such damage or destruction.
Then, in each case, the Landlord may, at its option and upon notice to
the Tenant, terminate this lease. In such event, this lease shall
terminate as of the date of such damage or destruction and the Rent
shall be apportioned and paid in full to the date of termination. The
Tenant will execute whatever documents may
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be required by the Landlord in order that all proceeds of insurance
relating to the Leasehold Improvements shall be released to the
Landlord.
8.2. DAMAGE TO PREMISES
If the Landlord does not elect to terminate this lease in accordance
with Section 8.1, then the Landlord shall commence with all reasonable
diligence to repair the Premises to the extent only of its obligations
under this lease and exclusive of any work performed in and to the
Premises by or on behalf of the Tenant (the "Landlord's Work of
Reconstruction"). The Tenant will execute whatever documents may be
required by the Landlord in order that all proceeds of insurance
relating to the Leasehold Improvements shall be released to the
Landlord. From the date of the happening of such damage or destruction
and until the completion of the Landlord's Work of Reconstruction, the
Net Rent shall abate:
(a) in its entirety if, in the opinion of the Architect, the
Premises are rendered wholly untenantable, or
(b) proportionately (to the portion of the Premises rendered
untenantable), if in the opinion of the Architect, the
Premises are rendered untenantable only in part, subject, in
either case, to the extent of the insurance proceeds actually
received by the Landlord.
8.3. LANDLORD'S PLANS
If the Landlord elects to repair the Premises, the Landlord shall be
entitled to use plans and specifications and working drawings in
connection therewith other than, but similar to those used in the
original construction of the Premises.
8.4. ARCHITECT'S CERTIFICATE
The decision of the Architect as to:
(a) the time within which the Premises can or cannot be repaired;
(b) the extent of the damage or destruction to the Premises;
(c) the cost of repairing the Premises; and
(d) the date on which the Landlord's Work of Reconstruction is
completed;
shall, in each case, be final and binding upon the parties hereto.
ARTICLE 9
9. DEFAULT
9.1. DEFAULT AND REMEDIES
If and whenever:
(a) any Net Rent is in arrears whether or not any demand for
payment has been made by the Landlord;
(b) any Additional Rent is in arrears and is not paid within 5
days after written demand by the Landlord;
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(c) the Tenant has breached any of its obligations in this lease
(other than the payment of Rent) and the Tenant fails to
remedy such breach within 15 days (or such shorter period as
may be provided in this lease) or if such breach cannot
reasonably be remedied within 15 days or such shorter period,
the Tenant fails to commence to remedy and thereafter proceed
diligently to remedy such breach, in each case after notice
in writing from the Landlord;
(d) the Tenant or any Indemnifier becomes bankrupt or insolvent
or takes the benefit of any statute for bankrupt or insolvent
debtors or makes any proposal, assignment or arrangement with
its creditors, or any steps are taken or proceedings
commenced by any Person for the dissolution, winding-up or
other termination of the Tenant's existence or the
liquidation of its assets;
(e) a trustee, receiver, receiver/manager or like Person is
appointed with respect to the business or assets of the
Tenant or any Indemnifier;
(f) the Tenant makes a sale in bulk of all or a substantial
portion of its assets other than in conjunction with a
Transfer approved by the Landlord;
(g) this lease or any of the Tenant's assets are taken under a
writ of execution;
(h) the Tenant purports to make a Transfer not in compliance with
this lease;
(i) the Tenant abandons or attempts to abandon the Premises or
disposes of its goods so that there would not after such
disposal be sufficient goods of the Tenant on the Premises
subject to distress to satisfy Rent for at least 3 months, or
the Premises become vacant and unoccupied for a period of 5
consecutive days or more without the consent of the Landlord;
or
(j) any of the Landlord's policies of insurance with respect to
the Building or any part thereof are actually or threatened
to be cancelled or adversely changed as a result of any use
or occupancy of the Premises;
then without prejudice to any other rights which it has pursuant to
this lease or at law, the Landlord shall have the following rights and
remedies, which are cumulative and not alternative:
(i) to terminate this lease;
(ii) to enter the Premises as agent of the Tenant and to
relet the Premises for whatever term, and on such
terms as the Landlord in its discretion may
determine and to receive the Rent therefor and as
agent of the Tenant to take possession of any
property of the Tenant on the Premises, to store
such property at the expense and risk of the Tenant
or to sell or otherwise dispose of such property in
such manner as the Landlord may see fit without
notice to the Tenant;
(iii) to remedy or attempt to remedy any default of the
Tenant under this lease for the account of the
Tenant and to enter upon the Premises for such
purposes;
(iv) to recover from the Tenant all damages and expenses
incurred by the Landlord as a result of any breach
by the Tenant including, if the Landlord terminates
this lease, any deficiency between those amounts
which would have been payable by the Tenant for the
portion of the Term following such termination and
the net amounts actually received by the Landlord
during such period of time with respect to the
Premises; and
(v) to recover from the Tenant the full amount of the
current month's Rent together with the next 3
months' instalments of Rent; all of which shall
accrue on a day-to-day basis and shall immediately
become due and payable as accelerated Rent.
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9.2. DISTRESS
Notwithstanding any provision of this lease or any provision of
applicable legislation, none of the goods of the Tenant on the
Premises at any time during the Term shall be exempt from levy by
distress for Rent in arrears, and the Tenant waives any such
exemption. If the Landlord makes any claim against the goods and
chattels of the Tenant by way of distress, this provision may be
pleaded as an estoppel against the Tenant in any action brought to
test the right of the Landlord to levy such distress.
9.3. COSTS
The Tenant shall pay to the Landlord on demand all costs incurred by
the Landlord, including lawyers' fees, on a solicitor/client basis,
incurred by the Landlord in enforcing any of the obligations of the
Tenant under this lease.
9.4. ALLOCATION OF PAYMENTS
The Landlord may at its option apply sums received from the Tenant
against any amounts due and payable by the Tenant under this lease in
such manner as the Landlord sees fit.
9.5. SURVIVAL OF OBLIGATIONS
All obligations of the Tenant under this lease which remain
unfulfilled at the determination of this lease and the Landlord's
rights in respect of any failure by the Tenant to perform any of its
obligations under this lease shall survive and remain in full force
and effect notwithstanding the expiration or earlier termination of
the Term.
9.6. ADDITIONAL RENT DEEMED RENT
All Additional Rent shall be deemed to be rent and the Landlord shall
have all rights against the Tenant for default in the payment of
Additional Rent as for default in the payment of Net Rent, except as
otherwise herein provided.
9.7. LANDLORD'S RIGHT TO PERFORM
In additional to all other remedies the Landlord may have by this
lease, at law or in equity, if the Tenant does not perform any of its
obligations hereunder, the Landlord may, at its option, but without
any obligation, perform any of such obligations of the Tenant, after 5
days' notice to the Tenant or in the event of an emergency, without
notice, and in such event, the cost of performing any of such
obligations, plus an administrative charge of 15% of such cost, shall
be payable by the Tenant to the Landlord forthwith on demand.
ARTICLE 10
10. STATUS STATEMENT; ATTORNMENT AND SUBORDINATION
10.1. STATUS STATEMENT
Within 10 days after written request by the Landlord, the Tenant shall
deliver to the Landlord, in a form supplied by the Landlord, a
certificate as to the status of this lease, the amount of Rent then
being paid and the dates to which it has been paid and any other
matters pertaining to this lease as to which the Landlord shall
request such certificate.
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10.2. SUBORDINATION
This lease and all rights of the Tenant shall be subject and
subordinate to any and all Mortgages from time to time in existence
against the Property or any part thereof. On request, the Tenant shall
subordinate this lease and its rights under the lease to any and all
Mortgages and to all advances made under such Mortgages. The form of
such subordination shall be made as required by the Landlord or any
Mortgagee.
10.3. ATTORNMENT
The Tenant shall promptly on request attorn to any Mortgagee, or to
the registered owners of the Property, or the lessee under any lease
of all or substantially all of the Property made by the Landlord or
otherwise affecting the Property, or the purchaser on any foreclosure
or sale under proceedings taken under any Mortgage, and shall
recognize such Mortgagee, owner, lessee or purchaser as the Landlord
under this lease.
10.4. EXECUTION OF DOCUMENTS
The Tenant irrevocably constitutes the Landlord the agent and attorney
of the Tenant for the purposes of executing any agreement,
certificate, attornment or subordination required by this lease and
for registering postponements in favour of any Mortgagee if the Tenant
fails to execute such documents within 10 days after request by the
Landlord.
ARTICLE 11
11. GENERAL PROVISIONS
11.1. QUIET ENJOYMENT
If the Tenant pays Rent and fully observes and performs all of its
obligations under this lease, the Tenant shall, subject to the
provisions of this lease, be entitled to peaceful and quiet enjoyment
of the Premises for the Term without interruption or interference by
the Landlord or any Person claiming through the Landlord.
11.2. RULES AND REGULATIONS
The Tenant shall comply with all Rules and Regulations, and amendments
to them, adopted by the Landlord - from time to time including those
set out in Schedule "B", so long as such Rules and Regulations are not
inconsistent with and do not contradict this lease. The Rules and
Regulations may differentiate between different types of businesses in
or other tenants or users of the Building and the Landlord shall not
be responsible to the Tenant for any non-observance of such Rules or
Regulations by any other tenant of the Building.
11.3. DELAY
Except as expressly provided in this lease, whenever the Landlord or
Tenant is delayed in the fulfillment of any obligation under this
lease, other than the payment of Rent, by an unavoidable occurrence
which is not the fault of the party delayed in performing such
obligation, then the time for fulfillment of such obligation shall be
extended during the period in which such circumstances operate to
delay the fulfillment of such obligation.
11.4. OVERHOLDING
If the Tenant remains in possession of the Premises without the
Landlord's consent after the end of the Term, there shall be no tacit
renewal of this lease or the Term, and the Tenant shall be deemed to
be occupying the Premises as a Tenant from month to month at a monthly
net rent equal to twice the monthly
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amount of Net Rent payable during the last month of the Term, and
otherwise upon the same terms as set out in this lease, if applicable
to a monthly tenancy.
11.5. WAIVER
If either the Landlord or Tenant excuses or condones any default by
the other of any obligation under this lease, this shall not be a
waiver of such obligation in respect of any continuing or subsequent
default and no such waiver shall be implied.
11.6. REGISTRATION
Neither the Tenant nor anyone claiming under the Tenant shall register
this lease or any Transfer without the prior written consent of the
Landlord. If the Tenant or any permitted Transferee wishes to register
a document, then the Landlord shall at the request and expense of the
Tenant execute a notice lease in such form as approved by the Landlord
and without disclosure of any terms which the Landlord does not desire
to have disclosed. If the Lands comprise more than one parcel of land,
the Landlord may direct the Tenant or Transferee as to the parcel or
parcels against which registration may be effected.
11.7. NOTICE
Any notice, consent or other instrument which may be or is required to
be given under this lease shall be in writing and shall be delivered
in person or sent by registered mail postage prepaid addressed, if to
the Landlord, at 10 Carlson Court, Suite 500, Etobicoke, Ontario, M9W
6L2; and if to the Tenant, at the Premises. Any such notice or other
instrument shall be deemed to have been given and received on the day
upon which personal delivery is made or, if mailed, 3 business days
following the date of mailing. Either party may give notice to the
other of any change of address and, after the giving of such notice,
the address so specified shall be used for the giving of notices. If
postal service is interrupted or substantially delayed, all notices or
other instruments shall be delivered in person.
11.8. SUCCESSORS & ASSIGNS
The rights and liabilities created by this lease extend to and bind
the successors and assigns of the Landlord and the permitted
successors and assigns of the Tenant. No rights, however, shall enure
to the benefit of any Transferee unless the provisions of Article 7
are complied with.
11.9. JOINT AND SEVERAL LIABILITY
If there is at any time more than one Tenant or more than one Person
constituting the Tenant, their covenants shall be considered to be
joint and several and shall apply to each and every one of them. If
the Tenant is or becomes a partnership, each Person who is a member,
or shall become a member, of such partnership or its successors shall
be and continue to be jointly and severally liable for the performance
of all covenants of the Tenant pursuant to this lease, whether or not
such Person ceases to be a member of such partnership or its
successor.
11.10. CONSENT
Whenever in this lease the consent or approval of the Landlord is
required, such consent or approval will not be unreasonably withheld
or delayed unless specifically stated to the contrary.
11.11. SIGNS
The Tenant will not paint, fix, display, or cause to be painted, fixed
or displayed, any sign, picture, advertisement notice, lettering or
decoration on any part of the exterior or the interior of the
Premises, except with the written permission of the Landlord,
consistent with the Landlord's sign criteria. The
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<PAGE> 28
Tenant shall cause such sign to be installed: (i) in compliance with
all requirements of all governmental -authorities having jurisdiction
with respect thereto; (ii) at the sole cost of the Tenant; (iii) in a
good and workmanlike manner, and (iv) in accordance with plans and
specifications that comply with the Landlord's reasonable regulations.
The sign shall be maintained by the Tenant at its sole cost and
expense and the Tenant shall pay for any electricity consumed by such
sign.
At the expiration or earlier termination of the Term, the Tenant shall
remove any such signs or other advertising material, as aforesaid,
from the Premises at the Tenant's expense and shall promptly repair
all damage caused by any such installation or removal.
11.12. ACCORD AND SATISFACTION
No payment by the Tenant or receipt by the Landlord of a lesser amount
than the monthly Rent herein stipulated shall be deemed to be other
than on account of the earliest stipulated rent, nor shall any
endorsement or statement on any cheque or any letter accompanying any
cheque or payment as rent be deemed an accord and satisfaction, and
the Landlord may accept such cheque or payment without prejudice to
the Landlord's right to recover the balance of such rent or pursue any
other remedy provided for in this lease.
11.13. OCCUPANCY PERMIT
The Tenant shall, at its own cost, be responsible to apply to the City
in which the Lands are located for an Occupancy Permit, upon
possession of the Premises, if required by such City.
11.14. SCHEDULES
The parties agree that Schedules "A", "B", "C" annexed hereto form
part of this Lease and any provisions thereof shall be enforceable in
the same manner as the provisions of this Lease.
11.15. ENTIRE AGREEMENT
This lease and the schedules and riders, if any, attached set forth
the entire agreement between the Landlord and Tenant concerning the
Premises. There are no agreements or understandings between them other
than as set out in this lease. This lease and its schedules and
riders, if any, may not be modified except by agreement in writing
executed by the Landlord and Tenant.
IN WITNESS WHEREOF the Landlord and Tenant have signed this lease.
The Landlord:
2725312 CANADA INC.
Per:/s/ [Illegible]
-------------------------
(Authorized Signatory)
Per:/s/ [Illegible] c/s
-------------------------
(Authorized Signatory)
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<PAGE> 29
The Tenant:
NEW ENGLAND COMPUTER GRAPHICS INC.
Per:/s/ David L. Boston, President
-----------------------------------------------
(Authorized Signatory)
Per:
----------------------------------------------- c/s
(Authorized Signatory)
I/We have authority to bind the Corporation.
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<PAGE> 30
SCHEDULE "A"
LEGAL DESCRIPTION AND SITE PLAN
Legal Description:
ALL AND SINGULAR that certain tract of land and premises situate, lying and
being in the City of Mississauga, in the Regional Municipality of Peel and
being composed of the whole of Lot 1 according to a Plan registered in the Land
Registry Office for the Land Titles Division of Peel as Number 43M-720.
The Tenant acknowledges that the purpose of this Schedule is solely to show the
approximate location of the Premises and it is not intended to be a
representation or warranty as to the exact location thereof.
[Graphic depiction of 7490 Pacific Circle omitted]
<PAGE> 31
SCHEDULE "B"
RULES AND REGULATIONS
1. The Tenant shall not do or permit anything to be done in the Premises,
or bring or keep anything therein which will in any way increase the
risk of fire or the rate of fire insurance on the Premises or on
property kept therein, or obstruct- or interfere with the rights of
other tenants or in any way injure or annoy them, or violate or act at
variance with the laws relating to fires or with the regulations of
the Fire Department or any governmental authority, or with any
insurance upon the Premises, or violate or act in conflict with any
statutes, rules and ordinances governing health standards or with any
other statute or municipal bylaw.
2. No inflammable oils or other inflammable, dangerous or explosive
materials save those approved in writing by the Landlord's insurers
shall be kept or permitted to be kept in the Premises.
3. The Tenant shall not place or maintain any supplies, inventory,
equipment or other articles or things of any kind whatsoever anywhere
exterior to the Building and shall not use any portion of the Lands
for outside storage.
4. The Tenant shall not allow any accumulation of debris, garbage, trash
or refuse either in or outside of the Premises or Building or on the
Lands and all of same shall be kept in appropriate vermin-proof
containers until removed. All garbage, trash, rubbish and refuse shall
be removed by the Tenant at its expense on a regular basis. If the
Tenant uses perishable articles or generates wet garbage, the Tenant
shall provide refrigerated storage facilities suitable to the
Landlord.
5. The Tenant shall maintain the Premises free of insects, rodents,
vermin and other pests and shall, if required at any time by the
Landlord, take out and maintain at its expense an appropriate pest and
vermin control contract with respect to the Premises with a person or
corporation duly qualified to perform such services.
6. The Tenant shall not cause or permit: any waste or damage to the
Premises; any overloading of the floors or the utility, electrical or
mechanical facilities of the Building; any nuisance in the Premises;
or any use or manner of use causing a hazard.
7. Except for the proper use of blinds and drapes, the Tenant shall not
cover, obstruct or affix any object or material to any of the
skylights or windows of the Premises which will either reflect or
admit light into any part of the Building including, but without
limitation, the application of solar films.
8. The Tenant shall not use or permit the use of any objectionable
advertising medium such as, but without limitation, loudspeakers,
phonographs, public address systems, sound amplifiers, radio broadcast
or television apparatus on the Premises which is in any manner audible
or visible outside of the Building.
9. The Tenant shall not permit or allow any odours, vapour, steam, water,
vibrations, noises or other undesirable effects to emanate from the
Premises or any equipment or any installation in the Premises which in
the Landlord's opinion are objectionable or cause any interference
with the safety, comfort or convenience of the Building to the
Landlord or the occupants or tenants thereof or their agents,
servants, invitees or employees.
10. The Tenant shall not mount or place an antenna of any nature on the
exterior of the Building or on the Lands.
11. The Tenant shall not deface or mark any part of the Building and shall
not make unreasonable use of nails, spikes, hooks or screws in the
walls, floors, ceilings or woodwork of any part of the Building or
bore, drill or cut into the walls, floors, ceilings or woodwork of any
part of the Building in any manner.
<PAGE> 32
12. If the Tenant requires telegraphic or telephonic connections the
Landlord, in its discretion, may direct the electricians as to where
and how wires are to be introduced into the Building. No gas pipes or
electric wiring will be permitted which has not been ordered or
authorized by the Landlord.
13. The water closets and other apparatus shall not be used for any
purpose other than those for which they were intended and no
sweepings, rubbish, rags, ashes or other substances shall be thrown
into them. Any damage resulting from misuse shall be borne by the
Tenant.
14. No-one shall use the Premises for sleeping apartments or residential
purposes or for the storage of personal effects or articles other than
those required for business purposes.
15. No cooking or heating of foods or liquids (other than the heating of
water or coffee in coffee makers or kettles or the heating of food in
a microwave oven) shall be permitted in the Premises without the
written consent of the Landlord.
16. No animals or birds shall be brought into any part of the Building
without the consent of the Landlord.
17. When required by any governmental authority having jurisdiction the
Tenant will provide facilities or accommodation for garbage and waste
and its disposal and pick up in accordance with such requirements.
18. The Tenant shall have the right to use designated portions of the
parking areas on the Lands for the parking of passenger vehicles. Such
parking areas shall be used only for the parking of passenger vehicles
and no part of the parking areas, driveway, shipping areas or other
parts of the Lands except as designated by the Landlord, shall be used
for the storage, repair and washing of trucks, trailers, vans or
similar vehicles. The Landlord shall have no obligation to supervise
police and control the use of the parking areas. The Tenant shall not
park any vehicle or permit any vehicle to be parked overnight at the
Premises unless the occupant of the vehicle is working in the Premises
overnight.
19. All tenants must observe strict care not to allow their windows or
doors to remain open so as to admit rain or snow or so as to interfere
with the heating of the Building. Any injury or damage caused to the
Building or its appointments, furnishing heating and other appliances
or to any other tenant by reason of windows or doors being left open
so as to admit rain or snow or by interferences with or neglect of the
heating appliances or by reason of the tenant or other person or
servant, subject to it, shall be made good by the tenant in whose
premises the neglect, interference or misconduct occurred.
<PAGE> 33
SCHEDULE "C"
SPECIAL PROVISIONS
OPTION TO EXTEND
Provided the Tenant has not been in default and is not then in default under
the terms of the lease; New England Computer Graphics Inc. is itself in
occupation of the whole of the Premises; the Tenant has provided written notice
to the Landlord no earlier than 12 months and no later than 5 months prior to
the expiry of the initial Term of its intention to exercise the within option
to extend, then the Tenant shall have a one time only option to extend the
initial Term of the lease for a further period of three (3) years, such
extension to begin upon the expiration of the initial Term and the lease and
all of its terms shall continue in force during such extension except that:
(a) the Tenant shall not be entitled to any further rent-free
period, Landlord's work, or financial inducement;
(b) the Tenant shall not have any further option to extend the Term
following the exercise, if any of the foregoing option to
extend; and
during the extension, the Tenant shall pay a net rent to be agreed upon by the
Landlord and the Tenant prior to the commencement of such extension, based on
the fair market rental rate for comparable premises, calculated in a comparable
manner on a comparable net lease basis for comparable buildings in the vicinity
of the Building. In the event that such rental rate has not been agreed upon by
the parties 3 months prior to the commencement of the extension then the net
rental rate shall be determined by arbitration under the Arbitration Act, 1991
of Ontario, as amended or replaced but, in any event, such net rental rate
shall not be less than the Net Rent payable by the Tenant during the last month
of the initial Term.
Failing written notification to the Landlord in accordance with paragraph 1
above, the foregoing option to extend shall be null and void.
The Landlord may require the Tenant to execute a lease amending agreement or,
at its option, its then standard net industrial lease in effect for the
Building, in order to confirm the terms of the foregoing option to extend.
LANDLORD'S WORK
The Landlord agrees to perform the following work in the Premises:
1. Existing carpet to be steamcleaned.
2. Wall coverings to be spotcleaned where necessary.
3. Any damaged ceiling tiles, missing light lenses and burnt-out lights to
be replaced.
4. Missing or damaged window coverings to be replaced.
NET RENT FREE PERIOD
Notwithstanding anything contained in this Lease to the contrary, the Tenant
shall not be responsible for the payment of Net Rent from August 1, 1997 to
September 30, 1997. For clarity, the Tenant shall be responsible for payment of
Additional Rent during this period. The Net Rent otherwise payable during this
period shall become immediately due and payable upon termination of the lease
pursuant to the terms of Article 9 - Default - of the lease.
<PAGE> 34
CONDITIONAL UPON VACANT POSSESSION
This Lease is conditional upon the Landlord obtaining vacant possession of the
Premises on or before 11:59 p.m., July 31, 1997, failing which, this Lease
shall become null and void and the Landlord shall return all deposit monies to
the Tenant without interest or penalty.
<PAGE> 1
EXHIBIT 10.30
ESCROW AGREEMENT
This Escrow Agreement (this "Agreement") is entered into as of May 1,
1998, by and among TEKGRAF, INC., a Delaware corporation (the "Purchaser"),
TEKGRAF SUB II, INC., a Georgia corporation ("Acquisition Sub"), MARTEC, INC., a
California corporation (the "Company"), Mark Lewis (the "Company Shareholder"),
and First Union National Bank, a national banking association (the "Escrow
Agent").
WHEREAS, the Purchaser and the Company have entered into an Agreement
and Plan of Merger (the "Merger Agreement") by and among the Company, the
Company Shareholder, Acquisition Sub and the Purchaser.
WHEREAS, the Merger Agreement provides that escrow accounts will be
established to secure the Company Shareholder's guaranty with respect to the
Warranted Pre-Tax Profit and the Warranted Tangible Net Asset Value of the
Company (each as defined in the Merger Agreement) on the terms and conditions
set forth herein.
WHEREAS, the parties hereto desire to establish the terms and
conditions pursuant to which such escrow accounts will be established and
maintained.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and not
otherwise defined shall have the meanings given them in the Merger Agreement.
2. Consent of Company Shareholder. By virtue of the Company
Shareholder's approval of the Merger Agreement, the Company Shareholder has
consented to: (a) the establishment of this escrow to secure the Company
Shareholder's guaranty with respect to the Warranted Pre-Tax Profit and the
Warranted Tangible Net Asset Value of the Company in the manner set forth herein
and in the Merger Agreement, and (b) all of the other terms, conditions and
limitations in this Agreement and the Merger Agreement.
3. Escrow and Warranty.
(a) Escrow of Cash. On the Closing Date, the Purchaser shall
deposit with the Escrow Agent $150,000 of the Cash Consideration. The Escrowed
Cash shall be held as a trust fund and shall not be subject to any lien,
attachment, trustee process or any other judicial process of any creditor of any
party hereto. The Escrow Agent agrees to accept delivery of the Escrowed Cash
and to hold the Escrowed Cash in an interest-bearing escrow account (the "Cash
Escrow Account"), subject to the terms and conditions of this Agreement.
(b) Escrow of Shares. On the Closing Date, the Purchaser shall
deposit with the Escrow Agent a certificate for 60,000 Purchaser Shares, issued
in the name of the Escrow Agent or its nominee as escrow agent. The Escrowed
Shares shall be held as a trust fund and shall not be subject to any lien,
attachment, trustee process or any other judicial process of any creditor of any
party hereto. The Escrow Agent agrees to accept delivery of the Escrowed Shares
and to hold the Escrowed Shares in an escrow account (the "Share Escrow
Account"), subject to the terms and conditions of this Agreement.
(c) Warranty. The Company Shareholder has agreed in Article I of
the Merger Agreement that the Warranted Pre-Tax Profit and the Warranted
Tangible Net Asset Value of the Company shall not be less than the amounts set
forth in Section 1.3(a) of the Merger Agreement. The Escrowed Shares shall be
security for such warranty obligation of the Company Shareholder, subject to the
limitations, and in the manner provided, in this Agreement.
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<PAGE> 2
(d) Dividends, Etc. Any securities distributable to the Company
Shareholder in respect of or in exchange for any of the Escrowed Shares, whether
by way of stock dividends, stock splits or otherwise, shall be delivered to the
Escrow Agent, who shall hold such securities in the Share Escrow Account. Such
securities shall be issued in the name of the Escrow Agent or its nominee, as
escrow agent, and shall be considered Escrowed Shares for purposes hereof. Any
cash dividends distributable to the Company Shareholder in respect of the
Escrowed Shares shall be distributed to the Company Shareholder.
(e) Voting of Shares. The Company Shareholder shall have the
right, in his sole discretion, to direct the Escrow Agent in writing as to the
exercise of any voting rights pertaining to the Escrowed Shares, and the Escrow
Agent shall comply with any such written instructions. In the absence of such
instructions, the Escrow Agent shall not vote any of the Escrowed Shares.
(f) Transferability. The interest of the Company Shareholder in
the Escrowed Shares shall not be assignable or transferable, other than by
operation of law. Notice of any such assignment or transfer by operation of law
shall be given to the Escrow Agent and the Purchaser, and no such assignment or
transfer shall be valid until such notice is given.
(g) Transfer of Shares Upon Waiver of Warranty. In the event the
Purchaser elects, pursuant to the provisions of Section 1.3(h) of the Merger
Agreement, to waive the Profit Shortfall Adjustment and the Profit Surplus
Adjustment, the Escrowed Shares shall be transferred, upon receipt of notice by
Escrow Agent from Purchaser of such waiver, into the escrow account created
pursuant to that certain Pledge, Security and Escrow Agreement dated as of even
date herewith, to be treated in all respects as escrow shares thereunder and the
Escrowed Shares in such case shall be distributed to the Company Shareholder
pursuant to the terms thereof.
4. Administration of Cash Escrow Account. The Escrow Agent shall
administer the Cash Escrow Account as follows:
(a) In the event that there is a Net Asset Value Shortfall
(including any Collection Shortfall or Inventory Shortfall that remains unpaid
ten (10) days after demand for payment thereof by Purchaser or Acquisition Sub
to the Company Shareholder), the Purchase Price shall be reduced by the amount
of such Net Asset Value Shortfall. Purchaser or Acquisition Sub shall provide to
the Escrow Agent and the Company Shareholder written notice of the amount of
such Net Asset Value Shortfall, and such amount, including any interest accrued
thereon (or such lesser amount as is then held in the Cash Escrow Account),
shall be paid to Purchaser by Escrow Agent within three (3) business days after
receipt of such notice.
(b) Any cash remaining in the Cash Escrow Account after payment of
the Net Asset Value Shortfall amount as set forth in subsection (a) above, shall
be distributed to the Company Shareholder pursuant to Section 6(a) hereof.
(c) In the event that the Net Asset Value Shortfall exceeds the
amount of Escrowed Cash available, Purchaser's recovery of cash pursuant to
Section 1.3 of the Merger Agreement shall not be limited to the amount of
Escrowed Cash available.
5. Administration of Share Escrow Account. The Escrow Agent shall
administer the Share Escrow Account as follows:
(a) In the event that the Warranted Pre-Tax Profit exceeds the
Actual Pre-Tax Profit for the Year (or the Alternative Year, if applicable), the
Purchase Price shall be reduced by the number of Purchaser Shares equal to the
Profit Shortfall Adjustment, subject to the Adjustment Floor. In such event,
Purchaser or Acquisition Sub and the Company Shareholder shall provide written
notice to the Escrow Agent of the amount of the Profit Shortfall Adjustment, and
the Escrow Agent shall transfer, deliver and assign to Purchaser such number of
Escrowed Shares held in the Share Escrow Account which have a Fair Market Value
equal to the Profit Shortfall Adjustment (or such lesser number of Purchaser
Shares as is then held in the Share Escrow Account). The Fair Market Value of
the Escrowed Shares to be distributed shall be determined in accordance with
Section 7 hereof.
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<PAGE> 3
(b) On the first anniversary of the Closing Date (or if the
Alternative Year is elected, at the end of the Alternative Year), the Escrow
Agent shall distribute to the Company Shareholder, in accordance with Sections
6(a) and (b) below, one half of the Escrowed Shares remaining in the Share
Escrow Account not required for redistribution pursuant to Section 5(a) hereof.
Any Escrowed Shares remaining in the Share Escrow Account after payment of the
Profit Shortfall Adjustment amount as set forth in subsection (a) above, shall
be distributed to the Company Shareholder pursuant to Sections 6(a) and (b)
hereof.
(c) In the event that the Profit Shortfall Adjustment exceeds the
number of Escrowed Shares available, Purchaser's recovery of Purchaser Shares
pursuant to Section 1.3 of the Merger Agreement shall not be limited to the
amount of Escrowed Share available.
6. Release of Escrowed Cash and Escrowed Shares.
(a) Any distribution of all or a portion of the Escrowed Cash or
the Escrowed Shares to the Company Shareholder shall be made in accordance with
the percentages set forth opposite such holders' respective names on Exhibit B
attached hereto. Distributions of Escrowed Shares to the Company Shareholder
shall be made by mailing stock certificates to the Company Shareholder at his
addresses shown on Exhibit B (or such other address as may be provided in
writing to the Escrow Agent by any such holder).
(b) No fractional Escrowed Shares shall be distributed to
Purchaser or Company Shareholder pursuant to this Agreement. Instead, the number
of shares that Purchaser or Company Shareholder shall receive shall be rounded
down to the nearest whole number; and the Escrow Agent shall sell such number of
Escrowed Shares as is equal to the aggregate of the fractional shares that would
otherwise be distributed to the Purchaser or the Company Shareholder, as the
case may be, and shall distribute the proceeds of such sale to the Purchaser or
the Company Shareholder otherwise entitled to a fractional Escrowed Share based
upon the fraction of an Escrowed Share to which Purchaser or the Company
Shareholder is otherwise entitled, as the case may be.
7. Valuation of Escrowed Shares. For purposes of this Agreement, the
Fair Market Value of the Escrowed Shares to be released from the Share Escrow
Account after a final determination of the Profit Shortfall Adjustment shall be
determined based upon the average closing prices of the Purchaser's Common Stock
on the Nasdaq National Market System for the twenty trading days immediately
preceding the date of such final determination.
8. Investment of Funds. Escrow Agent shall invest and reinvest the
funds held in the Cash Escrow Account as the Company Shareholder and the
Purchaser jointly shall direct (subject to applicable minimum investment
requirements) by the furnishing of a joint written direction; provided, however,
that no investment or reinvestment may be made except in the following:
(a) direct obligations of the United States of America or
obligations the principal of and the interest on which are unconditionally
guaranteed by the United States of America;
(b) certificates of deposit issued by any bank, bank and trust
company, or national banking association (including Escrow Agent and its
affiliates), which certificates of deposit are insured by the Federal Deposit
Insurance Corporation or a similar governmental agency;
(c) repurchase agreements with any bank, trust company, or
national banking association (including Escrow Agent and its affiliates); or
(d) any money market fund substantially all of which is invested
in the foregoing investment categories, including any money market fund managed
by Escrow Agent and any of its affiliates.
If Escrow Agent has not received a joint written direction at any time
that an investment decision must be made, Escrow Agent shall invest the Cash
Escrow Account, or such portion thereof as to which no joint written
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<PAGE> 4
direction has been received, in investments described in clause (d) above. Each
of the foregoing investments shall be made in the name of Escrow Agent. No
investment shall be made in any instrument or security that has a maturity of
greater than six (6) months. Notwithstanding anything to the contrary contained
herein, Escrow Agent may, without notice to the Purchaser or the Company
Shareholder, sell or liquidate any of the foregoing investments at any time if
the proceeds thereof are required for any release of funds permitted or required
hereunder, and Escrow Agent shall not be liable or responsible for any loss,
cost or penalty resulting from any such sale or liquidation. With respect to any
funds received by Escrow Agent for deposit into the Cash Escrow Account or any
joint written direction received by Escrow Agent with respect to investment of
any funds in the Cash Escrow Account after ten o'clock, a.m., Atlanta, Georgia,
time, Escrow Agent shall not be required to invest such funds or to effect such
investment instruction until the next day upon which banks in Atlanta, Georgia
are open for business.
9. Amounts Payable by Company Shareholder. The amounts payable by the
Company Shareholder under this Agreement (i.e., the fees and expenses of
arbitrators payable pursuant to Section 17, the fees of the Escrow Agent payable
pursuant to Section 15 and the indemnification obligations pursuant to Section
14 shall be payable solely as follows. The Company Shareholder shall notify the
Escrow Agent of any such amount payable by the Company Shareholder as soon as
they become aware that any such amount is payable, with a copy of such notice to
the Purchaser or the Company Shareholder, as the case may be. On the sixth
business day after the delivery of such notice, the Escrow Agent shall sell such
number of Escrowed Shares (up to the number of Escrowed Shares then available in
the Escrow Account), subject to compliance with all applicable securities laws,
as is necessary to raise such amount, and shall disburse such proceeds to the
party to whom such amount is owed in accordance with the instructions of the
Company Shareholder; provided that if the Purchaser delivers to the Escrow Agent
(with a copy to the Company Shareholder), within five business days after
delivery of such notice by the Company Shareholder, a written notice contesting
the legitimacy or reasonableness of such amount, then the Escrow Agent shall not
sell Escrowed Shares to raise the disputed portion of such claimed amount, and
such dispute shall be resolved by the Purchaser and the Company Shareholder in
accordance with the procedures set forth in Section 17.
10. Termination. This Agreement shall terminate upon the distribution
by the Escrow Agent of all of the Escrowed Cash and all of the Escrowed Shares
in accordance with this Agreement; provided that the provisions of Sections 13,
14 and 15 shall survive such termination.
11. Notices. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested, postage prepaid, or (ii) via a reputable
nationwide overnight courier service, in each case to the address set forth
below. Any such notice, instruction or communication shall be deemed to have
been delivered two business days after it is sent by registered or certified
mail, return receipt requested, postage prepaid, or one business day after it is
sent via a reputable nationwide overnight courier service.
If to the Purchaser and/or the Acquisition Sub:
Tekgraf, Inc.
6000 Lake Forrest Drive
Suite 110
Atlanta, Georgia 30328
If to the Company:
Martec, Inc.
370 Amapola Avenue, Suite 212
Torrance, California 90501
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<PAGE> 5
If to the Company Shareholder:
Mark Lewis
370 Amapola Avenue, Suite 212
Torrance, California 90501
If to the Escrow Agent:
First Union National Bank
Attn: Corporate Trust - GA9094
999 Peachtree Street, NE, Suite 1100
Atlanta, Georgia 30309-9094
Attn: Ms. Teresa L. Davis
Any party may give any notice, instruction or communication in
connection with this Agreement using any other means (including personal
delivery, telecopy or ordinary mail), but no such notice, instruction or
communication shall be deemed to have been delivered unless and until it is
actually received by the party to whom it was sent. Any party may change the
address to which notices, instructions or communications are to be delivered by
giving the other parties to this Agreement notice thereof in the manner set
forth in this Section 11.
12. Resignation and Removal of Escrow Agent. Escrow Agent may resign
from the performance of its duties hereunder at any time by giving ten (10)
days' prior written notice to the Purchaser and the Company Shareholder or may
be removed, with or without cause, by the Purchaser and the Company Shareholder,
acting jointly by furnishing a joint written direction to Escrow Agent, at any
time by the giving of ten (10) days' prior written notice to Escrow Agent. Such
resignation or removal shall take effect upon the appointment of a successor
Escrow Agent as provided hereinbelow. Upon any such notice of resignation or
removal, the Purchaser and the Company Shareholder jointly shall appoint a
successor Escrow Agent hereunder, which shall be a commercial bank, trust
company or other financial institution with a combined capital and surplus in
excess of $5,000,000. Upon the acceptance in writing of any appointment as
Escrow Agent hereunder by a successor Escrow Agent, such successor Escrow Agent
shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Escrow Agent, and the retiring Escrow
Agent shall be discharged from its duties and obligations under this Escrow
Agreement, but shall not be discharged from any liability for actions taken as
Escrow Agent hereunder prior to such succession. After any retiring Escrow
Agent's resignation or removal, the provisions of this Escrow Agreement shall
inure to its benefit as to any actions taken or omitted to be taken by it while
it was Escrow Agent under this Escrow Agreement. The retiring Escrow Agent shall
transmit all records pertaining to the Escrowed Cash and the Escrowed Shares and
shall pay all funds and deliver all shares held by it in the Cash Escrow Account
and the Share Escrow Account to the successor Escrow Agent, after making copies
of such records as the retiring Escrow Agent deems advisable and after deduction
and payment to the retiring Escrow Agent of all fees and expenses (including
court costs and attorneys' fees) payable to, incurred by, or expected to be
incurred by the retiring Escrow Agent in connection with the performance of its
duties and the exercise of its rights hereunder.
13. Liability of Escrow Agent.
(a) Escrow Agent shall have no liability or obligation with
respect to the Escrowed Cash or the Escrowed Shares except for Escrow Agent's
willful misconduct or gross negligence. Escrow Agent's sole responsibility shall
be for the safekeeping, investment, and disbursement of the Escrowed Cash or the
Escrowed Shares in accordance with the terms of this Escrow Agreement. Escrow
Agent shall have no implied duties or obligations and shall not be charged with
knowledge or notice of any fact or circumstance not specifically set forth
herein. Escrow Agent may rely upon any instrument, not only as to its due
execution, validity and effectiveness, but also as to the truth and accuracy of
any information contained therein, which Escrow Agent shall in good faith
believe to be genuine, to have been signed or presented by the person or parties
purporting to sign the same and to conform to the provisions of this Escrow
Agreement. In no event shall Escrow Agent be liable for incidental, indirect,
special, consequential or punitive damages. Escrow Agent shall not be obligated
to take any legal action or commence any proceeding in connection with the
Escrowed Cash or the Escrowed Shares, any account in which
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<PAGE> 6
Escrowed Cash or the Escrowed Shares are deposited, this Escrow Agreement or the
Merger Agreement, or to appear in, prosecute or defend any such legal action or
proceeding. Escrow Agent may consult legal counsel selected by it in the event
of any dispute or question as to the construction of any of the provisions
hereof or of any other agreement or of its duties hereunder, or relating to any
dispute involving any party hereto, and shall incur no liability and shall be
fully indemnified from any liability whatsoever in acting in accordance with the
opinion or instruction of such counsel. Purchaser and the Company Shareholder,
jointly and severally, shall each promptly pay, upon demand, one-half of the
reasonable fees and expenses of any such counsel.
(b) The Escrow Agent is authorized, in its sole discretion, to
comply with orders issued or process entered by any court with respect to the
Escrowed Cash or the Escrowed Shares, without determination by the Escrow Agent
of such court's jurisdiction in the matter. If any portion of the Escrowed Cash
or the Escrowed Shares is at any time attached, garnished or levied upon under
any court order, or in case the payment, assignment, transfer, conveyance or
delivery of any such property shall be stayed or enjoined by any court order, or
in case any order, judgment or decree shall be made or entered by any court
affecting such property or any part thereof, then and in any such event, the
Escrow Agent is authorized, in its sole discretion, to rely upon and comply with
any such order, writ, judgment or decree which it is advised by legal counsel
selected by it is binding upon it without the need for appeal or other action;
and if the Escrow Agent complies with any such order, writ, judgment or decree,
it shall not be liable to any of the parties hereto or to any other person or
entity by reason of such compliance even though such order, writ, judgment or
decree may be subsequently reversed, modified, annulled, set aside or vacated.
14. Indemnification of Escrow Agent. From and at all times after the
date of this Escrow Agreement, Purchaser and the Company Shareholder, jointly
and severally, shall, to the fullest extent permitted by law and to the extent
provided herein, indemnify and hold harmless Escrow Agent and each director,
officer, employee, attorney, agent and affiliate of Escrow Agent (collectively,
the "Indemnified Parties") against any and all actions, claims (whether or not
valid), losses, damages, liabilities, costs and expenses of any kind or nature
whatsoever (including without limitation reasonable attorneys' fees, costs and
expenses) incurred by or asserted against any of the Indemnified Parties from
and after the date hereof, whether direct, indirect or consequential, as a
result of or arising from or in any way relating to any claim, demand, suit,
action or proceeding (including any inquiry or investigation) by any person,
including, without limitation, Purchaser and the Company Shareholder, whether
threatened or initiated, asserting a claim for any legal or equitable remedy
against any person under any statute or regulation, including, but not limited
to, any federal or state securities laws, or under any common law or equitable
cause or otherwise, arising from or in connection with the negotiation,
preparation, execution, performance or failure of performance of this Escrow
Agreement or any transactions contemplated herein, whether or not any such
Indemnified Party is a party to any such action, proceeding, suit or the target
of any such inquiry or investigation; provided, however, that no Indemnified
Party shall have the right to be indemnified hereunder for any liability finally
determined by a court of competent jurisdiction, subject to no further appeal,
to have resulted solely from the gross negligence or willful misconduct of such
Indemnified Party. If any such action or claim shall be brought or asserted
against any Indemnified Party, such Indemnified Party shall promptly notify
Purchaser and the Company Shareholder in writing, and Purchaser and the Company
Shareholder shall assume the defense thereof, including the employment of
counsel and the payment of all expenses. Such Indemnified Party shall, in its
sole discretion, have the right to employ separate counsel (who may be selected
by such Indemnified Party in its sole discretion) in any such action and to
participate in the defense thereof, and the fees and expenses of such counsel
shall be paid by such Indemnified Party, except that Purchaser and/or the
Company Shareholder shall be required to pay such fees and expenses if (a)
Purchaser and/or the Company Shareholder agree to pay such fees and expenses, or
(b) Purchaser and/or the Company Shareholder shall fail to assume the defense of
such action or proceeding or shall fail, in the sole discretion of such
Indemnified Party, to employ counsel satisfactory to the Indemnified Party in
any such action or proceeding, (c) Purchaser or the Company Shareholder is the
plaintiff in any such action or proceeding or (d) the named or potential parties
to any such action or proceeding (including any potentially impleaded parties)
include both Indemnified Party and the Company Shareholder and/or Purchaser, and
Indemnified Party shall have been advised by counsel that there may be one or
more legal defenses available to it which are different from or additional to
those available to the Company Shareholder or Purchaser. Purchaser and the
Company Shareholder shall be jointly and severally liable to pay fees and
expenses of counsel pursuant to the preceding sentence, except that any
obligation to pay under clause (a) shall apply only to the party so agreeing.
All such fees and expenses payable by the Company Shareholder and/or Purchaser
pursuant to the foregoing sentence shall be paid from time to
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<PAGE> 7
time as incurred, both in advance of and after the final disposition of such
action or claim. All of the foregoing losses, damages, costs and expenses of the
Indemnified Parties shall be payable by Purchaser and the Company Shareholder,
jointly and severally, upon demand by such Indemnified Party. The obligations of
Purchaser and the Company Shareholder under this Section 14 shall survive any
termination of this Escrow Agreement, and the resignation or removal of Escrow
Agent shall be independent of any obligation of the Escrow Agent.
The parties agree that neither the payment by Purchaser or the
Company Shareholder of any claim by Escrow Agent for indemnification hereunder
nor the disbursement of any amounts to Escrow Agent from the Cash Escrow Account
or the Share Escrow Account in respect of a claim by Escrow Agent for
indemnification shall impair, limit, modify, or affect, as between Purchaser and
the Company Shareholder, the respective rights and obligations of Purchaser, on
the one hand, and the Company Shareholder, on the other hand, under the Merger
Agreement.
15. Fees and Expenses of Escrow Agent. Purchaser and the Company
Shareholder shall compensate Escrow Agent for its services hereunder and, in
addition, shall reimburse Escrow Agent for all of its reasonable out-of-pocket
expenses, including attorneys' fees, travel expenses, telephone and facsimile
transmission costs, postage (including express mail and overnight delivery
charges), copying charges and the like. All of the compensation and
reimbursement obligations set forth in this Section 15 shall be payable one-half
each by Purchaser and the Company Shareholder, jointly and severally, upon
demand by Escrow Agent. The obligations of Purchaser and the Company Shareholder
under this Section 15 shall survive any termination of this Escrow Agreement and
the resignation or removal of Escrow Agent.
16. General.
(a) Governing Law, Assigns. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of Georgia
without regard to conflict-of-law principles and shall be binding upon, and
inure to the benefit of, the parties hereto and their respective successors and
assigns.
(b) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(c) Entire Agreement. Except for those provisions of the Merger
Agreement referenced herein, this Agreement constitutes the entire understanding
and agreement of the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements or understandings, written or
oral, between the parties with respect to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of
any breach of any provision of this Escrow Agreement shall be effective unless
in writing. No waiver by any party of any such condition or breach, in any one
instance, shall be deemed to be a further or continuing waiver of any such
condition or breach or a waiver of any other condition or breach of any other
provision contained herein.
(e) Amendment. This Agreement may be amended only with the written
consent of the Purchaser, the Escrow Agent and the Company Shareholder.
17. Arbitration; Attorneys' Fees.
(a) The parties agree to use reasonable efforts to resolve any
dispute arising out of this Agreement, but should a dispute remain unresolved
ten (10) days following notice of the dispute to the other party (but in no
event prior to said ten (10) days, except as specifically provided otherwise
herein), such dispute shall be finally settled by binding arbitration in
Atlanta, Georgia in accordance with the then current Commercial Arbitration
Rules of the American Arbitration Association (the "AAA") or such other
mediation or arbitration service as shall be mutually agreeable to the parties,
and judgment upon the award rendered by the arbitrator shall be final and
binding on the parties and may be entered in any court having jurisdiction
thereof; provided,
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<PAGE> 8
however, that any party shall be entitled to appeal a question of law or
determination of law to a court of competent jurisdiction; and provided,
further, however, that the parties may first seek appropriate injunctive relief
prior to, and/or in addition to pursuing negotiation or arbitration. Such
arbitration shall be conducted by an arbitrator chosen by mutual agreement of
the parties, or failing such agreement, an arbitrator appointed by the AAA.
There shall be limited discovery prior to the arbitration hearing as follows:
(a) exchange of witness lists and copies of documentary evidence and documents
related to or arising out of the issues to be arbitrated, (b) depositions of all
party witnesses, and (c) such other depositions as may be allowed by the
arbitrator upon a showing of good cause. Depositions shall be conducted in
accordance with the Georgia Code of Civil Procedure and questions of evidence in
all hearings shall be resolved in accordance with the Federal Rules of Evidence.
The arbitrator shall be required to provide in writing to the parties the basis
for the award or order of such arbitrator, and a court reporter shall record all
hearings (unless otherwise agreed to by the parties), with such record
constituting the official transcript of such proceedings.
(b) In the event of arbitration or litigation filed or instituted
between the parties with respect to this Agreement, the prevailing party will be
entitled to receive from the other party all costs, damages and expenses,
including reasonable attorney's fees, incurred by the prevailing party in
connection with that action or proceeding whether or not the controversy is
reduced to judgment or award. The prevailing party will be that party who may be
fairly said by the arbitrator(s) or the court to have prevailed on the major
disputed issues.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
PURCHASER:
TEKGRAF, INC.
By: /s/ Dan I. Bailey
-----------------------------------
Dan I. Bailey, President
ACQUISITION SUB:
TEKGRAF SUB II, INC.
By: /s/ Philip Aginsky
-----------------------------------
Phillip Aginsky, Chairman
ESCROW AGENT:
FIRST UNION NATIONAL BANK
By: /s/ Teresa L. Davis
-----------------------------------
Name: Teresa L. Davis
Title: Vice President
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<PAGE> 9
COMPANY:
MARTEC, INC.
By: /s/ Mark Lewis
---------------------------------
Mark Lewis, President
COMPANY SHAREHOLDER:
/s/ Mark Lewis (SEAL)
------------------------------
Mark Lewis
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<PAGE> 10
EXHIBIT B
---------
<TABLE>
<CAPTION>
Company Shareholder Percentage
- ------------------- ----------
<S> <C>
Mark Lewis 100%
370 Amapola Avenue
Suite 212
Torrance, CA 90501
</TABLE>
10
<PAGE> 1
EXHIBIT 10.31
PLEDGE, SECURITY AND ESCROW AGREEMENT
This Pledge, Security and Escrow Agreement (this "Agreement") is
entered into as of May 1, 1998, by and among TEKGRAF, INC., a Delaware
corporation (the "Purchaser"), TEKGRAF SUB II, INC., a Georgia corporation
("Acquisition Sub"), MARTEC, INC., a California corporation (the "Company"),
Mark Lewis (the "Company Shareholder"), and First Union National Bank, a
national banking association (the "Escrow Agent").
WHEREAS, the Purchaser and the Company have entered into an Agreement
and Plan of Merger (the "Merger Agreement") by and among the Company, the
Company Shareholder, Acquisition Sub and the Purchaser.
WHEREAS, the Merger Agreement provides that an escrow account will be
established to secure the Company's and the Company Shareholder's
indemnification obligations to the Indemnified Parties under the Merger
Agreement on the terms and conditions set forth herein.
WHEREAS, the parties hereto desire to establish the terms and
conditions pursuant to which such escrow account will be established and
maintained.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and
not otherwise defined shall have the meanings given them in the Merger
Agreement.
2. Consent of Company Shareholder. By virtue of the Company
Shareholder's approval of the Merger Agreement, the Company Shareholder has
consented to: (a) the establishment of this escrow to secure the Company
Shareholder's indemnification obligations under Article V of the Merger
Agreement in the manner set forth herein and therein, and (b) all of the other
terms, conditions and limitations in this Agreement and the Merger Agreement.
3. Escrow and Indemnification.
(a) Escrow of Shares. On the Closing Date, the Purchaser shall
deposit with the Escrow Agent a certificate for 60,000 Purchaser Shares (the
"Escrow Shares"), issued in the name of the Escrow Agent or its nominee, as
escrow agent. In addition, in the event the Purchaser elects, pursuant to the
provisions of Section 1.3(h) of the Merger Agreement, to waive the Profit
Shortfall Adjustment and the Profit Surplus Adjustment, the shares of Purchaser
common stock held in the escrow account established by Section 1.3(e) of the
Merger Agreement shall be transferred into the escrow account created pursuant
to this Escrow Agreement (the "Transferred Shares"), to be treated in all
respects as Escrow Shares hereunder and the Transferred Shares shall be
distributed to the Company Shareholder pursuant to Section 5(a) hereof. The
Escrow Shares shall be held as a trust fund and shall not be subject to any
lien, attachment, trustee process or any other judicial process of any creditor
of any party hereto. The Escrow Agent agrees to accept delivery of the Escrow
Shares and to hold the Escrow Shares in an escrow account (the "Escrow
Account"), subject to the terms and conditions of this Agreement.
(b) Indemnification. The Company Shareholder has agreed in Article
V of the Merger Agreement to indemnify and hold harmless the Indemnified Parties
from and against specified Damages. The Escrow Shares shall be security for such
indemnity obligation of the Company Shareholder, subject to the limitations, and
in the manner provided, in this Agreement.
(c) Dividends, Etc. Any securities distributable to the Company
Shareholder in respect of or in exchange for any of the Escrow Shares, whether
by way of stock dividends, stock splits or otherwise, shall be
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<PAGE> 2
delivered to the Escrow Agent, who shall hold such securities in the Escrow
Account. Such securities shall be issued in the name of the Escrow Agent or its
nominee, as escrow agent, and shall be considered Escrow Shares for purposes
hereof. Any cash dividends distributable to the Company Shareholder in respect
of the Escrow Shares shall be distributed to the Company Shareholder.
(d) Voting of Shares. The Company Shareholder shall have the
right, in his sole discretion, to direct the Escrow Agent in writing as to the
exercise of any voting rights pertaining to the Escrow Shares, and the Escrow
Agent shall comply with any such written instructions. In the absence of such
instructions, the Escrow Agent shall not vote any of the Escrow Shares.
(e) Transferability. The interest of the Company Shareholder in
the Escrow Shares shall not be assignable or transferable, other than by
operation of law. Notice of any such assignment or transfer by operation of law
shall be given to the Escrow Agent and the Purchaser, and no such assignment or
transfer shall be valid until such notice is given.
4. Administration of Escrow Account. The Escrow Agent shall
administer the Escrow Account as follows:
(a) If an Indemnified Party has incurred or suffered Damages for
which it is entitled to indemnification under Article V of the Merger Agreement,
the Indemnified Party shall, on or before the date of the expiration of the
representation, warranty, covenant or agreement to which such claim relates,
give written notice of such claim (a "Claim Notice") to the Company Shareholder
and the Escrow Agent. Each Claim Notice shall state the amount of claimed
Damages (the "Claimed Amount") and the basis for such claim.
(b) Within 20 days after delivery of a Claim Notice, the Company
Shareholder shall provide to the Indemnified Party, with a copy to the Escrow
Agent, a written response (the "Response Notice") in which the Company
Shareholder shall: (i) agree that Escrow Shares having a Fair Market Value (as
computed pursuant to Section 6) equal to the full Claimed Amount may be released
from the Escrow Account to the Indemnified Party, (ii) agree that Escrow Shares
having a Fair Market Value equal to part, but not all, of the Claimed Amount
(the "Agreed Amount") may be released from the Escrow Account to the Indemnified
Party or (iii) contest that any of the Escrow Shares may be released from the
Escrow Account to the Indemnified Party. The Company Shareholder may contest the
release of Escrow Shares having a Fair Market Value equal to all or a portion of
the Claimed Amount only based upon a good faith belief that all or such portion
of the Claimed Amount does not constitute Damages for which the Indemnified
Party is entitled to indemnification under Article V of the Merger Agreement. If
no Response Notice is delivered by the Company Shareholder within such 20-day
period, the Company Shareholder shall be deemed to have agreed that Escrow
Shares having a Fair Market Value equal to all of the Claimed Amount may be
released to the Indemnified Party from the Escrow Account.
(c) If the Company Shareholder in the Response Notice agrees (or
is deemed to have agreed) that Escrow Shares having a Fair Market Value equal to
all of the Claimed Amount may be released from the Escrow Account to the
Indemnified Party, the Escrow Agent shall, promptly following the earlier of the
required delivery date for the Response Notice or the delivery of the Response
Notice, transfer, deliver and assign to the Indemnified Party such number of
Escrow Shares held in the Escrow Account which have a Fair Market Value equal to
the Claimed Amount (or such lesser number of Escrow Shares as is then held in
the Escrow Account).
(d) If the Company Shareholder in the Response Notice agrees that
Escrow Shares having a Fair Market Value equal to part, but not all, of the
Claimed Amount may be released from the Escrow Account to the Indemnified Party,
the Escrow Agent shall promptly following the delivery of the Response Notice
transfer, deliver and assign to the Indemnified Party such number of Escrow
Shares held in the Escrow Account which have a Fair Market Value equal to the
Agreed Amount (or such lesser number of Escrow Shares as is then held in the
Escrow Account). A determination with respect to the remainder of the Claimed
Amount shall be made in accordance with subsection 4(e) below.
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<PAGE> 3
(e) If the Company Shareholder in the Response Notice contests the
release of Escrow Shares having a Fair Market Value equal to all or part of the
Claimed Amount (the "Contested Amount"), the matter shall be settled by binding
arbitration in Atlanta, Georgia. All claims shall be settled by three
arbitrators in accordance with the Commercial Arbitration Rules then in effect
of the American Arbitration Association (the "AAA Rules"). The Company
Shareholder and the Indemnified Party shall each designate one arbitrator within
15 days of the delivery of the Company Shareholder's Response Notice contesting
the Claimed Amount. The Company Shareholder and the Indemnified Party shall
cause such designated arbitrators mutually to agree upon and designate a third
arbitrator; provided, however, that (i) failing such agreement within 45 days of
delivery of the Company Shareholder' Response Notice, the third arbitrator shall
be appointed in accordance with the AAA Rules and (ii) if either the Company
Shareholder or the Indemnified Party fails to timely designate an arbitrator,
the dispute shall be resolved by the one arbitrator timely designated. The
Company Shareholder and the Indemnified Party shall pay the fees and expenses of
their respectively designated arbitrators and shall bear equally the fees and
expenses of the third arbitrator. The Company Shareholder and the Indemnified
Party shall cause the arbitrators to decide the matter to be arbitrated pursuant
hereto within 60 days after the appointment of the last arbitrator. The
arbitrators' decision shall relate solely to whether the Indemnified Party is
entitled to receive the Contested Amount (or a portion thereof) pursuant to the
applicable terms of the Merger Agreement and this Agreement. The final decision
of the majority of the arbitrators shall be furnished to the Company
Shareholder, the Indemnified Party and the Escrow Agent in writing and shall
constitute a conclusive determination of the issue in question, binding upon the
Company Shareholder, the Indemnified Party and the Escrow Agent, and shall not
be contested by any of them. Such decision may be used in a court of law only
for the purpose of seeking enforcement of the arbitrators' award. After delivery
of a Response Notice that the Claimed Amount is contested by the Company
Shareholder, the Escrow Agent shall continue to hold in the Escrow Account a
number of Escrow Shares having a Fair Market Value sufficient to cover the
Contested Amount (up to the number of Escrow Shares then available in the Escrow
Account), notwithstanding the occurrence of the Termination Date (as hereinafter
defined), until (i) delivery of a copy of a settlement agreement executed by the
Indemnified Party and the Company Shareholder setting forth instructions to the
Escrow Agent as to the release of Escrow Shares, if any, that shall be made with
respect to the Contested Amount, or (ii) delivery of a copy of the final award
of the majority of the arbitrators setting forth instructions to the Escrow
Agent as to the release of Escrow Shares, if any, that shall be made with
respect to the Contested Amount. The Escrow Agent shall thereupon release Escrow
Shares from the Escrow Account (to the extent Escrow Shares are then held in the
Escrow Account) in accordance with such agreement or instructions; provided,
however, if the claim related to a third party claim the amount of which is
contested and the subject of litigation, the Escrow Agent shall not release the
Escrow Shares being held in connection with the Contested Amount of such third
party claim until a final order or other final resolution or settlement has been
entered or reached in the underlying litigation determining the amount of such
claim, whereupon the Escrow Agent shall release Escrow Shares from the Escrow
Account (to the extent Escrow Shares are then held in the Escrow Account) in
accordance with such final order or final resolution or settlement.
5. Release of Escrow Shares.
(a) In the event that Purchaser elects, pursuant to the provisions
of Section 1.3(h) of the Merger Agreement, to waive the Profit Shortfall
Adjustment and the Profit Surplus Adjustment, one half of the Transferred Shares
shall be distributed to the Company Shareholder on the first anniversary of the
Closing Date. Except as otherwise set forth herein, promptly after the
Termination Date, the Escrow Agent shall distribute to the Company Shareholder
all of the Escrow Shares (including any remaining Transferred Shares) then held
in escrow. Notwithstanding the foregoing, if an Indemnified Party has previously
given a Claim Notice which has not then been resolved in accordance with Section
4, the Escrow Agent shall retain in the Escrow Account after the Termination
Date a number of Escrow Shares (including Transferred Shares if necessary)
having a Fair Market Value equal to the Claimed Amount covered by any Claim
Notice which has not then been resolved. Any funds so retained in escrow shall
be disbursed in accordance with the terms of the resolution of such claims.
(b) Any distribution of all or a portion of the Escrow Shares to the
Company Shareholder shall be made in accordance with the percentages set forth
opposite such holders' respective names on Exhibit B attached hereto; provided,
however, that the Escrow Agent shall withhold the distribution of the portion of
the Escrow Shares
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<PAGE> 4
otherwise distributable to Company Shareholder if he has not, according to
written notice provided by the Purchaser to the Escrow Agent, prior to such
distribution, surrendered his Certificates pursuant to the terms and conditions
of the Merger Agreement. Any such withheld shares shall be delivered to the
Purchaser promptly after the Termination Date, and shall be delivered by the
Purchaser to the Company Shareholder upon surrender of his Certificates.
Distributions to the Company Shareholder shall be made by mailing stock
certificates to the Company Shareholder at his address shown on Exhibit B (or
such other address as may be provided in writing to the Escrow Agent by any such
holder). No fractional Escrow Shares shall be distributed to Company Shareholder
pursuant to this Agreement. Instead, the number of shares that Company
Shareholder shall receive shall be rounded down to the nearest whole number; and
the Escrow Agent shall sell such number of Escrow Shares as is equal to the
aggregate of the fractional shares that would otherwise be distributed to the
Company Shareholder and shall distribute the proceeds of such sale to the
Company Shareholder otherwise entitled to a fractional Escrow Share.
6. Valuation of Escrow Shares. For purposes of this Agreement,
the Fair Market Value of the Escrow Shares to be retained in the Escrow Account
pending a final resolution of a claim shall be determined based upon the average
of the closing prices of the Purchaser Common Stock on the Nasdaq National
Market System for the twenty trading days immediately preceding the date on
which the claim is made. The Fair Market Value of the Escrow Shares to be
released from the Escrow Account after a final determination/resolution of a
claim shall be determined based upon the average closing prices of the
Purchaser's Common Stock on the Nasdaq National Market System for the twenty
trading days immediately preceding the date of such final
determination/resolution.
7. Amounts Payable by Company Shareholder. The amounts payable by
the Company Shareholder under this Agreement (i.e., the fees and expenses of
arbitrators payable pursuant to Section 4(e), the fees of the Escrow Agent
payable pursuant to Section 12 and the indemnification obligations pursuant to
Section 11 shall be payable solely as follows. The Company Shareholder shall
notify the Escrow Agent of any such amount payable by the Company Shareholder as
soon as they become aware that any such amount is payable, with a copy of such
notice to the Purchaser. On the sixth business day after the delivery of such
notice, the Escrow Agent shall sell such number of Escrow Shares (up to the
number of Escrow Shares then available in the Escrow Account), subject to
compliance with all applicable securities laws, as is necessary to raise such
amount, and shall disburse such proceeds to the party to whom such amount is
owed in accordance with the instructions of the Company Shareholder; provided
that if the Purchaser delivers to the Escrow Agent (with a copy to the Company
Shareholder), within five business days after delivery of such notice by the
Company Shareholder, a written notice contesting the legitimacy or
reasonableness of such amount, then the Escrow Agent shall not sell Escrow
Shares to raise the disputed portion of such claimed amount, and such dispute
shall be resolved by the Purchaser and the Company Shareholder in accordance
with the procedures set forth in Section 11.
8. Termination. This Agreement shall terminate upon the later of
the date which is eighteen (18) months after the Date of Closing (the
"Termination Date") or the distribution by the Escrow Agent of all of the Escrow
Shares in accordance with this Agreement; provided that the provisiions of
Sections 4, 5, 10, 11, and 12 shall survive such termination.
9. Notices. All notices, instructions and other communications
given hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested, postage prepaid, or (ii) via a reputable
nationwide overnight courier service, in each case to the address set forth
below. Any such notice, instruction or communication shall be deemed to have
been delivered two business days after it is sent by registered or certified
mail, return receipt requested, postage prepaid, or one business day after it is
sent via a reputable nationwide overnight courier service.
If to the Purchaser and/or the Acquisition Sub:
Tekgraf, Inc.
6000 Lake Forrest Drive
Suite 110
Atlanta, Georgia 30328
Attn: Mr. Phillip Aginsky
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<PAGE> 5
If to the Company:
Martec, Inc.
370 Amapola Avenue
Suite 212
Torrance, California 90501
If to the Company Shareholder:
Mark Lewis
370 Amapola Avenue
Suite 212
Torrance, California 90501
If to the Escrow Agent:
First Union National Bank
Attn: Corporate Trust - GA9094
999 Peachtree Street, NE, Suite 1100
Atlanta, Georgia 30309-9094
Attn: Ms. Teresa L. Davis
Any party may give any notice, instruction or communication in
connection with this Agreement using any other means (including personal
delivery, telecopy or ordinary mail), but no such notice, instruction or
communication shall be deemed to have been delivered unless and until it is
actually received by the party to whom it was sent. Any party may change the
address to which notices, instructions or communications are to be delivered by
giving the other parties to this Agreement notice thereof in the manner set
forth in this Section 9.
10. Liability of Escrow Agent.
(a) Escrow Agent shall have no liability or obligation with
respect to the Escrowed Cash or the Escrowed Shares except for Escrow Agent's
willful misconduct or gross negligence. Escrow Agent's sole responsibility shall
be for the safekeeping, investment, and disbursement of the Escrowed Cash or the
Escrowed Shares in accordance with the terms of this Escrow Agreement. Escrow
Agent shall have no implied duties or obligations and shall not be charged with
knowledge or notice of any fact or circumstance not specifically set forth
herein. Escrow Agent may rely upon any instrument, not only as to its due
execution, validity and effectiveness, but also as to the truth and accuracy of
any information contained therein, which Escrow Agent shall in good faith
believe to be genuine, to have been signed or presented by the person or parties
purporting to sign the same and to conform to the provisions of this Escrow
Agreement. In no event shall Escrow Agent be liable for incidental, indirect,
special, consequential or punitive damages. Escrow Agent shall not be obligated
to take any legal action or commence any proceeding in connection with the
Escrowed Cash or the Escrowed Shares, any account in which Escrowed Cash or the
Escrowed Shares are deposited, this Escrow Agreement or the Merger Agreement, or
to appear in, prosecute or defend any such legal action or proceeding. Escrow
Agent may consult legal counsel selected by it in the event of any dispute or
question as to the construction of any of the provisions hereof or of any other
agreement or of its duties hereunder, or relating to any dispute involving any
party hereto, and shall incur no liability and shall be fully indemnified from
any liability whatsoever in acting in accordance with the opinion or instruction
of such counsel. Purchaser and the Company Shareholder, jointly and severally,
shall each promptly pay, upon demand, one-half of the reasonable fees and
expenses of any such counsel.
(b) The Escrow Agent is authorized, in its sole discretion, to
comply with orders issued or process entered by any court with respect to the
Escrowed Cash or the Escrowed Shares, without determination by the Escrow Agent
of such court's jurisdiction in the matter. If any portion of the Escrowed Cash
or the Escrowed Shares is at any time attached, garnished or levied upon under
any court order, or in case the payment, assignment,
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<PAGE> 6
transfer, conveyance or delivery of any such property shall be stayed or
enjoined by any court order, or in case any order, judgment or decree shall be
made or entered by any court affecting such property or any part thereof, then
and in any such event, the Escrow Agent is authorized, in its sole discretion,
to rely upon and comply with any such order, writ, judgment or decree which it
is advised by legal counsel selected by it is binding upon it without the need
for appeal or other action; and if the Escrow Agent complies with any such
order, writ, judgment or decree, it shall not be liable to any of the parties
hereto or to any other person or entity by reason of such compliance even though
such order, writ, judgment or decree may be subsequently reversed, modified,
annulled, set aside or vacated.
11. Indemnification of Escrow Agent. From and at all times after
the date of this Escrow Agreement, Purchaser and the Company Shareholder,
jointly and severally, shall, to the fullest extent permitted by law and to the
extent provided herein, indemnify and hold harmless Escrow Agent and each
director, officer, employee, attorney, agent and affiliate of Escrow Agent
(collectively, the "Indemnified Parties") against any and all actions, claims
(whether or not valid), losses, damages, liabilities, costs and expenses of any
kind or nature whatsoever (including without limitation reasonable attorneys'
fees, costs and expenses) incurred by or asserted against any of the Indemnified
Parties from and after the date hereof, whether direct, indirect or
consequential, as a result of or arising from or in any way relating to any
claim, demand, suit, action or proceeding (including any inquiry or
investigation) by any person, including without limitation Purchaser and the
Company Shareholder, whether threatened or initiated, asserting a claim for any
legal or equitable remedy against any person under any statute or regulation,
including, but not limited to, any federal or state securities laws, or under
any common law or equitable cause or otherwise, arising from or in connection
with the negotiation, preparation, execution, performance or failure of
performance of this Escrow Agreement or any transactions contemplated herein,
whether or not any such Indemnified Party is a party to any such action,
proceeding, suit or the target of any such inquiry or investigation; provided,
however, that no Indemnified Party shall have the right to be indemnified
hereunder for any liability finally determined by a court of competent
jurisdiction, subject to no further appeal, to have resulted solely from the
gross negligence or willful misconduct of such Indemnified Party. If any such
action or claim shall be brought or asserted against any Indemnified Party, such
Indemnified Party shall promptly notify Purchaser and the Company Shareholder in
writing, and Purchaser and the Company Shareholder shall assume the defense
thereof, including the employment of counsel and the payment of all expenses.
Such Indemnified Party shall, in its sole discretion, have the right to employ
separate counsel (who may be selected by such Indemnified Party in its sole
discretion) in any such action and to participate in the defense thereof, and
the fees and expenses of such counsel shall be paid by such Indemnified Party,
except that Purchaser and/or the Company Shareholder shall be required to pay
such fees and expenses if (a) Purchaser and/or the Company Shareholder agree to
pay such fees and expenses, or (b) Purchaser and/or the Company Shareholder
shall fail to assume the defense of such action or proceeding or shall fail, in
the sole discretion of such Indemnified Party, to employ counsel satisfactory to
the Indemnified Party in any such action or proceeding, (c) Purchaser or the
Company Shareholder is the plaintiff in any such action or proceeding or (d) the
named or potential parties to any such action or proceeding (including any
potentially impleaded parties) include both Indemnified Party and the Company
Shareholder and/or Purchaser, and Indemnified Party shall have been advised by
counsel that there may be one or more legal defenses available to it which are
different from or additional to those available to the Company Shareholder or
Purchaser. Purchaser and the Company Shareholder shall be jointly and severally
liable to pay fees and expenses of counsel pursuant to the preceding sentence,
except that any obligation to pay under clause (a) shall apply only to the party
so agreeing. All such fees and expenses payable by the Company Shareholder
and/or Purchaser pursuant to the foregoing sentence shall be paid from time to
time as incurred, both in advance of and after the final disposition of such
action or claim. All of the foregoing losses, damages, costs and expenses of the
Indemnified Parties shall be payable by Purchaser and the Company Shareholder,
jointly and severally, upon demand by such Indemnified Party. The obligations of
Purchaser and the Company Shareholder under this Section 11 shall survive any
termination of this Escrow Agreement, and the resignation or removal of Escrow
Agent shall be independent of any obligation of the Escrow Agent.
The parties agree that neither the payment by Purchaser or the
Company Shareholder of any claim by Escrow Agent for indemnification hereunder
nor the disbursement of any amounts to Escrow Agent from the Cash Escrow Account
or the Share Escrow Account in respect of a claim by Escrow Agent for
indemnification shall impair, limit, modify, or affect, as between Purchaser and
the Company Shareholder, the respective rights and obligations of Purchaser, on
the one hand, and the Company Shareholder, on the other hand, under the
Underlying Agreement.
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12. Fees and Expenses of Escrow Agent. Purchaser and the Company
Shareholder shall each pay one-half of the amount required to compensate Escrow
Agent for its services hereunder and, in addition, shall each pay one-half of
the amount required to reimburse Escrow Agent for all of its reasonable
out-of-pocket expenses, including attorneys' fees, travel expenses, telephone
and facsimile transmission costs, postage (including express mail and overnight
delivery charges), copying charges and the like. All of the compensation and
reimbursement obligations set forth in this Section 12 shall be payable one-half
each by Purchaser and the Company Shareholder, jointly and severally, upon
demand by Escrow Agent. The obligations of Purchaser and the Company Shareholder
under this Section 12 shall survive any termination of this Escrow Agreement and
the resignation or removal of Escrow Agent.
13. Resignation and Removal of Escrow Agent. Escrow Agent may
resign from the performance of its duties hereunder at any time by giving ten
(10) days' prior written notice to the Purchaser and the Company Shareholder or
may be removed, with or without cause, by the Purchaser and the Company
Shareholder, acting jointly by furnishing a joint written direction to Escrow
Agent, at any time by the giving of ten (10) days' prior written notice to
Escrow Agent. Such resignation or removal shall take effect upon the appointment
of a successor Escrow Agent as provided hereinbelow. Upon any such notice of
resignation or removal, the Purchaser and the Company Shareholder jointly shall
appoint a successor Escrow Agent hereunder, which shall be a commercial bank,
trust company or other financial institution with a combined capital and surplus
in excess of $5,000,000. Upon the acceptance in writing of any appointment as
Escrow Agent hereunder by a successor Escrow Agent, such successor Escrow Agent
shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Escrow Agent, and the retiring Escrow
Agent shall be discharged from its duties and obligations under this Escrow
Agreement, but shall not be discharged from any liability for actions taken as
Escrow Agent hereunder prior to such succession. After any retiring Escrow
Agent's resignation or removal, the provisions of this Escrow Agreement shall
inure to its benefit as to any actions taken or omitted to be taken by it while
it was Escrow Agent under this Escrow Agreement. The retiring Escrow Agent shall
transmit all records pertaining to the Escrowed Shares and shall deliver all
shares held by it in the Share Escrow Account to the successor Escrow Agent,
after making copies of such records as the retiring Escrow Agent deems advisable
and after deduction and payment to the retiring Escrow Agent of all fees and
expenses (including court costs and attorneys' fees) payable to, incurred by, or
expected to be incurred by the retiring Escrow Agent in connection with the
performance of its duties and the exercise of its rights hereunder.
14. General.
(a) Governing Law, Assigns. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of Georgia
without regard to conflict of law principles and shall be binding upon, and
inure to the benefit of, the parties hereto and their respective successors and
assigns.
(b) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(c) Entire Agreement. Except for those provisions of the Merger
Agreement referenced herein, this Agreement constitutes the entire understanding
and agreement of the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements or understandings, written or
oral, between the parties with respect to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of
any breach of any provision of this Escrow Agreement shall be effective unless
in writing. No waiver by any party of any such condition or breach, in any one
instance, shall be deemed to be a further or continuing waiver of any such
condition or breach or a waiver of any other condition or breach of any other
provision contained herein.
(e) Amendment. This Agreement may be amended only with the written
consent of the Purchaser, the Escrow Agent and the Company Shareholder.
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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
PURCHASER
TEKGRAF, INC.
By: /s/ Dan I. Bailey
---------------------------------
Dan I. Bailey, President
ACQUISITION SUB:
TEKGRAF SUB II, INC.
By: /s/ Phillip Aginsky
----------------------------------
Phillip Aginsky, Chairman
ESCROW AGENT
FIRST UNION NATIONAL BANK
By: /s/ Teresa L. Davis
---------------------------------
Name: Teresa L. Davis
Title: Vice President
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COMPANY:
MARTEC, INC.
By: /s/ Mark Lewis
------------------------------
Mark Lewis, President
COMPANY SHAREHOLDER:
/s/ Mark Lewis (SEAL)
----------------------------
Mark Lewis
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<TABLE>
<CAPTION>
EXHIBIT B
---------
Company Shareholder Percentage
- ------------------- ----------
<S> <C>
Mark Lewis 100%
370 Amapola Avenue
Suite 212
Torrance, CA 90501
</TABLE>
10
<PAGE> 1
EXHIBIT 10.34
ESCROW AGREEMENT
This Escrow Agreement (this "Agreement") is entered into as of May 8,
1998, by and among TEKGRAF, INC., a Georgia corporation (the "Purchaser"),
TEKGRAF SUB III, INC. ("Acquisition Sub"), NEW ENGLAND COMPUTER GRAPHICS, INC.,
a Massachusetts corporation (the "Company"), A. Lowell Nerenberg, William
Rychel, Thomas Gust, David Boston, Scott Barker, Robert Shumaker, and Thomas
Mills (collectively, the "Company Shareholders"), David Boston (the "Shareholder
Representative") and First Union National Bank, a national banking association
(the "Escrow Agent").
WHEREAS, the Purchaser and the Company have entered into an Agreement
and Plan of Merger, dated March 25, 1998, by and among the Company, the Company
Shareholders, Acquisition Sub and the Purchaser, as amended by that certain
First Amendment to Agreement and Plan of Merger, dated as of March 30, 1998 (the
"Merger Agreement").
WHEREAS, the Merger Agreement provides that escrow accounts will be
established to secure the Company Shareholders' guaranty with respect to the
Warranted Pre-Tax Profit and the Warranted Tangible Net Asset Value of the
Company (each as defined in the Merger Agreement) on the terms and conditions
set forth herein.
WHEREAS, the parties hereto desire to establish the terms and
conditions pursuant to which such escrow accounts will be established and
maintained.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and not
otherwise defined shall have the meanings given them in the Merger Agreement.
2. Consent of Company Shareholders. By virtue of the Company
Shareholders' approval of the Merger Agreement, the Company Shareholders who may
indirectly or directly receive cash and shares of Purchaser Common Stock
pursuant to the Merger Agreement have, without any further act of any Company
Shareholder, consented to: (a) the establishment of this escrow to secure the
Company Shareholders' guaranty with respect to the Warranted Pre-Tax Profit and
the Warranted Tangible Net Asset Value of the Company in the manner set forth
herein and in the Merger Agreement, (b) the appointment of the Shareholder
Representative as their representatives for purposes of this Agreement and as
attorneys-in-fact and agents for and on behalf of each Company Shareholder, and
the taking by the Shareholder Representative of any and all actions and the
making of any decisions required or permitted to be taken or made by him under
this Agreement, and (c) all of the other terms, conditions and limitations in
this Agreement and the Merger Agreement.
3. Escrow and Warranty.
(a) Escrow of Cash. On the Closing Date, the Purchaser shall
deposit with the Escrow Agent $75,000 of the Cash Consideration. The Escrowed
Cash shall be held as a trust fund and shall not be subject to any lien,
attachment, trustee process or any other judicial process of any creditor of any
party hereto. The Escrow Agent agrees to accept delivery of the Escrowed Cash
and to hold the Escrowed Cash in an interest-bearing escrow account (the "Cash
Escrow Account"), subject to the terms and conditions of this Agreement.
(b) Escrow of Shares. On the Closing Date, the Purchaser shall
deposit with the Escrow Agent a certificate for the number of Escrowed Shares
specified in Section 1.3(e) of the Merger Agreement, issued in the name of the
Escrow Agent or its nominee. The Escrowed Shares shall be held as a trust fund
and shall not be subject to any lien, attachment, trustee process or any other
judicial process of any creditor of any party hereto. The
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Escrow Agent agrees to accept delivery of the Escrowed Shares and to hold the
Escrowed Shares in an escrow account (the "Share Escrow Account"), subject to
the terms and conditions of this Agreement.
(c) Warranty. The Company Shareholders have agreed in Article I of
the Merger Agreement that the Warranted Pre-Tax Profit and the Warranted
Tangible Net Asset Value of the Company shall not be less than the amounts set
forth in Section 1.3(a) of the Merger Agreement. The Escrowed Shares shall be
security for such warranty obligation of the Company Shareholders, subject to
the limitations, and in the manner provided, in this Agreement.
(d) Dividends, Etc. Any securities distributable to the Company
Shareholders in respect of or in exchange for any of the Escrowed Shares,
whether by way of stock dividends, stock splits or otherwise, shall be delivered
to the Escrow Agent, who shall hold such securities in the Share Escrow Account.
Such securities shall be issued in the name of the Escrow Agent or its nominee
and shall be considered Escrowed Shares for purposes hereof. Any cash dividends
distributable to the Company Shareholders in respect of the Escrowed Shares
shall be distributed to the Company Shareholders.
(e) Voting of Shares. The Shareholder Representative shall have
the
right, in his sole discretion, on behalf of the Company Shareholders, to direct
the Escrow Agent in writing as to the exercise of any voting rights pertaining
to the Escrowed Shares, and the Escrow Agent shall comply with any such written
instructions. In the absence of such instructions, the Escrow Agent shall not
vote any of the Escrowed Shares.
(f) Transferability. The respective interests of the
Company Shareholders in the Escrowed Shares shall not be assignable or
transferable, other than by operation of law. Notice of any such assignment or
transfer by operation of law shall be given to the Escrow Agent and the
Purchaser, and no such assignment or transfer shall be valid until such notice
is given.
(g) Transfer of Shares Upon Waiver of Warranty. In the event the
Purchaser elects, pursuant to the provisions of Section 1.3(h) of the Merger
Agreement, to waive the Profit Shortfall Adjustment and the Profit Surplus
Adjustment, the Escrowed Shares shall be transferred, upon receipt of notice by
Escrow Agent from Purchaser of such waiver, into the escrow account created
pursuant to that certain Pledge, Security and Escrow Agreement dated as of even
date herewith, to be treated in all respects as escrow shares thereunder and the
Escrowed Shares in such case shall be distributed to the Company Shareholders
pursuant to the terms thereof.
4. Administration of Cash Escrow Account. The Escrow Agent
shall administer the Cash Escrow Account as follows:
(a) In the event that there is a Net Asset Value Shortfall
(including any Collection Shortfall or Inventory Shortfall that remains unpaid
ten (10) days after demand for payment thereof by Purchaser or Acquisition Sub
to the Company Shareholders), the Purchase Price shall be reduced by the amount
of such Net Asset Value Shortfall. Purchaser or Acquisition Sub shall provide to
the Escrow Agent and the Shareholder Representative written notice of the amount
of such Net Asset Value Shortfall, and such amount, including any interest
accrued thereon (or such lesser amount as is then held in the Cash Escrow
Account), shall be paid to Purchaser by Escrow Agent within three (3) business
days after receipt of such notice.
(b) Any cash remaining in the Cash Escrow Account after payment of
the Net Asset Value Shortfall amount as set forth in subsection (a) above, shall
be distributed to the Company Shareholders pursuant to Section 6(a) hereof.
(c) In the event that the Net Asset Value Shortfall exceeds the
amount of Escrowed Cash available, Purchaser's recovery of cash pursuant to
Section 1.3 of the Merger Agreement shall not be limited to the amount of
Escrowed Cash available.
5. Administration of Share Escrow Account. The Escrow Agent shall
administer the Share Escrow Account as follows:
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<PAGE> 3
(a) In the event that the Warranted Pre-Tax Profit exceeds the
Actual Pre-Tax Profit for the Year (or the Alternative Year, if applicable), the
Purchase Price shall be reduced by the number of Purchaser Shares equal to the
Profit Shortfall Adjustment, subject to the Adjustment Floor. In such event,
Purchaser or Acquisition Sub and the Shareholder Representative shall provide
written notice to the Escrow Agent of the amount of the Profit Shortfall
Adjustment, and the Escrow Agent shall transfer, deliver and assign to Purchaser
such number of Escrowed Shares held in the Share Escrow Account which have a
Fair Market Value equal to the Profit Shortfall Adjustment (or such lesser
number of Purchaser Shares as is then held in the Share Escrow Account). The
Fair Market Value of the Escrowed Shares to be distributed shall be determined
in accordance with Section 7 hereof.
(b) On the first anniversary of the Closing Date (or if the
Alternative Year is elected, at the end of the Alternative Year), the Escrow
Agent shall distribute to the Company Shareholders, in accordance with Sections
6(a) and (b) below, one half of the Escrowed Shares remaining in the Share
Escrow Account not required for redistribution pursuant to Section 5(a) hereof.
Any Escrowed Shares remaining in the Share Escrow Account after payment of the
Profit Shortfall Adjustment amount as set forth in subsection (a) above, shall
be distributed to the Company Shareholders pursuant to Sections 6(a) and (b)
hereof.
(c) In the event that the Profit Shortfall Adjustment exceeds the
number of Escrowed Shares available, Purchaser's recovery of Purchaser Shares
pursuant to Section 1.3 of the Merger Agreement shall not be limited to the
amount of Escrowed Shares available.
6. Release of Escrowed Cash and Escrowed Shares.
(a) Any distribution of all or a portion of the Escrowed Cash or
the Escrowed Shares to the Company Shareholders shall be made in accordance with
the percentages set forth opposite such holders' respective names on Exhibit B
attached hereto; provided, however, that the Escrow Agent shall withhold the
distribution of the portion of the Escrowed Cash or the Escrowed Shares
otherwise distributable to Company Shareholders who have not, according to
written notice provided by the Purchaser to the Escrow Agent, prior to such
distribution, surrendered their respective Certificates pursuant to the terms
and conditions of the Merger Agreement. Any such withheld cash or shares shall
be delivered to the Purchaser instead of to the Company Shareholders, and shall
be delivered by the Purchaser to the Company Shareholders upon surrender of
their Certificates. Distributions of Escrowed Shares to the Company Shareholders
shall be made by mailing stock certificates to such holders at their respective
addresses shown on Exhibit B (or such other address as may be provided in
writing to the Escrow Agent by any such holder).
(b) No fractional Escrowed Shares shall be distributed to
Purchaser or Company Shareholders pursuant to this Agreement. Instead, the
number of shares that Purchaser or each Company Shareholder shall receive shall
be rounded down to the nearest whole number; and the Escrow Agent shall sell
such number of Escrowed Shares as is equal to the aggregate of the fractional
shares that would otherwise be distributed to the Purchaser or the Company
Shareholders, as the case may be, and shall distribute the proceeds of such sale
to the Purchaser or the Company Shareholders otherwise entitled to a fractional
Escrowed Share based upon the fraction of an Escrowed Share to which Purchaser
or each such Company Shareholder is otherwise entitled, as the case may be.
7. Valuation of Escrowed Shares. For purposes of this Agreement, the
Fair Market Value of the Escrowed Shares to be released from the Share Escrow
Account after a final determination of the Profit Shortfall Adjustment shall be
determined based upon the average closing prices of the Purchaser's Common Stock
on the Nasdaq National Market System for the twenty trading days immediately
preceding the date of such final determination.
8. Fees and Expenses of Escrow Agent. The Purchaser and the Company
Shareholders shall compensate Escrow Agent for its services hereunder in
accordance with Schedule A attached hereto and, in addition, shall reimburse
Escrow Agent for all of its reasonable out-of-pocket expenses, including
attorneys' fees, travel expenses, telephone and facsimile transmission costs,
postage (including express mail and overnight delivery charges), copying charges
and the like. All of the compensation and reimbursement obligations set forth in
this Section 8
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<PAGE> 4
shall be payable one-half each by Purchaser and the Company Shareholders,
jointly and severally, upon demand by Escrow Agent. The obligations of Purchaser
and the Company Shareholders under this Section 8 shall survive any termination
of this Escrow Agreement and the resignation or removal of Escrow Agent.
9. Investment of Funds. Escrow Agent shall invest and reinvest the
funds held in the Cash Escrow Account as the Shareholder Representative and the
Purchaser jointly shall direct (subject to applicable minimum investment
requirements) by the furnishing of a joint written direction; provided, however,
that no investment or reinvestment may be made except in the following:
(a) direct obligations of the United States of America or
obligations the principal of and the interest on which are unconditionally
guaranteed by the United States of America;
(b) certificates of deposit issued by any bank, bank and trust
company, or national banking association (including Escrow Agent and its
affiliates), which certificates of deposit are insured by the Federal Deposit
Insurance Corporation or a similar governmental agency;
(c) repurchase agreements with any bank, trust company, or
national banking association (including Escrow Agent and its affiliates); or
(d) any money market fund substantially all of which is invested
in the foregoing investment categories, including any money market fund managed
by Escrow Agent and any of its affiliates.
If Escrow Agent has not received a joint written direction at any time
that an investment decision must be made, Escrow Agent shall invest the
Cash Escrow Account, or such portion thereof as to which no joint
written direction has been received, in investments described in clause
(d) above. Each of the foregoing investments shall be made in the name
of Escrow Agent. No investment shall be made in any instrument or
security that has a maturity of greater than six (6) months.
Notwithstanding anything to the contrary contained herein, Escrow Agent
may, without notice to the Purchaser or the Shareholder Representative,
sell or liquidate any of the foregoing investments at any time if the
proceeds thereof are required for any release of funds permitted or
required hereunder, and Escrow Agent shall not be liable or responsible
for any loss, cost or penalty resulting from any such sale or
liquidation. With respect to any funds received by Escrow Agent for
deposit into the Cash Escrow Account or any joint written direction
received by Escrow Agent with respect to investment of any funds in the
Cash Escrow Account after ten o'clock, a.m., Atlanta, Georgia, time,
Escrow Agent shall not be required to invest such funds or to effect
such investment instruction until the next day upon which banks in
Atlanta, Georgia are open for business.
10. Liability and Authority of Shareholder Representative; Successors
and Assignees.
(a) The Shareholder Representative shall incur no liability to the
Company Shareholders with respect to any action taken or suffered by him in
reliance upon any note, direction, instruction, consent, statement or other
documents believed by him to be genuinely and duly authorized, nor for other
action or inaction except his own willful misconduct or gross negligence. The
Shareholder Representative may, in all questions arising under the Escrow
Agreement, rely on the advice of counsel and for anything done, omitted or
suffered in good faith by the Shareholder Representative based on such advice,
the Shareholder Representatives shall not be liable to the Company Shareholders.
(b) In the event of the death or permanent disability of
Shareholder Representative, or his resignation as a Shareholder Representative,
a successor Shareholder Representative shall be elected by a majority vote of
the Company Shareholders, with each such Company Shareholder (or his or her
successors or assigns) to be given a vote equal to the number of votes
represented by the Escrowed Shares held by such Company Shareholder immediately
prior to the Effective Time. Each successor Shareholder Representative shall
have all of the power, authority, rights and privileges conferred by this
Agreement upon the original Shareholder Representative, and the term
"Shareholder Representative" as used herein shall be deemed to include successor
Shareholder Representatives.
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(c) The Shareholder Representatives shall have full power and
authority to represent the Company Shareholders, and their successors, with
respect to all matters arising under this Agreement and all actions taken by any
Shareholder Representative hereunder shall be binding upon the Company
Shareholder, and their successors, as if expressly confirmed and ratified in
writing by each of them. Without limiting the generality of the foregoing, the
Shareholder Representatives, acting jointly but not singly, shall have full
power and authority to interpret all of the terms and provisions of this
Agreement, to compromise any claims asserted hereunder and to authorize payments
to be made with respect thereto, on behalf of the Company Shareholders and their
successors. All actions to be taken by the Shareholder Representative hereunder
shall be evidenced by, and taken upon, the written direction of a majority
thereof.
11. Amounts Payable by Company Shareholders. The amounts payable by the
Company Shareholders under this Agreement (i.e., the fees and expenses of
arbitrators payable pursuant to Section 18, the fees of the Escrow Agent payable
pursuant to Section 8 and the indemnification obligations pursuant to Sections
16) shall be payable solely as follows. The Purchaser or the Shareholder
Representative shall notify the Escrow Agent of any such amount payable by the
Company Shareholders as soon as they become aware that any such amount is
payable, with a copy of such notice to the Purchaser. On the sixth business day
after the delivery of such notice, the Escrow Agent shall sell such number of
Escrowed Shares (up to the number of Escrowed Shares then available in the
Escrow Account), subject to compliance with all applicable securities laws, as
is necessary to raise such amount, and shall disburse such proceeds to the party
to whom such amount is owed in accordance with the instructions of the
Shareholder Representative; provided that if the Purchaser delivers to the
Escrow Agent (with a copy to the Shareholder Representative), within five
business days after delivery of such notice by the Shareholder Representative, a
written notice contesting the legitimacy or reasonableness of such amount, then
the Escrow Agent shall not sell Escrowed Shares to raise the disputed portion of
such claimed amount, and such dispute shall be resolved by the Purchaser and the
Shareholder Representative in accordance with the procedures set forth in
Section 19.
12. Termination. This Agreement shall terminate upon the distribution
by the Escrow Agent of all of the Escrowed Cash and all of the Escrowed Shares
in accordance with this Agreement; provided that the provisions of Sections 10,
15, 16 and 17 shall survive such termination.
13. Notices. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested, postage prepaid, or (ii) via a reputable
nationwide overnight courier service, in each case to the address set forth
below. Any such notice, instruction or communication shall be deemed to have
been delivered two business days after it is sent by registered or certified
mail, return receipt requested, postage prepaid, or one business day after it is
sent via a reputable nationwide overnight courier service.
If to the Purchaser and/or the Acquisition Sub:
Tekgraf, Inc.
6000 Lake Forrest Drive
Suite 110
Atlanta, GA 30328
Attn: Mr. Phillip Aginsky
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If to the Company:
New England Computer Graphics, Inc.
2 Park Drive #6
Westford, Massachusetts 01886
If to the Shareholder Representative:
David Boston
2 Park Drive #6
Westford, Massachusetts 01886
If to the Escrow Agent:
First Union National Bank
Attn: Corporate Trust - GA9094
999 Peachtree Street, NE, Suite 1100
Atlanta, Georgia 30309-9094
Attn: Ms. Teresa L. Davis
Any party may give any notice, instruction or communication in
connection with this Agreement using any other means (including personal
delivery, telecopy or ordinary mail), but no such notice, instruction or
communication shall be deemed to have been delivered unless and until it is
actually received by the party to whom it was sent. Any party may change the
address to which notices, instructions or communications are to be delivered by
giving the other parties to this Agreement notice thereof in the manner set
forth in this Section 13.
14. Resignation and Removal of Escrow Agent. Escrow Agent may resign
from the performance of its duties hereunder at any time by giving ten (10)
days' prior written notice to the Purchaser and the Shareholder Representative
or may be removed, with or without cause, by the Purchaser and the Shareholder
Representative, acting jointly by furnishing a joint written direction to Escrow
Agent, at any time by the giving of ten (10) days' prior written notice to
Escrow Agent. Such resignation or removal shall take effect upon the appointment
of a successor Escrow Agent as provided hereinbelow. Upon any such notice of
resignation or removal, the Purchaser and the Shareholder Representative jointly
shall appoint a successor Escrow Agent hereunder, which shall be a commercial
bank, trust company or other financial institution with a combined capital and
surplus in excess of $5,000,000. Upon the acceptance in writing of any
appointment as Escrow Agent hereunder by a successor Escrow Agent, such
successor Escrow Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Escrow Agent, and the
retiring Escrow Agent shall be discharged from its duties and obligations under
this Escrow Agreement, but shall not be discharged from any liability for
actions taken as Escrow Agent hereunder prior to such succession. After any
retiring Escrow Agent's resignation or removal, the provisions of this Escrow
Agreement shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was Escrow Agent under this Escrow Agreement. The retiring
Escrow Agent shall transmit all records pertaining to the Escrowed Cash and the
Escrowed Shares and shall pay all funds and deliver all shares held by it in the
Cash Escrow Account and the Share Escrow Account to the successor Escrow Agent,
after making copies of such records as the retiring Escrow Agent deems advisable
and after deduction and payment to the retiring Escrow Agent of all fees and
expenses (including court costs and attorneys' fees) payable to, incurred by, or
expected to be incurred by the retiring Escrow Agent in connection with the
performance of its duties and the exercise of its rights hereunder.
15. Liability of Escrow Agent. Escrow Agent shall have no liability or
obligation with respect to the Escrowed Cash or the Escrowed Shares except for
Escrow Agent's willful misconduct or gross negligence. Escrow Agent's sole
responsibility shall be for the safekeeping, investment, and disbursement of the
Escrowed Cash or the Escrowed Shares in accordance with the terms of this Escrow
Agreement. Escrow Agent shall have no implied duties or obligations and shall
not be charged with knowledge or notice of any fact or circumstance not
specifically set forth herein. Escrow Agent may rely upon any instrument, not
only as to its due execution, validity and
6
<PAGE> 7
effectiveness, but also as to the truth and accuracy of any information
contained therein, which Escrow Agent shall in good faith believe to be genuine,
to have been signed or presented by the person or parties purporting to sign the
same and to conform to the provisions of this Escrow Agreement. In no event
shall Escrow Agent be liable for incidental, indirect, special, consequential or
punitive damages. Escrow Agent shall not be obligated to take any legal action
or commence any proceeding in connection with the Escrowed Cash or the Escrowed
Shares, any account in which Escrowed Cash or the Escrowed Shares are deposited,
this Escrow Agreement or the Merger Agreement, or to appear in, prosecute or
defend any such legal action or proceeding. Escrow Agent may consult legal
counsel selected by it in the event of any dispute or question as to the
construction of any of the provisions hereof or of any other agreement or of its
duties hereunder, or relating to any dispute involving any party hereto, and
shall incur no liability and shall be fully indemnified from any liability
whatsoever in acting in accordance with the opinion or instruction of such
counsel. Purchaser and the Company Shareholders, jointly and severally, shall
each promptly pay, upon demand, one-half of the reasonable fees and expenses of
any such counsel.
The Escrow Agent is authorized, in its sole
discretion, to comply with orders issued or process entered by any court with
respect to the Escrowed Cash or the Escrowed Shares, without determination by
the Escrow Agent of such court's jurisdiction in the matter. If any portion of
the Escrowed Cash or the Escrowed Shares is at any time attached, garnished or
levied upon under any court order, or in case the payment, assignment, transfer,
conveyance or delivery of any such property shall be stayed or enjoined by any
court order, or in case any order, judgment or decree shall be made or entered
by any court affecting such property or any part thereof, then and in any such
event, the Escrow Agent is authorized, in its sole discretion, to rely upon and
comply with any such order, writ, judgment or decree which it is advised by
legal counsel selected by it is binding upon it without the need for appeal or
other action; and if the Escrow Agent complies with any such order, writ,
judgment or decree, it shall not be liable to any of the parties hereto or to
any other person or entity by reason of such compliance even though such order,
writ, judgment or decree may be subsequently reversed, modified, annulled, set
aside or vacated.
16. Indemnification of Escrow Agent. From and at all times after the
date of this Escrow Agreement, Purchaser and the Company Shareholders, jointly
and severally, shall, to the fullest extent permitted by law and to the extent
provided herein, indemnify and hold harmless Escrow Agent and each director,
officer, employee, attorney, agent and affiliate of Escrow Agent (collectively,
the "Indemnified Parties") against any and all actions, claims (whether or not
valid), losses, damages, liabilities, costs and expenses of any kind or nature
whatsoever (including without limitation reasonable attorneys' fees, costs and
expenses) incurred by or asserted against any of the Indemnified Parties from
and after the date hereof, whether direct, indirect or consequential, as a
result of or arising from or in any way relating to any claim, demand, suit,
action or proceeding (including any inquiry or investigation) by any person,
including without limitation Purchaser and the Company Shareholders, whether
threatened or initiated, asserting a claim for any legal or equitable remedy
against any person under any statute or regulation, including, but not limited
to, any federal or state securities laws, or under any common law or equitable
cause or otherwise, arising from or in connection with the negotiation,
preparation, execution, performance or failure of performance of this Escrow
Agreement or any transactions contemplated herein, whether or not any such
Indemnified Party is a party to any such action, proceeding, suit or the target
of any such inquiry or investigation; provided, however, that no Indemnified
Party shall have the right to be indemnified hereunder for any liability finally
determined by a court of competent jurisdiction, subject to no further appeal,
to have resulted solely from the gross negligence or willful misconduct of such
Indemnified Party. If any such action or claim shall be brought or asserted
against any Indemnified Party, such Indemnified Party shall promptly notify
Purchaser and the Company Shareholders in writing, and Purchaser and the Company
Shareholders shall assume the defense thereof, including the employment of
counsel and the payment of all expenses. Such Indemnified Party shall, in its
sole discretion, have the right to employ separate counsel (who may be selected
by such Indemnified Party in its sole discretion) in any such action and to
participate in the defense thereof, and the fees and expenses of such counsel
shall be paid by such Indemnified Party, except that Purchaser and/or the
Company Shareholders shall be required to pay such fees and expenses if (a)
Purchaser and/or the Company Shareholders agree to pay such fees and expenses,
or (b) Purchaser and/or the Company Shareholders shall fail to assume the
defense of such action or proceeding or shall fail, in the sole discretion of
such Indemnified Party, to employ counsel satisfactory to the Indemnified Party
in any such action or proceeding, (c) Purchaser or the Company Shareholders is
the plaintiff in any such action or proceeding or (d) the named or potential
parties to any such action or proceeding (including any potentially impleaded
parties) include both Indemnified Party and the Company Shareholders and/or
Purchaser, and
7
<PAGE> 8
Indemnified Party shall have been advised by counsel that there may be one or
more legal defenses available to it which are different from or additional to
those available to the Company Shareholders or Purchaser. Purchaser and the
Company Shareholders shall be jointly and severally liable to pay fees and
expenses of counsel pursuant to the preceding sentence, except that any
obligation to pay under clause (a) shall apply only to the party so agreeing.
All such fees and expenses payable by the Company Shareholders and/or Purchaser
pursuant to the foregoing sentence shall be paid from time to time as incurred,
both in advance of and after the final disposition of such action or claim. All
of the foregoing losses, damages, costs and expenses of the Indemnified Parties
shall be payable by Purchaser and the Company Shareholders, jointly and
severally, upon demand by such Indemnified Party. The obligations of Purchaser
and the Company Shareholders under this Section 16 shall survive any termination
of this Escrow Agreement, and the resignation or removal of Escrow Agent shall
be independent of any obligation of the Escrow Agent.
The parties agree that neither the payment by Purchaser or the
Company Shareholders of any claim by Escrow Agent for indemnification hereunder
nor the disbursement of any amounts to Escrow Agent from the Cash Escrow Account
or the Share Escrow Account in respect of a claim by Escrow Agent for
indemnification shall impair, limit, modify, or affect, as between Purchaser and
the Company Shareholders, the respective rights and obligations of Purchaser, on
the one hand, and the Company Shareholders, on the other hand, under the
Underlying Agreement.
17. General.
(a) Governing Law, Assigns. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of Georgia
without regard to conflict-of-law principles and shall be binding upon, and
inure to the benefit of, the parties hereto and their respective successors and
assigns.
(b) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(c) Entire Agreement. Except for those provisions of the Merger
Agreement referenced herein, this Agreement constitutes the entire understanding
and agreement of the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements or understandings, written or
oral, between the parties with respect to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of
any breach of any provision of this Escrow Agreement shall be effective unless
in writing. No waiver by any party of any such condition or breach, in any one
instance, shall be deemed to be a further or continuing waiver of any such
condition or breach or a waiver of any other condition or breach of any other
provision contained herein.
(e) Amendment. This Agreement may be amended only with the written
consent of the Purchaser, the Escrow Agent and the Shareholder Representative.
18. Arbitration; Attorneys' Fees.
(a) The parties agree to use reasonable efforts to resolve any
dispute arising out of this Agreement, but should a dispute remain unresolved
ten (10) days following notice of the dispute to the other party (but in no
event prior to said ten (10) days, except as specifically provided otherwise
herein), such dispute shall be finally settled by binding arbitration in
Atlanta, Georgia in accordance with the then current Commercial Arbitration
Rules of the American Arbitration Association (the "AAA") or such other
mediation or arbitration service as shall be mutually agreeable to the parties,
and judgment upon the award rendered by the arbitrator shall be final and
binding on the parties and may be entered in any court having jurisdiction
thereof; provided, however, that any party shall be entitled to appeal a
question of law or determination of law to a court of competent jurisdiction;
and provided, further, however, that the parties may first seek appropriate
injunctive relief prior to, and/or in addition to pursuing negotiation or
arbitration. Such arbitration shall be conducted by an arbitrator chosen by
mutual agreement of the parties, or failing such agreement, an arbitrator
appointed by the AAA. There shall be limited discovery prior to the
8
<PAGE> 9
arbitration hearing as follows: (a) exchange of witness lists and copies of
documentary evidence and documents related to or arising out of the issues to be
arbitrated, (b) depositions of all party witnesses, and (c) such other
depositions as may be allowed by the arbitrator upon a showing of good cause.
Depositions shall be conducted in accordance with the Georgia Code of Civil
Procedure and questions of evidence in all hearings shall be resolved in
accordance with the Federal Rules of Evidence. The arbitrator shall be required
to provide in writing to the parties the basis for the award or order of such
arbitrator, and a court reporter shall record all hearings (unless otherwise
agreed to by the parties), with such record constituting the official transcript
of such proceedings.
(b) In the event of arbitration or litigation filed or instituted
between the parties with respect to this Agreement, the prevailing party will be
entitled to receive from the other party all costs, damages and expenses,
including reasonable attorney's fees, incurred by the prevailing party in
connection with that action or proceeding whether or not the controversy is
reduced to judgment or award. The prevailing party will be that party who may be
fairly said by the arbitrator(s) or the court to have prevailed on the major
disputed issues.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
PURCHASER
TEKGRAF, INC.
By: /s/ Dan I. Bailey
---------------------------------
Dan I. Bailey, President
ACQUISITION SUB:
TEKGRAF SUB II, INC.
By: /s/ Phillip Aginsky
----------------------------------
Phillip Aginsky, Chairman
ESCROW AGENT
FIRST UNION NATIONAL BANK
By: /s/ Teresa L. Davis
---------------------------------
Name: Teresa L. Davis
Title: Vice President
9
<PAGE> 10
SHAREHOLDER REPRESENTATIVE:
By: /s/ David Boston
--------------------------------------
David Boston
COMPANY:
NEW ENGLAND COMPUTER GRAPHICS, INC.
By: /s/ David Boston (SEAL)
---------------------------------
David Boston, President
COMPANY SHAREHOLDERS:
/s/ A. Lowell Nerenberg (SEAL)
------------------------------------
A. Lowell Nerenberg
/s/ William Rychel (SEAL)
------------------------------------
William Rychel
/s/ Thomas Gust (SEAL)
------------------------------------
Thomas Gust
/s/ Scott Barker (SEAL)
------------------------------------
Scott Barker
/s/ Robert Shumaker (SEAL)
------------------------------------
Robert Shumaker
/s/ Thomas Mills (SEAL)
------------------------------------
Thomas Mills
/s/ David Boston (SEAL)
------------------------------------
David Boston
10
<PAGE> 11
<TABLE>
<CAPTION>
EXHIBIT B
---------
Company Shareholder NECG Shares Percentage
- ------------------- ----------- ----------
<S> <C> <C>
A. Lowell Nerenberg 5000 27.33%
C/o Tekgraf, Inc.
620 East Diamond Avenue
Gaithersburg, MD 20877
William Rychel 2500 13.66%
C/o Tekgraf, Inc.
980 Corporate Woods Parkway
Vernon Hills, IL 60061
Thomas Gust 2500 13.66%
C/o Tekgraf, Inc.
980 Corporate Woods Parkway
Vernon Hills, IL 60061
David Boston 3293 18.00%
C/o New England Computer Graphics, Inc.
2 Park Drive #6
Westford, MA 01886
Scott Barker 4000 21.87%
1110 West Butler Road
Greenville, SC 29607
Bob Shumaker 500 2.73%
1011 Plantation Drive
Simpsonville, SC 29681
Tom Mills 500 2.73%
110 Clubhouse Court
Taylors, SC 29687
</TABLE>
11
<PAGE> 1
EXHIBIT 10.35
PLEDGE, SECURITY AND ESCROW AGREEMENT
This Pledge, Security and Escrow Agreement (this "Agreement") is
entered into as of May 8, 1998, by and among TEKGRAF, INC., a Delaware
corporation (the "Purchaser"), TEKGRAF SUB III, INC. ("Acquisition Sub"), NEW
ENGLAND COMPUTER GRAPHICS, INC., a Massachusetts corporation (the "Company"), A.
Lowell Nerenberg, William Rychel, Scott Barker, Robert Shumaker, Thomas Mills,
Thomas Gust, and David Boston (the "Company Shareholders"), and David Boston
(the "Indemnification Representative") and First Union National Bank, a national
banking association (the "Escrow Agent").
WHEREAS, the Purchaser and the Company have entered into an Agreement
and Plan of Merger, dated March 25, 1998, by and among the Company, the Company
Shareholders, Acquisition Sub and the Purchaser, as amended by that certain
First Amendment to Agreement to Agreement and Plan of Merger, dated as of March
30, 1998 (the "Merger Agreement").
WHEREAS, the Merger Agreement provides that an escrow account will be
established to secure the Company's and the Company Shareholders'
indemnification obligations to the Indemnified Parties under the Merger
Agreement on the terms and conditions set forth herein.
WHEREAS, the parties hereto desire to establish the terms and
conditions pursuant to which such escrow account will be established and
maintained.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and
not otherwise defined shall have the meanings given them in the Merger
Agreement.
2. Consent of Company Shareholders. By virtue of the Company
Shareholders' approval of the Merger Agreement, the Company Shareholders who may
indirectly or directly receive shares of Purchaser Common Stock pursuant to the
Merger Agreement (the "Indemnifying Shareholders") have, without any further act
of any Company Stockholder, consented to: (a) the establishment of this escrow
to secure the Company Shareholders' indemnification obligations under Article V
of the Merger Agreement in the manner set forth herein and therein, (b) the
appointment of the Indemnification Representative as their representatives for
purposes of this Agreement and as attorneys-in-fact and agents for and on behalf
of each Indemnifying Shareholder, and the taking by the Indemnification
Representative of any and all actions and the making of any decisions required
or permitted to be taken or made by him under this Agreement, and (c) all of the
other terms, conditions and limitations in this Agreement and the Merger
Agreement.
3. Escrow and Indemnification.
(a) Escrow of Shares. On the Closing Date, the Purchaser shall
deposit with the Escrow Agent a certificate for the number of Purchaser Shares
specified in Section 5.6 of the Merger Agreement (the "Escrow Shares"), issued
in the name of the Escrow Agent or its nominee. In addition, in the event the
Purchaser elects, pursuant to the provisions of Section 1.3(h) of the Merger
Agreement, to waive the Profit Shortfall Adjustment and the Profit Surplus
Adjustment, the shares of Purchaser common stock held in the escrow account
established by Section 1.3(e) of the Merger Agreement shall be transferred into
the escrow
<PAGE> 2
account created pursuant to this Escrow Agreement (the "Transferred Shares"), to
be treated in all respects as Escrow Shares hereunder and the Transferred Shares
shall be distributed to the Company Shareholders pursuant to Section 5(a)
hereof. The Escrow Shares shall be held as a trust fund and shall not be subject
to any lien, attachment, trustee process or any other judicial process of any
creditor of any party hereto. The Escrow Agent agrees to accept delivery of the
Escrow Shares and to hold the Escrow Shares in an escrow account (the "Escrow
Account"), subject to the terms and conditions of this Agreement.
(b) Indemnification. The Indemnifying Shareholders have agreed in
Article V of the Merger Agreement to indemnify and hold harmless the Indemnified
Parties from and against specified Damages. The Escrow Shares shall be security
for such indemnity obligation of the Indemnifying Shareholders, subject to the
limitations, and in the manner provided, in this Agreement.
(c) Dividends, Etc. Any securities distributable to the
Indemnifying Shareholders in respect of or in exchange for any of the Escrow
Shares, whether by way of stock dividends, stock splits or otherwise, shall be
delivered to the Escrow Agent, who shall hold such securities in the Escrow
Account. Such securities shall be issued in the name of the Escrow Agent or its
nominee and shall be considered Escrow Shares for purposes hereof. Any cash
dividends distributable to the Indemnifying Shareholders in respect of the
Escrow Shares shall be distributed to the Indemnifying Shareholders.
(d) Voting of Shares. The Indemnification Representative shall
have the right, in his sole discretion, on behalf of the Indemnifying
Shareholders, to direct the Escrow Agent in writing as to the exercise of any
voting rights pertaining to the Escrow Shares, and the Escrow Agent shall comply
with any such written instructions. In the absence of such instructions, the
Escrow Agent shall not vote any of the Escrow Shares.
(e) Transferability. The respective interests of the Indemnifying
Shareholders in the Escrow Shares shall not be assignable or transferable, other
than by operation of law. Notice of any such assignment or transfer by operation
of law shall be given to the Escrow Agent and the Purchaser, and no such
assignment or transfer shall be valid until such notice is given.
4. Administration of Escrow Account. The Escrow Agent shall
administer the Escrow Account as follows:
(a) If an Indemnified Party has incurred or suffered Damages for
which it is entitled to indemnification under Article V of the Merger Agreement,
the Indemnified Party shall, on or before the date of the expiration of the
representation, warranty, covenant or agreement to which such claim relates,
give written notice of such claim (a "Claim Notice") to the Indemnification
Representative and the Escrow Agent. Each Claim Notice shall state the amount of
claimed Damages (the "Claimed Amount") and the basis for such claim.
(b) Within 20 days after delivery of a Claim Notice, the
Indemnification Representative shall provide to the Indemnified Party, with a
copy to the Escrow Agent, a written response (the "Response Notice") in which
the Indemnification Representative shall: (i) agree that Escrow Shares having a
Fair Market Value (as computed pursuant to Section 6) equal to the full Claimed
Amount may be released from the Escrow Account to the Indemnified Party, (ii)
agree that Escrow Shares having a Fair Market Value equal to part, but not all,
of the Claimed Amount (the "Agreed Amount") may be released from the Escrow
Account to the Indemnified Party or (iii) contest that any of the Escrow Shares
may be released from the Escrow Account to the Indemnified Party. The
Indemnification Representative may contest the release of Escrow Shares having a
Fair Market Value equal to all or a portion of the Claimed Amount only based
upon a good faith belief that all or such portion of the Claimed Amount does not
constitute Damages for which the Indemnified Party is entitled to
indemnification under Article V of the Merger Agreement. If no Response Notice
is delivered by the Indemnification Representative within such 20-day period,
the Indemnification Representative shall be deemed to have agreed that Escrow
Shares having a Fair Market
2
<PAGE> 3
value equal to all of the Claimed Amount may be released to the Indemnified
Party from the Escrow Account.
(c) If the Indemnification Representative in the Response Notice
agrees (or is deemed to have agreed) that Escrow Shares having a Fair Market
Value equal to all of the Claimed Amount may be released from the Escrow Account
to the Indemnified Party, the Escrow Agent shall, promptly following the earlier
of the required delivery date for the Response Notice or the delivery of the
Response Notice, transfer, deliver and assign to the Indemnified Party such
number of Escrow Shares held in the Escrow Account which have a Fair Market
Value equal to the Claimed Amount (or such lesser number of Escrow Shares as is
then held in the Escrow Account).
(d) If the Indemnification Representative in the Response Notice
agrees that Escrow Shares having a Fair Market Value equal to part, but not all,
of the Claimed Amount may be released from the Escrow Account to the Indemnified
Party, the Escrow Agent shall promptly following the delivery of the Response
Notice transfer, deliver and assign to the Indemnified Party such number of
Escrow Shares held in the Escrow Account which have a Fair Market Value equal to
the Agreed Amount (or such lesser number of Escrow Shares as is then held in the
Escrow Account). A determination with respect to the remainder of the Claimed
Amount shall be made in accordance with subsection 4(e) below.
(e) If the Indemnification Representative in the Response Notice
contests the release of Escrow Shares having a Fair Market Value equal to all or
part of the Claimed Amount (the "Contested Amount"), the matter shall be settled
by binding arbitration in Atlanta, Georgia. All claims shall be settled by three
arbitrators in accordance with the Commercial Arbitration Rules then in effect
of the American Arbitration Association (the "AAA Rules"). The Indemnification
Representative and the Indemnified Party shall each designate one arbitrator
within 15 days of the delivery of the Indemnification Representative's Response
Notice contesting the Claimed Amount. The Indemnification Representative and the
Indemnified Party shall cause such designated arbitrators mutually to agree upon
and designate a third arbitrator; provided, however, that (i) failing such
agreement within 45 days of delivery of the Indemnification Representative's
Response Notice, the third arbitrator shall be appointed in accordance with the
AAA Rules and (ii) if either the Indemnification Representatives or the
Indemnified Party fail to timely designate an arbitrator, the dispute shall be
resolved by the one arbitrator timely designated. The Indemnifying Shareholders
and the Indemnified Party shall pay the fees and expenses of their respectively
designated arbitrators and shall bear equally the fees and expenses of the third
arbitrator. The Indemnification Representative and the Indemnified Party shall
cause the arbitrators to decide the matter to be arbitrated pursuant hereto
within 60 days after the appointment of the last arbitrator. The arbitrators'
decision shall relate solely to whether the Indemnified Party is entitled to
receive the Contested Amount (or a portion thereof) pursuant to the applicable
terms of the Merger Agreement and this Agreement. The final decision of the
majority of the arbitrators shall be furnished to the Indemnification
Representative, the Indemnified Party and the Escrow Agent in writing and shall
constitute a conclusive determination of the issue in question, binding upon the
Indemnification Representative, the Indemnifying Shareholders, the Indemnified
Party and the Escrow Agent, and shall not be contested by any of them. Such
decision may be used in a court of law only for the purpose of seeking
enforcement of the arbitrators' award. After delivery of a Response Notice that
the Claimed Amount is contested by the Indemnification Representative, the
Escrow Agent shall continue to hold in the Escrow Account a number of Escrow
Shares having a Fair Market Value sufficient to cover the Contested Amount (up
to the number of Escrow Shares then available in the Escrow Account),
notwithstanding the occurrence of the Termination Date (as hereinafter defined),
until (i) delivery of a copy of a settlement agreement executed by the
Indemnified Party and the Indemnification Representative setting forth
instructions to the Escrow Agent as to the release of Escrow Shares, if any,
that shall be made with respect to the Contested Amount or (ii) delivery of a
copy of the final award of the majority of the arbitrators setting forth
instructions to the Escrow Agent as to the release of Escrow Shares, if any,
that shall be made with respect to the Contested Amount. The Escrow Agent shall
thereupon release Escrow Shares from the Escrow Account (to the extent Escrow
Shares are then held in the Escrow Account) in accordance with such agreement or
instructions; provided, however, if the claim related to a third party claim the
amount of which is contested and the subject of litigation, the Escrow
3
<PAGE> 4
Agent shall not release the Escrow Shares being held in connection with the
Contested Amount of such third party claim until a final order or other final
resolution or settlement has been entered or reached in the underlying
litigation determining the amount of such claim, whereupon the Escrow Agent
shall release Escrow Shares from the Escrow Account (to the extent Escrow Shares
are then held in the Escrow Account) in accordance with such final order or
final resolution or settlement.
5. Release of Escrow Shares.
(a) In the event that Purchaser elects, pursuant to the provisions
of Section 1.3(h) of the Merger Agreement, to waive the Profit Shortfall
Adjustment and the Profit Surplus Adjustment, one half of the Transferred Shares
shall be distributed to the Indemnifying Shareholders on the first anniversary
of the Closing Date. Promptly after the Termination Date, the Escrow Agent shall
distribute to the Indemnifying Shareholders all of the Escrow Shares (including
any remaining Transferred Shares) then held in escrow. Notwithstanding the
foregoing, if an Indemnified Party has previously given a Claim Notice which has
not then been resolved in accordance with Section 4, the Escrow Agent shall
retain in the Escrow Account after the Termination Date a number of Escrow
Shares (including Transferred Shares if necessary) having a Fair Market Value
equal to the Claimed Amount covered by any Claim Notice which has not then been
resolved. Any funds so retained in escrow shall be disbursed in accordance with
the terms of the resolution of such claims.
(b) Any distribution of all or a portion of the Escrow Shares to
the Indemnifying Shareholders shall be made in accordance with the percentages
set forth opposite such holders' respective names on Exhibit B attached hereto;
provided, however, that the Escrow Agent shall withhold the distribution of the
portion of the Escrow Shares otherwise distributable to Indemnifying
Shareholders who have not, according to written notice provided by the Purchaser
to the Escrow Agent, prior to such distribution, surrendered their respective
Certificates pursuant to the terms and conditions of the Merger Agreement. Any
such withheld shares shall be delivered to the Purchaser promptly after the
Termination Date, and shall be delivered by the Purchaser to the Indemnifying
Shareholders to whom such shares would have otherwise been distributed upon
surrender of their respective Certificates. Distributions to the Indemnifying
Shareholders shall be made by mailing stock certificates to such holders at
their respective addresses shown on Exhibit B (or such other address as may be
provided in writing to the Escrow Agent by any such holder). No fractional
Escrow Shares shall be distributed to Indemnifying Shareholders pursuant to this
Agreement. Instead, the number of shares that each Indemnifying Shareholder
shall receive shall be rounded down to the nearest whole number; and the Escrow
Agent shall sell such number of Escrow Shares as is equal to the aggregate of
the fractional shares that would otherwise be distributed to the Indemnifying
Shareholders and shall distribute the proceeds of such sale to the Indemnifying
Shareholders other-wise entitled to a fractional Escrow Share pro rata based
upon the fraction of an Escrow Shares to which each such Indemnifying
Shareholder is otherwise entitled.
6. Valuation of Escrow Shares. For purposes of this Agreement,
the Fair Market Value of the Escrow Shares to be retained in the Escrow Account
pending a final resolution of a claim shall be determined based upon the average
of the closing prices of the Purchaser Common Stock on the Nasdaq National
Market System for the twenty trading days immediately preceding the date on
which the claim is made. The Fair Market Value of the Escrow Shares to be
released from the Escrow Account after a final determination/resolution of a
claim shall be determined based upon the average closing prices of the
Purchaser's Common Stock on the Nasdaq National Market System for the twenty
trading days immediately preceding the date of such final
determination/resolution.
7. Fees and Expenses of Escrow Agent. The Purchaser and the
Company Shareholders as a group shall each pay one-half of the amounts required
to compensate Escrow Agent for its services hereunder and, in addition, shall
each pay one-half of the amounts required to reimburse Escrow Agent for all of
its reasonable out-of-pocket expenses, including attorneys' fees, travel
expenses, telephone and facsimile transmission costs, postage (including express
mail and overnight delivery charges), copying charges and the like. All of the
compensation and reimbursement obligations set forth in this Section 7
4
<PAGE> 5
shall be payable one-half each by Purchaser and the Company Shareholders,
jointly and severally, upon demand by Escrow Agent. The obligations of Purchaser
and the Company Shareholders under this Section 7 shall survive any termination
of this Escrow Agreement and the resignation or removal of Escrow Agent.
8. Liability and Authority of Indemnification Representative;
Successors and Assignees.
(a) The Indemnification Representative shall incur no liability to
the Indemnifying Shareholders with respect to any action taken or suffered by
them in reliance upon any note, direction, instruction, consent, statement or
other documents believed by them to be genuinely and duly authorized, nor for
other action or inaction except their own willful misconduct or gross
negligence. The Indemnification Representative may, in all questions arising
under the Escrow Agreement, rely on the advice of counsel and for anything done,
omitted or suffered in good faith by the Indemnification Representative based on
such advice, the Indemnification Representative shall not be liable to the
Indemnifying Shareholders.
(b) In the event of the death or permanent disability of the
Indemnification Representative, or his resignation as an Indemnification
Representative, a successor Indemnification Representative shall be elected by a
majority vote of the Indemnifying Shareholders, with each such Indemnifying
Shareholder (or his or her successors or assigns) to be given a vote equal to
the number of votes represented by the Escrowed Shares held by such Indemnifying
Shareholder immediately prior to the Effective Time. Each successor
Indemnification Representative shall have all of the power, authority, rights
and privileges conferred by this Agreement upon the original Indemnification
Representative, and the term "Indemnification Representative" as used herein
shall be deemed to include successor Indemnification Representatives.
(c) The Indemnification Representative shall have full power and
authority to represent the Indemnifying Shareholders, and their successors, with
respect to all matters arising under this Agreement and all actions taken by any
Indemnification Representative hereunder shall be binding upon the Indemnifying
Shareholders, and their successors, as if expressly confirmed and ratified in
writing by each of them. Without limiting the generality of the foregoing, the
Indemnification Representative shall have full power and authority to interpret
all of the terms and provisions of this Agreement, to compromise any claims
asserted hereunder and to authorize payments to be made with respect thereto, on
behalf of the Indemnifying Shareholders and their successors. All actions to be
taken by the Indemnification Representative hereunder shall be evidenced by, and
taken upon, the written direction of a majority thereof.
9. Amounts Payable by Indemnifying Shareholders. The amounts
payable by the Indemnifying Shareholders under this Agreement (i.e., the fees
and expenses of arbitrators payable pursuant to Section 4(e), the fees of the
Escrow Agent payable pursuant to Section 7 and the indemnification obligations
pursuant to Section 13) shall be payable solely as follows. The Purchaser or the
Indemnification Representative shall notify the Escrow Agent of any such amount
payable by the Indemnifying Shareholders as soon as they become aware that any
such amount is payable, with a copy of such notice to the Purchaser. On the
sixth business day after the delivery of such notice, the Escrow Agent shall
sell such number of Escrow Shares (up to the number of Escrow Shares then
available in the Escrow Account), subject to compliance with all applicable
securities laws, as is necessary to raise such amount, and shall disburse such
proceeds to the party to whom such amount is owed in accordance with the
instructions of the Indemnification Representative; provided that if the
Purchaser delivers to the Escrow Agent (with a copy to the Indemnification
Representative), within five business days after delivery of such notice by the
Indemnification Representative, a written notice contesting the legitimacy or
reasonableness of such amount, then the Escrow Agent shall not sell Escrow
Shares to raise the disputed portion of such claimed amount, and such dispute
shall be resolved by the Purchaser and the Indemnification Representative in
accordance with the procedures set forth in Section 4(e).
10. Termination. This Agreement shall terminate upon the later of
the date which is eighteen (18) months after the Date of Closing (the
"Termination Date") or the distribution by the Escrow Agent of
5
<PAGE> 6
all of the Escrow Shares in accordance with this Agreement; provided that the
provisions of Sections 4, 5, 7, 8, 9, 12 and 13 shall survive such termination.
11. Notices. All notices, instructions and other communications
given hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested, postage prepaid, or (ii) via a reputable
nationwide overnight courier service, in each case to the address set forth
below. Any such notice, instruction or communication shall be deemed to have
been delivered two business days after it is sent by registered or certified
mail, return receipt requested, postage prepaid, or one business day after it is
sent via a reputable nationwide overnight courier service.
If to the Purchaser and/or the Acquisition Sub:
Tekgraf, Inc.
6000 Lake Forrest Drive
Suite 110
Atlanta, Georgia 30328
Attn: Mr. Phillip Aginsky
If to the Company:
New England Computer Graphics, Inc.
2 Park Drive #6
Westford, Massachusetts 01886
Attn: Mr. David Boston
If to the Indemnification Representatives:
David Boston
2 Park Drive #6
Westford, Massachusetts 01886
If to the Escrow Agent:
First Union National Bank
Attn: Corporate Trust - GA9094
999 Peachtree Street, NE, Suite 1100
Atlanta, Georgia 30309-9094
Attn: Ms. Teresa L. Davis
Any party may give any notice, instruction or communication in
connection with this Agreement using any other means (including personal
delivery, telecopy or ordinary mail), but no such notice, instruction or
communication shall be deemed to have been delivered unless and until it is
actually received by the party to whom it was sent. Any party may change the
address to which notices, instructions or communications are to be delivered by
giving the other parties to this Agreement notice thereof in the manner set
forth in this Section 12.
12. Liability of Escrow Agent.
(a) Escrow Agent shall have no liability or obligation with
respect to the Escrowed Cash or the Escrowed Shares except for Escrow Agent's
willful misconduct or gross negligence. Escrow Agent's sole responsibility shall
be for the safekeeping, investment, and disbursement of the Escrowed Cash or the
Escrowed Shares in accordance with the terms of this Escrow Agreement. Escrow
Agent shall have no implied duties or obligations and shall not be charged with
knowledge or notice of any fact or circumstance
6
<PAGE> 7
not specifically set forth herein. Escrow Agent may rely upon any instrument,
not only as to its due execution, validity and effectiveness, but also as to the
truth and accuracy of any information contained therein, which Escrow Agent
shall in good faith believe to be genuine, to have been signed or presented by
the person or parties purporting to sign the same and to conform to the
provisions of this Escrow Agreement. In no event shall Escrow Agent be liable
for incidental, indirect, special, consequential or punitive damages. Escrow
Agent shall not be obligated to take any legal action or commence any proceeding
in connection with the Escrowed Cash or the Escrowed Shares, any account in
which Escrowed Cash or the Escrowed Shares are deposited, this Escrow Agreement
or the Merger Agreement, or to appear in, prosecute or defend any such legal
action or proceeding. Escrow Agent may consult legal counsel selected by it in
the event of any dispute or question as to the construction of any of the
provisions hereof or of any other agreement or of its duties hereunder, or
relating to any dispute involving any party hereto, and shall incur no liability
and shall be fully indemnified from any liability whatsoever in acting in
accordance with the opinion or instruction of such counsel. Purchaser and the
Company Shareholders, jointly and severally, shall each promptly pay, upon
demand, one-half of the reasonable fees and expenses of any such counsel.
b. The Escrow Agent is authorized, in its sole discretion, to
comply with orders issued or process entered by any court with respect to the
Escrowed Cash or the Escrowed Shares, without determination by the Escrow Agent
of such court's jurisdiction in the matter. If any portion of the Escrowed Cash
or the Escrowed Shares is at any time attached, garnished or levied upon under
any court order, or in case the payment, assignment, transfer, conveyance or
delivery of any such property shall be stayed or enjoined by any court order, or
in case any order, judgment or decree shall be made or entered by any court
affecting such property or any part thereof, then and in any such event, the
Escrow Agent is authorized, in its sole discretion, to rely upon and comply with
any such order, writ, judgment or decree which it is advised by legal counsel
selected by it is binding upon it without the need for appeal or other action;
and if the Escrow Agent complies with any such order, writ, judgment or decree,
it shall not be liable to any of the parties hereto or to any other person or
entity by reason of such compliance even though such order, writ, judgment or
decree may be subsequently reversed, modified, annulled, set aside or vacated.
13. Indemnification of Escrow Agent. From and at all times after
the date of this Escrow Agreement, Purchaser and the Company Shareholders,
jointly and severally, shall, to the fullest extent permitted by law and to the
extent provided herein, indemnify and hold harmless Escrow Agent and each
director, officer, employee, attorney, agent and affiliate of Escrow Agent
(collectively, the "Indemnified Parties") against any and all actions, claims
(whether or not valid), losses, damages, liabilities, costs and expenses of any
kind or nature whatsoever (including without limitation reasonable attorneys'
fees, costs and expenses) incurred by or asserted against any of the Indemnified
Parties from and after the date hereof, whether direct, indirect or
consequential, as a result of or arising from or in any way relating to any
claim, demand, suit, action or proceeding (including any inquiry or
investigation) by any person, including without limitation Purchaser and the
Company Shareholders, whether threatened or initiated, asserting a claim for any
legal or equitable remedy against any person under any statute or regulation,
including, but not limited to, any federal or state securities laws, or under
any common law or equitable cause or otherwise, arising from or in connection
with the negotiation, preparation, execution, performance or failure of
performance of this Escrow Agreement or any transactions contemplated herein,
whether or not any such Indemnified Party is a party to any such action,
proceeding, suit or the target of any such inquiry or investigation; provided,
however, that no Indemnified Party shall have the right to be indemnified
hereunder for any liability finally determined by a court of competent
jurisdiction, subject to no further appeal, to have resulted solely from the
gross negligence or willful misconduct of such Indemnified Party. If any such
action or claim shall be brought or asserted against any Indemnified Party, such
Indemnified Party shall promptly notify Purchaser and the Company Shareholders
in writing, and Purchaser and the Company Shareholders shall assume the defense
thereof, including the employment of counsel and the payment of all expenses.
Such Indemnified Party shall, in its sole discretion, have the right to employ
separate counsel (who may be selected by such Indemnified Party in its sole
discretion) in any such action and to participate in the defense thereof, and
the fees and expenses of such counsel shall be paid by such
7
<PAGE> 8
Indemnified Party, except that Purchaser and/or the Company Shareholders shall
be required to pay such fees and expenses if (a) Purchaser and/or the Company
Shareholders agree to pay such fees and expenses, or (b) Purchaser and/or the
Company Shareholders shall fail to assume the defense of such action or
proceeding or shall fail, in the sole discretion of such Indemnified Party, to
employ counsel satisfactory to the Indemnified Party in any such action or
proceeding, (c) Purchaser or the Company Shareholders is the plaintiff in any
such action or proceeding or (d) the named or potential parties to any such
action or proceeding (including any potentially impleaded parties) include both
Indemnified Party and the Company Shareholders and/or Purchaser, and Indemnified
Party shall have been advised by counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the Company Shareholders or Purchaser. Purchaser and the Company
Shareholders shall be jointly and severally liable to pay fees and expenses of
counsel pursuant to the preceding sentence, except that any obligation to pay
under clause (a) shall apply only to the party so agreeing. All such fees and
expenses payable by the Company Shareholders and/or Purchaser pursuant to the
foregoing sentence shall be paid from time to time as incurred, both in advance
of and after the final disposition of such action or claim. All of the foregoing
losses, damages, costs and expenses of the Indemnified Parties shall be payable
by Purchaser and the Company Shareholders, jointly and severally, upon demand by
such Indemnified Party. The obligations of Purchaser and the Company
Shareholders under this Section 13 shall survive any termination of this Escrow
Agreement, and the resignation or removal of Escrow Agent shall be independent
of any obligation of the Escrow Agent.
The parties agree that neither the payment by Purchaser or the
Company Shareholders of any claim by Escrow Agent for indemnification hereunder
nor the disbursement of any amounts to Escrow Agent from the Cash Escrow Account
or the Share Escrow Account in respect of a claim by Escrow Agent for
indemnification shall impair, limit, modify, or affect, as between Purchaser and
the Company Shareholders, the respective rights and obligations of Purchaser, on
the one hand, and the Company Shareholders, on the other hand, under the
Underlying Agreement.
14. Resignation and Removal of Escrow Agent. Escrow Agent may
resign from the performance of its duties hereunder at any time by giving ten
(10) days' prior written notice to the Purchaser and the Indemnification
Representative or may be removed, with or without cause, by the Purchaser and
the Indemnification Representative, acting jointly by furnishing a joint written
direction to Escrow Agent, at any time by the giving of ten (10) days' prior
written notice to Escrow Agent. Such resignation or removal shall take effect
upon the appointment of a successor Escrow Agent as provided hereinbelow. Upon
any such notice of resignation or removal, the Purchaser and the Indemnification
Representative jointly shall appoint a successor Escrow Agent hereunder, which
shall be a commercial bank, trust company or other financial institution with a
combined capital and surplus in excess of $5,000,000. Upon the acceptance in
writing of any appointment as Escrow Agent hereunder by a successor Escrow
Agent, such successor Escrow Agent shall thereupon succeed to and become vested
with all the rights, powers, privileges and duties of the retiring Escrow Agent,
and the retiring Escrow Agent shall be discharged from its duties and
obligations under this Escrow Agreement, but shall not be discharged from any
liability for actions taken as Escrow Agent hereunder prior to such succession.
After any retiring Escrow Agent's resignation or removal, the provisions of this
Escrow Agreement shall inure to its benefit as to any actions taken or omitted
to be taken by it while it was Escrow Agent under this Escrow Agreement. The
retiring Escrow Agent shall transmit all records pertaining to the Escrowed
Shares and shall deliver all shares held by it in the Share Escrow Account to
the successor Escrow Agent, after making copies of such records as the retiring
Escrow Agent deems advisable and after deduction and payment to the retiring
Escrow Agent of all fees and expenses (including court costs and attorneys'
fees) payable to, incurred by, or expected to be incurred by the retiring Escrow
Agent in connection with the performance of its duties and the exercise of its
rights hereunder.
15. General.
(a) Governing Law, Assigns. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of Georgia
without regard to conflict-of-law principles and
8
<PAGE> 9
shall be binding upon, and inure to the benefit of, the parties hereto and their
respective successors and assigns.
(b) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(c) Entire Agreement. Except for those provisions of the Merger
Agreement referenced herein, this Agreement constitutes the entire understanding
and agreement of the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements or understandings, written or
oral, between the parties with respect to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of
any breach of any provision of this Escrow Agreement shall be effective unless
in writing. No waiver by any party of any such condition or breach, in any one
instance, shall be deemed to be a further or continuing waiver of any such
condition or breach or a waiver of any other condition or breach of any other
provision contained herein.
9
<PAGE> 10
(e) Amendment. This Agreement may be amended only with the
written consent of the Purchaser, the Escrow Agent and the Indemnification
Representative.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
PURCHASER
TEKGRAF, INC.
By: /s/ Dan I. Bailey
---------------------------------
Dan I. Bailey, President
ACQUISITION SUB:
TEKGRAF SUB II, INC.
By: /s/ Phillip Aginsky
----------------------------------
Phillip Aginsky, Chairman
ESCROW AGENT
FIRST UNION NATIONAL BANK
By: /s/ Teresa L. Davis
---------------------------------
Name: Teresa L. Davis
Title: Vice President
10
<PAGE> 11
INDEMNIFICATION REPRESENTATIVE
By: /s/ David Boston
--------------------------------------
David Boston
COMPANY:
NEW ENGLAND COMPUTER GRAPHICS,
INC.
By: /s/ David Boston (SEAL)
---------------------------------
David Boston, President
COMPANY SHAREHOLDERS:
/s/ A. Lowell Nerenberg (SEAL)
------------------------------------
A. Lowell Nerenberg
/s/ William Rychel (SEAL)
------------------------------------
William Rychel
/s/ Thomas Gust (SEAL)
------------------------------------
Thomas Gust
/s/ Scott Barker (SEAL)
------------------------------------
Scott Barker
/s/ Robert Shumaker (SEAL)
------------------------------------
Robert Shumaker
/s/ Thomas Mills (SEAL)
------------------------------------
Thomas Mills
/s/ David Boston (SEAL)
------------------------------------
David Boston
11
<PAGE> 12
EXHIBIT B
---------
<TABLE>
<CAPTION>
Company Shareholder NECG Shares Percentage
- ------------------- ----------- ----------
<S> <C> <C>
A. Lowell Nerenberg 5000 27.33%
C/o Tekgraf, Inc.
620 East Diamond Avenue
Gaithersburg, MD 20877
William Rychel 2500 13.66%
C/o Tekgraf, Inc.
980 Corporate Woods Parkway
Vernon Hills, IL 60061
Thomas Gust 2500 13.66%
C/o Tekgraf, Inc.
980 Corporate Woods Parkway
Vernon Hills, IL 60061
David Boston 3293 18.00%
C/o New England Computer Graphics, Inc.
2 Park Drive #6
Westford, MA 01886
Scott Barker 4000 21.87%
1110 West Butler Road
Greenville, SC 29607
Bob Shumaker 500 2.73%
1011 Plantation Drive
Simpsonville, SC 29681
Tom Mills 500 2.73%
110 Clubhouse Court
Taylors, SC 29687
</TABLE>
12
<PAGE> 1
EXHIBIT 11.1
Tekgraf, Inc.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE QUARTER ENDED MARCH 31,
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Net income $ 110 $ 94
Weighted average number of common shares
Common shares 1,084 5,266
Net income per share $ 0.10 $ 0.02
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Prisym Technologies, Inc. of Georgia, a Georgia corporation
G&R Marketing, Inc.,an Illinois corporation
Microsouth, Inc., a Georgia corporation
tekgraf, inc., a Texas corporation
Computer Graphics Distributing Company, a Maryland corporation
Intelligent Products Marketing, Inc., a California corporation
IG Distributing, Inc., a California corporation
Computer Graphics Technology, Inc., a Georgia corporation
Media Graphics Distribution, Inc., a Georgia corporation
New England Computer Graphics, Inc., a Georgia corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TEKGRAF, INC. FOR THE THREE MONTH PERIOD ENDED MARCH
31, 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-31-1998
<CASH> 4,303,619
<SECURITIES> 0
<RECEIVABLES> 9,534,269
<ALLOWANCES> 221,000
<INVENTORY> 6,777,021
<CURRENT-ASSETS> 20,938,259
<PP&E> 630,895
<DEPRECIATION> 229,689
<TOTAL-ASSETS> 27,877,042
<CURRENT-LIABILITIES> 7,743,731
<BONDS> 0
0
0
<COMMON> 5,433
<OTHER-SE> 20,120,523
<TOTAL-LIABILITY-AND-EQUITY> 27,877,042
<SALES> 16,871,281
<TOTAL-REVENUES> 16,871,281
<CGS> 14,041,156
<TOTAL-COSTS> 2,694,143
<OTHER-EXPENSES> 118,006
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,808
<INCOME-PRETAX> 250,148
<INCOME-TAX> 146,000
<INCOME-CONTINUING> 104,180
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94,225
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
<PAGE> 1
EXHIBIT 99.1
Wednesday May 13, 10:31 am Eastern Time
Company Press Release
Tekgraf Completes Acquisition Of Media Graphics Distribution
ATLANTA--(BUSINESS WIRE)--May 13, 1998--Tekgraf, Inc., (NASDAQ: TKGFA - news)
announced today that it has completed the acquisition of Media Graphics
Distribution (MGD), based in Torrance, California, effective May 1, 1998. MGD, a
regional computer graphics technology distributor, will be incorporated into
Tekgraf's Graphics Division operations.
Under the terms of the agreement, Tekgraf exchanged a combination of
unregistered Class A common stock and cash, subject to adjustment, for all the
outstanding common stock of MGD. MGD had 1997 unaudited revenues of
approximately $8 million.
As part of the acquisition, Tekgraf will now have a 10,000-square foot warehouse
and demonstration facility in Torrance, California, to service customers in the
Southwest. This facility houses technical support, a sales showroom, a training
and educational facility for resellers and their corporate customers, and a
warehouse.
"Tekgraf's acquisition of Media Graphics Distribution is a further step in
maintaining our leadership role in the computer graphics arena," said Phillip
Aginsky, chairman of Tekgraf. "The joining of MGD and Tekgraf ensures that we
are able to meet the growing needs of resellers and their clients in the
Southwest and southern California."
Tekgraf's Graphics Division provides sales, marketing and technical support for
high-end computer graphics technologies through reseller channels. This
acquisition gives Tekgraf expanded geographic reach into southern California,
Arizona, New Mexico, southern Nevada and Hawaii by immediately adding more than
500 resellers to its expanding national network of high-end computer graphics
VARs. This move will broaden Tekgraf's ability to provide manufacturers with a
singular opportunity to design and deploy national distribution solutions.
Currently, Tekgraf is well positioned to provide extensive reseller and
manufacturer benefits based on its eight strategically located product
demonstration centers near Chicago, New York, Washington, D.C., San Francisco,
Atlanta, Houston, Greenville, S.C., and, with the acquisition of MGD, Los
Angeles. The addition of MGD further enhances Tekgraf's regionally distributed
team of trained salespeople who specialize in selling graphics technology
solutions and services through resellers.
"The addition of MGD to the Tekgraf network is very important because of the
success the company has experienced since its founding in 1987. In ten years
Mark Lewis and his staff have built a company known for partnering with its
customers to create technology solutions that work. In short, that is what
Tekgraf is all about," said Bill Rychel, Tekgraf Graphics Division president.
<PAGE> 2
"MGD and its employees are very excited to be a part of Tekgraf," said Mark
Lewis, MGD president and founder. "We see the opportunity to help define Tekgraf
as the leading national distributor of technology to the graphic industries as a
natural fit with what we have been doing with MGD in the Southwest. As a result
of the acquisition, we are now able to offer our customer base more strategic
and complete products and resources. We are simply better able to serve our
resellers now. For example, the ability to carry the Hewlett Packard DesignJet
line of products is a strong addition to our current offerings."
Founded in 1987, MGD is a value-added distribution company in the Southwest with
major emphases on the digital prepress, presentation graphics, desktop
publishing, digital photography and other digital imaging markets. MGD also
offers special services that include integration and installation, reseller
oriented marketing programs, and leasing and financing services. Currently, they
distribute for Agfa, Epson America, Scitex America, HuntGraphics and other
suppliers of graphics equipment. MGD and its management team are active members
in the North American Graphic Arts Suppliers Association (NAGASA).
Tekgraf, Inc. (NASDAQ: TKGFA - news), headquartered in Atlanta, is a value-added
wholesale distributor of advanced computer graphics products and a manufacturer
of custom personal computers. The Graphics Division provides sales, marketing
and technical support of computer graphics technologies through reseller
channels. Demonstration and distribution centers are located throughout the
United States. The Technology Division is primarily engaged in the manufacture,
sale, distribution and support of the Crescent Computer line of special purpose
Intel-based NT workstations and servers. Additional information on Tekgraf may
be obtained by visiting the company Web site at http://www.tekgraf.com, or by
calling the nearest Tekgraf Graphics Division office toll free at 888-321-TKGF.
Editors Note: Brand or product names are trademarks or registered trademarks of
their respective holders.
This press release contains statements that constitute forward-looking
statements within the meaning of the Safe Harbor provisions of the Private
Securities Litigation Reform Act of 1995, as amended. These statements appear in
a number of places in this press release and include all statements that are not
historical statement of fact. The words "may," "would," "could," "will,"
"progress toward," "move forward," "actively pursuing," "increase," "expect,"
"estimate," "anticipate," "believes," "intends," "plans," and similar
expressions and variations thereof are intended to identify forward-looking
statements. Investors are cautioned that such statements are not guarantees of
future performance and involve various risks and uncertainties, many of which
are beyond the Company's control. Actual results may differ materially from
those discussed in the forward-looking statements as a result of factors
described below. These risks include, but are not limited to, competitive market
pressures, material changes in customer demand, availability of labor, the
Company's ability to perform contracts, governmental policies adverse to the
computer industry, economic and competitive conditions, and other risks outside
the control of the Company, as well as those factors discussed in detail in the
Company's filings with the Securities and Exchange
<PAGE> 3
Commission, including the "Risk Factors" section of the Company's registration
statement on Form S-1 (Registration No. 333-33449).
Contact:
Duffey Communications, Inc. (Media)
Bob Wice/Mike Neumeier, 404-266-2600
[email protected]/[email protected]
OR
Tekgraf
Jeff Camp, 404-252-0201, ext. 105
[email protected]
<PAGE> 1
EXHIBIT 99.2
Thursday May 14, 10:47 am Eastern Time
Company Press Release
Latest Acquisition By Tekgraf Extends Company Reach Into Canada And New England
Tekgraf, Inc., Acquires New England Computer Graphics
ATLANTA--(BUSINESS WIRE)--May 14, 1998-- Tekgraf, Inc., (NASDAQ: TKGFA - news)
announced today that it has acquired New England Computer Graphics (NECG), with
offices in Boston, Mass., and Toronto, Ontario, Canada, effective May 8, 1998.
NECG's New England- and Canada-based computer graphics technology distribution
systems will be incorporated into Tekgraf's Graphics Division operations.
Under the terms of the agreement, Tekgraf exchanged a combination of
unregistered Class A common stock and cash, subject to adjustment, for all the
outstanding common stock of NECG. NECG had 1997 unaudited revenues of
approximately US$6 million.
With this acquisition, Tekgraf will have an additional 7,000 square feet of
facilities, including training, technical support and sales facilities, plus
warehouses and demo centers to service New England and Canada.
"Tekgraf's acquisition of New England Computer Graphics is another step forward
in our ongoing commitment to maintaining a leadership role in the computer
graphics arena," said Phillip Aginsky, chairman of Tekgraf. "By providing a
solution to the growing opportunities in the New England area, as well as
Canada, our manufacturer-and reseller-partners can be assured that we are making
strategic decisions that continually put Tekgraf in a position to help them meet
their long-term business objectives."
Tekgraf's Graphics Division provides sales, marketing and technical support for
high-end computer graphics technologies through reseller channels. The
acquisition gives Tekgraf enhanced geographic reach into the New England Region,
including upstate New York, by adding more than 450 resellers to its expanding
network of high-end computer graphics VARs. In addition, the acquisition marks
Tekgraf's first expansion outside the U.S., strengthening its relationship with
resellers and extending its capabilities and services into Canada, benefiting
manufacturers looking to distribute throughout North America.
Currently, Tekgraf provides extensive reseller and manufacturer benefits based
on its eight strategically located product demonstration centers in Chicago, New
York City, Washington, D.C., San Francisco, Atlanta, Houston, Los Angeles, and
Greenville, S.C. The acquisition of NECG adds two additional demonstration and
distribution centers and further enhances and extends Tekgraf's North American
network of trained salespeople who specialize in graphics technology solutions
and services offered through resellers.
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"NECG has built a successful company by delivering smart solutions to meet
reseller customer needs. That philosophy is exactly what Tekgraf provides. As
partners, we can now extend our scope and expertise to provide end-to-end
solutions from manufacturers to resellers throughout North America. It's a very
exciting time for us," said Bill Rychel, Tekgraf Graphics Division president.
"We are excited to be a part of Tekgraf," said David Boston, president of NECG.
"This is an opportunity for us to help Tekgraf define itself as a truly North
American distributor to the graphics industry. And as a result, the added
marketing capabilities and product offerings we will be able to offer our
reseller partners mean we can enhance our value as a strategic and complete
resource."
Founded in 1994, NECG is a value-added graphics distribution company in New
England and Canada with a major emphasis in digital pre press, engineering
document management systems, and wide format display graphics. NECG also offers
installation, training, technical support and reseller dedicated marketing
programs, as well as leasing and financing services. Currently NECG distributes
for Agfa, Epson America, Scitex America, HuntGraphics, Vidar Systems and other
suppliers of graphics equipment. NECG is an active member of the North American
Graphic Arts Suppliers Association (NAGASA).
Tekgraf, Inc. (NASDAQ: TKGFA - news), headquartered in Atlanta, is a value-added
wholesale distributor of advanced computer graphics products and a manufacturer
of custom personal computers. The Tekgraf Graphics Division provides sales,
marketing and technical support of computer graphics technologies through
reseller channels. Demonstration and distribution centers are located throughout
the United States. The Technology Division is engaged in the manufacture, sale,
distribution and support of the Crescent Computer line of special purpose
Intel-based NT workstations and servers. Additional information on Tekgraf may
be obtained by visiting the company Web site at http://www.tekgraf.com, or by
calling the nearest Tekgraf Graphics Division office toll free at 888-321-TKGF.
Editors Note: Brand or product names are trademarks or registered trademarks of
their respective holders.
This press release contains statements that constitute forward-looking
statements within the meaning of the Safe Harbor provisions of the Private
Securities Litigation Reform Act of 1995, as amended. These statements appear in
a number of places in this press release and include all statements that are not
historical statement of fact. The words "may," "would," "could," "will,"
"progress toward," "move forward," "actively pursuing," "increase," "expect,"
"estimate," "anticipate," "believes," "intends," "plans," and similar
expressions and variations thereof are intended to identify forward-looking
statements. Investors are cautioned that such statements are not guarantees of
future performance and involve various risks and uncertainties, many of which
are beyond the Company's control. Actual results may differ materially from
those discussed in the forward-looking statements as a result of factors
described below. These risks include, but are not limited to, competitive market
pressures, material changes in customer demand, availability of labor, the
Company's ability to perform contracts, governmental policies adverse to the
computer industry, economic
<PAGE> 3
and competitive conditions, and other risks outside the control of the Company,
as well as those factors discussed in detail in the Company's filings with the
Securities and Exchange Commission, including the "Risk Factors" section of the
Company's registration statement on Form S-1 (Registration No. 333-33449).
Contact:
Duffey Communications, Inc. (Media)
Bob Wice/Mike Neumeier, 404-266-2600
[email protected]/[email protected]
OR
Tekgraf
Lowell Nerenberg, 301/921-0011
[email protected]
