<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1997
REGISTRATION NO. 333-38471
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SPECTRATEK TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 2671 95-3541556
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
5405 JANDY PLACE
LOS ANGELES, CALIFORNIA 90066
(310) 822-2400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
TERRENCE CONWAY
CHIEF EXECUTIVE OFFICER AND PRESIDENT
SPECTRATEK TECHNOLOGIES, INC.
5405 JANDY PLACE
LOS ANGELES, CALIFORNIA 90066
(310) 822-2400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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BRUCE R. HALLETT, ESQ. DANA M. WARREN, ESQ.
ELLEN S. BANCROFT, ESQ. THOMAS M. CLEARY, ESQ.
MATTHEW V. WATERMAN, ESQ. ASHLEY S. NEWSOM, ESQ.
BROBECK, PHLEGER & HARRISON LLP RIORDAN & McKINZIE
4675 MacARTHUR COURT, SUITE 1000 300 SOUTH GRAND AVENUE, 29TH FLOOR
NEWPORT BEACH, CALIFORNIA 92660 LOS ANGELES, CALIFORNIA 90071
(714) 752-7535 (213) 629-4824
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
CALCULATION OF ADDITIONAL REGISTRATION FEE
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========================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(2)
- ------------------------------------------------------------------------------------------------------------------------
Common Stock................................................................... $5,360,000 $1,581.20
========================================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(o) solely for the purpose of calculating the
registration fee. This Registration Statement relates to the registration of
an aggregate 2,530,000 shares of Common Stock (including 330,000 shares of
Common Stock which may be purchased by the Underwriters to cover
over-allotments, if any) at a proposed maximum aggregate offering price per
share of $12.00.
(2) The Registrant submitted $7,576 with the initial filing of this Registration
Statement on October 22, 1997 covering securities with a proposed maximum
aggregate offering price of $30,000,000.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 15, 1997
PROSPECTUS
2,200,000 SHARES
[SPECTRATEK LOGO]
COMMON STOCK
------------------------
Of the 2,200,000 shares of common stock, $.0001 par value (the "Common
Stock") of Spectratek Technologies, Inc. ("Spectratek" or the "Company") being
offered, 1,600,000 shares are being sold by the Company and 600,000 shares are
being sold by the Selling Stockholders. The Company will not receive any
proceeds from the sale of Common Stock by the Selling Stockholders. See
"Principal and Selling Stockholders." Prior to this Offering, there has been no
public market for the Common Stock. It is currently estimated that the initial
public offering price will be between $10 and $12 per share. See "Underwriting"
for information relating to the factors to be considered in determining the
initial public offering price. The Company has applied to have the Common Stock
approved for quotation on the Nasdaq National Market under the symbol "SPTK."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
=====================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PROCEEDS TO SELLING
PUBLIC AND COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(2)
- -----------------------------------------------------------------------------------------------------
Per Share....................... $ $ $ $
- -----------------------------------------------------------------------------------------------------
Total(3)........................ $ $ $ $
=====================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $700,000. Of
the Proceeds to Company, approximately $3.6 million will be distributed to
the Company's existing stockholders in payment of promissory notes issued in
connection with the termination of the Company's S Corporation status. See
"Prior S Corporation Status" and "Use of Proceeds."
(3) The Company has granted to the Underwriters an option, exercisable within 45
days hereof, to purchase up to an aggregate of 330,000 additional shares of
Common Stock at the Price to Public less Underwriting Discounts and
Commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters named herein,
subject to prior sale, when, as and if issued by the Company and delivered to
and accepted by the Underwriters and subject to certain prior conditions,
including the right of the Underwriters to reject any order in whole or in part.
It is expected that delivery of the shares of Common Stock will be made through
the facilities of The Depository Trust Company in New York, New York on or about
January , 1998.
EVEREN SECURITIES, INC.
The date of this Prospectus is January , 1998
<PAGE> 3
[COLOR PHOTOS AND ART WORK INCLUDE A DIAGRAM OF THE MICROREPLICATION PROCESS AND
PICTURES OF THE COMPANY'S PRODUCTS USED IN PACKAGING, ARCHITECTURE, PAINT,
PAPER, RIBBONS AND THREAD APPLICATIONS]
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors and will
make available copies of quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
Geometric Pigment(TM), Spectratek(TM), Spectrasheen(TM), Holosheen(TM) and
Hyperplaid(TM) are trademarks of the Company. This Prospectus also includes
trade names and trademarks of other companies.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFER AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus (i) assumes no exercise of the Underwriters' over-allotment
option, (ii) assumes no exercise of options to purchase 91,500 shares of Common
Stock outstanding as of December 1, 1997, (iii) gives effect to a 300-for-1
stock split of the Common Stock effected in June 1997, (iv) gives effect to the
1.85-for-1 stock split to be effected in December 1997, and (v) gives effect to
the reincorporation of the Company in the State of Delaware to occur in December
1997.
THE COMPANY
Spectratek Technologies, Inc. is a leading manufacturer of microreplicated
holographic films that are used in a wide range of value added applications in
consumer products, packaging materials and industrial products. Using its
proprietary technologies, the Company records coherent light onto continuous
rolls of polymer film. This process adds unique optical characteristics to the
film, creating color, motion and the appearance of depth in natural light. The
Company's films are used in consumer applications including stickers, magazines,
glitter and cosmetics; in packaging applications and labels for toys, food,
beverages, computer games and displays; and in industrial applications such as
paint, fabrics and flooring and architectural materials. The Company has refined
its proprietary technologies to create virtually seamless holographic patterns
which the Company believes offer superior brightness, clarity and consistency
when compared with competing holographic films. The Company's holographic films
have been incorporated into products marketed by numerous companies in a broad
range of industries, including Coors Bottling Company, Kraft General Foods,
Mattel, Inc. and PPG Industries, Inc.
All of the Company's films utilize holographic technology. Holograms are
visual recordings of light wave patterns in a compacted form that enable three
dimensional information to be condensed onto a flat surface. Microscopic grooves
and bumps on the surface of film facilitate the dispersion of white light into
its component spectral colors to create the holographic effect. By arranging
areas of different grating angles and groove spacing, holographic images or
patterns are created that, when viewed from different angles, reveal features
(color and depth) of the hologram that are not otherwise visible in a
conventionally printed image.
A key step in the manufacture of holographic films is the microreplication
process, which involves the transfer of a master holographic image or pattern
onto the surface of thin film. The Company has developed proprietary remastering
methodologies that enable the Company to enhance and refine the shape, size and
position of the grooves and bumps on the existing custom holographic master. The
specific pattern of grooves and bumps determines the effect created by the
interaction of light with the thin films. By adjusting the depth and spacing of
the grooves (as many as 44,000 lines per linear inch) and bumps (often only .25
micron deep), the Company is able to increase the brightness and clarity of the
hologram. The Company is not aware of any competitor who is able to modify or
enhance an existing master. In addition, the elimination of virtually all seams
and breaks within most of the Company's patterns make the Company's products
more attractive and economical for its customers.
The Company currently manufactures and markets 14 custom stock patterns,
which are typically sold in finished rolls of film in widths of 24 or 40 inches,
or as glitter or geometric pigment (precision cut particles of the Company's
films). These stock patterns are generally forwarded to converters, cutters or
finishers who create the final product for end users. The Company is currently
constructing a new microreplication machine to manufacture film in widths of 55
inches, which should enable the Company to meet demand in new markets requiring
wider films. During 1996, the Company manufactured and sold more than 80 million
square feet of holographic thin films.
The Company sells microreplicated holographic films as well as converted
products which incorporate the Company's holographic films. Converted products
include film that is permanently laminated to paper or board stock or pressure
sensitive backing, that is coated or tinted, or that is cut into particles
ranging from 1/16 inch to 1/500 inch. The Company does not engage in such
conversion processes internally, but rather
3
<PAGE> 5
contracts with a number of third party vendors to perform these processes. Such
vendors also act as value added resellers who add conversion steps to these
films and sell the converted products directly.
The Company believes that significant growth opportunities exist for
holographic films in the markets for both rigid and flexible packaging materials
and for industrial applications due to the visual appeal, impact and uniqueness
of holographic films. According to the Flexible Packaging Association, the size
of the flexible packaging (bags and pouches) market is estimated to reach $16.4
billion in 1997. Packages utilizing holographic materials currently represent a
very small share of the packaging materials market due to their higher cost when
compared with traditional packaging materials. The Company's new
microreplication machine should enable it to produce films 55 inches wide in
order to better address the requirements of the packaging industry.
The Company is also taking steps to expand the industrial applications for
its products, particularly by marketing the Company's geometric pigment for use
in paints and coatings in the automobile paint markets. In July 1997, PPG
Industries, Inc. launched its Prizmatique(TM) automobile paint line, featuring
the Company's geometric pigment, for use in the automobile refinishing market.
In addition, BASF and Englehard are each beta testing the Company's geometric
pigment for use in their line paint products for automobile manufacturers. In
addition, Vegla, a large European glass manufacturer, is marketing the Company's
holographic films for use in residential and commercial decorative glass
applications. The Company's objective is to leverage its proprietary
microreplication technologies to expand its product offerings in existing
markets, maximize economies of scale, and develop new markets for its
holographic films.
The Company was incorporated in California in October 1980 as Spectratek,
changed its name to Spectratek Technologies, Inc. in June 1997, and was
reincorporated in Delaware in December 1997. The Company's executive offices are
located at 5405 Jandy Place, Los Angeles, California 90066, and its telephone
number at that location is (310) 822-2400.
THE OFFERING
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<S> <C>
Common Stock Offered
By the Company.......................... 1,600,000 shares
By the Selling Stockholders............. 600,000 shares
Total.............................. 2,200,000 shares
Common Stock to be outstanding after the
Offering................................... 7,172,264 shares(1)
Use of Proceeds.............................. The Company intends to use the net proceeds
from the Offering to purchase additional
capital equipment (primarily for the
Company's laser laboratory and mastering
facility), to repay indebtedness, including
indebtedness incurred in connection with the
S Corporation Distribution (as defined
herein) and under the Company's bank line of
credit, to fund the relocation of the
Company's manufacturing facilities to its new
facility, to expand the Company's marketing
capabilities, to upgrade the Company's
information systems and for general corporate
purposes (including working capital
requirements). See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... SPTK
</TABLE>
- ---------------
(1) Excludes 560,550 shares of Common Stock reserved for issuance under the
Company's 1997 Stock Incentive Plan (the "1997 Plan"). As of December 1,
1997, options to purchase 169,275 shares of Common Stock were outstanding
under the 1997 Plan at a weighted average exercise price of $9.04 per share.
See "Management -- 1997 Stock Incentive Plan" and Note 10 of Notes to
Financial Statements.
4
<PAGE> 6
SUMMARY FINANCIAL INFORMATION
The following summary financial information for the Company is qualified in
its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 4,536 $ 7,387 $ 9,052 $ 10,320 $ 12,003 $ 8,457 $ 11,857
Gross profit.............................. 1,458 4,485 3,809 4,747 4,889 3,444 5,213
Income from operations ................... 72 2,720 1,702 2,396 2,243 1,702 2,819
Income before provision for income
taxes................................... 74 2,725 1,804 2,395 2,145 1,669 2,782
Provision for income taxes................ 30 701 791 1,021 851 662 673(1)
Net income................................ $ 44 $ 2,024 $ 1,013 $ 1,374 $ 1,294 $ 1,007 $ 2,109
Net income per common and common
equivalent share........................ $ 0.01 $ 0.36 $ 0.18 $ 0.24 $ 0.23 $ 0.18
Weighted average common and common
equivalent shares(2).................... 5,630,194 5,630,194 5,630,194 5,630,194 5,634,285 5,629,660
Pro forma provision for income taxes(3)... $ 1,405
Pro forma net income(3)................... $ 1,377
Pro forma net income per share(3)......... $ 0.23
Pro forma weighted average common and
common equivalent shares(2)(4) 5,962,800
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
--------------------------------------------
PRO PRO FORMA
ACTUAL FORMA(5) AS ADJUSTED(5)(6)
------- -------- -----------------
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BALANCE SHEET DATA:
Working capital........................................................ $ 6,200 $ 5,559 $21,227
Total assets........................................................... 10,186 10,634 25,502
Notes payable.......................................................... 800 800 --
Retained earnings...................................................... 8,281 3,949 3,949
Stockholders' equity................................................... 8,351 7,619 23,287
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING AND OTHER DATA:
Capital expenditures...................... $ 171 $ 167 $ 404 $ 634 $ 103 $ 92 $ 334
Research and development.................. 238 397 576 571 504 379 193
Depreciation and amortization............. 79 214 107 165 310 232 313
EBITDA(7)................................. 158 2,971 1,945 2,628 2,612 2,017 3,174
Cash flow provided by (used in):
Operating activities.................... (424) 464 164 (5) 1,346 1,037 1,477
Investing activities.................... (171) (167) (404) (634) (103) (92) (334)
Financing activities.................... 391 10 (9) 661 (879) (732) (567)
</TABLE>
- ---------------
(1) The Company has been taxed as an S Corporation for federal and state income
tax purposes since January 1, 1997. Provision for income taxes for the nine
months ended September 30, 1997 consists primarily of net deferred tax
assets which were written-off in January 1997 upon the Company's election to
be taxed as an S Corporation. In October 1997, the Company made a
distribution (the "S Corporation Distribution") to its existing stockholders
consisting of promissory notes (the "Stockholder Notes") in an aggregate
principal amount equal to the undistributed retained earnings of the Company
from January 1, 1997 through the termination of the Company's S Corporation
status, to occur on or immediately prior to the consummation of the Offering
(the "Termination Date"), which amount is estimated to be approximately $3.6
million at the Termination Date. Other than the S Corporation Distribution,
the Company has never declared or paid cash dividends on its Common Stock.
(footnotes continued on next page)
5
<PAGE> 7
(2) See Note 2 of Notes to Financial Statements.
(3) Pro forma provision for income taxes, pro forma net income and pro forma net
income per share reflect the pro forma effect of income taxes as if the
Company had been taxed as a C Corporation for the nine months ended
September 30, 1997. Upon consummation of the Offering, the Company will be
subject to federal and state income taxes. See "Prior S Corporation Status."
(4) Also assumes as outstanding during each of the periods presented, 327,273
shares of the Common Stock offered by the Company in this Offering, which
represent the approximate number of shares deemed to be sold by the Company
to fund the repayment of the Stockholder Notes. See "Prior S Corporation
Status," "Use of Proceeds" and Note 2 of Notes to Financial Statements.
(5) Presented to give pro forma effect to (i) the S Corporation Distribution,
and (ii) the termination of the Company's S Corporation status.
(6) As adjusted to give effect to the sale by the Company and the Selling
Stockholders of 2,200,000 shares of Common Stock at an assumed initial
public offering price of $11 per share and the application of the estimated
net proceeds therefrom (including the repayment of indebtedness incurred
under the Company's bank line of credit and the Stockholder Notes). See
"Prior S Corporation Status" and "Use of Proceeds."
(7) EBITDA represents earnings before taking into consideration interest
expense, income tax expense and depreciation and amortization expense and is
not prepared in accordance with generally accepted accounting principles
("GAAP"). EBITDA may not provide an accurate comparison among companies
because it is not necessarily computed by all companies in an identical
manner. The use of such information is intended only to supplement the
conventional income statement presentation, and is not to be considered as
an alternative to net income, cash flows or any other indicator of the
Company's operating performance which is presented in accordance with GAAP
above.
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the Common Stock offered hereby.
DEPENDENCE ON MARKET ACCEPTANCE OF HOLOGRAPHIC PRODUCTS; LIMITATION ON ABILITY
TO IDENTIFY AND PENETRATE NEW MARKETS
All of the Company's products are based on holography and, as a result, the
Company's operating results will depend substantially on the continued market
acceptance of holographic products. Any decline in the applications for the
Company's products or the emergence of a new technology for the production of
high quality holographic materials at reduced prices would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company believes that its growth prospects depend
in large part on its ability to identify and penetrate new markets and to gain
greater acceptance of the Company's products in its existing markets.
Holographic materials currently constitute only a small percentage of the
materials used in the large and highly competitive markets in which the
Company's products are currently sold. In particular, the Company faces
significant challenges in penetrating the packaging market due to material size
constraints and cost considerations resulting from the availability of less
expensive packaging materials. Additional challenges to the Company's expansion
into new markets and within existing markets include, among others, adapting to
specialized marketing needs, technological requirements and new product
compositions. In addition, the Company sells a significant portion of its
products to value added resellers, and accordingly, is often unable to identify
the end user for such products. This limits the Company's ability to identify
and penetrate new markets and to pursue additional opportunities within its
existing markets. The inability of the Company to identify and penetrate new
markets or to gain broader acceptance of its products in the markets it
currently serves could have a material adverse effect on the Company's business,
results of operations and prospects for growth. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business -- Existing Markets" and "Business -- Competition."
PROTECTION OF PROPRIETARY TECHNOLOGIES; RELIANCE ON TRADE SECRETS; LACK OF
PATENT PROTECTION
The Company's ability to compete effectively depends in part on its ability
to develop and maintain the proprietary aspects of its technologies. The Company
believes that its proprietary processes are significantly different from and
superior to those used by competitors to produce similar materials. To date, the
Company has relied primarily upon trade secret laws and nondisclosure agreements
to protect its proprietary rights and has not sought patent protection. There
can be no assurance that such trade secrets will remain confidential, that any
patents will be applied for or granted or that other intellectual property
rights of the Company will provide meaningful protection for the Company's
proprietary rights. If the processes employed by the Company become known to
competitors, it is likely that they could be used to produce materials of the
quality and durability produced by the Company, and that such competitors could
gain market share and become more successful in the markets in which the Company
operates. There can be no assurance that the steps taken by the Company will be
adequate to deter the misappropriation of its proprietary information and
technologies, that the Company will be able to prevent the assertion of an
adverse claim to its technologies, that the Company will be able to detect
unauthorized use and take effective steps to enforce its intellectual property
rights, or that the Company's competitors will not independently develop
technologies that are similar or superior to the Company's technologies.
Two of the Company's officers and directors have created a separate
business, FosterCo, Inc. ("FosterCo"), which has formed a joint venture,
Cyberwerks Interactive LLC ("Cyberwerks LLC"), with The Upper Deck Company LLC
("Upper Deck"). Cyberwerks LLC holds an exclusive license from FosterCo to use
certain of FosterCo's intellectual property in order to develop products
incorporating pre-recorded digital information such as CD-ROMs (the "Information
Storage Products"). This intellectual property shares some common elements with
that used by the Company in the production of its products. In connection with
the Cyberwerks LLC joint venture, FosterCo will deposit into escrow certain
manufacturing documentation
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<PAGE> 9
describing the intellectual property used by FosterCo. in the development and
manufacture of the Information Storage Products. The escrow agreement provides
that if the escrow dissolves under certain circumstances, Cyberwerks LLC and/or
Upper Deck will obtain access to the manufacturing documentation and thereby
FosterCo's intellectual property. Although there are a number of mechanisms in
place designed to protect the confidentiality of such intellectual property
should the escrow dissolve, there can be no assurances that these mechanisms
will succeed. Disclosure of this confidential information to any of the
Company's competitors could enhance their knowledge base significantly, which
could enable them to compete more effectively with the Company. See "Certain
Transactions -- FosterCo/Cyberwerks LLC Transactions."
Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to determine the validity and scope of the
proprietary rights of others, or to defend the Company against claims of
infringement or invalidity by others. The Company's involvement in an
intellectual property dispute or in any action to protect its trade secrets,
even if successful, could have a material adverse effect on the Company's
business, financial condition and results of operations, and could result in
significant costs to the Company, both in terms of legal fees and expenses, as
well as a diversion of management's attention. Adverse determinations in any
such action could subject the Company to significant liabilities, require the
Company to seek licenses from third parties, which might not be available on
terms acceptable to the Company, if at all, and possibly prevent the Company
from manufacturing and selling its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- The Spectratek Advantage" and "-- Proprietary
Rights."
RELIANCE ON KEY PERSONNEL
The Company creates its products using proprietary technologies that the
Company's founders, particularly Michael Foster, have developed over the past
twenty-six years. Only four of the Company's executive officers are aware of all
of the proprietary techniques employed by the Company and the Company does not
have employment contracts with any of such officers. In particular, Mr. Foster
has had the primary responsibility for the development of the holographic
technologies currently used by the Company, and his absence or loss would make
it significantly more difficult for the Company to address evolving market needs
and to expand the applications for the Company's products, either of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company's future performance will also depend in significant part on
the efforts and contributions of Terrence Conway, James Wanlass and Michael
Wanlass, as well as certain other key technical personnel. While the Company
maintains key employee life insurance on Messrs. Conway and Foster in the
amounts of $1.0 million and $5.0 million, respectively, the Company does not
maintain key employee life insurance on any other employee. The loss of the
services of either Mr. Conway or Mr. Foster could have a material adverse effect
on the Company's operations beyond the value of such insurance policies. See
"Business -- Employees" and "Management -- Executive Officers and Directors."
MANAGEMENT OF GROWTH
The Company's sales and marketing efforts have historically been
application specific, with less emphasis directed to the particular industries
in which the Company's customers operate. As a consequence, the Company's sales
and marketing activities to date primarily have focused on reacting to its
customers' needs in existing markets. As new markets that require specific
expertise develop, the Company expects to reorganize its sales functions along
product and industry lines. Upon consummation of the Offering, the Company
intends to hire additional technical and sales personnel as part of its efforts
to expand its sales, marketing and manufacturing capabilities. The competition
for such personnel is intense. The Company faces the task of quickly
identifying, recruiting, training and integrating these new employees. As the
Company expands its operations, the Company will also be required to upgrade its
financial and management information systems. There can be no assurance that the
Company will be able to upgrade such systems on a timely basis, if at all. In
addition, the Company is currently in the process of expanding its manufacturing
capabilities to include, among other things, a laser laboratory and a 55 inch
wide microreplication machine, as well as additional quality control and testing
equipment. The failure of the Company's management to attract and retain
8
<PAGE> 10
qualified employees, to successfully expand the Company's sales, marketing and
manufacturing capabilities or to upgrade its financial and management
information systems could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Business Strategy."
DEPENDENCE ON CONVERTERS AND OTHER THIRD PARTIES
The Company manufactures microreplicated holographic films that are
purchased by customers and value added resellers who incorporate the Company's
films into a wide variety of finished products. The holographic films
manufactured by the Company must undergo a metallization process and, in many
cases, other converting processes before the Company can deliver the films to
such customers and value added resellers. These other converting processes may
include the slitting, coating, laminating or cutting of the holographic films.
The Company generally relies on third parties for coating, laminating, cutting
and certain other converting or finishing processes. Certain of the Company's
converting steps are highly specialized and can only be provided by a limited
number of vendors. For example, the Company is aware of only two high quality
glitter and geometric pigment cutters in the United States. Because these
vendors themselves may have capacity constraints and do not work exclusively for
the Company, the Company cannot always ensure the timely delivery of materials
ordered by its customers or the quality of the finished product. The Company has
not entered into long-term contracts with any of such vendors for the Company's
converting requirements. The inability of the Company to continue to obtain
quality services from these vendors in a timely manner and at attractive prices
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In certain instances, third party vendors to the Company are also
purchasers and resellers of the Company's materials, and often resell to the
same customers to which the Company sells directly. This competition may affect
such vendors' incentive to provide quality service to the Company. While as a
matter of policy, the Company does not wish to undertake converting processes
that are readily available and attractively priced from third parties, it may do
so if necessary to ensure or improve the quality of its products or the
availability of supply. Any expansion by the Company into areas traditionally
served by third party converters could, during that expansion, disrupt
relationships with those converters or interfere with the Company's ability to
meet its obligations to its customers, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
A large percentage of the Company's sales consists of holographic films
that are sold to value added resellers, who then convert such films into their
own end products. The Company also sells its holographic films to distributors,
who resell these films to value added resellers and end users. The inability of
such value added resellers or distributors to convert the Company's holographic
films successfully or to create attractive and saleable products from the
Company's materials would adversely affect their demand for the Company's films,
which in turn could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company intends to use a portion of the proceeds of this Offering to
design and install a laser laboratory and mastering facility in an effort to
reduce its reliance on third party customer holographers and to provide added
flexibility for its customers. There can be no assurance that the Company will
be able to design and develop such a facility successfully, or that the Company
will be able to produce high quality custom imagery cost-effectively in such
facility. The inability of the Company to develop and utilize such a facility
successfully could increase its dependence on converters and other third parties
as described above. See "-- Dependence on Market Acceptance of Holographic
Products" and "Business -- Manufacturing."
COMPETITION
The markets targeted by the Company for its products are highly competitive
and are dominated by manufacturers of non-holographic materials, particularly in
the markets for flexible packaging materials and folding cartons, pigments and
fabrics. The applications for holographic films within these markets
historically have been limited and have only recently begun to develop. Due to
the higher cost of holographic films, the
9
<PAGE> 11
Company's products often are at a price disadvantage when compared with many
non-holographic alternatives. As a result, the Company expects to continue to
encounter significant competition from manufacturers of non-holographic
materials in its markets, particularly as it seeks to expand the applications
for its products.
The market for holographic films is characterized by intense competition,
changing technology and evolving standards. Competitors vary based upon the type
of raw materials used, the quality and consistency of the holographic films they
produce, and the variety of stock patterns that they offer. Many of the
Company's current and potential competitors within the holographic materials
market have significantly greater financial, manufacturing, marketing and other
resources than the Company. These competitors may be able to use these resources
to expand the applications and market acceptance for their products and to
capture a greater share of the holographic films market or other non-holographic
markets. At the lower quality or "commodity" end of the holographic materials
market, the Company also faces potential competition from new entrants, since
basic holographic technology is well known and there are relatively low barriers
to entry. The Company also anticipates increased competition in this portion of
the market from other established and emerging companies. Increased competition
may result in price reductions, lower gross margins or loss of market share, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Competition."
FLUCTUATIONS OF QUARTERLY OPERATING RESULTS
The Company's operating results have in the past fluctuated and may
continue to fluctuate in the future, based on a number of factors, not all of
which are under the Company's control. These factors include, without
limitation, the size and timing of significant customer orders, changes in
pricing policies or price reductions by the Company or its competitors,
variations in the Company's sales channels or the mix of product sales, market
acceptance of product applications, the Company's ability to control costs,
possible delays in the shipment of products, currency fluctuations, personnel
changes, and general economic and market conditions. The Company generally ships
its products as orders are received, and accordingly, the Company historically
has had very little backlog. As a result, sales in any quarter are dependent
upon orders booked and shipped in that quarter and are not predictable with any
degree of certainty. Consequently, there may be significant variations in the
Company's operating results, and the results achieved in any quarter should not
be viewed as necessarily indicative of the results that will be achieved for a
full fiscal year or any future quarter. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results."
RISKS ASSOCIATED WITH INTERNATIONAL SALES
International product sales represented approximately 45% and 43% of the
Company's net sales during the year ended December 31, 1996 and the nine months
ended September 30, 1997, respectively. The Company believes that international
sales will continue to represent a significant portion of its net sales, and
that continued growth will require increased international sales. Currently, all
of the Company's sales are denominated in United States dollars. The Company's
international sales may be adversely affected by exchange rate fluctuations,
political or economic instability, changes in regulatory requirements, tariffs
and other trade barriers, varying technical standards, longer accounts
receivable payment cycles, difficulties in managing international operations and
retaining qualified international distributors and marketing representatives,
potentially adverse tax consequences or the burdens of compliance with a wide
variety of foreign laws. In particular, the Company cannot predict whether
recent economic instability in Asia (including the devaluation of certain
currencies) will have an immediate or delayed impact on the Company's
international sales. There can be no assurance that any of these factors will
not have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Sales and
Marketing; Principal Customers."
AVAILABILITY AND PRICE OF POLYESTER
Polyester, a petroleum based polymer, is the basic raw material used in
substantially all of the Company's products and constitutes approximately 25% of
the Company's cost of sales. Historically, the price of polyester
10
<PAGE> 12
has experienced significant fluctuations as a result of changes in worldwide
manufacturing capacity and the demand for and prices of petrochemicals. The
Company has never entered into long-term contracts for the purchase of
polyester. Consequently, no assurance can be given that polyester will continue
to be available on a timely basis, at acceptable prices or in quantities or
thicknesses required by the Company. Large price increases in or a shortage of
supply of polyester could have a material adverse effect on the Company's
business, financial condition and results of operations.
While the Company does not rely on any single source of supply for
polyester, the loss of any of the Company's suppliers could slow production and
adversely affect the Company's business until alternative supply arrangements
could be secured. In addition, there can be no assurance that any new supply
arrangement would be available to the Company on a timely basis or on terms
comparable with its existing supply arrangements. See
"Business -- Manufacturing."
CONCENTRATION OF CUSTOMER SALES
The Company has in the past derived, and expects in the future to continue
to derive, a significant portion of its net sales from a relatively small number
of customers, the identity of which have varied historically from period to
period. Approximately 24%, 17% and 32% of the Company's net sales for the years
ended December 31, 1995 and 1996 and the nine months ended September 30, 1997,
respectively, were derived from sales of products to the Company's three largest
customers in each of these periods. No single customer accounted for 10% or more
of the Company's net sales during each of these periods, other than
Labelad/Sandylion, which accounted for 13%, 10% and 17% of the Company's net
sales for the years ended December 31, 1995 and 1996 and the nine months ended
September 30, 1997, respectively. The Company expects that it will continue to
be dependent upon a limited number of customers that place large orders for a
significant part of its net sales in any future period. There can be no
assurance that any sales to the Company's existing customers, individually or as
a group, will continue or, if continued, will reach or exceed historical levels
in any future period. In addition, the loss of any significant customer could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Sales and Marketing; Principal
Customers."
RISK OF DISASTER; LACK OF REPLACEMENT EQUIPMENT
The Company currently manufactures all of its products at two facilities
located in Los Angeles, California. Substantially all of the equipment used in
these facilities was designed and built by the Company and is not available for
purchase elsewhere. Due to the need for substantial security to protect the
Company's proprietary rights, the Company's manufacturing processes cannot
readily be moved to replacement facilities. Accordingly, if a disaster (such as
an earthquake or fire) were to destroy or significantly damage either of these
facilities, the Company would need to acquire new facilities and rebuild its
machinery and custom microreplication equipment, which could take six months or
longer. Customer orders would have to be supplied from existing inventory, which
likely would not be sufficient to cover customers' needs. The loss of the
Company's manufacturing capability would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Reliance on Key Personnel" and "Business -- Manufacturing."
CONTROL BY EXISTING STOCKHOLDERS
Immediately following this Offering, Messrs. Conway, Foster, J. Wanlass and
M. Wanlass will beneficially own approximately 68.6% of the Company's
outstanding shares of Common Stock (65.5% if the Underwriters' over-allotment
option is exercised in full). As a result, these four individuals, who have
functioned together as the Company's management team for more than fifteen
years, will be able to significantly influence the use of the Company's proceeds
from this Offering, the election of the Company's directors, and the outcome of
corporate actions requiring stockholder approval, regardless of how other
stockholders of the Company may vote. If, for example, they were to act in
concert, they would be able to elect all of the directors and approve any
proposal submitted to the stockholders that requires the approval only of a
majority of a quorum of the stockholders at a valid meeting. Such a high level
of ownership by such persons
11
<PAGE> 13
may have a significant effect in delaying, deferring or preventing a change in
control of the Company. See "Management -- Executive Officers and Directors" and
"Principal and Selling Stockholders."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or
be sustained after this Offering or that the market price of the Common Stock
will not decline below the initial public offering price. The Company believes
that the price of its Common Stock could fluctuate, perhaps substantially, as a
result of the following factors: announcements of developments related to the
Company's business; fluctuations in operating results; failure to meet
securities analysts' expectations; the gain or loss of significant orders or
customers; changes in management; announcements of technological innovations or
new products by the Company, its customers or its competitors; general trends in
the industry and other events. In addition, in recent years, the stock market
has experienced extreme price and volume fluctuations which have affected the
market price for the securities of companies similar to the Company, and which
have often been unrelated to the operating performance of the companies whose
stocks were affected. Such fluctuations could adversely affect the market price
of the Company's Common Stock.
BROAD DISCRETION OVER USE OF PROCEEDS
A significant portion of the estimated net proceeds of this Offering has
not been allocated to a particular purpose, and management's allocation
decisions concerning such net proceeds are dependent on a variety of factors,
including the Company's ability to find additional applications for its products
and the timing and status of new product developments. Accordingly, management
will have broad discretion in allocating the net proceeds of this Offering, and
no stockholder approval will be required for such allocations. See "Use of
Proceeds."
ENVIRONMENTAL CONCERNS
The Company is subject to a variety of governmental regulations related to
the discharge and disposal of toxic, volatile or otherwise hazardous substances
used on the Company's premises, including state and local ordinances prohibiting
or restricting the use or disposal of solvents, polyester and certain other
materials used by the Company. Widespread adoption of such restrictions and a
resulting decline in consumer preference for polyester or other polymer products
due to environmental considerations could adversely effect demand for the
Company's products. The adoption of laws prohibiting or restricting the use or
disposal of aluminum dust or other waste products of the Company's metallizing
processes could substantially increase the Company's manufacturing costs or make
metallizing impractical, either of which would have a material adverse effect on
the Company's business, financial condition and results of operations. If the
Company fails to comply with environmental laws and regulations, it could be
subject to liability ranging from monetary damages to injunctions, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Manufacturing."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after
this Offering could adversely affect the market price of the Common Stock. Upon
the completion of this Offering, the Company will have a total of 7,172,264
shares of Common Stock outstanding, of which the 2,200,000 shares offered hereby
will be freely tradeable without restriction under the Securities Act of 1933,
as amended (the "Securities Act"). The remaining 4,972,264 shares are
"restricted securities" as defined by Rule 144 promulgated under the Securities
Act and will be eligible for sale in the public market 180 days after the date
of this Prospectus in reliance on Rule 144 (subject to the volume and other
applicable restrictions of Rule 144) following expiration of lock-up agreements
to be entered into by the holders of such shares with the representatives of the
Underwriters. In addition, following this Offering, the Company intends to file
a registration statement covering 560,550 shares of Common Stock reserved for
issuance under the Company's 1997 Stock Incentive Plan, of which options to
purchase 169,275 shares of Common Stock were outstanding at December 1, 1997.
12
<PAGE> 14
None of these options vest until April 1998. Subject to Rule 144 volume
limitations applicable to affiliates, such shares will be available for sale in
the open market at the time they are exercised by the holders thereof. The
Company is unable to estimate the number of shares of the Company's Common Stock
that will be sold under Rule 144 or under the planned registration statement,
since such sales will depend in part on the market price for the Common Stock,
the personal circumstances of the sellers and other factors not susceptible of
being known in advance. Prior to this Offering, there has been no public market
for the Common Stock, and any sale of substantial amounts of restricted shares
in the open market, or the availability of such shares for sale, could adversely
affect the market price of the Common Stock offered hereby. See
"Management -- 1997 Stock Inventive Plan," "Principal and Selling Stockholders"
and "Shares Eligible for Future Sale."
ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW;
POTENTIAL ADVERSE EFFECT OF UNISSUED PREFERRED STOCK
Certain provisions of the Company's Certificate of Incorporation and Bylaws
and of the Delaware General Corporation Law, together or separately, could have
the effect of discouraging potential acquisition proposals or delaying or
preventing changes in the control or management of the Company, and may limit
the price that certain investors might be willing to pay in the future for
shares of the Common Stock. These provisions include the ability to issue,
without further stockholder approval, preferred stock with voting rights,
liquidating preferences, redemption rights and other rights and privileges
senior to the Common Stock. See "Description of Securities."
DILUTION
Purchasers of the Common Stock of the Company in this Offering will
experience immediate and substantial dilution in the net tangible book value of
the Common Stock from the initial public offering price. See "Dilution."
ABSENCE OF DIVIDENDS
Other than the S Corporation Distribution, the Company has never declared
or paid cash dividends on shares of its capital stock. The Company currently
intends to retain any future earnings in its business and does not anticipate
paying any cash dividends in the foreseeable future. See "Dividend Policy."
13
<PAGE> 15
PRIOR S CORPORATION STATUS
On January 1, 1997, the Company elected to be treated as an S Corporation
under Subchapter S of the Internal Revenue Code of 1986, as amended, and
comparable state tax laws. As a result, substantially all of the Company's
earnings from January 1, 1997 until the date of termination of the Company's S
Corporation status (the "Termination Date") have been or will be included in the
taxable income of its stockholders for federal and certain state income tax
purposes, and the Company has not and will not be subject to tax on such
earnings, other than the 1.5% California franchise tax. Deferred income taxes
recorded when the Company was taxed as a C Corporation were written-off on
January 1, 1997. Following the Termination Date, the Company will no longer be
treated as an S Corporation, and accordingly, will be fully subject to federal
and state income taxes. The Termination Date will be on or immediately prior to
the consummation of the Offering.
In October 1997, the Company made a distribution to its existing
stockholders consisting of promissory notes (the "Stockholder Notes") in an
aggregate principal amount equal to the undistributed retained earnings of the
Company (which is estimated to be approximately $3.6 million at the Termination
Date) from January 1, 1997 through the Termination Date (the "S Corporation
Distribution"). The Stockholders Notes are due and payable on April 1, 1998, and
bear interest at the rate of 5.5% per annum. The Company intends to use a
portion of the proceeds of this Offering to repay all amounts due under the
Stockholder Notes upon consummation of this Offering. See "Use of Proceeds" and
"Certain Transactions."
On the Termination Date, as a result of its conversion to a C Corporation,
the Company will record an estimated $356,000 increase in earnings to establish
deferred income taxes which were previously the responsibility of the existing
stockholders. See Note 6 of Notes to Financial Statements.
Prior to the consummation of this Offering, the Company intends to enter
into a tax indemnity agreement with its existing stockholders pursuant to which
the Company will indemnify such stockholders, and such stockholders will
indemnify the Company, against unexpected tax consequences resulting from
adjustments to allocations of income.
14
<PAGE> 16
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock are estimated to be approximately $15.7 million (approximately $19.0
million if the Underwriters' over-allotment option is exercised in full), after
deducting the estimated underwriting discounts and commissions, and estimated
offering expenses.
The Company intends to use approximately $4.5 million to purchase capital
equipment (primarily for the Company's laser laboratory and mastering facility).
The Company also intends to use approximately $3.6 million of the net proceeds
of this Offering to repay the Stockholder Notes (representing the S Corporation
Distribution), approximately $800,000 to repay the indebtedness outstanding
under the Company's bank line of credit, approximately $500,000 to relocate the
Company's manufacturing facilities, and approximately $500,000 to develop
in-house particulate packaging capabilities. The proceeds from the Company's
line of credit were used to repay all outstanding indebtedness under the
Company's former line of credit to pay accrued income taxes and for general
working capital purposes. All outstanding indebtedness under the Company's
current line of credit and the Stockholder Notes is due and payable on April 1,
1998. Interest accrues on the Stockholder Notes at 5.5% per annum and on the
current line of credit at the base rate announced by the Company's senior lender
from time to time, plus .75% (9.25% at September 30, 1997).
The balance of the net proceeds of this Offering will be used to expand the
Company's marketing capabilities, to upgrade the Company's information systems
and for other general corporate purposes, including working capital
requirements. The Company may also use a portion of the net proceeds of this
Offering for acquisitions of complementary businesses and technologies, although
the Company currently has no agreement or understanding with respect to any such
acquisitions at this time. Pending the use thereof, the Company intends to
invest the net proceeds in short-term, interest bearing, investment grade
securities.
The Company will not receive any of the proceeds from the sale of the
shares of Common Stock being sold by the Selling Stockholders.
DIVIDEND POLICY
Other than the S Corporation Distribution, the Company has never declared
or paid cash dividends on its Common Stock. The Company anticipates that all
future earnings, if any, will be retained for use in the Company's business and
does not anticipate paying any cash dividends in the foreseeable future.
15
<PAGE> 17
CAPITALIZATION
The following table sets forth (i) the Company's actual capitalization as
of September 30, 1997, (ii) pro forma to give effect to the S Corporation
Distribution as if it had been made at September 30, 1997 and an increase of
$356,000 to earnings to establish the net deferred taxes of the Company that
would have been recorded had the Company's S Corporation status terminated on
September 30, 1997, and (iii) pro forma as adjusted to reflect the sale by the
Company of 1,600,000 shares of Common Stock offered hereby (assuming an initial
offering price of $11 per share) and the application of the net proceeds
therefrom (including the repayment of indebtedness incurred under the Company's
bank line of credit and the Stockholders Notes).
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable................................................ $ 800 $ 800 $ --
Stockholders' equity:
Preferred Stock, $.0001 par value; 5,000,000 shares
authorized; no shares issued or outstanding.............
Common Stock, $.0001 par value; 20,000,000 shares
authorized; 5,572,264 shares issued and outstanding,
actual(2);
5,899,536 shares issued and outstanding, pro
forma(2)(3); and 7,172,264 shares issued and
outstanding, pro forma as adjusted (2)(3)............... 10 10 10
Additional paid in capital................................. 60 3,660 19,328
Retained earnings.......................................... 8,281 3,949 3,949
------- ------- -------
Total stockholders' equity.............................. 8,351 7,619 23,287
------- ------- -------
Total capitalization.................................... $ 9,151 $8,419 $23,287
======= ======= =======
</TABLE>
- ---------------
(1) On January 1, 1997, the Company elected to be treated as an S Corporation
under Subchapter S of the Internal Revenue Code of 1986, as amended, and
comparable state tax laws through the Termination Date. As a result,
substantially all of the Company's earnings from January 1, 1997 until the
Termination Date have been or will be included in the taxable income of its
stockholders for federal and certain state income tax purposes, and the
Company has not and will not be subject to tax on such earnings, other than
the 1.5% California franchise tax. In October 1997, the Company made the S
Corporation Distribution to its existing stockholders consisting of the
Stockholder Notes. Pro forma retained earnings give effect to the S
Corporation Distribution. Following the Termination Date, the Company will
be treated as a C Corporation and will be fully subject to federal and state
income taxes. See "Prior S Corporation Status" and Note 2 to Notes to
Financial Statements.
(2) Excludes 560,500 shares of Common Stock reserved for issuance under the 1997
Stock Incentive Plan, of which 169,275 shares of Common Stock were subject
to outstanding options at a weighted average exercise price of $9.04 at
December 1, 1997. See "Management -- 1997 Stock Incentive Plan."
(3) Also includes as outstanding during each of the periods presented, 327,273
shares of the Common Stock offered by the Company, which represent the
approximate number of shares deemed to be sold by the Company to fund the
repayment of the Stockholder Notes. See "Prior S Corporation Status," "Use
of Proceeds" and Note 2 of Notes to Financial Statements.
16
<PAGE> 18
DILUTION
The net tangible book value of the Company at September 30, 1997 was $8.4
million or $1.50 per share of Common Stock. Net tangible book value per share is
equal to the Company's total assets less its total liabilities, divided by the
total number of outstanding shares of Common Stock. After giving effect to (i)
the sale of 2,200,000 shares of Common Stock in this Offering and the
application of the net proceeds therefrom and (ii) the S Corporation
Distribution, the pro forma net tangible book value of the Company as adjusted
at September 30, 1997 would have been $23.3 million or $3.25 per share. See
"Prior S Corporation Status" and "Use of Proceeds." This represents an immediate
increase in the net tangible book value of $2.36 to existing stockholders and an
immediate dilution of $7.75 per share to new investors purchasing shares of
Common Stock in this Offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $ 11.00
-------
Net tangible book value per share as of September 30, 1997....... $ 1.50
-------
Decrease attributable to S Corporation Distribution.............. $ (0.61)
-------
Increase per share attributable to new investors................. $ 2.36
-------
Pro forma net tangible book value per share as adjusted after this
Offering......................................................... $ 3.25
-------
Dilution per share to new investors................................ $ 7.75
=======
</TABLE>
The information with respect to net tangible book value per share in the
table set forth above does not include 169,275 shares of Common Stock which were
subject to outstanding options as of December 1, 1997 at a weighted average
exercise price of $9.04 per share under the 1997 Stock Incentive Plan. As of
December 1, 1997, 560,550 shares were reserved for issuance under the 1997 Plan
(inclusive of the 169,275 shares noted above). See "Management -- 1997 Stock
Incentive Plan." To the extent such options are exercised, there will be further
dilution to the new investors.
The following table summarizes, on a pro forma basis as of September 30,
1997, the difference between the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share paid
by existing stockholders and by new investors purchasing shares in this Offering
(assuming an initial public offering price of $11.00 per share and before
deducting underwriting discounts and commissions and estimated offering
expenses).
<TABLE>
<CAPTION>
SHARES PURCHASED
------------------- TOTAL CONSIDERATION
--------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........ 5,572,264 77.7% $ 70,000 0.4% $ 0.0124
New investors................... 1,600,000 22.3 17,600,000 99.6 $ 11.00
--------- ----- --------- -----
Total...................... 7,172,264 100.0% $17,670,000 100.0%
========= ===== ========= =====
</TABLE>
- ---------------
(1) Sales by the Selling Stockholders in this Offering will cause the number of
shares held by existing stockholders in the table set forth above to be
reduced to 4,972,264 shares or 69.3% of the total number of shares to be
outstanding after this Offering. See "Principal and Selling Stockholders."
17
<PAGE> 19
SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1995 and 1996 and
September 30, 1997, and for the years ended December 31, 1994, 1995 and 1996 and
the nine months ended September 30, 1997, has been derived from the financial
statements of the Company which have been audited by Deloitte & Touche LLP and
are included elsewhere in this Prospectus. The following selected financial data
as of December 31, 1992, 1993 and 1994, and September 30, 1996, and for the
years ended December 31, 1992 and 1993 and the nine months ended September 30,
1996 has been derived from the Company's unaudited financial statements. The
unaudited financial statements reflect, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. The results for the nine
months ended September 30, 1997 are not necessarily indicative of the results to
be expected for the full fiscal year ending December 31, 1997. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements of the Company and the related notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 4,536 $ 7,387 $ 9,052 $ 10,320 $ 12,003 $ 8,457 $ 11,857
Cost of goods sold........................ 3,078 2,902 5,243 5,573 7,114 5,013 6,644
--------- --------- --------- --------- --------- --------- ---------
Gross profit.............................. 1,458 4,485 3,809 4,747 4,889 3,444 5,213
Selling, general and administrative
expense................................. 1,148 1,368 1,531 1,780 2,142 1,363 2,201
Research and development expense.......... 238 397 576 571 504 379 193
--------- --------- --------- --------- --------- --------- ---------
Income from operations.................... 72 2,720 1,702 2,396 2,243 1,702 2,819
Interest expense.......................... 5 32 34 68 157 116 79
Other income (expense).................... 7 37 136 67 59 83 42
--------- --------- --------- --------- --------- --------- ---------
Income before provision for income
taxes................................... 74 2,725 1,804 2,395 2,145 1,669 2,782
Provision for income taxes................ 30 701 791 1,021 851 662 673(1)
--------- --------- --------- --------- --------- --------- ---------
Net income................................ $ 44 $ 2,024 $ 1,013 $ 1,374 $ 1,294 $ 1,007 $ 2,109
========= ========= ========= ========= ========= ========= =========
Net income per common and common
equivalent share........................ $ 0.01 $ 0.36 $ 0.18 $ 0.24 $ 0.23 $ 0.18
========= ========= ========= ========= ========= =========
Weighted average common and common
equivalent shares(2).................... 5,630,194 5,630,194 5,630,194 5,630,194 5,634,285 5,629,660
Pro forma provision for income taxes(3)... $ 1,405
=========
Pro forma net income(3)................... $ 1,377
=========
Pro forma net income per share(3)......... $ 0.23
=========
Pro forma weighted average common and
common equivalent shares(2)(4).......... 5,962,800
BALANCE SHEET DATA (AT PERIOD END):
Cash...................................... $ 17 $ 324 $ 75 $ 97 $ 462 $ 311 $ 1,038
Working capital........................... 1 2,128 2,814 3,134 4,097 4,025 6,200
Total assets.............................. 1,382 3,868 4,726 8,523 8,764 8,501 10,186
Notes payable............................. -- 17 12 1,582 695 1,029 800
Retained earnings......................... 467 2,491 3,504 4,878 6,172 5,885 8,281
Stockholders' equity...................... 477 2,501 3,513 4,888 6,242 5,895 8,351
OPERATING AND OTHER DATA:
Capital expenditures...................... $ 171 $ 167 $ 404 $ 634 $ 103 $ 92 $ 334
Research and development.................. 238 397 576 571 504 379 193
Depreciation and amortization............. 79 214 107 165 310 232 313
EBITDA(5)................................. 158 2,971 1,945 2,628 2,612 2,017 3,174
Cash flow provided by (used in):
Operating activities.................... (424) 464 164 (5) 1,346 1,037 1,477
Investing activities.................... (171) (167) (404) (634) (103) (92) (334)
Financing activities.................... 391 10 (9) 661 (879) (732) (567)
</TABLE>
18
<PAGE> 20
- ---------------
(1) The Company has been taxed as an S Corporation for federal and state income
tax purposes since January 1, 1997. Provision for income taxes for the nine
months ended September 30, 1997 consists primarily of net deferred tax
assets which were written-off in January 1997 upon the Company's election to
be taxed as an S Corporation. In October 1997, the Company made a
distribution to its existing stockholders consisting of the Stockholder
Notes in an aggregate principal amount equal to the undistributed retained
earnings of the Company from January 1, 1997 through the Termination Date
(which amount is estimated to be approximately $3.6 million). Other than the
S Corporation Distribution, the Company has never declared or paid cash
dividends on its Common Stock.
(2) See Note 2 to Notes to Financial Statements.
(3) Pro forma provision for income taxes, pro forma net income and pro forma net
income per share reflect the pro forma effect of income taxes as if the
Company has been taxed as a C Corporation for the nine months ended
September 30, 1997. Upon consummation of the Offering, the Company will be
subject to federal and state income taxes. See "Prior S Corporation Status."
(4) Also assumes as outstanding during each of the periods presented, 327,273
shares of Common Stock offered by the Company in this Offering, which
represent the approximate number of shares deemed to be sold by the Company
to fund the repayment of the Stockholder Notes. See "Prior S Corporation
Status," "Use of Proceeds" and Note 2 of Notes to Financial Statements.
(5) EBITDA represents earnings before taking into consideration interest
expense, income tax expense and depreciation and amortization expense and is
not prepared in accordance with GAAP. EBITDA may not provide an accurate
comparison among companies because it is not necessarily computed by all
companies in an identical manner. The use of such information is intended
only to supplement the conventional income statement presentation, and is
not to be considered as an alternative to net income, cash flows from
operating activities or any other indicator of the Company's operating
performance which is presented in accordance with GAAP above.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company commenced operations in October 1980 to pioneer the research
and development of microreplicated surfaces for use in holographic sheet
products, high-end special effect camera lenses and projection filters. The
Company initially manufactured these products on a custom order basis, one batch
at a time. Through considerable research, the Company developed proprietary
processes that enable it to manufacture microreplicated surfaces continuously
onto rolls of polymer film. This breakthrough has enabled the Company to
significantly increase its production speeds, lower costs, improve quality and
take advantage of the growing market for holographic films.
The commercial applications of the Company's proprietary microreplication
technologies have changed significantly over time. In the late 1980s and early
1990s, the Company manufactured large quantities of holographic custom images
for its customers. In 1992, the Company shifted its focus from the manufacture
of custom images to the mass production of microreplicated polymer films
featuring the Company's proprietary stock holographic patterns. This shift
enabled the Company to reduce its dependence upon large custom orders, increase
sales volumes, expand new product applications and improve manufacturing
efficiencies. The Company now focuses on three primary market segments: consumer
products, packaging materials and industrial applications. Sales of holographic
films featuring the Company's proprietary stock patterns constituted
substantially all of the Company's net sales during the year ended December 31,
1996 and the nine months ended September 30, 1997.
The Company's proprietary manufacturing processes consist of creating image
or pattern masters and microreplicating the master's surface topography onto
continuous rolls of polymer films. Most of the Company's polymer films are
"metallized" by thermally evaporating aluminum onto the holographic film,
creating a metallic or reflective appearance to the film. Once metallized, the
film often undergoes a number of converting or other finishing steps prior to
sale, including laminating, cutting, coating, slitting or sheeting processes.
Prior to 1996, the Company contracted with third party vendors to perform
substantially all of the metallizing and converting steps other than slitting.
In response to expanding sales, the Company made a capital investment in late
1995 of more than $1.5 million to obtain metallizing capabilities. This
investment was made to reduce the Company's metallizing costs, improve quality
and shorten turnaround time. The Company facilitates the sale of its products by
outsourcing certain nonproprietary conversion or finishing processes. While the
Company's products include both converted and unconverted holographic films, the
Company realizes higher gross margins on sales of its unconverted films. In 1996
and the nine months ended September 30, 1997, approximately one third of the
Company's cost of goods sold represented costs associated with outsourced
conversion processes.
International sales represented approximately 45% and 43% of the Company's
net sales for the year ended December 31, 1996 and the nine month period ended
September 30, 1997, respectively. In addition, the Company's international sales
have grown from $2.0 million (22% of net sales) in the year ended December 31,
1994 to $5.4 million (45% of net sales) in the year ended December 31, 1996. The
Company's results of operations in the future may be susceptible to, among other
things, exchange rate fluctuations and political and economic instability
abroad. The Company believes that international sales will continue to represent
a significant portion of its net sales, and that continued growth will require
increased international sales. See "Risk Factors -- Risks Associated with
International Sales" and Note 2 of Notes to Financial Statements.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Company's Financial Statements and notes
thereto included elsewhere in this Prospectus. Historical results of operations,
percentage relationships and any trends that may be inferred from the discussion
below are not necessarily indicative of the results for any future period.
20
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain statement
of operations data of the Company.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------ ------------------
1994 1995 1996 1996 1997
------ ------- ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales.......................... $9,052 $10,320 $12,003 $8,457 $11,857
Cost of goods sold................. 5,243 5,573 7,114 5,013 6,644
------ ------- ------- ------ -------
Gross profit....................... 3,809 4,747 4,889 3,444 5,213
Selling, general and administrative
expense.......................... 1,531 1,780 2,142 1,363 2,201
Research and development expense... 576 571 504 379 193
------ ------- ------- ------ -------
Income from operations............. 1,702 2,396 2,243 1,702 2,819
Interest expense................... 34 68 157 116 79
Other income (expense)............. 136 67 59 83 42
------ ------- ------- ------ -------
Income before provision for income
taxes............................ 1,804 2,395 2,145 1,669 2,782
Provision for income taxes......... 791 1,021 851 662 673(1)
------ ------- ------- ------ -------
Net income......................... $1,013 $ 1,374 $ 1,294 $1,007 $ 2,109(1)
====== ======= ======= ====== =======
</TABLE>
The following table sets forth for the periods indicated, the percentages
of net sales represented by each item in the Company's statement of operations.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------- ------------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......................... 57.9 54.0 59.3 59.3 56.0
----- ----- ----- ----- -----
Gross profit............................... 42.1 46.0 40.7 40.7 44.0
Selling, general and administrative
expense.................................. 16.9 17.3 17.8 16.1 18.6
Research and development expense........... 6.4 5.5 4.2 4.5 1.6
----- ----- ----- ----- -----
Income from operations..................... 18.8 23.2 18.7 20.1 23.8
Interest expense........................... 0.4 0.7 1.3 1.4 0.7
Other income............................... 1.5 0.7 0.5 1.0 0.4
----- ----- ----- ----- -----
Income before provision for income taxes... 19.9 23.2 17.9 19.7 23.5
Provision for income taxes................. 8.7 9.9 7.1 7.8 5.7(1)
----- ----- ----- ----- -----
Net income................................. 11.2% 13.3% 10.8% 11.9% 17.8%(1)
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) The Company has been taxed as an S Corporation for federal and state income
tax purposes since January 1, 1997. Provision for income taxes for the nine
months ended September 30, 1997 consists primarily of net deferred tax
assets which were written-off in January 1997 upon the Company's election to
be taxed as an S Corporation. If the Company had been taxed as a C
Corporation for the nine months ended September 30, 1997, the pro forma
provision for income taxes and the pro forma net income would have been
$1,405,000 (11.8% of net sales) and $1,377,000 (11.6% of net sales),
respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Net Sales. Net sales increased 40.2% to $11.9 million in the nine month
period ended September 30, 1997 from $8.5 million in the corresponding period of
1996. Increased sales of $2.8 million to the Company's ten largest customers
across all existing product markets constituted 81.9% of this increase.
Increased sales in
21
<PAGE> 23
the nine months ended September 30, 1997 also reflected increased demand for
glitter. Sales to two large customers who cut the Company's films into glitter
and geometric pigment represented approximately 33% of the increase in net sales
in the period. The Company's increase in net sales was also impacted, to a
lesser extent, by expanded applications of the Company's films in existing
markets.
Gross Profit. Gross profit increased 51.4% to $5.2 million in the nine
months ended September 30, 1997 from $3.4 million in the corresponding period of
1996. Gross profit as a percentage of net sales for the nine months ended
September 30, 1997 increased to 44.0% from 40.7% in the corresponding period of
1996. The improvement in gross profit as a percentage of net sales primarily
reflected the absorption of fixed overhead over an increased production volume
in the third quarter of 1997 and, to a somewhat lesser extent, increased sales
of unconverted films, which generate a higher gross profit, to certain large
customers in the third quarter of 1997. The improvement in gross profit as a
percentage of net sales was offset in part by lower selling prices to select
customers associated with higher sales volumes during the first six months of
1997.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 61.5% to $2.2 million (18.6% of net sales) in
the nine months ended September 30, 1997 from $1.4 million (16.1% of net sales)
in the corresponding period of 1996. This increase reflects higher expenses
associated with additional administrative and sales and marketing personnel
hired in connection with the Company's business expansion, and higher
commissions associated with the Company's increased net sales. As of September
30, 1997, the Company employed 55 full time personnel, representing a 25.0%
increase from September 30, 1996.
Research and Development Expense. Research and development expense
decreased 49.1% to $193,000 (1.6% of net sales) in the nine months ended
September 30, 1997 from $379,000 (4.5% of net sales) in the corresponding period
of 1996. Research and development efforts during the first nine months of 1997
were focused primarily on the completion of proprietary manufacturing equipment
capable of producing 55 inch web and the creation of two new custom masters used
in the manufacturing process. The Company capitalized approximately $194,000
related to these development efforts during the nine months ended September 30,
1997, and anticipates that these projects will be completed in the last quarter
of 1997.
Income From Operations. Income from operations increased 65.6% to $2.8
million (23.8% of net sales) in the nine months ended September 30, 1997 from
$1.7 million (20.1% of net sales) in the corresponding period of 1996. This
increase as a percentage of net sales was primarily due to increased sales by
the Company of higher margin products in the third quarter of 1997, partially
offset by the increase in selling, general and administrative expense described
above.
Interest Expense. Interest expense decreased 31.9% to $79,000 in the nine
months ended September 30, 1997 from $116,000 in the corresponding period of
1996. This decrease related primarily to the repayment of debt related to the
acquisition of the metallizer and incurred in connection with loans previously
advanced from time to time to the Company from certain of its officers in order
to finance the Company's operations.
Other Income (Expense). Other income (expense) decreased 49.4% to $42,000
in the nine months ended September 30, 1997 from $83,000 in the corresponding
period of 1996. This decrease was primarily due to audit adjustments to the
Company's 1994 and 1995 federal income tax returns and amortization of a loan
fee incurred in connection with the establishment of the Company's $3.5 million
line of credit facility in March 1997, which was partially offset by royalties
paid to the Company by a large label and packaging company for the license of
two of the Company's stock holographic patterns. The timing of the licensee's
promotional programs and product labeling needs varies from time to time,
resulting in fluctuations in other income.
Provision for Income Taxes. Historically, the Company has provided for
federal and state income taxes at a blended rate of approximately 42%. The
Company does not have any net operating losses or other unusual items that would
create significant differences between the tax rate applied in the financial
statements from the statutory tax rates. From January 1, 1997 through the
Termination Date, the Company has elected to be treated as an S Corporation for
federal and state income tax purposes. As a consequence, the Company generally
would not have any income tax liability during this period, and the Company's
earnings were treated
22
<PAGE> 24
as having been distributed to the existing stockholders for income tax reporting
purposes. As a result of this election, approximately $619,000 of net deferred
tax assets that were outstanding at December 31, 1996 were written off on
January 1, 1997 upon the Company's election to be treated as an S Corporation.
Net Income. Net income increased 109.4% to $2.1 million (17.8% of net
sales) for the nine months ended September 30, 1997 from $1.0 million (11.9% of
net sales) in the corresponding period of 1996. If income taxes had been
recorded during the nine months ended September 30, 1997 as if the Company were
a C Corporation, net income would have increased 36.7% to $1.4 million (11.6% of
net sales) for the nine months ended September 30, 1997 from $1.0 million (11.9%
of net sales) in the corresponding period of 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales increased 16.3% to $12.0 million in 1996 from $10.3
million in 1995. This increase in net sales was derived from sales growth across
the Company's diverse base of customers and represented sales principally of a
wide variety of the Company's stock holographic patterns.
Gross Profit. Gross profit increased 3.0% to $4.9 million in 1996 from $4.7
million in 1995, although gross margin declined to 40.7% in 1996 from 46.0% in
1995. In October 1995, the Company made an investment in substantially larger
facilities, expanding from 27,500 square feet to approximately 77,700 square
feet, in response to the growing commercial demand for its products. This
relocation increased the Company's fixed overhead costs related to internal
manufacturing, warehousing and shipping, causing gross profit as a percentage of
net sales to decline. The Company also invested in new metallizing equipment in
February 1996, which resulted in additional fixed costs during this period. The
decline in gross profit as a percentage of net sales also reflects increased
depreciation expense in the 1996 period of approximately $114,000 primarily
associated with the acquisition of the metallizing equipment. The Company
believes these strategic investments will enable the Company to better take
advantage of growth opportunities and to achieve economies of scale.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 20.3% to $2.1 million (17.8% of net sales) in
1996 from $1.8 million (17.3% of net sales) in 1995. The increase reflects
higher expenses associated with additional administrative and sales and
marketing personnel, and higher commissions associated with the Company's
increased net sales, as well as higher professional fees related to a three year
audit of the Company's accounts and records.
Research and Development Expense. Research and development expense declined
11.7% to $504,000 (4.2% of net sales) in 1996 from $571,000 (5.5% of net sales)
in 1995. This decrease was primarily due to the timing of development projects.
Income From Operations. Income from operations declined 6.4% to $2.2
million (18.7% of net sales) in 1996 from $2.4 million (23.2% of net sales) in
1995. This decline primarily reflected the decrease in gross profit as a
percentage of net sales due to the Company's significant investment in
facilities and equipment as described above.
Interest Expense. Interest expense increased 130.9% to $157,000 in 1996
from $68,000 in 1995. This increase reflected $61,000 of interest incurred in
connection with advances from officers as previously described. This increase
was also due in part to interest incurred in connection with the Company's
financing of certain metallizing equipment that was purchased in the fourth
quarter of 1995.
Other Income. Other income decreased 11.9% to $59,000 in 1996 from $67,000
in 1995. This decrease resulted from a decline in royalties paid by one customer
in connection with the license of two of the Company's stock holographic
patterns.
Provision for Income Taxes. The Company has provided for federal and state
income taxes at a blended rate of approximately 42%. The Company does not have
any net operating losses or other unusual items that would create significant
differences between the tax rate applied in the financial statements from the
statutory tax rates.
23
<PAGE> 25
Net Income. Net income decreased 5.8% to $1.3 million (10.8% of net sales)
in 1996 from $1.4 million (13.3% of net sales) in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Sales. Net sales increased 14.0% to $10.3 million in 1995 from $9.0
million 1994. This growth was primarily attributable to higher sales of pressure
sensitive films to the Company's largest customer in 1995 and, to a lesser
extent, due to increased market acceptance of the Company's glitter products.
These increases were offset in part by declining sales to certain significant
customers, reflecting a change in their product mix.
Gross Profit. Gross profit increased 24.6% to $4.7 million in 1995 from
$3.8 million in 1994. Gross profit as a percentage of net sales increased to
46.0% in 1995 from 42.1% in 1994. Management believes that the improvement in
gross profit as a percentage of net sales was due in part to a shift in the
product sales mix towards higher margin pressure sensitive and unconverted
holographic films. This margin improvement also reflected the absorption of
fixed overhead over an increased production volume.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 16.3% to $1.8 million (17.3% of net sales) in
1995 from $1.5 million (16.9% of net sales) in 1994. This increase was largely
due to increased rental obligations incurred in connection with the Company's
relocation to larger facilities and related moving expenses. This increase was
also due to the addition of administrative and sales and marketing personnel and
higher commissions associated with increased net sales.
Research and Development Expense. Research and development expense remained
relatively constant, decreasing slightly to $571,000 (5.5% of net sales) in 1995
from $576,000 (6.4% of net sales) in 1994.
Income From Operations. Income from operations increased 40.8% to $2.4
million (23.2% of net sales) in 1995 from $1.7 million (18.8% of net sales) in
1994. This increase was primarily due to increased net sales and improved gross
profit as a percentage of net sales in 1995.
Interest Expense. Interest expense increased 100.0% to $68,000 in 1995 from
$34,000 in 1994. This increase reflected additional interest expense associated
with debt incurred in connection with the financing of certain metallizing
equipment that was purchased in the fourth quarter of 1995.
Other Income. Other income decreased 50.7% to $67,000 in 1995 from $136,000
in 1994. This decrease primarily resulted from a decline in royalties paid by
one customer in connection with the license of two of the Company's stock
holographic patterns.
Provision for Income Taxes. The Company has provided for federal and state
income taxes at a blended rate of approximately 42%. The Company does not have
any net operating losses or other unusual items that would create significant
differences between the tax rate applied in the financial statements from the
statutory tax rates.
Net Income. Net income increased 35.6% to $1.4 million (13.3% of net sales)
in 1995 from $1.0 million (11.2% of net sales) in 1994.
24
<PAGE> 26
QUARTERLY RESULTS
The following table presents selected quarterly financial information for
each of the eight quarters through September 30, 1997 and as a percentage of the
Company's net sales for the periods presented. This information is unaudited,
but in the opinion of the Company's management, reflects all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of this information in accordance with
generally accepted accounting principles. Quarterly results for prior periods
are not necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Net sales...................... $2,488 $2,526 $2,926 $ 3,005 $3,546 $4,334 $3,288 $ 4,235
Cost of goods sold............. 1,344 1,497 1,734 1,781 2,102 2,633 1,893 2,118
------ ------ ------ ------- ------ ------ ------ -------
Gross profit................... 1,144 1,029 1,192 1,224 1,444 1,701 1,395 2,117
Selling, general and
administrative expense....... 452 455 438 470 779(1) 637 678 886
Research and development
expense...................... 143 127 128 124 125 130 42(2) 21(2)
------ ------ ------ ------- ------ ------ ------ -------
Income from operations......... 549 447 626 630 540 934 675 1,210
Income before provision for
income taxes................. 561 434 626 610 475 867 680 1,235
Provision for income taxes..... 239 173 248 241 189 635(3) 8(3) 30(3)
------ ------ ------ ------- ------ ------ ------ -------
Net income..................... $ 322 $ 261 $ 378 $ 369 $ 286 $ 232(3) $ 672(3) $ 1,205(3)
====== ====== ====== ======= ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............. 54.0 59.3 59.3 59.3 59.3 60.7 57.6 50.0
------ ------ ------ ------ ------ ------ ------ ------
Gross profit................... 46.0 40.7 40.7 40.7 40.7 39.3 42.4 50.0
Selling, general and
administrative expense....... 18.2 18.0 15.0 15.6 22.0(1) 14.7 20.6 20.9
Research and development
expense...................... 5.7 5.0 4.3 4.1 3.5 3.0 1.3 0.5
------ ------ ------ ------ ------ ------ ------ ------
Income from operations......... 22.1 17.7 21.4 21.0 15.2 21.6 20.5 28.6
Income before provision for
income taxes................. 22.5 17.2 21.4 20.3 13.4 20.0 20.6 29.2
Provision for income taxes..... 9.6 6.9 8.5 8.0 5.3 14.7(3) 0.2(3) 0.7(3)
------ ------ ------ ------ ------ ------ ------ ------
Net income..................... 12.9% 10.3% 12.9% 12.3% 8.1% 5.3%(3) 20.4%(3) 28.5%(3)
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Includes year end bonuses in the aggregate amount of $75,000, as well as a
$47,500 year end audit fee.
(2) Reflects a shift in the research and development team's focus towards the
construction of the Company's new microreplication machine for 55 inch wide
holographic film and two new custom masters, resulting in related
capitalized expenses.
(3) The Company has been taxed as an S Corporation for federal and state
purposes since January 1, 1997. Provision for income taxes for the quarter
ended March 31, 1997 consists primarily of net deferred tax assets which
were written off in January 1997 upon the Company's election to be taxed as
an S Corporation. If the Company had been taxed as a C Corporation for the
quarters ended March 31, June 30 and September 30, 1997, the Company's pro
forma provision for income taxes and pro forma net income, respectively,
would have been $364,000 (8.4% of net sales) and $503,000 (11.6% of net
sales) for the quarter ended March 31, 1997; $286,000 (8.7% of net sales)
and $394,000 (12.0% of net sales) for the quarter ended June 30, 1997; and
$519,000 (12.3% of net sales) and $716,000 (16.9% of net sales) for the
quarter ended September 30, 1997.
25
<PAGE> 27
SEASONALITY
The Company's business historically has not been impacted by general
seasonal trends. Although a number of the Company's customers are affected by
seasonality (in the decorative packaging market in particular), the diversity of
the Company's customer base typically negates the impact of these patterns.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has relied generally on funds generated from
operations and loans from its officers to finance its operations. The ownership
of the Company has been primarily concentrated in four individuals who have not
received any dividend distributions since the Company commenced operations in
1980 (other than the S Corporation Distribution). Cash provided by (used in)
operating activities amounted to $(5,000), $1.3 million and $1.5 million for
1995, 1996 and the nine months ended September 30, 1997, respectively. The
increase in cash provided by operating activities in the 1997 period was
primarily due to an increase in net income, which was offset by an increase in
the Company's accounts receivable due to higher sales. Cash used by the Company
in investing activities amounted to $634,000, $103,000 and $334,000 for 1995,
1996 and the nine months ended September 30, 1997, respectively. These
activities were restricted to the purchase of new manufacturing equipment and
office furniture. In particular, in 1995, the Company used cash and an aggregate
of $1.1 million in notes payable and advances from officers to purchase a new
metallizer machine at a cost of approximately $1.5 million. Cash generated by
(used in) financing activities in 1995 and 1996 primarily reflected the $1.1
million debt incurred to purchase a new metallizer in 1995, and payments made to
amortize principal and interest on that debt. During the nine month period ended
September 30, 1997, the Company borrowed approximately $1.0 million pursuant to
a new revolving line of credit, the proceeds of which, along with cash flow from
operations, were used to repay the outstanding balance of approximately $695,000
on its prior credit line, and approximately $672,000 that remained outstanding
on advances from officers of the Company.
The Company anticipates making capital expenditures of approximately $4.5
million through December 31, 1998 to expand and equip its laser laboratory,
quality control and research and development facilities, to relocate its
proprietary manufacturing operations to a new facility, to incorporate key
conversion steps into its manufacturing processes and, potentially, for
strategic acquisitions. The Company plans to use a portion of the proceeds of
this Offering to finance these capital expenditures.
In March 1997, the Company obtained a $3.5 million revolving credit line
facility from Citibank, FSB, which is secured by substantially all of the
Company's assets and has been guaranteed by four of the Company's stockholders.
The line of credit bears interest at Citibank's base rate plus .75% (9.25% at
September 30, 1997) and expires on April 1, 1998. At December 31, 1996, the
Company had $695,000 of outstanding indebtedness that was incurred to purchase
the Company's metallizer. The Company used borrowings under the new line of
credit to refinance that debt. The outstanding balance on the new line of credit
was approximately $100,000 at December 1, 1997. The Company plans to borrow an
additional $700,000 under this new line of credit in the near future in order to
pay approximately $400,000 of previously accrued federal and state income taxes
and to provide additional working capital. The Company plans to use a portion of
the net proceeds of this Offering to retire the balance outstanding under the
line of credit by January 31, 1998.
On January 1, 1997, the Company converted from a C Corporation to an S
Corporation and, in connection therewith, issued the Stockholder Notes to
provide the current stockholders with a one time distribution of retained
earnings derived from that time through the Termination Date. On or before the
consummation of the Offering, the Company will revert to a C Corporation. The
Company intends to use a portion of the proceeds of this Offering to repay all
amounts due under the Stockholder Notes upon consummation of this Offering
(estimated to be $3.6 million at the Termination Date). As a consequence of the
Company's January 1, 1997 election, approximately $619,000 of net deferred tax
assets that were outstanding at December 31, 1996 were written off on January 1,
1997.
The Company believes that funds generated from operations, the net proceeds
of the Offering and available borrowings under the Company's line of credit will
be sufficient to meet operating needs and other capital requirements of the
Company for at least the 18 months following the Offering.
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<PAGE> 28
BUSINESS
GENERAL
Spectratek Technologies, Inc. is a leading manufacturer of microreplicated
holographic films that are used in a wide range of value added applications in
consumer products, packaging materials and industrial products. Using
proprietary technologies, the Company records coherent light onto continuous
rolls of polymer film. This process adds unique optical characteristics to the
film, creating color, motion and the appearance of depth in natural light. The
Company's films are used in consumer applications including stickers, magazines,
glitter and cosmetics; in packaging applications and labels for toys, computer
games, food, beverages and displays; and in industrial applications such as
paint, fabrics, flooring and architectural materials. The Company has refined
its proprietary technology to create virtually seamless holographic patterns
which the Company believes offer superior brightness, clarity and consistency
when compared with competing holographic films. The Company's holographic films
have been incorporated into products marketed by numerous companies in a broad
range of industries, including Coors Bottling Company, Kraft General Foods,
Mattel, Inc. and PPG Industries, Inc.
TECHNOLOGY OVERVIEW
Holograms consist of visual recordings of light wave patterns in a
compacted form that permit three dimensional information to be condensed onto a
flat surface. While holography was originally invented in 1947, broad commercial
applications of holographic materials did not occur until the late 1980s due to
the specialized technology necessary to mass produce holograms.
Holograms add a colorful new dimension to traditional merchandising media.
Attention is often drawn to holograms because images appear to project out of
the hologram, creating the illusion of depth. In addition, when a hologram is
viewed from different angles, features of the depicted object can be seen that
would not otherwise be visible in a conventionally printed image. The Company
believes significant growth potential exists in the applications for the
Company's products due to the visual appeal, impact and uniqueness of holograms.
Holograms are generally created using a four step manufacturing process
involving mastering, microreplication, metallizing and finishing. A master
hologram is created by recording the interference of two coherent laser beams
onto a plate coated with photosensitive material which creates light and dark
regions on the plate. The photosensitive materials undergo a development process
in which certain unexposed areas are removed from the photosensitive material on
the plate, leaving a pattern of microscopic grooves or bumps on the plate's
surface. The close spacing of the grooves or bumps facilitates the dispersion of
white light into its component spectral colors. Color dispersion is increased by
using finer groove spacing. Patterns and artwork may be created by arranging
areas of different grating angles and groove spacing.
Once the master is formed, most traditional holographers use an
electroforming nickel process to produce an exact copy or negative of the
master. This process involves silver coating the master and then plating nickel
over the silver resulting in a hard microreplication negative or a "shim." The
shim is typically wrapped around a cylinder in the microreplication machine.
Microreplication is the process by which the microscopic grooves and bumps from
the shim are transferred to and pressed into thin film material (usually
polyester, nylon, polypropylene or paper). A seam or pattern break on the
holographic film is usually created where the shim is joined as it is wrapped
around the pressure cylinder.
Commercial applications for this technology require the production of large
quantities of continuous thin film material. The uniformity of the optical and
physical properties of this material throughout a production run is often
critical. Large scale production is accomplished with high speed, close
tolerance microreplication equipment.
Once the holographic film is microreplicated, it is often metallized in a
vacuum chamber where aluminum is thermally evaporated onto the holographic film,
creating a reflective coating on the film. Once the holographic film is
produced, it is often sent to third party converters for further processing.
These
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<PAGE> 29
converters cut the film into particulate, slit it into fine strips, coat or tint
the film or laminate the film to paper or board stock or pressure sensitive
backing.
THE SPECTRATEK ADVANTAGE
The Company's proprietary microreplication technologies have enabled the
Company to mass produce large quantities of holographic films which the Company
believes offer superior brightness, clarity and consistency when compared with
competitors' products. The Company's core strengths include the following:
[DIAGRAM SHOWING THE ADVANTAGES OF THE COMPANY'S PROPRIETARY BASE FILM]
Unlike most traditional holographers, the Company uses a proprietary
mastering process prior to microreplication that facilitates the mass production
of virtually seamless holographic patterns of a consistent quality. In this
mastering process, the Company creates its own master tool from the shim or the
original master (created either by the Company or by other custom holographers).
The Company utilizes this master tool in its microreplication machines instead
of a shim.
The Company is able to use this procedure to enhance and refine the shape,
size and position of the grooves on the master. By increasing the spacing of the
grooves (as many as 44,000 lines per linear inch) or depth of the bumps (often
only .25 micron deep) and by adjusting the frequency of the light waves (similar
to screening out audio noises), the Company is able to increase the brightness
and clarity of the hologram. The Company is not aware of any other competitor
that is able to modify or enhance a master hologram once it has been generated.
The brightness and clarity of the Company's films are retained even when the
films are finely chopped into geometric pigment. When added to paint or other
coatings, the Company's geometric pigment adds a sparkle and luster to the
finish. In addition, when viewed from different angles, the geometric pigment
creates an optical effect of changing colors. The Company believes these
different optical effects are sought after by large paint and coatings
companies.
The Company also has developed and constructed its own proprietary
microreplication machines that use the Company's unique mastering tool instead
of traditional shims. Because the grooves on a shim wear over time, films
produced using shims tend to lose their clarity and brightness as their groove
resolution deteriorates. The Company has experienced significantly less
deterioration in the groove structure in its mastering tool as compared to
traditional shims, thereby achieving greater output consistency and quality
throughout its production run. The Company is able to manufacture a large
quantity of film without a noticeable change in the quality of the films. The
failure of competitors' films to achieve uniformity throughout the production
run can make it difficult for printers to process the films due to mismatched
inks and can lead to an increased amount of wasted products. In addition,
because the Company's proprietary microreplication machines do not use shims,
the seams or breaks between the Company's patterns are virtually undetectable in
most of the Company's custom stock holographic patterns.
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<PAGE> 30
EXISTING MARKETS
The following table summarizes the Company's principal markets and product
applications:
<TABLE>
<CAPTION>
MARKET APPLICATION SELECTED END USERS *
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Consumer Products Children's stickers, wrapping DC Comics (Batman cover decals), Jerome
paper, bows, balloons, trading Russell Cosmetics (nail polish and body
cards, snowboards, magazines, gels), Labelad/Sandylion Sticker Co.
glitter, nail polish and (stickers), Motor Trend Magazine (cover
cosmetics. decals), MacUser and PCWorld (cover
decals), TOPPS (trading cards) and The
Upper Deck Company (trading cards)
- --------------------------------------------------------------------------------------------------------------
Packaging Materials Packaging and labels for toys, Coca-Cola (Hi-C labels), Coors (Coors
computer games, food, vitamins, Arctic Ice and Zima labels and signs),
beverages and cigarettes. Also Capital Records (security seals), GT
used in point of purchase Interactive (Duke Nukem software box),
displays and security seals. Kraft General Foods (Capri Sun
packaging), Lucas Art Entertainment (DIG
software box), Mattel (Barbie dolls and
packaging), Proctor & Gamble (Crest
decals), Ralston Purina (Ninja Turtles),
Sears (Mainframe garment tags), Sony
(security seals), Wachovia Bank
(security stickers for cashier's
checks), Wilson Sporting Goods (Pro
Staff Hammer tennis racquets) and
Wrigley Chewing Gum (bubble beeper)
- --------------------------------------------------------------------------------------------------------------
Industrial Applications Fabrics, paint, flooring and Charles Gray Interiors (AMC theater
architectural applications. decor), PPG Industries, Inc. (automobile
paint), Riviera Hotel (signage) and
Soorim Textile Co., Ltd. (fabrics)
</TABLE>
* The trademarks named are the property of their respective owners.
Consumer Products. The largest market addressed by the Company's products
is currently the consumer products market. The Company's films have been used in
children's stickers, wrapping paper, bows, balloons, trading cards, snow boards,
magazines, glitter, nail polish and cosmetics. The Company's largest application
to date within this market has been pressure sensitive labels. Consumer products
are often impulse purchases and the uniqueness and impact of holography can
differentiate products and draw attention to them at the point of purchase. The
Company believes that brightness and clarity of the films are key factors in
selecting holographic films for these applications.
Packaging Materials. The Company also manufactures holographic films for
flexible packaging and folding carton applications for a variety of consumer
products such as food, beverages, vitamins, cigarettes, toys and computer games.
The Company's products are also used in signage materials and point of purchase
displays. The Company believes significant growth opportunities exist for use of
the Company's products in the packaging materials market due to the visual
appeal, impact and uniqueness of holograms. The Company's holographic films are
selected in various packaging applications for appearance and functional
characteristics. Similar to the consumer products market, a significant
challenge in the packaging market is to draw the attention of the buyer to the
product. For packaging applications, the Company's proprietary stock pattern
films are often laminated to paper or board stock and then printed with a
combination of semi-opaque, opaque and reversed-out, four color process
printing, allowing the optical characteristics of the film to highlight certain
parts of the package.
The packaging market, which includes flexible packaging (bags and pouches)
as well as folding cartons, represents a significant expansion opportunity for
the Company. According to a recent report by the Flexible Packaging Association,
the size of the flexible packaging market is estimated to reach $16.4 billion in
1997. Holographic materials currently represent a very small share of this
market due to the higher cost of
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<PAGE> 31
holographic materials as compared to traditional packaging materials. To date,
the Company's ability to serve the flexible packaging market has also been
constrained to a large degree by limitations on the width of its material. In
general, it is more economical for the flexible packaging industry to work with
wider materials than the Company has historically been able to produce.
The Company is in the process of building a new microreplication machine
which is anticipated to be completed in late 1997, which should enable the
Company to manufacture film 55 inches wide. The Company believes its ability to
manufacture this wider material will broaden the applications for its products
by enabling the Company to address the larger material requirements of the
packaging materials market on a more cost-effective basis.
While the Company has produced only a limited quantity of holographic films
to date for the packaging market, its films were used in the Capri Sun package
for Kraft General Foods. The Company was presented a Silver Award/Structural
Packaging for the Capri Sun package as a part of the Beverage Packaging Global
Design Awards.
Industrial Applications. While industrial applications currently represent
the smallest existing market for the Company's products, the Company believes
this market offers the most significant growth opportunities. The Company's
products can be slit for use in fabrics, finely chopped into geometric pigment
to add sparkle to paint and flooring materials and can be used for architectural
applications such as billboard signage and window treatments. In general, the
Company's films can be used to replace mica or aluminum flakes in various
industrial applications.
The Company has developed proprietary microreplicating technologies which
enable the processing of polyester film ranging as thin as .004 inch to .00024
inch to a depth of .25 micron. The Company is not aware of any other company
with this capability. The Company is working with independent companies to
precision cut the Company's film into particles as small as 1/500 inch. The
Company has entered into joint development efforts with three large paint and
coating manufacturers to expand the applications for the Company's geometric
pigment, particularly for the automobile market. Metallic applications in
automobile paints are currently achieved by adding aluminum flakes or mica to
the paint. The Company's geometric pigment can be added to paint to achieve a
similar effect and to provide tiny pinpoints of reflecting light. Depending on
the angle of the sun, these pinpoints will reflect different colors. By varying
the size or amount of the pigment, the application of the Company's geometric
pigment to automobile paint can provide a subtle glimmer or a spectacular
sparkling effect. Due to the reflective nature of the Company's pigment and the
thinness of the material, the Company believes such effect can be achieved using
significantly less geometric pigment in the paint than would be required with
aluminum flakes or mica.
In July 1997, PPG Industries, Inc. launched the Prizmatique(TM) automobile
paint line which features the Company's geometric pigment. BASF and Englehard
are also beta testing the Company's geometric pigment for use in their paint
products. In addition to automobile paint, the Company's geometric pigment can
be used in a variety of other paint applications including bicycle, personal
watercraft and outdoor furniture paints.
BUSINESS STRATEGY
The Company's objective is to become the leading worldwide provider of
holographic materials by expanding the applications for its products,
continually improving the quality and consistency of its products, enhancing its
mastering capabilities and providing products that meet its customers'
objectives. The key elements of the Company's strategy include the following:
- Expand the Applications for the Company's Products. The Company currently
manufactures holographic film for use in the markets for consumer goods,
packaging materials and industrial applications. The Company believes
significant growth opportunities exist both for different applications
within these markets, as well as in new markets such as architectural
products. To date, the Company's penetration of the packaging market and
certain other markets has been constrained to a large degree by its
inability to produce materials in widths that can be efficiently
processed and used by converters, printers and finishers. The Company is
currently developing a new microreplication machine to manufacture 55
inch wide rolls of film which the Company believes will enable it to
better
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<PAGE> 32
address the packaging market. The Company also intends to focus its
research and development efforts to process thinner films, precision cut
the Company's film into finer particles, utilize other substrates and new
coatings, and expand its custom mastering capabilities.
- Maximize Cost Efficiencies. The Company plans to maintain its position as
a low cost producer of holographic films by expanding its production
facilities and by designing and building equipment capable of producing
wider material in larger quantities. The Company is currently operating
only one manufacturing shift and may be able to achieve greater
efficiencies by adding another shift, incorporating new equipment and
bringing certain of the manufacturing steps in house in order to lower
costs, increase quality and expedite turnaround. In addition, the Company
continually modifies its manufacturing processes and proprietary
microreplication equipment in order to utilize the Company's production
facilities more efficiently. In this regard, the Company's new metallizer
and the anticipated new microreplication machine should enable the
Company to manufacture 55 inch wide films with significantly less waste
than the Company's current 24 inch films.
- Expand Sales and Marketing Capabilities. The Company currently operates
in a number of discrete but very large market segments. The Company's
existing sales and marketing efforts have traditionally been application
specific, with less emphasis directed to the specific industries in which
the Company's customers operate. As a result, the Company's sales and
marketing activities to date primarily have been focused on reacting to
the needs of the Company's customers in existing markets. As new markets
that require specific expertise develop, the Company intends to
reorganize its sales functions along product and industry lines. The
Company plans to redirect its marketing strategies based on product
lines, focus on in-depth knowledge of targeted applications, provide
additional training to existing employees, increase advertising to
educate the Company's target markets about the benefits of holographic
products, and hire additional marketing personnel and sales
representatives to focus on specific product opportunities in the markets
for consumer products, packaging materials and industrial applications.
- Leverage Proprietary Technology to Expand Mastering Capabilities. The
Company's founders have been refining the proprietary microreplication
technologies and holographic manufacturing processes for nearly twenty
years and accordingly have gained significant expertise in manufacturing
high quality, durable holographic films. While the Company has in recent
years focused its resources on refining its manufacturing processes, it
has elected not to produce its own custom imagery on a large scale basis
in order to achieve greater manufacturing efficiencies. The Company
believes, however, that the increasing utilization of holographic films
will necessitate expanding the Company's mastering capabilities to
respond to its customers' needs quickly and more effectively. The Company
intends to leverage its proprietary technology and know-how to provide
custom imagery upon customer request by designing and installing a laser
laboratory and mastering facility. The Company believes these added
capabilities will enable the Company to offer higher quality holographic
imagery, reduce the Company's reliance on third party custom holographers
and provide additional flexibility for its customers.
- Increase Penetration in International Markets. International sales
constitute a significant portion of the Company's net sales, and the
Company intends to devote additional resources to expand the worldwide
marketing of its products. The Company anticipates substantial growth
opportunities in China, Europe and South America, and intends to market
its custom stock patterns and geometric pigment aggressively in those
markets through the Company's existing direct sales organization. The
Company may also enter into distribution arrangements with foreign
distributors or agents to increase its penetration of these markets.
- Acquire Complementary Products and Technologies. The Company believes
that numerous consolidation opportunities exist in the holographic
materials market which could enable the Company to increase its market
share in its target markets, enter into new markets and attain cost
efficiencies in its manufacturing operations. The Company may seek to
acquire companies with an existing presence in certain markets, which
have well developed sales and marketing capabilities (both domestically
and
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<PAGE> 33
internationally) or which have manufacturing expertise in certain of the
manufacturing steps not currently addressed by the Company.
PRODUCTS
The Company's holographic films are used in a wide range of value added
applications in consumer products, packaging materials and industrial
applications. In general, the Company's films represent only a small percentage
of the cost of the final product, but can have a significant effect on the
product's marketability due to the visual appeal, impact and uniqueness of the
holographic material.
The Company currently sells its holographic films in five basic forms:
metallized film, metallized pressure sensitive film, permanent laminated film,
glitter or geometric pigment and non-metallized film. The Company offers these
products in 14 stock holographic patterns manufactured at widths of either 25
inches or 40 inches, primarily polyester, in a variety of gauges (thicknesses)
from .004 inch to .00024 inch. The Company is currently in the process of
developing a new microreplication machine to enable the Company to produce 55
inch wide film. The Company believes this wider material will expand the
applications for the Company's products by enabling the Company to address the
larger material requirements of the packaging market on a more efficient basis.
The Company's principal products include the following:
Metallized Film. Nearly all of the Company's holographic films are
metallized by the Company. Once the polyester film has been
microreplicated, the Company typically metallizes the film in a vacuum
chamber where aluminum is thermally evaporated onto the holographic film
providing a reflective coating on the film. Microreplicated metallized film
is the Company's core product and is typically sold to value added
resellers who either laminate the film or convert it into the final
product.
Metallized Pressure Sensitive Film. Once the holographic film is
metallized, the Company often subcontracts with a converter to laminate the
film to paper coated with a silicone release layer. The resulting pressure
sensitive material is typically used in children's stickers, prime labels
and decals and has historically represented the largest segment of the
Company's business.
Permanent Laminated Film. To create its permanent laminated films, the
Company contracts with a converter who laminates the metallized film,
generally to plastic films, paper or board stock for use in packaging
applications. The laminated film is typically used in flexible packaging,
folding cartons, signs, banners, trading cards, point of purchase displays,
folders and boxes.
Glitter or Geometric Pigment. The brightness, clarity and other
optical characteristics of the Company's holographic films are retained
when the material is cut into fine particles creating glitter and geometric
pigment. Glitter is typically cut into particles ranging in size from 1/128
inch to 1/8 inch and is used in a variety of applications including nail
polish, fabrics, hobby and craft applications, cosmetics and injection
molded parts. Geometric pigment is produced by precision cutting the
holographic film into particles 1/250 inch, 1/500 inch or smaller and is
currently used in paint, cosmetics and flooring materials to add a sparkle,
glimmer, color change and other optical effects to these products.
Nonmetallized Film. While nearly all of the Company's products are
metallized, the Company also manufactures nonmetallized holographic film in
small quantities which is typically sold to converters who have their own
metallizing capabilities or to customers who are seeking a transparent
material.
SALES AND MARKETING; PRINCIPAL CUSTOMERS
The Company sells its holographic films directly to end users, to
distributors who sell to end users, and to value added resellers, who add
conversion steps to the film and sell to distributors and end users. A large
percentage of the Company's net sales represent sales of unfinished film to
distributors and to value added resellers. The Company intends to use a portion
of the proceeds of this Offering to expand its marketing and sales capabilities
and to provide a more in depth product focus in its marketing strategies.
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<PAGE> 34
The Company currently employs an internal sales staff of four
representatives at its Los Angeles headquarters and provides office space at
that location for an independent sales representative. The Company also has two
outside sales representatives located in Northern California and Michigan.
During 1996, the Company's customer base worldwide exceeded 1,000
customers. International sales are typically made directly and through foreign
distributors. The Company has entered into distribution arrangements with Soorim
Textile Co., Ltd. and Ying Lih Industrial Co., Ltd., pursuant to which the
Company's products are sold in Korea and Taiwan, respectively. The arrangements
are cancelable at will at any time by either party. Sales to Soorim and Ying Lih
during the year ended December 31, 1996 represented approximately 5% and 3%,
respectively of the Company net sales. See Note 2 of Notes to Financial
Statements.
During 1995, 1996 and the nine months ended September 30, 1997, the
Company's three largest customers accounted for an aggregate of 24%, 17% and
32%, respectively, of the Company's net sales. Upper Deck accounted for more
than 7% of the Company's net sales in 1994. Labelad/Sandylion Sticker Designs
accounted for 13%, 10% and 17%, respectively, of the Company's net sales in
1995, 1996 and the nine months ended September 30, 1997. In addition, the
Company believes that a number of its customers use the Company's
microreplicated films in the manufacture and packaging of products for Mattel,
Inc. While direct sales to Mattel and its subsidiaries are not generally large,
the Company believes that sales of its products to certain customers ultimately
are included in Mattel products and packaging, and that sales to such customers
may exceed ten percent of the Company's net sales. Consequently, the Company
believes that a change in the purchasing patterns of Mattel could adversely
impact the Company's business, financial condition and results of operations.
Because Mattel does not disclose the identity of its suppliers to the Company,
the Company cannot precisely quantify the impact of Mattel's purchases on its
business.
MANUFACTURING
Polyester is the primary raw material used in the Company's products. While
the Company also microreplicates nylon and polyvinyl chloride, approximately 95%
of all of the Company's products utilize thin polyester film in thicknesses
ranging from .004 inch to .00024 inch. Because the Company is able to
microreplicate directly into thin polyester film without altering the properties
of the film, the Company's products retain the inherent properties of the
polyester, resulting in a stronger final product which retains its existing
physical properties under extreme heat (up to 175 degrees Celsius) and can
withstand many solvents or other chemicals used in the finishing and converting
processes. The raw polyester film in the thicker gauges (.004 inch to .0005
inch) is readily available from a number of sources without any significant
qualitative differences, and the Company routinely tests material produced by
several suppliers. The Company obtains its .00024 inch polyester film from a
sole source supplier, and is currently investigating other sources of this
material.
The price the Company has paid for polyester film stock has fluctuated
significantly in recent periods due to changes in the supply and demand of
polyester products. Polyester is generally more expensive than the base
materials used by certain of the Company's competitors. There can be no
assurance that the necessary polyester film will continue to be available in the
desired thicknesses at favorable prices.
The Company's manufacturing processes consist primarily of creating image
or pattern masters and microreplicating the images and patterns onto continuous
rolls of polyester film. When the Company creates a new stock pattern or
undertakes a custom order, the Company usually subcontracts the initial custom
mastering. The Company intends to use a portion of the proceeds of this Offering
to install a laser laboratory and expand its mastering capabilities. The Company
currently creates all of the intermediate master tools which are used in the
Company's microreplication machines in lieu of the shims. The Company currently
operates four microreplication machines and is in the process of developing a
new machine that should enable the Company to manufacture 55 inch wide
holographic films. All of the Company's microreplication machines have been
custom developed by the Company and are not otherwise commercially available.
The Company purchased metallizing machines in the fourth quarter of 1995 to
enable the Company to engage in vacuum metallizing, which machines became
operational in February 1996. This equipment can
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<PAGE> 35
metallize rolls of film up to 65 inches wide. The Company also slits, rewinds
and splices rolls to satisfy customer orders, and to enable efficient
warehousing and shipping of its products. In addition, the Company outsources
certain other converting processes such as cutting, laminating, slitting,
coating, tinting and sheeting, but does not currently provide these processes
in-house. If a customer requires a converted product, the Company typically
processes the raw film, metallizes it and then ships it to converters for
additional processing. Some conversion processes are provided by a large number
of suppliers, and the Company has a wide range of choices in procuring services.
Other conversion processes such as cutting into particulate are more specialized
and only a few converters have demonstrated an ability to meet the Company's
requirements. In particular, the Company is aware of only two high quality
geometric pigment cutters in the United States who can consistently cut the
Company's films into 1/250 inch, 1/500 inch and smaller. The Company is
currently underutilizing its manufacturing capabilities and may be able to
achieve greater efficiencies by bringing more of the manufacturing steps in
house such as cutting, finishing and custom mastering capabilities.
The Company's primary output consists of continuous polyester rolls of
holographic film, although the Company also produces small quantities of other
polymer films, including nylon and polyvinyl chloride. Microreplication and the
Company's other proprietary processes are conducted in facilities which are
physically separate from the Company's administrative and warehouse facilities.
COMPETITION
Competition among holographic materials manufacturers is intense and is
characterized by changing technology and evolving standards. Competitors vary
based upon the type of materials into which they microreplicate, the quality of
the holograms, and the breadth of customization or stock patterns offered. While
the Company believes its holographic technology is unique, basic holographic
technology is well known, and there are relatively low barriers to entry into
the holographic materials market. Accordingly, the Company anticipates increased
competition from other established and emerging companies as the market for
holographic materials grows. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Many of the Company's current and potential
competitors have significantly greater financial, technical, manufacturing,
marketing and other resources than the Company and may be able to expand the
applications for their products and capture a greater share of the holographic
materials market.
The Company also competes to a certain extent with its value added
resellers who purchase the Company's holographic films, add conversion steps to
the films and market the converted products for resale. This competition may
affect such vendors' incentive to provide quality service to the Company.
The Company also experiences competition from manufacturers of
non-holographic materials, particularly in the market for packaging materials,
pigments, fabrics and aluminum flakes. The applications for holographic
materials within such markets are small and have only recently begun to expand.
Due to the higher cost of holographic film and current size constraints, the
Company is often at a price disadvantage as compared to certain non-holographic
media. Accordingly, the Company expects to continue to encounter significant
competition from manufacturers of non-holographic materials in its markets
particularly as it seeks to expand the applications for its products.
The Company's competitors utilize different techniques to microreplicate
polyester than those employed by the Company. The Company believes that its
techniques enable it to produce films which have superior appearance and
properties when compared with those produced by the Company's competitors. The
Company believes that it has a competitive advantage where appearance
characteristics, solvent resistance and durability are critical.
PROPRIETARY RIGHTS
The Company's ability to compete effectively depends in part on its ability
to develop and maintain the proprietary aspects of its microreplication
technology. The Company believes that its proprietary processes are
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<PAGE> 36
significantly different from those used by competitors to produce similar
materials. To date, the Company has relied primarily upon trade secret laws and
nondisclosure agreements to protect its proprietary rights and has not sought
patent protection for any of its technologies due to the limited protection
offered by process patents. All of the Company's proprietary manufacturing
processes are conducted at a limited access facility which is separate from the
Company's administrative and warehousing facilities. The Company maintains an
extensive security system at such facility to prevent the unauthorized
disclosure of its trade secrets, and plans to institute similar security
measures at its new manufacturing facility. There can be no assurance that such
trade secrets will remain confidential, that any patents will be applied for or
granted in the future or that other intellectual property rights of the Company
will provide meaningful protection for the Company's proprietary rights. If the
processes employed by the Company become known to competitors, it is likely that
they could be used to produce materials of the quality and durability produced
by the Company. Certain of the customers of the Company could, if in possession
of the Company's trade secrets, produce the materials which are substantially
equivalent or superior products to the Company's products. There can be no
assurance that the steps taken by the Company will be adequate to deter the
misappropriation of its proprietary information and technologies, or will
prevent the assertion of an adverse claim to technology utilized by the Company,
or that the Company will be able to detect unauthorized use and take effective
steps to enforce its intellectual property rights. The Company has substantial
foreign sales, and the laws of some foreign countries into which the Company's
products are sold may not protect the Company's proprietary rights to as great
an extent as do the laws of the United States. Accordingly, effective protection
of intellectual property may be unavailable or limited in certain foreign
countries. There can be no assurance that the Company's means of protecting its
proprietary rights in the United States or abroad will be adequate, or that
competitors will not independently develop technologies that are similar or
superior to the Company's technology or duplicate the Company's technology.
The Company has previously licensed to FosterCo, a related entity, on an
exclusive basis (even as to the Company), the use of certain aspects of any
proprietary technologies the Company may have with respect to the manufacture of
microreplicated films for pre-recorded and recordable machine readable digital
information. The Company currently does not anticipate that it will pursue these
applications as part of its growth strategy. Furthermore, to the extent that the
Company exercises the FosterCo Option, the Company will be bound by the
provisions of (i) an exclusive license agreement between FosterCo and Cyberwerks
LLC, and (ii) a noncompetition agreement previously entered into by FosterCo
with Upper Deck and Cyberwerks LLC that will prevent the Company from pursuing
applications using pre-recorded digital information.
The license agreement between FosterCo and Cyberwerks LLC provides
Cyberwerks LLC with the exclusive right to use certain of FosterCo's
intellectual property in order to develop Information Storage Products. This
intellectual property shares some common elements with that used by the Company
in the production of its products. In connection with this joint venture,
FosterCo will deposit into escrow certain manufacturing documentation describing
the intellectual property used by FosterCo in the development and manufacture of
the Information Storage Products. The escrow agreement provides that if the
escrow dissolves under certain circumstances, Cyberwerks LLC and/or Upper Deck
will obtain access to the manufacturing documentation and thereby FosterCo's
intellectual property. Although there are a number of mechanisms in place
designed to protect the confidentiality of such intellectual property should the
escrow dissolve, there can be no assurances that these mechanisms will succeed.
Disclosure of this confidential information to any of the Company's competitors
could enhance their knowledge base significantly, which could enable them to
compete more effectively with the Company. See "Certain
Transactions -- FosterCo/Cyberwerks LLC Transactions."
Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to determine the validity and scope of the
proprietary rights of others, or to defend the Company against claims of
infringement or invalidity by others. While the Company is not currently engaged
in any intellectual property litigation or proceedings, there can be no
assurance that it will not become so involved in the future. An adverse outcome
in such litigation or similar proceedings could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from others or require the Company to cease marketing or using certain products,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations. If the Company is required to
obtain licenses under
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patents or proprietary rights of others, there can be no assurance that any
required licenses would be made available on terms acceptable to the Company, if
at all. In addition, the cost of addressing any intellectual property litigation
claim, both in legal fees and expenses and the diversion of management's
attention, regardless of whether the claim is valid, could be significant and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
EMPLOYEES
At December 1, 1997, the Company employed 52 employees, including 30 in
shipping, warehousing and manufacturing, one in engineering, three in customer
service, ten in sales and marketing and eight in finance and administration. The
Company is not a party to any collective bargaining agreement or other similar
agreement and has not experienced any work stoppages to date. The Company
believes that its relationship with its employees is good.
FACILITIES
The Company currently leases a 70,440 square foot building in Los Angeles,
California under a sublease expiring in February 1998. This building serves as
the Company's principal administrative, sales and marketing, customer support
and warehousing facility. The Company also conducts certain non-proprietary
manufacturing processes including metallizing and slitting at this facility. The
Company recently renegotiated a new lease for this space which will commence in
February 1998 upon expiration of the existing sublease. The rent under the new
lease will be $42,000 per month. While the new lease will expires in 2003, the
Company has the option to extend this lease for an additional five years
thereafter.
The Company also currently leases two additional buildings on a
month-to-month basis in Los Angeles, California with a combined square footage
of approximately 7,500. These facilities house the Company's proprietary
manufacturing processes including mastering and microreplication which involve
trade secret technology. In July 1997, the Company leased an additional 17,000
square foot facility in Los Angeles pursuant to lease which expires in September
2002. The Company has the option to renew this lease for an additional five
years. The rent on this new facility is $12,750 per month. The Company intends
to relocate its proprietary manufacturing processes to this new facility within
the next six months and terminate the existing month-to-month lease on its two
smaller facilities once the relocation has been completed. The Company believes
that its facilities are sufficient to meet its needs for at least the next three
years.
LEGAL PROCEEDINGS
The Company may be involved in legal proceedings from time to time in the
ordinary course of business. As of the date of this Prospectus, there are no
material legal proceedings pending against the Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the Company's
executive officers and directors as of November 1, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- -------------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Michael S. Foster............... 53 Chairman of the Board and Chief Technology Officer
Terrence Conway(1)(2)........... 40 Director, President, Chief Executive Officer and Secretary
James Wanlass................... 52 Director and Vice President, Manufacturing
Michael Wanlass................. 55 Director and Vice President, Marketing
Charles M. Spear(1)(2).......... 54 Director and Chief Financial Officer
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Michael S. Foster, a co-founder of the Company, has served as its Chairman
of the Board and as a director since its inception in October 1980. Since March
1997, he has also served as the Company's Chief Technology Officer. From October
1980 to March 1997, Mr. Foster served as the Company's Vice President, Research
and Development. Since June 1995, Mr. Foster also has served as a director, the
Chief Technical Officer and the Vice President, Research and Development of
FosterCo., Inc., a development stage startup company ("FosterCo"). From June
1995 to August 1997, Mr. Foster served as the Chief Technical Officer and Vice
President, Research and Development of Cyberwerks Interactive, L.L.C., a
development stage startup company ("Cyberwerks LLC"). Mr. Foster successfully
completed in 1966 the coursework required to receive a B.S. degree in Chemistry
from the University of Utah.
Terrence Conway has served as the Company's President, Chief Executive
Officer, Secretary and as a director since January 1988. Since June 1995, Mr.
Conway also has served as a director and the President of FosterCo and as a
manager of Cyberwerks LLC. From June 1995 to August 1997, Mr. Conway served as
the President of Cyberwerks LLC. Mr. Conway received his B.B.A. degree from the
University of Michigan in 1979.
James Wanlass, a co-founder of the Company, has served as its Vice
President, Manufacturing since January 1988 and as a director since its
inception in October 1980. From October 1980 through December 1987, Mr. Wanlass
also served as the Company's President and Treasurer.
Michael Wanlass, a co-founder of the Company, has served as its Vice
President, Marketing and as a director since its inception in October 1980. From
October 1980 through December 1987, Mr. Wanlass also served as the Company's
Secretary.
Charles M. Spear joined the Company as a director in April 1997 and became
its Chief Financial Officer in October 1997. Since April 1993, Mr. Spear has
served as Chairman of the Board and Chief Executive Officer of Spear, Inc., a
privately held financial services company. From April 1995 through January 1996,
Mr. Spear served as Chief Financial Officer of Smith Micro Software, Inc., a
publicly held developer of communications software, and from July 1995 through
January 1996 he also served as a Senior Vice President and director of Smith
Micro. From April 1983 until December 1992, Mr. Spear served as Chairman of the
Board and Chief Executive Officer of Spear Financial Services, Inc., a public
company which Mr. Spear founded. Mr. Spear also is a member of the Board of
Directors of Dynatem, Inc. Mr. Spear received his B.B.A. degree from Ohio
University in 1964 and received his J.D. from Case Western Reserve University in
1968.
The Company's Certificate of Incorporation and Bylaws provide for the Board
of Directors to be divided into three classes, with each class to be as nearly
equal in number of directors as possible. At each annual meeting of
stockholders, the successors to the class of directors whose term expires at the
time are elected to hold office for a term of three years, and until their
respective successors are elected and qualified, so that the
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<PAGE> 39
term of one class of directors expires at each such annual meeting. The terms of
office expire as follows: Mr. J. Wanlass and Mr. Spear in 1998; Mr. M. Wanlass
and Mr. Conway in 1999; and Mr. Foster in 2000. See "Description of
Securities -- Certain Provisions of the Company's Certificate of Incorporation
and Bylaws."
The Company intends to appoint two independent directors to serve on the
Board upon the consummation of the Offering, as soon as appropriate individuals
are identified and agree to serve.
Officers are elected by, and serve at the discretion of, the Board of
Directors. Messrs. J. Wanlass and M. Wanlass are brothers. There are no other
family relationships among the directors or executive officers of the Company.
BOARD COMMITTEES
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee, which was established in April 1997 and is currently
comprised of Messrs. Conway and Spear, reviews the results and scope of the
audit and other services provided by the Company's independent auditors, reviews
and evaluates the Company's internal control functions, and monitors
transactions between the Company and its employees, officers and directors. The
Compensation Committee, which was established in April 1997 and is currently
comprised of Messrs. Conway and Spear, administers the Company's stock option
plan and designates compensation levels for officers and directors of the
Company.
Upon consummation of the Offering, the Company intends to establish a
Fairness Committee of the Board (comprised of two independent directors), which
will make recommendations to the Company regarding the exercise of the Company's
option to purchase the outstanding capital stock of FosterCo. See "Certain
Transactions -- FosterCo/Cyberwerks LLC Transactions." These independent
directors will also serve on the Compensation Committee and the Audit Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee currently consists of Messrs. Conway
and Spear, who are also officers and employees of the Company.
From January 1993 through December 1996, Mr. Conway made various loans to
the Company. No more than $672,115 was owing to Mr. Conway at any one time and,
as of March 31, 1997, all such loans had been repaid in full. In October 1997,
the Company declared a distribution to its existing stockholders, including
Messrs. Conway and Spear, representing all of the Company's undistributed
retained earnings through the Termination Date. Mr. Conway is a manager and
former officer of Cyberwerks LLC, a director and officer of FosterCo and a
shareholder of ComDisc Technologies, Inc., a California corporation ("ComDisc").
While Mr. Conway received a salary from both Cyberwerks LLC and FosterCo during
the past two fiscal years, he no longer receives any compensation from these
entities. The Company currently shares its facilities with Cyberwerks LLC and
has entered into licensing and other arrangements with Cyberwerks LLC, FosterCo
and ComDisc at various times. In addition, FosterCo previously loaned $25,000 to
the Company in August 1995, which amount has been repaid. See "Certain
Transactions."
In April 1996, the Company issued 55,500 shares of Common Stock to Mr.
Spear in consideration for consulting services previously rendered by him to the
Company. In October 1997, the Company granted an option to Mr. Spear for the
purchase of 13,875 shares of the Company's Common Stock under the 1997 Plan at
an exercise price of $10.41 per share. See "Certain Transactions -- Consulting
Arrangements."
Messrs. Conway and Foster currently serve as executive officers and
directors of FosterCo. No other executive officer of the Company serves as a
member of the board of directors or compensation committee of any entity which
has one or more executive officers serving as a member of the Company's Board of
Directors or its Compensation Committee.
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<PAGE> 40
DIRECTOR COMPENSATION
The Company currently does not provide any cash compensation to its
directors but does reimburse them for certain out-of-pocket expenses incurred in
connection with attendance at board and committee meetings. Nonemployee
directors will also receive stock option grants automatically under the 1997
Plan. See "-- 1997 Stock Incentive Plan."
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation received, for all
services rendered in all capacities to the Company, by the Chief Executive
Officer and each of the other four most highly compensated executive officers
(the "Named Executive Officers") whose salary and bonus exceeded $100,000 for
the fiscal year ended December 31, 1996. Except as indicated below, no Named
Executive Officer received other compensation in excess of the lesser of $50,000
or 10% of such officer's compensation.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITIONS SALARY BONUS
-------------------------------------------------------------- -------- -------
<S> <C> <C>
Michael S. Foster............................................. $300,000 $20,000
Chairman of the Board and Chief Technology Officer
Terrence Conway............................................... 150,000(1) 10,000
President and Chief Executive Officer
James Wanlass................................................. 150,000 10,000
Vice President, Manufacturing
Michael Wanlass............................................... 150,000 10,000
Vice President, Marketing
Charles M. Spear(2)........................................... -- --
Chief Financial Officer
</TABLE>
- ---------------
(1) Includes $60,000 earned by Mr. Conway in the fiscal year ended December 31,
1996 but paid in March 1997.
(2) Mr. Spear became the Chief Financial Officer of the Company in October 1997.
In October 1997, the Company granted an option to Mr. Spear for the purchase
of up to 13,875 shares of the Company's Common Stock at an exercise price
equal to $10.41 per share. Such options vest in five equal annual
installments beginning in April 1998.
The Company currently has no employment contracts with any of the Named
Executive Officers. As described below under "-- 1997 Stock Incentive Plan,"
under certain circumstances, the exercisability of options granted to the Named
Executive Officers may be accelerated.
1997 STOCK INCENTIVE PLAN
The Company's 1997 Stock Incentive Plan (the "1997 Plan") became effective
on April 1, 1997 upon adoption by the Board of Directors and approval by the
stockholders of the Company. A total of 560,550 shares of Common Stock have been
reserved for issuance under the 1997 Plan. In no event may any one participant
in the 1997 Plan receive option grants or direct stock issuances for more than
111,000 shares in any given calendar year.
The 1997 Plan is divided into three separate components: the Discretionary
Option Grant Program, the Stock Issuance Program and the Automatic Option Grant
Program. Under the Discretionary Option Grant Program, eligible individuals in
the employ or service or the Company or any parent or subsidiary of the Company
(including employees, officers, nonemployee directors, consultants and other
independent advisors thereof) may, in the discretion of the Plan Administrator,
be granted options to purchase shares of Common Stock at an exercise price not
less than the fair market value of those shares on the grant date. Under the
Stock Issuance Program, the same individuals may, in the discretion of the Plan
Administrator, be issued shares of Common Stock directly, through the purchase
of such shares at a price not less than fair market value of those shares at the
time of issuance, or as a bonus awarded for services rendered to the Company or
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<PAGE> 41
any parent or subsidiary of the Company. Lastly, under the Automatic Option
Grant Program, option grants will automatically be made at periodic intervals to
eligible nonemployee directors, which options will enable such directors to
purchase shares of Common Stock at an exercise price equal to 100% of the fair
market value of those shares on the grant date. Eligibility in the Automatic
Option Grant Program shall be limited to those individuals: (i) serving as
nonemployee directors on the date on which the Underwriting Agreement in
connection with this Offering is executed and the Common Stock offered hereby is
priced (the "Underwriting Date") (provided that no initial option will be
granted on such date to any director who has previously received a stock option
grant from the Company in connection with his or her Board service), (ii) who
first become non-employee directors at any time after the Underwriting Date,
whether through appointment by the Board or election by the Company's
stockholders (provided that no such person previously in the employ of the
Company or any parent or subsidiary of the Company shall receive an initial
option grant), and (iii) who serve as non-employee directors at one or more
annual meetings of the Company's stockholders held after the Underwriting Date
(provided that no such person who has not served as a nonemployee director for
at least six months shall receive an option grant in connection with their
service at any such meeting).
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Company's Compensation Committee. The Compensation
Committee as Plan Administrator will have complete discretion to determine which
eligible individuals are to receive option grants or stock issuances, the time
or times when such option grants or stock issuances are to be made, the number
of shares subject to each such grant or issuance, the status of any granted
option as either an incentive stock option or a nonqualified stock option, the
vesting schedule to be in effect for the option grant or stock issuance, and the
maximum term for which any granted option is to remain outstanding. The
administration of the Automatic Option Grant Program will be self executing in
accordance with the express provisions of that program.
The exercise price of options granted under the 1997 Plan may be paid in
cash or in shares of Common Stock valued at fair market value on the exercise
date. If the exercise price is paid in shares of Common Stock, the optionee is
required to hold the shares for a minimum period such that no compensation
expense is charged to the financial statements. The option may also be exercised
through a same day sale program that would enable an optionee to exercise
without any cash outlay. In addition, the Plan Administrator may provide
financial assistance to one or more individuals in their acquisition of shares
of Common Stock through option exercises or direct issuances by allowing such
individuals to deliver a full recourse, interest bearing promissory note in
payment of the applicable exercise or issue price (as well as any associated
withholding taxes incurred in connection with their acquisition of those
shares).
In the event that the Company is acquired by merger or the purchase of more
than 50% of the Company's outstanding voting securities, or in the event that
the Company sells substantially all of its assets, the exercisability of each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation or otherwise to continue in effect or to
be replaced with a cash incentive program of the successor corporation will
automatically accelerate in full, and all unvested shares then outstanding under
the Stock Issuance Program will immediately vest, except to the extent the
Company's repurchase rights with respect to those shares are to be assigned to
the successor corporation or such accelerated vesting is precluded by other
limitations imposed under the Stock Issuance Program. The Plan Administrator
will have the authority under the Discretionary Option Grant and Stock Issuance
Programs to grant options and to structure repurchase rights so that the shares
subject to those options or repurchase rights will automatically vest in the
event the individual's service is terminated, whether involuntarily or through a
resignation for good reason, within a designated period (not to exceed eighteen
(18) months) following (i) an acquisition in which those options are assumed or
replaced or those repurchase rights are assigned or (ii) a hostile change in
control of the Company effected by a successful tender offer for more than 50%
of the Company's outstanding voting stock or by proxy contest for the election
of directors.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Common Stock.
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<PAGE> 42
Under the 1997 Plan, the Plan Administrator has the authority to effect the
cancellation of options outstanding under the Discretionary Option Grant Program
in return for the grant of new options for the same or different number of
option shares with an exercise price per share equal to the fair market value of
the Common Stock on the new grant date.
Under the Automatic Option Grant Program, each individual who first joins
the Board after the effective date of this Offering as a nonemployee director
will receive an option grant for 9,435 shares of Common Stock at the time of his
or her commencement of Board service, provided such individual has not otherwise
been in the prior employ of the Company or any parent or subsidiary of the
Company. In addition, at each annual meeting of the Company's stockholders,
beginning with the first annual meeting held after the effective date of this
Offering, each individual who is to continue to serve as a nonemployee director
will receive an option grant to purchase an additional 4,440 shares of Common
Stock provided such individual has served as a nonemployee director for at least
six months.
Each grant of options made pursuant to the Automatic Option Grant Program
will have a maximum term of ten years, subject to earlier termination following
the optionee's cessation of service as a non-employee director. The options to
purchase 9,435 shares of Common Stock that may be granted to any individual who
first joins the Board as a nonemployee director after the effective date of this
Offering will vest and become exercisable in four equal annual installments over
the four year period commencing on the grant date. Any of the annual option
grants to purchase 4,440 shares of Common Stock will vest and become exercisable
in full on the one year anniversary of the grant date, assuming that the
nonemployee director who receives such option has continued to serve as a
director at all times during such period. Notwithstanding the foregoing, all
options granted pursuant to the Automatic Option Grant Program will become
immediately exercisable in full upon (i) certain changes in the ownership or
control of the Company, or (ii) the death or disability of the optionee if it
occurs while such optionee is serving as a nonemployee director.
The Board may amend or modify the 1997 Plan at any time. The 1997 Plan will
terminate on the earlier of (i) March 31, 2007, (ii) the date on which all
shares available for issuance under the 1997 Plan shall have been issued as
fully-vested shares or (iii) the termination of all outstanding options in
connection with a merger or consolidation in which securities possessing more
than 50% of the total combined voting power of the Company's outstanding
securities are transferred to a person or persons different from the persons
holding those securities immediately prior to such transaction or the sale,
transfer or other disposition of all or substantially all of the Company's
assets in complete liquidation or dissolution of the Company.
As of December 1, 1997, the Board had granted to certain employees of the
Company options to purchase an aggregate of 169,275 shares of Common Stock
pursuant to the 1997 Plan. The options vest in four equal annual installments
commencing on the grant date and have a weighted average exercise price of $9.04
per share. Such exercise price was equal to the fair market value of the Common
Stock on the grant date, as determined by the Board. As of December 1, 1997, no
other options had been granted under the Discretionary Option Grant Program, no
options had been granted under the Automatic Option Grant Program, and no shares
of Common Stock had been purchased or awarded pursuant to the terms of the Stock
Issuance Program.
KEY MAN LIFE INSURANCE
The Company currently maintains life insurance policies, under which the
Company is the sole beneficiary, in the amount of $5.0 million on the life of
Mr. Foster and $1.0 million on the life of Mr. Conway.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law (the "DGCL"), the
Company can indemnify its directors and officers against liabilities they may
incur in such capacities, including liabilities under the Securities Act. The
Company's Bylaws provide that the Company will indemnify its directors and
officers to the fullest extent permitted by law and require the Company to
advance litigation expenses upon receipt by the Company of an undertaking by the
director or officer to repay such advances if it is ultimately determined that
the director or officer is not entitled to indemnification. The Bylaws further
provide that rights
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<PAGE> 43
conferred under such Bylaws do not exclude any other right such persons may have
or acquire under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
The Company's Certificate of Incorporation provides that, pursuant to the
DGCL, the Company's directors shall not be liable for monetary damages for
breach of such directors' fiduciary duty of care to the Company and its
stockholders. This provision in the Certificate of Incorporation does not
eliminate the duty of care, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under the DGCL. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Company or its
stockholders, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under the DGCL. The provision
also does not affect a director's responsibilities under any other law, such as
the federal or state securities laws environmental laws.
The Company intends to enter into agreements to indemnify its directors in
addition to the indemnification provided for in the Company's Certificate of
Incorporation and Bylaws. These agreements, among other things, will indemnify
the Company's directors for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by such person in any action or
proceeding, including any action by or in the right of the Company, on account
of services as a director or officer of the Company, or as a director or officer
of any other company or enterprise to which the person provides services at the
request of the Company. The Company also intends to purchase liability insurance
covering its directors and officers.
There is no pending or overtly threatened litigation or proceeding
involving a director, officer, employee or other agent of the Company as to
which indemnification is being sought, nor is the Company aware of any pending
or overtly threatened litigation that may result in claims for indemnification
by any director, officer, employee or other agent.
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CERTAIN TRANSACTIONS
FOSTERCO/CYBERWERKS LLC TRANSACTIONS
To date, the Company has focused its microreplication technology primarily
on holographic film applications. In the early 1980s, Messrs. Conway, Foster, J.
Wanlass and M. Wanlass and a third party created a separate business, ComDisc,
to pursue applications of microreplication technology for the development and
production of products incorporating pre-recorded and recordable machine
readable digital information (the "Information Storage Technology"). In 1985,
Mr. Foster granted an exclusive license to ComDisc for the development and
production of products incorporating Information Storage Technology. At that
time, 87% of the outstanding Common Stock of ComDisc was owned by Messrs.
Conway, Foster, J. Wanlass and M. Wanlass, and the balance was owned by certain
individuals unaffiliated with the Company. ComDisc ceased to conduct active
business in 1988, but continued to hold the exclusive license from Mr. Foster.
In 1995, Messrs. Foster and Conway created a separate business, FosterCo,
which is owned 50% by Mr. Conway and 50% by Mr. Foster. In May 1995, the Company
(to the extent it had any rights to the Information Storage Technology) and
ComDisc granted perpetual exclusive licenses to the Information Storage
Technology to FosterCo. In consideration for these licenses to FosterCo,
FosterCo will pay to the Company and to ComDisc (and its affiliates), for a
period of ten years following the date of its agreements with such parties, 5%
and 4% royalties, respectively, based on the amount of thin film microreplicated
with pre-recorded digital information that was sold by FosterCo during such
period. While royalties to ComDisc are currently payable when earned, all
royalties to the Company accrue, but are not due and payable, until cumulative
sales revenue of $20 million is achieved by Cyberwerks LLC, a joint venture
owned 50% by FosterCo and 50% by Upper Deck, and to whom FosterCo has agreed to
supply such thin film. To date, Cyberwerks LLC has not generated any sales or
revenue, and all expenses of Cyberwerks LLC have been funded by Upper Deck. No
royalty payments to either the Company or ComDisc have been earned or accrued to
date.
In June 1995, FosterCo granted an exclusive license to the Information
Storage Technology to Cyberwerks LLC for certain commercial applications. In
connection with this license, FosterCo agreed to transfer to Cyberwerks LLC,
upon the earlier of (i) Cyberwerks LLC's achievement of revenues of $50 million
or more in any 12 month period, or (ii) upon the completion of an initial public
offering by Cyberwerks LLC (which, pursuant to the terms of the Operating
Agreement between Upper Deck and FosterCo pursuant to which Cyberwerks LLC was
created, unless amended, cannot occur until June 1998 and then only if certain
agreed upon conditions are met), the equipment used in the manufacture of
certain Information Storage Technology products and FosterCo's interest in the
facility used in or intended for the manufacture of such products. In addition,
FosterCo, Upper Deck and Cyberwerks LLC have entered into an escrow agreement
that requires FosterCo to deposit into escrow certain manufacturing
documentation describing the intellectual property used by FosterCo in the
development and manufacture of the Information Storage Products. The escrow
agreement provides that if the escrow dissolves under certain circumstances,
Cyberwerks LLC and/or Upper Deck would obtain access to the manufacturing
documentation and thereby FosterCo's intellectual property which is related to
the Information Storage Products. See "Risk Factors -- Protection of Proprietary
Technology; Reliance on Trade Secrets; Lack of Patent Protection."
Messrs. Conway and Richard McWilliam, the Chairman of the Board of Upper
Deck, are currently the managers of Cyberwerks LLC. In addition, from the date
of its formation until August 1997, Mr. Foster served as Cyberwerks LLC's Chief
Technical Officer and Mr. Conway served as its President. Both of Messrs. Foster
and Conway have resigned as employees and officers of Cyberwerks LLC.
In October 1997, Mr. Foster, the inventor and developer of the Company's
microreplication technology, assigned to the Company all of his rights in that
technology, other than for use in Information Storage Technology.
Messrs. Conway and Foster are also officers and directors of FosterCo. Mr.
Conway received compensation from FosterCo in the amount of approximately
$59,000 and $18,000 during the year ended December 31, 1996 and the period ended
July 31, 1997, respectively. Mr. Foster received compensation from FosterCo in
the
43
<PAGE> 45
amount of approximately $96,000 and $30,000 during the year ended December 31,
1996 and the period ended July 31, 1997, respectively.
Mr. Conway received compensation from Cyberwerks LLC in the amount of
approximately $35,481, $75,000 and $51,923 during the years ended December 31,
1995 and 1996 and the period ended July 31, 1997, respectively. Mr. Foster
received compensation from Cyberwerks LLC in the amount of approximately
$59,000, $125,000 and $87,000 during the years ended December 31, 1995 and 1996
and the period ended July 31, 1997, respectively.
Neither of Messrs. Conway or Foster will receive any compensation from
Cyberwerks LLC or FosterCo in the future. However, Cyberwerks LLC will continue
to be obligated to advance certain funds to FosterCo pursuant to the terms and
provisions of the Operating Agreement for Cyberwerks LLC.
Since August 1995, Cyberwerks LLC has subleased space at two of the
Company's facilities. Currently, Cyberwerks LLC subleases approximately 16% of
the square footage at both the Company's corporate headquarters and at its
manufacturing facilities. In consideration for the usage of such space,
Cyberwerks LLC has paid the Company an amount equal to a pro rata portion of the
Company's rent and overhead for each of those facilities. Cyberwerks LLC has
also relied on the Company to provide certain personnel, administrative and
management services and has compensated the Company in an amount equal to a pro
rata portion of the salaries and expenses of the Company personnel whose
services Cyberwerks LLC has used. The aggregate amount paid by Cyberwerks LLC to
the Company for rent, overhead, salary and expense reimbursement in 1995 and
1996, and for the nine months ended September 30, 1997 was approximately
$119,000, $633,000 and $370,000, respectively. The Company believes that it has
been compensated for both the usage of its space and its personnel on terms no
less favorable than it would have received in transactions with independent
third parties.
In October 1997, Messrs. Conway and Foster granted an option (the "FosterCo
Option") to the Company to purchase all the outstanding capital stock of
FosterCo from Messrs. Foster and Conway at an exercise price equal to the
greater of $5.0 million or 50% of the fair market value of FosterCo's
outstanding capital stock as of the date of exercise. In consideration for the
FosterCo Option, Messrs. J. Wanlass, M. Wanlass and Spear tendered an aggregate
of 33,236 shares of Common Stock to the Company for cancellation. The FosterCo
Option is exercisable during the 12-month period beginning October 1, 2002, but
will become exercisable immediately in the event Cyberwerks LLC files a
registration statement on Form S-1 with the Securities and Exchange Commission
to register shares of its Common Stock (which, pursuant to the terms of the
Operating Agreement for Cyberwerks LLC, unless amended, cannot occur before June
1998 and then only under certain circumstances, as previously described). The
FosterCo Option is exercisable in cash, stock of the Company or a combination
thereof, at the discretion of the Fairness Committee of the Board of Directors
of the Corporation, which will be comprised of the Company's two independent
directors. In connection with any exercise of the option, FosterCo's capital
stock shall be valued by mutual agreement of the Messrs. Foster and Conway and
the Fairness Committee or, in the event the parties cannot agree on a valuation,
by independent appraisal. The Company's decision to exercise the FosterCo Option
must be approved by the Fairness Committee. See "Management -- Board
Committees."
The Operating Agreement for Cyberwerks LLC contains a provision that
currently enables either FosterCo or Upper Deck to unilaterally dissolve
Cyberwerks LLC, based on its failure to achieve certain prescribed revenue
targets. Consequently, no assurances can be given that the FosterCo Option will
be of any value to the Company at any time.
On November 3, 1997, a minority shareholder of ComDisc filed a lawsuit in
San Diego Superior Court against Messrs. Foster and Conway and FosterCo,
alleging that such defendants fraudulently induced the plaintiff to grant to
FosterCo an exclusive license of the Information Storage Technology and that
Messrs. Foster and Conway breached their fiduciary duties to plaintiff and
ComDisc by assigning ComDisc's sole asset, the Information Storage Technology,
to FosterCo for inadequate consideration. The lawsuit seeks rescission of
ComDisc's license to FosterCo, an order enjoining FosterCo from using or
sublicensing the Information Storage Technology and general and exemplary
damages. The Company does not believe that there is any merit to these claims.
44
<PAGE> 46
FINANCING TRANSACTIONS
From January 1993 through December 1996, Mr. Conway, the Company's
President and Chief Executive Officer, made various loans to the Company for
working capital and unreimbursed expenses pursuant to nine short-term promissory
notes bearing interest ranging from 7.0% to 9.5% per annum. No more than
$672,115 was owing to Mr. Conway at any one time. As of March 31, 1997, all such
loans had been repaid in full. In December 1993, Mr. Foster, the Company's
Chairman of the Board and Chief Technical Officer, loaned the Company $40,000
for working capital purposes pursuant to a short-term promissory note bearing
interest at a rate of 7.0% per annum. This loan was repaid in full by December
1994. In August 1995, Mr. Foster loaned the Company $75,000 for working capital
purposes pursuant to a short-term promissory note bearing interest at a rate of
11.0% per annum. This loan was repaid in full by October 1995.
In August 1995, FosterCo loaned the Company $25,000 for working capital
purposes pursuant to a short-term promissory notes bearing interest at a rate of
9.75% per annum. This loan was repaid in full by December 1996.
In March 1997, the Company obtained a revolving $3.5 million line of credit
from Citibank, FSB, which is guaranteed personally by Messrs. Foster, Conway, J.
Wanlass and M. Wanlass for all amounts borrowed thereunder.
S CORPORATION DISTRIBUTION
In October 1997, the Company declared a distribution to its existing
stockholders, Messrs. Conway, Foster, Spear, J. Wanlass and M. Wanlass,
consisting of the Stockholder Notes in the aggregate principal amount equal to
the Company's undistributed retained earnings from January 1, 1997 through the
Termination Date (which is estimated to be approximately $3.6 million on the
Termination Date). The Stockholder Notes bear interest at the rate of 5.5% per
annum and are due and payable on April 1, 1998. The Company intends to use a
portion of the proceeds of the Offering to repay all amounts due under the
Stockholder Notes upon consummation of this Offering. See "Prior S Corporation
Status," "Use of Proceeds" and Note 1 to Notes to Financial Statements.
CONSULTING ARRANGEMENTS
In April 1996, the Company issued 55,500 shares of Common Stock to Mr.
Charles M. Spear, a director of the Company, in consideration for consulting
services previously rendered by him to the Company. In October 1997, the Company
granted an option to Mr. Spear for the purchase of up to 13,875 shares of the
Company's Common Stock at an exercise price equal to $10.41 per share. Such
options vest in five equal annual installments beginning in April 1998.
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<PAGE> 47
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of December 1, 1997, and
as adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each person or entity who beneficially owns more than 5% of the Company's
Common Stock, (ii) each of the Selling Stockholders, (iii) each Named Executive
Officer, (iv) each director of the Company, and (v) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP BENEFICIAL
PRIOR TO OWNERSHIP
OFFERING(1) AFTER OFFERING(1)
------------------- NUMBER OF -------------------
NUMBER OF SHARES BEING NUMBER OF
NAME AND ADDRESS(2) SHARES PERCENT OFFERED SHARES PERCENT
- ---------------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Michael Foster................................ 2,220,000 39.8% 241,411 1,978,589 27.6%
Terrence Conway............................... 1,110,000 19.9 120,705 989,295 13.8
James Wanlass................................. 1,093,788 19.6 118,942 974,846 13.6
Michael Wanlass............................... 1,093,788 19.6 118,942 974,846 13.6
Charles M. Spear.............................. 54,688 1.0 -- 54,688 *
All directors and executive officers
as a group (5 persons)...................... 5,572,264 100% 600,000 4,972,264 68.6%
</TABLE>
- ---------------
* Less than one percent.
(1) Beneficial ownership is based on 5,572,264 shares of Common Stock
outstanding as of December 1, 1997 and 7,172,264 shares of Common Stock
outstanding after completion of the Offering.
(2) The address for Messrs. Foster, Conway, J. Wanlass, M. Wanlass and Spear is
5405 Jandy Place, Los Angeles, California 90066. The persons named in the
table have sole voting and sole investment power with respect to all shares
of Common Stock shown as beneficially owned by them, subject to community
property laws where applicable.
46
<PAGE> 48
DESCRIPTION OF SECURITIES
Upon consummation of the Offering and the reincorporation of the Company in
the State of Delaware, the authorized capital stock of the Company will consist
of 20,000,000 shares of Common Stock, $.0001 par value per share, and 5,000,000
shares of Preferred Stock, $.0001 par value per share. No shares of Preferred
Stock are currently issued and outstanding. The following summary description of
the capital stock of the Company (i) assumes the reincorporation of the Company
in the State of Delaware immediately prior to the consummation of the Offering,
and (ii) does not purport to be complete and is qualified in its entirety by
reference to the Company's Certificate of Incorporation (the "Certificate") and
Bylaws, which are incorporated by reference as exhibits to the Registration
Statement of which this Prospectus is a part, and by the provisions of
applicable law.
COMMON STOCK
As of December 1, 1997, there were 5,572,264 shares of Common Stock issued
and outstanding held of record by five stockholders. The holders of Common Stock
are entitled to one vote for each share held of record on all matters to be
voted on by the stockholders. The holders of Common Stock are entitled to
receive ratable dividends, when, as and if declared by the Board of Directors
from funds legally available therefor, subject to the dividend preferences of
the holders of Preferred Stock, if any. In the event of a liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities and after provision is made for each series of
Preferred Stock, if any, having preference over the Common Stock. Holders of
Common Stock have no preemptive rights, no cumulative voting rights and no
rights to convert their Common Stock into any other securities. The rights,
preferences and privileges of holders of Common Stock are subject to, and may be
adversely affected by, the rights of any series of Preferred Stock which the
Company may issue in the future. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
this Offering will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, without any further vote or action by
the Company's stockholders, to issue up to 5,000,000 shares of Preferred Stock,
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund terms and the
number of shares constituting any series or the designation of such series. The
issuance of Preferred Stock could adversely affect, among other things, the
rights of existing stockholders or could delay or prevent a change in control of
the Company without further action by the stockholders. The issuance of
Preferred Stock could decrease the amount of earnings and assets available for
distribution to holders of Common Stock, and the satisfaction of any dividend
preferences of any outstanding Preferred Stock would reduce the amount of funds
available for the payment of dividends on Common Stock. Holders of Preferred
Stock may be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding up of the Company before any payment is made
to the holders of Common Stock. The issuance of Preferred Stock by the Board of
Directors could also have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company,
thereby delaying, discouraging or preventing a change in control of the Company.
The Company has no present plans to issue any shares of Preferred Stock.
DELAWARE LAW
Following the consummation of the Offering, the Company will be subject to
the provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date that the person became
an interested stockholder unless (with certain exceptions) the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a
47
<PAGE> 49
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the stockholder. Generally, an "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years prior,
did own) 15% or more of a corporation's outstanding voting stock. This provision
may have the effect of discouraging, delaying or preventing a change in control
of the Company without further action by the stockholders.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
Provisions of the Company's Certificate and Bylaws may make more difficult
the acquisition of control of the Company by various means, such as a tender
offer, open market purchases not approved by the Company's Board of Directors, a
proxy contest or otherwise and could thereby deprive the stockholders of
opportunities to realize a premium on their Common Stock. In addition, they may
adversely affect the prevailing market price of the stock. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors of the Company and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions, described below, which may involve an actual or threatened change
in control of the Company. The provisions are also intended to discourage
certain tactics that may be used in proxy fights. These provisions also
encourage persons seeking to acquire control of the Company to consult first
with the Company's Board of Directors to negotiate the terms of any proposed
business combination or offer. The provisions are designed to reduce the
vulnerability of the Company to an unsolicited proposal for a takeover that does
not contemplate the acquisition of all outstanding shares of the Company or that
is otherwise unfair to stockholders of the Company. The Board of Directors
believes that, as a general rule, such takeover proposals would not be in the
best interests of the Company and its stockholders. See "Risk
Factors -- Potential Anti-Takeover Effects of Certificate of Incorporation,
Bylaws and Delaware Law; Effect of Unissued Preferred Stock."
Directors; Classified Board; Removal; Filling Vacancies and Amendment. The
Certificate provides that the number of directors will be fixed from time to
time by resolution adopted by a majority of the directors then in office, but
shall not consist of less than five, nor more than nine, directors. The
Certificate provides for the Board of Directors to be divided into three
classes, with each class to be as nearly equal in number of directors as
possible. Further, subject to the rights of the holders of any series of
Preferred Stock then outstanding, the Certificate authorizes only the Board of
Directors to fill vacancies, including newly created directorships. Accordingly,
this provision could prevent a stockholder from obtaining majority
representation on the Board of Directors by enlarging the Board of Directors and
filling the new directorships with its own nominees. The Certificate also
provides that directors of the Company may be removed by stockholders only for
cause and only by the affirmative vote of holders of two-thirds of the
outstanding shares of voting stock.
Special Stockholder Meetings. The Certificate provides that special
meetings of the stockholders, for any purpose or purposes, unless required by
law, shall be called by the President or Secretary pursuant to a request in
writing of the President, a majority of the entire Board of Directors or
stockholders owning not less than 40% of the entire voting stock of the Company
then issued and outstanding. A special meeting may not be held absent such a
written request. The request shall state the purpose or purposes of the proposed
meeting. Such limitation on the right of stockholders to call a special meeting
could make it more difficult for stockholders to initiate action that is opposed
by the Board of Directors. Such action on the part of stockholders could include
the removal of an incumbent director, the election of a stockholder nominee as a
director or the implementation of a rule requiring stockholder ratification of
specific defensive strategies that have been adopted by the Board of Directors
with respect to unsolicited takeover bids. The limited ability of the
stockholders to call a special meeting of stockholders may make it more
difficult to change the existing Board of Directors and management.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Certificate establishes an advance notice procedure for the
nomination, other than by or at the discretion of the Board of Directors or a
committee thereof, of candidates for election as directors as well as for other
stockholder proposals to be considered at special or annual stockholders'
meetings. Notice of stockholder proposals and director nominations must be
timely given in writing to the Secretary of the Company prior to the meeting at
which the matters are to be acted upon or the directors are to be elected. To be
timely, notice must be received
48
<PAGE> 50
in general at the principal offices of the Company not less than 60 days nor
more than 90 days prior to the meeting of stockholders. The purpose of requiring
advance notice is to afford the Board of Directors an opportunity to consider
the qualifications of the proposed nominees or the merits of other stockholder
proposals and, to the extent deemed necessary or desirable by the Board of
Directors, to inform stockholders about those matters.
Amendment of Certain Provisions of the Certificate. The Certificate
generally requires the affirmative vote of the holders of at least two-thirds of
the outstanding voting stock in order to amend any provisions of the Certificate
concerning (i) the removal or appointment of directors, (ii) the authority of
stockholders to act by written consent, (iii) the required vote to amend the
Certificate, (iv) calling a special meeting of stockholders, (v) the procedure
and content of stockholder proposals concerning business to be conducted at a
meeting of stockholders, and (vi) director nominations by stockholders. These
voting requirements will make it more difficult for minority stockholders to
make changes in the Certificate that could be designed to facilitate the
exercise of control over the Company. On the other hand, the requirement for
approval by at least a two-thirds stockholder vote will enable the holders of a
minority of the voting stock of the Company to prevent the holders of a majority
or more of such securities from amending such provisions of the Certificate.
Following the completion of the Offering, the Company's present directors and
executive officers and their respective affiliates will beneficially own
approximately 68.6% of the outstanding Common Stock (65.5% if the Underwriters'
overallotment option is exercised in full), giving them veto power with respect
to any stockholder action or approval requiring a two-thirds vote.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is U.S.
Stock Transfer Corporation.
49
<PAGE> 51
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 7,172,264 shares
of Common Stock outstanding (7,502,264 if the Underwriters' over-allotment
option is exercised in full). All of the shares sold in this Offering will be
freely tradeable without restriction or registration under the Securities Act,
except for any shares held by an "affiliate" of the Company as defined in the
Securities Act (in general, a person who has a control relationship with the
Company). All of the remaining 4,972,264 shares are deemed to be "restricted
securities" as that term is defined in Rule 144 promulgated under the Securities
Act ("Restricted Shares"). Restricted Shares may not be sold unless they are
registered under the Securities Act or are sold pursuant to an applicable
exemption from registration, including an exemption under Rule 144 or Rule 144A.
Upon completion of the Offering, the resale of all of such remaining shares will
be exempt from registration pursuant to Rule 144, subject to the volume
limitations, lock-up prohibitions and certain other restrictions discussed
below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned for at
least one year (including the holding period of any immediate prior owner,
except an affiliate) shares of Common Stock that have not been registered under
the Securities Act or that were acquired from an "affiliate" of the Company (in
a transaction or chain of transactions not involving a public offering) is
entitled to sell in broker's transactions or to market makers, within any three
month period commencing 90 days after the date of effectiveness of the
Registration Statement of which this Prospectus is a part, a number of shares of
Common Stock which does not exceed the greater of (i) 1% of the number of shares
of Common Stock then outstanding (approximately 71,723 shares immediately after
this Offering, assuming the Underwriters do not exercise the over-allotment
option), or (ii) the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the sale. Sales under Rule 144 are generally
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during a 90 day period preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years (including the holding period
of any immediate prior owner, except an affiliate) is entitled to sell such
shares without having to comply with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
The Commission has recently proposed revisions to the holding periods and
volume limitations contained in Rule 144. The adoption of amendments effecting
such proposed revisions may result in resales of restricted securities sooner
than would be the case under Rules 144 and 144(k) as currently amended and in
effect. There can, however, be no assurance of when, if ever, such amendments
will be proposed or adopted.
The Company and its directors and executive officers have agreed that for a
period of 180 days from the date of this Prospectus that they will not, without
the prior written consent of EVEREN Securities, Inc., directly or indirectly
offer for sale, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for shares of Common Stock, subject to certain exceptions.
The Company intends to register, on or before March 31, 1998, the 560,550
shares of Common Stock that are reserved for issuance under the 1997 Plan. As of
December 1, 1997, options to purchase 169,275 shares were outstanding
thereunder. Once registered, shares issued upon exercise of options will be
generally eligible for immediate resale in the public market, subject to vesting
under the applicable option agreements.
The Company is unable to estimate the number of shares of the Company's
Common Stock that will be sold under Rule 144 or under the planned registration
statement since such sales will depend in part on the market price for the
Common Stock, the personal circumstances of the sellers and other factors not
susceptible of being known in advance.
Prior to this Offering, there has been no public market for the Common
Stock, and any sale of substantial amounts of restricted shares in the open
market, or the availability of such shares for sale, could adversely affect the
market price of the Common Stock offered hereby.
50
<PAGE> 52
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting
Agreement, the syndicate of underwriters named below (the "Underwriters"), for
whom EVEREN Securities, Inc. is acting as Representative (the "Representative"),
have severally agreed, to purchase from the Company and the Selling
Stockholders, and the Company and the Selling Stockholders have agreed to sell,
the respective number of shares of Common Stock set forth opposite the names of
such Underwriters below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
-------------------------------------------------------------------------- ----------
<S> <C>
EVEREN Securities, Inc....................................................
---------
Total........................................................... 2,200,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by their counsel
and to certain other conditions. The Underwriters are obligated to purchase all
of the shares of Common Stock offered hereby (other than the shares of Common
Stock covered by the over-allotment option described below) if any are
purchased.
The Company and the Selling Stockholders have been advised by the
Underwriters that they propose to offer the Common Stock to the public initially
at the price set forth on the cover page of this Prospectus and to certain
dealers (who may include the Underwriters) at such price, less a concession not
in excess of $ per share of Common Stock. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share of
Common Stock to certain other dealers. After the initial public Offering, the
price to the public, the concession and the discount to dealers may be changed.
The Representative has informed the Company that the Underwriters do not intend
to confirm sales to accounts over which they exercise discretionary authority.
The Offering of the Common Stock is made for delivery when, as and if
accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of the Common Stock.
The Company has granted to the Underwriters an option, exercisable for 45
days after the date of this Prospectus, to purchase up to an aggregate of
330,000 additional shares of Common Stock at the initial price to public, less
the underwriting discounts and commissions, solely to cover over-allotments. To
the extent that the Underwriters exercise such option, each Underwriter may be
committed, subject to certain conditions, to purchase a number of additional
shares of Common Stock proportionate to such Underwriter's initial commitment
pursuant to the Underwriting Agreement.
In the Underwriting Agreement, the Company, the Selling Stockholders and
the Underwriters have agreed to indemnify each other against certain
liabilities, including losses, claims, damages, liabilities and judgments caused
by, arising out of, related to or based upon any untrue statement or alleged
untrue statement of a material fact contained in this Registration Statement or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, as well as certain other liabilities under the Securities Act.
The initial price to the public for the Common Stock offered hereby was
determined by negotiation between the Company and the Representative. The
factors considered in determining the initial price to the public included the
history of and the prospects for the industry in which the Company competes, the
ability of the Company's management, the past and present operations of the
Company, the historical results of
51
<PAGE> 53
operations of the Company, the prospects for future earnings of the Company, the
general condition of the securities markets at the time of this Offering and the
recent market prices of securities of generally comparable companies.
Prior to this Offering, there has been no established trading market for
the Common Stock. There can be no assurance as to the liquidity of any market
that may develop for the Common Stock or the ability of holders to sell their
Common Stock; nor can there by any assurance that the price at which holders are
able to sell their Common Stock will not be lower than the price at which the
Common Stock is sold to the public by the Underwriters.
Subject to certain exceptions, the Company, the executive officers and
directors of the Company (which include the Selling Stockholders) each have
agreed that they will not, without the prior written consent of EVEREN
Securities, Inc., offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for such Common Stock or in any other manner
transfer all or a portion of the economic consequences associated with the
ownership of any such Common Stock for a period of 180 days from the date of
this Prospectus.
In connection with the Offering, the Representative and certain
Underwriters and selling group members and their respective affiliates may, in
accordance with Regulation M under the Securities Act of 1934 (the "Exchange
Act"), engage in over-allotment, stabilizing transactions, syndicate covering
transactions, penalty bids and other transactions that stabilize, maintain or
otherwise affect the market price for the Common Stock. Over-allotment involves
syndicate sales in excess of the offering size, which creates a syndicate short
position, in which case the Underwriters may engage in a syndicate covering
transaction or may exercise the Underwriters' over-allotment option described
above. Syndicate covering transactions involve the purchase of Common Stock in
the open market following completion of the offering to cover all or a portion
of a syndicate short position. Penalty bids permit the Representative, on behalf
of the Underwriters, to reclaim a selling concession from a syndicate member
when Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified minimum and prevent or retard a
decline in the market price of the Common Stock. Any of the transactions
described in this paragraph may cause the price of Common Stock to be higher
than it would otherwise be in the absence of such transactions. These
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
The Company has applied to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "SPTK."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Brobeck, Phleger & Harrison
LLP, Newport Beach, California. Certain legal matters relating to this Offering
will be passed upon for the Underwriters by Riordan & McKinzie, a Professional
Law Corporation, Los Angeles, California.
EXPERTS
The financial statements at December 31, 1995 and 1996 and at September 30,
1997, for the years ended December 31, 1994, 1995 and 1996, and for the nine
month period ended September 30, 1997 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
52
<PAGE> 54
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Certain items are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to this Company and the Common Stock, reference is made
to the Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract of
other document referred to are not necessarily complete, and in each instance,
if such contract or document is filed as an exhibit, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each statement being qualified in all respects by such reference. A
copy of the Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge or copied at the public reference
facilities maintained by the Commission in Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2551 and Seven World Trade Center, Suite 1300, New York,
New York 10048, and copies of all or any part thereof can also be obtained by
mail at prescribed rates from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549. Such material may also be
accessed electronically by means of the Commission's home page on the Internet
at http://www.sec.gov.
53
<PAGE> 55
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 and (unaudited)
Pro Forma as of September 30, 1997.................................................. F-3
Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and nine
month periods ended September 30, 1996 (unaudited) and September 30, 1997........... F-4
Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and
1996 and nine month period ended September 30, 1997................................. F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and nine
month periods ended September 30, 1996 (unaudited) and September 30, 1997........... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 56
The accompanying financial statements give effect to the completion of the
1.85-for-1 split of the Company's outstanding common stock which will take place
on or before the effective date of the offering. The following report is in the
form which will be furnished by Deloitte & Touche LLP upon completion of the
stock split of the Company's outstanding common stock described in Note 11 to
the financial statements and assuming that from November 6, 1997 to the date of
such completion no other material events have occurred that would affect the
accompanying financial statements or require disclosure therein.
INDEPENDENT AUDITORS' REPORT
"To the Stockholders of Spectratek Technologies, Inc.:
We have audited the accompanying balance sheets of Spectratek Technologies,
Inc. (the "Company"), as of December 31, 1995 and 1996 and September 30, 1997,
and the related statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996 and the
nine-month period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1995 and 1996
and September 30, 1997, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996 and the nine-month
period ended September 30, 1997 in conformity with generally accepted accounting
principles.
Los Angeles, California
November 6, 1997 (December 11, 1997 as to Note 11)"
DELOITTE & TOUCHE LLP
Los Angeles, California
December 11, 1997
F-2
<PAGE> 57
SPECTRATEK TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997 AND
PRO FORMA SEPTEMBER 30, 1997
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
(NOTE 13)
SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
---------- ---------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current Assets (Note 5):
Cash........................................ $ 97,371 $ 461,807 1,038,339 $ 1,038,339
Accounts receivable, net of allowance for
doubtful accounts and returns of
$119,518, $155,047 and $167,262 as of
December 31, 1995 and 1996 and September
30, 1997, respectively (Note 9).......... 1,124,275 1,328,809 2,147,437 2,147,437
Inventory (Note 3).......................... 4,080,802 3,957,663 3,973,402 3,973,402
Prepaid expenses and other current assets
(Note 9)................................. 109,315 68,805 796,180 796,180
Advances to officers........................ 78,875 78,875
Deferred tax asset (Note 6)................. 608,425 710,290 447,692
---------- ---------- ------------ ------------
Total current assets................ 6,020,188 6,527,374 8,034,233 8,481,925
Furniture, Fixtures and Equipment, Net
(Notes 4 and 5)............................. 2,273,175 2,021,583 2,054,972 2,054,972
Deposits...................................... 230,000 215,529 96,750 96,750
---------- ---------- ------------ ------------
Total............................... $8,523,363 $8,764,486 $ 10,185,955 $ 10,633,647
========== ========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................ $1,178,431 $ 622,994 $ 703,998 $ 703,998
Accrued expenses............................ 146,007 94,574 330,723 330,723
Income taxes payable (Note 6)............... 10,971 346,401 1,088,253
Advances from officers and related entity
(Note 8)................................. 663,519 672,115
Current portion of notes payable (Note 5)... 887,663 694,745 800,000 800,000
---------- ---------- ------------ ------------
Total current liabilities........... 2,886,591 2,430,829 1,834,721 2,922,974
---------- ---------- ------------ ------------
Notes Payable (Note 5)........................ 694,745
Deferred Tax Liability (Note 6)............... 54,297 91,692 91,692
Commitments and Contingencies (Note 7)
Stockholders' Equity (Note 10):
Preferred stock, $0.0001 par value,
5,000,000 shares authorized; no shares
issued or outstanding
Common stock, $0.0001 par value, 20,000,000
shares authorized; 5,550,000 and
5,605,500 shares issued and outstanding
as of December 31, 1995 and 1996,
respectively; 5,572,264 shares issued and
outstanding as of September 30, 1997 (Pro
Forma 5,899,536 shares).................. 10,000 10,100 10,100 10,100
Additional paid-in capital.................. 59,900 59,900 3,659,900
Retained earnings........................... 4,877,730 6,171,965 8,281,234 3,948,981
---------- ---------- ------------ ------------
Total stockholders' equity.......... 4,887,730 6,241,965 8,351,234 7,618,981
---------- ---------- ------------ ------------
Total............................... $8,523,363 $8,764,486 $ 10,185,955 $ 10,633,647
========== ========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 58
SPECTRATEK TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ------------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales (Note 9).................. $9,051,642 $10,320,300 $12,003,415 $8,457,440 $11,857,400
Cost of Goods Sold.............. 5,243,047 5,573,395 7,114,595 5,012,845 6,644,100
---------- ----------- ----------- ---------- -----------
Gross Profit.................... 3,808,595 4,746,905 4,888,820 3,444,595 5,213,300
---------- ----------- ----------- ---------- -----------
Selling, General and
Administrative Expense (Note
9)*........................... 1,531,474 1,779,941 2,142,186 1,363,205 2,200,912
Research and Development
Expense....................... 576,000 570,474 504,000 379,000 193,500
---------- ----------- ----------- ---------- -----------
Income from Operations.......... 1,701,121 2,396,490 2,242,634 1,702,390 2,818,888
Interest Expense (Notes 5 and
8)............................ 34,266 68,181 156,900 116,078 78,901
Other Income (Note 2)........... 136,899 67,558 59,459 83,495 41,974
---------- ----------- ----------- ---------- -----------
Income Before Provision for
Income Taxes.................. 1,803,754 2,395,867 2,145,193 1,669,807 2,781,961
Provision for Income Taxes (Note
6)............................ 790,991 1,021,439 850,958 662,496 672,692
---------- ----------- ----------- ---------- -----------
Net Income...................... $1,012,763 $ 1,374,428 $ 1,294,235 $1,007,311 $ 2,109,269
========== =========== =========== ========== ===========
Net Income per Common and Common
Equivalent Share.............. $ 0.18 $ 0.24 $ 0.23 $ 0.18
========== =========== =========== ==========
Weighted Average Common and
Common Equivalent Shares...... 5,630,194 5,630,194 5,634,285 5,629,660
========== =========== =========== ==========
Proforma Net Income Data
(Unaudited)
Income before income taxes, as
reported...................... $ 2,781,961
Proforma Provision for Income
Taxes......................... 1,404,945
-----------
Proforma Net Income............. $ 1,377,016
===========
Proforma Net Income per Common
and Common Equivalent Share... $ 0.23
===========
Proforma Weighted Average Common
and Common Equivalent Shares
(Note 2)...................... 5,962,800
===========
</TABLE>
- ---------------
* Net of reimbursed expenses by a related party of $119,045 and $632,663 for the
years ended December 31, 1995 and 1996, respectively, and $502,464 (unaudited)
and $369,689 for the nine month periods ended September 30, 1996 and 1997,
respectively.
See accompanying notes to financial statements.
F-4
<PAGE> 59
SPECTRATEK TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994................ 5,550,000 $10,000 $2,490,539 $2,500,539
Net income.............................. 1,012,763 1,012,763
--------- ------- ------- ---------- ----------
Balance at December 31, 1994.............. 5,550,000 10,000 3,503,302 3,513,302
Net income.............................. 1,374,428 1,374,428
--------- ------- ------- ---------- ----------
Balance at December 31, 1995.............. 5,550,000 10,000 4,877,730 4,887,730
Issuance of common stock................ 55,500 100 $59,900 60,000
Net income.............................. 1,294,235 1,294,235
--------- ------- ------- ---------- ----------
Balance at December 31, 1996.............. 5,605,500 10,100 59,900 6,171,965 6,241,965
Retirement of common stock (Note 12).... (33,236)
Net income.............................. 2,109,269 2,109,269
--------- ------- ------- ---------- ----------
Balance at September 30, 1997............. 5,572,264 $10,100 $59,900 $8,281,234 $8,351,234
========= ======= ======= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 60
SPECTRATEK TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income............................................. $1,012,763 $1,374,428 $1,294,235 $1,007,311 $2,109,269
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization........................ 107,171 164,762 309,969 232,477 312,658
Loss on disposal of assets........................... 44,271 2,860
Issuance of common stock for services rendered....... 60,000
Provision for deferred income taxes.................. (121,280) (200,868) (64,470) (161,016) 618,598
Provision for doubtful accounts and returns.......... 65,964 85,207 155,047 120,154 127,108
Changes in operating assets and liabilities:
Accounts receivable.................................. (130,250) (244,232) (359,581) (247,920) (945,736)
Inventory............................................ (392,785) (1,767,133) 123,139 274,304 (15,739)
Prepaid expenses and other current assets............ (190,508) 113,849 40,510 55,481 (527,071)
Advances to officers................................. (78,875)
Deposits............................................. (36,400) (93,600) 14,471 (747) (96,750)
Accounts payable and accrued expenses................ 103,442 551,580 (606,870) (291,292) 317,153
Income taxes payable................................. (254,353) 10,971 335,430 47,895 (346,401)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities..................................... 163,764 (5,036) 1,346,151 1,036,647 1,477,074
---------- ---------- ---------- ---------- ----------
Cash Flows from Investing Activities:
Capital expenditures................................... (403,547) (633,970) (102,648) (91,749) (333,682)
---------- ---------- ---------- ---------- ----------
Cash Flows from Financing Activities:
Net proceeds from (repayments of) line-of-credit....... -- 250,000 (250,000) (250,000) 800,000
Proceeds from issuance of notes payable................ 500,000
Repayments of notes payable............................ (16,667) (631,588) (459,806) (694,745)
Advances from officers and related entity.............. 147,227 364,151 131,407 101,007 --
Repayment of advances from officers and related
entity............................................... (151,314) (430,478) (122,811) (122,811) (672,115)
Repayment of capital lease obligations................. (4,997) (5,867) (6,075)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities..................................... (9,084) 661,139 (879,067) (731,610) (566,860)
---------- ---------- ---------- ---------- ----------
Net Increase (Decrease) in Cash.......................... (248,867) 22,133 364,436 213,288 576,532
Cash, Beginning of Period................................ 324,105 75,238 97,371 97,371 461,807
---------- ---------- ---------- ---------- ----------
Cash, End of Period...................................... $ 75,238 $ 97,371 $ 461,807 $ 310,659 $1,038,339
========== ========== ========== ========== ==========
Supplemental Disclosures of Cash Flow Information --
Cash paid for:
Interest............................................. $ 34,266 $ 47,526 $ 201,986 $ 72,392 $ 198,089
Income taxes......................................... 939,754 1,077,552 580,000 330,000 575,000
</TABLE>
Supplemental Disclosure of Noncash Investing and Financing Activities:
During 1995, the Company recorded $843,000 in notes payable and $250,000 of
advances from officers in connection with the purchase of equipment of
$1,093,000.
During 1995, a $100,000 advance from officer was recorded in connection with
the payment of a deposit on the Company's operating facility.
See accompanying notes to financial statements.
F-6
<PAGE> 61
SPECTRATEK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
1. ORGANIZATION
Spectratek (the "Company") was incorporated in the State of California in
October 1980, changed its name to Spectral Holding Corporation in May 1993 and
to Spectratek Technologies, Inc. in June 1997. The Company will be
reincorporated in Delaware in November 1997. The Company is a manufacturer of
microreplicated holographic films that are used in a wide range of value-added
applications in consumer products packaging materials and industrial products.
Sales are made to domestic and foreign companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventory -- Inventory is stated at standard cost, which approximates the
lower of weighted average cost or market.
Furniture, Fixtures and Equipment -- Furniture, fixtures and equipment are
stated at cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from five to fifteen years.
Amortization of leasehold improvements is computed using the straight-line
method over the shorter of the lease term or the estimated useful life of the
asset.
Revenue Recognition -- Revenue is recognized when the product is shipped.
An allowance is recorded for estimated sales returns at the time of shipment.
The allowance for doubtful accounts and returns consists of the following:
<TABLE>
<CAPTION>
NINE MONTH PERIOD
ENDED
SEPTEMBER 30,
-------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1........................... $ -- $ 65,964 $119,518 $119,518 $155,047
Provision for doubtful accounts and
returns.................................... 65,964 85,207 155,047 120,154 127,108
Actual write-offs............................ 31,653 119,518 89,639 114,893
-------- -------- -------- -------- --------
Ending balance............................... $65,964 $119,518 $155,047 $150,033 $167,262
======== ======== ======== ======== ========
</TABLE>
Major Customers and International Sales -- The Company had sales to a
single customer which represented approximately 6%, 13% and 10% of the Company's
net sales for the years ended December 31, 1994, 1995 and 1996, respectively.
During the nine month periods ended September 30, 1996 and 1997, sales to a
single customer were approximately 15% and 17% of total sales, respectively.
International product sales represented approximately 22%, 41% and 45% of net
sales for the years end December 31, 1994, 1995 and 1996, respectively. During
each of the nine month periods ended September 30, 1996 and 1997, international
product sales were approximately 43% of net sales, respectively.
International sales to Asia were approximately 12%, 22% and 25% of the
Company's net sales for the years ended December 31, 1994, 1995 and 1996,
respectively and approximately 22% and 20% of net sales for the nine month
periods ended September 30, 1996 and 1997, respectively. International sales to
North America, excluding the United States, were approximately 10%, 17% and 17%
of the Company's net sales for the years ended December 31, 1994, 1995 and 1996,
respectively, and were approximately 18% and 21% of the Company's net sales for
the nine month periods ended September 30, 1996 and 1997, respectively.
Research and Development Costs -- Research and Development Costs related to
the designing, developing and testing of new holographic equipment and patterns
are charged to expense as incurred. Certain employees involved in research and
development also participate in the creation and construction of proprietary
manufacturing equipment. Approximately $194,250 related to these development
efforts were capitalized during the nine month period ended September 30, 1997.
Other Income -- Other income consists primarily of royalty revenue paid to
the Company by a large label and packaging company for the license of two of the
Company's stock holographic patterns.
F-7
<PAGE> 62
SPECTRATEK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
Income Taxes -- Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and income tax bases of
assets and liabilities. Such deferred income tax asset and liability
computations are based on enacted tax law and rates applicable in periods in
which the differences are expected to reverse. A valuation allowance is
established to reduce deferred tax assets if it is more likely than not that the
amount will not be realized. Income tax expense is the tax payable or refundable
for the period and the effect of any changes in deferred income tax assets and
liabilities during the period.
On January 1, 1997, the Company elected to be treated as an S corporation
under Subchapter S of the Internal Revenue Code of 1986, as amended, and
comparable State laws through the effective date of the proposed initial public
offering (the "Termination Date"). Under those provisions the Company does not
pay federal or state corporate income taxes on the Company's taxable income from
January 1, 1997 until the Termination Date. Instead, the stockholders are liable
for federal and state income taxes on the Company's taxable income.
The State of California has adopted the provisions of the S Corporation
election; however, there is a 1.5% franchise tax charged at the corporate level.
Net Income Per Common and Common Equivalent Share -- Net income per common
and common equivalent share has been determined by dividing net income by the
weighted average common and common equivalent shares outstanding during the
period. Options issued at prices below the expected offering price in the twelve
months prior to the initial public offering have been included in the
calculation of weighted average common and common equivalent shares as if
outstanding for all periods presented using the treasury stock method.
Unaudited Pro Forma Net Income Per Share -- Unaudited Pro forma net income
per share is based on the weighted average number of shares of common stock
outstanding and dilutive common equivalent shares from stock options (using the
treasury stock method). The shares outstanding for all periods give effect to
the stock splits described in Note 11 as well as 327,273 shares deemed to be
outstanding, which represent the approximate number of shares deemed to be sold
by the Company (at an assumed initial public offering price of $11.00 per share)
to fund an S corporation distribution from January 1, 1997 to the Termination
Date (which is estimated to be $3.6 million at the Termination Date), which will
be paid from the proceeds of the offering. Common and common equivalent shares
issued during the 12-month period prior to the proposed offering have been
included in the calculation using the treasury stock method as if they were
outstanding for all periods presented.
Fair Values of Financial Instruments -- The Company's financial instruments
consist primarily of cash and cash equivalents, accounts receivable, accounts
payable, advances from officers, and notes payable. The carrying values of all
financial instruments, other than advances from officers and notes payable, are
representative of their fair values due to their short-term maturities. The
carrying value of the Company's notes payable is considered to approximate its
fair value due to the variable interest rate of this instrument. Fair values of
advances from officers are not determinable due to their related party nature.
Concentration of Credit Risk -- Financial instruments that subject the
Company to credit risk consist primarily of accounts receivable. Concentration
of credit risk with respect to accounts receivable are generally diversified due
to the large number of entities composing the Company's customer base and their
geographic dispersion. The Company performs ongoing credit evaluations of its
customers and maintains an allowance for potential credit losses. Approximately
22%, 24% and 17% of net revenues for the years ended December 31, 1994, 1995 and
1996, respectively, were derived from sales of products to the Company's three
largest customers. During the nine month periods ended September 30, 1996 and
1997, approximately 26% and 32% of net revenues were derived from sales of
products to the Company's three largest customers.
F-8
<PAGE> 63
SPECTRATEK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets -- The Company regularly reviews long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, the Company recognizes an impairment
loss. As of December 31, 1994, 1995 and 1996 and September 30, 1997, no
impairment was identified.
Unaudited Interim Financial Statements -- In the opinion of management, the
unaudited interim financial statements have been prepared on the same basis as
the audited financial statements and include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of financial
position and results of operations for such dates and periods.
Accounting Standards -- In October 1995, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") SFAS
No. 123, "Accounting for Stock-Based Compensation" which defines a fair value
based method of accounting for stock-based employee compensation plans. Under
SFAS No. 123, companies are encouraged, but are not required, to adopt the fair
value method for fiscal years beginning after December 15, 1995 for all employee
awards granted after the beginning of such year. Companies are permitted to
continue to account for such transactions under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), but
must disclose in a note to the financial statements pro forma net income and
earnings per share as if SFAS No. 123 had been applied. The Company has
determined that it will not adopt the fair value method but will continue to
account for stock-based compensation under APB No. 25. The required disclosures
related to SFAS No. 123 are presented in Note 10.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share"
("EPS") which supersedes Accounting Principles Board Opinion No. 15 "Earnings
per Share" ("APB No. 15") and replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and provides guidance on other computational changes. SFAS
No. 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
The Company does not expect EPS under SFAS No. 128 to be materially different
from EPS calculated under APB No. 15.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" SFAS No. 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. SFAS No 130 requires that
an enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. The Company
does not expect the impact of SFAS No. 130 to be material in relation to its
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." SFAS No. 131 established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosure about products and services, geographic areas and major
F-9
<PAGE> 64
SPECTRATEK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
customers. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. The Company does not expect the impact of
SFAS No. 131 to be material in relation to its financial statements.
3. INVENTORY
Inventory consists of the following components at December 31, 1995 and
1996 and at September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
Raw materials......................... $1,136,067 $ 896,368 $ 910,296
Finished goods........................ 2,944,735 3,061,295 3,063,106
---------- ---------- -----------
$4,080,802 $3,957,663 $ 3,973,402
========== ========== ===========
</TABLE>
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following at December 31,
1995 and 1996 and at September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
Furniture and fixtures................ $ 54,592 $ 64,703 $ 80,000
Equipment............................. 2,609,938 2,600,025 2,906,649
Leasehold improvements................ 90,463 127,420 137,211
---------- ---------- -----------
2,754,993 2,792,148 3,123,860
Less accumulated depreciation and
amortization........................ 481,818 770,565 1,068,888
---------- ---------- -----------
Furniture, fixtures and equipment,
net................................. $2,273,175 $2,021,583 $ 2,054,972
========== ========== ===========
</TABLE>
5. NOTES PAYABLE
Notes payable consist of the following at December 31, 1995 and 1996 and at
September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
---------- -------- -------------
<S> <C> <C> <C>
Line-of-credit agreement for $3,500,000
bearing interest at the bank's base
rate plus .75% per annum (9.25% at
September 30, 1997), which is subject
to change from time to time, payable
monthly. All unpaid principal and
interest is due April 1, 1998........ $ 800,000
Line-of-credit agreement for $500,000
bearing interest at the prime rate
plus 1% per annum (9.5% at December
31, 1995), which is subject to change
from time to time.................... $ 250,000
</TABLE>
F-10
<PAGE> 65
SPECTRATEK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
---------- -------- ----------
<S> <C> <C> <C>
Note payable to bank bears interest at
the prime rate plus 1% per annum
(9.25% at December 31, 1996), which
is subject to change from time to
time, payable on a monthly basis. The
note requires monthly principal
payments of $8,333 with the unpaid
balance due February 28, 1997. The
note is secured by substantially all
the assets of the Company............ 483,333 $351,745
Note payable bearing interest at 7.91%
per annum. The note requires various
principal payments along with accrued
interest throughout a period of two
years upon delivery of equipment
(August 1995). The note is secured by
the metallizer....................... 843,000 343,000
---------- -------- ----------
Total notes payable.................... 1,576,333 694,745 800,000
Capital lease obligations.............. 6,075
---------- -------- ----------
Total notes payable and capital lease
obligations.......................... 1,582,408 694,745 800,000
Less current portion................... 887,663 694,745 800,000
---------- -------- ----------
Long term portion of notes payable..... $ 694,745 $ -- $ --
========== ======== ==========
</TABLE>
In March 1997, the Company entered into a line of credit agreement with a
bank for $3.5 million which is guaranteed personally by four of the officers of
the Company. The Company drew on this line of credit to pay off all outstanding
debt at that time, and to pay the balance of the outstanding advances from
officers. The line of credit bears interest at the bank's base rate plus 0.75%.
All unpaid principal and interest is due April 1, 1998. The line of credit
agreement is secured by the assets of the Company. Under the terms of the
agreement, the Company is required to meet certain financial covenants, as
defined. These include covenants related to current ratio, tangible net worth,
total liabilities to tangible net worth, net profit, and net profit after tax.
The Company failed to comply with the net profit after tax covenant contained in
the line-of-credit agreement for the year ended December 31, 1996 and the three
month period ended March 31, 1997. In addition, the Company failed to provide
the bank within 120 days after year end 1996 audited financial statements. The
lender waived compliance with the net profit after tax covenant for the year
ended December 31, 1996 and the three month period ended March 31, 1997. The
lender waived the receipt of the audited financial statements for the year
ending December 31, 1996 until October 31, 1997.
The Company leased certain equipment under capital leases. Included in
furniture, fixtures and equipment are capitalized leases with a cost of $17,434
and accumulated depreciation of $14,529 as of December 31, 1995.
The weighted average interest rate on the line of credit agreements during
the years ended December 31, 1995 and 1996 and the nine month period ended
September 30, 1997 was 9.5%, 9.25% and 9.25%, respectively.
F-11
<PAGE> 66
SPECTRATEK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NINE MONTH
------------------------------------ PERIOD ENDED
1994 1995 1996 SEPTEMBER 30, 1997
-------- ---------- -------- ------------------
<S> <C> <C> <C> <C>
Current:
Federal..................... $716,468 $ 983,522 $771,704 $ --
State....................... 195,803 238,785 143,724 54,094
Deferred:
Federal..................... (94,528) (158,529) (41,348) 486,711
State....................... (26,752) (42,339) (23,122) 131,887
-------- ---------- -------- --------
Provision for income taxes.... $790,991 $1,021,439 $850,958 $672,692
======== ========== ======== ========
</TABLE>
A reconciliation of the provision for income taxes at the federal statutory
rate to the provision recorded in the accompanying financial statements is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, NINE MONTH
---------------------- PERIOD ENDED
1994 1995 1996 SEPTEMBER 30, 1997
---- ---- ---- ------------------
<S> <C> <C> <C> <C>
Statutory federal rate....................... 35.0% 35.0% 35.0% --%
State income taxes, net of federal income tax
benefit.................................... 7.9 6.4 4.5 1.9
Miscellaneous................................ 0.9 1.2 0.1 --
Write-off of deferred income taxes upon
S-Corporation election..................... 22.2
---- ---- ---- ----
Effective tax rates.......................... 43.8% 42.6% 39.6% 24.1%
==== ==== ==== ====
</TABLE>
The components of deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current:
Uniform capitalization............................... $ 26,045 $ 29,351
Accrued vacation..................................... 12,916 15,692
Allowance for bad debt............................... 51,751 67,135
Inventory reserve.................................... 432,168 558,697
Deferred salaries.................................... 42,095 42,095
State taxes.......................................... 43,450 (2,680)
-------- --------
Total current..................................... 608,425 710,290
-------- --------
Non-current:
State taxes.......................................... 4,277 7,223
Depreciation......................................... (58,574) (98,915)
-------- --------
Total non-current................................. (54,297) (91,692)
-------- --------
Total........................................ $554,128 $618,598
======== ========
</TABLE>
There are no deferred income tax balances as of September 30, 1997, due to
the write-off of the deferred income taxes upon the S Corporation election
effective January 1, 1997.
F-12
<PAGE> 67
SPECTRATEK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
7. COMMITMENTS AND CONTINGENCIES
The Company leases buildings under noncancelable operating leases that
expire on various dates through 2003. The Company is also a lessee under
operating leases for certain equipment whose terms are generally month to month.
Future minimum rental payments under such leases as of September 30, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
---------------
<S> <C>
1997 (quarter ending December 31, 1997)........ $ 177,525
1998........................................... 655,000
1999........................................... 657,000
2000........................................... 657,000
2001........................................... 657,000
2002........................................... 618,750
Thereafter..................................... 42,000
----------
$3,464,275
==========
</TABLE>
In September 1997, the Company entered into a new five year lease for space
approximating 17,000 square feet in a building located in Los Angeles,
California. This new space will replace two separate Los Angeles facilities
("Cotner Street" buildings), aggregating approximately 7,200 square feet,
presently used in research and manufacturing. Rent commenced on this new
facility on September 1, 1997 at a rate of $12,750 per month. The facilities on
Cotner Street are currently rented on a month-to-month basis, and will be
vacated upon six months notice. In addition, in July 1997, the Company
renegotiated a new lease for the existing premises on Jandy Place which will
commence in February 1998 upon expiration of the existing lease and expire in
February 2003. The rent under the new lease will be $42,000 per month.
Total rental expense for operating leases amounted to $259,589, $516,874
and $522,870 for the years ended December 31, 1994, 1995 and 1996, respectively.
Total rental expense for operating leases amounted to $410,732 (unaudited) and
$382,561 for the nine month periods ended September 30, 1996 and 1997,
respectively.
8. ADVANCES FROM OFFICERS AND RELATED ENTITY
Advances from officers and related entity bear interest at various rates
ranging from 7 to 11% per annum. Advances from officers and related entity were
$597,218 and $544,718 as of December 31, 1995 and 1996, respectively. Interest
payable related to advances from officers and related entity was $66,301 and
$127,397 as of December 31, 1995 and 1996, respectively. The related entity is
FosterCo, Inc. ("FosterCo"), a corporate entity owned by two stockholders and
officers of the Company. All amounts outstanding as of December 31, 1996 were
paid prior to September 30, 1997.
9. RELATED PARTY TRANSACTIONS
FosterCo is a corporate entity owned 50% by Terrence Conway and 50% by
Michael Foster, directors, stockholders and officers of the Company. The Upper
Deck Co. ("Upper Deck") is a customer of the company. Cyberwerks Interactive,
L.L.C. ("Cyberwerks LLC") is a joint venture 50% owned by FosterCo and 50% owned
by Upper Deck.
Since August 1995, the Company has subleased space at each of its two
facilities to Cyberwerks LLC which includes a portion of the Company's
headquarters facility and of its research and manufacturing facility, both in
Los Angeles, California. In addition to space, Cyberwerks LLC also shares
certain common services at these facilities including personnel, administrative
and management services, for which it reimburses the Company on a pro rata
basis. Expenses reimbursed by Cyberwerks LLC amounted to approximately $119,045
F-13
<PAGE> 68
SPECTRATEK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
and $632,663 in the years ended December 31, 1995 and 1996, respectively and
$502,464 (unaudited) and $369,689 for the nine month periods ended September 30,
1996 and 1997, respectively. Included in prepaid expenses and other current
assets as of December 31, 1995 is $71,795 due from Cyberwerks LLC. The Company
believes that it has been compensated for both the usage of its space and its
personnel on terms no less favorable than it would have received in transactions
with independent third parties and that the allocation method used is
reasonable. (see Note 12).
Upper Deck purchased product from the Company in amounts approximating
$666,810, $654,609 and $115,376 in the years ended December 31, 1994, 1995 and
1996, respectively and $79,740 for the nine month period ended September 30,
1996. Included in accounts receivable as of December 31, 1995 and 1996,
respectively, is $4,053 and $35,834 due from Upper Deck. The Company believes
that these purchases were made on terms no less favorable than it would have
received in transactions with independent third parties.
10. STOCKHOLDERS' EQUITY AND STOCK OPTION PLAN
During fiscal year 1996, the Company issued 55,500 shares of Common Stock
in exchange for $60,000 worth of consulting services. The number of shares
issued was based on the estimated fair value of the Company's stock at the time
of issuance related to the value of services performed.
Effective April 1, 1997, the Company adopted the 1997 Stock Incentive Plan
("1997 Plan") under which a total of 560,550 shares of the Company's Common
Stock have been reserved. Options are granted at the fair market value of the
Company's stock, as determined by the Board of Directors, on the date of grant.
The 1997 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program, under which eligible individuals in the
Company's employ or service (including officers, nonemployee directors and
consultants) may, in the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price not less than
the fair market value of those shares on the grant date, (ii) the Stock Issuance
Program, under which the same individuals may, in the discretion of the Plan
Administrator, be issued shares of Common Stock directly, through the purchase
of such shares at a price not less than fair market value of those shares at the
time of issuance, or as a bonus awarded for services rendered to the Company,
and (iii) the Automatic Option Grant Program under which option grants will
automatically be made at periodic intervals to eligible nonemployee directors,
which options will enable such directors to purchase shares of Common Stock at
an exercise price equal to 100% of the fair market value of those shares on the
grant date. The persons eligible to participant in the Discretionary Option
Grant and Stock Issuance Programs are Company employees, non-employee directors,
and consultants and other independent advisors who provide services to the
Company. A person is eligible to participate in the Automatic Option Grant
Program if he or she (i) is serving as non-employee director on the date on
which the Underwriting Agreement in connection with the Initial Public Offering
is executed and the Common Stock offered hereby is priced (the "Underwriting
Date") (provided that no initial option will be granted on such date to a
director who has previously received a stock option grant form the Company in
connection with his or her Board service), (ii) first becomes a non-employee
director at any time after the Underwriting Date, whether through appointment by
the Board or election by the Company's stockholders, and (iii) continues to
serve as a non-employee director at one or more annual meetings of the Company's
stockholders held after the Underwriting Date.
During the nine month period ended September 30, 1997, options to purchase
155,400 shares of common stock were granted at an exercise price of $8.92.
F-14
<PAGE> 69
SPECTRATEK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
Stock option activity for the years are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
SHARES PRICE PRICE
------- -------- --------
<S> <C> <C> <C>
Options outstanding, January 1, 1997........... 0 -- --
Options granted................................ 155,400 $8.92 $ 8.92
-------
Options outstanding, September 30, 1997........ 155,400 $8.92 $ 8.92
=======
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1997:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE SHARES
WEIGHTED OUTSTANDING REMAINING EXERCISABLE
AVERAGE AT CONTRACTUAL AT
GRANT EXERCISES SEPTEMBER 30, LIVES SEPTEMBER 30,
YEAR PRICES 1997 (YEARS) 1997
---------------------------- --------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
1997........................ $8.92 155,400 5 0
</TABLE>
All stock options are granted at the fair market value of the Company's
Common Stock at the grant date. The weighted average estimated fair value of the
options granted in the nine months ended September 30, 1997 was $2.51 per share.
As allowed, under SFAS 123, the Company applies Accounting Principles Board
Opinion No. 25 and the related interpretations in accounting for its stock
option plan. Accordingly, no compensation cost for the Company's stock option
plan has been recognized in 1997. Had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant dates or awards
under the plan, the Company's net income for the nine month period ended
September 30, 1997 would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1997
-----------------------
<S> <C>
Net income:
Pro forma as reported................................ $ 1,377,016
Pro forma under SFAS 123............................. $ 1,320,668
Net income per share:
Pro forma as reported................................ $ 0.23
Pro forma under SFAS 123............................. $ 0.22
</TABLE>
The fair market value of options granted under the stock option plan during
nine month period ended September 30, 1997 was determined using the minimum
value method as prescribed by SFAS 123 utilizing the following weighted-average
assumptions:
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1997
-------------------------
<S> <C>
Expected volatility................................... 0%
Dividend yield........................................ --
Risk-free interest rate............................... 6.73%
Expected life......................................... 5 years
</TABLE>
In October 1997, the Company granted options to purchase 13,875 shares of
Common Stock to an employee director at an exercise price of $10.41.
F-15
<PAGE> 70
SPECTRATEK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
11. COMMON STOCK SPLIT
In June 1997, the Company's Board of Directors enacted a 300 for one split
of its shares of common stock. On December 11, 1997, the Board of Directors
approved a forward stock split of 1.85-for-one expected to be effected in
December 1997. All outstanding options to purchase shares of the Company's
Common Stock were adjusted accordingly. All references to shares and per share
amounts have been restated to reflect the forward stock split.
12. SUBSEQUENT EVENTS
S Corporation Dividends -- In October 1997, the Company declared a
distribution to its existing stockholders, consisting of promissory notes (the
"Stockholder Notes") in an aggregate principal amount equal to the undistributed
retained earnings of the Company (which is estimated to be approximately $3.6
million at the Termination Date). The estimated distribution may change based on
actual earnings incurred through the Termination Date. The promissory notes bear
interest from the closing date of the Company's initial public offering at 5.5%
per annum. Unpaid principal and interest are due April 1, 1998. This amount
represents the Company's estimated undistributed retained earnings from January
1, 1997 through the Termination Date of the Company's status as an S
corporation. On the Termination Date, the Company will revert to its former
status as a C corporation.
In connection with the initial public offering of its Common Stock, the
Company anticipates that it will repay the Stockholder Notes from the proceeds
of the offering (see Note 13)
FosterCo Option Agreement -- In September 1997, the Company acquired an
option (the "FosterCo Option") to purchase all of the outstanding capital stock
of FosterCo from two stockholders of the Company. Three of the Company's
stockholders, who are not stockholders of FosterCo, contributed 33,236 shares of
Common Stock to the Company as consideration for the option, which shares were
retired on September 30, 1997. The exercise price is equal to the greater of
$5,000,000 or 50% of the fair market value, as defined, of FosterCo's
outstanding capital stock as of the date of exercise of the option. The FosterCo
Option is exercisable during the 12-month period beginning October 1, 2002 and
ending on September 30, 2003. The exercise date will be accelerated in the event
Cyberwerks LLC files a registration statement on Form S-1 with the Securities
and Exchange Commission to register shares of its Common Stock. The option is
exercisable in cash, stock of the Company or a combination thereof, at the
discretion of the Fairness Committee of the Board of Directors of the Company.
The potential effect of the exercise of the FosterCo Option, were it exercisable
at September 30, 1997, would not have a material effect on the Company's
financial statements.
13. PRO FORMA INFORMATION (UNAUDITED)
The unaudited pro forma balance sheet and the unaudited pro forma
adjustments to the statement of operations has been presented to give pro forma
effect to (i) the distribution, which will be made from the proceeds of the
Offering of previously undistributed income taxed or taxable to the Company's
stockholders (of approximately $3.6 million as of the Termination Date); and
(ii) the recognition of income tax expense as if the Company were a C
Corporation during the nine month period ended September 30, 1997.
A reconciliation of stockholders' equity is as follows:
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Historical balance..................... $10,100 $ 59,900 $8,281,234 $8,351,234
Effect on net income as if Company were
a C Corporation during the nine month
period ended September 30, 1997...... (732,253) (732,253)
Less S Corporation dividend............ 3,600,000 (3,600,000) --
------- ---------- ---------- ----------
Pro forma balance...................... $10,100 $3,659,900 $3,948,981 $7,618,981
======= ========== ========== ==========
</TABLE>
F-16
<PAGE> 71
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED HEREIN IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
STOCKHOLDERS OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE
PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Prior S Corporation Status............ 14
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Financial Data............... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 27
Management............................ 37
Certain Transactions.................. 43
Principal and Selling Stockholders.... 46
Description of Securities............. 47
Shares Eligible for Future Sale....... 50
Underwriting.......................... 51
Legal Matters......................... 52
Experts............................... 52
Additional Information................ 53
Index to Financial Statements......... F-1
UNTIL , 1998 (25 DAYS AFTER
THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
</TABLE>
======================================================
======================================================
2,200,000 SHARES
[LOGO]
COMMON STOCK
------------------
PROSPECTUS
------------------
EVEREN SECURITIES, INC.
, 1998
======================================================
<PAGE> 72
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts shown are estimated
except the Securities and Exchange Commission registration fee and the filing
fee for the National Association of Securities Dealers, Inc. All of the amounts
shown will be paid by the Company (the "Registrant").
<TABLE>
<CAPTION>
ITEM AMOUNT
------------------------------------------------------------------ ---------
<S> <C>
SEC registration fee.............................................. $ 8,957
NASD filing fee................................................... 3,536
Nasdaq National Market listing (entry) fee........................ 13,000
Blue sky fees and expenses........................................ 5,000
Printing and engraving expenses................................... 100,000
Legal fees and expenses........................................... 300,000
Accounting fees and expenses...................................... 225,000
Transfer agent and registrar fees................................. 5,000
Miscellaneous..................................................... 39,507
---------
Total................................................... $ 700,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933. The Registrant's Bylaws (to be filed as Exhibit 3.4 hereto) provide
that the Registrant shall indemnify its directors and officers to the fullest
extent permitted by Delaware law. The Bylaws require the Registrant, subject to
certain limitations, to advance litigation expenses in the case of stockholder
derivative actions or other actions, against an undertaking by the directors and
officers to repay such advances if it is ultimately determined that the
directors or officers are not entitled to indemnification. The Bylaws further
provide that rights conferred under such Bylaws shall not be deemed to be
exclusive of any other right such persons may have or acquire under any
agreement, vote of stockholders or disinterested directors, or otherwise. The
Registrant believes that indemnification under its Bylaws covers at least
negligence and gross negligence.
In addition, the Registrant's Certificate of Incorporation (the
"Certificate") (to be filed as Exhibit 3.3 hereto) provides that the Registrant
shall indemnify its directors and officers if such persons acted (i) in good
faith, (ii) in a manner reasonably believed to be in or not opposed to the best
interests of the Registrant, and (iii) with respect to any criminal action or
proceeding, with reasonable cause to believe such conduct was lawful. The
Certificate also provides that, pursuant to Delaware law, its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
of care to the Registrant and its stockholders. This provision in the
Certificate does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Registrant for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Certificate further provides that the
Registrant be authorized
II-1
<PAGE> 73
to indemnify its directors and officers to the fullest extent permitted by law
through the Bylaws, agreement, vote of stockholders or disinterested directors,
or otherwise.
The Registrant intends to obtain directors' and officers' liability
insurance in connection with this Offering.
In addition, the Registrant has entered or, concurrently with this
Offering, will enter, into agreements to indemnify its directors and certain of
its officers in addition to the indemnification provided for in the Certificate
and Bylaws. These agreements will, among other things, indemnify the
Registrant's directors and certain of its officers for certain expenses
(including attorneys fees), judgments, fines and settlement amounts incurred by
such person in any action or proceeding, including any action by or in the right
of the Registrant, on account of services by that person as a director or
officer of the Registrant or as a director or officer of any subsidiary of the
Registrant, or as a director or officer of any other company or enterprise that
the person provides services to at the request of the Registrant.
The Underwriting Agreement (to be filed as Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the Registrant, its officers and
directors and by the Registrant and the Selling Stockholders of the
Underwriters, for certain liabilities arising under the Securities Act or
otherwise.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since August 1994, the Registrant has sold and issued the following
unregistered securities:
1. On April 1, 1996, the Registrant issued 55,500 shares of its Common
Stock to a business consultant in consideration for services rendered to
the Registrant by such consultant.
2. On April 1, 1997, the Registrant granted incentive stock options to
certain employees of the Registrant under its 1997 Stock Incentive Plan
covering an aggregate of 155,400 shares of the Registrant's Common Stock,
at an exercise price of $8.92 per share. These options vest in five equal
annual installments commencing one year following the date of grant. None
of the optionees paid any cash consideration for these options.
3. In June 1997, the Registrant effected a 300-for-1 stock split. Such
issuance was exempt from registration under Section 2(3) of the Securities
Act on the basis that such transaction did not involve a "sale" of
securities.
4. In October 1997, the Registrant granted stock options to an officer
of the Registrant covering an aggregate of 13,875 shares of Common Stock,
at an exercise price of $10.41 per share. These options vest in five equal
annual installments commencing in April 1998. The optionee did not pay any
cash consideration for these options.
5. In December 1997, the Company intends to effect a 1.85-for-1 stock
split. Such issuance will be exempt from registration under Section 2(3) of
the Securities Act on the basis that such transaction did not involve a
"sale" of securities.
The issuance of securities in Items 1, 2 and 4 above were deemed to be
exempt from registration under the Securities Act by virtue of Rule 701
promulgated thereunder in that they were offered and sold either pursuant to a
written compensatory benefit plan or pursuant to written contract relating to
compensation, as provided by Rule 701.
There were no underwriters, brokers or finders employed in connection with
any of the transactions set forth above.
II-2
<PAGE> 74
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<S> <C>
1.1** Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation of the Registrant.
3.2* Amended and Restated Bylaws of the Registrant.
3.3** Form of Certificate of Incorporation of the Registrant, a Delaware corporation.
3.4** Form of Bylaws of the Registrant, a Delaware corporation.
3.5** Certificate of Merger of the Registrant, a Delaware corporation, and
Registrant, a California corporation.
4.1** Specimen certificate representing shares of Common Stock of the Registrant.
4.2* 1997 Stock Incentive Plan.
4.3* Form of Notice of Grant of Stock Option and related form of Stock Option
Agreement under 1997 Stock Incentive Plan.
4.4* Form of Notice of Grant of Nonemployee Director Automatic Stock Option and
related form of Stock Option Agreement under 1997 Stock Incentive Plan.
4.5* Form of Stock Issuance Agreement.
5.1** Form of Opinion of Brobeck, Phleger & Harrison LLP.
10.1* Form of Indemnification Agreement.
10.2* Standard Industrial/Commercial Single-Tenant Lease, dated July 1, 1997, between
Bardon of Hollywood, Inc. and the Registrant.
10.3* Standard Industrial Lease, dated July 10, 1985, between Phillip Rossman and
Ruth Rossman Trust and Comdisc Technologies, Inc., as assigned to the
Registrant as of July 10, 1985.
10.4* Standard Sublease, dated May 8, 1996, between Legasys Legal Systems and the
Registrant.
10.5* Revolving Credit Promissory Note Issued by the Registrant to Citibank, FSB.
10.6 Standard Industrial/Commercial Single-Tenant Lease, dated as of July 21, 1997,
between Jerry Harold Waxman and Arlene Reva Waxman, as Trustees under the Jerry
Harold Waxman and Arlene Reva Waxman Inter Vivos Trust Agreement Dated October
7, 1977, and the Registrant.
10.7* Option Agreement, dated October 1, 1997, among the Registrant, Terrence Conway,
Michael S. Foster and FosterCo, Inc.
10.8* Form of Employee Proprietary Information and Inventions Agreement.
10.9* Technology Assignment Agreement, dated October 1, 1997, between Michael S.
Foster and the Registrant.
10.10 Standard Sublease, dated June 8, 1995, between Foote, Cone & Belding
Communications, Inc., now known as True North Communication, and the
Registrant.
10.11* Form of Stockholder's Note, dated October 1, 1997.
10.12** License Agreement and Release, dated May 31, 1995 among the Registrant,
FosterCo, Inc., Michael Foster, Terrence Conway, Michael Wanlass and James
Wanlass.
11.1 Statement Regarding Computation of Earnings Per Share.
23.1 Consent of Deloitte & Touche LLP Independent Auditors.
23.2** Consent of Brobeck, Phleger & Harrison LLP (to be contained in Exhibit 5.1).
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* filed as an exhibit to the Registrant's Registration Statement on Form S-1,
as filed with the Commission on October 22, 1997.
** to be filed by amendment
II-3
<PAGE> 75
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
SCHEDULE
------------
<S> <C>
Schedule II Valuation and Qualifying Accounts
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreements, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be
part of this registration statement as of the time it was declared
effective;
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the Offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on the 15th day of
December 1997.
SPECTRATEK TECHNOLOGIES, INC.
By: /s/ TERRENCE CONWAY
------------------------------------
Terrence Conway
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------- --------------------------------- ------------------
<S> <C> <C>
/s/ TERRENCE CONWAY Chief Executive Officer, December 15, 1997
- ------------------------------------- President and Director
Terrence Conway (principal executive officer)
* Chairman of the Board, Director December 15, 1997
- ------------------------------------- and Chief Technology Officer
Michael S. Foster
* Vice President, Marketing December 15, 1997
- ------------------------------------- and Director
Michael Wanlass
* Vice President, Manufacturing December 15, 1997
- ------------------------------------- and Director
James Wanlass
/s/ CHARLES M. SPEAR Chief Financial Officer December 15, 1997
- ------------------------------------- and Director
Charles M. Spear (principal financial and
accounting officer)
</TABLE>
*By: /s/ TERRENCE CONWAY
---------------------------
Terrence Conway
Attorney-in-Fact
II-5
<PAGE> 77
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------------------------------------------------------------------- ------------
<S> <C> <C>
1.1** Form of Underwriting Agreement.........................................
3.1* Amended and Restated Articles of Incorporation of the Registrant.......
3.2* Amended and Restated Bylaws of the Registrant..........................
3.3** Form of Certificate of Incorporation of the Registrant, a Delaware
corporation............................................................
3.4** Form of Bylaws of the Registrant, a Delaware corporation...............
3.5** Certificate of Merger of the Registrant, a Delaware corporation, and
Registrant, a California corporation...................................
4.1** Specimen certificate representing shares of Common Stock of the
Registrant.............................................................
4.2* 1997 Stock Incentive Plan..............................................
4.3* Form of Notice of Grant of Stock Option and related form of Stock
Option Agreement under 1997 Stock Incentive Plan.......................
4.4* Form of Notice of Grant of Nonemployee Director Automatic Stock Option
and related form of Stock Option Agreement under 1997 Stock Incentive
Plan...................................................................
4.5* Form of Stock Issuance Agreement.......................................
5.1** Form of Opinion of Brobeck, Phleger & Harrison LLP.....................
10.1* Form of Indemnification Agreement......................................
10.2* Standard Industrial/Commercial Single-Tenant Lease, dated July 1, 1997,
between Bardon of Hollywood, Inc. and the Registrant...................
10.3* Standard Industrial Lease, dated July 10, 1985, between Phillip Rossman
and Ruth Rossman Trust and Comdisc Technologies, Inc., as assigned to
the Registrant as of July 10, 1985.....................................
10.4* Standard Sublease, dated May 8, 1996, between Legasys Legal Systems and
the Registrant.........................................................
10.5* Revolving Credit Promissory Note Issued by the Registrant to Citibank,
FSB....................................................................
10.6 Standard Industrial/Commercial Single-Tenant Lease, dated as of July
21, 1997, between Jerry Harold Waxman and Arlene Reva Waxman, as
Trustees under the Jerry Harold Waxman and Arlene Reva Waxman Inter
Vivos Trust Agreement Dated October 7, 1977, and the Registrant........
10.7* Option Agreement, dated October 1, 1997, among the Registrant, Terrence
Conway, Michael S. Foster and FosterCo, Inc............................
10.8* Form of Employee Proprietary Information and Inventions Agreement......
10.9* Technology Assignment Agreement, dated October 1, 1997, between Michael
S. Foster and the Registrant...........................................
10.10 Standard Sublease, dated June 8, 1995, between Foote, Cone & Belding
Communications, Inc., now known as True North Communication, and the
Registrant.............................................................
10.11* Form of Stockholder's Note, dated October 1, 1997......................
10.12** License Agreement and Release, dated May 31, 1995 among the Registrant,
FosterCo, Inc., Michael Foster, Terrence Conway, Michael Wanlass and
James Wanlass..........................................................
11.1 Statement Regarding Computation of Earnings Per Share..................
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.................
23.2** Consent of Brobeck, Phleger & Harrison LLP (to be contained in Exhibit
5.1)...................................................................
24.1* Power of Attorney......................................................
27.1 Financial Data Schedule................................................
</TABLE>
- ---------------
* filed as an exhibit to the Registrant's Registration Statement on Form S-1,
as filed with the Commission on October 22, 1997.
** to be filed by amendment
<PAGE> 1
Exhibit 10.6
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes
only, July 21, 1997, is made by and between JERRY HAROLD WAXMAN AND ARLENE REVA
WAXMAN, AS TRUSTEES UNDER THE JERRY HAROLD WAXMAN AND ARLENE REVA WAXMAN INTER
VIVOS TRUST AGREEMENT DATED OCTOBER 7, 1977 ("LESSOR") and SPECTRATEK
TECHNOLOGIES, INC., A CALIFORNIA CORPORATION ("Lessee"), (collectively the
"PARTIES," or individually a "PARTY").
1.2 PREMISES: That certain real property, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
and commonly known as 12500 BEATRICE STREET, LOS ANGELES, CA 90066, located in
the County of LOS ANGELES, State of CALIFORNIA, and generally described as
(describe briefly the nature of the property and, if applicable, the "PROJECT",
if the property is located within a Project) APPROXIMATELY 17,000 SQUARE FEET
OF INDUSTRIAL/OFFICE SPACE INCLUDING PARKING FOR APPROXIMATELY 31 CARS
("PREMISES"). (See also Paragraph 2)
1.3 TERM: FIVE (5) years and ONE (1) months ("ORIGINAL TERM")
commencing SEPTEMBER 1, 1997 ("COMMENCEMENT DATE") and ending SEPTEMBER 30,
2002 ("EXPIRATION DATE"). (See also Paragraph 3)
1.4 EARLY POSSESSION: UPON COMPLETION OF DEMOLITION WORK BY
LESSOR ("EARLY POSSESSION DATE"). (See Paragraphs 3.2 and 3.3)
1.5 BASE RENT: $12,750 per month ("BASE RENT"), payable on the
FIRST (1ST) day of each month commencing SEPTEMBER 1, 1997 (See also Paragraph
4)
[ ]If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $12,750 as Base Rent for the
period SEPTEMBER 1, 1997 THROUGH OCTOBER 31, 1997.
1.7 SECURITY DEPOSIT: $12,750 ("SECURITY DEPOSIT"). (See also
Paragraph 5)
1.8 AGREED USE: OFFICES, WAREHOUSING AND MANUFACTURING OF
HOLOGRAMS. (See also Paragraph 6)
1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless
otherwise stated herein. (See also Paragraph 8)
1.10 REAL ESTATE BROKERS: (See also Paragraph 15)
(a) REPRESENTATION: The following real estate brokers
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction (check applicable boxes):
[x] COMMERCIAL INDUSTRIAL ASSOCIATES AND MCKINNEY, TRAVERS represents
Lessor exclusively ("LESSOR'S BROKER");
[x] ZAMEL & ASSOCIATES represents Lessor exclusively
("LESSOR'S BROKER"); or
[ ] _________________________________________________ represents Lessor and
Lessee ("DUAL AGENCY").
(b) PAYMENT TO BROKERS: Upon execution and delivery of
this Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in
their separate written agreement (or if there is no such agreement, the sum of
- -- % of the total Base Rent for the brokerage services rendered by said
Broker).
1.11 GUARANTOR. The obligations of the Lessee under this Lease are
to be guaranteed by ___________________________________________________________
_____ ("GUARANTOR"). (See also Paragraph 37)
PAGE 1
<PAGE> 2
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or
Addenda consisting of Paragraphs 50 through 52 and Exhibits "A", all of which
constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon all of
the terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may
have been used in calculating rental, is an approximation which the Parties
agree is reasonable and the rental based thereon is not subject to revision
whether or not the actual size is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom
clean and free of debris on the Commencement Date or the Early Possession Date,
whichever first occurs ("START DATE"), and, so long as the required service
contracts described in Paragraph 7.1(b) below are obtained by Lessee within
thirty (30) days following the Start Date, warrants that the existing
electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air
conditioning systems ("HVAC"), loading doors, if any, and all other such
elements in the Premises, other than those constructed by Lessee, shall be in
good operating condition on said date and that the structural elements of the
roof, bearing walls and foundation of any buildings on the Premises (the
"BUILDING") shall be free of material defects. If a non-compliance with said
warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation
with respect to such matter, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same at
Lessor's expense. If, after the Start Date, Lessee does not give Lessor
written notice of any non-compliance with this warranty within: (i) one year as
to the surface of the roof and the structural portions of the roof, foundations
and bearing walls, (ii) six (6) months as to the HVAC systems, (iii) thirty
(30) days as to the remaining systems and other elements of the Building,
correction of such non-compliance shall be the obligation of Lessee at Lessee's
sole cost and expense.
2.3 COMPLIANCE. Lessor warrants that the improvements on the
Premises comply with all applicable laws, covenants or restrictions of record,
building codes, regulations and ordinances ("APPLICABLE REQUIREMENTS") in
effect on the Start Date. Said warranty does not apply to the use to which
Lessee will put the Premises or to any Alterations or Utility Installations (as
defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is
responsible for determining whether or not the zoning is appropriate for
Lessee's intended use, and acknowledges that past uses of the Premises may no
longer be allowed. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided, promptly after receipt of written notice
from Lessee setting forth with specificity the nature and extent of such non-
compliance, rectify the same at Lessor's expense. If Lessee does not give
Lessor written notice of a non-compliance with this warranty within six (6)
months following the Start Date, correction of that non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense. If the Applicable
Requirements are hereafter changed (as opposed to being in existence at the
Start Date, which is addressed in Paragraph 6.2(e) below) so as to require
during the term of this Lease the construction of an addition to or an
alteration of the Building, the remediation of any Hazardous Substance, or the
reinforcement or other physical modification of the Building ("CAPITAL
EXPENDITURE"), Lessor and Lessee shall allocate the cost of such work as
follows:
(a) Subject to Paragraph 2.3(c) below, if such Capital
Expenditures are required as a result of the specific and unique use of the
Premises by Lessee as compared with uses by tenants in general, Lessee shall be
fully responsible for the cost thereof, provided, however that if such Capital
Expenditure is required during the last two (2) years of this Lease and the
cost thereof exceeds six (6) months' Base Rent, Lessee may instead terminate
this Lease unless Lessor notifies Lessee, in writing, within ten (10) days
after receipt of Lessee's termination notice that Lessor has elected to pay the
difference between the actual cost thereof and the amount equal to six (6)
months' Base Rent. If Lessee elects termination, Lessee shall immediately
cease the use of the Premises which requires such Capital Expenditure and
deliver to Lessor written notice specifying a termination date at least ninety
(90) days thereafter. Such termination date shall, however, in no event be
earlier than the last day that Lessee could legally utilize the Premises
without commencing such Capital Expenditure.
(b) If such Capital Expenditure is not the result of the
specific and unique use of the Premises by Lessee (such as, governmentally
mandated seismic modifications), then Lessor and Lessee shall allocate the
obligation to pay for such costs pursuant to the provisions of Paragraph
7.1(c); provided, however, that if such
PAGE 2
<PAGE> 3
Capital Expenditure is required during the last two years of this Lease or if
Lessor reasonably determines that it is not economically feasible to pay its
share thereof, Lessor shall have the option to terminate this Lease upon ninety
(90) days prior written notice to Lessee unless Lessee notifies Lessor, in
writing, within ten (10) days after receipt of Lessor's termination notice that
Lessee will pay for such Capital Expenditure. If Lessor does not elect to
terminate, and fails to tender its share of any such Capital Expenditure,
Lessee may advance such funds and deduct same, with interest, from Rent until
Lessor's share of such costs have been fully paid. If Lessee is unable to
finance Lessor's share, or if the balance of the Rent due and payable for the
remainder of this Lease is not sufficient to fully reimburse Lessee on an
offset basis, Lessee shall have the right to terminate this Lease upon thirty
(30) days written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning
Capital Expenditures are intended to apply only to non-voluntary, unexpected,
and new Applicable Requirements. If the Capital Expenditures are instead
triggered by Lessee as a result of an actual or proposed change in use, change
in intensity of use, or modification to the Premises then, and in that event,
Lessee shall be fully responsible for the cost thereof, and Lessee shall not
have any right to terminate this Lease.
2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been
advised by Lessor and/or Brokers to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical, HVAC
and fire sprinkler systems, security, environmental aspects, and compliance
with Applicable Requirements), and their suitability for Lessee's intended use,
(b) Lessee has made such investigation as it deems necessary with reference to
such matters and assumes all responsibility therefor as the same relate to its
occupancy of the Premises, and (c) neither Lessor, Lessor's agents, nor any
Broker has made any oral or written representations or warranties with respect
to said matters other than as set forth in this Lease. In addition, Lessor
acknowledges that: (a) Broker has made no representations, promises or
warranties concerning Lessee's ability to honor the Lease or suitability to
occupy the Premises, and (b) it is Lessor's sole responsibility to investigate
the financial capability and/or suitability of all proposed tenants.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor
in Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original
Term of this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this
Lease (including but not limited to the obligations to pay Real Property Taxes
and insurance premiums and to maintain the Premises) shall, however, be in
effect during such period. Any such early possession shall not affect the
Expiration Date.
3.3 DELAY IN POSSESSION. Lessor agrees to use its best
commercially reasonable efforts to deliver possession of the Premises to Lessee
by the Commencement Date. If, despite said efforts, Lessor is unable to
deliver possession as agreed, Lessor shall not be subject to any liability
therefor, nor shall such failure affect the validity of this Lease. Lessee
shall not, however, be obligated to pay Rent or perform its other obligations
until it receives possession of the Premises. If possession is not delivered
within sixty (60) days after the Commencement Date, Lessee may, at its option,
by notice in writing within ten (10) days after the end of such sixty (60) day
period, cancel this Lease, in which event the Parties shall be discharged from
all obligations hereunder. If such written notice is not received by Lessor
within said ten (10) day period, Lessee's right to cancel shall terminate.
Except as otherwise provided, if possession is not tendered to Lessee when
required and Lessee does not terminate this Lease, as aforesaid, any period of
rent abatement that Lessee would otherwise have enjoyed shall run from the date
of delivery of possession and continue for a period equal to what Lessee would
otherwise have enjoyed under the terms hereof, but minus any days of delay
caused by the acts or omissions of Lessee. If possession of the Premises is
not delivered within four (4) months after the Commencement Date, this Lease
shall terminate unless other agreements are reached between Lessor and Lessee,
in writing.
PAGE 3
<PAGE> 4
3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender
possession of the Premises to Lessee until Lessee complies with its obligation
to provide evidence of insurance (Paragraph 8.5). Pending delivery of such
evidence, Lessee shall be required to perform all of its obligations under this
Lease from and after the Start Date, including the payment of Rent,
notwithstanding Lessor's election to withhold possession pending receipt of
such evidence of insurance. Further, if Lessee is required to perform any
other conditions prior to or concurrent with the Start Date, the Start Date
shall occur but Lessor may elect to withhold possession until such conditions
are satisfied.
4. RENT.
4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor
under the terms of this lease (except for the Security Deposit) are deemed to
be rent ("RENT").
4.2 PAYMENT. Lessee shall cause payment of Rent to be received by
Lessor in lawful money of the United States, without offset or deduction, on or
before the day on which it is due. Rent for any period during the term hereof
which is for less than one (1) full calendar month shall be prorated based upon
the actual number of days of said month. Payment of Rent shall be made to
Lessor at its address stated herein or to such other persons or place as Lessor
may from time to time designate in writing. Acceptance of a payment which is
less than the amount then due shall not be a waiver of Lessor's rights to the
balance of such Rent, regardless of Lessor's endorsement of any check so
stating.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution
hereof the Security Deposit as security for Lessee's faithful performance of
its obligations under this Lease. If Lessee fails to pay Rent, or otherwise
Defaults under this Lease, Defaults under this Lease, Lessor may use, apply or
retain all or any portion of said Security Deposit for the payment of any
amount due Lessor or to reimburse or compensate Lessor for any liability,
expense, loss or damage which Lessor may suffer or incur by reason thereof. If
Lessor uses or applies all or any portion of said Security Deposit, Lessee
shall within ten (10) days after written request therefor deposit monies with
Lessor sufficient to restore said Security Deposit to the full amount required
by this Lease. If the Base Rent increases during the term of this Lease,
Lessee shall, upon written request from Lessor, deposit additional moneys with
Lessor so that the total amount of the Security Deposit shall at all times bear
the same portion to the increased Base Rent as the initial Security Deposit
bore to the initial Base Rent. Should the Agreed Use be amended to accommodate
a material change in the business of Lessee or to accommodate a sublessee or
assignee, Lessor shall have the right to increase the Security Deposit to the
extent necessary, in Lessor's reasonable judgment, to account for any increased
wear and tear that the Premises may suffer as a result thereof. If a change in
control of Lessee occurs during this Lease and following such change the
financial condition of Lessee is, in Lessor's reasonable judgment,
significantly reduced, Lessee shall deposit such additional monies with Lessor
as shall be sufficient to cause the Security Deposit to be at a commercially
reasonable level based on said change in financial condition. Lessor shall not
be required to keep the Security Deposit separate from its general accounts.
Within fourteen (14) days after the expiration or termination of this Lease, if
Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise
within thirty (30) days after the Premises have been vacated pursuant to
Paragraph 7.4(c) below, Lessor shall return that portion of the Security
Deposit not used or applied by Lessor. No part of the Security Deposit shall
be considered to be held in trust, to bear interest or to be prepayment for any
monies to be paid by Lessee under this Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the
Agreed Use, or any other legal use which is reasonably comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises
in a manner that is unlawful, creates damage, waste or a nuisance, or that
disturbs owners and/or occupants of, or causes damage to neighboring
properties. Lessor shall not unreasonably with or delay its consent to any
written request for a modification of the Agreed Use, so long as the same will
not impair the structural integrity of the improvements on the Premises or the
mechanical or electrical systems therein, is not significantly more burdensome
to the Premises. If Lessor elects to withhold consent, Lessor shall within
five (5) business days after such request give written notification of same,
which notice shall include an explanation of Lessor's objections to the change
in use.
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6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCES" as used in this Lease shall mean any product, substance, or waste
whose presence, use, manufacture, disposal, transportation, or release, either
by itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety or
welfare, the environment or the Premises, (ii) regulated or monitored by any
governmental authority, or (iii) a basis for potential liability of Lessor to
any governmental agency or third party under any applicable statute or common
law theory. Hazardous Substances shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, and/or crude oil or any products,
by-products or fractions thereof. Lessee shall not engage in any activity in
or on the Premises which constitutes a Reportable Use of Hazardous Substances
without the express prior written consent of Lessor and timely compliance (at
Lessee's expense) with all Applicable Requirements. "REPORTABLE USE" shall
mean (i) the installation or use of any above or below ground storage tank,
(ii) the generation, possession, storage, use, transportation, or disposal of a
Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with, any
governmental authority, and/or (iii) the presence at the Premises of a
Hazardous Substance with respect to any Applicable Requirements requires that a
notice be given to persons entering or occupying the Premises or neighboring
properties. Notwithstanding the foregoing, Lessee may use any ordinary and
customary materials reasonably required to be used in the normal course of the
Agreed Use, so long as such use is in compliance with all Applicable
Requirements, is not a Reportable Use, and does not expose the Premises or
neighboring property to any meaningful risk of contamination or damage or
expose Lessor to any liability therefor. In addition, Lessor may condition its
consent to any Reportable use upon receiving such additional assurances as
Lessor reasonably deems necessary to protect itself, the public, the Premises
and/or the environment against damage, contamination, injury and/or liability,
including, but not limited to, the installation (and removal on or before Lease
expiration or termination) of protective modifications (such as concrete
encasements) and/or increasing the Security Deposit.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has
reasonable cause to believe, that a Hazardous Substance has come to be located
in, on, under or about the Premises, other than as previously consented to by
Lessor, Lessee shall immediately give written notice of such fact to Lessor,
and provide Lessor with a copy of any report, notice, claim or other
documentation which it has concerning the presence of such Hazardous Substance.
(c) LESSEE REMEDIATION. Lessee shall not cause or permit
any Hazardous Substance to be spilled or released in, on, under or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any
Hazardous Substance brought onto the Premises during the term of this Lease, by
or for Lessee, or any third party.
(d) LESSEE INDEMNIFICATION. Lessee shall indemnify,
defend and hold Lessor, its agents, employees, lenders and ground lessor, if
any, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, claims, expenses, penalties, and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee, or any third party (provided, however, that
Lessee shall have no liability under this Lease with respect to underground
migration of any Hazardous Substance under the Premises from adjacent
properties). Lessee's obligations shall include, but not be limited to, the
effects of any contamination or injury to person, property or the environment
created or suffered by Lessee, and the cost of investigation, removal,
remediation, restoration and/or abatement, and shall survive the expiration or
termination of this Lease. NO TERMINATION, CANCELLATION OR RELEASE AGREEMENT
ENTERED INTO BY LESSOR AND LESSEE SHALL RELEASE LESSEE FROM ITS OBLIGATIONS
UNDER THIS LEASE WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS SPECIFICALLY SO
AGREED BY LESSOR IN WRITING AT THE TIME OF SUCH AGREEMENT.
(e) LESSOR INDEMNIFICATION. Lessor and its successors
and assigns shall indemnify, defend, reimburse and hold Lessee, its employees
and lenders, harmless from and against any and all environmental damages which
existed as a result of Hazardous Substances on the Premises prior to the Start
Date or which are caused by the gross negligence, or intentional acts of
Lessor, its agents or employees. Lessor's obligations, as and
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when required by the Applicable Requirements, shall include, but not be limited
to, the cost of investigation, removal, remediation, restoration and/or
abatement, and shall survive the expiration or termination of this Lease.
(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain
the responsibility and pay for any investigations or remediation measures
required by governmental entities having jurisdiction with respect to the
existence of Hazardous Substances on the Premises prior to the Start Date.
Lessee shall cooperate fully in any such activities at the request of Lessor,
including allowing Lessor and Lessor's agents to have reasonable access to the
Premises at reasonable times in order to carry out Lessor's investigative and
remedial responsibilities.
(g) LANDLORD TERMINATION OPTION. If a Hazardous
Substance Condition occurs during the term of this Lease, unless Lessee is
legally responsible therefor (in which case Lessee shall make the investigation
and remediation thereof required by the Applicable Requirements and this Lease
shall continue in full force and effect, but subject to Lessor's rights under
Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i)
investigate and remediate such Hazardous Substance Condition, if required, as
soon as reasonably possible at Lessor's expense, in which event this Lease
shall continue in full force and effect, or (ii) if the estimated cost to
remediate such condition exceeds twelve (12) times the then monthly Base Rent
of $100,000, whichever is greater, give written notice to Lessee, within thirty
(30) days after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of
the date sixty (60) days following the date of such notice. In the event
Lessor elects to give a termination notice, Lessee may, within ten (10) days
thereafter, give written notice to Lessor of Lessee's commitment to pay the
amount by which the cost of the remediation of such Hazardous Substance
Condition exceeds an amount equal to twelve (12) times the then monthly Base
Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said
funds or satisfactory assurance thereof within thirty (30) days following such
commitment. In such event, this Lease shall continue in full force and effect,
and Lessor shall proceed to make such remediation as soon as reasonably
possible after the required funds are available. If Lessee does not give such
notice and provide the required funds or assurance thereof within the time
provided, this Lease shall terminate as of the date specified in Lessor's
notice of termination.
6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as
otherwise provided in this Lease, Lessee, shall, at Lessee's sole expense,
fully, diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date.
Lessee shall, within ten (10) days after receipt of Lessor's written request,
provide Lessor with copies of all permits and other documents, and other
information evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or
involving the failure of Lessee or the Premises to comply with any Applicable
Requirements.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender and
consultants shall have the right to enter into Premises at any time, in the
case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease. The cost of any such inspections shall be paid by Lessor,
unless a violation of Applicable Requirements, or a contamination is found to
exist or be imminent, or the inspection is requested or ordered by a
governmental authority. In such case, Lessee shall upon request reimburse
Lessor for the cost of such inspections, so long as such inspection is
reasonably related to the violation or contamination.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) IN GENERAL. Subject to the provisions of Paragraphs
2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition and repair,
(whether or not the portion of the Premises requiring repairs, 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
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Premises), including, but not limited to, all equipment or facilities, such as
plumbing, HVAC, electrical, lighting facilities, boilers, pressure vessels,
fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors,
windows, doors, plate glass, skylights, landscaping, driveways, parking lots,
fences, retaining walls, signs, sidewalks and parkways located in, on, or
adjacent to the Premises. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance practices,
specifically including the procurement and maintenance of the service contracts
required by Paragraph 7.1(b) below. Lessee's obligations shall include
restorations, replacements or renewals when necessary to keep the Premises and
all improvements thereon or a part thereof in good order, condition and state
of repair. Lessee shall, during the term of this Lease, keep the exterior
appearance of the Building in a first-class condition consistent with the
exterior appearance of other similar facilities of comparable age and size in
the vicinity, including, when necessary, the exterior repainting of the
Building.
(b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole
expense, procure and maintain contracts, with copies to Lessor, in customary
form and substance for, and with contractors specializing and experienced in
the maintenance and service of the following equipment and improvements ("BASIC
ELEMENTS"), if any, as and when installed on the Premises: (i) HVAC equipment,
(ii) boiler and pressure vessels, (iii) fire protection systems, (iv)
landscaping and irrigation systems, (v) roof covering and drains, and (vi)
asphalt and parking lots, (vii) clarifiers and (viii) any other equipment, if
reasonably required by Lessor.
(c) REPLACEMENT. Subject to Lessee's indemnification of
Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of
liability resulting from Lessee's failure to exercise and perform good
maintenance practices, if the Basic Elements described in Paragraph 7.1(b)
cannot be repaired other than at a cost which is in excess of 50% of the cost
of replacing such Basic Elements, then such Basic Elements shall be replaced by
Lessor, and the cost thereof shall be prorated between the Parties and Lessee
shall only be obligated to pay, each month during the remainder of the term of
this Lease, on the date on which Base Rent is due, an amount equal to the
product of multiplying the cost of such replacement by a fraction, the
numerator of which is one, and the denominator of which is the number of months
of the useful life of such replacement as such useful life is specified
pursuant to Federal income tax regulations or guidelines for depreciation
thereof (including interest on the unamortized balance as is then commercially
reasonable in the judgment of Lessor's accountants), with Lessee reserving the
right to prepay its obligation at any time.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs
2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14
(Condemnation), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, or
the equipment therein, all of which obligations are intended to be that of the
Lessee. It is the intention of the Parties that the terms of this Lease govern
the respective obligations of the Parties as to maintenance and repair of the
Premises, and they expressly waive the benefit of any statute now or hereafter
in effect to the extent it is inconsistent with the terms of this Lease.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" refers to all floor and window coverings, air lines, power
panels, electrical distribution, security and fire protection systems,
communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing
in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery
and equipment that can be removed without doing material damage to the
Premises. The term "ALTERATIONS" shall mean any modification of the
improvements, other than Utility Installations or Trade Fixtures, whether by
addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS"
are defined as Alterations and/or Utility Installations made by Lessee that are
not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make
any Alterations or Utility Installations to the Premises without Lessor's prior
written consent. Lessee may, however, make non-structural Utility
Installations to the interior of the Premises (excluding the roof) without such
consent but upon notice to Lessor, as long as they are not visible from the
outside, do not involve puncturing, relocating or removing the roof or any
existing walls, and the cumulative cost thereof during this Lease as extended
does not exceed $50,000 in the aggregate or $10,000 in any one year.
(b) CONSENT. Any Alterations or Utility Installations
that Lessee shall desire to make and which require the consent of the Lessor
shall be presented to Lessor in written form with proposed detailed plans.
Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable
governmental permits,
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(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be
performed in a workmanlike manner with good and sufficient materials. Lessee
shall promptly upon completion thereof furnish Lessor with as-built plans and
specifications. For work which costs an amount equal to the greater of one
month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee
providing a lien and completion bond in an amount equal to one and one-half
times the estimated cost of such Alteration or Utility Installation and/or upon
Lessee's posting an additional Security Deposit with Lessor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all
claims for labor or materials furnished or alleged to have been furnished to or
for Lessee at or for use on the Premises, which claims are or may be secured by
any mechanics' or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior to
the commencement of any work in, on or about the Premises, and Lessor shall
have the right to post notices of non-responsibility. If Lessee shall contest
the validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend and protect itself, Lessor and the Premises against the same and
shall pay and satisfy any such adverse judgment that may be rendered thereon
before the enforcement thereof. If Lessor shall require, Lessee shall furnish
a surety bond in an amount equal to one and one-half times the amount of such
contested lien, claim or demand, indemnifying Lessor against liability for the
same. If Lessor elects to participate in any such action, Lessee shall pay
Lessor's attorneys' fees and costs.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require
removal or elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered a
part of the Premises. Lessor may, at any time, elect in writing to be the
owner of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
termination of this Lease, become the property of Lessor and be surrendered by
Lessee with the Premises.
(b) REMOVAL. By delivery to Lessee of written notice
from Lessor not later than ninety (90) days prior to the end of the term of
this Lease, Lessor may require that any or all Lessee Owned Alterations or
Utility Installations be removed by the expiration or termination of this
Lease, Lessor may require the removal at any time of all or any part of any
Lessee Owned Alterations or Utility Installations made without the required
consent.
(c) SURRENDER/RESTORATION. Lessee shall surrender the
Premises by the Expiration Date or any earlier termination date, with all of
the improvements, parts and surfaces thereof broom clean and free of debris,
and in good operating order, condition and state of repair, ordinary wear and
tear excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or
deterioration that would have been prevented by good maintenance practice.
Lessee shall repair any damage occasioned by the installation, maintenance or
removal of Trade Fixtures, furnishings, and equipment as well as the removal of
any storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or groundwater contaminated by Lessee. Trade
fixtures shall remain the property of Lessee and shall be removed by Lessee.
The failure by Lessee to timely vacate the Premises pursuant to this Paragraph
7.4(c) without the express written consent of Lessor shall constitute a
holdover under the provisions of Paragraph 26 below.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance
required under Paragraph 8 except to the extent of the cost attributable to
liability insurance carried by Lessor under Paragraph 8.2(b) in excess of
$2,000,000 per occurrence. Premiums for policy periods commencing prior to or
extending beyond the Lease term shall be prorated to correspond to the Lease
term. Payment shall be made by Lessee to Lessor within ten (10) days following
receipt of an invoice.
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8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in
force a Commercial General Liability Policy of Insurance protecting Lessee and
Lessor against claims for bodily injury, personal injury and property damage
based upon or arising out of the ownership, use, occupancy or maintenance of
the Premises and all areas appurtenant thereto. Such insurance shall be on an
occurrence basis providing single limit coverage in an amount not less than
$2,000,000 per occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF
PREMISES ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION
ENDORSEMENT" for damage caused by heat, smoke or fumes from a hostile fire.
The policy shall not contain any intra-insured exclusions as between insured
persons or organizations, but shall include coverage for liability assumed
under this Lease as an "insured contract" for the performance of Lessee's
indemnity obligations under this Lease. The limits of said insurance shall
not, however, limit the liability of Lessee nor relieve Lessee of any
obligation hereunder. All insurance carried by Lessee shall be primary to and
not contributory with any similar insurance carried by Lessor, whose insurance
shall be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall maintain liability
insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of,
the insurance required to be maintained by Lessee. Lessee shall not be named
as an additional insured therein.
8.3 PROPERTY INSURANCE -- BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall
obtain and keep in force a policy or policies in the name of Lessor, with loss
payable to Lessor and to any Lender insuring loss or damage to the Premises.
The amount of such insurance shall be equal to the full replacement cost of the
Premises, as the same shall exist from time to time, or the amount required by
any Lendors, but in no event more than the commercially reasonable and
available insurable value thereof. If Lessor is the insuring Party, however,
Lessee Owned Alterations and Utility Installations, Trade Fixtures, and
Lessee's personal property shall be insured by Lessee under Paragraph 8.4
rather than by Lessor. If the coverage is available and commercially
appropriate, such policy or policies shall insure against all risks of direct
physical loss or damage (except the perils of flood and/or earthquake unless
required by a Lender), including coverage for debris removal and the
enforcement of any Applicable Requirements requiring the upgrading, demolition,
reconstruction or replacement of any portion of the Premises as the result of a
covered loss. Said policy or policies shall also contain an agreed valuation
provision in lieu of any coinsurance clause, waiver of subrogation, and
inflation guard protection causing an increase in the annual property insurance
coverage amount by a factor of not less than the adjusted U.S. Department of
Labor consumer Price Index for All Urban Consumers for the city nearest to
where the Premises are located. If such insurance coverage has a deductible
clause, the deductible amount shall not exceed $1,000 per occurrence, and
Lessee shall be liable for such deductible amount in the event of an Insured
Loss.
(b) RENTAL VALUE. The Insuring Party shall obtain and
keep in force a policy or policies in the name of Lessor with loss payable to
Lessor and any Lender, insuring the loss of the full Rent for one (1) year.
Said insurance shall provide that in the event the Lease is terminated by
reason of an insured loss, the period of indemnity for such coverage shall be
extended beyond the date of the completion of repairs or replacement of the
Premises, to provide for one full year's loss of Rent from the date of any such
loss. Said insurance shall contain an agreed valuation provision in lieu of
any coinsurance clause, and the amount of coverage shall be adjusted annually
to reflect the projected Rent otherwise payable by Lessee, for the next twelve
(12) month period. Lessee shall be liable for any deductible amount in the
event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a
larger building, or of a group of buildings owned by Lessor which are adjacent
to the Premises, the Lessee shall pay for any increase in the premiums for the
property insurance of such building or buildings if said increase is caused by
Lessee's acts, omissions, use or occupancy of the Premises.
8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain
insurance coverage on all of Lessee's personal property, Trade Fixtures, and
Lessee Owned Alterations and Utility Installations. Such insurance
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shall be full replacement cost coverage with a deductible of not to exceed
$1,000 per occurrence. The proceeds from any such insurance shall be used by
Lessee for the replacement of personal property, Trade Fixtures and Lessee
Owned Alterations and Utility Installations. Lessee shall provide Lessor with
written evidence that such insurance is in force.
(b) BUSINESS INTERRUPTION. If reasonably available, and
if Lessor requests Lessee to do so in writing, Lessee shall obtain and maintain
loss of income and extra expense insurance in amounts as will reimburse Lessee
for direct or indirect loss of earnings attributable to all perils commonly
insured against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.
(c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes
no representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 INSURANCE POLICIES. Insurance required herein shall be by
companies duly licensed or admitted to transact business in the state where the
Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least B+, V, as set forth in the most current issue
of "Best's Insurance Guide", or such other rating as may be required by a
Lender. Lessee shall not do or permit to be done anything which invalidates
the required insurance policies. Lessee shall, prior to the Start Date,
delivered to Lessor certified copies of policies of such insurance or
certificates evidencing the existence and amounts of the required insurance.
No such policy shall be cancelable or subject to modification except after
thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty
(30) days prior to the expiration of such policies, furnish Lessor with
evidence of renewals or "insurance binders" evidencing renewal thereof, or
Lessor may order such insurance and charge the cost thereof to Lessee, which
amount shall be payable by lessee to Lessor upon demand. Such policies shall
be for a term of at least one year, or the length of the remaining term of this
Lease, whichever is less. If either Party shall fail to procure and maintain
the insurance required to be carried by it, the other Party may, but shall not
be required to, procure and maintain the same.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and
waive their entire right to recover damages against the other, for loss of or
damage to its property arising out of or incident to the perils required to be
insured against herein. The effect of such releases and waivers is not limited
by the amount of insurance carried or required, or by any deductibles
applicable thereto. The Parties agree to have their respective property damage
insurance carriers waive any right to subrogation that such companies may have
against Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.
8.7 INDEMNITY. Except for Lessor's sole negligence, Lessee shall
indemnify, protect, defend and hold harmless the Premises, Lessor and its
agents, Lessor's master or ground lessor, partners and Lenders, from and
against any and all claims, loss of rents and/or damages, liens, judgments,
penalties, attorneys' and consultants' fees, expenses and/or liabilities
arising out of, involving, or in connection with, the use and/or occupancy of
the Premises by Lessee. If any action or proceeding is brought against Lessor
by reason of any of the foregoing matters, Lessee shall upon notice defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and
Lessor shall cooperate with Lessee in such defense. Lessor need not have first
paid any such claim in order to be defended or indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be
liable for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or
any other person in or about the Premises, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, HVAC or lighting fixtures, or from any other
cause, whether the said injury or damage results from conditions arising upon
the Premises or upon other portions of the Building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under
no circumstances be liable for injury to Lessee's business or for any loss of
income or profit therefrom.
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9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or
destruction to the improvements on the Premises, other than Lessee Owned
Alterations and Utility Installations, which can reasonably be repaired in six
(6) months or less from the date of the damage or destruction. Lessor shall
notify Lessee in writing within thirty (30) days from the date of the damage or
destruction as to whether or not the damage is Partial or Total.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations, which cannot reasonably be repaired in six (6) months or less
from the date of the damage or destruction. Lessor shall notify Lessee in
writing within thirty (30) days from the date of the damage or destruction as
to whether or not the damage is Partial or Total.
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of Applicable Requirements, and
without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the
occurrence or discovery of a condition involving the presence of, or a
contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on,
or under the Premises.
9.2 PARTIAL DAMAGE -- INSURED LOSS. If a Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect; provided, however, that Lessee shall, at
Lessor's election, make the repair of any damage or destruction the total cost
to repair of which is $10,000 or less, and, in such event, Lessor shall make
any applicable insurance proceeds available to Lessee on a reasonable basis for
that purpose. Notwithstanding the foregoing, if the required insurance was not
in force or the insurance proceeds are not sufficient to effect such repair,
the Insuring Party shall promptly contribute the shortage in proceeds (except
as to the deductible which is Lessee's responsibility) as and when required to
complete said repairs. In the event, however, such shortage was due to the
fact that, by reason of the unique nature of the improvements, full replacement
cost insurance coverage was not commercially reasonable and available, Lessor
shall have no obligation to pay for the shortage in insurance proceeds or to
fully restore the unique aspects of the Premises unless Lessee provides Lessor
with the funds to cover same, or adequate assurance thereof, within ten (10)
days following receipt of written notice of such shortage and request therefor.
If Lessor receives said funds or adequate assurance thereof within said ten
(10) day period, the party responsible for making the repairs shall complete
them as soon as reasonably possible and this Lease shall remain in full force
and effect. If such funds or assurance are not received, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to: (i) make such restoration and repair as is commercially reasonable with
Lessor paying any shortage in proceeds, in which case this Lease shall remain
in full force and effect, or have this Lease terminate within thirty (30) days
thereafter. Lessee shall not be entitled to reimbursement of any funds
contributed by Lessee to repair any such damage or destruction. Premises
Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3,
notwithstanding that there may be some insurance coverage, but the net proceeds
of any such insurance shall be made available for the repairs if made by either
Party.
9.3 PARTIAL DAMAGE -- UNINSURED LOSS. If a Premises Partial
Damage that is not an Insured Loss occurs, unless caused by a negligent or
willful act of Lessee (in which event Lessee shall make the repairs at Lessee's
expense), Lessor may either: (i) repair such damage as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in full
force and effect, or (ii) terminate this Lease by giving written notice to
Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage. Such
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termination shall be effective sixty (60) days following the date of such
notice. In the event Lessor elects to terminate this Lease, Lessee shall have
the right within ten (10) days after receipt of the termination notice to give
written notice to Lessor of Lessee's commitment to pay for the repair of such
damage without reimbursement from Lessor. Lessee shall provide Lessor with
said funds or satisfactory assurance thereof within thirty (30) days after
making such commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision
hereof, if a Premises Total Destruction occurs, this Lease shall terminate
sixty (60) days following such Destruction. If the damage or destruction was
caused by the gross negligence or willful misconduct of Lessee, Lessor shall
have the right to recover Lessor's damages from Lessee except as provided in
Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six
(6) months of this Lease there is damage for which the cost to repair exceeds
one (1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate
this Lease effective sixty (60) days following the date of occurrence of such
damage by giving a written termination notice to Lessee within thirty (30) days
after the date of occurrence of such damage. Notwithstanding the foregoing, if
Lessee at that time has an exercisable option to extend this Lease or to
purchase the Premises, then Lessee may preserve this Lease by, (a) exercising
such option and (b) providing Lessor with any shortage in insurance proceeds
(or adequate assurance thereof) needed to make the repairs on or before the
earlier of (i) the date which is ten days after Lessee's receipt of Lessor's
written notice purporting to terminate this Lease, or (ii) the day prior to the
date upon which such option expires. If Lessee duly exercises such option
during such period and provides Lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's
commercially reasonable expense, repair such damage as soon as reasonably
possible and this Lease shall continue in full force and effect. If Lessee
fails to exercise such option and provide such funds or assurance during such
period, then this Lease shall terminate on the date specified in the
termination notice and Lessee's option shall be extinguished.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) ABATEMENT. In the event of Premises partial Damage
or Premises Total Destruction or a Hazardous Substance Condition for which
Lessee is not responsible under this Lease, the Rent payable by Lessee for the
period required for the repair, remediation or the restoration of such damage
shall be abated in proportion to the degree to which Lessee's use of the
Premises is impaired, but not to exceed the proceeds received from the Rental
Value insurance. All other obligations of Lessee hereunder shall be performed
by Lessee, and Lessor shall have no liability for any such damage, destruction,
remediation, repair or restoration except as provided herein.
(b) REMEDIES. If Lessor shall be obligated to repair or
restore the Premises and does not commence, in a substantial and meaningful
way, such repair or restoration within ninety (90) days after such obligation
shall accrue, Lessee may, at any time prior to the commencement of such repair
or restoration, give written notice to Lessor and to any Lenders of which
Lessee has actual notice, of Lessee's election to terminate this Lease on a
date not less than sixty (60) days following the giving of such notice. If
Lessee gives such notice and such repair or restoration is not commenced within
thirty (30) days thereafter, this Lease shall terminate as of the date
specified in said notice. If the repair or restoration is commenced within
said thirty (30) days, this Lease shall continue in full force and effect.
"COMMENCE" shall mean either the unconditional authorization of the preparation
of the required plans, or the beginning of the actual work on the Premises,
whichever first occurs.
9.7 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this
Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment
shall be made concerning advance Base Rent and any other advance payments made
by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of
Lessee's Security Deposit as has not been, or is not then required to be, used
by Lessor.
9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of
this Lease shall govern the effect of any damage to or destruction of the
Premises with respect to the termination of this Lease and hereby waive the
provisions of any present or future statute to the extent inconsistent
herewith.
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10. REAL PROPERTY TAXES.
10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term
"REAL PROPERTY TAXES" shall include any form of assessment; real estate,
general, special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises, Lessor's right to other income therefrom, and/or Lessor's
business of leasing, by any authority having the direct or indirect power to
tax and where the funds are generated with reference to the Building address
and where the proceeds so generated are to be applied by the city, county or
other local taxing authority of a jurisdiction within which the Premises are
located. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy,
assessment or charge, or any increase therein, imposed by reason of events
occurring during the term of this Lease, including but not limited to, a change
in the ownership of the Premises.
10.2
(a) PAYMENT OF TAXES. Lessee shall pay the Real Property
Taxes applicable to the Premises during the term of this Lease. Subject to
Paragraph 10.2(b), all such payments shall be made at least ten (10) days prior
to any delinquency date. Lessee shall promptly furnish Lessor with
satisfactory evidence that such taxes have been paid. If any such taxes shall
cover any period of time prior to or after the expiration or termination of
this Lease, Lessee's share of such taxes shall be prorated to cover only that
portion of the tax bill applicable to the period that this Lease is in effect,
and Lessor shall reimburse Lessee for any overpayment. If Lessee shall fail to
pay any required Real Property Taxes, Lessor shall have the right to pay the
same, and Lessee shall reimburse Lessor therefor upon demand.
(b) ADVANCE PAYMENT. In the event Lessee incurs a late
charge on any Rent payment, Lessor may, at Lessor's option, estimate the
current Real Property Taxes, and require that such taxes be paid in advance to
Lessor by Lessee, either: (i) in a lump sum amount equal to the installment
due, at least twenty (20) days prior to the applicable delinquency date, or
(ii) monthly in advance with the payment of the Base Rent. If Lessor elects to
require payment monthly in advance, the monthly payment shall be an amount
equal to the amount of the estimated installment of taxes divided by the number
of months remaining before the month in which said installment becomes
delinquent. When the actual amount of the applicable tax bill is known, the
amount of such equal monthly advance payments shall be adjusted as required to
provide the funds needed to pay the applicable taxes. If the amount collected
by Lessor is insufficient to pay such Real Property Taxes when due, Lessee
shall pay Lessor, upon demand, such additional sums as are necessary to pay
such obligations. All moneys paid to Lessor under this Paragraph may be
intermingled with other moneys of Lessor and shall not bear interest. In the
event of a Breach by Lessee in the performance of its obligations under this
Lease, then any balance of funds paid to Lessor under the provisions of this
Paragraph may at the option of Lessor, be treated as an additional Security
Deposit.
10.3 JOINT ASSESSMENT. If the Premises are not separately
assessed, Lessee's liability shall be an equitable proportion of the Real
Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be conclusively determined by Lessor from
the respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to
delinquency, all taxes assessed against and levied upon Lessee Owned
Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and
all personal property of Lessee. When possible, Lessee shall cause such
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said personal property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee's property
within ten (10) days after receipt of a written statement.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
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12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law
assign, transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT")
or sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent.
(b) A change in the control of Lessee shall constitute an
assignment requiring consent. The transfer, on a cumulative basis, of fifty
percent (50%) 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, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee by an amount
equal to or greater than fifty percent (50%) of such Net Worth as it was
represented at the time of the execution of this Lease or at the time of the
most recent assignment to which Lessor has consented, or as it exists
immediately prior to said transaction or transactions constituting such
reduction, whichever was or is greater, shall be considered an assignment of
this Lease to which Lessor may withhold its consent. "NET WORTH OF LESSEE"
shall mean the net worth of Lessee (excluding any guarantors) established under
generally accepted accounting principles.
(d) As assignment or subletting without consent shall, at
Lessor's option, be a Default curable after notice per Paragraph 13.1(c).
[Remainder of paragraph deleted.]
(e) Lessee's remedy for any breach of Paragraph 12.1 by
Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not: (i) be effective without the express written assumption
by such assignee or sublessee of the obligations of Lessee under this Lease,
(ii) release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Rent or for the performance of any other
obligations to be performed by Lessee.
(b) Lessor may accept 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 Rent or performance shall constitute a waiver
or estoppel of Lessor's right to exercise its remedies for Lessee's Default or
Breach.
(c) Lessor's consent to any assignment or subletting
shall not constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee,
Lessor may proceed directly against Lessee, any Guarantors or anyone else
responsible for the performance of the Lessee's obligations under this Lease,
including any assignee or sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefore to Lessor, or any
security held by Lessor.
(e) Each request for consent to an assignment or
subletting shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not
limited to the intended use and/or required modification of the Premises,
Lessee agrees to provide Lessor with such other or additional information
and/or documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease
shall, by reason of accepting such assignment or entering into such sublease,
be deemed to have assumed and agreed to conform and comply with each
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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.
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 Rent payable on any sublease, and Lessor may collect
such Rent and apply same toward Lessee's obligations under this Lease;
provided, however, that until a Breach shall occur in the performance of
Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by
reason of the foregoing or any assignment of such sublease, nor by reason of
the collection of the Rent, be deemed liable to the sublessee for any failure
of Lessee to perform and comply with any of Lessee's obligations to such
sublessee. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor all Rent due and to become due under the sublease. Sublessee shall rely
upon any such notice from Lessor and shall pay all Rents to Lessor without any
obligation or right to inquire as to whether such Breach exists,
notwithstanding any claim from Lessee to the contrary.
(b) In the event of a Breach by Lessee, Lessor may, at
its option, require sublessee to attorn to Lessor, in which event Lessor shall
undertake the obligations of the sublessor under such sublease from the time of
the exercise of said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor or for any prior Defaults or Breaches
of such sublessor.
(c) Any matter requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or
any part of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default
or Breach by Lessee to the sublessee, who shall have the right to cure the
default of Lessee within the grace period, if any, specified in such notice.
The sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "Default" is defined as a failure by the
Lessee to comply with or perform any of the terms, covenants, conditions or
rules under this Lease. A "BREACH" is defined as the occurrence of one or more
of the following Defaults, and the failure of Lessee to cure such Default
within any applicable grace period:
(a) The abandonment of the Premises; or the vacating of
the Premises without providing a commercially reasonable level of security, or
where the coverage of the property insurance described in Paragraph 8.3 is
jeopardized as a result thereof, or without providing reasonable assurances to
minimize potential vandalism.
(b) The failure of Lessee to make any payment of Rent or
any other monetary payment required to be made by Lessee hereunder, whether to
Lessor or to a third party, when due, to provide reasonable evidence of
insurance or surety bond, or to fulfill any obligation under this Lease which
endangers or threatens life or property, where such failure continues for a
period of three (3) business days following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable
written evidence of compliance with Applicable Requirements, (ii) the service
contracts, (iii) the rescission of an unauthorized assignment or subletting,
(iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence
concerning any guaranty and/or Guarantor, (vii) any document requested under
Paragraph 42 (easements), or (viii) any other documentation or information
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which Lessor may reasonably require of Lessee under the terms of this Lease,
where any such failure continues for a period of ten (10) days following
written notice to Lessee.
(d) A Default by Lessee as to the terms, covenants,
conditions or provisions of this Lease, or of the rules adopted under Paragraph
40 hereof, other than those described in subparagraphs 13.1(a), (b) or (c),
above, where such Default continues for a period of thirty (30) days after
written notice; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach if Lessee commences such cure within said
thirty (30) day period and thereafter diligently prosecutes such cure to
completion.
(e) The occurrence of any of the following events: (i)
the making of any general arrangement or assignment for the benefit of
creditors; (ii) becoming a "debtor" as defined in 11 U.S.C. Section 101 or any
successor or 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 of other judicial seizure of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where such seizure is not discharged within thirty (30) days; provided,
however, in the event that any provision of this subparagraph (e) is contrary
to any applicable law, such provision shall be of no force or effect, and not
affect the validity of the remaining provisions.
(f) The discovery that any financial statement of Lessee
or of any Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this
Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within sixty (60) days following
written notice of any such event, to provide written alternative assurance or
security, which, when coupled with the then existing resources of Lessee,
equals or exceeds the combined financial resources of Lessee and the Guarantors
that existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any of its affirmative
duties or obligations, within ten (10) days after written notice (or in case of
an emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses,
permits or approvals. The costs and expenses of any such performance by Lessor
shall be due and payable by Lessee upon receipt of invoice therefor. If any
check given to Lessor by Lessee shall not be honored by the bank upon which it
is drawn, Lessor, at its option, may require all future payments to be made by
Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or
without further notice or demand, and without limiting Lessor in the exercise
of any right or remedy which Lessor may have by reason of such Breach:
(a) Terminate Lessee's right to possession of the
Premises by any lawful means, in which case this Lease shall terminate and
Lessee shall immediately surrender possession to Lessor. In such event Lessor
shall be entitled to recover from Lessee: (i) the unpaid Rent which had been
earned at the time of termination; (ii) the worth at the time of award of the
amount by which the unpaid rent which would have been earned after termination
until the time of award exceeds the amount of such rental loss that the Lessee
proves could have been reasonably avoided; (iii) the worth at the time of award
of the amount by which the unpaid rent for the balance of the term after the
time of award exceeds the amount of such rental loss that the Lessee proves
could be reasonably avoided; and (iv) any other amount necessary to compensate
Lessor for all the detriment proximately caused by the Lessee's failure to
perform its obligations under this Lease or which in the ordinary course of
things would be likely to result therefrom, including but not limited to the
cost of recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys'
fees, and that portion of any leasing commission paid by Lessor in connection
with this Lease applicable to the unexpired term of this Lease. The worth at
the time of award of the amount referred to in provision (iii) of the
immediately preceding sentence shall be computed by discounting such amount at
the discount rate of the Federal Reserve Bank of the District within which the
Premises are located at the time of award plus one percent (1%). Efforts by
Lessor to
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mitigate damages caused by Lessee's Breach of this Lease shall not waive
Lessor's right to recover damages under Paragraph 12. If termination of this
Lease is obtained through the provisional remedy of unlawful detainer, Lessor
shall have the right to recover in such proceeding any unpaid Rent and damages
as are recoverable therein, or Lessor may reserve the right to recover all or
any part thereof in a separate suit. If a notice and grace period required
under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or
to perform or quit given to Lessee under the unlawful detainer statute shall
also constitute the notice required by Paragraph 13.1. In such case, the
applicable grace period required by Paragraph 13.1 and the unlawful detainer
statute shall run concurrently, and the failure of Lessee to cure the Default
within the greater of the two such grace periods shall constitute both an
unlawful detainer and a Breach of this Lease entitling Lessor to the remedies
provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession
and recover the Rent as it becomes due, in which event Lessee may sublet or
assign, subject only to reasonable limitations. Acts of maintenance, efforts
to relet, and/or the appointment of a receiver to protect the Lessor's
interests, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter available
under the laws or judicial decisions of the state wherein the Premises are
located. The expiration or termination of this Lease and/or the termination of
Lessee's right to possession shall not relieve Lessee from liability under any
indemnity provisions of this Lease as to matters occurring or accruing during
the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent
or other charges, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering into
this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT
PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful
performance of all of the terms, covenants and conditions of this Lease. Upon
Breach of this Lease by Lessee, any such Inducement Provision shall
automatically be deemed deleted from this Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement Provision
shall be immediately due and payable by Lessee to Lessor, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or
the cure of the Breach which initiated the operation of this paragraph shall
not be deemed a waiver by Lessor of the provisions of this Paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any
Rent shall not be received by Lessor within five (5) days after such amount
shall be due, then, without any requirement for notice to Lessee, Lessee shall
pay to Lessor a one-time late charge equal to ten percent (10%) of each such
overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Lessor will incur by reason of late
payment. Acceptance of such late charge by Lessor shall in no event constitute
a waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent the exercise of any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of Base Rent, then notwithstanding any
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 INTEREST. Any monetary payment due Lessor hereunder, other
than late charges, not received by Lessor within thirty (30) days following the
date on which it was due, shall bear interest from the thirty-first (31st) day
after it was due. The interest ("INTEREST") charged shall be equal to the
prime rate charged by the largest state chartered bank in the state in which
the Premises are located plus 4%, but shall not exceed the maximum rate allowed
by law. Interest is payable in addition to the potential late charge provided
for in Paragraph 13.4.
13.6 BREACH BY LESSOR.
(a) NOTICE OF BREACH. Lessor shall not be deemed in
breach of this Lease unless Lessor fails within a reasonable time to perform an
obligation required to be performed by Lessor. For purposes of this
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Paragraph, a reasonable time shall in no event be less than thirty (30) days
after receipt by Lessor, and any Lender whose name and address shall have been
furnished Lessee in writing for such purpose, of written notice specifying
wherein such obligation of Lessor has not been performed; provided, however,
that if the nature of Lessor's obligation is such that more than thirty (30)
days are reasonably required for its performance, then Lessor shall not be in
breach if performance is commenced within such thirty (30) day period and
thereafter diligently pursued to completion.
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the
event that neither Lessor nor Lender cures said breach within thirty (30) days
after receipt of said notice, or if having commenced said cure they do not
diligently pursue it to completion, then Lessee may elect to cure said breach
at Lessee's expense and offset from Rent an amount equal to the greater of one
month's Base Rent or the Security Deposit, and to pay an excess of such expense
under protest, reserving Lessee's right to reimbursement from Lessor. Lessee
shall document the cost of said cure and supply said documentation to Lessor.
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 (collectively "CONDEMNATION"), this Lease shall terminate as to the part
taken as of the date the condemning authority takes title or possession,
whichever first occurs. If more than ten percent (10%) of any building, or
more than twenty-five percent (25%) of the land area not occupied by any
building, is taken by Condemnation, Lessee may, at Lessee's option, to be
exercised in writing within ten (10) days after Lessor shall have given Lessee
written notice of such taking (or in the absence of such notice, within ten
(10) days after the condemning authority shall have taken possession) terminate
this Lease as to the date the condemning authority takes such possession. If
Lessee does not terminate this Lease in accordance with the foregoing, this
Lease shall remain in full force and effect as to the portion of the Premises
remaining, except that the Base Rent shall be reduced in proportion to the
reduction in utility of the Premises caused by such Condemnation. Condemnation
awards and/or payments shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold, the
value of the part taken, or for severance damages; provided, however, that
Lessee shall be entitled to any compensation for Lessee's relocation expenses,
loss of business goodwill and/or Trade Fixtures, without regard to whether or
not this Lease is terminated pursuant to the provisions of this Paragraph. All
Alterations and Utility Installations made to the Premises by Lessee, for
purposes of Condemnation only, shall be considered the property of the Lessee
and Lessee shall be entitled to any and all compensation which is payable
therefor. In the event that this Lease is not terminated by reason of the
Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.
15. BROKERS' FEE.
15.1 ADDITIONAL COMMISSION. In addition to the payments owed
pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise
agree in writing, Lessor agrees that: (a) if Lessee exercises any Option, (b)
if Lessee acquires any rights to the Premises or other premises owned by Lessor
and located within the same Project, if any, within which the Premises is
located, (c) if Lessee remains in possession of the Premises, with the consent
of Lessor, after the expiration of this Lease, or (d) if Base Rent is
increased, whether by agreement or operation of an escalation clause herein,
then, Lessor shall pay Brokers a fee in accordance with the schedule of said
Brokers in effect at the time of the execution of this Lease.
15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of
Lessor's interest in this Lease shall be deemed to have assumed Lessor's
obligation hereunder. Each Broker shall be a third party beneficiary of the
provisions of Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a
Broker any amounts due as and for commissions pertaining to this Lease when
due, then such amounts shall accrue interest. In addition, if Lessor fails to
pay any amounts to Lessee's Broker when due, Lessee's Broker may send written
notice to Lessor and Lessee of such failure and if Lessor fails to pay such
amounts within ten (10) days after said notice, Lessee shall pay said monies to
its Broker and offset such amounts against Rent. In addition, Lessee's Broker
shall be deemed to be a third party beneficiary of any commission agreement
entered into by and/or between Lessor and Lessor's Broker.
15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS.
Lessee and Lessor each represent and warrant to the other that it has had no
dealings with any person, firm, broker or finder (other than the Brokers, if
any) in connection with this Lease, and that no one other than said named
Broker is entitled to any commission or finder's fee in connection therewith.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and
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hold the other harmless from and against liability for compensation or charges
which may be claimed by any such unnamed broker, finder or other similar party
by reason of any dealings or actions of the indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect thereto.
16. TENANCY STATEMENT/ESTOPPEL CERTIFICATE.
16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days
after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party an estoppel certificate in
writing, in 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 If Lessor desires to finance, refinance, or sell the Premises,
or any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lessor such financial statements as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or,
if this is a sublease, of the Lessee's interest in the prior lease. In the
event of a transfer of Lessor's title or interest in the Premises or this
Lease, Lessor shall deliver to the transferee or assignee (in cash or by
credit) any unused Security Deposit held by Lessor. Except as provided in
Paragraph 15, upon such transfer or assignment and delivery of the Security
Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with
respect to the obligations and/or covenants under this Lease thereafter to be
performed by the Lessor. Subject to the foregoing, the obligations and/or
covenants in this Lease to be performed by the Lessor shall be binding only
upon the Lessor as hereinabove defined. Notwithstanding the above, the
original Lessor under this Lease, and all subsequent holders of the Lessor's
interest in this Lease shall remain liable and responsible with regard to the
potential duties and liabilities of Lessor pertaining to Hazardous Substances
as outlined in Paragraph 6 above.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. DAYS. Unless otherwise specifically indicated to the contrary, the
word "days" as used in this Lease shall mean and refer to calendar days.
20. LIMITATION ON LIABILITY. Except with respect to Lessor's fraud, gross
negligence or willful misconduct, the obligations of Lessor under this Lease
shall not constitute personal obligations of Lessor, the individual partners of
Lessor or its or their individual partners, directors, officers or
shareholders, and Lessee shall look to the Premises, and to no other assets of
Lessor, for the satisfaction of any liability of Lessor with respect to this
Lease, and shall not seek recourse against the individual partners of Lessor,
or its or their individual partners, directors, officers or shareholders, or
any of their personal assets for such satisfaction.
21. TIME OF ESSENCE. Time is of the essence with respect to the
performance of all obligations to be performed or observed by the Parties under
this Lease.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains
all agreements between the Parties with respect to any matter mentioned herein,
and no other prior or contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that
it has made, and is relying solely upon, its own investigation as to the
nature, quality, character and financial responsibility of the other Party to
this Lease and as to the nature, quality and character of the Premises.
Brokers have no responsibility with respect thereto or with respect to any
default or breach hereof by either Party. The liability (including court costs
and Attorneys' fees), of any Broker with respect to negotiation, execution,
delivery or performance by either Lessor or Lessee under this Lease or any
amendment or modification hereto shall be limited to an amount up to the fee
received by such Broker pursuant to this Lease; provided, however, that the
foregoing
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limitation on each Broker's liability shall not be applicable to any gross
negligence or willful misconduct of such Broker.
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
courier) or may be sent by regular, certified or registered mail or U.S. Postal
Service Express Mail, with postage prepaid, or by facsimile transmission, and
shall be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this
Lease shall be that Party's address for delivery or mailing of notices. Either
Party may by written notice to the other specify a different address for
notice, except that upon Lessee's taking possession of the Premises, the
Premises shall constitute Lessee's address for notice. A copy of all notices
to Lessor shall be concurrently transmitted to such party or parties at such
addresses as Lessor may from time to time hereafter designate in writing.
23.2 DATE OF NOTICE. Any notice sent by registered or certified
mail, return receipt requested, shall be deemed given on the date of delivery
shown on the receipt card, or if no delivery date is shown, the postmark
thereon. If sent by regular mail the notice shall be deemed given forty-eight
(48) hours after the same is addressed as required herein and mailed with
postage prepaid. Notices delivered by United States Express Mail or overnight
courier that guarantee next day delivery shall be deemed given twenty-four (24)
hours after delivery of the same to the Postal Service or courier. Notices
transmitted by facsimile transmission or similar means shall be deemed
delivered upon telephone confirmation of receipt, provided a copy is also
delivered via delivery or mail. If notice is received on a Saturday, Sunday or
legal holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof.
Lessor's consent to, or approval of, any act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. The acceptance of Rent by Lessor shall not be a waiver of any Default
or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on
account of 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 termination of this
Lease. In the event that Lessee holds over, then the Base Rent shall be
increased to one hundred fifty percent (150%) of the Base Rent applicable
during the month immediately preceding the expiration or termination. Nothing
contained herein shall be construed as consent by Lessor to any holding over by
Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions
of this Lease to be observed or performed by Lessee are both covenants and
conditions. In construing this Lease, all headings and titles are for the
convenience of the parties only and shall not be considered a part of this
Lease. Whenever required by the context, the singular shall include the plural
and vice versa. This Lease shall not be construed as if prepared by one of the
parties, but rather according to its fair meaning as a whole, as if both
parties had prepared it.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located.
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Any litigation between the Parties hereto concerning this Lease shall be
initiated in the county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall
be subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "SECURITY DEVICE"), now
or hereafter placed upon the Premises, to any and all advances made on the
security thereof, and to all renewals, modifications, and extensions thereof.
Lessee agrees that the holders of any such Security Devices shall have no
liability or obligation to perform any of the obligations of Lessor under this
Lease. Any Lender may elect to have this Lease and/or any Option granted
hereby superior to the lien of its Security Device by giving written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not:
(i) be liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership; (ii) be subject to any
offsets or defenses which Lessee might have against any prior lessor, or (iii)
be bound by prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered
into by Lessor after the execution of this Lease, Lessee's subordination of
this Lease shall be subject to receiving a commercially reasonable
non-disturbance agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which
Non-Disturbance Agreement provides that Lessee's possession of the Premises,
and this Lease, including any options to extend the term hereof, will not be
disturbed so long as Lessee is not in Breach hereof and attorns to the record
owner of the Premises. Further, within sixty (60) days after the execution of
this Lease, Lessor shall use its commercially reasonable efforts to obtain a
Non- Disturbance Agreement from the holder of any pre-existing Security Device
which is secured by the Premises. In the event that Lessor is unable to
provide the Non-Disturbance Agreement within said sixty (60) days, then Lessee
may, at Lessee's option, directly contact Lessor's lender and attempt to
negotiate for the execution and delivery of a Non-Disturbance Agreement.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with
a sale, financing or refinancing of the Premises, Lessee and Lessor shall
execute such further writings as may be reasonably required to separately
document any such subordination, attornment and/or Non-Disturbance Agreement
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. 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. They 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. In addition, Lessor
shall be entitled to attorneys' fees, costs and expenses incurred in the
preparation and service of notices of Default and consultations in connection
therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's
agents shall have the right to enter the Premises at any time, in the case of
an emergency, and otherwise at reasonable times for the purpose of showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises as Lessor may
deem necessary. All such activities shall be without abatement of rent or
liability to Lessee. Lessor may at any time place on the Premises any ordinary
"FOR SALE" signs and Lessor may
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during the last six (6) months of the term hereof place on the Premises any
ordinary "FOR LEASE" signs. Lessee may at any time place on or about the
Premises any ordinary "FOR SUBLEASE" sign.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessor's prior written consent. Lessor shall
not be obligated to exercise any standard of reasonableness in determining
whether to permit an auction.
34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not
place any sign upon the Premises without Lessor's prior written consent. All
signs must comply with all Applicable Requirements.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing
by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, that Lessor may elect to continue any one
or all existing subtenancies. Lessor's failure within ten (10) days following
any such event to elect to the contrary by written notice to the holder of any
such lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. CONSENTS. Except as otherwise provided herein, wherever in this Lease
the consent of a Party is required to an act by or for the other Party, such
consent shall not be unreasonably withheld or delayed. Lessor's actual
reasonable costs and expenses (including but not limited to architects',
attorneys', engineers' and other consultants' fees) incurred in the
consideration of, or response to, a request by Lessee for any Lessor consent,
including but not limited to consents to an assignment, a subletting or the
presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt
of an invoice and supporting documentation therefor. Lessor's consent to any
act, assignment or subletting shall not constitute and acknowledgement that no
Default or Breach by Lessee of this Lease exists, nor shall such consent be
deemed a waiver of any then existing Default or Breach, except as may be
otherwise specifically stated in writing by Lessor at the time of such consent.
The failure to specify herein any particular condition to Lessor's consent
shall not preclude the imposition by Lessor at the time of consent of such
further or other conditions as are then reasonable with reference to the
particular matter for which consent is being given. In the event that either
Party disagrees with any determination made by the other hereunder and
reasonably requests the reasons for such determination, the determining party
shall furnish its reasons in writing and in reasonable detail within ten (10)
business days following such request.
37. GUARANTOR.
37.1 EXECUTION. The Guarantors, if any, shall each execute a
guaranty in the form most recently published by the American Industrial Real
Estate Association, and each such Guarantor shall have the same obligations as
Lessee under this Lease.
37.2 DEFAULT. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses, upon request to provide: (a) evidence of the
execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, (b) current financial statements, (c)
a Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and
performance of all of the covenants, conditions and provisions on Lessee's part
to be observed and performed under this Lease, Lessee shall have quiet
possession and quiet enjoyment of the Premises during the term hereof.
39. OPTIONS.
39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the
term of or renew this Lease or to extend or renew any lease that Lessee has on
other property of Lessor; (b) the right of first refusal or first offer to
lease either the Premises or other property of Lessor; (c) the right to
purchase or the right of first refusal to purchase the Premises or other
property of Lessor.
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39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to
Lessee in this Lease is personal to the original Lessee, and cannot be assigned
or exercised by anyone other than said original Lessee and only while the
original Lessee is in full possession of the Premises and, if requested by
Lessor, with Lessee certifying that Lessee has no intention of thereafter
assigning or subletting.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later Option cannot be exercised
unless the prior Options have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option: (i)
during the period commencing with the giving of any notice of Default and
continuing until said Default is cured, (ii) during the period of time any Rent
is unpaid (without regard to whether notice thereof is given Lessee), (iii)
during the time Lessee is in Breach of this Lease, or (iv) in the event that
Lessee has been given three (3) or more notices of Default, whether or not the
Defaults are cured, during the twelve (12) month period immediately preceding
the exercise of the Option.
(b) The period of time within which an Option may be
exercised shall not be extended or enlarged by reason of Lessee's inability to
exercise an Option because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force
or effect, notwithstanding Lessee's due and timely exercise of the Option, if,
after such exercise and prior to the commencement of the extended term, (i)
Lessee fails to pay Rent for a period of thirty (30) days after such Rent
becomes due (without any necessity of Lessor to give notice thereof), (ii)
Lessor gives to Lessee three (3) or more notices of separate Default during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, care of said properties, including the care and cleanliness of the
grounds and including the parking, loading and unloading of vehicles, and that
Lessee will pay its fair share of common expenses incurred in connection
therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other
security measures, and that Lessor shall have no obligation whatsoever to
provide same. Lessee assumes all responsibility for the protection of the
Premises, Lessee, its agents and invitees and their property from the acts of
third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time,
to grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay.
44. AUTHORITY. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this lease on its behalf. Each party
shall, within thirty (30) days after request, deliver to the other party
satisfactory evidence of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease
and the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
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46. OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. MULTIPLE PARTIES. If more than one person or entity is named herein
as either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the
Mediation and/or the Arbitration of all disputes between the Parties and/or
Brokers arising out of this Lease [ ] is [x] IS NOT attached to this Lease.
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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND
THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
The Parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
<TABLE>
<S> <C>
Executed at: Inglewood, California Executed at: Los Angeles, California
---------------------------------------------- ----------------------------------
on: July , 1997 on: July 31, 1997
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By LESSOR: Jerry Harold Waxman and Arlene Reva By LESSEE:
-----------------------------------------------
Waxman Inter Vivos Trust Agreement Spectratek Technologies, Inc.
---------------------------------------------------------- -----------------------------------------------
dated October 7, 1977
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By: By:
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Name Printed: Jerry H. Waxman Name Printed:
-------------------------------------------- ---------------------------------
Title: Trustee Title:
--------------------------------------------------- ----------------------------------------
By: By: /s/ Terry Conway
------------------------------------------------------ -------------------------------------------
Name Printed: Arelene R. Waxman Name Printed: /s/ Terry Conway
-------------------------------------------- ---------------------------------
Title: Trustee Title: /s/ President
--------------------------------------------------- ----------------------------------------
Address: 850 N. Oak Street Address: 5405 Jandy Place
------------------------------------------------- --------------------------------------
Inglewood, CA 90302 Los Angeles, CA
---------------------------------------------------------- -----------------------------------------------
Telephone: (310) 330-3800 Telephone: (310) 822-2400
----------------------------------------- ------------------------------
Facsimile: (310) 412-7134 Facsimile: (310) 822-2660
----------------------------------------- ------------------------------
Federal ID No. Federal ID No.
------------------------------------------- --------------------------------
BROKER: BROKER:
Commercial Industrial Associates Zamel & Associates
---------------------------------------------------------- -----------------------------------------------
Executed at: Santa Monica, California Executed at: Santa Monica, California
--------------------------------------------- ----------------------------------
on: July , 1997 on: July , 1997
------------------------------------------------------ -------------------------------------------
By: By:
------------------------------------------------------ -------------------------------------------
Name Printed: Thomas L. Walsmith Name Printed: Mark Zamel
-------------------------------------------- ----------------------------------
Title: Broker/Partner Title:
--------------------------------------------------- ----------------------------------------
Address: 3130 Wilshire Boulevard, Suite 300 Address: 1932 14th Street
------------------------------------------------- --------------------------------------
Santa Monica, CA 90403 Santa Monica, CA 90404
---------------------------------------------------------- -----------------------------------------------
Telephone: (310) 204-4040 Telephone: (310) 392-9797
----------------------------------------- ------------------------------
Facsimile: (310) 453-1513 Facsimile: (310) 392-0656
----------------------------------------- ------------------------------
Federal ID No. 95-3930147 Federal ID No.
------------------------------------------- --------------------------------
</TABLE>
NOTE: These forms are often modified to meet changing requirements of law
and industry needs. Always write or call to make sure you are
utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 700 So. Flower Street, Suite 600, Los Angeles, California
90017. (213) 687-8777. Fax No. (213) 687-8616
PAGE 25 FORM 204N-R-6/96
(R) Copyright 1996 - By American Industrial Real Estate Association. All rights
reserved. No part of these works may be reproduced in any form without
permission in writing.
<PAGE> 26
ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL
SINGLE TENANT LEASE-NET
FOR THE PREMISES AT 12500 BEATRICE STREET, LOS ANGELES, CA 90066
SPECTRATEK TECHNOLOGIES, INC., AS LESSEE
DATED JULY 21, 1997
50. Lessor Improvements: Lessor shall, at Lessor's sole cost and expense,
and prior to September 1, 1997, demolish offices within the premises
as indicated on the attached plan. Lessor shall not be required to
paint, carpet or in any way improve the remaining offices. Lessee
shall supervise demolition work. All removal of debris will be
through the west loading door.
51. Lessee Improvements: Lessee may remove the following items (at
Lessee's expense) without the requirement to restore at the
termination of lease:
a. All old carpeting and floor covering.
b. "Built-in" units, including cabinets, bookcases and dividers.
c. Some additional offices and bull-pen areas and the warehouse
dividing wall.
#1 + #2 3
d. Existing security system.
[/s/ TC] All work shall be done in a workman-like manner and damage
resulting from removal shall be repaired by Lessee.
Lessor hereby grants permission for Lessee, at Lessee's expense, to install
perimeter fencing, window and door security gates, and grating. Lessee shall
remove same at termination of Lease, at Lessor's discretion, as per Paragraph
7.4b of the Lease.
Initials: /s/ TC Initials:
------------------ ------------------
------------------ ------------------
<PAGE> 27
OPTION(S) TO EXTEND
ADDENDUM TO
STANDARD LEASE
DATED July 21, 1997
----------------------------------------------------------------
Jerry Harold Waxman and Arlene Reva Waxman
BY AND BETWEEN (LESSOR) Inter Vivos Trust Agreement, dated
October 7, 1977
------------------------------------------------------
(LESSEE)Spectratek Technologies, Inc.
------------------------------------------------------
PROPERTY ADDRESS: 12500 Beatrice Street, Los Angeles, CA 90066
--------------------------------------------------------------
Paragraph 52
A. OPTION(S) TO EXTEND:
Lessor hereby grants to Lessee the option to extend the term of this
Lease for 1 additional 60 month period(s) commencing when the prior term expires
upon each and all of the following terms and conditions:
(i) Lessee gives to Lessor, and Lessor actually receives on a date
which is prior to the date that the option period would commence (if exercised)
by at least 4 and not more than 6 months, a written notice of the exercise of
the option(s) to extend this Lease for said additional term(s), time being of
essence. If said notification of the exercise of said option(s) is (are) not so
given and received, the option(s) shall automatically expire; said option(s) may
(if more than one) only be exercised consecutively;
(ii) The provisions of paragraph 39, including the provision relating to
default of Lessee set forth in paragraph 39.4 of this Lease are conditions of
this Option;
(iii) All of the terms and conditions of this Lease except where specifically
modified by this option shall apply;
(iv) The monthly rent for each month of the option period shall be
calculated as follows, using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
[x] I. COST OF LIVING ADJUSTMENT(S) (COL)
(a) On (Fill in COL Adjustment Date(s): September 1, 1990;
September, 2001; October 1, 2004; and October 1, 2006 the monthly rent payable
under paragraph 1.5 ("Base Rent") of the attached Lease shall be adjusted by the
change, if any, from the Base Month specified below, in the Consumer Price index
of the Bureau of Labor Statistics of the U.S. Department of Labor for (select
one): [x] CPIW (Urban Wage Earners and Clerical Workers) or [ ] CPIU (All Urban
Consumers), for (Fill in Urban Area): Los Angeles, Anaheim, Riverside, All Items
(1982-1984 = 100), herein referred to as "C.P.I."
(b) The monthly rent payable in accordance with paragraph AI(a) of
this Addendum shall be calculated as follows: the Base Rent set forth in
paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the
numerator of which shall be the C.P.I. of the calendar month 2 (two) months
prior to the month(s) specified in paragraph AI(a) above during which the
adjustment is to take effect, and the denominator of which shall be the C.P.I.
of the calendar month which is two (2) months prior to (select one): [x] the
first month of the term of this Lease as set forth in paragraph 1.3 ("Base
Month") or [ ] (Fill in Other "Base Month"): __________. The sum so calculated
shall constitute the new monthly rent hereunder, but in no event, shall any
such new monthly rent be less than the rent payable for the month immediately
preceding the date for rent adjustment.
<PAGE> 28
(c) In the event the compilation and/or publication of the C.P.I.
shall be transferred to any other governmental department or bureau or agency
or shall be discontinued, then the index most nearly the same as the C.P.I.
shall be used to make such calculation. In the event that Lessor and Lessee
cannot agree on such alternative index, then the matter shall be submitted for
decision to the American Arbitration Association in accordance with the then
rules of said association and the decision of the arbitrators shall be binding
upon the parties. The cost of said Arbitrators shall be paid equally by Lessor
and Lessee.
[x] II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV)
(a) On (Fill in MRV Adjustment Date(s): October 1, 2002 the
monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease
shall be adjusted to the "Market Rental Value" of the property as follows:
1) Four months prior to the Market Rental Value (MRV)
Adjustment Date(s) described above, Lessor and Lessee shall meet to establish
an agreed upon new MRV for the specified term. If agreement cannot be reached,
then:
Initials: /s/ TC Initials:
------------------ ------------------
------------------ ------------------
OPTION(S) TO EXTEND
Page 1 of 2
NOTICE: These forms are often modified to meet changing requirements of law
and industry needs. Always write or call to make sure you are
utilizing the most current form; American Industrial Real Estate
Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA
90071, (213) 687-8777, Fax No. (213) 687-8616.
(C) 1991 American Industrial Real Estate Association.
<PAGE> 29
i) Lessor and Lessee shall immediately appoint a
mutually acceptable appraiser or broker to establish the new MRV within the
next 30 days. Any associated costs will be split equally between the parties,
or
ii) Both Lessor and Lessee shall each immediately select
and pay the appraiser or broker of their choice to establish a MRV within the
next 30 days. If, for any reason, either one of the appraisals is not
completed within the next 30 days, as stipulated, then the appraisal that is
completed at that time shall automatically become the new MRV. If both
appraisals are completed and the two appraisals/brokers cannot agree on a
reasonable average MRV then they shall immediately select a third mutually
acceptable appraiser/broker to establish a third MRV within the next 30 days.
The average of the two appraisals closest in value shall then become the new
MRV. The costs of the third appraisal will be split equally between the
parties.
2) In any event, the new MRV shall not be less than the
rent payable for the month immediately preceding the date for rent adjustment.
(b) Upon the establishment of each New Market Rental Value as
described in paragraph AII:
1) the monthly rental sum so calculated for each term as
specified in paragraph AII(a) will become the new "Base Rent" for the purpose
of calculating any further Cost of Living Adjustments as specified in paragraph
AI(a) above and
2) the first month of each Market Rental Value term as
specified in paragraph AII(a) shall become the new "Base Month" for the purpose
of calculating any further Cost of Living Adjustments as specified in paragraph
AI(b).
III. [Deleted]
C. BROKER'S FEE:
The Real Estate Brokers specified in paragraph 1.10 of the attached
Lease shall be paid a Brokerage Fee for each adjustment specified
above in accordance with paragraph 15 of the attached Lease.
Initials: /s/ TC Initials:
------------------ ------------------
------------------ ------------------
OPTION(S) TO EXTEND
Page 2 of 2
NOTICE: These forms are often modified to meet changing requirements of law
and industry needs. Always write or call to make sure you are
utilizing the most current form; American Industrial Real Estate
Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA
90071, (213) 687-8777, Fax No. (213) 687-8616.
(C) 1991 American Industrial Real Estate Association.
<PAGE> 1
EXHIBIT 10.10
STANDARD SUBLEASE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. PARTIES. This Sublease, dated, for reference purposes only, June 8,
1995, is made by and between FOOTE, CONE & BELDING COMMUNICATIONS, INC. now
known as TRUE NORTH COMMUNICATION, a delaware corporation (herein called
"Sublessor") and SPECTRAL HOLDINGS CORPORATION, a California Corporation, dba
SPECTRATEK (herein called "Sublessee").
2. PREMISES. Sublessor hereby subleases to Sublessee and Sublessee
hereby subleases from Sublessor for the term, at the rental, and upon all of
the conditions set forth herein, that certain real property situated in the
County of Los Angeles, State of California, commonly known as 5405 JANDY PLACE,
LOS ANGELES 90066 and described as AN INDUSTRIAL BUILDING CONTAINING
APPROXIMATELY 70,440 SQUARE FEET
Said real property, including the land and all improvements thereon, is
hereinafter called the "Premises".
3. TERM.
3.1 TERM. The term of this Sublease shall be for 31 months and 21
days commencing on June 20, 1995 * see addendum 12e and ending on February 11,
1998 unless sooner terminated pursuant to any provision hereof.
3.2 DELAY IN COMMENCEMENT. Notwithstanding said commencement
date, if for any reason Sublessor cannot deliver possession of the Premises to
Sublessee on said date, Sublessor shall not be subject to any liability
therefore, nor shall such failure affect the validity of this Lease or the
obligations of Sublessee hereunder or extend the term hereof, but in such case
Sublessee shall not be obligated to pay rent until possession of the Premises
is tendered to Sublessee, provided, however, that if Sublessor shall not have
delivered possession of the Premises within sixty (60) days from said
commencement date. Sublessee may, at Sublessee's option, by notice in writing
to Sublessor within ten (10) days thereafter, cancel this Sublease in which
event the parties shall be discharged from all obligations thereunder. If
Sublessee occupies the Premises prior to said commencement date such occupancy
shall be subject to all provisions hereof such occupancy shall not advance the
termination date and Sublessee shall pay rent for such period at the initial
monthly rates set forth below.
4. RENT. Sublessee shall pay to Sublessor as rent for the Premises equal
monthly payments of $40,000.00, in advance, on the 11th day of each month of
the term hereof. Sublessee shall pay Sublessor upon the execution hereof
$67,096.77, as rent for June 20, 1995 through August 10, 1995. Rent for any
period during the term hereof which is for less than one month shall be a
prorata portion of the monthly installment. Rent shall be payable in lawful
money of the United States to Sublessor at the address stated herein or to such
other persons or at such other places as Sublessor may designate in writing.
5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon
execution hereof $100,000.00 as security for Sublessee's faithful performance
of Sublessee's obligations hereunder. If Sublessee fails to pay rent or other
charges due hereunder, or otherwise defaults with respect to any provision of
this Sublease, Sublessor may use, apply or retain all or any portion of said
deposit for the payment of any rent or other charge in default or for the
payment of any other sum to which Sublessor may become obligated by reason of
Sublessee's default, or to compensate Sublessor for any loss or damage which
Sublessor may suffer thereby. If Sublessor so uses or applies all or any
portion of said deposit, Sublessee shall within ten (10) days after written
demand therefore deposit cash with Sublessor in an amount sufficient to restore
said deposit to the full amount hereinabove stated and Sublessee's failure to
do so shall be a material breach of this Sublease. Sublessor shall not be
required to keep said deposit separate from its general accounts. If Sublessee
performs all of Sublessee's obligations hereunder, said deposit, or so much
thereof as has not theretofore been applied by Sublessor, shall be returned,
without payment of interest or other increment for its use to Sublessee (or at
Sublessor's option, to the last assignee, if any, of Sublessee's interest
hereunder) at the expiration of the term hereof, and after Sublessee has
vacated the Premises. No trust relationship is created herein between
Sublessor and Sublessee with respect to said Security Deposit.
<PAGE> 2
6. USE.
6.1 USE. The Premises shall be used and occupied only for
corporate office, warehouse, manufacturing and distribution of holograms and
other related uses. and for no other purpose.
6.2 COMPLIANCE WITH LAW.
(a) Sublessor warrants to Sublessee that the Premises, in
its existing state but without regard to the use for which Sublessee will use
the Premises, does not violate any applicable building code regulation or
ordinance at the time that this Sublease is executed in the event that it is
determined that this warranty has been violated, then it shall be the
obligation of the Sublessor after written notice from Sublessee, to promptly,
at Sublessor's sole cost and expense, rectify any such violation. In the event
that Sublessee does not give to Sublessor written notice of the violation of
this warranty within 1 year from the commencement of the term of this Sublease,
it shall be conclusively deemed that such violation did not exist and the
correction of the same shall be the obligation of the Sublessee.
(b) Except as provided in paragraph 6.2(a), Sublessee
shall, at Sublessee's expense, comply promptly with all applicable statutes,
ordinances, rules, regulations, orders, restrictions of record, and
requirements in effect during the term or any part of the term hereof
regulating the use by Sublessee of the Premises. Sublessee shall not use or
permit the use of the Premises in any manner that will tend to create waste or
a nuisance or if there shall be more than one tenant of the building containing
the Premises, which shall tend to disturb such other tenants.
6.3 CONDITION OF PREMISES. Except as provided in paragraph 6.2(a)
Sublessee hereby accepts the Premises in their as is condition existing as of
the date of the execution hereof, subject to all applicable zoning, municipal,
county and state laws, ordinances, and regulations governing and regulating the
use of the Premises, and accepts this Sublease subject thereto and to all
matters disclosed thereby and by any exhibits attached hereto. Sublessee
acknowledges that neither Sublessor nor Sublessor's agents have made any
representation or warranty as to the suitability of the Premises for the
conduct of Sublessee's business.
7. MASTER LEASE.
7.1 Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter referred to as the "Master Lease", a copy of which is attached
hereto marked Exhibit 1, dated October 6, 1992 wherein Bardon of Hollywood,
Inc., a California Corporation, dba Bardon, Inc. is the lessor, hereinafter
referred to as the "Master Lessor"
7.2 This Sublease is and shall be at all times subject and
subordinate to the Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor
and Sublessee to each other under this Sublease shall be the terms and
conditions of the Master Lease except for those provisions of the Master Lease
which are directly contradicted by this Sublease in which event the terms of
this Sublease document shall control over the Master Lease. Therefore, for the
purposes of this Sublease, wherever in the Master Lease the word "Lessor" is
used it shall be deemed to mean the Sublessor herein and wherever in the Master
Lease the word "Lessee" is used it shall be deemed to mean the Sublessee
herein.
7.4 During the term of this Sublease and for all periods
subsequent for obligations which have arisen prior to the termination of this
Sublease, Sublessee does hereby expressly assume and agree to perform and
comply with, for the benefit of Sublessor and Master Lessor, each and every
obligation of Sublessor under the Master Lease except for the following
paragraphs which are excluded therefrom: see paragraph 12
7.5 The obligations that Sublessee has assumed under paragraph 7.4
hereof are hereinafter referred to as the "Sublessee's Assumed Obligations".
The obligations that Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".
<PAGE> 3
7.6 Sublessee shall hold Sublessor free and harmless of and from
all liability, judgments, costs, damages, claims or demands, including
reasonable attorneys fees, arising out of Sublessee's failure to comply with or
perform Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the
entire term of this Sublease, subject, however, to any earlier termination of
the Master Lease without the fault of the Sublessor, and to comply with or
perform Sublessor's Remaining Obligations and to hold Sublessee free and
harmless of and from all liability, judgments, costs, damages, claims or
demands arising out of Sublessor's failure to comply with or perform
Sublessor's Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is in
full force and effect and that no default exists on the part of any party to
the Master Lease.
8. ASSIGNMENT OF SUBLEASE AND DEFAULT.
8.1 Sublessor hereby assigns and transfers to Master Lessor the
Sublessor's interest in this Sublease and all rentals and income arising
therefrom, subject however to terms of Paragraph 8.2 hereof.
8.2 Master Lessor, by executing this document, agrees that until a
default shall occur in the performance of Sublessor's Obligations under the
Master Lease, that Sublessor may receive, collect and enjoy the rents accruing
under this Sublease. However, if Sublessor shall default in the performance of
its obligations to Master Lessor then Master Lessor may, at its option, receive
and collect, directly from Sublessee, all rent owing and to be owed under this
Sublease. Master Lessor shall not, by reason of this assignment of the
Sublease nor by reason of the collection of the rents from the Sublessee, be
deemed liable to Sublessee for any failure of the Sublessor to perform and
comply with Sublessor's Remaining Obligations.
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee,
upon receipt of any written notice from the Master Lessor stating that a
default exists in the performance of Sublessor's obligations under the Master
Lease, to pay the Master Lessor the rents due and to become due under the
Sublease. Sublessor agrees that Sublessee shall have the right to rely upon
any such statement and request from Master Lessor, and that notice from or
claim from Sublessor to the contrary and Sublessor shall have no right or claim
against Sublessee for any such rents so paid by Sublessee.
8.4 No changes or modifications shall be made to this Sublease
without the consent of Master Lessor.
9. CONSENT OF MASTER LESSOR.
9.1 In the event that the Master Lease requires that Sublessor
obtain the consent of Master Lessor to any subletting by Sublessor then this
Sublease shall not be effective unless within 10 days of the date hereof.
Master Lessor signs this Sublease thereby giving its consents to this
Subletting.
9.2 In the event that the obligations of the Sublessor under the
Master Lease have been guaranteed by third parties then this Sublease, nor the
Master Lessor's consent, shall not be effective unless, within 10 days of the
date hereof, said guarantors sign this Sublease thereby giving guarantors
consent to this Sublease and the terms thereof.
9.3 In the event that Master Lessor does give such consent then:
(a) Such consent will not release Sublessor of its
obligations or alter the primary liability of Sublessor to pay the rent and
perform and comply with all of the obligations of Sublessor to be performed
under the Master Lease.
(b) The acceptance of rent by Master Lessor from
Sublessee or any one else liable under the Master Lease shall not be deemed a
waiver by Master Lessor of any provisions of the Master Lease.
<PAGE> 4
(c) The consent to this Sublease shall not constitute a
consent to any subsequent subletting or assignment.
(d) In the event of any default of Sublessor under the
Master Lease, Master Lessor may proceed directly against Sublessor, any
guarantors or any one else liable under the Master Lease or this Sublease
without first exhausting Master Lessor's remedies against any other person or
entity liable thereon to Master Lessor.
(e) Master Lessor may consent to subsequent sublettings
and assignments of the Mater Lease or this Sublease or any amendments or
modifications thereto without notifying Sublessor nor any one else liable under
the Master Lease and without obtaining their consent and such action shall not
relieve such persons from liability.
(f) In the event that Sublessor shall default in its
obligations under the Master Lease, then Master Lessor, at its option and
without being obligated to do so, may require Sublessee to attorn to Master
Lessor in which event Master Lessor shall undertake the obligations of
Sublessor under this Sublease from the time of the exercise of said option to
termination of this Sublease but Master Lessor shall not be liable for any
prepaid rents nor any security deposit paid by Sublessee, nor shall Master
Lessor be liable for any other defaults of the Sublessor under the Sublease.
9.4 The signatures of the Master Lessor and any Guarantors of
Sublessor at the end of this document shall constitute their consent to the
terms of this Sublease.
9.5 Master Lessor acknowledges that, to the best of Master
Lessor's knowledge, no default presently exists under the Master Lease of
obligations to be performed by Sublessor and that the Master Lease is in full
force and effect.
9.6 In the event that Sublessor defaults under its obligations to
be performed under the Master Lease by Sublessor, Master Lessor agrees to
deliver to Sublessee a copy of any such notice of default. Sublessee shall
have the right to cure any default of Sublessor described in any notice of
default within ten days after service of such notice of default on Sublessee.
If such default is cured by Sublessee then Sublessee shall have the right of
reimbursement and offset from and against Sublessor
10. BROKERS FEE.
10.1 Upon execution hereof by all parties, Sublessor shall pay to
ZAMEL & ASSOCIATES, pursuant to 5/9/95 agreement. DELETED
10.2 DELETED.
10.3 DELETED.
10.4 DELETED.
10.5 DELETED.
11. ATTORNEY'S FEES. If any party or the Broker named herein brings an
action to enforce the terms hereof or to declare rights hereunder, the
prevailing party in any such action, on trial and appeal, shall be entitled to
his reasonable attorney's fees to be paid by the losing party as fixed by the
Court. The provision of this paragraph shall inure to the benefit of the
Broker named herein who seeks to enforce a right hereunder.
12. ADDITIONAL PROVISIONS. [If there are no additional provisions draw a
line from this point to the next printed word after the space left here. If
there are additional provisions place the same here.]
see addendum attached
<PAGE> 5
If this Sublease has been filled in it has been prepared for
submission to your attorney for his approval. No representation or
recommendation is made by the real estate broker or its agents or
employees as to the legal sufficiency, legal effect, or tax
consequences of this Sublease or the transaction relating thereto.
<TABLE>
<S> <C>
Executed at San Francisco, CA Foote, Cone & Belding Communications, Inc.
--------------------------------------- ---------------------------------------------------
now known as True North Communications, Inc.
---------------------------------------------------
on June 20, 1995
------------------------------------------------
By /s/ Signature unreadable
------------------------------------------------
address 1255 Battery Street
-------------------------------------------
By VP Finance; FCB/WEST
------------------------------------------------
San Francisco
- ---------------------------------------------------
"Sublessor" (Corporate seal)
Executed at Los Angeles, CA Spectral Holdings Corporation
---------------------------------------- ---------------------------------------------------
on June 13, 1995 dba Spectratek
------------------------------------------------- ---------------------------------------------------
By /s/ Terry Conway
------------------------------------------------
address 1508 Cotner Avenue
-------------------------------------------
By President
------------------------------------------------
Los Angeles CA 90025
- ---------------------------------------------------
"Sublessee" (Corporate seal)
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
Executed at
--------------------------------------- ---------------------------------------------------
on By
------------------------------------------------ ------------------------------------------------
address By
------------------------------------------- ------------------------------------------------
"Master Lessor" (Corporate seal)
- ---------------------------------------------------
Executed at
--------------------------------------- ---------------------------------------------------
on By
------------------------------------------------ ------------------------------------------------
address By
------------------------------------------- ------------------------------------------------
"Guarantors" (Corporate seal)
- ---------------------------------------------------
</TABLE>
<PAGE> 7
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET
(Do not use this form for Multi-Tenant Property)
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("Lease") dated for reference purposes
only, October 6, 1992 is made by and between Bardon of Hollywood, Inc., a
California corporation, dba Bardon, Inc. ("Lessor") and Krupp/Taylor U.S.A., a
Delaware corporation ("Lessee"), (collectively the "Parties," or individually
a "Party").
1.2 PREMISES: That certain real property, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
and commonly known by the street address of 5405 Jandy Place located in the
County of Los Angeles, State of California 90066 and generally described as
(describe briefly the nature of the property) an industrial building containing
approximately 70,440 square feet and more particularly described on Exhibit "A"
attached hereto and incorporated herein by reference ("Premises"), (See
Paragraph 2 for further provisions.)
1.3 TERM: five (5) years and four (4) months ("Original Term")
commencing October 12, 1992 ("Commencement Date") and ending February 11, 1998
("Expiration Date"), (See Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: Not Applicable (See Paragraphs 3.2 and 3.3 for
further provisions.)
1.5 BASE RENT: $35,220 per month ("Base Rent"), payable on the
first (1st) day of each month commencing October 12, 1992 and shall be
increased on the first day of the 33rd month of the Term hereof in accordance
with the provisions of Section 4.2 below. See Addendum (See Paragraph 4 for
further provisions.) [ ]x If this box is checked, there are provisions in this
Lease for the Base Rent to be adjusted.
1.6 BASE RENT PAID UPON EXECUTIONS: $35,220 as Base Rent for the
fourth (4th) month of the Original Term.
1.7 SECURITY DEPOSIT: $70,440 ("Security Deposit"). (See Paragraph 5 for
further provisions.)
1.8 PERMITTED USE: Printing, storage and distribution of direct
and mass-mailing materials and related office and other uses (See Paragraph 6
for further provisions.)
1.9 Insuring Party: Lessor is the "Insuring Party" unless
otherwise stated herein. (See Paragraph 8 for further provisions.)
1.10 REAL ESTATE BROKERS: The following real estate brokers
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes): The
Klabin Company (Attention: Stuart Klabin, Doug Marshall) represents
[x] Lessor exclusively ("Lessor's Broker"): [ ] both Lessor and Lessee, and
Cushman & Wakefield of California, Inc. (Attention: Jay Borzi) represents
[x] Lessee exclusively ("Lessee's Broker"): [ ] both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
1.11 GUARANTOR. The obligations of the Lessee under this Lease are
to be guaranteed by Foote, Cone and Belding Communications, a Delaware
corporation ("Guarantor"). (See Paragraph 37 for further provisions.)
1.12 ADDENDA. Attached here is an Addendum or Addenda consisting
of Paragraphs 1 through 11 and Exhibits "A" and the Guaranty attached hereto
all of which constitute a part of this Lease.
Page 1
<PAGE> 8
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises for the term, at the rental, and upon all of
the terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable
See Addendum
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, fire sprinkler system, lighting, air conditioning, hearing,
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 one
hundred eighty (180) 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 to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility installations (as defined in Paragraph 7.3(a)) made or
to be made by Lessee. If the Premises do not comply with said warranty, 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 the same at Lessor's expense if Lessee does not
give Lessor written notice of a non-compliance with this warranty within
eighteen (18) months following the Commencement Date, correction of that
non-compliance shall be the obligation of Lessee at Lessee's sole cost and
expense. See Addendum
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that
it has ben advised by the Brokers 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, compliance with Applicable
Law, as defined in Paragraph 6.3) 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 and except as otherwise
expressly provided herein assumes all responsibility therefor as the same
relate to Lessee's occupancy of the Premises and/or the term 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 the said matters other
than as set forth in this Lease.
2.5 DELETED.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original
Term of this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be applied for the period or such early possession. All other terms of this
Lease, however, (including but not limited to the obligations to pay Real
Property Taxes and insurance premiums and to maintain the Premises) shall be in
effect during such period. Any such early possession shall not affect no
advance the Expiration Date of the Original Term.
Initials /s/
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/s/
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3.3 DELAY IN POSSESSION. If for any reasons Lessor cannot deliver
possession of the Premises to Lessee as agreed herein 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 at
any time prior to the date Lessor delivers possession of the Premises to Lessee
in the condition required hereunder, cancel this Lease, in which event the
Parties shall be discharged from all obligations hereunder; provided, however,
that if such written notice by Lessee is not received by Lessor within said ten
(10) day period, Lessee's right to cancel this Lease shall terminate and be of
no further force or effect. Except as may be otherwise provided, and
regardless of when the 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 what Lessee would otherwise have
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 cause payment of Base Rent and other
rent or charges, as the same may be adjusted from time to time, to be received
by Lessor in lawful money of the United States, without offset or deduction
except as expressly provided herein 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 (1) full calendar
month shall be prorated based upon the actual number of days of the calendar
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 See Addendum
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon 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 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
reasons thereof if Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefor
deposit moneys 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 Premiss, return to Lessee (or, at Lessor' 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 moneys to be paid by Lessee under this Lease See
Addendum
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the
purposes set forth in Paragraph 1.8, or any other use which is comparable
hereto, and for no other purpose. Lessee shall not use or permit the use of
the Premises in a manner that creates waste or a nuisance, or that disturbs
owners and/or occupants of, or cause damage to, neighboring premises or
properties.
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
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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
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, by-products or fractions thereof. Lessee shall not engage in any
activity in, on 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 Law (as defined in 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. Reportable use shall also include
Leasee's being responsible for the presence in, or about the Premises of a
Hazardous Substance with respect to which any Applicable Law requires that a
notice be given to persons entering or occupying the Premises or neighboring
properties. Notwithstanding the foregoing, Leasee may without Lessor's prior
consent, but in compliance with all Applicable Law, use any ordinary and
customary materials reasonably required to be used by Lessee in the normal
course of Lessee's business permitted on the Premises, 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 the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances (other than an increase in the Security Deposit) 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 therefrom or therefor, including, but not limited to, the
installation (and removal on or before Lease expiration or earlier termination)
of reasonably necessary protective modifications to the Premises (such as
concrete encasements)
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
case to believe, that Hazardous Substance, or a condition, giving or resulting
from same, has come to be located in, on, under or about the Premises, other
than as previously consented to by Lessor, Lessee shall immediately give
written notice of such fact to Lessor. Lessee shall also immediately give
Lessor 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, or persons entering
or occupying the Premises, concerning the presence, spill, release, discharge
of, or exposure to, any Hazardous Substance or contamination in, on, or about
the Premises, including but not limited to all such documents as may be
involved in any Reportable Uses involving the Premises.
(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 lost of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substances or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include,
but not be limited to the effects of any contamination or injury to person,
property or the environmental created or suffered by Lessee, and the cost of
investigation (including consultant's and attorney's 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 or storage tanks, unless
specifically so agreed by Lessor in writing at the time of such agreement
(d) See Addendum
6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in
this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently
and in a timely manner, comply with all "Applicable Law," which term is used in
this Lease to include 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 to any
manner to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill or release
by Lessee or any of its agents,
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employees, contractors, sublessees, assignees or invitees of any hazardous
Substance or storage tank), now in effect or which may hereafter come into
effect, and whether or not reflecting a change in policy from any previously
existing policy. Lessee shall, within fifteen (15) 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 Law specified by Lessor, and shall upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or
involving failure by Lessee or the Premises to comply with any Applicable Law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as
defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any
time in the case of an emergency, and otherwise at reasonable times and upon
reasonable prior notice for the purpose of inspecting the condition of the
Premises and for verifying compliance by Lessee with this Lease and all
Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or
consultants in connection therewith and to advise Lessor with respect to
Lessee's activities, including but not limited to the installation, operation,
use, monitoring, maintenance, or removal of a Hazardous Substance or storage
tank on or from the Premises. The costs and expenses of any such inspections
shall be paid by the party request same, unless a Default or Breach of this
Lease, violation of Applicable Law, or a contamination, caused or materially
contributed to by Lessee is found to exist or unless the inspection is
requested or ordered by a governmental authority as the result of any such
existing violation or contamination. In any 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. Lessor and Lessor's Lender(s) shall endeavor
to perform any such entry in a manner which minimizes the interference with or
disruption of Lessee's operations.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's
warranty as to condition), 2.3 and Section 3 of the Addendum (Lessor's warranty
as to compliance with covenants, etc), 7.2 and Section 7 of the Addendum
(Lessor's obligations to repair), 9 (damage and 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 occur
*required by Applicable Law Initials /s/
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as a result of Lessee's use, any prior use, the elements or the age of the such
portion of the Premises including, without limiting the generality of the
foregoing, all equipment or facilities serving the Premises, such as plumbing,
heating, air conditioning, ventilating, electrical, lighting, facilities,
boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and
hose or other automatic fire extinguishing system including fire alarm and/or
smoke detection systems and equipment, fire hydrants, fixtures, walls
(interior), ceilings, floors, windows, doors, plate glass, skylights,
landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks
and parkways located in, on, about, or adjacent to the Premises. Lessee shall
not cause or permit any Hazardous Substance to be spilled or released in, on,
under or about the Premises (including through the plumbing or sanitary sewer
system) and shall promptly, at Lessee's expense, take all investigatory and/or
remedial action reasonably recommended, whether or not formally ordered or
required, for the cleanup of any contamination of, and for the maintenance,
security and/or monitoring of, the Premises, the elements surrounding same, or
neighboring properties, that was caused or materially contributed to by Lessee,
or pertaining to or involving any Hazardous Substance and/or storage tank
brought onto the Premises by or for Lessee or under its control. 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) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contacts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises (i) heating,
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air conditioning and ventilation equipment, (ii) boiler, fired or unfired
pressure vessels, (iii) fire sprinkler and/or sidepipe and hose or other
automatic fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation systems, (v) rock clearing and drain
maintenance and (vi) asphalt and parking lot maintenance.
7.2 LESSOR'S OBLIGATIONS. Except for the warranties and
agreements of Lessor contained in Paragraph 2.2 (relating to condition of the
Premises), 2.2 and Section 3 of the Addendum (relating to compliance with
covenants, restrictions and building code), 9 (relating to destruction of the
Premises) and Section 7 of the Addendum and 14 (relating to condemnation of the
Premises), it is intended by the Parties hereto that Lessor have no obligation,
in any manner whatsoever, to repair and maintain the Premises, the improvements
located thereon, or the equipment therein, all of which obligations are
intended to be that of the Lessee under Paragraph 7.1 hereof* it is the
intention of the Parties that the terms of this Lease govern the respective
obligations of the Parties to maintenance and repair of the Premises. Lessee
and Lessor expressly waive the benefit of any statute now or hereafter in
effect to the extent it is inconsistent with the terms of this Lease with
respect to, or which allows Lessee the right to make repairs at the expense of
Lessor or to terminate this Lease by reason of any needed repairs.
*See Addendum
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "Utility
Installations" is used in this Lease to refer to all carpeting, window
coverings, air lines, power panels, electrical distribution, security, fire
protection systems, communication 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 that can be removed without doing material damage to the
Premises. The term "Alterations" shall mean any modification of the
improvements of the Premises from that which are provided by Lessor under the
terms of this Lease, other than Utility Installations or Trade Fixtures,
whether by addition or deletion, "Lessee Owned Alterations and/or Utility
Installations" are defined as Alterations and/or Utility Installations made by
Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee
shall not make any Alterations or Utility Installations in, on, under or about
the Premises without Lessor's prior written consent which consent shall not be
unreasonably withheld, conditioned or delayed. Lessee may, however without
Lessor's consent make non-structural Utility Installations to the interior of
the Premises (excluding the roof), as long as they are not visible from the
outside, do not involve puncturing, relocating or removing the roof or any
existing walls, and the cumulative cost thereof during the term of this Lease
as extended does not exceed $25,000.
(b) CONSENT. Any Alterations or Utility Installations
that Lessee shall desire to make and which require the consent of the Lessor
shall be presented to Lessor in written form with proposed 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 in
compliance with all Applicable Law. Lessee shall promptly upon completion
thereof furnish Lessor with as-built plans and specifications therefor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all
claims for labor or materials furnished or alleged to have been furnished to or
for Lessee at or for use on the Premises, which claims are or may be secured by
any mechanics' or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior to
the commencement of any work in, 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 tendered 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
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addition Lessor may require Lessee to pay Lessor's attorney's 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 or become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Additions 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 and be surrendered by Lessee with
the Premises.
(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 their installation may have been consented to by Lessor.
Lessor may require the removal at any time of all or any part of any Lessee
Owned Alterations or Utility installations made without the required consent 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, with all of the improvements, parts and surfaces thereof
clean and free of debris and in good operating order, condition and state of
repair, ordinary wear and tear and damage by casualty 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 in
writing by Lessor, the Premises, as surrendered that include the 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 Alterations and/or 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 at levels in violation of applicable laws all as may
then be required by Applicable Law. 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.
7.5 See Addendum.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or
Lessee is the Insuring Party, Lessee shall pay all insurance required under
this Paragraph 8 except to the extent of the cost attributable to liability
insurance carried by Lessor in excess of $2,000,000 per occurrence. Premiums
for policy periods commencing prior to or extending beyond the Lease term shall
be prorated to correspond to the Lease term. Payment shall be made by Lessee
to Lessor within thirty (30) days following receipt of an invoice for any
amount due.
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 and Lessor (as an additional insured) 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
$2,000,000 per occurrence with an "Additional Insured Managers or Lessors of
Premises" Endorsement and contain the "Amendment of the Pollution Exclusion"
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
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to and not contributory with any similar insurance carried by Lessor, whose
insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. In the event Lessor is the
Insuring Party, 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. The Insuring Party shall
obtain and keep in force during the term of this Lease a policy or policies in
the name of Lessor, with loan payable to Lessor and to the holders of any
mortgages, deeds of trust or ground leases on the Premises ("Lender(s)"),
insuring loss or damage to the Premises. The amount of such insurance shall be
equal to the full replacement cost of the Premises, as the same shall exist
from time to time or the amount required by Lenders, 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. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations shall be insured by Lessee
under Paragraph 8.4 rather than by Lessor. If the coverage is available and
commercially appropriate, such policy or policies shall insure against all
risks of direct physical loss or damage (except the perils of flood unless
required by a Lender), 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 Premises 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 cause of loss and earthquake coverage. Said policy or
policies shall also contain an agreed valuation provision in lieu of any
coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a
factor of not less than the adjusted U.S. Department of Labor Consumer Price
Index for All Urban Consumers for the city nearest to where the Premises are
located. If such insurance coverage has a deductible clause, the deductible
amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for
such deductible amount in the event of an insured Loss, as defined in Paragraph
9.1(c). See Addendum.
(b) RENTAL VALUE. The Insuring Party shall, in addition,
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 Lender(s), insuring the
loss of the full rental and other charges payable by Lessee to Lessor under the
Lease for one (1) year (including all real estate taxes, insurance costs, and
any scheduled rental increases). Said insurance shall provide that in the
event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the completion
of repairs or replacement of the Premises, to provide for one full year's loss
of rental revenues from the date of any such loss. Said insurance shall
contain an agreed valuation provision in lieu of any coinsurance clause, and
the amount of coverage shall be adjusted annually to reflect the projected
rental income property taxes, insurance premium costs and other expenses, if
any, otherwise payable by Lessee for the next twelve (12) month period. Lessee
shall be liable for any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a
larger building, or if the Premises are part of a group of buildings owned by
Lessor which are adjacent to the Premises, the Lessee shall pay for any
increase in the premiums for the property insurance of such building or
buildings if said increase is caused by Lessee's acts, omissions, use or
occupancy of the Premises.
(d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring
Party, the 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. If Lessee is the Insuring Party, the
policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned
Alterations and Utility installations.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its costs 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, Lessee Owned Alterations and
Utility Installations in, on or about the Premises similar in coverage to that
carried by the Insuring Party under Paragraph 8.3. Such insurance shall be
full replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. Lessee shall be the
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Insuring Party with respect to the insurance required by this Paragraph 8.4 and
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
having a lien on the Premises, 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.
If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor
certificates evidencing the existence and amounts of such insurance with the
insureds and loss payable clauses as required by this Lease. No such policy
shall be cancellable 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. If the Insuring Party shall fail to procure
and maintain the insurance required to be carried by the Insuring Party under
this Paragraph 8, the other Party may, but shall not be required to procure and
maintain the same, but at Lessee's expense.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("Waiving Party") 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 of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured
against under Paragraph 8 (text unreadable) in accordance with Paragraph 8.3(a)
above). 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.
8.7 INDEMNITY. Except for Lessor's or its employees', agents' or
contractors' negligence, willful misconduct and/or breach of express warranties
or any provision of this Lease, 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, permits, attorney's
and consultant's fees, expenses and/or liabilities arising out of, involving,
or in dealing 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, and whether well founded or not 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. See Addendum.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Subject to Section 9 of
the Addendum 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 the said
injury or damage results from conditions arising upon the Premises or upon
other portions of the building of which the Premises are a part or from other
sources or places, 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 tenant of
Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor
shall under no circumstances be liable for injury to Lessee's business or for
any loss of income or profit therefrom.
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9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or
destruction to the improvements on the Premises, other than Lessee Owned
Alterations and Utility installations, the repair cost of which damage or
destruction is less than 50% of the then Replacement Cost of the Premises
immediately prior to such damage or destruction, excluding from such
calculation the value of the land and Lessee Owned Alterations and Utility
Installations or damage the**
(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 50% or more of
the then Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations or damage the repair of***
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, 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, to the extent Lessor makes a Hazardous Substance as defined
in Paragraph 6.2(a), in, on, or under the Premises.
9.2 PARTIAL DAMAGE-INSURED LOSS. If a Premises Partial Damage
that is an Insured Loss occurs then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and
Utility Installations unless Lessor, as the insuring party, has elected to
carry insurance on the same and provided such loan is not also covered by
Lessee's insurance as soon as reasonably possible and this Lease shall continue
in full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less to the extent Lessor makes insurance proceeds
available to Lessee for that purpose. Notwithstanding the foregoing, if the
required insurance was not in force or the insurance proceeds are not
sufficient to effect such repair, the Insuring Party shall promptly contribute
the shortage in proceeds (except as to the deductible which is Lessee's
responsibility) as and when required to complete said repairs. In the event,
however, the shortage in proceeds was due to the fact that, by reason of the
unique nature of the improvements, full replacement cost insurance coverage was
not commercially reasonable and available, Lessor shall have no obligation to
pay for the shortage in insurance proceeds or to fully restore the unique
aspects of the Premises unless Lessee provides Lessor with the funds to cover
same or adequate assurance thereof, within ten (10) days following receipt of
written notice of such shortage and request therefor, if Lessor receives said
funds or adequate assurance thereof within said ten (10) day period, the party
responsible for making the repairs shall complete them as soon as reasonably
possible and this Lease shall remain in full force and effect. If 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 in such case Lessor does not so elect, 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.
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*and earthquake coverage.
**repair of which can be completed in less than 180 days from the date of
casualty.
***which cannot be completed in less than 180 days from the date of casualty
(unless the same does not materially interfere with (text unreadable).
9.3 PARTIAL DAMAGE -- UNINSURED LOSS. If a Premises Partial
Damage that is not an Insured Loss occurs, unless caused by a negligent or
willful act of Lessee (in which event Lessee shall make the repairs at Lessee's
expense and this Lease shall continue in full force and effect, but subject to
Lessor's rights under Paragraph 13), 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 giving 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 thirty (30) 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 Lessee's
said commitment. In such event this Lease shall continue in full force and
effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible and 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 a Premises Total Destruction occurs (including any destruction
required by any authorized public authority), this Lease shall terminate as of
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 8.6.
9.5 DAMAGE NEAR END OF TERM. See Addendum
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraph 9.2
(Partial Damage--Insured) or Paragraph 9.3 (Partial Damage - Uninsured Loss),
whether or not Lessor or Lessee repairs or restores the Premises, the Base
Rent, Real Property Taxes, insurance premiums, and other charges, if any,
payable by Lessee hereunder for the period during which such damage, its repair
or the restoration continues (not to exceed the period for which rental value
insurance is required under Paragraph 8.3(b)), shall be abated in proportion to
the degree to which Lessee's use of the Premises is impaired. Except for
abatement of Base Rent, Real Property Taxes, insurance premiums, 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 repair or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, 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 receipt of such
notice, this Lease shall continue in full force and effect. "COMMENCE" as used
in this Paragraph shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs.
9.7 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
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by Applicable Law and this Lease shall continue in full force and effect, but
subject to Lessor's rights under 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 one hundred eighty (180) 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
giving 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 investigation and remediation of such
Hazardous Substance Condition totally at Lessee's expense and without
reimbursement from Lessor except to the extent of 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 Lessee's said commitment.
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 and the required funds are available. If Lessee does not give such
notice and provide the required funds or assurance thereof within the times
specified above, this Lease shall terminate as of the date specified in
Lessor's notice of termination. If a Hazardous Substance Condition occurs for
which Lessee is not legally responsible, there shall be abatement of Lessee's
obligations under this Lease to the same extent as provided in Paragraph 9.6(a)
for a period of not to exceed twelve (12) months.
9.8 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this
Lease pursuant to this Paragraph 9, an equitable adjustment shall be made
concerning advance Base Rent and any other advance payments made by Lessee to
Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's
Security Deposit as has not been, or is not then required to be, used by Lessor
under the terms of this Lease.
9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of
this Lease shall govern the effect of any damage to or destruction of the
Premises with respect to the termination of this Lease and hereby waive the
provisions of any present or future statute to the extent inconsistent
herewith.
10. REAL PROPERTY TAXES.
10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property
Taxes, as defined in Paragraph 10.2, applicable to the Premises during the
terms of this Lease. Subject to Paragraph 10.1(b), all such payments shall be
made at least ten (10) days prior to the delinquency date of the applicable
installment. Lessee shall promptly furnish Lessor with satisfactory evidence
that such taxes have been paid. If any such taxes to be paid by Lessee shall
cover any period of time prior to or after the expiration or earlier
termination of the term hereof, Lessee's share of such taxes shall be equitably
prorated to cover only the period of time within the tax fiscal year this Lease
is in effect, and Lessor shall reimburse Leasee for any overpayment after such
proration. If Lessee shall fail to pay any Real Property Taxes required by
this Lease to be paid by Lessee, Lessor shall have the right to pay the same,
and Lessee shall reimburse Lessor therefor upon demand.
(b) ADVANCE PAYMENT. In order to insure payment when due
and before delinquency of any or all Real Property Taxes, Lessor reserves the
right, at Lessor's option, if Lessee has been delinquent in the payment of Real
Property Taxed at any time during the Lease Term, to estimate the current Real
Property Taxes applicable to the Premises, and to require such current year's
Real Property Taxes to be paid in advance to Lessor by Lessee, either: (i) in
a lump sum amount equal to the installment due, at least twenty (20) days prior
to the applicable delinquency date, or (ii) monthly in advance with the payment
of the Base Rent. If Lessor elects to require payment monthly in advance, the
monthly payment shall be that equal monthly amount which, over the number of
months remaining before the month in which the applicable tax installment would
become delinquent (and without interest thereon), would provide a fund large
enough to fully discharge before delinquency the estimated installment of taxes
to be paid. When the actual amount of the applicable tax bill is known, the
amount of such equal monthly advance payment shall be adjusted as required to
provide the fund needed to pay the applicable taxes before delinquency. If the
amounts paid to Lessor by Lessee under the provisions of this Paragraph are
insufficient to discharge the obligations of Lessee to pay such Real Property
Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand,
such additional sums as are necessary to pay such obligations. All moneys paid
to Lessor under this Paragraph may be intermingled with other moneys of Lessor
and shall not bear interest. In
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the event of a Breach by Lessee in the performance of the obligations of Lessee
under this Lease, then any balance of funds paid to Lessor under the provisions
of this Paragraph may, subject to proration as provided in Paragraph 10.1(a),
at the option of Lessor, be treated as an additional Security Deposit under
Paragraph 5.
10.2 DEFINITION OF "REAL PROPERTY TAXES." 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 Premises by any authority
having the direct or indirect power to tax, including any city, state or
federal government, or any school, agricultural, sanitary, fire, street,
drainage or other improvement district thereof, levied against any legal or
equitable interest of Lessor in the Premises or in the real property of which
the Premises are a part, 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 changes in applicable law taking effect,
during the term of this Lease. See Addendum
10.3 JOINT ASSESSMENT. If the Premises are not separately
assessed, Lessee's liability shall be an equitable proportion of the Real
Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in
good faith, shall be conclusive.
Initials /s/
------------------
/s/
------------------
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to
delinquency all taxes assessed against and levied upon Lessee Owned
Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and
all personal property of Lessee contained in the Premises. When possible,
Lessee shall cause its Trade Fixtures, furnishings, equipment and all personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said personal property shall be assessed with Lessor's real
property, Lessee shall pay such taxes to the taxing authority prior to
delinquency (of if already paid, to Lessor directly within ten (10) days after
receipt of a written statement setting forth the taxes applicable to Lessee's
property.)
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIREMENT.
(a) Lessee shall not voluntarily or by operation of law
assign, transfer, mortgage or otherwise transfer or encumber (collectively,
"ASSIGNMENT") 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
fifty (50) percent 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 exists prior to said
transaction or transactions constituting such reduction, shall be considered an
assignment of this Lease by Lessee to which Lessor may reasonably withhold its
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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(c).
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, in
accordance with the terms of such assignment or subletting (ii) release Lessee
of any obligations hereunder, or (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 or 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
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 on the Lease or sublease and without
obtaining their consent, and such action shall not relieve such persons from
liability under this Lease or sublease.
(d) In the event of any Default or Breach of Lessee's
obligations under this Lease, Lessor may proceed directly against Lessee, any
Guarantors or any one else responsible for the performance of the Lessee's
obligations under this Lease, including the sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor or Lessee.
(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, (which use and/or modifications shall be reasonably considered by Lessor).
Lessee agrees to provide Lessor with such other or additional information
and/or documentation as may be reasonably requested by Lessor with such other
or additional information and/or documentation as may be reasonably requested
by Lessor, and shall pay lessor's reasonable*
(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.
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
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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 rents accruing under such sublease.
Lessor shall not, by reason of this 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 said 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 except to the
extent received by Lessor or for any other prior Defaults or Breaches of such
sublessor under such sublease.
(d) No sublessee shall further assign or sublet all or
any part of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default
or Breach by Lessee to the sublessee, who shall have the right to cure the
Default of Lessee within the grace period, if any, specified in such notice.
The sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
See Addendum
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" is
defined as a failure by the Lessee to observe, comply with or perform any of
the terms, covenants, conditions or rules applicable to Lessee under this
Lease. A "BREACH" 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 coupled with a failure to pay
rent when due.
(b) Except as expressly otherwise provided in this Lease,
the failure by Lessee to make any payment of Base Rent or any other monetary
payment required to be made by Lessee hereunder, whether to Lessor or to a
third party, as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
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 ten
(10) days following written notice thereof by or on behalf of Lessor to Lessee.
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(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
law 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(b), (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 (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 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 arrangement or assignment for the benefit
of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C 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 sixty (60) 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 sixty (60) days; provided, however,
in the event that any provision of this subparagraph (e) is contrary to any
applicable law, such provision shall be of no force or effect, and not affect
the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement
given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder
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 assurance or security, which, when
coupled with the then existing resources of Lessee, equals or exceeds the
combined financial resources of Lessee and the guarantors that existed at the
time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease (after expiration of any applicable cure
period), 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 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 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
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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 the leasing commission paid by Lessor
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 prior sentence shall be
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent. 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. 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
therein 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
subparagraphs 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
subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period
under subparagraphs 13.1(b), (c) or (d) and 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 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 abandonment and recover the rent as it becomes due,
provided Lessee has the right to sublet or assign, subject only to reasonable
limitations. See Paragraphs 12 and 36 for the limitations on assignment and
subletting which limitations Lessee and Lessor agree 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 the 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 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 See Addendum.
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 trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due form
Lessee shall not be received by Lessor or Lessor's designee within five (5)
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 three percent (3%)
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.
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
13.6, a reasonable time shall be thirty (30) days after receipt by Lessor, and
by the holders of any ground lease, mortgage or deed of trust covering the
Premises whose name and address shall have been furnished Lessee
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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 required for its performance, the 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 a portion of the Premises, or
the land area not occupied by any building, is taken by condemnation, which
materially impairs Lessee's ability to conduct its operations from the Premises
Lessee may, at Lessee's option, to be exercised in writing within thirty (30)
days after Lessor shall have given Lessee written notice of such taking (or in
the absence of such notice, within thirty (30) days after the condemning
authority shall
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have taken possession) terminate this Lease as to 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 accordance with the impairment in Lessee's ability to conduct its
operations from 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 in value of the leasehold or
for 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 the legal and
other expenses incurred by Lessor in the condemnation matter, repair any damage
to the Premises caused by such condemnation, except to the extent that Lessee
has been reimbursed therefor by the condemning authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. BROKER'S FEE.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes
of this Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay
to said Brokers 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 Brokers.
15.3 Deleted.
15.4 Deleted.
15.5 Lessee and Lessor each represent and warrant to the other that
it has had no dealings with any person, firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) 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 Brokers 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 form and against liability for compensation of charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the Indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
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16. TENANCY STATEMENT.
16.1 Each Party (as "RESPONDING PARTY") shall within twenty (20)
days after written notice from the other Party (the "REQUESTING PARTY")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in form similar to the then most current "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 If Lessor desires to finance, refinance, or sell the Premises,
any part thereof, or the building of which the Premises are a part, Lessee and
all Guarantors of Lessee's performance hereunder 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, or,
if this is a sublease, of the lessee's interest in the prior lease. In the
event of a transfer of Lessor's title or interest in the Premises or 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, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject
to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinafter
defined. See Addendum.
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 thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the
performance of all obligations to be performed or observed by the Parties under
this Lease.
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 understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that
it has made, and is relying solely upon, its own investigation as to the
nature, quality, character and financial responsibility of the other Party to
this Lease and as to the nature, quality and character of the Premises.
Brokers have no responsibility with respect thereto or with respect to any
default or breach hereof by either Party.
23. NOTICES.
23.1 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 Mail, with postage prepaid, or by facsimile transmission, and
shall be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this
Lease shall be that Party's address for delivery or mailing of 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 courtesy copy of all notices required or
permitted to be given to either Party hereunder shall be concurrently
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transmitted to such party or parties at such addresses as such Party may from
time to time hereafter designate by written notice to the other Party.
23.2 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 confirmation of receipt of
the transmission thereof, provided a copy is also delivered via delivery or
mail. If notice is received on a Sunday or legal holiday, it shall be deemed
received on the next business day.
24. WAIVERS. No waiver by either Party of the Default or Breach of any
term, covenant or condition hereof by the other, shall be deemed a waiver of
any other term, covenant or condition hereof, or of any subsequent Default or
Breach by the other of the same or of any other term, covenant or condition
hereof, Lessor's consent to, or approval of, any act shall not be deemed to
render unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. 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 preceding Default or Breach by Lessee of any provision hereof, other than
the failure of Lessee to pay the particular rent so accepted. 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. Deleted.
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.
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.
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28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed
or performed by Lessee are both covenants and conditions.
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. Subject to the nondisturbance provisions of
Paragraph 30.3 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 give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the
cure of said default before invoking any remedies Lessee may have by reasons
thereof. If any Lender shall elect to have this Lease and/or any Option
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granted hereby superior to the lien of its Security Device and shall give
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 reasons of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not:
(i) be liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership, (ii) be subject to any
offsets or defenses which Lessee might have against any prior lessor, or (iii)
be bound by prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered
into by Lessor after the execution of this Lease, Lessee's subordination of
this Lease shall be subject to receiving assurance (a "NON-DISTURBANCE
AGREEMENT") in a commercially reasonable form from the Lender that Lessee's
possession and this Lease, including any options to extend the term hereof,
will not be disturbed so long as Lessee is not in Breach hereof and attorns to
the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with
a sale, financing or refinancing of the Premises, Lessee and Lessor shall
execute such further writings as may be reasonably required to separately
document any such subordination or non-subordination, attornment and/or
non-disturbance agreement as is provided for herein.
31. ATTORNEY'S 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) or Broker in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorney's fees.
Such fees may be awarded in the same suit or recovered in a separate suit,
whether or not such action or proceeding is pursued to decision or judgment.
The term, "PREVAILING PARTY" shall include, without limitation, a Party or
Broker who substantially obtains or defeats the relief sought, as the case may
be, whether by compromise, settlement, judgment, or the abandonment by the
other Party or Broker of its claim or defense. They attorney's fee award shall
not be computed in accordance with any court fee schedule, but shall be such as
to fully reimburse all attorney's fees reasonably incurred. Lessor shall be
entitled to attorney's fees, costs and expenses incurred in the preparation and
service of notices of Default and consultations in connection therewith,
whether or not a legal action is subsequently commenced in connection with such
Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's
agents shall have the right to enter the Premises at any time, in the case of
an emergency, and otherwise at reasonable times for the purpose of showing the
same to prospective purchasers, lenders, or during the last nine (9) months of
the Term lessees, and making such alterations, repairs, improvements or
additions to the Premises or to the building of which they are a part, as
Lessor may 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 twenty (120) 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, and shall be
conducted in a manner to minimize interference with Lessee's operations.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted,
either voluntarily or involuntarily, any auction upon the Premises without
first having obtained Lessor's prior written consent. Notwithstanding anything
to the contrary in this Lease, Lessor shall not be obligated to exercise any
standard of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises, 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. The
installation of any sign on the Premises by or for 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 and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.
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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 any 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 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 expenses (including
but not limited to architects', attorneys', engineers' or 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 to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to
Lessor upon receipt of an invoice and supporting documentation therefor.
Subject to Paragraph 12.2(e) (applicable to assignment or subletting), 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.
Except as otherwise provided, 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 waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(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 imposition
by Lessor at the time of consent of such further or other conditions as are
then reasonable with reference to the particular matter for which consent is
being given.
37. GUARANTOR.
37.1 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 said 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 called for by Paragraph 16.
37.2 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 including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signature of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as 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 observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession 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 Paragraph 39 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
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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 the Premises, or the right of first offer to purchase
the Premises, or the right to purchase other property of Lessor, or the right
of first refusal to purchase other property of Lessor, or the right of first
offer to purchase other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Deleted.
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.
Initial /s/
------------------
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 time Lessee is in Breach of this Lease.
(b) The period of time within which an Option may be
exercised shall not be extended or enlarged by reasons of Lessee's inability to
exercise an Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an
Option shall terminate and be of no further force or effect, notwithstanding
Lessee's due and timely exercise of the Option, if, after such exercise and
during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary
obligation of Lessee for a period of thirty (30) days after notice from Lessor
that such obligation is past due or if Lessee commits a Breach of this Lease.
39.5 See Addendum.
40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for
the management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred
in connection therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other
security measures, and that Lessor shall have no obligation whatsoever to
provide same. Lessee assumes all responsibility for the protection of the
Premises, Lessee, its agents and invitees and their property from the acts of
third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time,
to grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
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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 and the requesting Party shall, within thirty
(30) days after request by the other Party, deliver to the requesting Party
evidence satisfactory to requesting Party of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease
and the typewritten or handwritten provisions or the Addendum attached hereto
and incorporated herein by this reference shall be controlled by the
typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed 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 than 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.
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 SUBMISSION
TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED
TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE
OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION
OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR
EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO 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 LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE
WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
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The Parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
<TABLE>
<S> <C>
Executed at Executed at
--------------------------------------- ---------------------------------------
on on
------------------------------------------------ ------------------------------------------------
by LESSOR: by LESSEE:
Bardon of Hollywood, Inc., a California Krupp/Taylor, U.S.A., a Delaware
- --------------------------------------------------- ---------------------------------------------------
corporation, dba Bardon, Inc. corporation
- --------------------------------------------------- ---------------------------------------------------
By Patrick J. Coll
------------------------------------------------
By /s/ Name Printed: Patrick J. Coll
------------------------------------------------ -------------------------------------
Name Printed: Donald H. Slate Title: President
------------------------------------- --------------------------------------------
Title: Pres.
--------------------------------------------
By
------------------------------------------------
By Name Printed:
------------------------------------------------ -------------------------------------
Name Printed: Title:
------------------------------------- --------------------------------------------
Title: Address:
-------------------------------------------- ------------------------------------------
Address:
------------------------------------------ ---------------------------------------------------
Tel. No. ( ) Fax No. ( )
- --------------------------------------------------- ---- -------------- ---- -----
Tel. No. ( ) Fax No. ( )
---- -------------- ---- -----
</TABLE>
NET
NOTICE: These forms are often modified to meet changing requirements of law
and industry needs. Always write or call to make sure you are
utilizing the most current form: American Industrial Real Estate
Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA
90071 (213) 687-8777. Fax No. (213) 687-8616.
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ADDENDUM
This Addendum is attached to and forms a part of that certain Lease
dated October 6, 1992 by and between Bardon of Hollywood, Inc., a California
corporation, dba Bardon, Inc., as Lessor, and Krupp/Taylor U.S.A., a Delaware
corporation, as Lessee. The provisions of this Addendum supersede any contrary
provisions in the Lease.
1. SECTION 1.5 - BASE RENT.
Subject to the provisions set forth below, provided that Lessee is not
then in Default under the terms and provisions of this Lease, Lessee shall not
be obligated to pay Base Rent for the first (1st), second (2nd), third (3rd)
and twenty-first (21st) months of the Original Term of this Lease (the "Abated
Rent"). The foregoing shall not, however, relieve Lessee from paying all other
fees and charges payable by Lessee hereunder during such months.
2. SECTION 2.1 - LETTING.
The Base Rent set forth above is computed at the rate of fifty cents
($.50) per month per square foot of Building Area, based on 70,440 square feet
of Building Area. For purposes of this Lease, "Building Area" shall mean the
gross floor area of the Premises measured from the outside of the exterior
walls of the Premises. At Lessee's election, Lessee's licensed architect may
verify the Building Area of the Premises within thirty (30) days after the
Commencement Date, and any dispute shall be resolved by binding arbitration in
Los Angeles in accordance with the rules and regulations of the American
Arbitration Association. Lessor and Lessee shall thereafter promptly confirm
in writing the Building Area of the Premises and shall set out the initial Base
Rent payable hereunder. If Lessee fails to cause such verification to be
performed within said 30-day period, the square footage set forth above shall
be deemed conclusive for all purposes hereunder. Except as provided below, if
the Premises has more (or less) than 70,440 square feet of Building Area, then
the Base Rent set forth in Paragraph 1.6 above, shall be proportionately
increased (or decreased) to the amount obtained by multiplying fifty cents
($.50) times the agreed upon number of square feet of Building Area contained
in the Premises. If any previous Base Rent payments exceed the amount of Base
Rent determined in accordance with this Paragraph, Lessee shall be given a
credit against the next Base Rent installment due under this Lease. If any
previous Base Rent payments were less than the amount of Base Rent determined
in accordance with this Paragraph, Lessee shall, within ten (10) days of such
determination of Building Area, pay the difference to Lessor.
3. SECTION 2.3 - COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING
CODE.
Notwithstanding anything to the contrary set forth in the printed
portion of paragraph 2.3 above, Lessor's warranty shall only be effective for a
period of six (6) months following the Commencement Date with respect to
Hazardous Substances and shall not apply at any time to the removal of asbestos
or other Hazardous Substances from the Premises the removal of which would not
have been required by applicable law but for Lessee's Alterations and/or
Utility Installations.
In addition to the obligations of Lessor set forth in the printed
portion of paragraph 2.3 above, Lessor hereby agrees, at its sole cost and
expense, to comply with any requirements of the Americans With Disabilities Act
of 1990 (42 U.S.C. Section 12101, et seq.) which are required by any
governmental agency to be performed with respect to the Premises provided the
same do not arise from or in connection with any of the Alterations or Utility
Installations constructed by or at the request of Lessee with respect to which
Lessee shall be liable, at its sole cost and expense, for such compliance.
4. SECTION 4.2 - COST OF LIVING INCREASE (NEW).
The Base Rent shall be increased on the first day of the 33rd month of
the Original Term hereof (the "Rental Adjustment Date") in accordance with the
increase in the United States Department of Labor, Bureau of Labor Statistics,
Consumer Price Index for All Urban Consumers (Los Angeles/Anaheim/Riverside
Statistical Area on the basis of 1982-1984 = 100) (the "Index"), as follows:
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The Base Rent (the "Comparison Base Rent") in effect immediately prior
to the Rental Adjustment Date (without regard to any setoffs, free rent or
other deductions) shall be increased by the percentage that the Index has
increased from the date (the "Comparison Date") on which payment of the
Comparison Base Rent began through the month in which the Rental Adjustment
Date occurs; provided, however, the increase in Base Rent payable by Lessee
pursuant to this section shall not be greater than 13.3333% of the Base Rent in
effect immediately prior to the Rental Adjustment Date. The Base Rent shall
not, however, be reduced by reason of such computation. Lessor shall notify
Lessee of such increase by a written statement which shall include the Index
for the Comparison Date, the Index for the Rental Adjustment Date, the
percentage increase between the two indices and the new Base Rent. Lessee
shall pay the new Base Rent from the Rental Adjustment Date until the
expiration of the Original Term. Lessor's notice may be given after the Rental
Adjustment Date and Lessee shall pay Lessor the accrued rental adjustment for
the months elapsed between the effective date of the increase and Lessor's
notice of such increase within thirty (30) days after Lessor's notice. If the
format or components of the Index are materially changed after the Commencement
Date, Lessor shall reasonably select a substitute index which is published by
the Bureau of Labor Statistics or similar agency and which is most nearly
equivalent to the Index in effect on the Commencement Date.
5. SECTION 5 - SECURITY DEPOSIT.
Provided that Lessee is not in Default under the terms of this Lease
(as defined in Paragraph 13.1) on the last day of the 35th month of the
Original Term hereof, Lessor shall apply $35,220 of the Security Deposit
against the Base Rent then owing for the 36th month of the Term of this Lease.
The foregoing shall not, however, relieve Lessee from paying any additional
Base Rent or other charges applicable to the 36th month of the Term.
Thereafter, Lessee shall only be obligated to maintain a Security Deposit equal
to $35,220.
6. SECTION 6.2(d) - LESSOR'S INDEMNIFICATION.
Lessor shall indemnify, protect, defend and hold Lessee, its agents,
employees and lenders, if any, and the Premises harmless from and against any
and all damages, liabilities, judgments, costs, claims, liens, expenses,
penalties, permits and attorneys and consultants fees arising out of or
involving any Hazardous Substance or storage tank brought onto the Premises by
or for Lessor or under Lessor's control or which occurred or existed prior to
the Commencement Date of this Lease. Lessor's obligations under this paragraph
shall include, but not be limited to, the effects of any contamination or
injury to persons, property or the environment created or suffered by Lessor
and the costs 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. Additionally, to Lessor's actual knowledge without
any inquiry, the Premises is presently free of any asbestos or other Hazardous
Substances and/or storage tanks.
7. SECTION 7.2 - LESSOR'S OBLIGATIONS.
Notwithstanding anything to the contrary contained in this Lease,
Lessor shall, at its sole cost and expense, maintain the foundations,
subfloors, roof (including the repair and/or replacement, as necessary),
exterior walls and other structural portions of the Premises in good condition
and repair provided that Lessor shall not be responsible for the routine
cleaning of the roof or maintenance of the drainage systems or any damage
caused to the foregoing which results from the acts or omissions of Lessee, its
agents or employees. Furthermore, Lessee acknowledges and agrees that to the
extent any of Lessee's improvements (including the installation and maintenance
of an HVAC system on the roof of the Premises) causes any damage to the roof or
other structural portions of the Premises, Lessee shall remain liable for such
damage including, without limitation, the repair and/or replacement of the
roof.
8. SECTION 7.5 - LESSEE'S IMPROVEMENTS.
Subject to the provisions of paragraphs 2.2 and 2.3 above, Lessee
hereby acknowledges and agrees that it is accepting the Premises in their "As
Is" condition and that Lessor shall not be obligated to construct or pay for
any tenant improvements thereon except that Lessor shall provide to Lessee a
tenant improvement allowance (the "Improvement Allowance") of up to Twenty
Thousand Dollars ($20,000) to paint and carpet the existing office space in the
Premises. The Improvement Allowance shall be promptly reimbursed to Lessee
upon Lessor's receipt of paid invoices from Lessee with respect to such
painting and carpeting. Any portion of the Improvement Allowance
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which is not used to paint and carpet the Premises within six (6) months of the
Commencement Date shall be retained by the Lessor. Lessee acknowledges that
all other improvements to the premises shall be made at Lessee's sole cost and
expense and shall be subject to Lessor's prior written approval and the
provisions of paragraphs 7.3 and 7.4 above. Furthermore, Lessee acknowledges
and agrees that the execution and commencement of this Lease shall not be
subject to, delayed or conditioned upon Lessee obtaining any governmental
approvals or permits or other consents to construct any improvements in the
Premises. Lessor expressly acknowledges that Lessee intends to construct
additional improvements in the Premises promptly following the Commencement
Date at a cost of approximately Two Hundred Thousand Dollars ($200,000).
Lessor agrees that it shall, within seven (7) days of its receipt of any
proposed plans and specifications for such alterations, provide to Lessee
either Lessor's written approval of such plans and specifications or written
notice of Lessor's disapproval thereof, which disapproval notice shall state
the reasons for such disapproval and the specific changes to the submitted
plans and specifications which must be made in order for Lessor to approve the
same, if any. Lessor's response with respect to any revised plans and
specifications shall thereafter be limited to five (5) days following its
receipt of the revised documents. The failure of Lessor to respond in writing
within the required time period shall conclusively be deemed to constitute
Lessor's approval of the plans and specifications as submitted by Lessee.
9. SECTION 8.3 - PROPERTY INSURANCE.
Notwithstanding anything to the contrary contained in the printed
portion of Paragraph 8.3 of the Lease, Lessee shall not be obligated to pay for
the premium attributable to the portion of the property insurance relating to
earthquake coverage except Lessee shall pay for such earthquake coverage (i)
during the first year of the Lease (not to exceed $16,200), or (ii) if required
by any Lender; provided, however, Lessor shall use its diligent efforts to
persuade any such Lender that earthquake insurance should not be required
coverage.
10. SECTION 8.7 - LESSOR'S INDEMNITY.
Except for Lessee's or its employees', agents', contractors',
sublessees' or assignees' negligence and/or breach of express warranties or any
provisions of this Lease, Lessor shall indemnify, defend and hold Lessee and
its directors, officers, employees and agents harmless from and against any and
all claims, damages, costs, liens, judgments, penalties, expenses (including,
without limitation attorneys and consultants costs and fees) and/or liabilities
(but excluding consequential damages) arising out of directly or indirectly any
breach by Lessor of this Lease or any provision hereof or as a result of the
negligence or willful misconduct of Lessor, its employees, agents, contractors
or invitees. The following shall include but not be limited to the defense or
pursuit of any claims or any action or proceeding involved therein and whether
or not (in the case of claims made against Lessee) litigated and/or reduced to
judgment and whether well founded or not. In case any action or proceeding be
brought against Lessee by reason of any of the foregoing matters, Lessor, upon
notice from Lessee, shall defend the same at Lessor's expense and Lessee shall
cooperate with Lessor in such defense. Lessee need not have first paid any
such claim in order to be so indemnified.
11. SECTION 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 or Lessee may, at their respective
option, terminate this Lease by giving notice to the other of such party's
election to do so within thirty (30) days after the date of the occurrence of
such damage. In such event, this Lease shall terminate as of the date of such
notice; provided, however, if Lessee at the time has an exercisable option to
extend this Lease, then Lessee may preserve this Lease by exercising such
option within twenty (20) days following the occurrence of damage or before the
expiration of the time provided in such option for its exercise, whichever is
earlier (the "Exercise Period"). If Lessee duly exercises such option during
said Exercise Period, Lessor shall, if and to the extent required under this
Paragraph 9, repair such damage as soon as reasonably possible and this Lease
shall, subject to the provisions of this Paragraph 9, continue in full force
and effect. If Lessee fails to exercise such option during said Exercise
Period, then Lessor or Lessee may, at their respective option, terminate this
Lease by giving written notice to the other of its election to do so within ten
(10) days after the expiration of the Exercise Period, notwithstanding any term
or provision in the grant of option to the contrary. In such event, this Lease
shall terminate as of the date of such notice.
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12. SECTION 10.2 - DEFINITION OF "REAL PROPERTY TAXES."
Notwithstanding anything to the contrary contained herein, Lessee
shall not, during the Original Term of this Lease or any extension thereof, be
liable for increases in Real Property Taxes that result from a sale, financing
or refinancing or other transfer by Lessor of the Premises or any portion
thereof or interest therein.
13. SECTION 12.4 - ASSIGNMENT AND SUBLETTING TO AFFILIATES.
Notwithstanding anything to the contrary contained in Paragraph 12 of
the Lease, Lessee shall have the right, without Lessor's consent, to assign
this Lease or sublet all of the Premises to any parent or subsidiary of Lessee
or to any person, firm or corporation which is controlled by, under the control
of, or under common control with Lessee, or, subject to the terms of Paragraph
12.1(c) of the Lease any entity into which Lessee may be merged or consolidated
or which purchases all or substantially all of the assets of Lessee; provided,
however, in all such instances, Lessee shall provide Lessor with written notice
of such transfer, the transferee shall expressly assume in writing all of
Lessee's obligations under the Lease and Lessee shall not be released from any
liability under the Lease.
14. SECTION 17 - LESSOR'S LIABILITY.
Lessee understands and agrees that this Lease is a sublease of the
Premises and that Lessor is the tenant under that certain Master Lease dated
_________________ (the "Master Lease") between Jandy Investment Company, a
California general partnership ("Master Landlord"), as landlord, and Lessor, as
tenant. As a condition to Lessee's obligations hereunder and to the
effectiveness of this Lease, Lessor shall deliver to Lessee concurrently with
Lessor's execution hereof, a non-disturbance agreement from the Master Landlord
in the form attached hereto which provides that as long as Lessee is not in
default under the terms and provisions of the Lease, Lessee's right to
possession of the Premises under the Lease or any extensions or renewals
thereof shall not be diminished or interfered with by Master Landlord and
Master Landlord shall, upon termination of the Master Lease, recognize Lessee
as its tenant under the Lease as if Master Landlord and Lessee were original
signatories thereto.
15. SECTION 39.5 - OPTION TO EXTEND.
(a) GRANT OF OPTION.
Lessor hereby grants to Lessee one (1) option (the "Option") to
extend the Original Term for an additional term of five (5) years (the
"Extension"), on the same terms and conditions as set forth in the Lease, but
at a Base Rent as set forth below. The Option shall be exercised only by
written notice delivered to Lessor at least one hundred twenty (120) days
before the expiration of the Original Term. If Lessee fails to deliver to
Lessor written notice of the exercise of the Option within the prescribed time
period, the Option shall lapse, and there shall be no further right to extend
the Original Term.
(b) FAIR RENTAL VALUE ADJUSTMENT.
The Base Rent shall be increased on the first day of the first
month of the Extension (the "Rental Adjustment Date") to ninety- five percent
(95%) of the "fair rental value" of the Premises, determined in the following
manner:
(i) Not later than one hundred (100) days prior to the
Rental Adjustment Date, Lessor and Lessee shall meet in an effort to negotiate,
in good faith, the fair rental value of the Premises as of such Rental
Adjustment Date. If Lessor and Lessee have not agreed upon the fair rental
value of the Premises at least ninety (90) days prior to the Rental Adjustment
Date, the fair rental value shall be determined by appraisal, by one or more
brokers (herein called "Brokers"), as provided in Subparagraph (ii), below.
Such Broker(s) shall have at least five (5) years' experience in the sales and
leasing of commercial/industrial real property in the area in which the
Premises is located and shall be members of professional organizations such as
the of American Industrial Real Estate Association, or equivalent.
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(ii) If Lessor and Lessee are not able to agree upon the
fair rental value of the Premises within the prescribed time period, then
Lessor and Lessee shall attempt to agree in good faith upon a single Broker not
later than seventy-five (75) days prior to the Rental Adjustment Date. If
Lessor and Lessee are unable to agree upon a single Broker within such time
period, then Lessor and Lessee shall each appoint one Broker not later than
sixty five (65) days prior to the Rental Adjustment Date. Within ten (10) days
thereafter, the two (2) appointed Brokers shall appoint a third (3rd) Broker.
If either Lessor or Lessee fails to appoint its Broker within the prescribed
time period, the single Broker appointed shall determine the fair rental value
of the Premises. If both parties fail to appoint Brokers within the prescribed
time period, the single Broker appointed shall determine the fair rental value
of the Premises. If both parties fail to appoint Brokers within the prescribed
time periods, then the first Broker thereafter selected by a party shall
determine the fair rental value of the Premises. Each party shall bear the
cost of its own Broker and the parties shall share equally the cost of the
single or third Broker, if applicable.
(iii) For the purposes of such appraisal, the term "fair
market value" shall mean the price that a ready and willing tenant would pay,
as of the Rental Adjustment Date, as monthly rent to a ready and willing
landlord of property comparable to the Premises if such property were exposed
for lease on the open market for a reasonable period of time and taking into
account all of the purposes for which such property may be used but excluding
any value given to the "Lessee Owned Alterations and/or Utility Installations."
If a single Broker is chosen, then such Broker shall determine the fair rental
value of the Premises. Otherwise, the fair rental value of the Premises shall
be the arithmetic average of the two (2) of the three (3) appraisals which are
closest in amount, and the third appraisal shall be disregarded. In no event,
however, shall the Base Rent be reduced by reason of such computation below the
Base Rent payable by Lessee during the last month of the Original Term. Lessor
and Lessee shall instruct the Broker(s) to complete the determination of the
fair rental value not later than thirty (30) days prior to the Rental
Adjustment Date. If the fair rental value is not determined prior to the
Rental Adjustment Date, then Lessee shall continue to pay to Lessor the Base
Rent applicable to the Premises immediately prior to the Extension, until the
fair rental value is determined. When the fair rental value of the Premises is
determined, Lessor shall deliver notice thereof to Lessee, and Lessee shall pay
to Lessor, within ten (10) days after receipt of such notice, the difference
between the Base Rent actually paid by Lessee to Lessor and the new Base Rent
determined hereunder.
(c) COST OF LIVING ADJUSTMENT.
The Base Rent shall be further increased on the first day of the
31st month of the Extension (the "Extension Adjustment Date") by reference to
the Index (or substitute index) defined in Paragraph 4.2 of the Lease as
follows: The Base Rent in effect immediately prior to the Extension Adjustment
Date (the "Comparison Base Rent") shall be increased by the percentage that the
Index has increased from the month in which the payment of the Comparison Base
Rent commenced through the month in which the Extension Adjustment Date occurs;
provided, however, the increase in Base Rent payable by Lessee pursuant to this
section shall not be greater than 12.5% of the Base Rent in effect immediately
prior to the Extension Adjustment Date. In no event shall the Base Rent be
reduced by reason of such computation.
16. SELF-HELP.
If Lessee provides written notice to Lessor of an item of repair which
is the obligation of Lessor which requires the action of Lessor, and Lessor
fails to provide such action within a reasonable period of time, given the
circumstances, after receipt of such written notice, but in no event earlier
than thirty (30) days after receipt of such written notice (except in the event
of emergency repairs required for the roof, in which event Lessor shall provide
such services or take such action within a reasonable period of time), then
Lessee may proceed to take the required action upon the delivery of an
additional written notice to Lessor specifying that Lessee is taking such
required action, and if such action was required under the terms of this Lease
to be taken by Lessor, then Lessee shall be entitled to a prompt reimbursement
by Lessor for Lessee's reasonable cost and expense in taking such action.
Further, if Lessor does not deliver a written objection to Lessee within thirty
(30) days after receipt of an invoice from Lessee for its costs in taking such
action which Lessee claims should have been taken by Lessor, and if such
invoice from Lessee sets forth a reasonably detailed breakdown of its costs and
expenses in connection with taking such action on behalf of Lessor, then Lessee
shall be entitled to deduct from rental payable by Lessee under the Lease the
amount set forth in such invoice. If, however, Lessor delivers to Lessee
within thirty (30) days after
Page 5
<PAGE> 37
receipt of Lessee's notice a written objection to the payment of such invoice,
then Lessee shall not be entitled to such deduction from rental but as Lessee's
sole remedy, Lessee may proceed to claim a default by Lessor and the matter
shall proceed through the judicial process in the court of appropriate
jurisdiction or, at either party's election, the matter shall proceed to
resolution by the selection of an arbitrator to resolve the dispute, which
arbitrator shall be selected and qualified pursuant to the rules of the
American Arbitration Association in Los Angeles, California, and whose costs
shall be paid for by the losing party unless it is not clear that there is a
"losing" party, in which case the cost of arbitration shall be shared equally.
The purpose of the use of an arbitrator to resolve such a dispute is to avoid
the delays incident to the court calendar system of the jurisdiction within
which the Premises are located. Therefore, the parties agree that if the issue
in dispute between Lessor and Lessee under this section may be expected to be
resolved under the then current calendar of the court of appropriate
jurisdiction within a period not exceeding six months from the date the issue
is joined by Lessor's objection to Lessee's invoice, then the arbitration
process described hereinabove shall be utilized and the matter shall proceed
through the judicial process of the court of appropriate jurisdiction.
17. SAFE TO REMAIN ON PREMISES.
Lessee acknowledges and agrees that the safe located on the mezzanine
level of the Premises is and shall remain the sole and exclusive property of
Lessor. However, as an accommodation to Lessor, Lessee hereby agrees to permit
Lessor to store the safe at the Premises during the term of the Lease, at no
additional cost or expense, provided that Lessor removes all contents therefrom
on or before October 31, 1992. Thereafter, Lessor shall have no further right
of access to the safe until the Lease expires. Lessee shall not be liable for
any damage or destruction to the safe unless caused by Lessee's gross
negligence or willful misconduct.
Page 6
<PAGE> 38
SUBORDINATION, NON-DISTURBANCE AND
ATTORNMENT AGREEMENT
1. PARTIES.
This Subordination, Non-Disturbance and Attornment Agreement (the
"Agreement"), dated as of October 6, 1992, is entered into by and between Jandy
Investment Company, a California general partnership ("Master Lessor"), Bardon
of Hollywood, Inc., a California corporation, dba Bardon, Inc. ("Landlord"),
and Krupp/Taylor U.S.A., a Delaware corporation ("Tenant").
2. RECITALS.
2.1 Master Lessor and Landlord entered into that certain Lease dated
as of _____________________________, 199__, hereinafter referred to as the
"Master Lease" covering that certain real property (the "Property") commonly
known as 5405 Jandy Place, Los Angeles, California, as more particularly
described in the Master Lease.
2.2 On or about October 6, 1992, Landlord, as sublessor, and Tenant,
as sublessee, entered into a Sublease (the "Sublease") for the entire Property.
2.3 The parties hereto intend to establish certain rights of quiet
and peaceful possession and use of the Property and other rights for the
benefit of the parties and further to define the terms, covenants and
conditions pertaining to such rights.
3. AGREEMENT.
NOW, THEREFORE, in consideration of the foregoing and other mutual
covenants and agreements hereinafter set forth, the parties hereby agree as
follows:
3.1 SUBORDINATION. The Sublease is now and shall at all times
continue to be subject and subordinate in each and every respect to the Master
Lease.
3.2 NON-DISTURBANCE. Master Lessor agrees that so long as the
Sublease has not been lawfully terminated on account of a default by Sublessee
thereunder in accordance with the provisions of the Sublease, Master Lessor
shall honor all of the provisions of the Sublease and shall not disturb or
otherwise interfere with Sublessee's possession and quiet enjoyment of the
Property in accordance with the terms of the Sublease, nor shall any of the
rights and privileges of Sublessee under the Sublease be in any manner
diminished or affected by Master Lessor, all notwithstanding any default by
Landlord under the Master Lease or any termination of the Master Lease.
3.3 SUBLESSEE'S ATTORNMENT. In the event the Master Lease is
terminated and Master Lessor thereafter succeeds to the interest of Landlord
under the Sublease, Sublessee shall attorn to and be bound to Master Lessor
under all the terms and conditions of the Sublease for the balance of the term
thereof with the same force and effect as if Master Lessor were the landlord
thereunder, such attornment to be effective and self-operative without the
execution of any further instrument on the part of any of the parties hereto,
immediately upon Master Lessor succeeding to the interests of Landlord under
the Sublease. The rights and obligations of Sublessee and Master Lessor,
respectively, upon such attornment shall, to the extent of the then remaining
balance of the term of the Sublease, including any renewals or extension
thereof provided for in the Sublease, be the same as now set forth in the
Sublease and by this reference, the Sublease is incorporated herein as part of
this Agreement.
4. MISCELLANEOUS.
4.1 ATTORNEYS FEES. In the event of any action at law or in suit or
in equity is brought to enforce any of the provisions of this Agreement, the
prevailing party shall be entitled to recover its reasonable attorneys fees in
connection therewith.
Page 1
<PAGE> 39
4.2 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
4.3 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but when taken together
shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
"MASTER LESSOR"
JANDY INVESTMENT COMPANY, a
California general partnership
By: /s/
---------------------------------
Its: Partner
--------------------------------
"LANDLORD"
BARDON OF HOLLYWOOD, INC., a
California corporation
By: /s/
---------------------------------
Its: Pres.
--------------------------------
"TENANT"
KRUPP/TAYLOR U.S.A., a Delaware
corporation
By: /s/
---------------------------------
Its: President
--------------------------------
Page 2
<PAGE> 1
EXHIBIT 11.1
SPECTRATEK TECHNOLOGIES, INC.
STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE
AND OF PRO FORMA NET INCOME PER SHARE
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net income........................... $1,012,763 $1,374,428 $1,294,235 $1,007,311
Pro forma net income................. $1,377,016
Weighted average number of shares
outstanding........................ 5,549,999 5,549,999 5,591,624 5,586,999 5,605,377
Dilutive effect of stock options
using the treasury stock method.... 80,195 80,195 42,661 48,273 30,150
Effect of common stock issued in
connection with the IPO to pay-off
Stockholder Notes.................. 327,273
---------- ---------- ---------- ---------- ----------
Number of shares used to compute net
income and pro forma net income per
share.............................. 5,630,194 5,630,194 5,634,285 5,629,660 5,962,800
========== ========== ========== ========== ==========
Net income per share................. $ 0.18 $ 0.24 $ 0.23 $ 0.18
========== ========== ========== ==========
Pro forma net income per share....... $ 0.23
==========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
The accompanying financial statements give effect to the completion of the
1.85-for-1 split of the Company's outstanding common stock which will take place
on or before the effective date of the offering. The following consent is in the
form which will be furnished by Deloitte & Touche LLP upon completion of the
stock split of the Company's outstanding common stock described in Note 11 to
the financial statements and assuming that from November 6, 1997 to the date of
such completion no other material events have occurred that would affect the
accompanying financial statements or require disclosure therein.
INDEPENDENT AUDITORS' CONSENT
"We consent to the use in this Amendment No. 2 to Registration Statement
No. 333-38471 of Spectratek Technologies, Inc. of our report dated November 6,
1997 (December 11, 1997 as to Note 11), appearing in the Prospectus, which is
part of such Registration Statement and to the reference to us under the
headings "Selected Financial Data" and "Experts" in such Prospectus.
Los Angeles, California
December 11, 1997"
DELOITTE & TOUCHE LLP
Los Angeles, California
December 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's consolidated financial statement for the year ended December 31, 1996
and September 30, 1997 financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,038
<SECURITIES> 0
<RECEIVABLES> 2,314
<ALLOWANCES> 167
<INVENTORY> 3,973
<CURRENT-ASSETS> 8,034
<PP&E> 2,055
<DEPRECIATION> 1,069
<TOTAL-ASSETS> 10,186
<CURRENT-LIABILITIES> 1,835
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 60
<TOTAL-LIABILITY-AND-EQUITY> 10,186
<SALES> 11,857
<TOTAL-REVENUES> 11,857
<CGS> 6,644
<TOTAL-COSTS> 6,644
<OTHER-EXPENSES> 2,226
<LOSS-PROVISION> 127
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> 2,782
<INCOME-TAX> 673
<INCOME-CONTINUING> 2,109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,109
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's consolidated financial statements for the year ended December
31, 1996 and June 30, 1997 (unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 462
<SECURITIES> 0
<RECEIVABLES> 1,484
<ALLOWANCES> 155
<INVENTORY> 3,958
<CURRENT-ASSETS> 6,527
<PP&E> 2,792
<DEPRECIATION> 771
<TOTAL-ASSETS> 8,764
<CURRENT-LIABILITIES> 2,431
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 60
<TOTAL-LIABILITY-AND-EQUITY> 8,764
<SALES> 12,003
<TOTAL-REVENUES> 12,003
<CGS> 7,115
<TOTAL-COSTS> 7,115
<OTHER-EXPENSES> 2,432
<LOSS-PROVISION> 155
<INTEREST-EXPENSE> 157
<INCOME-PRETAX> 2,145
<INCOME-TAX> 851
<INCOME-CONTINUING> 1,294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,294
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
