FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
Commission file number: 333-46643
INDUSTRIAL RUBBER PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1550505
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3804 East 13th Street, Hibbing, MN 55746
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code: (218) 263-8831
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ] - - - The Company's revenues for its
fiscal year ended December 31, 1998: $9,981,268.
Aggregate Market Value of Stock held by Non-Affiliates of the Company as of
March 23, 1999: $1,762,983, based on a closing average bid and asked price on
that date of $1.421875 per share.
The number of shares of the Company's Common Stock outstanding as of March 23,
1999 is 4,184,500.
Transitional Small Business Disclosure Form: Yes: [ ] ; No: [X].
Documents Incorporated by Reference
Portions of the Proxy Statement for the 1999 Annual Meeting of Shareholders are
incorporated by references in Part III.
TABLE OF CONTENTS
PART I
Item 1: Description of Business.....................................3
Item 2: Description of Property....................................15
Item 3: Legal Proceedings..........................................16
Item 4: Submission of Matters to a Vote of Security Holders........16
Part II
Item 5: Market for Common Equity and Related Stockholder
Matters........................................................16
Item 6: Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................17
Item 7: Financial Statements.......................................21
Item 8: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................21
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PART III
Item 9: Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act.................................................22
Item 10: Executive Compensation.....................................22
Item 11: Security Ownership of Certain Beneficial Owners
and Management................................................22
Item 12: Certain Relationships and Related Transactions.............22
Item 13: Exhibits and Reports on Form 8-K...........................22
PART I
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Annual Report on Form 10-KSB are "forward
looking statements' intended to qualify for the safe harbors from liability
established by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes",
"anticipates", "expects", or words of similar import. Similarly, statements that
describe the Company's future plans, objectives or goals are also
forward-looking statements. Such forward- looking statements are subject to
certain risks and uncertainties which are described in close proximity to such
statements and which could cause actual results to differ materially from those
anticipated as of the date of this report. Shareholders, potential investors and
other readers are urged to consider these factors in evaluating the
forward-looking statements and are cautioned not to place undue reliance on such
forward-looking statements. The forward-looking statements included herein are
only made as of the date of this report and the Company undertakes no obligation
to publicly update such forward-looking statements to reflect subsequent events
or circumstances.
Item 1: Business
(a) General development of business
Industrial Rubber Products, Inc. (the "Company" or "Industrial Rubber") was
founded in 1986 to acquire and operate a rubber lining facility then owned by
Irathane Systems Incorporated, a wholly owned subsidiary of Illinois Tool Works,
Inc.
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The Company was incorporated as a Minnesota corporation on March 5, 1986, as
Industrial Rubber Applicators, Inc., and on January 30, 1998, changed its name
to Industrial Rubber Products, Inc. The Company's executive offices are located
at 3804 E. 13th Avenue, Hibbing, MN 55746, and its telephone number is (218)
263- 8831.
The Company began operations in April of 1986. The Company's business originally
consisted of applying and then vulcanizing rubber (for corrosion and abrasion
resistance purposes) to wearable parts that were used primarily in the mining
industry.
In 1996 the Company entered into a major contract of approximately $10,000,000,
to provide rubber lining services for the Kennecott Utah Copper pipe-lining
project near Salt Lake City, Utah. To effectively provide these services the
Company leased and opened a manufacturing facility in Clearfield Utah in 1996.
During 1997 and 1998 the Company used the facility to provide services to
Kennecott and other customers in the area. The Kennecott project was completed
in 1998.
On January 20, 1999, the Company acquired Sonwil Products, Inc. dba TJ
Products in West Jordan, Utah. This acquisition is referred to throughout this
Form 10-KSB report and the 1998 Annual Report.
On January 31, 1999, the lease on the Clearfield facility expired and the
Company consolidated those operations at the facilities of the newly acquired TJ
Products.
Initially, the Company was taxed as a C corporation under the Internal Revenue
Code. Effective January 1, 1989, the Company elected to be taxed as an S
corporation. The Company continued to be taxed as an S corporation until March
31, 1998, when the Company elected C corporation status.
(b) Narrative description of Industrial Rubber's business
Principal Products, Services and Markets
Industrial Rubber designs, produces and supplies protective materials, abrasion
resistant products and equipment, erosion/corrosion protective linings and
proprietary rubber products to the mineral processing, power, wood processing
and other heavy industries.
Product Lines
Industrial Rubber has three product lines. Its pipe and pipe lining products
line consists of rubber lined pipe and pipe parts fabricated primarily for the
mineral processing industry. Its proprietary products are engineered replacement
parts primarily for mineral processing facilities. Its standard rubber products
are sold,
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along with related services, to the Company's customers in the various industry
segments served by the Company.
Pipe and Pipe Lining Products. Industrial Rubber produces and supplies rubber
and steel slurry pipe and components for tailings pipeline systems. A
proprietary formulated rubber compound (I.R.P. X8220) is used which protects
these pipelines from abrasion and corrosion. This proprietary compound has
increased pipeline life expectancy by 50% in one North American taconite plant.
A taconite plant has advised Industrial Rubber that its operational evaluation
has demonstrated that unprotected steel tailing pipe has a service life of
20,000 hours, while similar pipe lined with Industrial Rubber's proprietary
compound X8220 has a service life of 40,000 hours. The Company's proprietary
compound X8220 has been used in 600,000 feet of slurry transportation pipe
products for 12 mineral processing plants. Since its development it has
demonstrated its ability to extend service life and protect expensive tailings
impoundment systems from corrosion and abrasive wear. In 1996, the Company
designed and developed new processes and equipment that decreased the cost and
improved the overall product quality of overland slurry pipelines. Mechanical
couplings, historically used in connecting lined pipe for long distance overland
slurry systems, are typically high cost items to the customer. This is
particularly true in high pressure, large diameter pipelines. The Company
believes that prior to 1996, industry standards and equipment limitations only
allowed for the production of 40' long pipe sections. Industrial Rubber has
designed its own production equipment, and presently supplies to its customers
60' lined pipe sections, eliminating one third of the required mechanical
couplings, and resulting in cost savings to the customers.
The Company used this technology in lining 120,000 linear feet of pipe for the
abrasive slurry transportation system of the Kennecott Utah Copper Corporation
at its $450,000,000 tailings impoundment modernization project in Utah. Since
1996, three other major slurry transportation system products have been ordered
from Industrial Rubber:
1997 B & K Steel 8,200' 48" diameter pipe (completed)
1998 Royal Oak Kemess 47,000' 26" diameter pipe (completed)
1998 Newmont/Batu Haiju 21,000' 44" diameter pipe (completed)
The Company believes that the development of 60' lined pipe has set the standard
for the industry. Industrial Rubber is continuing development efforts to
eliminate mechanical couplings in rubber lined pipe products for overland slurry
transportation systems.
In 1996, Industrial Rubber and its suppliers developed 1" thick calendared
rubber, the first in the industry to meet engineered specifications for an
abrasive slurry material. This rubber product doubled the expected service life
of industry standard
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1/2" calendared rubber in slurry transport, and is projected to result in cost
savings for customers by reducing replacement costs.
Industrial Rubber's pipe product line includes large overland slurry system pipe
products and products as small as 2" in diameter. The Company can produce
rubber-lined pipe from 2" to 72' in diameter, from 1" to 60' long, and with
calendared linings from 1/8" to 1" thick. It can provide all fittings, tees,
Y's, manifolds and other piping components typically used in mineral processing
and power generation facilities.
Proprietary and Engineered Products. Industrial Rubber's proprietary and
engineered product line includes engineered grinding mill parts. Examples of
such products are air bags, lifter bars and shell liners. The hard host rock
that contains minerals must be ground to small fragmented product size, using
large grinding mills. The wearable parts that protect these grinding mills have
a relatively short service life. They have been typically made of heavy iron
castings.
Industrial Rubber believes that its patented rubber grinding mill discharger
reduces weight, matches or increases service life and provides improved fit when
compared to other dischargers. A North American mineral-processing plant has
informed the Company that by using the Industrial Rubber patented grinding mill
dischargers, it has reduced grinding costs by increasing production and
decreasing energy costs per ton ground. The patented grinding mill discharger is
being used at two taconite, one molybdenum and three copper mines, operating in
17 grinding mills. Grinding mill dischargers and other grinding mill products
are being designed for five additional mining properties.
Standard Rubber Products. The Company's standard rubber products range in weight
from less than one pound to over 10,000 pounds, with costs ranging from $20 to
$20,000 for individual parts. Examples of such products are manifolds, screens,
pulleys, and rolls. All products are made to customer engineered specifications.
The Company's Quality Assurance Program seeks to insure product conformity while
limiting defects and reducing associated value added costs. The Company,
responding to the needs of international markets, has begun preparations to
qualify under an ISO 9000 program.
Markets
The markets for the Company's products are the hard rock mineral processing,
coal and power generation, paper and pulp production, and other similar heavy
industries. Its marketing to date has focused primarily on the mineral
processing industry.
The North American mining industry is considered heavy industry. The hard rock
that hosts important minerals (iron, copper, gold, molybdenum), is generally
blasted
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from the earth and then crushed, and ground (processed), to allow the extraction
(beneficiation) of these minerals. The equipment needed to process and
beneficiate this rock is subject to constant abrasion, corrosion and erosion.
Industrial Rubber has developed, designed, tested and produced rubber products
that protect the mineral processing and beneficiation equipment, extending their
serviceable life, and saving its customers money through decreased replacement
costs and reduced downtime. The Company's rubber products also provide further
benefits to its customers through noise abatement and dust and dirt reductions.
Although Industrial Rubber's products protect the mineral processing and
beneficiation equipment, the products do become worn and must be replaced. Many
of the Company's products are used to replace its own and other manufacturers'
protective products that have become worn.
Industrial Rubber's first market was the Minnesota taconite industry where
taconite rock with a typical iron ore content of 25% to 30% is excavated,
crushed, ground and separated to make 46 million tons of high grade taconite
(iron ore) pellets annually.
In 1991, Industrial Rubber began to sell its products to other mineral
processing markets to diversify its business and minimize the effects of demand
cycles. In 1998, approximately 50% of the Company's sales were to mineral
processing facilities other than taconite. A large proportion of those sales
related to copper and gold production.
The U.S. and Canada rank number two and number three, respectively, in worldwide
copper production and have slated many new mine openings and expansion projects
for copper production. Most of these, however, are on hold due to current
commodity prices. Arizona is the number one copper producing state.
Copper ore is typically a 1% to 1.5% grade. Gold ore is considerably lower. The
waste rock slurry pipe systems needed to transport this rock to large
impoundments have grown, due to environmental and practical needs. A North
American copper producer recently invested $450,000,000 in a new 3,500 acre
copper rock waste (tailings) impoundment; of this total, $40,000,000 was spent
on highly abrasive resistant, lined pipe products.
Although North America is a large market for the Company's products, the world
mining industry is significantly larger, with Chile alone operating a
significant number of grinding mills with resulting mine production of 3,000,000
metric tons. Recently, the Company has begun to expand by selling its products
outside of North America. In 1997, less than 1% of the Company's sales were
shipped offshore, in 1998, this proportion grew to approximately 25% of sales.
The international market offers potential market growth for Industrial Rubber,
with most of the actual contracts coming from North American engineering firms
or their subcontractors.
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Marketing and Distribution of Products
The Company markets its products through a direct sales force and independent
sales representatives. The Company's major customers in 1998 included Hibbing
Taconite Company, whose majority owner is Bethlehem Steel (taconite production),
Royal Oak Mining Kemess Mine (gold mining), and BendTec (pipe
engineering/manufacturing firm).
The Company's present sales force consists of a sales and marketing manager,
three direct salespeople, a sales clerk, and two independent sales
representative companies that employ five direct salespeople and a marketing
consultant. The Company plans to grow its number of direct salespeople and is in
the process of establishing independent sales representation in certain national
and international markets.
The Company has recently added three direct sales people with the acquisition of
TJ Products. The people, who previously worked for TJ's, cover a seven state
territory including and surrounding Utah.
Industrial Rubber seeks to grow through increased penetration of the North
American hard rock mining market with its present rubber products, the
development and sales of new products, sales to new mineral processing markets
outside of North America and sales of present and new products to the coal power
generation, paper and pulp manufacturing and other heavy industries.
Industrial Rubber's marketing strategy is to maximize penetration of domestic
markets, including mineral processors and coal and power generating facilities,
with its present products. The Company is acting to expand its product lines and
new products will be cross-sold to existing and new customers.
The marketing plan includes prospective customer identification, customer needs
analysis and increased and strategic placement of the sales force, to facilitate
geographic market and product expansion. The marketing plan is being implemented
in the U.S. and Canadian markets and, when appropriate, will be implemented
internationally. The Company intends to develop business partnerships with
existing customers and the engineering firms that serve them.
Chile, Peru, Brazil, Argentina, Mexico, and Australia are major mineral
processing countries, as are certain Southeast Asian countries. The Company will
direct its efforts to penetrate these markets by adding direct sales people,
adding independent representatives and forming strategic alliances with original
equipment manufacturers in these markets.
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Industrial Rubber utilizes general and product specific brochures and sales
literature. Video is used as an additional marketing resource. Advertising and
articles in industry trade magazines, journals, newsletters and papers has been
increased. Trade show attendance and participation has increased to become a
larger part of the marketing effort.
Industrial Rubber is in the process of placing satellite production and
distribution facilities where justified by the local market. The Company has
identified a potential satellite location in southern Arizona.
The Company has identified other protective material products, including steel
and iron products, that are not presently produced by Industrial Rubber, but are
used by its customers. Through its representation of Ani Braken, the Company
seeks to be able to supply cast iron and steel products to its customers and is
seeking strategic relationships with the manufacturers of related products. The
goal is to allow the Company to supply its customers with a full line of
protective products eliminating the disadvantage to the customers of acquiring
components from multiple suppliers. Customers should further benefit by having a
single source for the design and testing of protective product improvements.
Recent studies in Minnesota and Michigan have demonstrated that there is a
concern among its customers regarding the environmental considerations both for
present disposal costs and future liabilities arising from landfill disposal of
steel, rubber, urethane and other worn out products. At the present time,
grinding mill parts, pump parts, classification screens, pipe products and other
benefication equipment protective parts made of rubber, steel and urethane, are
disposed of after usable life, normally through a landfill method. The Company
is continuing to expand its closed-loop recycling program to allow its customers
to return these used equipment products to the Company. The Company will remove
the elastomeric compounds, and through cryogenic technology and the Company's
and other's proprietary material enhancement processes, produce recycled raw
materials to be used in manufacturing molded rubber protective parts for
repurchase.
Industrial Rubber is investigating developing a closed-loop-recycling program
for integration into its marketing strategies for all products and locations to
meet its customers' needs . A further benefit of the "closed-loop" recycling
process and the re-manufacturing of raw materials would be to reduce the
Company's future dependency on natural rubber.
Status of Publicly Announced New Products
In August of 1998 the Company signed an agreement to market high-alloy ferrous
cast mill and crusher parts in North America for the Melbourne, Australia based
firm, ANI Bradken. Initial delivery and sales of the product for testing took
place in
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the first quarter of 1999. Potential future sales for this product line will
depend on several variables, including current testing, which are unknown at
this time.
Competitive Conditions
The protective material products business that serves the mineral processing and
other heavy industries is competitive. These protective material products are
made of steel, iron, rubber, urethane, ceramics, plastics and hybrids of these
materials. The Company's competitors fabricate, cast, mold, shape, machine, and
form the material into finished products. Both large and small companies
throughout the world compete on price and by adding value to their products
through fit and function, using physical design, chemical or physical make up or
proprietary data (patents). The competition falls into two categories.
The first category is the regional manufacturer/supplier that services the
mineral processing and power generation properties that are close to its
production facility. Standard rubber liners, urethane castors and metal
fabricators typically fall within this category. They use personalized service
and quick delivery as an advantage to their regional customers.
The second category is national manufacturers of products that are used by a
large number of mineral processing and power generating plants. Rubber molders,
cast iron and metal makers, ceramic manufacturers and original equipment
manufacturers typically fall into this category. They use proprietary design,
large distribution networks and high volume to reduce manufacturing costs.
Sophisticated quality programs, managed inventories and just-in-time deliveries
are advantages to their customers and their size provides them with access to
greater financial and other resources.
The Company believes that regional manufacturer/supplier R. Wales & Sons and
national manufacturer/suppliers Rubber Engineering, Illinois Tool Works, Linatex
and Svedala represent the Company's main sources of competition and each such
competitor has greater resources than the Company.
The Company believes that it can successfully compete with companies in both
categories, through focused service to customers located near its Minnesota and
Utah facilities and through its ability to provide quality products in
increasingly large quantities to customers located in geographically distant
areas. The Company also believes that the satellite facilities that it may
establish will increase its ability to compete in geographically distant
markets.
Raw Materials and Supplies.
The Company currently purchases its rubber from multiple suppliers that
manufacture to the Company's specifications and formulas. The Company is
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evaluating the potential acquisition of a raw material supplier or the purchase
of equipment to process raw materials. This integration could reduce production
costs and expand potential markets by providing the capability to develop new
formulas internally. Currently, the low price of natural rubber makes these
alternatives less beneficial.
The Company obtains most of the rubber used to treat or line its pipe products
and to manufacture its standard rubber products from Bedell-Kraus and Dyna-Mix.
The Company obtains pipe from Piping Machine Specialties, Naylor Pipe, Thrall
Distributors and NAPTech, Inc. The Company obtains pipe parts and other metal
products from Furin & Shea and Vidmar Iron Works. The Company anticipates that
it will continue to obtain these materials from these suppliers, but other
sources are available for all such materials.
Dependence on Major Customers
While the Company is not dependent on any single customer a substantial portion
of Industrial Rubber's revenues in 1996, 1997 and 1998 were from large project
contracts for rubber lined tailings pipe. The companies purchasing such products
and services from the Company pursuant to large contracts vary and the recent
drops in commodity prices has caused many modernization and new projects to be
put on hold. The Company has no orders for large contracts at this time.
Proprietary Rights and Labor Contracts
The Company currently holds one patent for a Discharge Millhead. The patent on
the Discharge Millhead will terminate on April 7, 2013. The Company is
developing additional potentially patentable products, including rubber
compounds, grinding mill parts, screens and cyclone products, pipe coupling
products and closed loop material handling services. Since many of the Company's
developments are extensions of existing knowledge, no assurance can be given
that patents for either the products or processes being developed will be
issued, that the scope of any patent protection will exclude competitors or
provide competitive advantages to the Company, that any of the Company's patents
will be held valid if subsequently challenged or that others will not claim
rights in or ownership to the patents and other proprietary rights held by the
Company. Further, there can be no assurance competitors have not developed or
will not develop similar products, duplicate the Company's products or, if
patents are issued to the Company, design around such patents. In addition,
whether or not patents are issued, others may hold or receive patents which
contain claims having a scope that covers products developed by the Company.
Industrial Rubber's proprietary rubber formula is not patentable. While the
Company obtains confidentiality agreements from its suppliers and its key
employees, competitors could independently develop the formula. Further,
litigation to protect either patents or trade secrets, to enforce patents issued
to the Company, to protect trade secrets or know-how owned by the
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Company, and to defend the Company against claimed infringement may be
necessary.
The Minnesota production employees are covered by a collective bargaining
agreement with the United SteelWorkers of America, Local No. 6860-1, which
terminates on April 1, 2000. There is no union affiliation at the Utah facility
Research and Development.
The Company has not incurred significant research and development costs,
although it has incurred certain of such costs on a job-by-job basis which are
expensed as incurred.
The Company has announced plans to pursue an Elastomer Technology and Material
Research Center to be located in Hibbing Minnesota. The center, which would
develop better grinding and separation methods for recycled rubber, would
require an initial investment of approximately $3,000,000 of public and private
funds. The Company has committed $500,000 and is currently pursuing both public
and private sources for the remaining funds. The Company proposes to manage the
center and use the developed technology for product development and a closed
loop recycling program.
Governmental Regulation
While Industrial Rubber's products are not subject to, and do not require any
governmental approvals, before sale, the Company is subject to a wide variety of
governmental regulations. As a manufacturing company, Industrial Rubber is
subject to safety regulations established by the United States Department of
Labor and the Minnesota Department of Labor and Industry under the Occupational
Safety and Health Act ("OSHA"). Because its products are sold to the mining
industry, workplace safety at the Company is also subject to regulation by the
Mine Safety and Health Administration. The Company's operations are continually
being monitored and inspected. During February 1998, the Company received OSHA
reports addressing a number of deficiencies found by inspectors in the Company's
production facilities, and assessing fines against the Company totaling
approximately $6,000. In 1998 all deficiencies were addressed, none of which had
a material effect on the Company's operations. The Company intends to
participate with OSHA in a program to limit or correct future deficiencies
before fines are assessed.
Environmental Regulation
The Company uses hazardous solvents in its production processes and disposes of
waste products such as used solvents. These and other activities of the Company
are subject to various federal, state and local laws and regulations governing
the
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generation, handling, storage, transportation, treatment and disposal of
hazardous wastes. Under such laws, an owner or lessee of real estate may be
liable for, among other things, (I) the costs of removal or remediation of
certain hazardous or toxic substances located on, in or emanating from, such
property, as well as related costs of investigation and property damage and
substantial penalties for violations of such laws, and (ii) environmental
contamination at facilities where its waste is or has been disposed. Such laws
often impose such liability without regard to whether the owner or lessee knows
of, or was responsible for, the presence of such hazardous or toxic substances.
While the Company's operations, to its best knowledge, are in full
compliance with all existing laws and regulations, environmental legislation and
regulations have changed rapidly in recent years and the Company cannot predict
what, if any, impact future changes in such legislation may have on the
Company's business. Further, environmental legislation has been enacted, and may
in the future be enacted, that creates liability for past actions that were
lawful at the time taken. As in the case with manufacturing companies in
general, if damage to persons or the environment has been caused, or is in the
future caused, by the Company's use of hazardous solvents or by hazardous
substances located at the Company's facilities, the Company may be fined or held
liable for the cost of remediating such damage. Imposition of such fines or the
incurrence of such liability may have a material adverse effect on the Company's
business, financial condition and results of operations. Further, changes in
environmental regulations in the future may require the Company to make
significant capital expenditures to change methods of disposal of hazardous
solvents or otherwise alter aspects of its operations.
The United States Environmental Production Agency ("EPA") in its October 1992
Preliminary Assessment of the Company's Minnesota facility reported that the
Company's predecessor had a 5,000 square foot unlined outdoor waste drum storage
area between 1967 and 1981. The EPA's assessment revealed no documented releases
from this area. During 1997, the Minnesota Pollution Control Agency ("MPCA")
notified the Company that it was required to complete an initial investigation
of possible soil contamination caused by the previous owner of the Minnesota
facility. In June of 1998 representatives from the MPCA's Regulatory Compliance
Section ("RCS") collected samples from the former drum storage area. All results
were reported as below detection limits; therefore, no further soil or ground
water investigation is necessary at this time.
Recent Event
On March 25, 1999 the Company executed an agreement with Illinois Tool Works
Inc., ("ITW") to acquire all of the assets of ITW's Irathane Systems Division.
Irathane Systems produces liquid urethanes, urethane moldings, and rubber and
urethane linings for the mineral processing, aggregate, paper and electric power
industries.
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The assets to be acquired include all of the machinery, equipment, tools, molds,
vehicles, furniture, fixtures, supplies, leasehold improvements, accounts
receivable, inventories, and real estate of the division. It also includes
prepaid expenses, and intangible assets including the Irathane trademark in the
United States and Canada, trade secrets, intellectual property, customer lists,
existing contracts, and similar assets. The assets that are proposed to be
purchased include the Irathane System Division real estate owned in Colorado
Springs, Colorado, and Sudbury, Ontario, Canada.
The Irathane Systems Division has manufacturing facilities in Colorado Springs,
Colorado, Hibbing, Minnesota and Sudbury, Ontario, Canada. As a requirement of
the agreement, all of Irathane's current employees will be offered employment
with Industrial Rubber at the time of the closing.
The purchase price of the assets to be acquired will be approximately
$8,000,000. Approximately $300,000 of this will be paid by the assumption of
liabilities, and the remaining $7, 700,000 will be paid in cash. The source of
the cash funds to make the acquisition is the remaining proceeds of Industrial
Rubber Products, Inc.'s Initial Public Offering completed in April of 1998 and
bank financing provided by U.S. Bank.
While an allocation of the purchase price to the assets will not be made until
after closing, it is anticipated that accounts receivable will constitute
approximately $1,300,000 of the assets purchased, inventory will constitute
approximately $1,250,000 of the assets purchased and prepaid expenses will
constitute approximately $50,000 of the assets purchased The remaining balance
of the purchase price will be allocated between physical assets and intangibles.
In order to permit the closing of the transaction at the end of the first
quarter of 1999, the parties have agreed that the customary due diligence that
would otherwise take place in a transaction such as this will take place after
closing. The Purchase Agreement contains special provisions providing for
adjustments to be made to the purchase price based upon the post closing due
diligence as well as the more traditional adjustments arising as a result of a
closing. The Company has obtained a commitment for bridge financing for the
acquisition of $7,000,000 as well as a commitment for line of credit financing
of $2,000,000 from U.S. Bank. The bank financing will be closed at the same time
as, or just prior, to the closing of the acquisition of the Irathane System
Division assets.
Employees
As of February 28, 1999, Industrial Rubber had 80 employees, all of whom were
full-time; 50 were in Minnesota and 30 were in Utah (TJ Products). Of the 80
employees, 55 were in production, seven were in sales, four were in engineering
and design, and fourteen were in executive, administrative and clerical
positions.
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The Company believes that its relations with its employees are excellent,
demonstrated by a low turnover rate. The Minnesota production employees are
covered by a collective bargaining agreement with the United SteelWorkers of
America, local No. 6860-1, which terminates on April 1, 2000. There is no union
affiliation at the Utah facility. The Company believes that the representation
of the Minnesota production employees by the Union acts to remove a potential
barrier to the sale of certain of the Company's products to the taconite mining
plants by responding to union contract language that limits out-sourcing of
work.
Item 2: Properties
Industrial Rubber operates three production and distribution centers. Its
Minnesota manufacturing facility (located on the Mesaba Iron Range, the heart of
the taconite mining industry) is a 30,000 square foot manufacturing/office
facility. Proprietary and rubber lined pipe products produced at the facility
are used by taconite pellet producing companies and are also shipped throughout
North America for use in copper, gold, molybdenum and other mineral processing
operations. The facility also houses the Company's corporate headquarters and
sales and technical support staffs.
The Company recently acquired a second facility in Hibbing, Minnesota. The
facility, which is approximately 16,000 sq.ft., is being used for general
expansion and a distribution center.
In 1996, due to customer demand, a second production facility in Clearfield
Utah, equipped with over $1,000,000 in specially designed processing machinery,
was opened. The Clearfield plant was designed to supply Industrial Rubber's
piping and pipe products to the western United States and Canada.
In December of 1998 the Company made a decision to cancel it's lease on the
Clearfield facility effective January 31, 1999, and consolidate the operations
from the Clearfield facility with the soon to be acquired TJ Products. This
consolidation is expected to reduce future operating costs. It also provides the
Company with sufficient equipment to start-up a new satellite facility most
likely Arizona.
The Hibbing Minnesota manufacturing facility is a 30,000 square foot facility on
four acres of land in the Hibbing Industrial Park. Newly renovated corporate
office space occupies approximately 4,000 square feet of this facility, with the
remainder dedicated to manufacturing space. Portions of the four acres of land
are used for receiving, storage and sandblasting activities.
The Hibbing manufacturing facility is subject to a mortgage with a principal
balance of $311,000 as of December 31, 1998.
15
<PAGE>
The Company leases structures of approximately 25,000 square feet and 3.5 acres
of land in West Jordan, Utah, that were previously leased by TJ Products, which
the Company acquired on January 20, 1999. The lease agreement runs through
January 19, 2009, and the Company has options to terminate the lease after
January 19, 2003 upon six months' notice, and options during the entire period
to purchase the facilities and property at "appraised value".
The Company believes that all facilities are in satisfactory condition.
Item 3: Legal Proceedings
The Company has not been involved in any legal proceedings since the date of the
initial public offering and there are no known pending or threatened legal
proceedings at this time.
Item 4: Submission of Matters to a Vote of Security Holders
No matters have been submitted to a vote of the security holders of the Company
since the date of its initial public offering, April 24, 1998, through the
solicitation of proxies or otherwise.
Part II
Item 5: Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock trades on the Nasdaq SmallCap Market under the symbol
INRB. The following table sets forth the high and low bid quotation for the
quarters shown. The prices quoted represent prices between trades in the stock
without adjustments for mark-ups, mark-downs or commissions and do not
necessarily reflect actual transactions. The Company's initial public offering
date was April 24, 1998.
1998
Quarter High Low
1st n/a n/a
2nd 4-7/8 3-1/4
3rd 3-7/8 2
4th 2-3/4 1
The approximate number of shareholders of record and beneficial shareholders of
the Company's $.001 par value common stock as of December 31, 1998 was 50 and
1,000, respectively.
16
<PAGE>
The Company has not paid any dividends on its Common Stock, and intends to
follow a policy of retaining all of its earnings to finance its business and any
future acquisitions. The terms of the Company's covenants with its bank further
limits its ability to pay dividends
Item 6: Management's Discussion and Analysis of Financial Condition and
Results of Operations
This commentary should be read in conjunction with the Financial Statements and
Notes, presented immediately following the signature page of this 10-KSB Report,
for a full understanding of Industrial Rubber's financial position and results
of operations.
Fiscal 1998 Compared With 1997.
Net sales in the year ended December 31, 1998, of $9,981,268 decreased 30.8%, or
$4,440,091, when compared to 1997 sales of $14,421,359. The decrease was mainly
attributable to the decrease in major contracts. In 1997 the Company realized
nearly $8.1 million in net sales from the Kennecott Utah Copper pipe- lining
project. During 1998 the Company's net sales included two major projects which
totaled approximately $4.1 million. As a result, the Company experienced a loss
of about $4.0 million in net sales from major projects.
Although the Company continues to pursue major projects, currently depressed
commodity prices make the near-term likelihood of such projects very low. The
Company is not projecting any sales from major projects in 1999. Rather, the
Company is projecting sales growth through expansion and acquisition, such as
the January 20, 1999 acquisition of TJ Products in West Jordan, Utah. TJ
Products is expected to contribute annual sales of about $3.5 to $4.0 million.
The Company is also actively pursing other acquisition candidates, such as ITW's
Irathane System Division previously referred to.
The Company's order backlog on December 31, 1998, was approximately $789,290.
The Company currently anticipates that it will have filled all current backlog
orders by the end of the first quarter of 1999.
Cost of sales as a percentage of net sales was 78.0% in 1998 compared with 69.0%
in 1997. The increase was primarily the result of a loss in major projects,
especially the Kennecott Utah Copper project, which are generally more
profitable and provide certain economies-of-scale benefits.
Selling, general and administrative expenses increased from $1,664,611 in 1997
to $2,342,553 in 1998. Approximately $300,000 of the $677,942 increase was the
result of increased administrative personnel and associated expenses related to
organizing and operating a public company. In addition, the Company recorded a
17
<PAGE>
$280,000 allowance for doubtful accounts to cover the entire trade receivable
balance from Kemess Royal Oak mines, which recently filed for protection under
Canadian bankruptcy law. The Company plans to continue to pursue collection of
the unpaid balance to the fullest extent possible. The Company also recorded an
$81,000 loss in achieving a final and complete out-of-court settlement with
IRM/NAPTech, concerning certain claims related to the $10 million Kennecott Utah
Copper project.
The Company experienced a $209,881 pre-tax provision for the restructuring costs
associated with the closing of the Clearfield, Utah facility and the
consolidation of Clearfield operations at the acquired facilities of TJ Products
in nearby West Jordan, Utah. This consolidation is expected to result in
operating cost savings in future years.
Non-operating income increased from $3,620 in 1997 to $245,713. This increase
was the result of interest income earned on the net proceeds on the initial
public offering on April 24, 1998, and approximately $81,000 of interest earned
on trade receivable accounts. The Company anticipates that interest income will
be substantially reduced in the future as the net proceeds from the initial
public offering are utilized as planned. Interest expense increased from
$110,731 in 1997 to $138,247 in 1998. The primary reasons for the increase is
higher short-term borrowing early in the year to fund trade receivables,
partially offset by reduced long-term interest due to the early retirement of
equipment loans in 1997.
As discussed elsewhere in this Form 10-KSB, the Company was an S Corporation
until March 31, 1998, and as such, was generally not responsible for income
taxes. Instead, the then sole stockholder was taxed on the Company's taxable
income. If the Company had paid income taxes as a C corporation, its estimated
income taxes during 1997 would have been $1,038,000. It is estimated that income
taxes for 1998 would have been a credit of $80,000. Additional information is
provided in Note 9. Income Tax Matters and Change in Tax Status, of the
Financial Statements, presented immediately following the signature page of this
10-KSB Report.
The pro-forma net loss of $168,454, or $.04 per basic and diluted share for
1998, represents a decrease from pro forma net income of $1,663,767 or $.54 per
basic and diluted share of the prior year. This change was due to the reduced
sales and increased costs and expenses previously discussed.
Fiscal 1997 Compared with 1996.
Net sales increased from $6,309,775 for 1996 to $14,421,359 for 1997. Of the net
sales in 1997, $8,094,517 was related to Kennecott Utah Copper pipe lining
project. The Company's order backlog on January 15, 1998 was approximately
$6,300,000, most of which was related to two major projects, Royal Oak Kemess
and Bend Tec, which were completed in the first and second quarters,
respectively.
18
<PAGE>
Cost of sales as a percentage of sales was 69% in 1997 compared with 76% in
1996. The decrease in 1997 was mainly due to achieving a higher level of
profitability on a major contract and the impact of increased volume on fixed
overhead costs.
Selling, general and administrative expenses increased from $1,122,968 in 1996,
to $1,664,611 in 1997. The increase was due primarily to increased staffing
expenses, which were necessary to service increased sales and increased salaries
for key personnel, reflecting their efforts to increase sales and profitability.
The major non-operating expense, interest expense, increased from $90,554 in
1996, to $110,731 in 1997. Non-operating income was not a significant factor in
the Company's operating results in 1996 and 1997.
Net income (before tax) in 1997 was $2,701,767 compared to $319,785 in 1996. Net
income as a percentage of net sales, increased from 5% in 1996 to 19% in 1997.
The increase was due primarily to the successful completion of a major
pipelining contract.
As discussed elsewhere in this Form10-KSB, the Company was an S Corporation
until March 31, 1998, and as such was generally not responsible for income
taxes. Instead, the existing stockholder was taxed on the Company's taxable
income. If the Company had paid income taxes as a C Corporation, its estimated
income taxes in 1996 would have been $145,300 and in 1997 income taxes would
have been $1,038,000.
Liquidity and Capital Resources.
The Company's cash flows provided by operating activities were $1,651,198 for
1998, compared with $1,845,624 in 1997. The two periods included two
significant, but nearly offsetting changes. Net income decreased nearly $2.6
million in 1998 compared with 1997. Favorable working capital changes in 1998,
compared with 1997, included approximately $1.9 million in receivables, which
consists of approximately a $1.2 million increase in 1997 and approximately a
$700,000 decrease in 1998. Inventories were also reduced in 1998.
Cash flows used for investing activities were $2,296,703 in 1998, compared with
$587,422 in 1997. Nearly the entire difference of approximately $1.7 million
related to the short-term investment in marketable securities with initial
public offering proceeds in 1998. Cash invested in property and equipment was
nearly constant for the two periods at about $617,000.
The Company's cash flows provided by financing activities were $3,229,127 in
1998 compared with a use of cash of $1,165,119 in 1997. The approximate $4.4
19
<PAGE>
million increase is the result of net proceeds from the initial public offering
of about $5.5 million, offset by reductions in short-term and long-term
borrowing.
At December 31, 1998, the Company had working capital of $4,953,251, including
$2,715,966 of cash and cash equivalents and $1,642,784 of short-term
investments. The Company had long-term debt of $329,108 as of December 31, 1998.
As disclosed elsewhere in this Form 10-KSB, the Company received the proceeds of
its initial public offering of $5,463,276 on April 29, 1998. During the year,
the Company made use of proceeds as outlined in the prospectus, of approximately
$1.1 million.
During the first quarter of 1999, the Company used approximately $2.8 million of
additional proceeds from the initial public offering. Most of these funds, $2.6
million, were used for the acquisition of TJ Products in January of 1999. The
Company intends to complete bank financing during 1999 on a portion of the TJ
Products acquisition. Further, the Company intends to leverage potential future
acquisitions with a combination of initial public offering proceeds and bank
term financing, such as the acquisition of ITW's Irathane System Division
previously referred to.
The Company believes that it can fund proposed capital expenditures and
operational requirements from operations, currently available cash and cash
equivalents, short-term investments and existing bank credit lines. Proposed
capital expenditures, excluding potential acquisitions, for the year ending
December 31, 1998 are expected to total approximately $600,000, compared with
$617,000 the past two years.
The Company intends to continue to grow its business, internally and through
alliances and acquisitions. The Company currently anticipates that any potential
acquisitions would be financed by proceeds from the initial public offering,
additional term financing, internally generated funds or the issuance of the
Company's common stock.
Impact of the Year 2000 Issue.
The Company has established a team to assess and address the possible exposures
related to the Year 2000 (Y2K) issue and is in the initial assessment phase. It
will be using both in-house personnel and outside resources to accomplish this
task. The areas under investigation include business computer systems,
production equipment, vendor readiness and contingency plans. The Company does
not use internally developed computer software and is therefore not anticipating
major reprogramming efforts. The Company's primary financial computing system
has been assessed and is certified Y2K compliant. There are several ancillary
applications that may not currently be Y2K compliant. The Company expects them
to be compliant by mid-calendar 1999. The majority of the Company's personal
20
<PAGE>
computers are currently Y2K compliant. Those computers that may not currently be
Y2K compliant are planned to be upgraded or replaced in the ordinary course of
business. None of these replacements have been accelerated and are not
anticipated to have a material effect on the Company's financial statements.
Equipment used for production or quality control does not use dates to control
operations. The costs of this examination to date have been expensed as incurred
and have not been material.
The Company intends to mail questionnaires to each of its significant vendors
and customers early in the second quarter of 1999 to determine the extent to
which the Company may be vulnerable to those third parties' failure to remediate
their own Y2K issues. It is anticipated this assessment will be completed by the
end of second quarter 1999. The Company anticipates developing a contingency
plan once it has completed its assessment of significant vendor and customer
compliance that it anticipates to be by the end of third quarter 1999. A
contingency plan, if needed, will be developed during the second half of 1999 to
minimize the Company's exposure to work slowdowns or business disruptions. In
the event any vendors are not Y2K compliant, the Company may seek new vendors to
meet its production needs. Any costs that may be incurred by the Company that
are related to external systems Y2K issues are unknown at this time (other than
immaterial costs of the questionnaire itself). However, management expects that
after reviewing and evaluating the responses to the survey, it will be able to
complete an assessment of its Y2K exposure and estimate the costs associated
with resolving any Y2K issues.
Although the Company does not at this time expect a significant impact on its
financial position, results of operations and cash flows, the assessment has not
been completed and there can be no assurance that the systems of other companies
will be converted on a timely basis and will not have a corresponding adverse
effect on the Company.
Item 7. Financial Statements
The Company's financial statements are filed as a part of this report on Form
10-KSB immediately following the signature page.
Item 8. Changes in and Disagreements with Accountants on
Accounting and
Financial Disclosure
The Company has not, during the past two years and through the date of this
report, had a change in its independent certified public accountants or had a
disagreement with such accountants on any matter of accounting principles,
practices or financial statement disclosure.
Part III
21
<PAGE>
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act
The response to this item incorporates by reference the information under the
caption "Election of Directors" of Industrial Rubber's Proxy Statement for the
1999 annual meeting of the stockholders.
Item 10. Executive Compensation
The response to this item incorporates by reference the information under the
caption "Executive Compensation" of Industrial Rubber's Proxy Statement for the
1999 annual meeting of the stockholders.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The response to this item incorporates by reference the information under the
caption voting Securities and Principal Holders of Industrial Rubber's Proxy
Statement for the 1999 annual meeting of the stockholders.
Item 12. Certain Relationships and Related Transactions
The response to this item incorporates by reference the information under the
caption "Certain Transactions" of Industrial Rubber's Proxy Statement for the
1999 annual meeting of the stockholders.
Item 13. Exhibits and Reports on Form 8-K.
(a) Required Exhibits
Exhibits Number
2. Purchase Agreement between Industrial Rubber Products - Utah,
Inc. and Company and Sonwil Products, Inc., dba T.J. Products
and Dean G. Wilson dated January 20, 1999 (Filed as Exhibit
2.1 to Form 8-K dated February 4, 1999, File No. 000-24039).
3(a)(1) Restated Articles of Incorporation of Company dated
as of January 30, 1998 (Filed as Exhibit 3.1 to Form
SB-2 dated February 20, 1998, File No. 333-46643).
3(a)(2) Restated Bylaws of Company as of January 30, 1998
(Filed as Exhibit 3.1 to Form SB-2 dated February 20,
1998 File No. 333-46643).
22
<PAGE>
10(1) Employment Agreement between the Company and Daniel O. Burkes
dated January 30, 1998 (Filed as Exhibit 10.1 to Form SB-2
dated February 20, 1998 File No. 333-46643).
10(2) Management Contract between the Company and Nelson Roofing,
Inc. dated January 30, 1998 (Filed as Exhibit 10.2 to Form
SB-2 dated February 20, 1998 File No. 333-46643).
10(3) Labor Agreement between the Company and United Steelworkers of
America dated May 28, 1998 (Filed as Exhibit 10.4 to Form SB-2
dated February 20, 1998 File No. 333-46643).
10(4) Stock Option Plan, including Speciman Stock Option Agreement
as of January 30, 1998 (Filed as Exhibit 10.5 to Form SB-2
dated February 20, 1998 File No. 333-46643).
10(5) Restated Term Loan and Credits Agent between the Company and
Norwest Bank Minnesota North dated November 20, 1997 (Filed as
Exhibit 10.6 to Form SB-2 (Amendment No 1) dated March 27,
1998 File No. 333-46643).
10(6) Waiver Letter from Norwest Bank Minnesota North to the Company
dated February 13, 1998 (Filed as Exhibit 10.6 to Form SB-2
(Amendment No 1) dated March 27, 1998 File No. 333-46643).
10(7) Lease Agreement between DGW Enterprises, L.C. and Industrial
Rubber Products - Utah, Inc. dated January 20, 1999.
10(8) Purchase Agreement between Illinois Tool Works Inc. and Industrial
Rubber Products, Inc. dated March 25, 1999.
21. List of Subsidiaries
Industrial Rubber Products - Utah, Inc., a Utah corporation which does
business as "TJ Products".
27. Financial Data Schedule
Period Type Year - 1998
Fiscal Year End December 31, 1998
Period Start January 1, 1998
Period End December 31, 1998
Cash $2,715,966
Securities $1,642,784
Receivables $1,481,564
23
<PAGE>
Allowances 280,000 Inventory 408,731 Total Current Assets 6,160,041
PP&E 3,072,119 Accumulated Depreciation 1,372,420 Total Assets
8,225,790 Total Current Liabilities 1,206,790 Bonds, mortgages and
similar debt 329,108 Preferred stock - mandatory redemption Preferred
stock - no mandatory redemption Common stock 4,194 Other stockholders'
equity 6,685,698 Total liabilities and stockholders' equity 8,225,790
Net sales of tangible products 9,981,268 Total revenues 9,981,268 Cost
of tangible goods sold 7,784,754 Total costs and expenses of sales and
revenues 10,337,188 Other costs and expenses Provision for doubtful
accounts and notes 280,000 Interest and amortization of debt discount
138,247 Income /(loss) before taxes and other items (248,454) Income
tax expense/(credit) (337,000) Income/(loss) continuing operations
88,546 Discontinued operations Extraordinary items Cumulative effect of
change in accounting principle Net income or loss 88,546 Earnings
(loss) per share - primary (0.04) Earnings (loss) per share - fully
diluted (0.04)
(b) Reports on Form 8-K
None
Signatures
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, this registrant has caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
24
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
Dated: March 29, 1999 /s/ John M. Kokotovich
- - - - - - - - - - - - - - - - -
Chief Financial Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Signature Title Date
President
/s/ Daniel O. Burkes Chief Executive Officer
Daniel O. Burkes and Director March 29, 1999
Vice President
/s/ Christopher M. Liesmaki Chief Operating Officer
Christopher M. Liesmaki and Director March 29, 1999
/s/ Paul A. Friesen
Paul A. Friesen Director March 29, 1999
/s/ James D. Mackay
James D. Mackay Director March 29, 1999
/s/ John R. Ryan, Jr.
John R. Ryan, Jr. Director March 29, 1999
25
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
FINANCIAL REPORT
DECEMBER 31, 1998
26
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Report of independent auditors 28
Balance sheets as of December 31, 1997 and 1998 29
Statements of income for the years ended December 31, 1997 and 1998 31
Statements of stockholders' equity for the years ended December 31, 1997
and 1998 32
Statements of cash flows for the years ended December 31, 1997 and 1998 33
Notes to financial statements 34-45
27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Industrial Rubber Products, Inc.
Hibbing, Minnesota
We have audited the accompanying balance sheets of Industrial Rubber
Products, Inc. as of December 31, 1997 and 1998, and the related statements of
income, stockholder's equity, and cash flows for each of the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Industrial Rubber
Products, Inc. as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Duluth, Minnesota
February 23, 1999, except for the last paragraph of Note 13, as to which the
date is March 25, 1999
28
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
BALANCE SHEETS
December 31, 1997 and 1998
ASSETS (Notes 5 and 6) 1997 1998
- --------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 132,344 $ 2,715,966
Marketable debt securities (Note 3) - 1,642,784
Trade receivables, less allowance for doubtful
accounts of $280,000 in 1998 2,282,637 947,364
Income tax refund receivable - 254,200
Inventories (Note 4) 840,363 408,731
Prepaid expenses 53,367 57,996
Deferred taxes (Note 9) - 133,000
------------ -- ----------------
Total current assets 3,308,711 6,160,041
- ---------------- -- ----------------
Other Assets
Cash value of life insurance 122,780 135,166
Other - 23,884
---------- -- ----------------
122,780 159,050
--------- -- ----------------
Deferred Taxes (Note 9) - 207,000
--------- -- ----------------
Property and Equipment (Note 12)
Land 10,000 10,000
Buildings 518,741 572,907
Automotive equipment 339,481 458,759
Machinery and equipment 1,709,134 2,030,453
------------ -- ----------------
2,577,356 3,072,119
Less accumulated depreciation 1,059,263 1,372,420
------------ -- ----------------
1,518,093 1,699,699
------------ -- ----------------
$ 4,949,584 $ 8,225,790
== ================ == ================
See Notes to Financial Statements.
29
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1998
- --------------------------------------------------------------------------------
Current Liabilities
Bank note payable (Note 5) $ 1,135,000 $ -
Current maturities of long-term debt (Note 6) 218,861 174,263
Due to related party (Note 11) 106,825 -
Accounts payable 674,144 485,493
Accrued expenses 399,850 547,034
------------- -- ----------------
Total current liabilities 2,534,680 1,206,790
------------- -- ----------------
Long-Term Debt, less current maturities (Note 6) 171,095 329,108
------------- -- ----------------
Commitments and Contingencies (Notes 12 and 13)
Stockholders' Equity (Note 7)
Common stock, $.001 par value; authorized
25,000,000 shares; issued 1997 2,934,000 shares;
1998 4,194,000 shares 2,934 4,194
Additional paid-in capital 143,816 5,605,832
Retained earnings 2,097,059 1,090,605
------------------- ----------------
2,243,809 6,700,631
Less cost of 6,500 shares of common stock
reacquired - 10,739
-- ------------------- ----------------
2,243,809 6,689,892
-- ------------------- ----------------
$ 4,949,584 $ 8,225,790
== =================== ================
30
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
STATEMENTS OF INCOME
Years Ended December 31, 1997 and 1998
1997 1998
- --------------------------------------------------------------------------------
Net Sales (Notes 2 and 12) $ 14,421,359 $ 9,981,268
Cost of Sales 9,947,870 7,784,754
-- ---------------- -- ----------------
Gross profit 4,473,489 2,196,514
Operating Expenses 1,664,611 2,342,553
Provision for Restructuring of Operations (Note 12) 209,881
-- ---------------- -- ----------------
Operating income (loss) 2,808,878 (355,920)
-- ---------------- -- ----------------
Nonoperating Income (Expense)
Interest and other income 3,620 245,713
Interest expense (110,731) (138,247)
-- ---------------- -- ----------------
(107,111) 107,466
-- ---------------- -- ----------------
Income (loss) before income taxes 2,701,767 (248,454)
Federal and State Income Taxes (Credits)
(Note 9) - (337,000)
-- ---------------- -- ----------------
Net income $ 2,701,767 $ 88,546
== ================ == ================
Unaudited Pro Forma Information (Note 9)
Income (loss) before income taxes $ 2,701,767 $ (248,454)
Provision for income taxes (credits) 1,038,000 (80,000)
-- ---------------- -- ----------------
Net income (loss) $ 1,663,767 $ (168,454)
== ================ == ================
Basic earnings (loss) per share $ 0.54 $ (0.04)
== ================ == ================
Diluted earnings (loss) per share $ 0.54$ (0.04)
== ================ == ================
Weighted average shares outstanding 3,087,600 3,803,651
== ================ == ================
See Notes to Financial Statements.
31
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997 and 1998
Common Stock Additional Total
---------------- Paid-in Retained Reacquired Stockholders'
Shares Amount Capital Earnings Shares Equity
- --------------------------------------------------------------------------------
Balance,
December 31, 1996
36,880 $38,604 $108,146 $209,945 - $356,695
Issuance of
additional shares
and transfer to
adjust common stock
to authorized par
value as a result
of stock split
(Note 7) 2,897,120 (35,670) 35,670 - - -
Net income - - - 2,701,767 - 2,701,767
Dividends on common
stock - - - (814,653) - (814,653)
------------------------------------------------------------------------
Balance,
December 31, 1997
2,934,000 2,934 143,816 2,097,059 - 2,243,809
Sale of
1,260,000 shares
of common stock,
net of issuance
costs (Note 7)
1,260,000 1,260 5,462,016 - - 5,463,276
Purchase of
6,500 shares
of stock - - - - (10,739) (10,739)
Net income - - - 88,546 - 88,546
Dividends
on common
stock
(Note 7) - - - (1,095,000) - (1,095,000)
--------------------------------------------------------------------
Balance,
December 31, 1998
4,194,000 $ 4,194 $5,605,832 $1,090,605 $ (10,739) $ 6,689,892
---------------------------------------------------------------------
See Notes to Financial Statements.
32
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
INDUSTRIAL RUBBER PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 and 1998
1997 1998
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $2,701,767 $ 88,546
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 374,551 394,592
Provision for bad debts - 362,839
Loss on disposal of property and equipment - 41,451
Deferred taxes - (340,000)
Changes in working capital components:
(Increase) decrease in trade receivables(1,164,704) 972,434
Increase in income tax refund receivable - (254,200)
(Increase) decrease in inventories 235,230) 431,632
Increase in prepaid expenses (7,447) (4,629)
Increase (decrease) in accounts payable
and accrued expenses 176,687 (41,467)
-------------- ----------------
Net cash provided by operating
activities 1,845,624 1,651,198
--- ------------------- ----------------
Cash Flows from Investing Activities
Purchase of property and equipment (617,273) (617,649)
Disbursement for marketable debt securities - (2,467,784)
Proceeds from maturity of marketable debt securities - 825,000
Disbursement for other assets - (23,884)
Collection of receivable from related party 32,500 -
Increase in cash value of life insurance (2,649) (12,386)
-- ------------------- ----------------
Net cash used in investing activities (587,422) (2,296,703)
------------------ ----------------
Cash Flows from Financing Activities
Net proceeds (repayment) on short-term borrowings 245,000 (1,135,000)
Proceeds from long-term borrowings 20,000 358,800
Principal payments on long-term borrowings (825,291) (245,385)
Proceeds from sale of common stock,
net of issuance costs - 5,463,276
Disbursement for common stock reacquired - (10,739)
Dividends paid on common stock (711,653) (1,095,000)
Advances from (repayment to) related party 106,825 (106,825)
------------------- ----------------
Net cash provided by (used in)
financing activities (1,165,119) 3,229,127
--- ------------------- ----------------
Net increase in cash
and cash equivalents 93,083 2,583,622
Cash and cash equivalents:
Beginning 39,261 132,344
--- ------------------- ----------------
Ending $ 132,344 $ 2,715,966
=== =================== ================
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 111,430$ 136,686
=== =================== ================
Cash payments for income taxes $ - 257,200
=== =================== ================
See Notes to Financial Statements
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: The Company's operations consist primarily of vulcanizing
rubber and applying urethane (for corrosion and abrasion resistant purposes) to
pipes, pumps and launders that are used in the mining industry in Northern
Minnesota and Utah. The Company extends credit to its customers, all on an
unsecured basis, on terms that it establishes for individual customers.
A summary of the Company's significant accounting policies follows:
Cash and cash equivalents: For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. Cash equivalents consist of money market
funds.
The Company maintains its cash in accounts which, at times, may exceed insured
limits. The Company has not experienced any losses in such accounts.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
Investment in debt securities: The Company has investments in marketable debt
securities. Management determines the appropriate classification of the
securities at the time they are acquired and evaluates the appropriateness of
such classifications at each balance sheet date. Available-for-sale securities
are stated at fair value, and unrealized holding gains and losses, net of the
related deferred tax effect, are reported as a separate component of
stockholders' equity.
Property and equipment: Property and equipment is stated at cost. Depreciation
is computed as follows:
Years Method
- ----------------------------------------------------------- --------------------
Buildings 19 - 39 Straight-line
Automotive equipment 3 - 5 Accelerated
Machinery and equipment 5 - 10 Accelerated
Income taxes: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment. As described in Note 9, the Company changed its income tax
status during 1998.
Advertising costs: The Company follows the policy of charging the costs of
advertising to expense as incurred. For the years ended December 31, 1997 and
1998, advertising expense totaled $22,450 and $74,005, respectively.
33
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
Revenue recognition: The Company recognizes revenue upon shipment of product.
Returns and allowances are recorded in the period the need for such is
identified.
Disclosures about fair value of financial instruments: The carrying amount of
current assets and liabilities approximates fair value because of the short
maturity of those instruments. The carrying amount of long-term debt
approximates fair value since primarily all long-term debt has interest rates
which fluctuates with or approximates the prime rate.
Use of estimates in the preparation of financial statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Segment information: The Financial Accounting Standards Board issued FASB
Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information. Statement No. 131 establishes 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. Statement No.
131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers. All of the Company's revenue is
attributed to a single reportable segment and therefore, the adoption of
Statement No. 131 had no effect on the financial statements.
Earnings per share: The FASB has issued Statement No. 128, Earnings per Share,
which the Company adopted during the first quarter of 1998. Statement No. 128
requires the presentation of earnings per share by all entities that have common
stock or potential common stock, such as options, warrants and convertible
securities, outstanding that trades in a public market. Those entities that have
only common stock outstanding are required to present basic earnings per-share
amounts. All other entities are required to present basic and diluted per-share
amounts. Diluted per-share amounts assume the conversion, exercise or issuance
of all potential common stock instruments unless the effect is to reduce a loss
or increase the income per common share from continuing operations.
Earnings per share based on pro forma net income for the years ended December
31, 1997 and 1998 follows:
Year Ended December 31,
-----------------------------------------------------------------
1997 1998
-------------------------------- -------------------------------
Net Net
Income Income
Numerator Denominator Per Share Numerator Denominator Per Share
- --------------------------------------------------------------------------------
Basic earnings per share:
Income available
to common
stockholders $1,663,767 2,934,000 $ - $(168,454) 3,803,651 $-
1997 adjustment(a) - 153,600 - - - -
------------------ ----------- ---------- ------------------------
Basic earnings
per share 1,663,767 3,087,600 0.54 (168,454) 3,803,651 (0.04)
Stock options - - - - - -
---------- -------------------------- ------ ---------- --------
Diluted earnings
per share $ 1,663,767 3,087,600 $ 0.54 $ (168,454) 3,803,651 $ (0.04)
=============== ============= =================== ============ ======
34
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
(a) Earnings per share for the year ended December 31, 1997 are computed based
upon the weighted average number of shares outstanding during the period, and
assume the issuance of sufficient shares at $5.00 per share to provide net
proceeds, after estimated aggregate offering expenses and underwriting discount,
to repay short-term bank debt of $675,000 incurred to make an S Corporation
distribution to the existing shareholder.
Diluted earnings per share: During the year ended December 31, 1998, the Company
granted options to employees to purchase 173,600 shares of common stock at $4.50
per share and issued underwriters warrants to purchase 126,000 shares of common
stock at $6.00 per share. Those options and warrants were not included in the
computation of diluted earnings per share because the exercise price exceeded
the average market price of the common shares during the year.
Note 2. Segment Information
The Company's revenue results from one product or service which consists
primarily of vulcanizing rubber and applying urethane to pipes, pumps, and
launders that are used in the mining industry. The Company's revenue (based on
location of the customer) is attributable to the United States, except for sales
to customers in Canada which amounted to approximately $639,000 and $1,800,000
for the years ended December 31, 1997 and 1998, respectively. All long-lived
assets are located in the United States.
The following table presents net sales from external customers for each of the
Company's groups of products and services for the years ended December 31, 1997
and 1998:
1997 1998
- ----------------------------------------------------------- -------------------
Pipe and pipe lining products $ 11,068,890 $ 6,503,184
Proprietary and engineered products 857,858 878,980
Standard rubber products 2,200,153 2,107,511
Other 294,458 491,593
---------------- -------------------
$ 14,421,359 $ 9,981,268
Net sales for the years ended December 31, 1997 and 1998 include sales to
several major customers, each of which accounted for 10 percent or more of net
sales:
Amount of Net Sales
Year Ended December 31,
--------------------------------------
1997 1998
- ------------------------------------------------------ -------------------------
Customer A $ 8,094,517 $ *
Customer B * 2,424,942
Customer C * 1,252,635
Customer D * 1,740,710
*The net sales to these customers was under 10 percent of net sales.
35
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 3. Marketable Debt Securities
The following is a summary of the Company's investment in available for sale
securities in which fair value approximates cost as of December 31, 1998:
Amount
- --------------------------------------------------------------------------------
US government securities $ 448,028
Corporate debt securities 1,194,756
-------------------
$ 1,642,784
===================
The debt securities mature through February 1999.
Note 4. Inventories
Inventories consist of the following as of December 31, 1997 and 1998:
1997 1998
- ------------------------------------------------------------------- ------------
Raw materials $ 538,330 $ 241,756
Work in process 255,937 126,405
------------------- -- ----------------
794,267 368,161
Raw materials purchased on behalf of customers 46,096 40,570
------------------ -- ----------------
$ 840,363 $ 408,731
=================== == ================
The Company incurs costs on behalf of its customers for the purchase of pipes,
pumps and launders and is reimbursed for these costs by the customers. The
Company does not receive a commission or recognize gross profit upon sale of
these components; therefore, net sales and cost of sales in the statements of
income do not include amounts for sales and purchases of components.
Note 5. Note Payable
The Company has a $1,500,000 bank line of credit for working capital financing
which is due on demand. Advances under the line of credit are subject to a
borrowing base of eligible trade receivables and inventories, as defined in the
agreement. The line of credit is collateralized by trade receivables,
inventories, equipment, assignment of a life insurance policy, and is personally
guaranteed by the majority stockholder. Interest is payable monthly at the
bank's prime rate (8.75% at December 31, 1998).
Among other things, the agreement requires the Company to:
a. Maintain a current ratio of at least 1.2 to 1.
b. Maintain a ratio of total liabilities to tangible net worth of less than 3 to
1. c. Maintain a ratio of traditional cash flow to current maturities of
long-term debt of at least 1.5 to 1. d. Refrain from declaring or paying
dividends in excess of 50% of after tax net income. e. Refrain from incurring
additional debt not subordinated to the bank.
36
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 6. Long-Term Debt
A summary of long-term debt as of December 31, 1997 and 1998 is as follows:
1997 1998
- ----------------------------------------------------------------------------
Note payable bank, due in monthly installments
of $20,900 including interest at the bank's
prime rate (8.75% at December 31, 1998) to
August 1999, at which time the remaining
balance is due. The note is subject to the
same collateral and covenants as described
in Note 5. $370,594 $ 145,540
Note payable bank, due in monthly installments
of $1,576 including interest at 8.5% to April
2003, at which time the remaining balance is due. - 156,527
Note payable bank, in participation with the Iron
Range Resources Rehabilitation Board, due in
monthly installments of $1,144 including interest
at 3.5% to April 2003, at which time the
remaining balance is due. - 154,589
Other notes payable due through November 2002. 19,362 46,715
------------------- -------------------
389,956 503,371
Less current maturities 218,861 174,263
------------------- -------------------
$ 171,095 $ 329,108
=================== ===================
The 8.5 percent and 3.5 percent notes payable to the bank are collateralized by
real estate and guaranteed by the majority stockholder. Among other things,
these notes require the Company to:
a. Maintain a current ratio of at least 1.2 to 1.
b. Maintain a ratio of total liabilities to tangible net worth of less than 3 to
1. c. Maintain a ratio of traditional cash flow to current maturities of
long-term debt of at least 1.5 to 1. d. Refrain from declaring or paying
dividends in excess of 50% of after tax net income. e. Limit capital
expenditures to $500,000. f. Obtain bank approval for the issuance of additional
debt.
g. Refrain from consolidating, combine or merging with any other corporation
or purchase or acquire the assets of another business.
The Company was in violation of certain covenants of the above bank notes
payable and line of credit agreement as of December 31, 1998; however, these
violations have been waived by the Bank.
Aggregate maturities required on long-term debt as of December 31, 1998 are as
follows:
December 31, Amount
- ------------------------------------------------------------ -------------------
1999 $ 174,263
2000 30,360
2001 27,204
2002 22,630
2003 248,914
-------------------
$ 503,371
===================
Note 7. Stockholders' Equity
In January 1998, the Company amended its Articles of Incorporation to increase
the number of authorized shares of common stock to 25,000,000 and declared a
stock split so that 2,934,000 shares of common stock were outstanding. The stock
split has been retroactively reflected in the accompanying financial statements.
During 1997, the Company commenced activity to accomplish an initial public
offering (IPO) of its common stock. The Company completed the initial public
offering on April 24, 1998, and issued 1,260,000 shares of common stock
(excluding the underwriters' over allotment option to purchase an additional
189,000 shares of common stock) at an offering price of $5.00 per share.
Proceeds raised from the sale of common stock amounted to $5,463,276, net of
offering expenses of $836,724.
In connection with the initial public offering the Company issued warrants to
the underwriters to purchase 126,000 shares of the Company's common. The
warrants may not be exercised during the first year after the effective date of
the offering and are exercisable during a period of four years thereafter at a
price equal to $6.00 per share.
During 1997, distributions totaling $814,653 were paid to the stockholder to pay
his individual income taxes on the Company's taxable income for the year ended
December 31, 1996. The Company made distributions totaling $1,095,000 during
1998 to enable the stockholder to pay income taxes on the Company's income for
the year ended December 31, 1997 and period ended March 31, 1998. (See Note 9).
In November 1998, the Board of Directors authorized a plan that allows the
Company to purchase up to 50,000 shares of the Company's common stock. In
December 1998, the Company repurchased 6,500 shares at a cost of $10,739.
Note 8. Stock Option Plan
On January 30, 1998, the Company adopted the 1998 Stock Option Plan which
provided for the granting of stock options to employees, directors and officers
of the Company. The number of shares issued pursuant to the options granted
shall not exceed 400,000 shares. Options are exercisable at $4.50 per share
which approximates fair market value at the date of grant and expire five years
after date of grant. Options generally vest at a rate of 25 percent per year
over a period of four years from the date of grant.
37
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plan as of December 31,
1998, and the changes during the year is presented below:
Weighted-
Average
Exercise Price
Shares
---------------------- -------------------
Outstanding at beginning of year - $ -
Granted 173,600 4.50
Exercised - -
Forfeited (4,400) 4.50
Outstanding at end of year 169,200 $ 4.50
-------------------- ---------------
Exercisable at end of year -
--------------------
Weighted-average fair value per option of
options granted during the year $ 4.01
----------------
At December 31, 1998, the options outstanding under the stock option plan has an
exercise price of $4.50 per share and a weighted-average remaining contractual
life of 4.35 years. Options begin to vest in January 1999.
As permitted under generally accepted accounting principles, grants under the
plan are accounted for following the provisions of APB Opinion No. 25 and its
related interpretations. Accordingly, no compensation cost has been recognized
for grants made to date.
Pro forma net earnings and earnings per share information, as required by SFAS
No. 123 Accounting for Stock-Based Compensation has been determined as if the
Company had accounted for the stock option plan under SFAS 123's fair value
method. The fair value of these options was estimated at grant date using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998: risk-free interest rate of 5.75; no dividends; expected
option life of 4 years; no volatility.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the 4-year average vesting period.
38
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
Had compensation costs for the Company's stock options been determined based on
the fair value method prescribed in FASB Statement No. 123, net income (loss)
and earnings (loss) per share would have been reduced to the pro forma amounts
shown below:
Year Ended December 31, 1998 Amount
- --------------------------------------------------------------------------------
Net income (loss):
As reported $ (168,454)
Pro forma $ (189,254)
Basic earnings (loss) per share:
As reported $ (0.04)
Pro forma $ (0.05)
Diluted earnings (loss) per share:
As reported $ (0.04)
Pro forma $ (0.05)
Options were not included in the computation of diluted earnings per share
because the exercise price of those options exceeded the average market price of
the common shares during the year.
The pro forma effects of applying Statement No. 123 are not necessarily
representative of the effects on pro forma disclosures of future years.
Note 9. Income Tax Matters and Change in Tax Status
For the years ended through December 31, 1997 and the three month period ended
March 31, 1998, the Company, with the consent of its stockholder, elected to be
taxed under sections of federal and state income tax law, which provide that, in
lieu of corporation income taxes, the stockholder separately account for the
Company's items of income, deductions, losses and credits. On March 15, 1998,
the Company's stockholder terminated this election effective with the period
beginning on April 1, 1998 in connection with the initial public offering of its
common stock. (See Note 7).
As a result of the termination, the Company recorded a net deferred tax asset of
$15,000, by a credit to income tax expense, for temporary differences between
the financial reporting and the income tax basis.
Deferred taxes credited to income during 1998 consisted of the following:
Amount
- --------------------------------------------------------------------------------
Effect of change in tax status $ 15,000
Change in net deferred tax assets 325,000
-------------------
$ 340,000
===================
Pro forma income taxes represent the estimated income taxes that would have been
reported had the Company filed federal and state income tax returns under the
asset and liability method of accounting.
39
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
The following summarizes the pro forma provision for income taxes (credits) for
the years ended December 31, 1997 and 1998 as if the Company was taxed as a C
Corporation for the years then ended, and the actual tax provision for the
period since the S Corporation termination:
Pro forma Actual
----------------------------------------------
Year Ended December 31, 1997 1998 1998
- --------------------------------------------------------------------------------
Current:
Federal $ 873,300 $ 4,200 $
State 167,400 3,800 3,000
----------------- --------------- ---------
1,040,700 8,000 3,000
----------------- --------------- ---------
Deferred:
Federal (2,150) (68,000) (265,000)
State (550) (20,000) (75,000)
----------------- --------------- ---------
(2,700) (88,000) (340,000)
----------------- --------------- ---------
Total $ 1,038,000 $ (80,000) $ (337,000)
================= ================ =========
The income tax provision differs from the amount of income tax determined by
applying the US federal income tax rate to pretax income due to the following:
Pro forma Actual
-----------------------------------
Year Ended December 31, 1997 1998 1998
- --------------------------------------------------------------------------------
Computed "expected" tax expense $ 945,600 $(87,000) $(87,000)
Increase (decrease) in income taxes resulting from:
State income taxes,
net of federal tax benefit 110,100 (10,700) (14,800)
Benefit of income taxed at lower rates (27,000) 6,800 6,800
Deferred taxes recorded due to change
in tax status - - (15,000)
Effect of S Corporation earnings not
included in taxable income for first
quarter of 1998 - - (241,000)
Nondeductible expenses and other 9,300 10,900 14,000
-------------------------------------
Total $1,038,000 $ (80,000) $(337,000)
=====================================
Net deferred tax assets consist of the following components as of December 31,
1998:
Amount
- --------------------------------------------------------------------------------
Property and equipment, principally due to differences
in accumulated depreciation and bases of assets $ (30,000)
-------------------
Additional costs capitalized to inventory for income tax purposes 12,000
Accrued expenses not currently deductible for tax purposes 9,000
Allowance for doubtful accounts 112,000
Net operating loss carryforwards 237,000
-------------------
Total deferred tax assets 370,000
-------------------
Valuation allowance for deferred tax assets -
-------------------
Net deferred tax assets $ 340,000
===================
The deferred tax amounts have been classified on the accompanying balance sheet
as of December 31, 1998 as follows:
Amount
- --------------------------------------------------------------------------------
Current deferred tax assets $ 133,000
Noncurrent deferred tax assets 207,000
-------------------
Net deferred tax assets $ 340,000
===================
The Company has determined that it is more likely than not that the deferred tax
assets will be realized and a valuation allowance for such assets is not
required.
At December 31, 1998, the Company has federal net operating loss carryforwards
of approximately $602,000 and state operating loss carryforwards for Minnesota
and Utah of approximately $379,000 and $215,000, respectively, which are
available to reduce future taxable income. The net operating loss carryforwards
expire through 2018.
Note 10. Retirement Plan
The Company has a Salary Savings Plan and Trust (401(k)) which covers
substantially all employees of the Company. The plan provides for contributions
in such amounts as the Board of Directors may annually determine. Company
contributions for 1997 and 1998 were $49,165 and $29,000, respectively.
Note 11. Related Party Transactions
The Company had a payable of $106,825 to Nelson Roofing, Inc. as of December 31,
1997, a company owned by the majority stockholder of the Company. The Company
has a receivable of $6,986 as of December 31, 1998, from Nelson Roofing, Inc.
Under the terms of an agreement with Nelson Roofing, Inc. the Company provides
management and administrative services based upon actual employee cost plus
overhead and receives a management fee for such services.
Management fees received from Nelson Roofing, Inc. amounted to
approximately $102,000 in 1997 and $90,400 in 1998. The Company paid $9,243 and
$7,874 in 1997 and 1998, respectively, to Nelson Roofing, Inc. for construction
services.
The Company rented a house in Utah owned by the majority stockholder on a
month-to-month basis. Total rent paid to the majority stockholder amounted to
$61,100 in 1997 and $50,760 in 1998.
The Company rents warehouse space from a company owned by the majority
stockholder which amounted to $6,700 for both 1997 and 1998.
On January 30, 1998, the Company entered into a two-year employment agreement
with its president, who is also the majority stockholder. Under the agreement,
the president will receive a base salary of $255,216 and bonuses as determined
by the Board of Directors. The agreement contains certain noncompetition
provisions.
40
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 12. Leases and Business Restructuring
The Company leased its Utah production facility under the terms of an operating
lease expiring January 31, 1999. Lease payments amounted to $13,600 per month at
December 31, 1998. The lease provided that the Company pay all utilities, and
property taxes and insurance over certain amounts.
Total rent expense, including rent paid to related parties, amounted to
approximately $282,000 in 1997 and $301,200 in 1998.
On December 16, 1998, the Company decided to discontinue the operations of the
Clearfield, Utah facility and relocate certain assets to a new facility in Utah
as described in Note 13. The Company terminated its operating lease effective
January 31, 1999. The estimated loss on closing the facility for the year ended
December 31, 1998 is as follows:
Amount
- --------------------------------------------------------------------------------
Loss on disposal of assets $ 39,881
Operating losses from measurement date to December 31, 1998 43,000
Estimated expenses to close from January 1, 1999 to
anticipated disposal date 127,000
---------------
$ 209,881
=================
Inventory amounting to $84,600 and property and equipment with a net book value
of approximately $548,000, as of December 31, 1998, are expected to be stored at
the new facility and placed in service in future periods.
Approximately 70 percent and 35 percent of net sales resulted from the Utah
operations for the years ended December 31, 1997 and 1998, respectively.
Note 13. Subsequent Event
On January 20, 1999, the Company, through a newly formed wholly-owned
subsidiary, entered into an agreement to purchase certain assets of a Utah
corporation engaged in the business of producing rubber linings, rubber moldings
and urethane moldings for the mineral processing, electric power, paper, and US
military and aerospace industries. The total acquisition cost was approximately
$2,260,000 and will be accounted for under the purchase method.
The Company entered into a lease agreement of real property with the previous
owner. The lease term is for ten years, which can be terminated at the option of
the Company after four years, and requires monthly lease payments of
approximately $13,300 and payment of all real estate taxes, maintenance and
insurance. The Company also entered into employment agreements with the previous
owner and certain employees of the acquired company and issued the previous
owner options to purchase 30,000 shares of the Company's common stock at $4.50
per share.
41
<PAGE>
INDUSTRIAL RUBBER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
On March 25, 1999 the Company signed an agreement to purchase certain assets of
the Irathane Systems Division of Chicago-based Illinois Tool Works, Inc. (ITW).
Under the terms of the agreement the Company will pay approximately $8,000,000
for the trade accounts receivable, inventory, land, building, equipment molds
and intangible assets. The Company will acquire Irathane Systems' manufacturing
facilities in Colorado Springs, Colorado; Hibbing, Minnesota; and Sudbury,
Ontario, Canada. ITW's Irathane Systems Division produces liquid urethanes,
urethane moldings and rubber and urethane linings for the mineral processing,
aggregate, paper and power industries. To finance the acquisition the Company
plans to obtain a term loan from a bank and use the remaining proceeds of its
initial public offering. The acquisition will be accounted for under the
purchase method of accounting.
42
<PAGE>
EXHIBIT 10(7)
LEASE AGREEMENT
This Lease Agreement (the "Lease") is made effective as of the 20 day
of January, 1999, between DGW Enterprises, L.C., a Utah limited liability
company ("Lessor"), and Industrial Rubber Products-Utah, a Utah corporation
("Lessee").
R E C I T A L S :
A. Lessor is the owner of certain real property located in Salt Lake County,
Utah, at 5574 Leo Park Road, West Jordan, and four (4) buildings located on such
real property (collectively, the "Buildings").
B. Lessee desires to lease the Premises, as defined herein, from Lessor upon the
terms and conditions set forth below.
NOW THEREFORE, In consideration of the mutual covenants contained herein, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Lessor and Lessee hereby agree as follows:
SECTION ONE
1.1 PREMISES: Lessor hereby leases to Lessee and Lessee hereby rents from Lessor
the real property that is more particularly described and depicted on the
attached Exhibit "A" and the Buildings and other improvements located thereon
(the "Premises").
1.2 CONDITION. Lessor shall deliver the Premises to Lessee on the Commencement
Date, as defined herein, in their "as-is" condition.
1.3 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges (a) that it has inspected
and hereby accepts the Premises in their "as-is" "with-all-faults" condition;
(b) that Lessee has made such investigation as it deems necessary with reference
to such matters and assumes all responsibility therefor as the same relates to
Lessee's occupancy of the Premises and/or for 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, implied or express, with respect to the said
matters other than as set forth in this Lease.
SECTION TWO
2.1 TERM OF LEASE. The initial term of the Lease shall be for a period of ten
(10) years (the "Term"), commencing on January 20, 1999 (the "Commencement
Date"), and terminating on January 19, 2008. Lessee shall surrender the Premises
to Lessor immediately on termination of the Lease. Further, Lessee shall have
the right to terminate this Lease upon at any time after January 19, 2003, upon
six (6) months' prior written notice to Lessor.
SECTION THREE
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SIGNAGE: In the event that Lessee desires to affix any signage to any part of
the exterior of the Premises, such signage shall be at Lessee's expense. Signage
must comply with Lessor's master sign plan and with all local ordinances and
must be pre-approved in writing by Lessor. Upon expiration or termination of the
Lease, Lessee shall remove any such signage at its sole cost and shall repair
any damage to the Premises or the Buildings.
SECTION FOUR
4.1 RENT: Lessee shall cause payment of Rent and 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 demand, except as set forth herein, on or
before the day on which it is due under the terms of this Lease. 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 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. For purposes of this Lease, the term "Rent" shall include the monthly
rental amounts due hereunder and all other charges and amounts due under this
Lease. Lessee shall pay Rent in advance on the first (lst) day of each month of
the Term of this Lease as follows: (a) $12,500.00 per month from January 1,
1999, through and including December 31, 2000; (b) $13,000.00 per month from
January 1, 2001, through and including December 31, 2003; (c) $13,500.00 per
month from January 1, 2004, through and including December 31, 2005; and (d)
$14,000.00 per month from January 1, 2006, through and including December 31,
2008.
4.2 PAYMENTS: Rent payments shall be made to Lessor at the address directed,
from time to time, by Lessor. A payment shall be delinquent if not paid and
received by the tenth (10th) day of the month in which it is due, at which time
the late charges referred to in Section 14 hereof shall apply and will be
assessed against Lessee. On Lessee's failure to pay the Rent when due, a Default
shall have occurred hereunder, and Lessor shall have the right to damages for
Default and to enforce the remedies permitted hereunder and under applicable
law.
4.3 INTENTIONALLY DELETED.
SECTION FIVE
5.1 USE OF PREMISES: Lessee agrees to use the Premises hereunder for the sole
purpose of providing, manufacturing, and distributing protective rubber,
urethane, and other abrasion resistant products, coatings, and linings and
related specialty materials and products and certain painting. Lessee agrees
that the Premises shall not be used for any other purposes or for any unlawful
purpose, and Lessee agrees that Lessee shall not permit any use of the Premises
which is in violation of any law, ordinance or regulation of any governmental
authority, or any use which will constitute a nuisance. Lessee further agrees
that the Premises shall not be used in any manner that will injure or impair the
structural strength or the integrity of the Buildings. Lessee agrees not to sell
or display any offensive or inappropriate merchandise in or outside the
Premises.
5.2 MAINTENANCE.
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(a) Lessee shall, at Lessee's sole cost and expense and at all times, keep,
repair, and maintain the Premises and every part thereof in good order,
condition and repair, non-structural (whether or not such portion of the
Premises requiring repair and maintenance, or the means of repairing and
maintaining the same, are reasonably or readily accessible to Lessee, and
whether or not the need for such repairs occurs as a result of Lessee's use, any
prior use, the elements or the age of such portion of the Premises), including,
without limiting the generality of the foregoing, all equipment or facilities
serving the Premises, such as fans, 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, interior walls, ceilings, floors, slab,
windows, doors, plate glass, stained glass, skylights, landscaping, driveways,
parking lots, fences, retaining walls, walls needing interior and/or exterior
paint, 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 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. Lessor may require Lessee to repaint the
exterior of the Buildings on the Premises as reasonably required, but not more
frequently than once every five (5) years at Lessee's cost.
(b) Lessee shall, at Lessee's sole cost and expense, procure and maintain
contracts, 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, air conditioning and ventilation equipment; (ii) boiler,
fired or unfired pressure vessels; (iii) fire sprinkler and/or standpipe and
hose or other automatic fire extinguishing systems, including fire alarm and/or
smoke detection; (iv) landscaping and irrigation systems; (v) roof covering and
drain maintenance; and (vi) asphalt maintenance. Notwithstanding the foregoing,
Lessee may provide reasonable evidence of such inspection, maintenance and
service in lieu of outsource contracting.
5.3 LESSOR OBLIGATIONS. It is intended by Lessor and Lessee that Lessor have
only the obligation to repair and maintain the structural components of the
Buildings. Specifically, Lessor shall maintain and repair the foundations,
roofs, and structural components of the walls. Otherwise, Lessor shall have no
obligation, in any manner whatsoever, to repair or maintain the Premises or the
Buildings, the improvements located thereon, or the equipment therein. Except as
expressly set forth in this Section 5.3, all maintenance and repair obligations
are intended to be that of the Lessee's under Section 5.2 hereof. It is the
intention of the Lessor and Lessee that the terms of this Lease govern the
respective obligations of the Lessor and Lessee as to maintenance and repair of
the Premises.
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5.4 INTENTIONALLY LEFT BLANK.
5.5 INTENTIONALLY LEFT BLANK
5.6 HAZARDOUS SUBSTANCES:
(a) The term "Hazardous Substance," as used in this Lease, shall mean any
product, substance, chemical, material or waste whose presence, nature, quantity
and/or intensity of existence, use, manufacture, disposal, transportation,
spill, release or effect, either by itself or in combination with other
materials expected to be on the Premises, is either: (i) potentially injurious
to the public health, safety or welfare, the environment or the Premises, (ii)
regulated or monitored by any governmental authority, or (iii) a basis for
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 Section 5.7). "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 Lessee's being
responsible for the presence in, on 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, Lessee 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 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) and/or the deposit of an additional Security Deposit hereunder.
(b) If Lessee knows, or has reasonable cause to believe, that a Hazardous
Substance, or a condition involving 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 Use
involving the Premises.
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(c) 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 loss of rents and/or damages, liabilities, judgments, costs,
claims, liens, expenses, penalties, permits and attorneys' and consultant's fees
arising out of or involving any Hazardous Substance or storage tank brought onto
the Premises by or for Lessee or under Lessee's control. Lessee's obligations
under this Section 5.6 shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by Lessee, and the cost of investigation (including consultant's and
attorneys' fees and testing), removal, remediation, restoration and/or abatement
thereof, or of any contamination therein involved, and shall survive the
expiration or earlier termination of this Lease. No termination, cancellation or
release agreement entered into by Lessor and Lessee shall release Lessee from
its obligations under this Lease with respect to Hazardous Substances or storage
tanks, unless specifically so agreed by Lessor in writing at the time of such
agreement.
5.7 LESSEE 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 in any manner
to the Premises (including, but not limited to, matters pertaining to (i)
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance 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 five (5) days after receipt of Lessor's written request, provide Lessor
with copies of all documents and information, including, but not limited to,
permits registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law 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 failure by Lessee or the
Premises to comply with any Applicable Law.
5.8 INSPECTION/COMPLIANCE. It is recognized and acknowledged that Lessor or an
employee or agent of Lessor will be on the premises working in the capacity of
Lessee's general manager. In consequence of that, Lessor acknowledges that it
has continuous opportunities to inspect and shall make itself aware of the
continuing condition of the Premises and shall promptly report any changes,
conditions or otherwise which may trigger rights or obligations under this
Lease. Mr. Dean G. Wilson owns and controls Lessor and is currently employed by
Lessee. If Mr. Wilson, in his employment capacity with Lessee, directly causes
Lessee to breach the terms of this Lease, Lessee shall not be responsible,
financially or otherwise, for such breach.
SECTION SIX
6.1 TAXES AND ASSESSMENTS: This Lease is intended to be absolutely net of all
costs to Lessor.
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(a) Payment of Taxes. Lessee shall pay the Real Property Taxes, as defined in
Section 6.2, applicable to the Premises during the term of this Lease. Subject
to Section 6.1(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 Lessee 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, during any period
in which Lessee remains in uncured default after applicable cure periods, 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 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 funds needed to pay
the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee
under the provisions of this Section 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 Section
may be intermingled with other moneys of Lessor and shall not bear interest. In
the event of a Breach by Lessee in the performance of the obligations of Lessee
under this Lease, then any balance of funds paid to Lessor under the provisions
of this Section may, subject to proration as provided in Section 6.1(a), at the
option of Lessor, be treated as an additional Security Deposit hereunder.
6.2 "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's 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 events
occurring, or changes in applicable law taking effect, during the term of this
Lease, including, but not limited to, a change in the ownership of the Premises
or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Lessor and Lessee.
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6.3 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.
6.4 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 or elsewhere. When possible, Lessee shall
cause such Trade fixtures, furnishings, equipment and all other 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 Lessor the taxes attributable to Lessee within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property or, at Lessor's option, as provided in Section
6.1(b).
6.5 INSURANCE:
(a) Payment for Insurance. Lessee shall obtain and pay for all insurance
required under this Section 6.5 (the "Insuring Party"). 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 for any amount due.
(b) Liability Insurance. 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 $1,000,000 per occurrence with
such endorsements as Lessor shall reasonably request. The policy shall not
contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance required by this Lease or as
carried by Lessee shall not, however, limit the liability of Lessee nor relieve
Lessee of any obligation hereunder. All insurance to be carried by Lessee shall
be primary to and not contributory with any similar insurance carried by Lessor,
whose insurance shall be considered excess insurance only.
(c) Property Insurance--Buildings, Improvements and Rental Value.
(i) Buildings 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 loss 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 the coverage is available and
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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), 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. 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.
(ii) 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.
(iii) 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 Section 8.3 shall insure Lessee Owned Alterations
and Utility Installations.
(d) Lessee's Property Insurance. Subject to the requirements of Section 6.5(e),
Lessee at its cost shall either by separate policy or, at Lessor's option, by
endorsement to a policy already carried, maintain insurance coverage on all of
Lessee's personal property, Lessee Owned Alterations and Utility Installations
in, on, or about the Premises similar in coverage to that carried by the
Insuring Party under 6.5(c). Such insurance shall be full replacement cost
coverage. The proceeds from any such insurance shall be used by Lessee for the
replacement of personal property or the restoration of Lessee Owned Alterations
and Utility Installations. Lessee shall be the Insuring Party with respect to
the insurance required by this Section 6.5(d) and shall provide Lessor with
written evidence that such insurance is in force.
(e) 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" 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
Section 6.5. If Lessee is the Insuring Party, Lessee shall cause to be delivered
to Lessor certified copies of policies of such insurance or 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
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. If the Insuring Party shall fail to procure and
maintain the insurance required to be carried by the Insuring Party under this
Section 6.5, the other party hereto may, but shall not be required to, procure
and maintain the same, but at Lessee's
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expense. Notwithstanding any provision herein to the contrary, Lessee may obtain
insurance coverages under so-called blanket basis policies which provide
insurance to other premises operated by Lessee or its affiliates, which policies
may contain such deductible and other features as are determined by Lessee in
the exercise of reasonable business judgment.
(f) 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
Section 6.5. 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.
(g) Indemnity. Except for Lessor's gross negligence and/or breach of express
warranties or breach of this Lease, Lessee shall indemnify, protect, defend and
hold harmless the 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, 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. Except for
Lessee's gross negligence and/or breach of express warranties or breach of this
Lease, Lessor shall indemnify, protect, defend and hold harmless the Lessee and
its agents from and against any and all claims, damages, costs, liens,
judgments, penalties, attorneys' and consultants' fees, expenses and/or
liabilities arising out of or involving any act, omission or neglect by Lessor,
its agents, contractors, employees or invitees and out of any default or breach
by Lessor in the performance in a timely manner of any obligation on Lessor's
part to be performed under this Lease.
(h) Exemption of Lessor from Liability. Lessor shall not be liable for injury or
damage to the person or goods, wares, merchandise or other property of Lessee,
Lessee's employees, contractors, invitees, customers, or any other person in or
about the Premises, whether such damage or injury is caused by or results from
fire, steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, fire sprinklers, wires, appliances,
plumbing, air conditioning or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the Buildings 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
unless caused by the gross negligence of Lessor or its agents or employees or
Lessor's breach of this Lease. Lessor shall not be liable for any damages
arising from any act or neglect of any other tenant of Lessor.
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6.6 UTILITIES AND SNOW REMOVAL: Lessee shall arrange, fix and bear the cost of
gas, electrical, water, sewage and telephone services furnished to the Premises
during the Term and all renewals thereof of this Lease. Lessee shall pay for all
water, gas, heat, light, power, telephone, trash disposal, snow removal, and
other utilities and services supplied to the Premises, together with any taxes
thereon. Lessee agrees to remove accumulations of snow and ice, within a
reasonable time after such removal becomes necessary, from the front of the
entire Buildings including the south doorway and the full length of the sidewalk
in order to allow easy access to the Buildings and the Premises and to ensure
safety.
SECTION SEVEN
7.1 ALTERATIONS/FIXTURES.
(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, fire protection 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 on 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 Section 7.2. Lessee shall not make any Alterations or
Utility Installations in, on, under or about the Premises without Lessor's prior
written consent, which will not be unreasonably withheld or delayed. Lessee may,
however, 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 cost thereof during the term of this Lease as extended does not
exceed $50,000.
(b) Consent. Any Alterations that Lessee shall desire to make shall be presented
to Lessor in written form with proposed detailed plans. All consents given by
Lessor, whether by virtue of Section 7.2(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,
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defend and protect itself, Lessor and the Premises against the same and shall
pay and satisfy any such adverse judgment that may be rendered thereon before
the enforcement thereof against the Lessor or the Premises. If Lessor shall
require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in
an amount equal to one and one-half times the amount of such contested lien
claim or demand, indemnifying Lessor against liability for the same, as required
by law for the holding of the Premises free from the effect of such lien or
claim. In addition, Lessor may require Lessee to pay Lessor's attorneys' fees
and costs in participating in such action if Lessor shall decide it is to its
best interest to do so.
(d) Addition. Lessee has informed Lessor that it will require an addition to one
of the Buildings located on the Premises to house the additional equipment,
inventory, and supplied currently located in Lessee's Clearfield, Utah, facility
(the "Addition"). Lessee shall bear the entire cost of the Addition, and the
planning and construction of the Addition shall be subject to the terms of this
Section 7.1 and to the other terms of this Lease.
7.2 OWNERSHIP/REMOVAL/SURRENDER/RESTORATION:
(a) Ownership. Subject to Lessor's right to require their removal as hereinafter
provided in this Section 7.2, all Utility Additions made to the Premises by
Lessee shall be the property of and owned by Lessor. Unless otherwise instructed
per Section 7.2(b) hereof, all 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 provided that notice is given
at least six months prior to the 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 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
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, shall 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, all as may then be required by Applicable
Law and/or good practice. Lessee's Trade Fixtures shall remain the property of
Lessee and shall be removed by Lessee subject to its obligation to repair and
restore the Premises per this Lease.
7.3 REPAIRS:
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Lessee shall be responsible for the cost of making all routine and extraordinary
repairs and replacements of any non-structural nature to the Buildings and the
Premises, including, but not limited to, plumbing, equipment, carpeting,
lighting fixtures, painting and the cost of all maintenance on the leased
Premises. Repairs and maintenance shall include work needed to maintain and
preserve all fixtures, glass, appurtenances, plumbing, electrical, heating,
ventilating and other equipment. Notwithstanding the foregoing or any other
provision to the contrary, Lessee shall be responsible for the cost of any
upgrades, replacements, changes, or modifications to the Premises or to the
Buildings, including structural items required by any law, ordinance, code or
regulation promulgated by any federal, state or local authority and which apply
to the Lessee's use of the Premises or Buildings during the term of this Lease
and any extensions thereof. Any repair, replacement, maintenance, upgrade,
change or modification must be done with the prior reasonable consent of Lessor
in a manner reasonably approved by Lessor and by contractors approved by Lessor.
7.4 COMPLIANCE:
Any work done at the request of or as part of the responsibility of the Lessee,
including all replacements, must be completed in compliance with all applicable
codes, standards or regulations. If Lessee refuses or neglects to work on,
repair, replace, restore or maintain the Premises or the Buildings as required
hereunder, or commence such work within 60 days after written demand by the
Lessor, Lessor may make such repairs or undertake the required work without
liability to the Lessee for any loss or damage to Lessee's merchandise, fixtures
or other property, or to Lessee's business, by reason of such work, and Lessee
shall on demand reimburse Lessor, upon Lessor providing a bill to Lessee, all of
Lessor's costs of such work. Late payments shall be subject to the same
provisions and penalties as set forth in Section 4.2 above.
SECTION EIGHT
LESSOR'S RIGHT TO ENTER: Lessee shall permit Lessor and Lessor's agents
to enter the Premises after reasonable notice to Lessee to inspect the Premises;
to post notices of non-liability for alterations, additions, or repairs, or to
place on the Premises any usual or ordinary "For Sale" signs, without any rebate
of Rent to Lessee or damages for any loss of occupation or quiet enjoyment of
the Premises, provided such entry or activity by Lessor shall not unreasonably
interfere with or disrupt Lessee's business at the Premises. Lessor retains the
right to enter the Premises at any time without notice to Lessee in the event of
any emergency. Lessor may, at any time within sixty (60) days prior to the
expiration of this Lease, place on the windows and doors of the Premises any
usual or ordinary "to Let" or "To Lease" signs. Lessor and Lessor's agents may,
during the last-mentioned period, enter on the Premises at reasonable hours, and
exhibit the same to prospective tenants, provided such entry or activity by
Lessor shall not unreasonably interfere with or disrupt Lessee's business at the
Premises. This provision need only apply so long as Mr. Dean G. Wilson is not
permitted to enter the Premises in his employment with Lessee.
SECTION NINE
REMOVAL OF LIENS BY LESSEE: Lessee will not permit any mechanic's,
materialman's, or other liens to stand against the Premises or the Buildings for
work or material contracted for by Lessee. Should any liens be filed against the
Premises or the Buildings arising out of work
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performed or materials furnished at the request of the Lessee, or because of any
claim against Lessee, Lessee shall cause the same to be canceled within ten (10)
days after notice by Lessor, subject to the terms of Section 7.1(c) hereof.
Lessee hereby indemnifies and holds Lessor harmless against all loss, damages,
expenses and costs, including attorney's fees, on account of claims and/or liens
based on work or material furnished for Lessee or persons claiming under Lessee.
In the event that Lessee fails to have any lien removed, Lessor may satisfy such
lien and Lessee shall be responsible for all costs and expenses incurred by
Lessor in connection with such lien satisfaction and removal, including
attorney's fees.
SECTION TEN
INTENTIONALLY DELETED
SECTION ELEVEN
CONDEMNATION: If the Premises or any portion thereof are taken under the power
of eminent domain or sold under the threat of the exercise of said power (all of
which are herein called "condemnation"), this Lease shall terminate as to the
part so taken as of the date the condemning authority takes title or possession,
whichever first occurs. If more than ten percent (10%) of the floor area of the
Premises, or more than twenty-five percent (25%) of the land area not occupied
by any Buildings, is taken by condemnation, Lessee may, at Lessee's option, to
be exercised in writing within ninety (90) days after Lessor shall have given
Lessee written notice of such taking (or in the absence of such notice, within
ninety (90) days after the condemning authority shall have taken possession)
terminate this Lease as of the date the condemning authority takes such
possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the Buildings located on 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 divided
between Lessor and Lessee in accordance with applicable Utah law; 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.
SECTION TWELVE
DAMAGE OR DESTRUCTION.
12.1 DEFINITIONS.
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(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.
(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.
(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
Section 6.5(c), irrespective of any deductible amounts or coverage limits
involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements
owned by Lessor at the time of the occurrence to their condition existing
immediately prior thereto, including demolition, debris removal and upgrading
required by the operation of applicable building codes, ordinances or laws, and
without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a
condition involving the presence of, or a contamination by, a Hazardous
Substance as defined herein in, on, or under the Premises.
12.2 PARTIAL DAMAGE--INSURED LOSS. If a Premises Partial Damage that is an
Insured Loss occurs, then Lessor shall provide Lessee with written notice of
Lessor election to repair and restore or to terminate this Lease within 30 days
after the Insured Loss, and Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) within 60 days of the occurrence and this Lease shall continue in
full force and effect. 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 thirty (30) days following receipt of written notice
of such shortage and request therefor. If Lessor receives said funds or adequate
assurance thereof within said thirty (30) 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 thirty (30) days thereafter to make such restoration and
repair as is commercially reasonable with Lessor paying any shortage in
proceeds, 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
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by Lessee to repair any such damage or destruction, provided such funds are
actually expended in reconstruction. Premises Partial Damage due to flood or
earthquake shall be subject to Section 12.3 rather than Section 12.2,
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
Lessor or Lessee.
12.3 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
Section 14), Lessor may elect to repair such damage as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in full
force and effect. Lessor shall provide Lessee with written notice of its
election within 30 days after the occurrence of such Premises Partial Damage.
12.4 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 sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. Lessor shall have the election to repair and restore the Premises or to
terminate this Lease in the event of such Premises Total Destruction, and Lessor
shall provide Lessee with written notice of its election within 30 days of such
Premises Total Destruction.
12.5 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
(1) month's Rent, whether or not an Insured Loss, Lessor may, at Lessor's
option, terminate this Lease effective sixty (60) days following the date of
occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("Exercise Period"), (a) exercising such option and (b)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option during
said Exercise Period and provides Lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during said Exercise Period, then Lessor may at
Lessor's option terminate this Lease as of the expiration of said sixty (60) day
period following the occurrence of such damage by giving written notice to
Lessee of Lessor's 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.
12.6 ABATEMENT OF RENT/LESSEE REMEDIES:
(a) In the event of damage described in Section 12.2 (Partial Damage-Insured),
whether or not Lessor or Lessee repairs or restores the Premises, the 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, shall be abated in proportion to the degree
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to which Lessee's use of the Premises is impaired. Except for abatement of 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 Section 12 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 Section 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.
12.7 INTENTIONALLY DELETED
12.8 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease pursuant to
this Section 12, an equitable adjustment shall be made concerning advance 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.
12.9 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.
12.10 LESSEE RIGHTS. In the event of any destruction -- whether partial,
insured, uninsured, total or otherwise -- in the event Lessor is unable to
rebuild or substantially restore the premises to a tenantable condition within
one hundred twenty (120) days after the event giving rise to such damage or
otherwise enter into an Agreement to Lessee's satisfaction providing for the
prompt and timely repair and restoration, Lessee shall have the absolute right
to terminate this Lease and all rights and obligations hereunder on not less
than thirty (30) days' written notice to Lessor.
SECTION THIRTEEN
ASSIGNMENT AND SUBLETTING.
13.1 CONSENT REQUIRED.
(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
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this Lease or in the Premises without Lessor's prior written consent given under
and subject to the terms of Section 24.
(b) A change in the control of Lessee shall constitute an assignment requiring
Lessor's consent. For purposes of this Lease, a "change of control" shall mean a
majority of the board of directors or other governing body being elected during
the term hereof consisting of directors or members who are not members of such
board of directors or governing body at any time for at least 2 years prior to
such election and who are not approved by the majority of incumbent directors
immediately prior to the change.
(c) The involvement of Lessee or its assets in any transaction, or series of
transactions (by way of merger, sale, acquisition, financing, refinancing,
transfer, leveraged buy-out or otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an
amount equal to or greater than twenty-five percent (25%) of such Net Worth of
Lessee as it was represented to Lessor at the time of the execution by Lessor of
this Lease or at the time of the most recent assignment to which Lessor has
consented, or as it exists immediately prior to said transaction or transactions
constituting such reduction, at whichever time said Net Worth of Lessee was or
is greater, shall be considered an assignment of this Lease by Lessee to which
Lessor may reasonably withhold its consent. "Net Worth of Lessee" for purposes
of this Lease shall be the net worth of Lessee (excluding any guarantors)
established under generally accepted accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease without
Lessor's specific prior written consent shall, at Lessor's option, be a Default
curable after notice per Section 14.1(c), or a noncurable Breach without the
necessity of any notice and grace period. If Lessor elects to treat such
unconsented to assignment or subletting as a noncurable Breach, Lessor shall
have the right to either: (i) terminate this Lease, or (ii) upon thirty (30)
days' written notice ("Lessor's Notice"), increase the monthly Rent to fair
market rental value or one hundred ten percent (110%) of the Rent then in
effect, whichever is greater. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Rent coming due, and any underpayment for the period retroactively to the
effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and market value
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
(without the Lease being considered an encumbrance or any deduction for
depreciation or obsolescence, and considering the Premises at its highest and
best use and in good condition), or one hundred ten percent (110%) of the price
previously in effect, whichever is greater, (ii) any index-oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to require
that the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Rent in effect immediately prior to the market value
adjustment.
13.2 TERMS AND CONDITIONS:
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(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 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 of 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, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the current monthly Rent, whichever is
greater, as reasonable consideration for Lessor's considering and processing the
request for consent. Lessee agrees to provide Lessor with such other or
additional information and/or documentation as may be reasonably requested by
Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason of
accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Section 13.1(c) shall give
Lessor the right (but not the obligation) to require that the Security Deposit
be increased to an amount equal to six (6) times the then monthly Rent, and
Lessor may make the actual receipt by Lessor of the amount required to establish
such Security Deposit a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment structure of the rent
payable under this Lease be adjusted to what is
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then the market value and/or adjustment structure for property similar to the
Premises as then constituted.
13.3 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, rentals, and income arising from any sublease of all or a portion of
the Premises heretofore or hereafter made by Lessee, and Lessor may collect such
Rent and income and apply same toward Lessee's obligations under this Lease;
provided, however, that until a Breach (as defined in Section 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
Rent 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 Rent 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 Rent and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its obligations
under this Lease, Lessor, at its option and without any obligation to do so, may
require any sublessee to attorn to Lessor, in which event Lessor shall undertake
the obligations of the sublessor under such sublease from the time of the
exercise of said option to the expiration of such sublease; provided, however,
Lessor shall not be liable for any prepaid rents or security deposit paid by
such sublessee to such sublessor or for any other prior Defaults or Breaches of
such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a sublease
shall also require the consent of Lessor herein.
(d) No sublessee 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.
SECTION FOURTEEN
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DEFAULT/BREACH/REMEDIES.
14.1 DEFAULT/BREACH: A "Default" is defined as a failure by the Lessee after
notice 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 Sections
14.2 and/or 14.3:
(a) The vacating of the Premises without the intention to reoccupy same, or the
abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure by Lessee
to make any payment of 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 the failure of Lessee to fulfill any
obligation under this Lease, where such failure continues for a period of ten
(10) days for the payment of Rent and thirty (30) days for any other Breach
after such performance is due.
(c) Except as expressly otherwise provided in this Lease, the failure by Lessee
to provide Lessor with any 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 thirty (30) 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 that are to be observed, complied with or performed by Lessee, other
than those described in Sections 14 (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. ss.101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subsection (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.
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(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.
14.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of
Lessee under this Lease, 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 Section
14.1, 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 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 Section. 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
Section 14.1(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
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purposes required by Sections 14.1(b), (c) or (d). In such case, the applicable
grace period under Sections 14.1(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 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
Sections 13 and 24 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.
14.3 INTENTIONALLY DELETED
14.4 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 from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) days after notice
shall be due, then, without any requirement for notice to Lessee, Lessee shall
pay to Lessor a late charge equal to five percent (5%) of such overdue amount.
The parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late payment by Lessee.
Acceptance of such late charge by Lessor shall in no event constitute a waiver
of Lessee's Default or Breach with respect to such overdue amount, nor prevent
Lessor from exercising any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of Rent, then notwithstanding any other
provision of this Lease to the contrary, Rent shall, at Lessor's option, become
due and payable quarterly in advance.
14.5 BREACH BY LESSOR: Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to maintain the structural
components of the Buildings asrequired under Section 5.3 hereof. For purposes of
this Section 14.5, a reasonable time shall in no event be less than thirty (30)
days after receipt of notice by Lessor. If Lessor shall not commence the
diligent cure of such roof repair, after notice is provided for above, Lessee
shall have the right, on not less than ten (10) days' notice to Lessor, to
itself cure such structural component repairs at
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the expense of Lessor and shall have the further right to offset and charge
against any monetary obligation subsequently due hereunder.
SECTION FIFTEEN
BROKERS' FEES: Both Lessor and Lessee represent and warranty to each
other that no brokers, real estate or leasing agents are entitled to any fee or
commission in connection with the Premises or this Lease. Further Lessor and
Lessee hereby agree to indemnify and hold the other harmless from and against
any claims, damages, actions, commissions, and/or costs (including attorney's
fees) arising in connection with any claim for a commission related to the
Premises and/or this Lease
SECTION SIXTEEN
16. OPTION TO PURCHASE:
16.1 GRANT OF OPTION. Lessor hereby grants to Lessee the exclusive
right and option, upon the terms and conditions hereinafter set forth, to
purchase the Premises from Lessor (the "Option").
16.2 EXERCISE PERIOD. This Option shall be exercisable only as follows:
(1) for a period of one (1) year from the date hereof at the Initial Purchase
Price and for the balance of the Term of this Lease at the Appraised Purchase
Price. Notwithstanding any other provisions set forth in this Agreement, the
Option shall automatically terminate upon Lessee's termination of this Lease
pursuant to Section 2.1 hereof or upon any other termination hereof.
16.3 FAILURE TO EXERCISE OPTION. If Lessee does not exercise this
Option prior to the expiration of the exercise period referred to in Section
16.2 hereof, all consideration paid for this Option shall be retained by Lessor,
this Agreement shall, without further act of the parties hereto, become null and
void and of no further force or effect, and Lessee shall have no further rights
or claims against Lessor or the Premises.
16.4 EXERCISE OF OPTION. This Option may be exercised by Lessee at any
time during the exercise period referred to in Section 16.2 above by written
notice to Lessor delivered or sent in any manner permitted in Section 21 below.
If Lessee so exercises this Option, then upon and subject to the terms and
conditions of this Agreement, Lessor agrees to sell the Premises to Lessee, and
Lessee agrees to purchase the Premises from Lessor. Said sale and purchase shall
be effected by use of a special warranty deed (herein called the "Deed"),
subject to the Permitted Exceptions as hereinafter defined, which Deed Lessor
shall execute, acknowledge, and deliver to the Title Company prior to Closing
16.5 PURCHASE PRICE. The purchase price for the Premises shall be
$1,100,000.00 in cash or immediately available funds, if Lessee exercises the
Option on or before January 1, 2000 (the "Initial Purchase Price"). If Lessee
exercises the Option after January 1, 2000, the purchase price for the Premises
shall be equal to the appraised value of the Premises in cash or immediately
available funds, prepared as soon as possible (but within 45 days at the latest)
after such exercise of the Option by Jonathan L. Cook, MAI (the "Appraised
Purchase Price"). If he is
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unwilling or unable to do so, such appraisal shall be rendered and performed by
J. Philip Cook, MAI in accordance with this Section 16.5. If he is unwilling or
unable to do so, Lessor and Lessee may mutually select an MAI appraiser to
perform such appraisal within fifteen (15) days after such exercise. If Lessor
and Lessee cannot mutually agree on such appraiser within such time, Lessor and
Lessee shall each select an MAI appraiser, and the 2 appraisers shall mutually
select a third MAI appraiser within 10 days after they are appointed. The
Appraised Purchase Price shall then become the average of those 3 appraisals.
The Initial Purchase Price and the Appraised Purchase Price, as appropriate used
and applied in this Agreement, are sometimes referred to as the "Purchase
Price."
16.6 PAYMENT OF PURCHASE PRICE. Lessee shall pay the Purchase Price in
immediately available funds either by wire or in cash at Closing.
16.7. CONDITION TO EXERCISE. Lessor's right to exercise the Option is
subject to the following conditions: Lessee shall not be in monetary default
under this Lease, and Lessee shall not have failed to fully reimburse any and
all funds requested by Lessor and spent by Lessor to cure a breach of this Lease
by Lessee.
16.8 OPENING TITLE COMPANY ACCOUNT. Within three (3) business days
after Lessee exercises this Option, Lessor and Lessee shall open an account (the
"Title Company Account") with a title company selected by Lessor (the "Title
Company") to consummate the sale and purchase contemplated by this Agreement
(herein called the "Closing"), shall deposit with the Title Company one fully
executed counterpart of this Agreement.
16.9 CONDITIONS TO CLOSING. The Closing shall not occur unless and
until each and every of the following conditions precedent to Closing have been
satisfied; provided, how-ever, that the party entitled to the benefit of any
such condition may waive the same by written notice to the Title Company and the
other party hereto:
(a) Upon Closing, the Title Company shall be ready, willing, able and
irrevocably committed to issue an American Land Title Association (ALTA) owner's
policy of title insurance, current standard form for extended coverage, insuring
Lessee's fee simple ownership of the Premises in the amount of the Purchase
Price, subject only to the following Permitted Exceptions (herein called the
"Permitted Exceptions"): (i) nondelinquent taxes; (ii) easements and
rights-of-way; (iii) other non-financial matters of record; and (iv) any
exceptions created by Lessee.
(b) At Closing Lessor shall execute, acknowledge and deliver to the
Title Company a Non-Foreign Affidavit.
(c) Between the date of exercise of this Option and the Closing, the
Premises shall not have been materially adversely affected in any way as the
result of any legislative or regulatory change, or any fire, explosion,
earthquake, accident, casualty, riot, civil commotion, condemnation,
requisition, embargo, act of God or of the public enemy or of the armed forces
of the United States, or otherwise, whether or not insured against.
16.10 BEST EFFORTS TO FULFILL CONDITIONS. Lessor and Lessee agree to
pursue diligently the satisfaction of and to use their best efforts to satisfy
each and every of the conditions to Closing referred to in Section 16.9 hereof
as soon as reasonably possible and
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further agree to give Title Company and the other party hereto written notice of
the satisfaction, waiver or failure of each such condition promptly after such
satisfaction, waiver of failure finally occurs.
16.11 FAILURE OF CONDITIONS. Should either party hereto receive or give
notice in accordance with Section 16.10 above, either before or upon the date
set for Closing, that any of the conditions referred to in Section 16.9 above as
to which such party is entitled to the benefit will not be satisfied, and should
such party choose not to waive such condition, such party may, in its sole and
absolute discretion, terminate the Title Company Account and this Agreement by
written notice to Title Company and the other party hereto, in which event Title
Company shall return all documents and funds deposited pursuant hereto to the
party depositing the same and neither party hereto shall have any further
liability to the other hereunder.
16.12 CLOSING. The Title Company shall close the sale and purchase of
the Premises contemplated hereunder as soon as reasonably possible after the
date upon which the last of the conditions set forth in Section 16.9 hereof has
been finally satisfied or waived; provided, however, that unless the Closing
shall occur on or before the date which is thirty (30) days after Lessee
exercises this Option, the Title Company Account shall terminate without further
acts of the parties hereto, and in such event the Title Company shall, unless
Lessor refuses to close, return all documents and funds deposited pursuant
hereto to the parties depositing the same and neither party shall have any
further liability to the other hereunder, except as otherwise expressly provided
in said Section 16.14 hereof.
When the Title Company is prepared to close the transaction
contemplated hereby, Title Company is authorized and instructed to record the
Deed in the Office of the County Recorder of Salt Lake County, Utah.
16.13 PRORATIONS AND COSTS. All property taxes and all other income and
expenses with regard to the Premises shall be prorated between Lessor and Lessee
through the Title Company Account as of the date of Closing. In the event the
transaction contemplated by this Agreement does not close for any reason other
than the default of Lessee, Lessor and Lessee shall equally share and pay any
and all cancellation fees charged by the Title Company.
16.14 REMEDIES. In the event of a default or breach by Lessor or Lessee
hereunder which prevents the Closing from taking place in accordance with the
terms of this Agreement, the nondefaulting party shall have all the rights and
remedies allowed at law or in equity. Both parties agree that, should either
party default in any of the covenants or agreements herein contained, the
defaulting party shall pay all costs and expenses, including without limitation,
reasonable attorney's fees, which may arise or accrue from enforcing or
terminating this Agreement, or in pursuing any remedy provided hereunder or
allowed by applicable law. In the event the Title Company is required to file an
interpleader action in court to resolve the dispute over the earnest money
deposit referred to herein or otherwise in connection with this Agreement,
Lessor and Lessee agree that the defaulting party shall pay the court costs and
reasonable attorney's fees incurred by the Title Company in bringing such
action.
16.15 OPTION NON-TRANSFERABLE: The Option is personal to Lessee and may
not be transferred, assigned, sold, or otherwise conveyed to any entity or
person.
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SECTION SEVENTEEN
ATTORNEYS' FEES. In the event that either Lessor or Lessee shall
institute any action or proceeding against the other relating to the provisions
of this Lease, or any Default or Breach hereunder, then, and in that event, the
unsuccessful party in such action or proceeding agrees to reimburse the
successful party for the reasonable expenses of such action including reasonable
attorneys' fees and disbursements incurred therein by the successful party.
Further, Lessee shall reimburse Lessor on demand for any and attorney's fees and
costs incurred in connection with any efforts or actions, whether in suit or
otherwise, taken by Lessor to enforce the terms of this Lease
SECTION EIGHTEEN
HOLDING OVER: If Lessee holds possession of the Premises after the
Term, as applicable, Lessee shall become a tenant at will on and subject to the
terms herein specified, but at the monthly Rent shall automatically increase to
150% of the then current monthly Rent.
SECTION NINETEEN
SUBORDINATION/ATTORNMENT/NON-DISTURBANCE
19.1 SUBORDINATION: This Lease and any option granted hereby shall be subject
and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's Default with respect to any such
obligation, Lessee will 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 reason thereof.
If any Lender shall elect to have this Lease and/or any option granted hereby
superior to the lien of its Security Device and shall 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.
19.2 ATTORNMENT: Subject to the non-disturbance provisions of Section 19.3,
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: (a) be liable for any act
or omission of any prior lessor or with respect to events occurring prior to
acquisition of ownership, (b) be subject to any offsets or defenses which Lessee
might have against any prior lessor, or (c) be bound by prepayment of more than
one month's rent. By complying with this Section 19.2, Lessee does not waive any
claims it may have against Lessor for breaches of this Lease.
19.3 NON-DISTURBANCE: With respect to the Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving
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assurance (a "non-disturbance agreement") from the Lender that Lessee's
possession and this Lease, including any options to extend the term hereof or
purchase the Premises, will not be disturbed so long as Lessee is not in Breach
hereof and attorns to the record owner of the Premises and such new Lessor
agrees to be bound by and subject to the terms of this Lease.
19.4 SELF-EXECUTING: The agreements contained in this Section 19 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.
SECTION TWENTY
QUIET ENJOYMENT: Lessor covenants, warrants and represents that Lessor
has full right and power to execute this Lease and to grant the estate demised
herein and, so long as Lessee is not in Default or Breach under any of the terms
and conditions of this Lease, Lessee shall peaceably hold and quietly enjoy the
Premises, and shall have the right of ingress and egress to and from the
Premises. Lessee will not attach any stereo speakers to ceiling of Premises and
will not play music at an excessively high volume. Lessor further warrants to
Lessee that it is the owner in fee simple absolute of the Premises leased
hereunder and has good and marketable title thereto subject to no encumbrances,
restrictions, covenants or conditions which would materially interfere with or
restrict Lessee's rights hereunder. Lessor shall provide to Lessee prior to the
commencement of this Lease a commitment for a lessee's policy of title insurance
evidencing Lessor's good and marketable title to the Premises leased hereby at
Lessee's cost.
SECTION TWENTY-ONE
NOTICE: All notices under this Lease must be in writing and either hand
delivered or sent by United States mail, certified receipt requested, postage
prepaid, addressed as follows, except that any party may by written notice,
given as aforesaid, change its address for subsequent notice to be given
hereunder:
Lessor: Dean G. Wilson
DGW Enterprises, L.C.
5577 West Leo Park Road
West Jordan Utah 84088
With a copy to:
Carl W. Barton, Esq.
Prince, Yeates & Geldzahler
175 East 400 South
Suite 900
Salt Lake City, Utah 84111
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Lessee: Industrial Rubber Products-Utah,Inc.
3804 East 13th Avenue
Hibbing MN 55746
Attn:Daniel O. Burkes
With a copy to:
John N. Nys
Johnson, Killen, Thibodeau & Seiler
811 Norwest Center
230 West Superior Street
Duluth, MN 55802
SECTION TWENTY-TWO
PARKING: It is expressly agreed and acknowledged by Lessee shall have the
exclusive right to use any and all parking located on the Premises.
SECTION TWENTY-THREE
23.1 NO WAIVER: Lessor's acceptance of late rent or failure to enforce
any term of this Lease shall not be construed as a waiver of any of Lessor's
rights under this Lease. No payment by Lessor or a receipt by Lessor of an
amount less the monthly rent herein stipulated shall be deemed to be other than
on account of the earliest stipulated rent, nor shall any endorsement or
statement of any check or any letter accompanying any check or payment be deemed
by itself as accord and satisfaction, and Lessor may accept such check or
payment without prejudice to Lessor's right to recover the balance of such rent
or pursue any other remedy.
23.2 BINDING EFFECT: The terms of this Lease shall apply to and bind the
heirs and assigns of the parties.
23.3 UNENFORCEABLE PROVISIONS: If any provision of this Lease shall be
declared invalid or unenforceable, the remainder of the Lease shall continue in
full force and effect.
23.4 GOVERNING LAW: This agreement is made in the State of Utah and its
validity and the rights and obligations to the parties hereunder shall be
determined in accordance with the laws of the State of Utah.
23.5 HEADINGS: The section captions contained in this Lease are for
convenience only and shall not be considered in the construction of
interpretation of any provision hereof.
23.6 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.
23.7 INTEREST ON PAST-DUE OBLIGATIONS: Any monetary payment due, other
than late charges, not received by a party 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 herein.
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23.8 TIME OF ESSENCE: Time is of the essence with respect to the
performance of all obligations to be performed or observed by Lessor and Lessee
under this Lease.
23.9 RENT DEFINED: All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be Rent.
23.10 NO PRIOR OR OTHER AGREEMENTS: This Lease contains all agreements
between Lessor and Lessee with respect to any matter mentioned herein, and no
other prior to contemporaneous agreement or understanding shall be effective.
23.11 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.
23.12 COVENANTS AND CONDITIONS: All provisions of this Lease to be
observed or performed by Lessee are both covenants and conditions.
23.13 CHOICE OF LAW: This Lease shall be governed by the laws of the
State of Utah. Any litigation between the Lessor and Lessee hereto concerning
this Lease shall be initiated in the county in which the Premises are located.
23.14 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.
23.15 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.
23.16 INTENTIONALLY DELETED
23.17 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.
23.18 AUTHORITY. If any party hereto is a corporation, trust, limited
liability company, or general or limited partnership, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. If Lessee is a
corporation, limited liability company, trust, or partnership, Lessee shall,
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within thirty (30) days after request by Lessor, deliver to Lessor evidence
satisfactory to Lessor of such authority.
23.19 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
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.
23.20 MULTIPLE PARTIES. Except as otherwise expressly provided herein,
if more than one person or entity is named herein as Lessee, the obligations of
such multiple parties shall be the joint and several responsibility of all
persons or entities named herein as such Lessee.
SECTION TWENTY-FOUR
INTENTIONALLY DELETED
SECTION TWENTY-FIVE
TENANCY STATEMENT. Each party hereto (as "Responding Party") shall within ten
(10) days after written notice from the other party hereto (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.
SECTION TWENTY-SIX
GUARANTOR.
26.1 If there are to be any guarantors of this Lease, the form of the guaranty
to be executed by each such guarantor shall be in a form prepared by and
acceptable to Lessor, 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 Section 25.
26.2 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 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 signatures 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.
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SECTION TWENTY-SEVEN
27.1 Force Majeure. Lessee shall be excused from the performance of any duty or
obligation incumbent upon it under the Lease during any period in which Lessee
shall be prevented from completing or performing such duty by reason of strikes,
walkouts, labor troubles, restrictive governmental laws or regulations, riots,
insurrection or war or other reason of like nature not the fault of Lessee. If
Lessee cannot occupy substantially all of the premises, there shall be a
proportionate abatement of all charges during such period of less than full
occupancy. During any period, all rent and other charges will abate on an
equitable basis in light of the extent to which Lessee can perform.
27.2 Recording. Lessor agrees to enter into a short form of this Lease
in recordable form recognizing Lessee's rights hereunder, including its rights
to purchase the Premises, and that Lessee shall be entitled to record a copy of
such short form lease with Lessee to bear the costs of such recording.
IN WITNESS WHEREOF, the parties have executed this Lease on the date and at the
placed listed opposite their names.
LESSOR
DGW ENTERPRISES, L.C.
By s/ Dean G. Wilson
Dean G. Wilson, managing member
LESSEE Industrial Rubber
Products-Utah, Inc., a Utah
corporation
By s/ Daniel O. Burkes
Its Chairman
EXHIBIT "A"
Legal Description
Parcel 1:
BEGINNING at a point which lies South 89(degree)46'30" East 61.00 feet and North
0(degree)03' East 110.09 feet and South 89(degree)57'00" East 183.72 feet from
the Southwest corner of Section 1, Township 3 South, Range 2 West, Salt Lake
Base and Meridian, and running thence South 89(degree)57'00" East 80.29 feet;
thence North 0(degree)03' East 120.00 feet; thence South 27(degree)08'50" East
366.27 feet to a point on the North line of Leo Park Road; thence Southwesterly
along a 943.90 foot radius curve to the right (center is North 27(degree)08'50"
West 943.90 feet) 181.72 feet; thence North 16(degree)07' West 284.06 feet to
the place of BEGINNING.
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Parcel 2:
BEGINNING at a point which lies South 89(degree)46'30" East 61.00 feet, South
0(degree)03'00" West 539.71 (South 0(degree)03'00" East 539.71 feet in some
instruments of record) and North 71(degree)44'06" East 295.70 feet from the
Northwest corner of Section 12, Township 3 South, Range 2 West, Salt Lake Base
and Meridian, and running thence North 13(degree)13'00" West 219.38 feet; thence
Easterly 181.79 feet along the arc of a 1003.90 foot radius curve to the left,
long chord bears North 71(degree)35'44' East 181.55 feet; thence South
23(degree)35'32" East 219.92 feet; thence South 71(degree)44'06" West 221.27
feet to the point of BEGINNING.
Parcel 4:
BEGINNING at a point which lies South 89(degree)46'30" East 61.00 feet and South
0(degree)03' West 200.06 feet and Northeasterly along a curve to the left (whose
center is North 0(degree)03' West 943.90 feet) 448.05 feet from the Southwest
corner of Section 1, Township 3 South, Range 2 West, Salt Lake Base and
Meridian; and running thence Northeasterly along said curve 95.01 feet; thence
North 57(degree)05'09" East 85.23 feet; thence North 32(degree)54'51" West
407.89 feet; thence South 78(degree)25' West 101.24 feet; thence South
0(degree)03' West 90.00 feet; thence South 27(degree)08'50" East 366.27 feet to
the point of BEGINNING.
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EXHIBIT 10(8)
PURCHASE AGREEMENT
This Purchase Agreement (the "Agreement") is made and entered into on
this 25th day of March 1999 by and between ILLINOIS TOOL WORKS INC., a Delaware
corporation (hereinafter referred to as "ITW" a Seller), and Industrial Rubber
Products, Inc., a Minnesota corporation, or its nominee (hereinafter referred to
as "IRP" or "Purchaser").
RECITALS:
1. The Seller, through its division, ITW Irathane Systems ("Irathane") is in the
business of manufacturing cast urathane parts and coatings for equipment and
structural surfaces (the "Business"). 2. Purchaser wishes to purchase
substantially all of the assets which are used by the Seller to conduct the
Business for the purchase price set forth herein and upon and subject to the
terms and conditions hereinafter set forth. With specified limited exceptions,
Purchaser shall not assume any liabilities or other obligations of the Seller.
W I T N E S S E T H:
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements herein contained, the
parties hereto agree as follows: SECTION I - PURCHASE AND SALE.
1.1 Assets. As of 11:59 p.m. on March 31, 1999, Seller shall sell,
convey, assign, deliver and transfer to Purchaser, and Purchaser shall buy and
take possession of, all right, title and interest in and to all personal,
tangible, intangible, choate, inchoate, contingent and other properties, rights,
interests and other assets of any kind owned or held by Seller and used in the
operation or administration of the Business (collectively, the "Assets")
including, but not limited to, the following properties, rights and other
assets, except for the Excluded Assets (as defined in Section 1.2) and excluded
trademarks (as defined in Schedule 1.1(f):
(a) Inventories. All raw materials, work-in-process, finished goods,
supplies and parts inventory of the Business ("Inventories").
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(b) Personal Property. The tangible personal property owned or used in
connection with the operation or administration of the Business including all
tools, dies, molds, capital expenditures in-process and works-in-process
("Tangible Personal Property").
(c) Accounts Receivable. All accounts receivable reflected or reserved
against in the Closing Balance Sheet due from unrelated third parties ("Accounts
Receivable").
(d) Backlog. All outstanding customer orders, commitments, bids,
proposals and quotations relating to the Business ("Backlog").
(e) Records. Copies of assets ledgers, inventory records, customer
lists, customer credit information, supplier lists, technical data, sales
literature, correspondence, computer printouts, books, notes, files and general
operating records relating to the operation or administration of the Business
("Records").
(f) Intangible Rights. All patents, patents pending, inventions,
copyrights, formulas, licenses, contract rights, trade secrets, know-how,
goodwill and similar intangibles held, owned or used in connection with the
Business, including, without limitation, all blueprints, specifications used
other technical documents associated with products manufactured by the Business
but specifically excluding such trademarks as are listed on Schedule 1.1(f). The
transferred patents are more fully defined in Schedule A (Patents) attached to
the patent assignment. The transferred trademarks are more fully defined in
Schedule A (Trademarks) attached to the trademark assignment. Both assignments
should be incorporated herein.
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(g) Contract Rights. All rights of Seller under all contracts, purchase
orders, agreements, licenses, leases and similar documents relating to the
Business.
(h) The real property used by the Business located in Sudbury, Canada
and Englewood, Colorado (the "Owned Real Property").
1.2 Excluded Assets. Notwithstanding anything to the contrary contained
herein, the following assets (the "Excluded Assets") shall not be sold to
Purchaser and shall be retained by Seller: (i) all tax returns and related tax
records of Seller and all tax refunds, (ii) all cash and cash equivalents; and
(iii) any rights acquired in or use of the Irathane trademark in Europe, the
Middle East and Asia utilizing sprayable potable water compliant products.
1.2.1 Excluded Liabilities. Notwithstanding anything to the contrary
contained herein, the following liabilities (the "Excluded Liabilities") shall
be retained by Seller: any claims under the Union Contracts (as hereinafter
defined ) filed prior to the Closing Date.
1.3 Assumption of Liabilities. Purchaser shall assume, pay, fulfill,
perform or otherwise discharge the following liabilities and obligations of
Seller (the "Assumed Liabilities") as of the date hereof, but in any case not
including any obligation or liability not reflected on the Financial Statements
unless specifically agreed herein and as otherwise set forth in Section 1.4:
(a) All of the trade and other accounts payable of the Business to
unrelated third parties reflected or reserved against on the Closing Balance
Sheet, plus additional liabilities relating to the order backlog and purchase
orders arising in the usual and ordinary course of the Business consistent with
past practice.
(b) Except as provided in Section 1.4, all obligations of Seller
relating to the Business under contracts, agreement, licenses, leases and
similar documents which are to be transferred to Buyer and which are listed on
any Schedule hereto (including, without limitation, the Union Contract, as
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defined in Section 7.1,) or which are in effect as of the date hereof and not
required to be so listed under the terms of this Agreement.
(c) All liabilities and obligations of Seller to employees of the
Business as set forth in Section 7, except as to employees listed on Schedule
1.3(c).
(d) Those liabilities and obligations of Seller otherwise specifically
assumed by Buyer in this Agreement.
1.4 Agreement to Purchase. In consideration for the purchase of the
Assets set forth above, IRP will pay the sum of EIGHT MILLION DOLLARS
($8,000,000) at Closing minus TWO HUNDRED AND SIXTY-EIGHT THOUSAND ($268,000) in
estimated accounts payable which amount shall be assumed by Purchaser and
further adjusted in accordance with Section 1.5.2 and also minus FORTY THOUSAND
DOLLARS ($40,000) representing a credit for all accrued vacation liability
assumed by Purchaser under Section 7.4.
1.5.1 Post Closing Audit. Purchaser and Seller acknowledge that
Purchaser is purchasing the Assets of the Business as reflected on the Seller's
December 31, 1998 Financial Statements without having the opportunity to conduct
a due diligence audit as is customary in transactions of this nature. Within
sixty (60) days of the Closing Date, Purchaser shall conduct a complete due
diligence audit of the Business (the "Audit"). Upon completion of the Audit, a
post closing adjustment will be made for changes in Seller's financial condition
from the December 31, 1998 Financial Statements to the March 31, 1999 Financial
Statements, including adjustments for any accounts payable of the Business
assumed by Purchaser as of the Closing Date.
If a post closing adjustment to the Purchase Price is required based on
Purchaser's Audit, such adjustment shall occur within ten (10) days of
completion of the Audit. In the event that Purchaser and Seller disagree on the
Purchase Price adjustment required based on the Audit, the parties shall appoint
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a "big five" accounting firm acceptable to them, whose expenses will be shared
equally by the Seller and the Purchaser. The accounting firm shall as promptly
as possible determine whether the Audit fairly states, in accordance with the
provisions of this Agreement, the values of the items as to which the Seller has
taken issue and, if the accounting firm concludes that it does not do so with
respect to any of such items, the value which in such firm's opinion does so.
The determination of amounts due to Purchaser for post closing adjustments based
on the Audit by such accounting firm shall be conclusive and binding on the
parties hereto. Within (i) five (5) days of the delivery of such report by the
accounting firm or the settlement of any dispute, or (ii) within five (5) days
following delivery of the Audit report if no dispute exists, payment shall be
made by Seller to the Purchaser of the appropriate post closing Audit adjustment
amount. Seller shall have no obligation to refund any amount to Purchaser for
Purchase Price adjustments due to the Post Closing Audit described in Section
1.5.1 until such adjustments total at least FIFTY THOUSAND DOLLARS ($50,000.00).
1.5.2. Post Closing Purchase Price Adjustment. In addition, there
shall be an adjustment to the Purchase Price to the extent that:
(a) net trade accounts receivable are valued at an amount other
than $1.298 Million as of the Closing Date;
(b) Inventory is valued at an amount other than $1.236 Million in
accordance with Section 3.1.3;
(c) prepaid expenses and other current assets are valued at an amount
other than FIFTY- TWO THOUSAND DOLLARS ($52, 000);
(d) any property or equipment used in conducting the Business has been
disposed of since December 31, 1998 and has not been replaced with like kind
property or equipment; and
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(e) trade payable adjustments are valued at an amount other than
$268,000 as deducted from the Purchase Price at Closing as described in Section
1.4
Purchase Price adjustments under Section 1.5.2 shall be on a
dollar-for-dollar basis and will not be subject to a cap or a basket.
In connection with the foregoing, the Purchaser shall provide the
Seller with an unaudited schedule (the "Schedule") showing the proposed
calculation of the Purchase Price adjustment due and payable to the Purchaser
pursuant to Section 1.5.2 not more than sixty (60) days after the Closing Date.
Within fifteen (15) days of receipt of the Schedule, the Seller shall advise the
Purchaser in writing if it disputes any portion of the calculation, setting
forth in full the respects in which it fails to be correct and the reasons for
reaching that conclusion. In the event that the parties are unable to resolve
any dispute so raised within sixty (60) days after delivery of the Schedule,
they shall appoint a "big five" accounting firm acceptable to them, whose
expenses will be shared equally by the Seller and the Purchaser. The accounting
firm shall as promptly as possible determine whether the Schedule fairly states,
in accordance with the provision of this Agreement, the values of the items as
to which the Seller has taken issue and, if the accounting firm concludes that
it does not do so with respect to any of such items, the value which in such
firm's opinion does so. The determination of amounts set forth on the Schedule
by such accounting firm shall be conclusive and binding on the parties hereto.
Within (i) five (5) days after delivery of the report by such
accounting firm or the settlement of any dispute, or (ii) within five (5) days
following delivery of the Schedule if no dispute exists, payment shall be made
by the Seller to the Purchaser of the appropriate Purchase Price adjustment
amount, as finally determined under the Schedule. SECTION 2 - CLOSING.
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2.1 Closing. The Closing (the "Closing") of the sale and purchase of
the Assets shall take place on or before March 31, 1999 at the offices of
Seller. The date of the Closing is herein referred to as the "Closing Date".
Closing costs will be allocated between Seller and Purchaser in accordance with
local law in each of the jurisdictions where the assets are located and paid
outside of Closing.
2.2 Items to be Delivered at Closing. At the Closing and subject to the
terms and conditions herein contained:
(a) Seller will deliver to Purchaser the following:
(i) a general instruments of sale, and conveyance, assignment,
transfer and delivery with respect to each jurisdiction where the Assets are
located, such instruments to be in the form of Schedule 2.2(a) hereto; and
(ii) transfer documents ready for recordation and all
title documents with respect to the Owned Real Property
(b) Purchaser will deliver to Seller the following: (i) The
Purchase Price shall be disbursed by certified check
or wire transfer as directed by Seller.
2.3 Further Assurances. Seller from time to time after the Closing, at
Purchaser's reasonable request, will execute, acknowledge and deliver to
Purchaser such other instruments of conveyance and transfer and will take such
other actions and execute and deliver such other documents, certifications and
further assurances as Purchaser may reasonably request in order to vest more
effectively in Purchaser, or to put Purchaser more fully in possession of any of
the Assets, or to better enable Purchaser to complete, perform or discharge any
of the obligations with respect to the Assumed Liabilities specifically assumed
by Purchaser. SECTION 3 - REPRESENTATIONS AND WARRANTIES.
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3.1 Representations and Warranties of Seller. Seller hereby represents
and warrants to Purchaser as follows:
3.1.1 Corporate Existence. Seller a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Irathane
is a division of Seller. Seller has all requisite power and authority to carry
on its business as it has been and is now being conducted and to own, lease and
operate the properties used in connection therewith.
3.1.2 Corporate Power; Authorization; Enforceable Obligations. Seller
has the full power, authority and legal right to execute, deliver and perform
this Agreement. This Agreement constitutes when executed and delivered will
constitute, legal, valid and binding agreements of Seller enforceable against
Seller in accordance with their respective terms, except as may be limited by
bankruptcy, insolvency and other similar laws affecting creditors' rights
generally and by general equity principles.
3.1.3 Inventory. Except as reserved on the Financial Statements all
items of Irathane's inventory and related supplies for the Business reflected on
the Unaudited Financial Statements are merchantable, or suitable and useable for
the production or completion of merchantable products, for sale in the ordinary
course of business as first quality goods at normal mark-ups; are not obsolete
or below standard quality and are valued at the lower of cost or market in
accordance with generally accepted accounting principles consistently applied.
3.1.4 Existing Condition. Since January 1, 1999, Seller has not
with respect to Irathane:
(a) sold, assigned or transferred any of its assets or properties
except in the ordinary course of its business;
(b) suffered any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting its business, operations, assets,
properties or prospects;
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(c) suffered any material adverse change in its business, operations,
assets, properties or prospects;
(d) received notice or had knowledge of any actual or threatened labor
trouble, strike or other occurrence, event or condition of any similar character
which has had or might have a material adverse effect on its business,
operations, assets, properties or prospects;
(e) made any capital expenditure or capital addition or betterment
except such as may be involved in the ordinary course of business; or
(f) entered into any material transaction other than in the ordinary
course of its business consistent with past practice.
3.1.5 Title to Properties. Seller has good, valid and marketable title
to all of the assets and properties purchased hereunder by IRP, free and clear
of all liens, pledges, security interests, charges, claims, restrictions and
other encumbrances and defects of title of any nature whatsoever, except as
disclosed on Schedule 3.1.5 hereto. Seller has the unrestricted right to sell
the Assets as herein provided. All Assets used in the conduct of the Business
are being transferred to Purchaser pursuant to the terms of this Purchase
Agreement.
3.1.6 Condition and Location of Tangible Assets. The machinery,
equipment, tools and other material items of tangible personal property which
are a part of the Assets shall on the Closing Date be in the good operating
condition and repair, subject to normal wear and maintenance, and shall conform,
in all material respects, to all applicable laws, ordinances, codes, rules and
regulations relating to their construction, use, operation and maintenance.
3.1.7 Receivables. The accounts receivable set forth on the Financial
Statements as adjusted under Section 1.5.2 arose from bona fide transactions in
the ordinary course of Irathane's business and shall be good and collectible
within three (3) months of the Closing Date. To the extent such
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receivables have not been collected within three (3) months of the Closing Date,
Purchaser shall be allowed an Indemnified Loss claim (hereinafter defined) to
the extent the uncollected receivables are in excess of any reserve provided for
in the Financial Statements dated March 31, 1999 and such uncollected
receivables shall be assigned to the Seller for collection.
3.1.8 Validity of Contemplated Transactions, etc. Except as set forth
on Schedule 3.1.8 the execution, delivery and performance of this Agreement and
the transactions contemplated hereby by Seller will not contravene or violate
(a) any law, rule or regulation of which Seller is aware, (b) any judgment,
order, writ, injunction, decree or award of any court, arbitrator or
governmental or regulatory official, body or authority which is applicable to
Seller, or (c) the charter documents of Seller or any securities issued by
Seller; nor will such execution, delivery or performance violate, be in conflict
with or result in the breach (with or without the giving of notice or lapse of
time, or both) of any term, condition or provision of, or require the consent of
any other party, to, any indenture, agreement, contract, commitment, lease,
plan, license, permit, authorization or other instrument, document or
understanding, oral or written, to which Seller is a party, by which Seller may
have rights or by which any of the Assets may be bound or affected, or give any
party with rights thereunder the right to terminate, modify, accelerate or
otherwise change the existing rights or obligations of Seller thereunder except
in each case for any such item which would not have a material adverse effect.
No authorization, approval or consent, and no registration or filing with any
governmental or regulatory official, body or authority is required in connection
with the execution, delivery and performance of this Agreement by Seller.
3.1.9 Contracts and Commitments. Except as may be disclosed on Schedule
3.1.9, each of the agreements, contracts and commitments of the Business is a
legal, valid and binding agreement enforceable in accordance with its terms,
except as such enforceability may be limited by bankruptcy,
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insolvency, moratorium, or similar laws now or hereafter in effect relating to
or limiting creditors' rights generally and to the knowledge of Seller, the
parties thereto are in compliance with the provisions thereof, no party has made
or received any prepayments or credits with respect thereto, to the knowledge of
Seller, no party is in default in the performance, observance or fulfillment of
any material obligation, covenant or condition contained therein, and to the
knowledge of Seller, no event has occurred which with or without the giving of
notice or lapse of time, or both, would constitute a default thereunder.
3.1.10 Patents and Trademarks. To the best of Seller's knowledge,
except as set forth on Schedule 3.1.10, Seller owns (or possesses adequate and
enforceable licenses or other rights to use) all trademarks, trade names,
patents, copyrights, service marks, service names, inventions, trade secrets,
know-how, software formulas and processes and other proprietary rights and
corresponding foreign counterparts (the "Intellectual Property") necessary to
the conduct of the Business and, to its knowledge, such use does not conflict
with the rights of others. Except as disclosed on Schedule 3.1.10, no
proceedings have been instituted or are pending, or to the knowledge of the
Seller, threatened which challenge the validity of the ownership by the Seller
to such Intellectual Property. The Seller has not entered into any patent or
trademark license, technology transfer, or non-competition agreement relating to
its business except as set forth in Schedule 3.1.10. The Seller, to its
knowledge, is not infringing upon or otherwise acting adversely to any
Intellectual Property. The Seller, is not in default under any license
agreement. The Seller has, to its knowledge complied and is in compliance with
all applicable registered user laws or regulations. Neither the Seller, nor, to
its knowledge, any employee of the Seller has disclosed or made available to any
third party any trade secrets of the Seller under circumstances constituting a
breach of confidentiality. There are no existing or, to its knowledge,
threatened Intellectual Property related lawsuits by, or against, the Seller,
nor are
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there any outstanding notices, to the Seller or by the Seller to another,
regarding possible patent infringement of either a Seller-owned or the licensed
patent of a third party.
3.1.11 Compliance with Applicable Laws. To the best of Seller's
knowledge, Seller has complied with all laws, regulations, injunctions, decrees
and orders applicable to it or to the operation of its business, including but
not limited to compliance with all computer software licensing requirements.
Seller has not received written notice of any alleged violation of any such law,
regulation, injunction, decree or order.
3.1.12 Environmental Matters. Except as would not individually or in
the aggregate have a material adverse effect or except as set forth in Schedule
3.1.12:
(a) To the knowledge of the Seller, Seller has not deposited or caused
to be deposited, on, under or about the property owned or leased by the Seller
identified on Schedule 3.1.12 (the "Real Property") any solvents, pollutants,
chemicals, flammables, contaminants, gasoline, petroleum products, crude oil,
explosives, radioactive materials, substances, or wastes, or polychlorinated
biphenyls or related or similar materials, asbestos or any material containing
asbestos, (collectively, the "Hazardous Substances") in violation of any
Environmental Law, as defined below in (b).
(b) To the knowledge of the Seller, the Seller has not used the Real
Property to generate, manufacture, refine, transport, treat, store, handle,
dispose, transfer, produce, process or in any manner deal with Hazardous
Substances, except in compliance in all material respects with applicable
Environmental Laws, as defined herein, including, any applicable federal, state
or local governmental law, rule, regulation or ordinance dealing with Hazardous
Substances, including, without limitation, the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C.
Sections 9601, et seq.), the Hazardous Materials Transportation Act, as amended
(49 U.S.C. Section 1801, et. seq.), the Resource Conservation and Recovery Act,
as amended (42 U.S.C. Section
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6901, et. seq.), the Federal Water Pollution Control Act, as amended (33 U.S.C.
Sections 1251, et. seq.), the Clean Air Act, as amended (42 U.S.C. Sections
7401, et. seq.), the Toxic Substances Control Act, as amended (15 U.S.C.
Sections 2601, et. seq.), the Clean Water Act, as amended (33 U.S.C. Sections
1251, et. seq.), in each case as in effect on the date of this Agreement,
(collectively all such laws, rules, ordinances or regulations called herein,
"Environmental Laws");
(c) To the knowledge of the Seller, the Seller has obtained all
required registrations, permits, licenses, and other authorizations (the
"Environmental Permits") which are required under all Environmental Laws and
including all laws relating to emissions, discharges, releases, or threatened
releases of Hazardous Substances from the Real Property or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Substances at or from the Real Property;
(d) To the knowledge of the Seller, the Seller is in compliance in all
respects with all terms and conditions of the Environmental Permits;
(e) There is no civil, criminal, or administrative action, suit,
demand, claim, hearing, notice of violation, investigation, order, decree, plan,
judgement, injunction, proceeding, notice or demand letter pending, or, to the
knowledge of the Seller, threatened against the Seller relating in any way to
(i) the Environmental Laws, or (ii) relating to the release into the environment
by the Seller of any Hazardous Substances whether or not occurring at or on a
site owned, leased or operated by the Seller.
(f) To the knowledge of Seller, the Seller has timely filed all
reports, obtained all required approvals, generated and maintained all required
data, documentation and records required by the Environmental Laws or any
regulation, code, plan, order, decree, judgement injunction, notice or demand
letter issued, entered, promulgated or approved thereunder.
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3.1.13 Tax Liabilities. Seller has filed all federal, state, county,
local and foreign income, excise, property, sales and other tax returns relating
to the Business which are required to be filed up to and including the date
hereof and has paid all taxes which have become due, or any assessment which has
become payable.
3.1.14 Insurance. There are no claims for insurable losses in excess of
$25,000 per occurrence filed by the Seller in connection with the Business
during the three-year period immediately preceding the Closing.
3.1.15 Balance Sheets Seller has delivered to Purchaser (i) unaudited
financial statements of the Business for the period ended December 31, 1998 (the
"Unaudited Financial Statements" or the "Financial Statements") including a
balance sheet and statements of income. The Unaudited Financial Statements have
been prepared in all material respects on a basis consistent with generally
accepted
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accounting principles except that the Financial Statements may be subject to
normal audit adjustments, which in the aggregate are not material. The balance
sheets included in the Financial Statements do not include any material assets
or liabilities not intended to constitute part of the Business or the Assets
after giving effect to the transactions contemplated hereby, and present fairly
the financial condition of the Business as at their respective dates. The
statements of income included in the Financial Statements do not reflect the
operations of any entity or business not intended to constitute a part of the
Business after giving effect to all such transactions and present fairly the
results of operations of the Business for the periods indicated.
3.1.16 Proceedings Regarding Employee Benefit Plans. ITW is not
transferring to IRP and IRP is not assuming any liability for any Pension Plan
as defined in Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended, or any Profit Sharing Plan qualified under Section 401(a) of
the Internal Revenue Code of 1986, as amended.
3.1.16.1 Regarding Pension Plan for U.S. Union Employees. The
Irathane Systems, Inc. Retirement Income Plan (the "Union Pension Plan"):
3.1.16.2 has a "favorable Letter" as that term is defined in IRS Rev
Proc 98-22 3.1.16.3 does not have pending any operational compliance
failures which would result in
disqualification or sanctions;
3.1.16.4 does not have any accumulated funding deficiency with respect
to the funding standard account described in section 412(a) of the Internal
Revenue Code of 1986 (whether or not waived);
3.1.16.5 has not had a complete or partial termination; 3.1.16.6 has
not had a reportable event as such term is defined in the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"); and
3.1.16.7 has not had a "fiduciary" or "party in interest" or
"disqualified person" enter into and "prohibited transaction" as defined in
ERISA.
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3.1.17 Labor Relations Warranties. Seller warrants and represents that
there are no pending, threatened, or rumored grievances, unfair labor practice
charges, claims, or suits arising out of or related to the collective bargaining
agreement described in Section 7.1 or arising out of or related to the labor
relations between Seller and the union described in Section 7.1.
3.1.18 Litigation. Except as disclosed on Schedule 3.1.18, there is no
claim, legal action, suit, arbitration, governmental investigation or other
legal or administrative proceeding, nor any order, decree or judgment in
progress, pending or in effect, or to the knowledge of Seller threatened against
or relating to Seller which would materially affect the Business, or the
transactions contemplated by this Agreement.
3.2 Representations and Warranties of Purchaser. Purchaser hereby
represents and warrants to Seller as follows:
3.2.1 Corporate Existence. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Minnesota.
3.2.2 Corporate Power and Authorization. Purchaser has the corporate
power, authority and legal right to execute, deliver and perform this Agreement.
The execution, delivery and performance of this Agreement by Purchaser and any
document to be delivered at Closing have been duly authorized by all necessary
corporate action. This Agreement has been, and any document to be delivered at
Closing will be, duly executed and delivered by Purchaser and constitutes the
legal, valid and binding agreement of Purchaser enforceable against it in
accordance with its terms, except as may be limited by bankruptcy, insolvency
and other similar laws affecting creditors' rights generally and by general
equity principles.
3.2.3. Validity of Contemplated Transactions, etc. The execution,
delivery and performance of this Agreement by Purchaser will not contravene or
violate (a) any law, rule or regulation to which Purchaser is subject, (b) any
judgment, order, writ, injunction, decree or award of any court, arbitrator or
governmental or regulatory official, body or authority which is applicable to
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Purchaser, or (c) the charter documents or By-Laws of Purchaser or any
securities issued by Purchaser; nor will such execution, delivery or performance
violate, be in conflict with or result in the breach (with or without the giving
of notice or lapse of time, or both) of any term, condition or provision of, or
require the consent of any other party, to, any indenture, agreement, contract,
commitment, lease, plan, license, permit, authorization or other instrument,
document or understanding, oral or written, to which Purchaser is a party, by
which Purchaser may have rights or by which any of the Assets may be bound or
affected, or give any party with rights thereunder the right to terminate,
modify, accelerate or otherwise change the existing rights or obligations of
Purchaser thereunder. No authorization, approval or consent, and no registration
or filing with any governmental or regulatory official, body or authority is
required in connection with the execution, delivery and performance of this
Agreement by Purchaser except in each case for any item which would not have a
material adverse effect.
3.3 Survival of Representations and Warranties. All representations and
warranties made by the parties to this Agreement or in any certificate,
schedule, document or instrument furnished hereunder or in connection with the
execution and performance of this Agreement shall survive the Closing for a
period of two years. Notwithstanding any investigation or audit conducted before
or after the Closing Date or the decision of any party to complete the Closing,
each party shall be entitled to rely upon the representations, warranties,
covenants and agreements set forth herein. SECTION 4 - CONDITIONS PRECEDENT TO
THE CLOSING.
4.1. Conditions Precedent to Purchaser's Obligations. All obligations
of Purchaser under this Agreement are subject to the fulfillment or
satisfaction, prior to or at the Closing, of each of the following conditions
precedent:
4.1.1 Compliance with this Agreement. Seller shall have performed and
complied in all material respects, with all agreements and conditions required
by this Agreement to be performed by it prior to or at the Closing.
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4.1.2 No Threatened or Pending Litigation. On the Closing Date, no
suit, action or other proceeding, or injunction or final judgment relating
thereto, shall be threatened or be pending before any court or governmental or
regulatory official, body or authority in which it is sought to restrain or
prohibit or to obtain damages or other relief in connection with this Agreement
or the consummation of the transactions contemplated hereby, and no
investigation that might result in any such suit, action or proceeding shall be
pending or threatened.
4.1.3 No Material Damage; etc. Neither the Assets nor the inventory of
Seller shall have been or shall be damaged or destroyed (other than sales of
inventory in the ordinary course of business).
4.1.4 Covenants Not To Compete. For a period of five (5) years after
the Closing Date Seller shall not carry on or be engaged in or control any
business which competes with the Irathane business as conducted immediately
prior to Closing in the jurisdictions where the Irathane business is carried on
at Closing. Nothing in clause 4.1.5 shall prevent Seller from acquiring and then
being engaged in or carrying on the whole or any part of a business that
includes activities the carrying on of which would otherwise amount to a breach
of the undertaking contained in clause 4.1.4 if the annual turnover of such
activities does not amount to ten (10) percent or more of the aggregate annual
turnover of the business concerned. In the event of the purchase of a Business
during the five (5) year time period referred to above, the Seller shall
promptly notify Purchaser of said purchase. Within thirty (30) days of said
notification, Purchaser may elect to purchase said Business by written notice to
Seller. The Purchase Price for the Business shall be the Purchase Price paid by
Seller for said Business, together with all costs and expenses incurred in
connection with said purchase. To the extent the parties cannot agree upon a
Purchase Price within thirty (30) days of Purchaser's election of its purchase
right, then the Chicago office of a big five public accounting firm selected by
the parties shall be employed as arbitrator hereunder to determine the Purchase
Price due and payable for the Business.
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The arbitrating accountant's determination with respect to any dispute shall be
in writing and shall be final and binding upon the parties hereto.
4.1.5 Facility Lease. Seller will assign to Purchaser all of Seller's
right, title and interest under that certain lease agreement dated January 1,
1997 by and between Mesaba Realty Company, as landlord ("Landlord") and Illinois
Tool Works Inc. as tenant. Seller will use its best efforts to obtain Landlord's
written consent to such assignment. If Seller is unable to obtain Landlord's
consent to an assignment or sublease as of the Closing Date, Seller shall pay
Purchaser for its direct costs of relocation up to amount of FIFTY THOUSAND
DOLLARS ($50,000).
4.1.6 Supply and Secrecy Agreement. Seller and Purchaser shall have
entered into a supply agreement and secrecy and supply agreement as of the
Closing Date, relating to Purchaser's purchase of adhesives from Seller and
Seller's purchase of automotive components from Purchaser.
4.2 Conditions Precedent to Seller's Obligations. All obligations of
Seller under this Agreement are subject to the fulfillment or satisfaction,
prior to or at the Closing, of each of the following conditions precedent:
4.2.1 Compliance with this Agreement. Purchaser shall have performed
and complied in all material respects, with all agreements and conditions
required by this Agreement to be performed by it prior to or at the Closing.
4.2.2 No Threatened or Pending Litigation. On the Closing Date, no
suit, action or other proceeding , or injunction or final judgment relating
thereto, shall be threatened or be pending before any court or governmental or
regulatory official, body or authority in which it is sought to restrain or
prohibit or to obtain damages or other relief in connection with this Agreement
or the consummation of the transactions contemplated hereby, and no
investigation that might result in any such suit, action or proceeding shall be
pending or threatened. SECTION 5 - INDEMNIFICATION.
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5.1 General Indemnification Obligation of Seller. Seller will indemnify
and hold harmless Purchaser, and its officers, directors and shareholders
against and in respect of:
(a) any and all actions, suits and claims, or legal, administrative,
arbitration, governmental or other proceedings or investigations against Seller
that relate to Seller, the Business or the Assets and which result from or arise
out of any event, occurrence, action, inaction or transaction occurring prior to
the Closing Date;
(b) any and all damages, losses, settlement payments, deficiencies,
liabilities, costs and expenses suffered, sustained, incurred or required to be
paid by Seller because of or that result from, relate to or arise out of the
untruth, inaccuracy or breach of, or the failure to fulfill, any representation,
warranty, agreement, covenant or statement (i) of Seller contained in this
Agreement, or (ii) contained in any certificate, schedule, document or
instrument furnished to the Purchaser by or on behalf of Seller at the Closing;
(c) Seller agrees to indemnify Purchaser against (including, without
limitation, reasonable attorney's fees, disbursements, and court costs incurred
by Purchaser) and hold it harmless from any product liability claims made
against Purchaser arising out of or relating to any product manufactured or sold
by Seller at any time before the Closing;
(d) any and all actions, suits, claims, proceedings, investigations,
demands, audits, assessments, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and expenses) incident to
any of the foregoing or to the enforcement of this Section 5.1.
Seller shall have no liability under this Section 5.1 for
indemnification of Purchaser until the aggregate of all claims which have become
final totals $25,000 and then only for the amount by which such claims exceed
$25,000. Seller shall have no liability under this Section 5.1 for
indemnification of Purchaser in excess of the Purchase Price as defined in
Section 1.4 hereof. An amount for which Purchaser is entitled to receive
indemnification under this Section, after giving effect to the foregoing
deductible and cap as limitations on liability is an "Indemnified Loss". The
foregoing deductibles shall
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not apply to post-closing adjustments pursuant to Section 1.5 hereof or in the
event Purchaser has a claim for accounts receivables not collected within three
(3) months of closing in accordance with the provisions of Section 3.1.17
hereof.
The indemnities under this Section 5 are the sole and exclusive
remedies of Purchaser on account of, or with respect to, any of the matters
covered by this Section 5 or any other action or claim based upon any of the
representations, warranties or covenants set forth in, or arising out of any
transaction contemplated by, this Agreement, and is intended by the parties to
this Agreement to bar and preclude the assertion of any other rights or remedies
by the party under or related to this Agreement or the transaction contemplated
by this Agreement. The Seller's indemnification under this Section 5 shall
expire two (2) years from the Closing date except the Seller's indemnification
of Purchaser with respect to claims brought by third parties under Section
5.1(a)(b)(c)(d) shall survive for the applicable statute of limitations plus six
(6) months.
Purchaser shall promptly notify Seller, of the existence of any matter
to which the obligations set forth in this paragraph shall apply, and shall give
Seller reasonable opportunity to defend any claim or litigation at its own
expense, with counsel of its own selection approved by Purchaser (which shall
not be unreasonably withheld); provided that Purchaser shall also at all times
have the right fully to participate in such defense at its own expense. If
Seller shall fail, within a reasonable time after such notice, to defend such
claim or litigation, Purchaser or any successor to the business and assets of
Purchaser shall have the right, but not the obligation, to defend, compromise or
settle any such claim or litigation.
5.2 General Indemnification Obligation of Purchaser. Except to the
extent Seller has agreed to be liable to Purchaser, Purchaser will indemnify and
hold harmless Seller, and its officers, directors, and shareholders against and
in respect of:
(a) any and all actions, suits, claims or legal, administrative,
arbitration, governmental or other proceedings or investigations, against
Purchaser that relate to Purchaser, the business or the
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Assets and which result from or arise out of any event, occurrence, action,
inaction or transaction occurring after the Closing Date;
(b) any and all damages, losses, settlement payments, deficiencies,
liabilities, costs and expenses suffered, sustained, incurred or required to be
paid by Purchaser because of or that result from, relate to or arise out of the
untruth, inaccuracy or breach of, or the failure to fulfill, any representation,
warranty, agreement, covenant or statement (i) of Purchaser contained in this
Agreement; or (ii) contained in any certificate, schedule, document or
instrument furnished to Seller by or on behalf of Purchaser at the Closing;
(c) Purchaser agrees to indemnify Seller against (including, without
limitation, reasonable attorney's fees, disbursements, and court costs incurred
by Seller) and hold it harmless from any product liability claims made against
Seller arising out of or relating to any product manufactured or sold by
Purchaser after the Closing Date; and
(d) any and all actions, suits, claims, proceedings, investigation,
demands, assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and expenses) incident to
any of the foregoing or to the enforcement of this Section 5.2. Seller shall
promptly notify Purchaser of the existence of any matter to which the
obligations set forth in this paragraph shall apply, and shall give Purchaser
reasonable opportunity to defend any claim or litigation at his own expense,
with counsel of his own selection approved by Seller (which shall not be
unreasonably withheld); provided that Seller shall also at all times have the
right fully to participate in such defense at its own expense. If Purchaser
shall fail, within a reasonable time after such notice, to defend such claim or
litigation, Seller, or any successor to the business and assets of Purchaser,
shall have the right, but not the obligation, to defend, compromise or settle
any such claim or litigation.
The indemnities under this Section 5 are the sole and exclusive
remedies of Seller on account of, or with respect to, any of the matters covered
by this Section 5 or any other action or claim based upon any of the
representations, warranties or covenants set forth in, or arising out of any
transaction
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contemplated by, this Agreement, and is intended by the parties to this
Agreement to bar and preclude the assertion of any other rights or remedies by
the party under or related to this Agreement or the transaction contemplated by
this Agreement. SECTION 6 - COVENANTS OF THE PARTIES.
Seller will conduct the Business prior to the Closing Date in the
normal course and will use reasonable efforts to preserve the business
organization of Seller intact and retain the services of its present officers,
employees and agents to the end that it may retain its goodwill and preserve its
business relationships with customers, suppliers and others.
(a) In addition, Seller covenants that, from the date hereof until
the Closing:
(i) the Business will be conducted in the ordinary
course, and none of its properties or assets will be sold or otherwise disposed
of, mortgaged, pledged or otherwise hypothecated, except in the ordinary course
of business;
(ii) no general increase in excess of four percent (4%) or
individual increase in excess of ten percent (10%) has occurred since December
31, 1998 except as disclosed on the Financial Statements will be made in the
compensation payable or to become payable by Seller to of the officers,
employees or agents of the Business;
(iii) no contract, obligation or commitment will be entered
into or assumed by or on behalf of the Business extending beyond the Closing,
except normal commitments for the purchase of raw materials, supplies, licenses
and other assets used in the ordinary course of business;
(iv) no change, other than those required in the ordinary
course of business, will be made affecting personnel or agents of the Business;
(v) Seller will maintain the Real Property and the tangible
personal property in the same operating condition and repair as of the date of
the Agreement, using its customary standards of maintenance, reasonable wear and
tear excepted;
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(vi) Seller will continue until the Closing to carry
insurance in the forms and in the amounts now carried; and
(vii) Seller will permit Purchaser to have access to its books
and records with respect to the assets, the business, and other aspects of the
Business;
SECTION 7 - EMPLOYEE MATTERS
7.1 Employment of Union Employees. Effective March 25, 1999, Purchaser
shall recognize The International Brotherhood of Painters and Allied Trade Local
1904 as the exclusive bargaining agent for the bargaining unit of employees (the
"Union Employees") in Canada and the Carpenters Midwestern Industrial Council as
the exclusive bargaining agent for the bargaining unit of employees ("Union
Employees") in Minnesota. Subject to the concurrence of said union, Purchaser
shall assume, honor, and abide by said collective bargaining agreement, and all
obligations and liabilities thereunder, for the balance of its term. Subject to
the concurrence of said union, Purchaser shall execute the appropriate
documentation substituting Purchaser in the place and stead of Seller as the
contracting employer under said collective bargaining agreement.
7.1(a) Purchaser shall assume the Union Pension Plan as of the Closing
Date and shall thereafter be responsible for the continuation thereof and for
all future contributions thereto; provided that the Seller shall be responsible
for funding the maximum deductible contribution to said plan for the 1998 plan
year (determined using the actuarial methods and assumptions set forth in the
plan actuary's valuation report dated March 12, 1998) and one quarter of said
amount for the first quarter of 1999.
7.2 Employment of Non-Union Employees. Effective as of the date hereof,
Purchaser shall offer immediate employment to all non-union employees of the
Business as listed on Schedule 7.2 (the "Non-Union Employees"), except for those
individuals listed on Schedule 7.1, on the following terms and conditions:
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(a) Salary and other remuneration which are substantially equivalent to
those which are provided by Seller for each of such Non-Union Employees
individually as of the date hereof; and
(b) Retirement, welfare, and other employee benefits under Purchaser's
retirement, welfare, and other benefit plans or arrangements which, in the
aggregate, have a value which is substantially equivalent to those offered by
Seller to such Non-Union Employees. (All such Union Employees and Non-Union
Employees who accept employment with Purchaser are herein referred to as the
"Transferees".)
7.3 Assumption of Union Pension Plan. Purchaser shall assume the Union
Pension Plan as of the Closing Date and shall thereafter be responsible for the
continuation thereof and for all future contributions thereto; provided that the
Seller shall be responsible for funding the maximum deductible contribution to
said plan for the 1998 plan year (determined using the actuarial methods and
assumptions set forth in the plan actuary's valuation report dated March 12,
1998) and one quarter of said amount for the first quarter of 1999. Seller and
Purchaser shall jointly review the investment policy for the Union Pension Plan
and shall consult with the plan's actuary on the implications any change in such
policy would have on the interest assumption used for the 1999 plan year
actuarial valuation. To the extent that after changes in investment policy leave
the Union Pension Plan with any unfunded accrued liability as of January 1,
1999, Seller agrees to pay to Purchaser the amount of such unfunded accrued
liability.
7.3 Accrued Vacation Pay, Holiday Pay and Severance Pay.
(a) As of the date hereof, Purchaser shall be liable and
responsible for the payment of accrued but unpaid vacation pay and holiday pay
for the Transferees, as determined in accordance with Seller's vacation and
holiday pay policies in effect as of the date hereof for the Transferees, and as
reflected on the records.
(b) Purchaser shall be liable and responsible for the payment
of accrued but unpaid severance pay (accrued on the basis of one week severance
pay for each eligible year of employment)
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as determined in accordance with Seller's severance pay policies in effect as of
the date hereof for the Non-Union Transferees who Buyer terminated in the first
twelve (12) months following the Closing Date, other than for cause.
7.4 Third-Party Beneficiaries. This Agreement is between the parties
hereto only, and nothing herein shall establish any enforceable rights, legal or
equitable, in any person other than Purchaser and Seller, including any employee
of the Business. Any claim, including claims for benefits asserted by any person
with respect to his or her employment with Purchaser after the date hereof,
shall be governed solely by applicable employment policies and such benefit
plans which Purchaser shall maintain for its employees, construed under
applicable law. Nothing in this Agreement shall be deemed to restrict the right
of Buyer to deal with the Transferees as employees at will in the same manner as
it would be free to deal with such employee in the absence of this Agreement and
to terminate the employment of such Transferees at any time after the date
hereof.
7.5 Seller's Obligations. Seller shall be responsible for, and
indemnify Purchaser against, any claim by any employee of the Business employed
by Seller on or prior to the date hereof with respect to rights of such
employees arising under any profit sharing or pension plan other than the Union
Pension Plan, group insurance or retirement plans or any other benefit
agreement, plan, policy or arrangement of Seller applicable to such employees of
the Business, it being understood and agreed that Purchaser shall not be liable
or responsible for the payment of any employee benefits offered by Seller as of
the date hereof (with the exception of the parties' express agreement set forth
in Sections 7.1, 7.2, 7.3 and 7.4 or other Sections of this Agreement). SECTION
8 - POST CLOSING MATTERS.
8.1 Access to Records and Persons. Seller and Purchaser agree that,
both before and after the Closing, each will have access, upon prior reasonable
written request and at any reasonable time during normal business hours, to the
other's officers and employees and to its books and records relating to the
assets, properties and operations of Seller, and each shall have the right to
make copies
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of such books and records; provided, however, that such access shall be solely
for the purpose of enabling such party to prepare financial statements and tax
returns, and any litigation, claims, collection or arbitration matters and for
such other business purposes as Seller and Purchaser may agree, but Purchaser
shall not have access to Seller's trade secrets until the successful completion
of Closing. SECTION 9 - TERMINATION OF AGREEMENT.
This Agreement may be terminated at any time:
(a) by mutual consent of the parties;
(b) by either party if the Closing shall not have occurred by April 30,
1999 and the party seeking termination is ready, willing and able to close and
not in material default of its obligations under this Agreement;
(c) by either party if there shall have been a material
misrepresentation or breach of warranty or a breach of a material covenant on
the part of the other party in the representations and warranties or covenants
set forth herein or in any Schedule, Exhibit or other instrument delivered in
connection herewith, which misrepresentation or breach is not cured prior to the
Closing;
(d) by either party if any material claim, investigation or litigation
relating to the assets of the business or the transaction is pending as of the
date of termination. SECTION 10 - DISPUTE RESOLUTION.
10.1.1 Any dispute arising out of or relating to this Agreement or any
document delivered at Closing, including, but not limited to, claims for
indemnification pursuant to Section 5 shall be resolved in accordance with the
procedures specified in this Section 10, which shall be the sole and exclusive
procedures for the resolution of any such disputes.
10.1.2 The parties shall attempt in good faith to resolve any dispute
arising out of or relating to this Agreement promptly by negotiation between the
appointed representative of the Seller and executives of Purchaser who, if
possible, are at a higher level of management than the persons with
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direct responsibility for administration of this Agreement. Any party may give
the other party written notice of any dispute not resolved in the normal course
of business. Within fifteen days after delivery of the notice, the receiving
party shall submit to the other a written response. The notice and response
shall include (a) a statement of each party's position, and (b) the name and
title of the executive who will accompany the representative. Within 30 days
after delivery of the disputing party's notice, the executives of Purchaser and
Seller shall meet at a mutually acceptable time and place, and thereafter as
often as they reasonably deem necessary to attempt to resolve the dispute. All
reasonable requests for information made by one party to the other will be
honored.
10.1.3 If the matter has not been resolved by these persons within 60
days of the disputing party's notice, or if the parties fail to meet within 30
days, either party may initiate mediation as provided.
10.1.4 All negotiations, agreements and mediations pursuant to this
clause are confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and State Rules of
Evidence.
10.1.5 If the dispute has not been resolved by negotiation as provided
herein, the parties shall endeavor to settle the dispute by mediation under the
then current Center for Public Resources ("CPR") Model Procedure for Mediation
of Business Disputes. The neutral third party will be selected from the CPR
Panels of Neutrals, with the assistance of CPR, unless the parties agree
otherwise.
10.1.6 If the dispute has not been resolved by non-binding mediation as
provided herein within 90 days of the initiation of such procedure, either party
may initiate litigation (upon 30 days written notice to the other party);
provided, however, that if one party has requested the other to participate in a
non-binding procedure and the other has failed to participate, the requesting
party may initiate litigation before expiration of the above period.
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10.1.7 Nothing herein shall be construed to prevent any party from
seeking equitable relief in any court of competent jurisdiction to restrain or
prohibit any breach or threatened breach of any covenant of the parties set
forth in this Agreement. SECTION 11 - MISCELLANEOUS.
11.1 Brokers' and Finders' Fees. The Seller and the Purchaser represent
and warrant to each other that neither of them has employed any broker, finder
or intermediary in connection with the transactions contemplated by this
Agreement who might be entitled to a fee or commission upon the consummation of
the transaction contemplated hereby.
11.2 Expenses. The parties hereto shall pay their own expenses,
including without limitation their legal fees and expenses, incidental to the
preparation of this Agreement, the carrying out of the provisions of this
Agreement and the consummation of the transactions contemplated hereby.
11.3 Contents of Agreement; Parties in Interest; etc. This Agreement
sets forth the entire understanding of the parties hereto with respect to the
transactions contemplated hereby. It shall not be amended or modified except by
written instrument duly executed by each of the parties hereto. Any and all
previous agreements and understandings between or among the parties regarding
the subject matter hereof, whether written or oral, are superseded by this
Agreement.
11.4 Assignment and Binding Effect. All of the terms and provisions of
this Agreement shall be binding upon and inure to the benefit of and be
enforceable by the successors and assigns of Seller and Purchaser. No party may
assign its rights hereunder, except Purchaser may assign its rights to a wholly
owned subsidiary if it unconditionally guarantees such subsidiaries' obligation
hereunder.
11.5 Waiver. Any term or provision of this Agreement may be waived at
any time by the party or parties entitled to the benefit thereof but only by a
written instrument duly executed by such party or parties.
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11.6 Notices. Any notice, request, demand, waiver, consent, approval or
other communication which is required or permitted hereunder shall be in writing
and shall be deemed given only if delivered personally or sent by registered or
certified mail, postage prepaid, as follows:
If to Purchaser: Industrial Rubber Products
3804 East 13th Avenue
P.O. Box 782
Hibbing, Minnesota 55746
If to Seller: Illinois Tool Works Inc.
3600 West Lake Avenue
Glenview, IL 60025
Attn: Corporate Secretary
or to such other address as the addressee may have specified in a notice duly
given to the sender as provided herein. Such notice, request, demand, waiver,
consent, approval or other communication will be deemed to have been given as of
the date so delivered, facsimiled or mailed.
11.7 No Benefit to Others. The representations, warranties, covenants
and agreements contained in this Agreement are for the sole benefit of the
parties hereto and their successors and assigns, and they shall not be construed
as conferring any rights on any other persons.
11.8 Schedules and Exhibits. All Exhibits and Schedules referred to
herein are intended to be and hereby are specifically made a part of this
Agreement. If a document or matter is disclosed in any Exhibit or Schedule of
this Agreement, it shall be deemed to be disclosed for all purposes of this
Agreement without the necessity of specific repetition or cross-reference.
11.9 Severability. Any provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall be ineffective to the extent of such
invalidity or unenforceability without invalidating or rendering unenforceable
the remaining provisions hereof, and any such invalidity or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
11.10 Cooperation. Each party to this Agreement shall cooperate and
take such action as may be reasonably requested by any other party in order to
carry out the provisions and purposes of this Agreement.
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11.11 Counterparts. This Agreement may be executed in any number of
counterparts, any party hereto may execute any such counterpart, each of which
when executed and delivered shall be deemed to be an original and all of which
counterparts taken together shall constitute but one and the same instrument.
This Agreement shall become binding when one or more counterparts taken together
shall been executed and delivered by the parties. It shall not be necessary in
making proof of this Agreement or any counterpart hereof to produce or account
for any of the other counterparts. Signatures delivered by facsimile for this
Agreement or any document delivered at Closing shall be binding to the same
extent as an original.
11.12 Governing Law. This Agreement shall be governed by the laws
of the State of Minnesota.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the date first written.
Attest: INDUSTRIAL RUBBER PRODUCTS, INC.
s/ John M. Kokotovich By: s/ Daniel O. Burkes
Corporate Secretary
Title: President
ITW IRATHANE a division of
ILLINOIS TOOL WORKS INC.
By: s/ Richard J. Budweg
Title: General Manager ITW-PRC
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SCHEDULES AND EXHIBITS
Any schedules called for in this Purchase Agreement and not provided are to be
provided at Closing.
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