<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended: SEPTEMBER 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0-9628
ANCHOR PACIFIC UNDERWRITERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-1687187
(State or other jurisdiction (I.R.S.Employer Identification
incorporation or organization) No.)
1800 Sutter Street, Suite 400,
Concord, California, 94520 510/682-7707
(Address of principal executive offices (Registrant's telephone number
and Zip Code) including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of September 30, 1996
Common Stock, par value $.02 per share 3,729,540 shares
This document is comprised of 70 pages.
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ANCHOR PACIFIC UNDERWRITERS, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets, September 30,
1996 (unaudited) and December 31, 1995........................... 1
Consolidated Statements of Operations for the nine months and
quarters ended September 30, 1996 and 1995 (unaudited)............ 3
Consolidated Statements of Shareholders' Equity for the nine
months ended September 30, 1996 (unaudited) and year ended
December 31, 1995................................................. 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995 (unaudited)........................... 5
Notes to Consolidated Financial Statements........................ 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................ 18
ITEM 2. Changes in Securities............................................ 18
ITEM 3. Defaults Upon Senior Securities.................................. 18
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 18
ITEM 5. Other Information................................................ 18
ITEM 6. Exhibits and Reports on Form 8-K................................. 18
<PAGE>
PART I - FINANCIAL INFORMATION
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1996 1995
------------ ------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents - corporate funds $ 320,909 $ 904,781
Cash and cash equivalents - brokerage
fiduciary funds 1,333,844 1,529,524
Cash and cash equivalents - third-party
administration fiduciary funds 3,128,761 4,010,606
Accounts receivable (less allowance for
doubtful accounts of $36,622 in 1996 and
$49,560 in 1995) 1,326,306 1,255,335
Prepaid expenses and other current assets 275,584 295,537
----------- ----------
Total current assets 6,385,404 7,995,783
Property and equipment 2,965,153 2,892,462
Less accumulated depreciation and amortization (2,052,150) (1,835,530)
----------- ----------
913,003 1,056,932
Other assets:
Goodwill, net 2,026,433 2,128,452
Intangible assets, net 1,263,696 1,128,740
Deferred compensation 257,784 361,344
Other 62,855 61,182
------------ -----------
3,610,768 3,679,718
Total assets $10,909,175 $12,732,433
------------ -----------
------------ -----------
1
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ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
September 30, December 31,
1996 1995
------------ ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Cash and cash equivalents - third-party
administration fiduciary funds $ 3,128,761 $ 4,010,606
Net premiums payable - insurance companies 2,347,614 2,510,983
Accounts payable and accrued expenses 361,973 404,801
Short-term debt 1,320,000 1,175,000
Current portion of long-term debt 81,415 156,622
Current portion of long-term liabilities 669,358 498,537
----------- -----------
Total current liabilities 7,909,121 8,756,549
Long-term liabilities 841,878 1,034,895
Long-term debt, including $960,000 in 1996 and
$790,000 in 1995, owed to related parties 1,362,366 1,266,635
Deferred tax liability 111,322 111,322
Shareholders' equity:
Common stock - $.02 par value; 8,000,000
shares authorized; 3,729,540 and 3,674,501
shares issued as of 9/30/96 and 12/31/95
respectively 74,591 73,490
Additional paid-in capital 3,083,173 2,989,275
Retained earnings (deficit) (2,473,276) (1,499,733)
----------- -----------
Total shareholders' equity 684,488 1,563,032
----------- -----------
Total liabilities and shareholders' equity $10,909,175 $12,732,433
----------- -----------
----------- -----------
SEE ACCOMPANYING NOTES.
2
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ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS QUARTERS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ --------------------------
1996 1995 1996 1995
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Commissions, fees & other income $5,990,112 $6,620,790 $1,903,701 $2,182,458
Interest Income 81,194 103,883 21,815 42,146
---------- ---------- ---------- ----------
Total revenue 6,071,306 6,724,673 1,925,516 2,224,604
Operating expenses:
Salaries, commissions & employee
benefits 4,094,131 4,468,034 1,331,075 1,454,431
Selling, general & administrative
expenses 2,438,242 2,307,208 831,125 785,044
---------- ---------- ---------- ----------
Total operating expenses 6,532,373 6,775,242 2,162,200 2,239,475
---------- ---------- ---------- ----------
(461,067) (50,569) (236,684) (14,871)
Other income (expense):
Amortization of goodwill &
intangible assets (282,061) (300,465) (95,160) (97,086)
Interest (279,124) (113,677) (76,931) (39,876)
Other 53,509 129,893 16,065 (28,652)
Nonrecurring merger expenses - (204,209) - -
---------- ---------- ---------- ----------
Total other income (expense) (507,676) (488,458) (156,026) (165,614)
---------- ---------- ---------- ----------
Loss before income taxes (968,743) (539,027) (392,710) (180,485)
Income tax expense 4,800 4,800 - -
---------- ---------- ---------- ----------
Net loss $ (973,543) $ (543,827) $ (392,710) $ (180,485)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss per common &
common equivalent share $ (0.26) $ (0.15) $ (0.11) $ (0.05)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of
common & common equivalent
shares outstanding 3,692,750 3,674,559 3,692,750 3,674,559
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
SEE ACCOMPANYING NOTES
</TABLE>
3
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ANCHOR PACIFIC UNDERWRITERS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit) Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1994 (Restated) 3,923,258 $78,465 $3,294,702 $ (632,704) $2,740,463
Stock issued for
warrants exercised 163 3 486 - 489
Canceled stock:
Acquisition related
adjustment (248,710) (4,974) (305,917) - (310,891)
Fractional shares (210) (4) 4 - -
Net Loss - - - (867,029) (867,029)
----------------------------------------------------------------
Balance at December 31,
1995 3,674,501 $73,490 $2,989,275 $(1,499,733) $1,563,032
Convertible debentures 11,111 222 14,778 - 15,000
Purchase agreements 43,928 879 79,120 - 79,999
Net loss - - - (973,543) (973,543)
----------------------------------------------------------------
Balance at September 30,
1996 (Unaudited) 3,729,540 $74,591 $3,083,173 $(2,473,276) $ 684,488
----------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
4
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ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months
Ended September 30,
-------------------------
1996 1995
(unaudited) (unaudited)
OPERATING ACTIVITIES
Net loss $(973,543) $(543,827)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization 216,620 159,330
Amortization of goodwill, and other
intangibles 282,061 300,465
Deferred tax liability - 5,135
Changes in operating assets and liabilities,
net of effect of purchases of subsidiaries:
Cash and cash equivalents - brokerage
fiduciary funds 195,680 (288,992)
Accounts receivable (70,971) 55,917
Prepaid expenses and other current assets 14,536 91,559
Other assets (1,673) 24,937
Deferred compensation 103,560 103,560
Net premiums payable - insurance companies (163,369) 347,014
Accounts payable and accrued expenses (42,828) (28,013)
Other liabilities (32,430) (10,072)
--------- ---------
Net cash (used in) provided by operating activities (472,357) 217,013
INVESTING ACTIVITIES
Notes receivable, net (2,028) (78,169)
Purchases of property and equipment (72,691) (157,878)
Purchases of customer list (314,999) (63,366)
--------- ---------
Net cash used in investing activities (389,718) (299,413)
5
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ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine Months
Ended September 30,
-------------------------
1996 1995
(unaudited) (unaudited)
FINANCING ACTIVITIES
Common stock - warrants exercised - 33
Debt:
Borrowings 325,000 907,697
Repayment (202,819) (878,271)
Capital lease payments - (46,610)
Net payments on amounts due on acquisitions 156,022 62,976
--------- ---------
Net cash provided by financing activities 278,203 45,825
--------- ---------
Net (decrease) in cash (583,872) (36,575)
Cash and cash equivalents - corporate funds at
beginning of period 904,781 384,102
--------- ---------
Cash and cash equivalents - corporate funds at
end of period $ 320,909 $ 347,527
--------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 279,124 $ 113,677
--------- ---------
Income taxes $ - $ 5,600
--------- ---------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING &
FINANCING ACTIVITIES
Increase in goodwill and liabilities as a result
of purchase price adjustments related to the
PKW merger $ - $ 104,542
--------- ---------
Decrease in goodwill and shareholders' equity
related to cancellation of stock issued in
conjunction with PKW merger $ - $ 310,890
--------- ---------
Increase in intangible assets and notes payable,
related to the purchase of customer list $ - $ 140,395
--------- ---------
Common stock - convertible debentures exercised $ 15,000 $ -
--------- ---------
Common stock - issued per purchase agreements $ 79,999 $ -
--------- ---------
SEE ACCOMPANYING NOTES
6
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ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1996
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Anchor Pacific Underwriters, Inc. and its subsidiaries ("Anchor") have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for
the nine month period ended September 30, 1996 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1996.
For further information, refer to the consolidated financial statements and
footnotes thereto included in Anchor's Form 10-K for the year ended December
31, 1995.
The financial statements have been prepared on the going concern
basis. Anchor has reported net losses during the past three years. The
increase in net loss in 1995 and 1994 relates to expenses incurred in
connection with acquisitions and a merger. These events are further
discussed in the footnotes of the audited financials included in the 1995
Form 10-K. Anchor's business is not capital intensive and Anchor
historically has had sufficient capital to meet its operating needs.
Continued operating losses, however, have negatively impacted Anchor's
working capital position. To remedy this situation and supplement working
capital, Anchor is seeking to raise at least $500,000 from members of the
Board of Directors and other qualified investors through the sale of 10%
Subordinated Bridge Notes ("Bridge Notes"). As of November 7, 1996 Anchor
had received $180,000 in proceeds from the sale of Bridge Notes with
additional funds anticipated by the end of the year. Anchor plans to
continue making acquisitions and, in order to fund these acquisitions, it has
sought financing from third party sources. Anchor is presently seeking
short-term financing to fund a portion of one significant transaction; and,
has engaged an investment banking firm to explore the possibility of raising
up to $10 million from institutional investors.
Management's plan to achieve and sustain profitability includes a
strategy to strengthen its core health insurance and property and casualty
insurance businesses by: (a) continuing to develop specialized affiliated
business units that target selected insurance market segments defined by
industry type, geographic location and consumer demographics; (b)
establishing new products and services; (c) strengthening management, sales
and marketing staff; and (d) seeking to acquire and integrate compatible
insurance brokerage and administration businesses in the Western United
States. In conjunction with such acquisition strategies, management intends
to realize efficiencies and reduce expenses through the integration and
centralization of certain services with its existing infrastructure.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform with
the current year presentation.
NOTE 2 - ACQUISITIONS
On January 6, 1995 Anchor merged with System Industries, Inc.
("System"). For accounting purposes, the merger has been treated as a
recapitalization of Anchor with Anchor as the acquirer (reverse acquisition).
The historical financial statements prior to January 6, 1995 are those of
Anchor. These historical financial statements have been restated to give
effect to this recapitalization. Upon consummation of this merger,
shareholders of System received one share of Anchor Common Stock and one
Warrant to purchase one share of Anchor Common Stock for every 42.3291 shares
of issued and outstanding System Common Stock. As a result of
7
<PAGE>
the merger, Anchor became a public company. In February 1995, Anchor acquired
certain third-party administration accounts from a company located in
Stockton, California at a purchase price of approximately $204,000 (which
reflects a $50,000 cash payment and a discounted future income stream) with
an additional $55,000 of Anchor's Common Stock which was issued on July 29,
1996 at an agreed per share value of $1.75 per share (31,428 shares). On
March 1, 1996 Anchor purchased the R.L. Ferguson Insurance Agency ("RLF"), at
a purchase price of approximately $260,000 (which reflects a $95,000 cash
payment and a discounted future income stream) with an additional $25,000 of
Anchor's Common Stock which was issued on August 29, 1996 at an agreed per
share value of $2.00 per share (12,500 shares). On April 1, 1996 Anchor
acquired certain property and casualty accounts from Norman I. Robins
("Robins") at a purchase price equal to 30% of the net commission revenues to
be paid over a period of 60 consecutive months. On May 1, 1996 Anchor and
Putnam, Knudsen & Wieking, Inc. ("PKW") acquired certain property and
casualty accounts from John R. McPherson ("McPherson") at a purchase price
equal to 20% of the net commission revenues to be paid over a period of 48
consecutive months.
The results of operations from these acquisitions are included in
Anchor's consolidated financial statements from the date of purchase.
Although Anchor is engaged in discussions with third parties
regarding potential acquisitions, as of November 7, 1996 it did not have any
binding agreements with respect to acquisitions. However, Anchor has
released three Letters of Intent to potential acquisition prospects with whom
due diligence is currently ongoing. No assurances can be given with respect
to the likelihood, or financial or business effect, of any possible future
acquisition.
NOTE 3 - CONTINGENCIES
Anchor is subject to certain legal proceedings and claims arising in
connection with its business. It is management's opinion that the resolution
of these claims will not have a material effect on Anchor's consolidated
financial position.
NOTE 4 - CONVERTIBLE PREFERRED STOCK
Anchor has engaged an investment banking firm to explore the
possibility of raising up to $10 million in long-term financing through the
private sale of Series A Convertible Preferred Stock to one or more
institutional investors. The proceeds of this offering would be used for
debt consolidation, working capital and to fund future acquisitions.
Although representatives of Anchor and the investment banking firm have met
with potential investors such discussions are only in the preliminary stages.
Consequently, there can be no assurances as to when or whether Anchor will
raise additional capital or what the final terms and conditions would be for
such capital.
NOTE 5 - ADJUSTABLE BRIDGE NOTES AND WARRANT
Anchor was seeking to raise up to $3 million in short-term financing
through the proposed issuance of Adjustable Bridge Notes and Warrant to
Purchase Shares of Anchor Common Stock ("Adjustable Notes"). Anchor intended
to utilize a substantial portion of the proceeds to acquire all of the issued
and outstanding shares in a potential acquisition of an insurance specialty
managing general agency located in Scottsdale, Arizona. This short-term
financing is no longer being pursued by Anchor due to other financing
alternatives that have been developed over the last several months (see Note
6 below).
NOTE 6 - BANK LINE OF CREDIT AND WARRANT
Anchor is currently in negotiations with a regional San Francisco
Bay Area bank to fund a $1,000,000 credit line for the purpose of acquiring
all of the issued and outstanding shares in a potential acquisition of an
insurance specialty managing general agency located in Scottsdale, Arizona.
This line of credit would be treated as senior to all indebtedness and
obligations of Anchor, except for any obligation of Anchor under existing
bank lines of credit. As of November 7, 1996 the terms and conditions of
said line of credit have not been finalized. There can be no assurances as
to when or whether Anchor will raise this additional line of credit or what
the final terms and conditions would be for such line of credit.
8
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NOTE 7 - 10% SUBORDINATED BRIDGE NOTES AND WARRANT
During the second half of fiscal 1996 Anchor began to raise
additional funds from members of the Board of Directors and other qualified
investors through an issuance of 10% Subordinated Bridge Notes and Warrant to
Purchase Shares of Anchor Common Stock ("Bridge Notes"). As of November 7,
1996 Anchor has received $180,000 from said investors with additional
commitments outstanding to purchase approximately $200,000 of the Bridge
Notes before the end of the year. Anchor intends to utilize a substantial
portion of the proceeds from the Bridge Notes to support current and future
working capital needs of Anchor. Terms of the Bridge Notes provide 10%
interest paid annually in arrears with a one year maturity from date of
issuance. For every $10,000 of principal invested the purchaser would
receive a five year warrant to acquire 1,000 shares of Anchor Common Stock.
The warrant provides for a purchase price of $1.75 per share and includes
antidilution protection for stock splits, stock dividends, recapitalizations
and reorganizations. The Bridge Notes are junior to all indebtedness and
obligations of Anchor, except that the Bridge Notes are equal in status to
the Subordinated Convertible Debentures issued during 1995 which become due
in 1997.
NOTE 8 - 10% CONVERTIBLE SUBORDINATED DEBENTURES
During 1995, Anchor raised $370,000 to supplement its working
capital and capital expenditure requirements by selling 10% Convertible
Subordinated Debentures (the "Debentures"). The basic terms of the
Debentures were: (a) 10% interest per annum; (b) two year maturity; (c)
conversion price of $1.35 in the first year and $1.65 in the second year; (d)
"piggyback" registration rights for three years; (e) subordination provisions
that subordinated the Debentures to Anchor's "Senior Debt" (as defined in the
Debentures); and (f) provisions that permitted Anchor to redeem the
Debentures at par at any time. Purchasers of the Debentures included seven
members of the Board of Directors and a limited number of other sophisticated
investors.
An additional $600,000 was raised in the fourth quarter of 1995 to
supplement Anchor's working capital and capital expenditure requirements by
selling a 10% Convertible Subordinated Debenture, Series A (the "Series A
Debenture") to Guarantee Life Company ("Guarantee"). The basic terms of the
Series A Debenture were: (a) 10% interest per annum; (b) two year maturity;
(c) conversion price of $1.50; (d) "piggyback" registration rights for three
years; (e) subordination provisions that subordinated the Series A Debenture
to Anchor's "Senior Debt" (as defined in the Series A Debenture); and (f)
provisions that permitted Anchor to redeem the Series A Debenture at par at
any time.
In November 1996, Guarantee agreed to convert all $600,000 of the
Series A Debenture into 444,444 shares of Anchor's Common Stock at $1.35 per
share. In November 1996, investors holding $220,000 of the Debentures,
including members of the Board of Directors, agreed to convert their
Debentures into 162,963 shares of Anchor's Common Stock at $1.35 per share.
When completed, the conversion will save Anchor approximately $80,000 in
interest payments, reduce outstanding indebtedness by $820,000 and increase
shareholders' equity by $820,000.
NOTE 9 - COMMITMENTS
On June 27, 1996 Anchor entered into an Engagement Letter with
Gerbsman Partners ("Gerbsman"), a business and investment banking firm, to
assist Anchor in developing a strategy to access short-term debt financing
sources for future acquisitions. This Engagement Letter was canceled on July
31, 1996 per the terms of the contract, as Gerbsman was unsuccessful in
assisting Anchor in raising short-term debt financing.
The Engagement Letter provided for a $25,000 retainer fee which is
due and payable on January 4, 1997 plus reasonable business expenses through
July 31, 1996. However, inasmuch as Gerbsman was unable to raise the
short-term debt financing, there are no additional retainer fees or
options/warrants due under said contract.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND
Anchor was organized in 1986 as a California general partnership for
the specific purpose of acquiring Harden & Company ("Harden"), a third-party
employee benefits administrator. Anchor was reorganized as a private
California corporation in March 1987, and became a public reporting Delaware
corporation on January 6, 1995 when it merged with System.
Since its inception, Anchor has expanded its insurance and financial
service capabilities through internal growth and a series of acquisitions.
In August 1994, Harden acquired Benefit Resources, Inc. ("BRI"), a
third-party employee benefits administrator located in Scottsdale, Arizona;
in October 1994, Anchor acquired Putnam, Knudsen & Wieking, Inc. ("PKW"), a
property and casualty insurance brokerage company located in Oakland,
California; in March 1996, Anchor acquired RLF, a property and casualty
insurance brokerage company located in Walnut Creek, California; in April
1996, Anchor acquired certain property and casualty accounts from Robins; and
in May 1996, Anchor and PKW acquired certain property and casualty accounts
from McPherson. The RLF, Robins and McPherson acquisitions are not
significant to Anchor. These acquisitions were accounted for using the
purchase method of accounting. Anchor expects to continue to expand its
insurance brokerage and administration businesses and to explore other
complementary expansion opportunities.
Historically, Anchor derived a majority of its revenues from
third-party administration services. In light of its acquisition of PKW in
October 1994; the March 1, 1996 acquisition of RLF; the April 1, 1996
acquisition of accounts from Robins; and, the May 1, 1996 acquisition of
accounts from McPherson, Anchor expects to significantly increase the
percentage of its revenues that are derived from property and casualty
insurance brokerage activities.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
GENERAL
Anchor derives a substantial portion of its revenues from
commissions, which generally are based on a percentage of premiums produced
by Anchor, contingent commissions, which generally are based on underwriting
profits derived over a given period of time by the insurance carrier, and
fees received for claims administration (including underwriting and risk
analysis) services, which generally are based on a percentage of premiums
collected, or on a per capita basis. Anchor does not assume any underwriting
risk in connection with its business.
Fluctuations in premiums charged by insurance companies may
materially affect commission revenues. During the last eight years, the
property and casualty insurance industry has experienced a "soft market"
where the underwriting capacity of insurance companies expanded, stimulating
an increase in competition and a decrease in premium rates, thereby reducing
related commissions and fees. In addition to the soft market for property
and casualty insurance, workers' compensation reform in California has had
the effect of reducing workers' compensation insurance premiums and,
consequently, reducing commissions generated by the sale of related insurance
products. Although some sources in the insurance industry have predicted
future premium increases, the likelihood of rate increases in the near future
remains uncertain. Anchor believes that revenues generated from anticipated
future growth and continued diversification of its business will offset
weaknesses in the property and casualty market and any loss of revenues that
may result from workers' compensation reform.
Inflation may also impact commission revenues by, among other
things, increasing property replacement costs and workers' compensation and
liability claims, thereby causing some clients to seek higher levels of
insurance coverage and pay higher premiums. During the past several years,
the United States has experienced very low rates of inflation along with
gradual business expansion. Because the United States has recently
experienced limited inflationary pressures, inflation has had minimal impact
on insurance prices.
10
<PAGE>
Other factors, such as client uncertainty about the effect of health
care reform, could also affect Anchor's business. Anchor believes, however,
that its expertise in two major areas that are the targets of health care
reform proposals (managed care and managed competition), combined with its
strategy of serving middle market clients, makes it well positioned to
operate effectively in a managed care and managed competition environment.
Anchor also believes that in the current political environment, the United
States will experience incremental, rather than comprehensive, changes in
health care regulations. It is not possible at this time to predict the
effect that any future health care legislation will have on Anchor's business
condition or operations.
Anchor is unaware of any current regulatory proposals that could
have a material effect on its liquidity, capital resources or operations.
Anchor has taken steps to strengthen the sales management at both
PKW and BRI by hiring seasoned sales and marketing executives to take over
marketing responsibilities. Product development and new product sales
continue to be a top priority as does geographical diversification into other
states and marketing territories. Marketing for new business on the release
of a new product by Harden and BRI's new insurance carrier began on April 1,
1996. Market reaction to these changes has been encouraging and the increase
in new revenue is beginning to match prior periods of production.
Furthermore, Harden and BRI have been successful in securing an alternative
insurance carrier to strengthen and broaden their product offerings in the
small group market; as well as facilitate geographic diversification. This
new insurance carrier has negotiated a multi-year, exclusive contract with
Harden and BRI which management believes will materially enhance sales
opportunities in California and Arizona. Initial market reaction to this
change is encouraging.
REVENUES
TOTAL REVENUES. Total revenues for the nine months ended September
30, 1996 were $6,071,306, a decrease of $653,367 or 9.7% compared to
$6,724,673 of revenues for the nine months ended September 30, 1995. The
decrease in revenues in this nine month period resulted from net lost
business due primarily to a change in the underwriting insurance carrier for
Harden as discussed below. Anchor's revenues vary from quarter to quarter as
a result of the timing of policy renewals and net new/lost business
production, whereas expenses are fairly uniform throughout the year.
Commissions and fees make up substantially all of Anchor's revenues.
The following table sets forth the percentages of Anchor's revenues
attributable to insurance brokerage services (for which commissions are
generated), and third-party administration and underwriting and risk analysis
services (for which fees are generated), for the nine months ended September
30, 1996, 1995 and 1994. Also included is the percentage of revenues
generated from premium finance activities.
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NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 1994
- -------------------------------------------------------------------------------
Insurance Brokerage Commissions 44% 40% 21%
- -------------------------------------------------------------------------------
Third-Party Administration Fees 56% 59% 78%
- -------------------------------------------------------------------------------
Premium Financing - 1% 1%
- -------------------------------------------------------------------------------
Total 100% 100% 100%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Historically, Anchor derived a majority of its revenues from
third-party administration services. In light of its acquisitions of PKW in
October 1994; RLF in March 1996; and the account acquisitions of Robins in
April 1996, and McPherson in May 1996, Anchor expects to continue to
experience an increase in the percentage of its revenues that are derived
from insurance brokerage activities.
11
<PAGE>
COMMISSIONS. Commissions from insurance brokerage services are
reported net of sub-broker commissions and generally are recognized as of the
effective date of the insurance policy except for commissions on installment
premiums which are recognized periodically as billed. Commissions for the
first nine months of 1996 were $2,602,842 a decrease of $67,728 or 2.5%
compared to $2,670,570 of commissions for the first nine months of 1995. The
decrease resulted from net lost business for the nine month period ended
September 30, 1996 largely due to the continuing soft property and casualty
market and the effects of open-rating in workers' compensation.
Anchor expects that commission revenues generated from sales of
workers' compensation insurance, which accounted for approximately 15% of
commission revenues to PKW (or 7% of Anchor's total revenues) for the first
nine months of 1996, may begin to stabilize as a result of workers'
compensation reform in California. Anchor believes that revenues generated
from anticipated growth and continued diversification of its business will
substantially offset and rebuild lost revenues that resulted from workers'
compensation reform.
FEES. Fees from Anchor's third-party administration (including
underwriting and risk analysis) services for the nine months ended September
30, 1996 were $3,386,054 a decrease of $555,845 or 14.1% compared to
$3,941,899 in fees for the same period in 1995. This loss of fees income is
the direct result of changes in the underwriting insurance carriers for
Harden and BRI and is discussed below.
Revenues generated from fees by Anchor in the first nine months of
1996 from third-party administration services consist of revenues generated
by both Harden and BRI. A significant portion of the Harden and BRI fee
revenues generated from new clients relate to an insurance product
underwritten by one insurance carrier, which currently is an A+ (Superior)
rated insurance carrier.
Harden's third-party administration revenues are substantially
derived from: (a) an insurance product currently underwritten by two
insurance carriers, which are rated A+ (Superior) and A (Excellent); and (b)
the administration of insurance programs underwritten by various insurance
carriers for a number of self-insured employers. The insurance product
referred to in (a) above, accounted for approximately 60.6% of Harden's
revenues (or approximately 25.1% of Anchor's total revenues) in 1995, and
revenues related to the administration of self-insured benefit plans
described in (b) above, accounted for 38.0% of Harden's revenues in such
period. Self-insurance is a benefit plan in which a client assumes a
manageable portion of its insurance risks, usually placing the less
predictable and larger loss exposure with an excess loss insurance carrier.
The insurance company which offered the product that accounted for
65% of Harden's 1994 third-party administration revenues informed Harden in
the first quarter of 1995 that as a result of changes in its business
strategy it would discontinue offering such an insurance product by the end
of 1995. On July 20, 1995, Harden obtained a binding commitment from an A+
(Superior) rated insurance carrier to underwrite the risk and provide a
replacement product as of October 1, 1995. The transition to the new
insurance carrier has caused several clients to reevaluate their insurance
needs. In conjunction with this transition process, existing clients are
required to satisfy the new carrier's underwriting standards. During the
first quarter in 1996, one client who represented approximately 9% of
Harden's 1995 revenues, (or 3.7% of Anchor's consolidated revenues) was
advised by the new insurance carrier that it would not be accepted as a
client because it did not meet its underwriting standards. As a result of the
transition to the new insurance carrier, Harden has experienced a near term
loss of business accounts and revenues. Management expects an improvement as
new clients are added over the next six to twelve month period.
The insurance company, an A+ (Superior) rated insurance carrier,
which provided the replacement product as of October 1, 1995 informed Harden
in the third quarter of 1996, that as a result of changes in its business
strategy, it would discontinue offering such an insurance product by the end
of February 1997. This product currently represents 51% of Harden and BRI's
revenue and 27% of Anchor's total revenue.
As of October 31, 1996, Harden obtained a commitment from an
A-(Excellent) rated insurance carrier to underwrite the risk and provide a
replacement product as of December 1, 1996. Management believes that the
transition to the new insurance carrier will be less intrusive on Harden and
BRI's clients because the replacement insurance carrier will fully assume all
policies in California and the majority of policies in Arizona thereby
avoiding the loss of accounts which Harden and BRI experienced earlier. The
impact on Harden and BRI's revenue is expected to be minimal.
12
<PAGE>
The new replacement insurance carrier is a subsidiary of the largest
HMO in Nevada. Management believes that the new insurance carrier will
enable Anchor to provide the small group medical insurance market with
stronger managed care components. The replacement insurance carrier's
business strategy is to aggressively market group health products in a
multi-state distribution system through an exclusive multi-year contract with
Harden and BRI. The initial reaction of the Harden and BRI distributors has
been very favorable. At the end of October 1996 Harden and BRI had received
commitments for in excess of $5 million of new business premiums. Revenues
from this new business would begin in January 1997.
INTEREST INCOME. Interest income consists of interest earned on
insurance premiums and other funds held in fiduciary accounts and interest
earned on investments. Interest income was $81,194 and $103,883 for the nine
months ended September 30, 1996 and 1995, respectively. The decrease in
interest income in 1996, as compared to 1995, was primarily caused by reduced
insurance premiums and other funds being held in fiduciary accounts which is
directly related to business lost due to the change of primary insurance
carriers referred to above.
EXPENSES
TOTAL EXPENSES. Total operating expenses for the nine months ended
September 30, 1996 were $6,532,373 a decrease of $242,869 or 3.6% as compared
to the operating expenses of $6,775,242 for the same period in 1995. As
discussed below, the decrease in total expenses resulted from a decrease in
employee compensation and benefits offset, in part, by an increase in
selling, general and administrative expenses.
Anchor continues to monitor expenses closely as Harden and BRI
transition from one insurance carrier to another for their major indemnity
product. Anchor is also monitoring staffing levels as well as outside
professional services. Management expects to achieve further cost reductions
in connection with the recent termination of an outside vendor supplying
systems support.
EMPLOYEE COMPENSATION AND BENEFITS. Employee compensation and
benefits for the nine months ended September 30, 1996 were $4,094,131 a
decrease of $373,903 or 8.4% as compared to $4,468,034 for the same period in
1995. Starting in 1996, PKW went to a compensation system for all sales
personnel based upon commission only versus the prior practice of paying
commission plus salary. The change in 1996 was made in order to record
commissions to properly match with earned revenues. In addition, this
overall decrease was also attributed to normal attrition and selective
downsizing at PKW, Harden and BRI, and a reclassification of certain items to
selling, general and administrative expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $2,438,242 and $2,307,208 for the nine months
ended September 30, 1996 and 1995, respectively. The $131,034, or 5.7%
increase in 1996, as compared to 1995, resulted primarily from reclassification
of certain items previously classified as employee compensation and benefits.
General and administrative expenses include rent, travel, insurance, postage,
telephone, supplies and other miscellaneous expenses.
INTEREST EXPENSE. Interest expense totaled $279,124 and $113,677 for
the nine months ended September 30, 1996 and 1995, respectively. The
increase in interest expense of $165,447 in the first nine months of 1996, as
compared to the same period in 1995, resulted primarily from an increase in
outstanding borrowings on Anchor's existing lines of credit, and $85,000 of
expense related to the Convertible Preferred Stock Offering. The successful
completion of the Convertible Preferred Stock Offering and subsequent debt
consolidation could materially lower interest expense. There can be no
assurances as to when or whether Anchor will raise this additional capital or
what the final terms and conditions will be for such capital.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Goodwill represents
the excess of the cost of acquisitions over the fair value of net assets
acquired. Other intangibles include covenants not to compete, customer lists
and other contractual rights. Amortization of goodwill and other intangibles
was $282,061 and $300,465 for the nine months ended September 30, 1996 and
1995, respectively. The decrease in amortization of goodwill and other
intangibles is a result of an adjustment to goodwill in the fourth quarter of
1995 due to the subsequent adjustment of the PKW purchase price. For further
information, refer to Adjustment to PKW Purchase Price, page 15, in Anchor's
Annual Report on Form 10-K for the year ended December 31, 1995.
13
<PAGE>
INCOME TAXES
Anchor's expense for income taxes was $4,800 for both nine month
periods ended September 30, 1996 and 1995. This $4,800 expense represents
the minimum annual required tax payment due.
RESULTS OF OPERATIONS - QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995
REVENUES
TOTAL REVENUES. Total revenues for the three months ended September
30, 1996 were $1,925,516, a decrease of $299,088, or 13.4%, as compared to
1995 third quarter revenues. The decrease in revenue resulted primarily from
the insurance carrier change at Harden and BRI.
COMMISSIONS. Commissions for the third quarter of 1996 were $851,973,
a decrease of $21,245, or 2.4%, as compared to $873,218 of commissions for
the third quarter of 1995. The net loss of business revenue at PKW accounted
for substantially all of the decrease.
FEES. Fees from Anchor's third-party administration (including
underwriting and analysis) services for the three months ended September 30,
1996 were $1,051,095, a decrease of $256,975, or 19.6% as compared to
$1,308,070 in fees for the same period in 1995. The insurance carrier change
at Harden and BRI accounted for substantially all of the revenue decrease.
INTEREST INCOME. Interest income was $21,815 and $42,146 for the
three months ended September 30, 1996 and 1995, respectively. The decrease
in interest income in the third quarter of 1996, as compared to 1995,
resulted primarily from reduced insurance premiums and other funds held in
fiduciary accounts.
EXPENSES
TOTAL EXPENSES. Total operating expenses for the three months ended
September 30, 1996 were $2,162,200, a decrease of $77,275, or 3.5%, as
compared to the operating expenses for the same period in 1995. The decrease
resulted primarily from a decrease in employee compensation and benefits
offset, in part, by the increase in selling, general and administrative
expenses.
EMPLOYEE COMPENSATION AND BENEFITS. Employee compensation and
benefits for the three months ended September 30, 1996 were $1,331,075, a
decrease of $123,356, or 8.5%, over the same period in 1995. The decrease
related primarily to normal attrition and selective downsizing at PKW, Harden
and BRI.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $831,125 and $785,044 for the three months ended
September 30, 1996 and 1995, respectively. The $46,081, or 5.9%, increase in
the third quarter of 1996, as compared to the same period in 1995, resulted
primarily from reclassification of certain items previously classified as
employee compensation and benefits. General and administrative expenses
include rent, travel, insurance, postage, telephone, supplies and other
miscellaneous expenses.
INTEREST EXPENSE. Interest expense was $76,931 and $39,876 for the
three months ended September 30, 1996 and 1995, respectively. The increase
in interest expense in 1996, as compared to 1995, resulted primarily from an
increase in outstanding borrowings on Anchor's existing lines of credit, and
expenses related to the Convertible Preferred Stock Offering. The successful
completion of the Convertible Preferred Stock Offering and subsequent debt
consolidation could materially lower interest expense. There can be no
assurances as to when or whether Anchor will raise this additional capital or
what the final terms and conditions will be for such capital.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Goodwill represents
the excess of the cost of acquisitions over the fair value of net assets
acquired. Other intangibles include covenants not to compete, customer lists
and other contractual rights. Amortization of goodwill and other intangibles
was $95,160 and $97,086 for the three months ended September 30, 1996 and
1995, respectively.
14
<PAGE>
INCOME TAXES
Anchor's minimum annual required tax payment due was reported during
the first quarter of 1996 and 1995. Therefore, there was no income tax
expense reported for the three month periods ended September 30, 1996 and
1995.
LIQUIDITY AND CAPITAL RESOURCES
Anchor's business is not capital intensive and Anchor historically has
had sufficient capital to meet its operating needs. Anchor reported net cash
flows (used in) operations of $(472,357) for the nine months ended September
30, 1996 compared to net cash flows provided by operations of $217,013 for
the nine months ended September 30, 1995. During 1996, Anchor expects to
meet its operating and capital needs from cash flow derived from operations,
borrowing under its existing credit agreements and use of the proceeds from
the Bridge Notes. As of September 30, 1996 Anchor had approximately
$105,000 available on its existing lines of credit. Anchor is seeking to
raise at least $500,000 from the members of the Board of Directors and other
qualified investors through a Bridge Notes to supplement working capital. As
of November 7, 1996 Anchor had received $180,000 in proceeds from the sale of
Bridge Notes with additional funds anticipated by the end of the year. To
further supplement current funding sources, Anchor is presently seeking
alternative bank lines and, as described below, is seeking to raise up to $10
million from institutional investors. Liquidity would be impaired if cash
flow from operations were reduced or if existing credit lines and proceeds
from other debt financing were insufficient.
During late 1995, Anchor engaged the services of an investment banker
to assist in raising approximately $10 million from institutional investors
through the proposed issuance of Series A Convertible Preferred Stock.
Marketing of this private placement to institutional investors began in June
1996. The proceeds of this offering would be used for debt consolidation,
working capital and to fund future acquisitions. At the present time, Anchor
expects to offer investors preferred stock that will be convertible into
shares of common stock. Anchor is continuing to have discussions with
various potential investors, but has not yet obtained any commitments with
respect to such financing. Consequently, there can be no assurance as to
when or whether Anchor will raise additional capital or what the terms and
conditions would be for such capital.
In June 1996, Anchor engaged the services of a business consultant and
investment banker to assist in raising approximately $3 million from private
investors through the proposed issuance of Adjustable Notes. This engagement
was canceled on July 31, 1996 as the business consultant and investment
banker was unsuccessful in raising said funds.
Anchor is currently in final negotiations with a regional San
Francisco Bay Area bank to fund a $1,000,000 line of credit. The proceeds of
this line of credit will be used to acquire all of the issued and outstanding
shares in a potential acquisition of an insurance specialty managing general
agency located in Scottsdale, Arizona. As of November 7, 1996 the proposed
terms of the line of credit have not been finalized. There can be no
assurances as to when or whether Anchor will obtain this line of credit or
what the final terms and conditions would be for such line of credit.
Anchor continues to raise additional funds from members of the Board
of Directors and other qualified investors through the offer and sale of
Bridge Notes. As of November 7, 1996 Anchor had received $180,000 with
additional commitments outstanding to purchase approximately $200,000 by the
end of the year. The proceeds would be used to support current and future
working capital needs. There can, however, be no assurance as to when or
whether Anchor will raise additional working capital or what the terms and
conditions would be for such capital.
Capital and certain acquisition related expenditures were $387,690 and
$221,244 for the nine months ended September 30, 1996 and 1995, respectively.
During the first quarter of 1996, RLF, an insurance agency located in Walnut
Creek, California was acquired and merged into Anchor's insurance brokerage
subsidiary, PKW, located in Concord, California. In addition, during the
second quarter of 1996 certain property and casualty accounts of Robins and
McPherson were acquired and merged into PKW. During the first quarter of
1995 certain third-party administration accounts from a company located in
Stockton, California were acquired and merged in Anchor's third-party
administration subsidiary, Harden, located in Concord, California.
15
<PAGE>
Short-term debt, current portion of long-term debt and current portion
of long-term liabilities at September 30, 1996 totaling in the aggregate
$2,070,773 (as compared to $1,830,159 at December 31, 1995) consisted of:
(a) $975,000 outstanding under a $1,000,000 revolving line of credit
maintained by Anchor with a regional San Francisco Bay Area bank; (b)
$345,000 outstanding under a $500,000 unsecured line of credit maintained by
Anchor with another regional San Francisco Bay Area bank; (c) approximately
$228,750 of future fixed payments under a consulting agreement entered into
with a company affiliated with the former shareholders of BRI; (d) $150,000
representing the current portion of obligations with regard to certain real
property leased by PKW prior to its acquisition by Anchor and relocation to
Anchor's executive offices; and (e) $372,023 for certain other current
liabilities.
On September 8, 1996 the $1,000,000 line of credit expired. The bank
has notified Anchor that it no longer will continue to extend credit to
Anchor because Anchor's performance has not met the bank's expectations. The
bank has given Anchor 120 days, or until January 7, 1997 to make arrangements
to replace the credit facility. Anchor will work with the bank to move the
credit facility to another bank or use proceeds from the Convertible
Preferred Stock Offering (Note 4) to satisfy the obligation. The interest
rate on the $1,000,000 line of credit is at the lending bank's prime rate.
The line of credit requires Anchor to maintain shareholders' equity of at
least $800,000. Anchor's shareholders' equity as of September 30, 1996 was
$684,488. However, in November 1996, Anchor received commitments to convert
the $600,000 Series A Debenture and $220,000 of Debentures into 607,407
shares of Anchor's Common Stock at $1.35 per share. When completed, the
conversion will reduce Anchor's outstanding indebtedness by $820,000 and
increase shareholders' equity by $820,000 (see Note 8 above).
In 1995 the bank that provided Anchor with the $1,000,000 line of
credit also provided Anchor with equipment financing loans of $125,000 and
$62,000 for equipment purchased with operating capital. The proceeds from
the $125,000 equipment financing loan were then used to reduce the
outstanding balance on said $1,000,000 line of credit.
The $500,000 unsecured line of credit expired on July 30, 1996. The
credit line has been renewed with the bank in the amount of $450,000 for
twelve months and matures on October 20, 1997. The interest rate on the
$450,000 line of credit has an interest rate equal to the lending bank's
prime rate plus 1.5%.
At September 30, 1996 long-term liabilities, less the current portion
discussed above, totaled $2,315,566 (as compared to $2,412,852 at December
31, 1995) and primarily consisted of: (a) convertible debentures in the
total amount of $955,000; (b) approximately $282,000 of future fixed payments
under the consulting agreement mentioned above with a company affiliated with
the former shareholders of BRI; (c) approximately $280,000 representing the
long-term portion of obligations with regard to certain real property leased
by PKW prior to its acquisition by Anchor and relocation to Anchor's
executive offices; (d) approximately $281,00 represents deferred rent with
regard to certain real property currently leased by Anchor; (e) subordinated
bridge notes of $180,000; and (f) approximately $337,566 for certain other
long-term liabilities. In May 1995, PKW entered into a sublease with respect
to 82% of PKW's prior office space. The sublease expires on September 30,
1997 (unless extended by the subtenant through November 30, 1999, the date
on which the term of the master lease expires) and requires PKW to provide a
multi-year rent subsidy. In December 1995, PKW entered into a sublease with
respect to an additional 10% of PKW's prior office space. The sublease
expires on November 30, 1999 and requires PKW to provide a multi-year rent
subsidy. The amounts classified as short and long-term liability with
respect to the PKW leases reflect such subsidy and are based upon the
assumptions that: (a) the subtenant of the May 1995, sublease will exercise
its option to extend the lease through 1999; and (b) the remaining 8% of such
office space will be subleased in 1997.
Anchor has not paid cash dividends in the past and does not expect to
pay cash dividends in the foreseeable future.
16
<PAGE>
STRATEGY
Anchor's strategy is to strengthen its core health insurance and
property and casualty (including workers' compensation) insurance businesses
by: (a) continuing to develop specialized affiliated business units that
target selected insurance industry market segments defined by industry type,
geographic location and consumer demographics; (b) establishing new products
and services; (c) strengthening management, sales and marketing staff; and
(d) seeking to acquire and integrate compatible insurance brokerage and
administration businesses in the Western United States. In connection with
this strategy, Anchor regularly considers acquisition opportunities. To
date, acquisitions by Anchor have involved both relatively small acquisitions
of insurance brokerage and administration accounts as well as larger
acquisitions of insurance brokerage companies, such as PKW, and third-party
administrators, such as BRI. Anchor expects to continue to pursue appropriate
acquisition opportunities, and believes that its status as a public company
enhances its ability to make acquisitions and continue its expansion
strategy. Although Anchor is engaged in discussions with third parties
regarding potential acquisitions, as of November 7, 1996 it did not have any
binding agreements with respect to acquisitions. No assurances can be given
with respect to the likelihood, or financial or business effect, of any
possible future acquisition.
As part of Anchor's strategy to create the premier regional publicly
traded insurance brokerage/administrator in the Western United States, it
expects to obtain additional momentum by using its larger operating base to
attract public and private financing. Such funding would be available to
Anchor for future acquisition, expansion, and consolidation of its insurance
operations.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Anchor and its subsidiaries are parties from time to time to various
lawsuits that have arisen in the normal course of business. Management is
not aware of any lawsuits to which Anchor or its subsidiaries is currently a
party or to which any property of Anchor or any of its subsidiaries is
subject, which might materially adversely affect the financial condition or
results of operations of Anchor.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
4.6 Form of 10% Subordinated Bridge Note.
4.6a Form of Warrant to Purchase Shares of Common Stock of Anchor
Pacific Underwriters, Inc.
10.22 Industrial Real Estate Lease (Multi-Tenant Facility) dated
September 12, 1996 between Palo Cristi Airpark II, L.L.C., and Benefit
Resources, Inc.
27.0 Financial Data Schedule
B. Reports on Form 8-K
None
18
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Anchor
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ANCHOR PACIFIC UNDERWRITERS, INC.
Date: November 7, 1996 /s/ James R. Dunathan
-------------------- -------------------------------------
James R. Dunathan
President and Chief Executive Officer
Date: November 7, 1996 /s/ Earl Wiklund
-------------------- -------------------------------------
Earl Wiklund
Senior Vice President and Chief Financial Officer
19
<PAGE>
Note No.__________
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR
QUALIFICATION UNDER SUCH SECURITIES LAWS OR AN OPINION OF COUNSEL,
SATISFACTORY TO THE COMPANY, THAT THE SALE OR TRANSFER IS PURSUANT TO AN
EXEMPTION FROM THE REGISTRATION OR QUALIFICATION REQUIREMENTS OF SUCH
SECURITIES LAWS.
ANCHOR PACIFIC UNDERWRITERS, INC.
10% Subordinated Bridge Note,
(and Warrant to Purchase Shares of Common Stock)
$ Concord, California
_____________, 1996
ANCHOR PACIFIC UNDERWRITERS, INC., a Delaware corporation (the
"Company"), for value received, hereby promises to pay to
________________________ or such other person in whose name this Note is
registered on the Note Register (as that term is defined below) (the
"Holder"), the principal amount of _________ Thousand Dollars ($_________),
with simple interest on the unpaid balance of such principal amount at the
rate of ten percent (10%) per annum from the date of this Note. Interest on
the outstanding principal balance shall be due and payable to the Holder on
the Maturity Date as that term is defined below. Each Note delivered upon
registration of transfer or in exchange for or in lieu of this Note shall
carry the rights to interest accrued and unpaid, and to accrue, which were
carried by this Note.
The full principal amount of this Note, plus interest, will be due and
payable on _____________, 1997 (the "Maturity Date"). Payment of interest and
principal shall be made in lawful money of the United States of America by
wire transfer to an account designated by the Holder appearing on the Note
Register.
<PAGE>
This Note is a duly authorized Note of the Company, limited to the
aggregate principal amount of $_________.
1. REPRESENTATIONS, WARRANTIES AND COVENANTS.
1.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business or properties.
1.2 VALID ISSUANCE OF NOTES AND SHARES. The Note, when issued, sold
and delivered in accordance with the terms hereof for the consideration
expressed herein, will be a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, and based in part
upon the representations of the Holder contained in the Subscription Agreement
pursuant to which this Note is being issued, will be issued in compliance with
all applicable federal and state securities laws. The shares of the Company's
Common Stock, $.02 par value per share, issuable upon exercise of the Warrant
(the "Shares") have been duly and validly reserved for issuance and, upon
issuance in accordance with the terms of this Note, shall be duly and validly
issued, fully paid and nonassessable.
1.3 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation of or default under any provisions of its Certificate of Incorporation
or Bylaws as amended and in effect on and as of the date of this Note or of any
material provision of any instrument or contract to which it is a party or by
which it is bound or, to its knowledge, of any material provision of any federal
or state judgment, writ, decree, order, statute, rule or governmental regulation
applicable to the Company. The execution, delivery and issuance of this Note
will not result in any such violation or be in conflict with or constitute, with
or without the passage of time and giving of notice, a default under any such
provision, instrument or contract or an event which
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<PAGE>
results in the creation of any lien, charge or encumbrance upon any assets of
the Company.
2. SUBORDINATION.
2.1 SUBORDINATION. The indebtedness evidenced by this Note is
subordinate and junior in right of payment to all Senior Debt (as such term is
defined below) to the extent provided herein, and the Holder, by such Holder's
acceptance hereof, agrees to the subordination herein provided and shall be
bound by the provisions hereof. Senior Debt shall continue to be Senior Debt
and entitled to the benefits of these subordination provisions irrespective of
any amendment, modification or waiver of any term of the Senior Debt or
extension or renewal of the Senior Debt. The Note shall rank PARI PASSU in
right of payment with the 10% Convertible Subordinated Debentures and the 10%
Convertible Subordinated Debentures, Series A issued by the Company in 1995.
2.2 SENIOR DEBT DEFINED. As used herein, the term "Senior Debt"
shall mean the following whether now outstanding or subsequently incurred,
assumed or created: (a) all indebtedness (whether or not secured) of the Company
or its subsidiaries to banks, insurance companies or other financial
institutions regularly engaged in the business of lending money; (b) such other
indebtedness of the Company or its subsidiaries to the extent that the
instrument creating or evidencing such indebtedness provides that it shall
constitute Senior Debt; (c) any indebtedness issued in exchange for such Senior
Debt, or any indebtedness arising from the satisfaction of such Senior Debt by a
guarantor; and (d) any deferrals, renewals, or extensions of any such Senior
Debt.
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<PAGE>
2.3 DEFAULT ON SENIOR DEBT. If the Company shall default in the
payment of any principal of or interest on any Senior Debt when the same shall
become due and payable, whether at maturity or at a date fixed for prepayment or
by declaration of acceleration or otherwise, then, upon written notice of such
default to the Company by the holders of Senior Debt or any trustee therefor,
unless and until such default shall have been cured or waived or shall have
ceased to exist, no direct or indirect payment (in cash, property, securities,
by set-off or otherwise) shall be made or agreed to be made on account of the
principal of or interest on this Note, or in respect of any redemption,
repayment, retirement, purchase or other acquisition of this Note.
2.4 PRIOR PAYMENT OF SENIOR DEBT.
(a) In the event of: (i) any insolvency, bankruptcy,
receivership, liquidation, reorganization, readjustment, composition or
other similar proceeding relating to the Company; (ii) any proceeding for
the liquidation, dissolution or other winding up of the Company, voluntary
or involuntary, whether or not involving insolvency or bankruptcy
proceedings; (iii) any assignment by the Company for the benefit of
creditors; or (iv) any other marshaling of the assets of the Company, all
Senior Debt (including any interest thereon accruing after the commencement
of any such proceedings) shall first be paid in full before any payment or
distribution, whether in cash, securities or other property, shall be made
to any Holder on account of the principal or interest on this Note. Any
payment or distribution, whether in cash, securities or other property
(other than securities of the Company or any other corporation provided for
by a plan of reorganization or readjustment the payment of which is
subordinate, at least to the extent provided in these subordination
provisions with respect to the indebtedness evidenced by this Note, to the
payment of all Senior Debt at the time outstanding and to any securities
issued in respect thereof under any such plan of reorganization or
readjustment), which would otherwise (but for these subordination
provisions) be payable or deliverable in respect of this Note shall be paid
or delivered directly to the holders of
-4-
<PAGE>
Senior Debt in accordance with the priorities then existing among such
holders until all Senior Debt (including any interest thereon accruing
after the commencement of any such proceedings) shall have been paid in
full. In the event of any such proceeding, after payment in full of
all sums owing with respect to Senior Debt, the Holder of this Note,
together with the holders of any obligations of the Company ranking on
a parity with this Note, shall be entitled to be paid from the
remaining assets of the Company the amounts at the time due and owing
on account of unpaid principal of and interest on this Note and such
other obligations before any payment or other distribution, whether in
cash, property or otherwise, shall be made on account of any capital
stock or any obligations of the Company ranking junior to this Note and
such other obligations.
(b) In the event that, notwithstanding the foregoing, any
payment or distribution of any character, whether in cash, securities or
other property (other than securities of the Company or any other
corporation provided for by a plan of reorganization or readjustment the
payment of which is subordinate, at least to the extent provided in these
subordination provisions with respect to the indebtedness evidenced by this
Note, to the payment of all Senior Debt at the time outstanding and to any
securities issued in respect thereof under any such plan of reorganization
or readjustment), shall be received by any Holder in contravention of any
of the terms hereof, such payment or distribution or security shall be
received in trust for the benefit of, and shall be paid over or delivered
and transferred to, the holders of the Senior Debt at the time outstanding
in accordance with the priorities then existing among such holders for
application to the payment of all Senior Debt remaining unpaid, to the
extent necessary to pay all such Senior Debt in full. In the event of the
failure of any such Holder to endorse or assign any such payment,
distribution or security, each holder of Senior Debt is hereby irrevocably
authorized to endorse or assign the same.
2.5 NO IMPAIRMENT OF RIGHTS. Nothing contained herein shall impair,
as between the Company and the Holder, the
-5-
<PAGE>
obligation of the Company to pay such Holder the principal of and interest on
this Note or prevent such Holder from exercising all rights, powers and
remedies otherwise permitted by applicable law or hereunder upon an Event of
Default (as defined below) hereunder, all subject to the rights of the
holders of the Senior Debt to receive cash, securities or other property
otherwise payable or deliverable to the Holder of this Note.
2.6 SUBROGATION. Upon the payment in full of all Senior Debt, the
Holders of the Notes, together with all other subordinated debt of the Company
ranking on a parity therewith, shall be subrogated to all rights of any holders
of Senior Debt to receive any further payments or distributions applicable to
the Senior Debt until the indebtedness evidenced by the Notes shall have been
paid in full, and such payments or distributions received by the Holders
thereof, by reason of such subrogation, of cash, securities or other property
which otherwise would be paid or distributed to the holders of Senior Debt,
shall, as between the Company and its creditors other than the holders of Senior
Debt, on the one hand, and such Holders on the other hand, be deemed to be a
payment by the Company on account of Senior Debt and not on account of the
Notes.
2.7 NO IMPAIRMENT OF SECURITY INTEREST. The provisions of this Note
shall not impair any rights, remedies or powers of any secured creditor of the
Company in respect of any security interest. The securing of any obligations of
the Company otherwise ranking on a parity with the Notes or ranking junior to
such Notes shall not be deemed to prevent such obligations from constituting,
respectively, obligations ranking on a parity with such Notes or ranking junior
to such Notes.
2.8 AMENDMENT OF SUBORDINATION PROVISIONS. No modification or
amendment of the subordination provisions contained in Section 2 hereof in a
manner adverse to the holders of Senior Debt may be made without the consent of
all holders of Senior Debt.
2.9 UNDERTAKING. By its acceptance of this Note, the Holder agrees
to execute and deliver such documents as may be reasonably requested from time
to time by the Company or the
-6-
<PAGE>
lender of any Senior Debt in order to implement the foregoing provisions of
Section 2 hereof.
3. NO RESTRICTIONS ON ISSUANCE OF ADDITIONAL DEBT. Nothing contained
in this Note shall restrict the Company from creating, assuming or incurring
any additional indebtedness, whether ranking junior to, on par with, or
senior to, this Note, or require the Company to obtain the consent of the
Holder with respect thereto.
4. DEFAULT.
4.1 EVENT OF DEFAULT. Each of the following events shall be an Event
of Default hereunder:
(a) Default in the payment of any interest on this Note
when due, continued for thirty (30) business days.
(b) Default in the payment of the principal on the Maturity
Date.
(c) Material default in the performance of any of the
covenants or agreements of the Company contained in this Note continued for
thirty (30) days after notice thereof (provided, however, that if the
default cannot reasonably be corrected within such period, there shall be
no event of default if corrective action is instituted promptly and is
pursued diligently until the default is corrected).
(d) If a petition in involuntary bankruptcy is filed
against the Company under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation under the law
of any jurisdiction, whether now or hereafter in effect, and is not stayed
or dismissed within thirty (30) days after such filing, or if the Company
shall make an assignment for the benefit of creditors, or shall file a
voluntary petition in bankruptcy, or shall be adjudicated a bankrupt or
insolvent, or shall file any petition or answer seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, or shall seek or
-7-
<PAGE>
consent to or acquiesce in the appointment of any trustee, receiver or
liquidator of the Company or of all or any substantial part of the
properties of the Company, or commence voluntary or involuntary
dissolution proceedings.
(e) Default under Senior Debt that gives the holder thereof the
right to accelerate such Senior Debt, and such Senior Debt is in fact
accelerated by such holder.
4.2 REMEDIES ON DEFAULT, ETC.
(a) If an Event of Default occurs and is continuing after the
expiration of any applicable grace period, the Holder may declare the Note
immediately due and payable.
(b) In case of a default in the payment of any principal or
interest due on this Note, the Company shall pay to the Holder thereof the
amount owing together with: (i) simple interest on the amount owing at the
rate per annum equal to the lower of (x) twelve percent (12%) or (y) the
maximum rate permitted under applicable law on the amounts past due; and
(ii) such additional amount as shall be sufficient to cover the cost and
expenses of collection, including, without limitation, reasonable
attorneys' fees, expenses and disbursements.
(c) No right, power or remedy conferred by this Note upon any
Holder shall be exclusive of any other right, power or remedy referred to
herein or now or hereafter available at law, in equity, by statute or
otherwise.
5. NOTES.
5.1 NOTE REGISTER. The Company shall cause to be kept at the
principal office of the Company a register (the "Note Register") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration and the transfer of the Note subject to the
provisions regarding transferability contained in this Note. Upon surrender for
registration of transfer of any Note at the principal office of the Company, the
Company shall execute and deliver, in the name
-8-
<PAGE>
of the designated transferee or transferees, one or more new Notes in minimum
denominations of $20,000 and integral multiples of $10,000; or as otherwise
agreed.
5.2 TRANSFER OF NOTES. At the time the Note is presented or
surrendered for registration of transfer it shall (if so required by the
Company) be duly endorsed, or be accompanied by a written instrument of transfer
in form satisfactory to the Company, duly executed by the Holder thereof or his
attorney duly authorized in writing. No service charge shall be made for any
registration of transfer, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer of the Notes.
5.3 REPLACEMENT NOTE.
(a) If the Note is mutilated and is surrendered to the Company,
the Company shall execute and deliver in exchange therefor a new Note of
like tenor and principal amount and bearing a number not contemporaneously
outstanding. If there shall be delivered to the Company: (i) evidence to
its satisfaction of the destruction, loss or theft of the Note; and
(ii) such security or indemnity as may be required by it to save the
Company and any agent harmless, then, in the absence of notice to the
Company that the Note has been acquired by a bona fide purchaser, the
Company shall execute and deliver, in lieu of any such destroyed, lost or
stolen Note, a new Note of like tenor and principal amount and bearing a
number not contemporaneously outstanding. In the event such mutilated,
destroyed, lost or stolen Note has become or is about to become due and
payable, the Company in its discretion may, instead of issuing a new Note,
retire such Note.
(b) Upon the issuance of any new Note under this Section 5.3,
the Company may require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in relation thereto and any
other expenses connected therewith.
-9-
<PAGE>
(c) Any new Note issued pursuant to this Section 5.3 in lieu of
any destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost
or stolen Note shall be at any time enforceable by anyone.
(d) The provisions of this Section 5.3 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect
to the replacement or payment of mutilated, destroyed, lost or stolen
Notes.
6. LIMITATIONS ON DISPOSITION. The Holder understands that this
Note, the Shares issuable upon exercise of the Warrant and any other securities
issued under this Note are "restricted securities" under the federal securities
laws inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable restrictions
such securities may be resold without registration under the Securities Act of
1933, as amended (the "Act") only in certain limited circumstances. In this
connection, the Holder represents that it is familiar with Rule 144 under the
Act and the limitations imposed thereby and by the Act.
The Holder further agrees not to make any disposition of all or any portion
of this Note and the Shares issuable upon the exercise of the Warrant unless and
until: (a) there is then in effect a Registration Statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such Registration Statement; or (b) the Holder shall have (i) notified the
Company of the proposed disposition and shall have furnished the Company with a
reasonably detailed statement of the circumstances surrounding the proposed
disposition; and (ii) furnished the Company with an opinion of counsel,
satisfactory to the Company, that such disposition will not require registration
of the securities under the Act.
The Holder understands that this Note, the Shares issuable upon the
exercise of the Warrant may bear the following legend, together with any other
legend required by law:
-10-
<PAGE>
"The securities represented hereby have not been registered under the
Securities Act of 1933, or any state securities laws. These securities may
not be sold or transferred in the absence of an effective registration
statement or qualification under such securities laws or an opinion of
counsel, satisfactory to the Company, that the sale or transfer is pursuant
to an exemption from the registration or qualification requirements of any
applicable securities laws."
7. LIMITATIONS ON DIVIDENDS AND DISTRIBUTIONS. So long as this Note
is outstanding, the Company shall not declare, pay, make or set apart any sum
for a dividend or other distribution (whether in cash or other property) with
respect to any class of common stock of the Company (other than dividends or
distributions payable in its common stock), or for the redemption, retirement,
purchase or other acquisition for value of any share of any class of common
stock of the Company or any warrants or rights to purchase any class of common
stock of the Company.
8. REDEMPTION. The Company shall have no right to redeem the Note
prior to the Maturity Date. In the event that during the term of this Note
the Company receives five million dollars ($5,000,000) or more through the
sale of its capital stock the Holder shall have a one-time right, after
giving ten (10) days' written notice, to require the Company to redeem all or
a portion of the Note, with interest adjusted through the date of redemption.
9. MISCELLANEOUS.
9.1 AMENDMENT. The provisions of this Note may be amended or
modified only with the written consent of the Company and the Holder.
9.2 ENTIRE AGREEMENT. This Note constitute the entire agreement
among the parties with regard to the subject matter hereof, and supersedes and
replaces any and all prior to contemporaneous agreements, written or oral. The
terms and conditions of this Note shall inure to the benefit of, and be binding
upon, the respective successors and assigns of the
-11-
<PAGE>
parties. Nothing in this Note is intended to confer on any third party any
rights, liabilities or obligations, except as specifically provided.
9.3 HEADINGS. The titles and subtitles used in this Note are for
convenience only and are not to be used in construing or interpreting this Note.
9.4 SEC FILINGS. During the term of this Note the Company shall
promptly forward to the Holder annual and periodic reports and proxy statements
required to be filed by the Company with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934.
9.5 GOVERNING LAW. This Note shall be governed by the internal laws
of the State of California as applicable to transactions performed in California
between California residents.
9.6 ATTORNEYS' FEES. The prevailing party in any action or
proceeding between the parties arising out of or related to this Note shall be
entitled to recover all reasonable expenses, including without limitation
attorneys' fees and costs, incurred in connection with any such action or
proceeding.
IN WITNESS WHEREOF, the undersigned have executed this Note on the date
first above written.
ANCHOR PACIFIC UNDERWRITERS, INC.
By:
------------------------------
James R. Dunathan
President
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<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
WARRANT
TO PURCHASE
SHARES OF
COMMON STOCK
OF
ANCHOR PACIFIC UNDERWRITERS, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
----
1. General Terms................................................. 1
1.1 Right to Acquire Securities.............................. 1
1.2 Exercise of Warrant...................................... 2
1.3 Record Holder............................................ 2
1.4 Payment of Taxes......................................... 2
1.5 Transfer and Exchange.................................... 2
2. Transfer of Securities........................................ 3
2.1 Restrictions of Transfer................................. 3
2.2 Cooperation.............................................. 4
3. Registration Rights........................................... 4
3.1 Rights of Warrantholders................................. 4
3.2 Expenses................................................. 6
3.3 Company Responsibilities................................. 6
3.4 Indemnification.......................................... 6
3.5 Holder's Obligations..................................... 8
3.6 Assignment............................................... 8
4. Adjustments to Exercise Price and Warrant Shares.............. 8
4.1 Subdivision or Combination............................... 8
4.2 Adjustment for Reorganization, Consolidation, Merger..... 8
4.3 Miscellaneous Exercise Matters........................... 9
4.4 No Dilution or Impairment................................ 9
4.5 Notice of Adjustment.....................................10
4.6 Duty to Make Fair Admustments in Certain Cases...........10
5. Miscellaneous.................................................10
5.1 Entire Agreement.........................................10
5.2 Sucessors and Assigns....................................10
5.3 Governing Law............................................10
5.4 Notices, Etc.............................................10
5.5 Delays or Omissions......................................10
5.6 Survival.................................................11
5.7 Waivers and Amendments...................................11
5.8 Severability.............................................11
(ii)
<PAGE>
5.9 Registered Holder........................................11
5.10 Titles and Subtitles.....................................12
Exercise Notice..............................................................13
Form of Assignment...........................................................14
(iii)
<PAGE>
WARRANT
TO PURCHASE SHARES OF COMMON STOCK OF
ANCHOR PACIFIC UNDERWRITERS, INC.
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A)
COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT, (B) IN
COMPLIANCE WITH RULE 144 UNDER SUCH ACT, OR (C) THE COMPANY HAS BEEN
FURNISHED WITH AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY
THAT NO REGISTRATION IS REQUIRED FOR SUCH TRANSFER.
__________ Shares of Common Stock
1. GENERAL TERMS.
1.1 RIGHT TO ACQUIRE SECURITIES.
(a) This Warrant certifies that for value received ________________
________________________________________________ (the "Holder"), or registered
assigns, are entitled at any time before 5:00 p.m., San Francisco, California
time, on the Expiration Date (as such term is defined herein) to purchase
from ANCHOR PACIFIC UNDERWRITERS, INC., a Delaware corporation (the
"Company"), ________ shares (the "Warrant Shares") of the fully paid and
non-assessable Common Stock of the Company ("Common Stock") as constituted on
the date hereof (the "Issuance Date"), at a price of $1.75 per share (the
"Exercise Price"), such number of shares and price per share subject to
adjustment as provided herein and all subject to the conditions set forth
herein. This Warrant may be exercised at any time on or before five years
from the date hereof (the "Expiration Date").
Upon any partial exercise hereof, there shall be issued to the
Holder a new Warrant or Warrants with respect to the shares of Common Stock
not so exercised. No fractions of a share of Common Stock will be issued
upon the exercise of this Warrant, but if a fractional share would be
issuable upon exercise the Company will pay in cash the fair market value
thereof as determined by the Board of Directors of the Company in good faith.
(b) The Warrant may be subdivided, at the Warrantholder's option,
into several warrants to purchase the Warrant Shares (collectively, also
referred to as the "Warrant"). Such subdivision may be accomplished in
accordance with the provisions of Section 1.5 hereof.
(1)
<PAGE>
1.2 EXERCISE OF WARRANT.
(a) The Holder or any person or entity to whom the Holder has
assigned its right under this Warrant (collectively referred to as the
"Warrantholder") may exercise the Warrant, in whole or in part, at any time or
from time to time, prior to its expiration, on any business day, by delivering a
written notice in the form attached hereto (the "Exercise Notice") to the
Company at the offices of the Company designated in Section 5.4 hereof,
exercising the Warrant and specifying (i) the total number of shares of Common
Stock the Warrantholder will purchase pursuant to such exercise and (ii) a place
and date not less than one nor more than 20 business days from the date of the
Exercise Notice for the closing of such purchase.
(b) At any closing under Section 1.2(a) hereof, (i) the
Warrantholder will surrender the Warrant and make payment to the Company of
the aggregate Exercise Price for the shares of Common Stock so purchased by
bank, cashier's or certified check and (ii) the Company will deliver to the
Warrantholder a certificate or certificates for the number of shares of
Common Stock issuable upon such exercise, together with cash, in lieu of any
fraction of a share, as provided in Section l.l(a) above. Upon any partial
exercise, a new warrant or warrants of the same tenor and expiration date for
the purchase of the number of such shares not purchased upon such exercise
shall be issued by the Company to the registered holder thereof.
1.3 RECORD HOLDER. A Warrant shall be deemed to have been
exercised immediately prior to the close of business on the date of its
surrender for exercise as provided in Section 1.2(b) above, and the person
entitled to receive the shares of Common Stock issuable upon such exercise
shall be treated for all purposes as the holder of such shares of record as
of the close of business on such date.
1.4 PAYMENT OF TAXES. The Company shall pay all taxes and other
governmental charges that may be imposed in respect of the issue or delivery
of the Warrant Shares or any portion thereof. The Company shall not be
required, however, to pay any tax or other charge imposed in connection with
any transfer involved in the issue of any certificate for the Warrant Shares
or any portion thereof in any name other than that of the registered holder
of the Warrant surrendered in connection with the purchase of such shares,
and in such case the Company shall not be required to issue or deliver any
certificate until such tax or other charge has been paid or it has been
established to the Company's satisfaction that no tax or other charge is due.
1.5 TRANSFER AND EXCHANGE.
(a) Subject to the terms hereof, including, without
limitation, Section 2.1, the Warrant and all rights thereunder are
transferable, in whole or in part, on the books of the Company maintained for
such purpose at its office designated in Section 5.4 hereof by the registered
holder hereof in person or by duly authorized attorney, upon surrender of the
Warrant properly endorsed and upon payment of any necessary transfer tax or
other governmental charge
(2)
<PAGE>
imposed upon such transfer. Upon any partial transfer, the Company will issue
and deliver to such holder a new warrant or warrants with respect to the
Warrant Shares not so transferred. Each taker and holder of the Warrant, by
taking or holding the same, consents and agrees that the Warrant when
endorsed in blank shall be deemed negotiable, and that when the Warrant shall
have been so endorsed, the holder may be treated by the Company and all other
persons dealing with the Warrant as the absolute owner of such Warrant for
any purpose and as the person entitled to exercise the rights represented
thereby, or to the transfer on the books of the Company, any notice to the
contrary notwithstanding; but until such transfer on such books, the Company
may treat the registered holder of the Warrant as the owner for all purposes.
The term "Warrant" as used herein shall include the Warrant and, any warrants
delivered in substitution or exchange therefor as provided herein.
(b) The Warrant is exchangeable for a warrant or warrants for
the same aggregate number of Warrant Shares, each new Warrant to represent
the right to purchase such number of shares as the holder shall designate at
the time of such exchange.
2. TRANSFER OF SECURITIES.
2.1 RESTRICTIONS OF TRANSFER. Neither the Warrant nor the
Warrant Shares shall be transferable except upon the conditions specified in
this Section 2.1, which conditions are intended to insure compliance with the
provisions of the Securities Act of 1933 (the "1933 Act") in respect to the
transfer of the Warrant and the Warrant Shares.
(a) Unless and until otherwise permitted by this Section
2.1, the Warrant and each certificate or other document evidencing any of the
Warrant Shares shall be endorsed with a legend substantially in the following
form:
"THESE SECURITIES HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED UNLESS (A) COVERED BY AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT, (B) IN
COMPLIANCE WITH RULE 144 UNDER SUCH ACT, OR (C)
THE COMPANY HAS BEEN FURNISHED WITH AN OPINION
OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY
TO THE EFFECT THAT NO REGISTRATION IS REQUIRED
FOR SUCH TRANSFER."
(b) Neither the Warrant nor the Warrant Shares shall be
transferred, and the Company shall not be required to register any such
transfer, unless and until one of the following events shall have occurred:
(i) the Company shall have received an opinion of
counsel, in form and substance reasonably acceptable to the Company and its
counsel, stating that the contemplated transfer is exempt from registration
under the 1933 Act as then in effect, and the Rules and Regulations of the
Securities and Exchange Commission (the "Commission") thereunder. Within five
business days after delivery to the Company and its counsel of such an
(3)
<PAGE>
opinion, the Company either shall deliver to the proposed transferor a
statement to the effect that such opinion is not satisfactory in the
reasonable opinion of its counsel (and shall specify in detail the legal
analysis supporting any such conclusion) or shall authorize the Company's
transfer agent to make the requested transfer;
(ii) the Company shall have been furnished with a letter
from the Commission in response to a written request in form and substance
acceptable to counsel for the Company setting forth all of the facts and
circumstances surrounding the contemplated transfer, stating that the
Commission will take no action with regard to the contemplated transfer;
(iii) the Warrant or the Warrant Shares are
transferred pursuant to a registration statement which has been filed with
the Commission and has become effective; or
(iv) the Warrant or the Warrant Shares are transferred in
accordance with the provisions of Rule 144 promulgated by the Commission
under the 1933 Act.
(c) The restrictions on transfer imposed by this Section 2.1
shall cease and terminate as to the Warrant and the Warrant Shares when (i)
such securities shall have been effectively registered under the 1933 Act and
sold by the holder thereof in accordance with such registration, (ii) an
acceptable opinion as described in Section 2.1(b)(i) or a "no action" letter
described in Section 2.1(b)(ii) states that future transfers of such
securities by the transferor or the contemplated transferee would be exempt
from registration under the 1933 Act, or (iii) such securities may be sold in
accordance with the provisions of Rule 144 promulgated under the 1933 Act.
When the restrictions on transfer contained in this Section 2.1 have
terminated as provided above, the holder of the securities as to which such
restrictions shall have terminated or the transferee of such holder shall be
entitled to receive promptly from the Company, without expense to him, new
certificates not bearing the legend set forth in Section 2.1(a) hereof.
2.2 COOPERATION. The Company shall cooperate in supplying such
information as may be reasonably requested by the Warrantholder to complete
and file any information reporting forms presently or subsequently required
by the Commission as a condition to the availability of an exemption,
presently existing or subsequently adopted, from the 1933 Act for the sale of
the Warrant or the Warrant Shares.
3. REGISTRATION RIGHTS.
3.1 RIGHTS OF WARRANTHOLDERS. Holders of the Common Stock issued
or issuable upon exercise of this Warrant (collectively, the "Registrable
Securities") shall have "piggyback" registration rights as set forth below:
(a) If, at any time, through and including the third anniversary
of the date of this Warrant, the Company proposes to register any of its
securities under the Act (other than in connection with a merger,
acquisition, reorganization or similar transaction pursuant to a Form S-4
Registration Statement or an employee stock compensation plan pursuant to a
Form S-8 Registration Statement), it will give written notice by registered
(4)
<PAGE>
mail, at least (30) days prior to the filing of each such registration
statement, to the Holder of its intention to do so. If the Holder
notifies the Company within 20 days after receipt of any such notice of
its desire to include any Registrable Securities in such proposed
registration statement, the Company shall afford such Holder the
opportunity to have any of the Registrable Securities registered under
such registration statement and included in any underwriting involved
with respect thereto.
(b) Notwithstanding the provisions of Section 3 hereof: (i)
the Company shall have the right at any time after it shall have given
written notice pursuant to this Section 3 (irrespective of whether a
written request for inclusion of any Registrable Securities shall have
been made) to elect not to file any such proposed registration
statement, or to withdraw the same after the filing but prior to the
effective date thereof; and (ii) in the event a registration under
Section 3 hereof relates to an underwritten public offering which does
not include any securities being offered and sold on behalf of selling
shareholders, the inclusion of any Registrable Securities may, at the
election of the Company, be conditioned upon the Holder agreeing that
the public offering of such Registrable Securities shall not commence
until 90 days after the effective date of such registration.
(c) The rights of the Holder pursuant to Section 3 hereof
shall be conditioned upon such Holder's participation in the
underwriting with respect thereto and the inclusion of such Holder's
Registrable Securities in such underwriting (unless otherwise mutually
agreed by the Company, the managing underwriter or, if none, a majority
of the underwriters, and such Holder) to the extent provided herein.
(d) Notwithstanding any other provision of this Warrant, if
the managing underwriter or, if none, a majority of the underwriters,
determines that marketing factors require a limitation of the number of
shares to be underwritten or a complete exclusion of such shares, such
underwriter or underwriters may limit the number of Registrable
Securities that may be included in the registration and underwriting or
exclude all of the Registrable Securities, as appropriate. In the case
of an underwritten registration in which the number of Registrable
Securities that may be included is limited, the Company shall advise the
Holder of the limited number of Registrable Securities that may be
included in the registration, and the number of Registrable Securities
that may be included in the registration and underwriting shall be
allocated among all Holders thereof in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities
entitled to inclusion in such registration held by such Holders at the
time of filing the registration statement.
(e) The Company shall (together with all Holders proposing to
distribute their securities through an underwriting) enter into an
underwriting agreement in customary form with the underwriter or
underwriters selected for the underwriting.
(5)
<PAGE>
3.2 EXPENSES.
All expenses incurred in connection with any registration
pursuant to this Warrant or Warrant Shares, including without limitation, all
registration, filing and qualification fees, printing expenses, fees and
disbursements of counsel for the Company, and expenses of any special audits
incidental to or required by such registration, shall be borne by the
Company; provided however the Company shall not be required to pay:
(a) fees of legal counsel of any Holder, or underwriters'
fees, discounts, commissions or expenses relating to Registrable
Securities; and
(b) for expenses that the Company is prohibited from paying
under Blue Sky laws or by Blue Sky administrators.
3.3 COMPANY RESPONSIBILITIES.
In the case of a piggyback registration of Warrant Shares, the
Company shall use its best efforts to keep the Holder advised in writing as
to the initiation, effectiveness and completion of such registration. At its
expense the Company shall:
(a) prepare and file a registration statement (and such
amendments and supplements thereto) with respect to such Registrable
Securities and use its best efforts to cause such registration statement
to become and remain effective for a period of 180 days or until the
Holder or Holders have completed the distribution described in the
registration statement relating thereto, whichever first occurs;
(b) furnish such number of copies of a Prospectus in
conformity with the requirements of applicable law, and such other
documents incident thereto as a Holder from time to time may reasonably
request; and
(c) use every reasonable effort to register or qualify the
Registrable Securities covered by such registration statement under the
state Blue Sky laws of such jurisdictions as the Company's Board of
Directors may reasonably determine, and do any and all other acts and
things which may be necessary under said Blue Sky laws to enable the
sellers of the Registrable Securities to consummate the public sale or
other disposition of the Registrable Securities owned by them in such
jurisdictions, except that the Company shall not for any purpose be
required to qualify to do business as a foreign corporation in any
jurisdiction wherein the Registrable Securities are so qualified.
3.4 INDEMNIFICATION.
(a) The Company shall indemnify the Holder, with respect to such
registration effected pursuant to Section 3 hereof, against all claims,
losses, damages and liabilities (or actions in respect thereto) arising
out of or based on any untrue statement
(6)
<PAGE>
(or alleged untrue statement) of a material fact contained in any
registration statement or related Prospectus, or based on any omission
(or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or any violation by the Company of any rule or regulation
promulgated under any securities law applicable to the Company and
relating to action or inaction required of the Company in connection
with any such registration, and shall reimburse the Holder and each
person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, provided
that the Company shall not be liable in any such case to the extent that
any such claim, loss, damage or liability arises out of or is based on
any untrue statement or omission based upon written information
furnished to the Company in an instrument duly executed by such Holder
specifically for use therein.
(b) The Holder shall, if Registrable Securities held by or
issuable to the Holder are included in the securities as to which such
registration is being effected, indemnify the Company, each of its
directors and officers who sign such registration statement, each
underwriter, if any, of the Company's securities covered by such a
registration statement, each person who controls the Company within the
meaning of the Act, and each other Holder, against all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of
or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement or related
Prospectus, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and shall reimburse the Company and
such Holders for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability, or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement or
related Prospectus in reliance upon and in conformity with written
information furnished to the Company in an instrument duly executed by
such Holder specifically for use therein.
(c) Each party entitled to indemnification under this Section 3.4
(the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the Indemnifying Party to
assume the defense of any such claim or any litigation resulting
therefrom, provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or litigation, shall be approved by
the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at
such party's expense; and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve
the Indemnifying Party of its obligations under this Section 3.4. No
Indemnifying Party, in the defense of any such claim or litigation,
shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement, which does not
include as an unconditional
(7)
<PAGE>
term thereof, the giving by the claimant or plaintiff to such Indemnified
Party of a release from all liability in respect to such claim or
litigation.
3.5 HOLDER'S OBLIGATIONS. The Holder shall furnish to the Company
such written information regarding such Holder and the distribution proposed by
such Holder as the Company may reasonably request in writing and as shall be
required in connection with any registration referred to in this Warrant
3.6 ASSIGNMENT. The rights granted to the Holder pursuant to this
Warrant may be assigned to a transferee or assignee of the Warrant or any of
the Registrable Securities, provided that the transferee or assignee is an
affiliated entity of the Holder and the Company is given written notice at
the time of or within 10 days after said transfer, stating the name and
address of said transferee or assignee and identifying the Registrable
Securities with respect to which such registration rights are being assigned.
4. ADJUSTMENTS TO EXERCISE PRICE AND WARRANT SHARES. The Exercise
Price in effect from time to time and the number of Warrant Shares shall be
subject to adjustment in certain cases as set forth in this Section 4.
4.1 SUBDIVISION OR COMBINATION. In the event the outstanding
Common Stock shall be subdivided into a greater number of shares of Common
Stock, the Exercise Price for the Warrant Shares shall, simultaneously with
the effectiveness of such subdivision, be proportionately reduced and the
number of Warrant Shares proportionately increased, and conversely, in case
the outstanding Common Stock shall be combined into a smaller number of
shares of Common Stock, the Exercise Price shall, simultaneously with the
effectiveness of such combination, be proportionately increased and the
number of Warrant Shares proportionately reduced.
4.2 ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER.
(a) In case of any reorganization of the Company (or any other
corporation the stock or other securities of which are at the time receivable
on the exercise of the Warrant) after the date on which this Warrant is first
issued (the "Issuance Date"), or in case, after such date, the Company (or
any such other corporation) shall consolidate with or merge into another
corporation or convey all or substantially all of its assets to another
corporation, then and in each such case the Warrantholder, upon exercise of
the Warrant as provided in Section 1.2 hereof at any time after the
consummation of such reorganization, consolidation, merger or conveyance,
shall be entitled to receive, in lieu of the stock or other securities and
property receivable upon the exercise of the Warrant prior to such
consummation, the stock or other securities or property to which the
Warrantholder would have been entitled upon such consummation if the
Warrantholder had exercised or converted the Warrant immediately prior
thereto; in each such case, the terms of this Warrant, including the exercise
provisions of Sections 1.2, shall be applicable to the shares of stock or
other securities or property receivable upon the exercise or conversion of
the Warrant after such consummation.
(8)
<PAGE>
(b) The Company shall not effect any consolidation, merger
or conveyance of all or substantially all of its assets unless prior to the
consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation into or for
the securities of which the previously outstanding stock of the company shall
be changed in connection with such consolidation or merger, or the
corporation purchasing such assets, as the case may be, shall assume by
written instrument, in form and substance satisfactory to the Warrantholder,
executed and delivered in accordance with Section 5.4 hereof, the obligation
to deliver to the Warrantholder such shares of stock, securities or assets
as, in accordance with the foregoing provisions, the Warrantholder is
entitled to purchase.
(c) If a purchase, tender or exchange offer is made to and
accepted by the holders of more than 50% of the outstanding shares of Common
Stock of the Company, the Company shall not effect any consolidation, merger
or sale with the Person having made such offer or with any Affiliate of such
Person, unless prior to consummation of such consolidation, merger or sale
the Warrantholder shall have been given a reasonable opportunity to then
elect to receive either the stock, securities or assets then issuable upon
the exercise or conversion of the Warrant or, if different, the stock,
securities or assets, or the equivalent, issued to previous holders of the
Common Stock in accordance with such offer, computed as though the
Warrantholder hereof had been, at the time of such offer, a holder of the
stock, securities or assets then purchasable upon the exercise or conversion
of the Warrant. As used in this paragraph (c), the term "Person" shall mean
and include an individual, a partnership, a corporation, a trust, a joint
venture, an unincorporated organization and a government or any department or
agency thereof, and an "Affiliate" of any Person shall mean any Person
directly or indirectly controlling, controlled by or under direct or indirect
common control with, such other Person. A Person shall be deemed to control a
corporation if such Person possesses, directly or indirectly, the power to
direct or cause the direction of the management and policies of such
corporation, whether through the ownership of voting securities, by contract
or otherwise.
4.3 MISCELLANEOUS EXERCISE MATTERS. The Company shall at all times
reserve and keep available out of its authorized but unissued Common Stock
the full number of Warrant Shares deliverable upon exercise of the Warrant
Shares, as such number may change from time to time. Also, the Company shall,
at its own expense, take all such actions and obtain all such permits and
orders as may be necessary to enable the Company lawfully to issue the
Warrant Shares upon the exercise of the Warrant.
4.4 NO DILUTION OR IMPAIRMENT. The Company will not, by amendment
of its certificate of incorporation or through reorganization, consolidation,
merger, dissolution, issue or sale of securities, sale of assets or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms of the Warrant, but will at all times in good faith assist in
the carrying out of all such terms and in the taking of all such actions as
may be necessary or appropriate in order to protect the rights of the
Warrantholder against dilution or other impairment. Without limiting the
generality of the foregoing, the Company will take all such action as may be
necessary or appropriate in order that the Company may validly and legally
issue fully paid and non-assessable shares upon the exercise or conversion of
the Warrant.
(9)
<PAGE>
4.5 NOTICE OF ADJUSTMENT. When any adjustment is required to be
made in either the Exercise Price or the number of shares issuable upon
exercise of the Warrant, the Company shall promptly notify the Warrantholder
of such event, of the calculation by which such adjustment is to be made and
of the resulting Exercise Price or conversion rate, as the case may be.
4.6 DUTY TO MAKE FAIR ADJUSTMENTS IN CERTAIN CASES. If any event
occurs as to which in the opinion of the Board of Directors the other
provisions of this Section 4 are not strictly applicable or if strictly
applicable would not fairly protect the purchase and exercise rights of the
Warrant in accordance with the essential intent and principles of such
provisions, then the Board of Directors shall make an adjustment in the
application of such provisions, in accordance with such essential intent and
principles, so as to protect such purchase rights as aforesaid.
5. MISCELLANEOUS.
5.1 ENTIRE AGREEMENT. This Warrant constitutes the full and entire
understanding and agreements between the parties hereto with respect to the
subjects hereof and thereof.
5.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this
Warrant shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties hereto, except as expressly provided
otherwise herein.
5.3 GOVERNING LAW. This Warrant shall be governed by and construed
under the laws of the State of California.
5.4 NOTICES, ETC. All notices and other communications required
or permitted hereunder shall be in writing and shall be deemed effectively
given upon personal delivery or upon the seventh day following mailing by
registered air mail, postage prepaid, addressed (a) if to the Warrantholder,
at __________________________________________, or at such other address as it
shall have furnished to the Company in writing, (b) if to the Company, a copy
should be sent to its address set forth on the signature page of this
Agreement and addressed to the attention of the corporate secretary, or at
such other address as the Company shall have furnished in writing to the
Warrantholder, or (c) if to any other holder of any Warrant or of Warrant
Shares issued upon conversion of the Warrant, at such address as such holder
shall have furnished to the Company in writing, or, until such holder so
furnishes an address to the Company, then to and at the address of the last
holder of such Warrant or Warrant Shares who so furnished an address to the
Company.
5.5 DELAYS OR OMISSIONS. No delay or omission to exercise any
right, power or remedy accruing to any holder of any securities issued or
sold or to be issued or sold hereunder, upon any breach or default of the
Company under this Agreement, shall impair any such right, power or remedy of
such holder nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or in any similar breach or default
thereafter occurring, nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or
(10)
<PAGE>
default theretofore or thereafter occurring. Any waiver, permit, consent or
approval of any kind or character on the part of any holder of any breach or
default under this Agreement, or any waiver on the part of any holder of any
provisions or conditions of this Agreement, must be in writing and shall be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
holder, shall be cumulative and not alternative.
5.6 SURVIVAL. The representations, warranties, covenants and
agreements made herein and or made pursuant to this Agreement shall survive
the execution and delivery of this Agreement, except as expressly provided
otherwise herein.
5.7 WAIVERS AND AMENDMENTS. With the written consent of the record
or beneficial holders of more than 50% of the Warrant Shares (treated as if
converted), the obligations of the Company and the rights of the holders of
the Warrant and the Warrant Shares may be waived (either generally or in a
particular instance, either retroactively or prospectively and either for a
specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of its Board of Directors, may enter
into a supplemental agreement for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Warrant;
provided, however, that no such waiver or supplemental agreement shall reduce
the aforesaid percentage of the Warrant Shares, the holders of which are
required to consent to any waiver or supplemental agreement, without the
consent of the record or beneficial holders of all of the Warrant Shares
(treated as if converted). Upon the effectuation of each such waiver,
consent, agreement of amendment or modification, the Company promptly shall
give written notice thereof to the record holders of the Warrant and the
Warrant Shares. This Warrant or any provision hereof may not be changed,
waived, discharged or terminated orally, but only by a statement in writing
signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, except to the extent provided in this
Section 5.7.
5.8 SEVERABILITY. If one or more provisions of this Warrant are
held to be invalid, illegal or unenforceable under applicable law, such
provision shall be modified in such manner as to be valid, legal and
enforceable, but so as to most nearly retain the intent of the parties, and
if such modification is not possible, such provision shall be severed from
this Agreement as if such provision were not included, in either case, and
the balance of this Warrant shall not in any way be affected or impaired
thereby and shall be enforceable in accordance with its terms.
5.9 REGISTERED HOLDER. The Company may deem and treat the
registered Holder(s) hereof as the absolute owner(s) of this Warrant
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise or conversion hereof, of any
distribution to the Holder(s) hereof, and for all other purposes, and the
Company shall not be affected by any notice to the contrary. Other than as
set forth herein, this Warrant does not entitle any Holder hereof to any
rights of a stockholder of the Company.
(11)
<PAGE>
5.10 TITLES AND SUBTITLES. The titles of the sections and
subsections of this Warrant are for convenience and are not to be considered
in construing this Warrant.
IN WITNESS WHEREOF, Company has caused this Warrant to be signed by
its duly authorized officer and issued as of the date set forth below.
Dated: __________________
ANCHOR PACIFIC UNDERWRITERS, INC.
By:________________________________
Its:_______________________________
(12)
<PAGE>
EXERCISE NOTICE
(To be executed only upon exercise of Warrant)
The undersigned registered owner of a Warrant of ANCHOR PACIFIC
UNDERWRITERS, INC. (the "Company"), originally issued to ______________________
_________________________ irrevocably exercises such Warrant for the purchase
of shares of Common Stock of the Company, purchasable with the Warrant, and
hereby sets the place and date for the closing of such purchase as follows,
all on the terms and conditions specified in the Warrant.
Place of Closing ______________________
Date of Closing _______________________
The undersigned requests that a certificate for such shares be
registered in the name of _____________________________________________________,
whose address is__________________________________________________. If said
number of shares is less than all of the shares of Common Stock purchasable
under the Warrant, the undersigned requests that a new Warrant representing
the remaining balance of such shares be registered in the name of
_____________________________________________________________, whose address
is ____________________________________________________.
Dated:______________________
_________________________________________
Signature of Registered Owner
_________________________________________
Street Address
_________________________________________
City State Zip
(13)
<PAGE>
FORM OF ASSIGNMENT
FOR VALUED RECEIVED, the undersigned registered owner of this
Warrant issued by ANCHOR PACIFIC UNDERWRITERS, INC. hereby sells, assigns and
transfers unto the Assignee named below all of the rights of the undersigned
under the within Warrant, with respect to the number of Shares of Common
Stock set forth below:
NAME OF ASSIGNEE ADDRESS NO. OF SHARES
and does hereby irrevocably constitute and appoint______________________________
_____________________________________attorney to make such transfer on the books
of ________________________, maintained for such purpose, with full power of
substitution in the premises.
Dated:_____________________
_________________________________________
Signature of Registered Owner
_________________________________________
Witness
BBMSF1: 161340
37353-0100
(14)
<PAGE>
Exhibit 10.22
INDUSTRIAL REAL ESTATE LEASE (Multi-Tenant Facility)
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of
the Lease referred to in this Article One explain and define the Basic Terms
and are to be read in conjunction with the Basic Terms.
Section 1.01. DATE OF LEASE: September 12, 1996.
Section 1.02. LANDLORD (INCLUDE LEGAL ENTITY): Palo Cristi Airpark
II, L.L.C., and Arizona limited liability company, whose address is 4425 N.
the Street, Phoenix, Arizona 85016.
Section 1.03. TENANT (INCLUDE LEGAL ENTITY): Benefit Resources, Inc.,
an Arizona corporation, whose address is 10301 N. 92nd Street, Suite 201,
Scottsdale, AZ 85258
Section 1.04. PROPERTY: The Property is part of Landlord's multi
tenant real property under construction known as Palo Cristi Commerce Center
Phase II and described or depicted in Exhibit "A" (the "Project"). The
Project includes the land, the buildings and all other improvements located
on the land, and the common areas described in Paragraph 4.05(a). The
Property is an approximate 6,992 s.f. 2nd floor office space at 15721 N.
Greenway-Hayden Loop Road, Scottsdale, AZ., improved substantially in
accordance with the space plan ("Exhibit B") and the Standard Tenant
Improvements and Allowances schedule ("Exhibit C"), both attached hereto and
incorporated herein by reference.
Section 1.05. LEASE TERM: Five (5) years three (3) months beginning
on March 1, 1997 and ending on May 31, 2002.
OPTION TO EXTEND: Provided Tenant is not then in
default, Tenant shall have the option to extend the Lease Term for an
additional five (5) year period at the then prevailing market rental rate,
but in no case lower than the average rental rate paid in the original Lease
Term, by giving Landlord notice sixty (60) days prior to the expiration of
the original Lease Term.
Section 1.06. PERMITTED USES: (See Article Five) General and
administrative offices.
Section 1.07. TENANT'S GUARANTOR: None
Section 1.08. BROKERS.
Landlord's Broker: Classic Real Estate (Greg Hopley)
Tenant's Broker: None
Section 1.09. COMMISSION PAYABLE TO LANDLORD'S BROKER: (See Article
Fourteen) By separate agreement
Section 1.10. INITIAL SECURITY DEPOSIT: (See Section 3.03) $5,826.67.
Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: (See
Section 4.05) 15 metal covered parking stalls to the rear of the Property.
Section 1.12. RENT AND OTHER CHARGES PAYABLE BY TENANT:
(a) Base Rent: FIVE THOUSAND EIGHT HUNDRED TWENTY SIX AND 67/100 DOLLARS
($5,826.67) per month beginning March 1, 1997 for the first thirty six (36)
months, as provided in Section 3.01. This Lease provides for free Base Rent
for three (3) months from March 1, 1997 to May 31, 1997 (the "Abated Rent) (See
Section 10.04). Abated Rent does not include Other Periodic Payments as
defined in subparagraph (b) hereinbelow.
The Base Rent shall be increased on the first day of the month(s) after the
Commencement Date as provided below:
Month thirty seven (37) to month forty eight (48) - SIX THOUSAND ONE
HUNDRED EIGHTEEN AND NO/100 DOLLARS ($6,118.00) per month.
Month forty nine (49) to month sixty three (63)- SIX THOUSAND TWO HUNDRED
FORTY AND 36/100 DOLLARS ($6,240.36) per month.
(b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.02);
(ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section
4.04), (iv) Tenant's Pro Rata Share of Common Area Expenses (23.31%) (See
Section 4.05); (v) Impounds for Insurance Premiums and Property Taxes (See
Section 4.08); (vi) Maintenance, Repairs and Alterations (See Article Six).
Other Periodic Payments shall be paid by Tenant on a one-twelfth (1/12) basis
with each payment of Base Rent.
Section 1.13. LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE:
(See Section 9.05) NA percent (NA%) of the Profit (the "Landlord's Share").
Section 1.14. RIDERS: The following Riders are attached to and made a
part of this Lease:
Right of First Refusal
Initials /s/ illegible
-------------
Initials /s/ illegible
-------------
(MULTI-TENANT NET FORM)
<PAGE>
ARTICLE TWO: LEASE TERM
Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the
Lease Term. The Lease Term is for the period stated in Section 1.05 above
and shall begin and end on the dates specified in Section 1.05 above, unless
the beginning or end of the Lease Term is changed under any provision of this
Lease. The "Commencement Date" shall be the date specified in Section 1.05
above for the beginning of the Lease Term, unless advanced or delayed under
any provision of this Lease.
Section 2.02. DELAY IN COMMENCEMENT. Landlord shall not be liable to
Tenant if Landlord does not deliver possession of the Property to Tenant on
the Commencement Date. Landlord's non-delivery of the Property to Tenant on
that date shall not affect this Lease or the obligations of Tenant under this
Lease except that the Commencement Date shall be delayed until Landlord
delivers possession of the Property to Tenant and the Lease Term shall be
extended for a period equal to the delay in delivery of possession of the
Property to Tenant, plus the number of days necessary to end the Lease Term
on the last day of a month. If Landlord does not deliver possession of the
Property to Tenant within sixty (60) days after the Commencement Date, Tenant
may elect to cancel this Lease by giving written notice to Landlord within
ten (10) days after the sixty (60) day period ends. If Tenant gives such
notice, the Lease shall be cancelled and neither Landlord nor Tenant shall
have any further obligations to the other. If Tenant does not give such
notice, Tenant's right to cancel the Lease shall expire and the Lease Term
shall commence upon the delivery of possession of the Property to Tenant. If
delivery of possession of the Property to Tenant is delayed, Landlord and
Tenant shall, upon such delivery, execute an amendment to this Lease setting
forth the actual Commencement Date and expiration date of the Lease. Failure
to execute such amendment shall not affect the actual Commencement Date and
expiration date of the Lease.
Section 2.03. EARLY OCCUPANCY. If Tenant occupies the Property prior to
the Commencement Date, Tenant's occupancy of the Property shall be subject to
all of the provisions of this Lease. Early occupancy of the Property shall not
advance the expiration date of this Lease. Tenant shall pay all other charges
specified in this Lease for the early occupancy period.
Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse
Landlord for and Indemnify Landlord against all damages which Landlord incurs
from Tenant's delay in vacating the Property. If Tenant does not vacate the
Property upon the expiration or earlier termination of the Lease and
Landlord thereafter accepts rent from Tenant, Tenant's occupancy of the
Property shall be a "month to month" tenancy, subject to all of the terms of
this Lease applicable to a month to month tenancy, except that the Base Rent
then in effect shall be increased by ten (10%).
ARTICLE THREE: BASE RENT
Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.12(a) above for the first month of the Lease Term. On the first day of the
second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, without offset, deduction or prior
demand. The Base Rent shall be payable at Landlord's address or at such other
place as Landlord may designate in writing.
Section 3.02. COST OF LIVING INCREASES.
[OMITTED]
Section 3.03. SECURITY DEPOSIT; INCREASES.
(a) Upon the execution of this Lease, Tenant shall deposit with Landlord
a cash Security Deposit in the amount set forth in Section 1.10 above.
Landlord may apply all or part of the Security Deposit to any unpaid rent or
other charges due from Tenant or to cure any other defaults of Tenant. If
Landlord uses any part of the Security Deposit, Tenant shall restore the
Security Deposit to its full amount within ten (10) days after Landlord's
written request. Tenant's failure to do so shall be a material default under
this Lease. No interest shall be paid on the Security Deposit. Landlord shall
not be required to keep the Security Deposit separate from its other accounts
and no trust relationship is created with respect to the Security Deposit.
(b) Each Time the Base Rent is increased, Tenant shall deposit additional
funds with Landlord sufficient to increase the Security Deposit to an amount
which bears the same relationship to the adjusted Base Rent as the initial
Security Deposit bore to the Initial Base Rent.
2
(MULTI-TENANT NET FORM)
Copyright-1988 Southern California Chapter Initials /s/ illegible
of the Society of Industrial -------------
and Office Realtors.-TM- Inc.
/s/ illegible
-------------
<PAGE>
Section 3.04. TERMINATION; ADVANCE PAYMENTS. Upon termination of this Lease
under Article Seven (Damage or Destruction), Article Eight (Condemnation) or
any other termination not resulting from Tenant's default, and after Tenant
has vacated the Property in the manner required by this Lease, Landlord shall
refund or credit to Tenant (or Tenant's successor) the unused portion of the
Security Deposit, any advance rent or other advance payments made by Tenant
to Landlord, and any amounts paid for real property taxes and other reserves
which apply to any time periods after termination of the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. ADDITIONAL RENT. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next monthly
installment of Base Rent. The term "rent" shall mean Base Rent and Additional
Rent.
Section 4.02. PROPERTY TAXES.
(a) REAL PROPERTY TAXES. Tenant shall pay prorata share real property
taxes on the Property (including any fees, taxes or assessments against, or
as a result of, any tenant improvements installed on the Property by or for
the benefit of Tenant) during the Lease Term. Subject to Paragraph 4.02(c)
and Section 4.08 below, such payment shall be made at least ten (10) days
prior to the delinquency date of the taxes. Within such ten (10)-day period,
Tenant shall furnish Landlord with satisfactory evidence that the real
property taxes have been paid. Landlord shall reimburse Tenant for any real
property taxes paid by Tenant covering any period of time prior to or after
the Lease Term. If Tenant fails to pay the real property taxes when due,
Landlord may pay the taxes and Tenant shall reimburse Landlord for the amount
of such tax payment as Additional Rent.
(b) DEFINITION OF "REAL PROPERTY TAX." "Real property tax" means: (i) any
fee, license fee, license tax, business license fee, commercial rental tax,
levy, charge, assessment, or tax imposed by any taxing authority against the
Property; (ii) any tax on the Landlord's right to receive, or the receipt of,
rent or income from the Property or against Landlord's business of leasing
the Property; (iii) any tax or charge for fire protection, streets,
sidewalks, road maintenance, refuse or other services provided to the
Property by any governmental agency; (iv) any tax imposed upon this
transaction or based upon a re-assessment of the Property due to a change of
ownership, as defined by applicable law, or other transfer of all or part of
Landlord's interest in the Property; and (v) any charge or fee replacing any
tax previously included within the definition of real property tax. "Real
property tax" does not, however, include Landlord's federal or state income,
franchise, inheritance or estate taxes.
(c) JOINT ASSESSMENT. If the Property is not separately assessed, Landlord
shall reasonably determine Tenant's share of the real property tax payable
by Tenant under Paragraph 4.02(a) from the assessor's worksheets or other
reasonably available information. Tenant shall pay such share to Landlord
within fifteen (15) days after receipt of Landlord's written statement.
(d) PERSONAL PROPERTY TAXES.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to Tenant.
Tenant shall try to have personal property taxed separately from the
Property.
(ii) If any of Tenant's personal property is taxed with the Property,
Tenant shall pay Landlord the taxes for the personal property within fifteen
(15) days after Tenant receives a written statement from Landlord for such
personal property taxes.
Section 4.03. UTILITIES. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal and other utilities and services supplied
to the Property. However, if any services or utilities are jointly metered
with other property, Landlord shall make a reasonable determination of
Tenant's proportionate share of the cost of such utilities and services and
Tenant shall pay such share to Landlord within fifteen (15) days after
receipt of Landlord's written statement.
Section 4.04. INSURANCE POLICIES.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad
form comprehensive general liability insurance) insuring Tenant against
liability for bodily injury, property damage (including loss of use of
property) and personal injury arising out of the operation, use or occupancy
of the Property. Tenant shall name Landlord as an additional insured under
such policy. The initial amount of such insurance shall be One Million
Dollars ($1,000,000) per occurrence and shall be subject to periodic increase
based upon inflation, increased liability awards, recommendation of
Landlord's professional insurance advisers and other relevant factors. The
liability insurance obtained by Tenant under this Paragraph 4.04(a) shall (i)
be primary and non-contributing, (ii) contain cross liability endorsements;
and (iii) insure Landlord against Tenant's performance under Section 5.05, if
the matters giving rise in the indemnity under Section 5.05 result from the
negligence of Tenant. The amount and coverage of such insurance shall not
limit Tenant's liability nor relieve Tenant of any other obligation under
this Lease. Landlord may also obtain comprehensive public liability insurance
in an amount and with coverage determined by Landlord insuring Landlord
against liability arising out of ownership, operation, use or occupancy of
the Property. The policy obtained by Landlord shall not be contributory and
shall not provide primary insurance.
(b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term, Landlord
shall maintain policies of insurance covering loss of or damage to the
Property in the full amount of its replacement value. Such policy shall
contain an Inflation Guard Endorsement and shall provide protection against
all perils included within the classification of fire, extended coverage,
vandalism, malicious mischief, special extended perils (all risk), sprinkler
leakage and any other perils which Landlord deems reasonably necessary.
Landlord shall have the right to obtain flood and earthquake insurance if
required by any lender holding a security interest in the Property. Landlord
shall not obtain insurance for Tenant's fixtures or equipment or building
improvements installed by Tenant on the Property. During the Lease Term,
Landlord shall also maintain a rental income insurance policy, with loss
payable to Landlord, in an amount equal to one year's Base Rent, plus
estimated real property taxes and insurance premiums. Tenant shall be liable
for the payment of any deductible amount under Landlord's or Tenant's
insurance policies maintained pursuant to this Section 4.04, in an amount not
to exceed One Thousand Dollars ($1,000). Tenant shall not do or permit
anything to be done which invalidates any such insurance policies.
(c) PAYMENT OF PREMIUMS. Subject to Section 4.08, Tenant shall pay all
premiums for the insurance policies described in Paragraphs 4.04(a) and (b)
(whether obtained by Landlord or Tenant) within fifteen (15) days after
Tenant's receipt of a copy of the premium statement or other evidence of the
amount due, except Landlord shall pay all premiums for non-primary
comprehensive public liability insurance which Landlord elects to obtain as
provided in Paragraph 4.04(a). For insurance policies
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maintained by Landlord which cover improvements on the entire Project, Tenant
shall pay Tenant's prorated share of the premiums, in accordance with the
formula in Paragraph 4.05(e) for determining Tenant's share of Common Area
costs. If insurance policies maintained by Landlord cover improvements on
real property other than the Project, Landlord shall deliver to Tenant a
statement of the premium applicable to the Property showing in reasonable
detail how Tenant's share of the premium was computed. If the Lease Term
expires before the expiration of an insurance policy maintained by Landlord,
Tenant shall be liable for Tenant's prorated share of the insurance premiums.
Before the Commencement Date, Tenant shall deliver to Landlord a copy of any
policy of insurance which Tenant is required to maintain under this Section
4.04. At least thirty (30) days prior to the expiration of any such policy,
Tenant shall deliver to Landlord a renewal of such policy. As an alternative
to providing a policy of insurance, Tenant shall have the right to provide
Landlord a certificate of insurance, executed by an authorized officer of the
insurance company, showing that the insurance which Tenant is required to
maintain under this Section 4.04 is in full force and effect and containing
such other information which Landlord reasonably requires.
(d) GENERAL INSURANCE PROVISIONS.
(i) Any insurance which Tenant is required to maintain under this Lease
shall include a provision which requires the insurance carrier to give
Landlord not less than thirty (30) days' written notice prior to any
cancellation or modification of such coverage.
(ii) If Tenant fails to deliver any policy, certificate or renewal to
Landlord required under this Lease within the prescribed time period or if
any such policy is cancelled or modified during the Lease Term without
Landlord's consent, Landlord may obtain such insurance, in which case Tenant
shall reimburse Landlord for the cost of such insurance within fifteen (15)
days after receipt of a statement that indicates the cost of such Insurance.
(iii) Tenant shall maintain all insurance required under this Lease
with companies holding a "General Policy Rating" of A-12 or better, as set
forth in the most current issue of "Best Key Rating Guide". Landlord and
Tenant acknowledge the insurance markets are rapidly changing and that
insurance in the form and amounts described in this Section 4.04 may not be
available in the future. Tenant acknowledges that the insurance described in
this Section 4.04 is for the primary benefit of Landlord. If at any time
during the Lease Term, Tenant is unable to maintain the insurance required
under the Lease, Tenant shall nevertheless maintain insurance coverage which
is customary and commercially reasonable in the insurance industry for
Tenant's type of business, as that coverage may change from time to time.
Landlord makes no representation as to the adequacy of such insurance to
protect Landlord's or Tenant's interests. Therefore, Tenant shall obtain any
such additional property or liability insurance which Tenant deems necessary
to protect Landlord and Tenant.
(iv) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of
recovery against the other, or against the officers, employees, agents or
representatives of the other, for loss of or damage to its property or the
property of others under its control, if such loss or damage is covered by
any insurance policy in force (whether or not described in this Lease) at the
time of such loss or damage. Upon obtaining the required policies of
Insurance, Landlord and Tenant shall give notice to the Insurance carriers of
this mutual waiver of subrogation.
Section 4.05. COMMON AREAS; USE, MAINTENANCE AND COSTS.
(a) COMMON AREAS. As used in this Lease, "Common Areas" shall mean all
areas within the Project which are available for the common use of tenants of
the Project and which are not leased or held for the exclusive use of Tenant
or other tenants, including, but not limited to, parking areas, driveways,
sidewalks, loading areas, access roads, corridors, landscaping and planted
areas. Landlord, from time to time, may change the size, location, nature and
use of any of the Common Areas, convert Common Areas into leaseable areas,
construct additional parking facilities (including parking structures) in the
Common Areas, and increase or decrease Common Area land and/or facilities.
Tenant acknowledges that such activities may result in inconvenience to
Tenant. Such activities and changes are permitted if they do not materially
affect Tenant's use of the Property.
(b) USE OF COMMON AREAS. Tenant shall have the nonexclusive right (in
common with other tenants and all others to whom Landlord has granted or may
grant such rights) to use the Common Areas for the purposes intended, subject
to such reasonable rules and regulations as Landlord may establish from time
to time. Tenant shall abide by such rules and regulations and shall use its
best effort to cause others who use the Common Areas with Tenant's express or
implied permission to abide by Landlord's rules and regulations. At any time,
Landlord may close any Common Areas to perform any acts in the Common Areas
as, in Landlord's judgment, are desirable to improve the Project. Tenant
shall not interfere with the rights of Landlord, other tenants or any other
person entitled to use the Common Areas.
(c) SPECIFIC PROVISIONS RE: VEHICLE PARKING. Tenant shall be entitled to
use the number of vehicle parking spaces in the Project allocated to Tenant
in Section 1.11 of the Lease without paying any additional rent. Tenant's
parking shall not be reserved and shall be limited to vehicles no larger than
standard size automobiles or pickup utility vehicles. Tenant shall not cause
large trucks or other large vehicles to be parked within the Project or on
the adjacent public streets. Temporary parking of large delivery vehicles in
the Project may be permitted by the rules and regulations established by
Landlord. Vehicles shall be parked only in striped parking spaces and not in
driveways, loading areas or other locations not specifically designated for
parking. Handicapped spaces shall only be used by those legally permitted to
use them. If Tenant parks more vehicles in the parking area than the number
set forth in Section 1.11 of this Lease, such conduct shall be a material
breach of this Lease. In addition to Landlord's other remedies under the
Lease, Tenant shall pay a daily charge determined by Landlord for each such
additional vehicle.
(d) MAINTENANCE OF COMMON AREAS. Landlord shall maintain the Common Areas
in good order, condition and repair and shall operate the Project, in
Landlord's sole discretion, as a first-class industrial/commercial real
property development. Tenant shall pay Tenant's pro rata share (as determined
below) of all costs incurred by Landlord for the operation and maintenance of
the Common Areas. Common Area costs include, but are not limited to, costs
and expenses for the following: gardening and landscaping; utilities, water
and sewage charges; maintenance of signs (other than tenants' signs);
premiums for liability, property damage, fire and other types of casualty
insurance on the Common Areas and worker's compensation insurance; all
property taxes and assessments levied on or attributable to the Common Areas
and all Common Area improvements; all personal property taxes levied on or
attributable to personal property used in connection with the Common Areas;
straight-line depreciation on personal property owned by Landlord which is
consumed in the operation of maintenance of the Common Areas; rental or lease
payments paid by Landlord for rented or leased personal property used in the
operation or maintenance
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of the Common Areas; fees for required licenses and permits; repairing,
resurfacing, repaving, maintaining, painting, lighting, cleaning, refuse
removal, security and similar items; reserves for roof replacement and
exterior painting and other appropriate reserves; and a reasonable allowance
to Landlord for Landlord's supervision of the Common Areas (not to exceed
five percent (5%) of the gross rents of the Project for the calendar year).
Landlord may cause any or all of such services to be provided by third
parties and the cost of such services shall be included in Common Area costs.
Common Area costs shall not include depreciation of real property which forms
part of the Common Areas.
(e) TENANT'S SHARE AND PAYMENT. Tenant shall pay Tenant's annual pro
rata share of all Common Area costs (prorated for any fractional month) upon
written notice from Landlord that such costs are due and payable, and in any
event prior to delinquency. Tenant's pro rata share shall be calculated by
dividing the square foot area of the Property, as set forth in Section 1.04
of the Lease, by the aggregate square foot area of the Project which is
leased or held for lease by tenants, as of the date on which the computation
is made. Tenant's initial pro rata share is set out in Paragraph 1.12(b). Any
changes in the Common Area costs and/or the aggregate area of the Project
leased or held for lease during the Lease Term shall be effective on the
first day of the month after such change occurs. Landlord may, at Landlord's
election, estimate in advance and charge to Tenant as Common Area costs, all
real property taxes for which Tenant is liable under Section 4.02 of the
Lease, all insurance premiums for which Tenant is liable under Section 4.04
of the Lease, all maintenance and repair costs for which Tenant is liable
under Section 6.04 of the Lease, and all other Common Area costs payable by
Tenant hereunder. At Landlord's election, such statements of estimated Common
Area costs shall be delivered monthly. Landlord may adjust such estimates at
any time based upon Landlord's experience and reasonable anticipation of
costs. Such adjustments shall be effective as of the next rent payment date
after notice to Tenant. Within sixty (60) days after the end of each calendar
year of the Lease Term, Landlord shall deliver to Tenant a statement prepared
in accordance with generally accepted accounting principles setting forth, in
reasonable detail, the Common Area costs paid or incurred by Landlord during
the preceding calendar year and Tenant's pro rata share. Upon receipt of such
statement, there shall be an adjustment between Landlord and Tenant, with
payment to or credit given by Landlord (as the case may be) so that Landlord
shall receive the entire amount of Tenant's share of such costs and expenses
for such period.
Section 4.06. LATE CHARGES. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs
are impractical or extremely difficult to ascertain. Such costs may include,
but are not limited to, processing and accounting changes and late charges
which may be imposed on Landlord by any ground lease, mortgage or trust deed
encumbering the Property. Therefore, if Landlord does not receive any rent
payment within ten (10) days after it becomes due, Tenant shall pay Landlord
a late charge equal to ten percent (10%) of the overdue amount. The parties
agree that such late charge represents a fair and reasonable estimate of the
costs Landlord will incur by reason of such late payment.
Section 4.07. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by
Tenant to Landlord which is not paid when due shall bear interest at the rate
of fifteen percent (15%) per annum from the due date of such amount. However,
interest shall not be payable on late charges to be paid by Tenant under this
Lease. The payment of interest on such amounts shall not excuse or cure any
default by Tenant under this Lease. If the interest rate specified in this
Lease is higher than the rate permitted by law, the interest rate is hereby
decreased to the maximum legal interest rate permitted by law.
Section 4.08. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES.
If requested by any ground lessor or lender to whom Landlord has granted a
security interest in the Property, or if Tenant is more than ten (10) days
late in the payment of rent more than once in any consecutive twelve
(12)-month period, Tenant shall pay Landlord a sum equal to one-twelfth
(1/12) of the annual real property taxes and insurance premiums payable by
Tenant under this Lease, together with each payment of Base Rent. Landlord
shall hold such payments in a non interest bearing impound account. If
unknown, Landlord shall reasonably estimate the amount of real property taxes
and insurance premiums when due. Tenant shall pay any deficiency of funds in
the Impound account to Landlord upon written request. If Tenant defaults
under this Lease, Landlord may apply any funds in the Impound account to any
obligation then due under this Lease.
ARTICLE FIVE: USE OF PROPERTY
Section 5.01. PERMITTED USES. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.
Section 5.02. MANNER OF USE. Tenant shall not cause or permit the
Property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which annoys or interferes
with the rights of tenants of the Project, or which constitutes a nuisance or
waste. Tenant shall obtain and pay for all permits, including a Certificate
of Occupancy, required for Tenant's occupancy of the Property and shall
promptly take all actions necessary to comply with all applicable statutes,
ordinances, rules, regulations, orders and requirements regulating the use by
Tenant of the Property, including the Occupational Safety and Health Act.
Section 5.03. HAZARDOUS MATERIALS. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition
of "hazardous substances", "hazardous wastes", "hazardous materials" or
"toxic substances" now or subsequently regulated under any applicable
federal, state or local laws or regulations, including without limitation
petroleum based products, paints, solvents, lead, cyanide, DDT, printing
inks, acids, pesticides, ammonia compounds and other chemical products,
asbestos, PCBs and similar compounds, and including any different products
and materials which are subsequently found to have adverse effects on the
environment or the health and safety of persons. Tenant shall not cause or
permit any Hazardous Material to be generated, produced, brought upon, used,
stored, treated or disposed of in or about the Property by Tenant, its
agents, employees, contractors, sublessees or invitees without the prior
written consent of Landlord. Landlord shall be entitled to take into account
such other factors or facts as Landlord may reasonably determine to be
relevant in determining whether to grant or withhold consent to Tenant's
proposed activity with respect to Hazardous Material. In no event, however,
shall Landlord be required to consent to the installation or use of any
storage tanks on the Property.
Section 5.04. SIGNS AND AUCTIONS. Tenant shall not place any signs on
the Property without Landlord's prior written consent. Tenant shall not
conduct or permit any auctions or sheriff's sales at the Property.
Section 5.05. INDEMNITY. Tenant shall indemnify Landlord against and
hold Landlord harmless from any and all costs, claims or liability arising
from: (a) Tenant's use of the Property; (b) the conduct of Tenant's business
or anything else done or
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permitted by Tenant to be done in or about the Property, including any
contamination of the Property or any other property resulting from the
presence or use of Hazardous Material caused or permitted by Tenant; (c) any
breach or default in the performance of Tenant's obligations under this
Lease; (d) any misrepresentation or breach of warranty by Tenant under this
Lease; or (e) other acts or omissions of Tenant. Tenant shall defend Landlord
against any such cost, claim or liability at Tenant's expense with counsel
reasonably acceptable to Landlord or, at Landlord's election. Tenant shall
reimburse Landlord for any legal fees or costs incurred by Landlord in
connection with any such claim. As a material part of the consideration to
Landlord, Tenant assumes all risk of damage to property or injury to persons
in or about the Property arising from any cause, and Tenant hereby waives all
claims in respect thereof against Landlord, except for any claim arising out
of Landlord's gross negligence or willful misconduct. As used in this
Section, the term "Tenant" shall include Tenant's employees, agents,
contractors and invitees, if applicable.
Section 5.06. LANDLORD'S ACCESS. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants or other parties: to do any other act or to inspect and
conduct tests in order to monitor Tenant's compliance with all applicable
environmental laws and all laws governing the presence and use of Hazardous
Material; or for any other purpose Landlord deems necessary. Landlord shall
give Tenant prior notice of such entry, except in the case of an emergency.
Landlord may place customary "For Sale" or "For Lease" signs on the Property.
Section 5.07. QUIET POSSESSION. If Tenant pays the rent and complies
with all other terms of this Lease. Tenant may occupy and enjoy the Property
for the full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. EXISTING CONDITIONS. Tenant accepts the Property in its
condition as of the execution of the Lease, subject to all recorded matters,
laws, ordinances, and governmental regulations and orders. Except as provided
herein, Tenant acknowledges that neither Landlord nor any agent of Landlord
has made any representation as to the condition of the Property or the
suitability of the Property for Tenant's intended use. Tenant represents and
warrants that Tenant has made its own inspection of and inquiry regarding the
condition of the Property and is not relying on any representations of
Landlord or any Broker with respect thereto. If Landlord or Landlord's Broker
has provided a Property Information Sheet or other Disclosure Statement
regarding the Property, a copy is attached as an exhibit to the Lease.
Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be
liable for any damage or injury to the person, business (or any loss of
income therefrom), goods, wares, merchandise or other property of Tenant,
Tenant's employees, invitees, customers or any other person in or about the
Property, whether such damage or injury is caused by or results from: (a)
fire, steam, electricity, water, gas or rain; (b) the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances,
plumbing, air conditioning or lighting fixtures or other cause; (c)
conditions arising in or about the Property or upon other portions of the
Project, or from other sources or places; or (d) any act or omission of any
other tenant of the Project. Landlord shall not be liable for any such damage
or injury even though the cause of or the means of repairing such damage of
injury are not accessible to Tenant. The provisions of the Section 6.02 shall
not, however, exempt Landlord from liability for Landlord's gross negligence
or willful misconduct.
Section 6.03. LANDLORD'S OBLIGATIONS.
(a) Except as provided in Article Seven (Damage or Destruction) and
Article Eight (Condemnation). Landlord shall keep the following in good
order, condition and repair: the foundations, exterior walls and roof of the
Property (including painting the exterior surface of the exterior walls of
the Property not more than once every five (5) years, if necessary) and all
components of electrical, mechanical, plumbing, heating and air conditioning
systems and facilities located in the Property which are concealed or used in
common by tenants of the Project. However, Landlord shall not be obligated to
maintain or repair windows, doors, plate glass or the interior surfaces of
exterior walls. Landlord shall make repairs under this Section 6.03 within a
reasonable time after receipt of written notice from Tenant of the need for
such repairs.
(b) Tenant shall pay to reimburse Landlord for all costs Landlord incurs
under Paragraph 6.03(a) above as Common Area costs as provided for in Section
4.05 of the Lease. Tenant waives the benefit of any statute in effect now or
in the future which might give Tenant the right to make repairs at
Landlord's expense or to terminate this Lease due to Landlord's failure to
keep the Property in good order, condition and repair.
Section 6.04. TENANT'S OBLIGATIONS.
(a) Except as provided in Section 6.03, Article Seven (Damage or
Destruction) and Article Eight (Condemnation), Tenant shall keep all portions
of the Property (including structural, nonstructural, interior, systems and
equipment) in good order, condition and repair (including interior repainting
and refinishing, as needed). If any portion of the Property or any system or
equipment in the Property which Tenant is obligated to repair cannot be fully
repaired or restored, Tenant shall promptly replace such portion of the
Property or system or equipment in the Property, regardless of whether the
benefit of such replacement extends beyond the Lease Term, but if the benefit
or useful life of such replacement extends beyond the Lease Term (as such
term may be extended by excercise of any options), the useful life of such
replacement shall be prorated over the remaining portion of the Lease Term
(as extended), and Tenant shall be liable only for that portion of the cost
which is applicable to the Lease Term (as extended) Tenant shall maintain a
preventative maintenance contract providing for the regular inspection and
maintenance of the heating and air conditioning system by a licensed heating
and air conditioning contractor, unless Landlord maintains such equipment
under Section 6.03 above. If any part of the Property or the Project is
damaged by any act or omission of Tenant, Tenant shall pay Landlord the cost
of repairing or replacing such damaged property, whether or not Landlord
would otherwise be obligated to pay the cost of maintaining or repairing such
property. It is the intention of Landlord and Tenant that at all times Tenant
shall maintain the portions of the Property which Tenant is obligated to
maintain in an attractive, first class and fully operative condition.
(b) Tenant shall fulfill all of Tenant's obligations under this Section
6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or
replace the Property as required by this Section 6.04, Landlord may, upon ten
(10) days' proir notice to Tenant (except that no notice shall be required in
the case of an emergency), enter the Property and perform such maintenance or
repair (including replacement, as needed) on behalf of Tenant. In such case,
Tenant shall reimburse Landlord for all costs incurred in performing such
maintenance or repair immediately upon demand.
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Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS.
(a) Tenant shall not make any alterations, additions, or improvements
to the Property without Landlord's prior written consent, except for
non-structural alterations which do not exceed Ten Thousand Dollars ($10,000)
in cost cumulatively over the Lease Term and which are not visible from the
outside of any building of which the Property is part. Landlord may require
Tenant to provide demolition and/or lien and completion bonds in form and
amount satisfactory to Landlord. Tenant shall promptly remove any
alterations, additions, or improvements constructed in violation of this
Paragraph 6.05(a) upon Landlord's written request. All alterations,
additions, and improvements shall be done in a good and workmanlike manner,
in conformity with all applicable laws and regulations, and by a contractor
approved by Landlord. Upon completion of any such work, Tenant shall provide
Landlord with "as built" plans, copies of all construction contracts, and
proof of payment for all labor and materials.
(b) Tenant shall pay when due all claims for labor and material
furnished to the Property. Tenant shall give Landlord at least twenty (20)
days' prior written notice of the commencement of any work on the Property,
regardless of whether Landlord's consent to such work is required. Landlord
may elect to record and post notices of nonresponsibility on the Property.
Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in
the same condition as received except for ordinary wear and tear which Tenant
was not otherwise obligated to remedy under any provision of this Lease.
However, Tenant shall not be obligated to repair any damage which Landlord is
required to repair under Article Seven (Damage or Destruction). In addition,
Landlord may require Tenant to remove any alterations, additions or
improvements (whether or not made with Landlord's consent) prior to the
expiration of the Lease and to restore the Property to its prior condition,
all at Tenant's expense. All alterations, additions and improvements which
Landlord has not required Tenant to remove shall become Landlord's property
and shall be surrendered to Landlord upon the expiration or earlier
termination of the Lease, except that Tenant may remove any of Tenant's
machinery or equipment which can be removed without material damage to the
Property. Tenant shall repair, at Tenant's expense, any damage to the
Property caused by the removal of any such machinery or equipment. In no
event, however, shall Tenant remove any of the following materials or
equipment (which shall be deemed Landlord's property) without Landlord's prior
written consent: any power wiring or power panels; lighting or lighting
fixtures; wall coverings; drapes, blinds or other window coverings; carpets or
other floor coverings; heaters, air conditioners or any other heating or air
conditioning equipment; fencing or security gates; or other similar building
operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. PARTIAL DAMAGE TO PROPERTY.
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage to the Property. If the Property is only partially
damaged (i.e., less than fifty percent (50%) of the Property is untenantable
as a result of such damage or less than fifty percent (50%) of Tenant's
operations are materially impaired) and if the proceeds received by Landlord
from the insurance policies described in Paragraph 4.04(b) are sufficient to
pay for the necessary repairs, this Lease shall remain in effect and Landlord
shall repair the damage as soon as reasonably possible. Landlord may elect
(but is not required) to repair any damage to Tenant's fixtures, equipment,
or improvements.
(b) If the insurance proceeds received by Landlord are not sufficient to
pay the entire cost of repair, or if the cause of the damage is not covered
by the insurance policies which Landlord maintains under Paragraph 4.04(b),
Landlord may elect either to (i) repair the damage as soon as reasonably
possible, in which case this Lease shall remain in full force and effect, or
(ii) terminate this Lease as of the date the damage occurred. Landlord shall
notify Tenant within thirty (30) days after receipt of notice of the
occurrence of the damage whether Landlord elects to repair the damage or
terminate the Lease. If Landlord elects to repair the damage, Tenant shall
pay Landlord the "deductible amount" not to exceed $1,000 (if any) under
Landlord's insurance policies and, if the damage was due to an act or
omission of Tenant, or Tenant's employees, agents, contractors or invitees,
the difference between the actual cost of repair and any insurance proceeds
received by Landlord. If Landlord elects to terminate the Lease, Tenant may
elect to continue this Lease in full force and effect, in which case Tenant
shall repair any damage to the Property and any building in which the
Property is located. Tenant shall pay the cost of such repairs, except that
upon satisfactory completion of such repairs, Landlord shall deliver to
Tenant any insurance proceeds received by Landlord for the damage repaired by
Tenant. Tenant shall give Landlord written notice of such election within ten
(10) days after receiving Landlord's termination notice.
(c) If the damage to the Property occurs during the last six (6) months
of the Lease Term and such damage will require more than thirty (30) days to
repair, either Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate this Lease shall give written
notification to the other party of such election within thirty (30) days
after Tenant's notice to Landlord of the occurrence of the damage.
Section 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage
to the Property is greater than partial damage as described in Section 7.01),
and regardless of whether Landlord receives any insurance proceeds, this
Lease shall terminate as of the date the destruction occurred.
Notwithstanding the preceding sentence, if the Property can be rebuilt within
six (6) months after the date of destruction, Landlord may elect to rebuild
the Property at Landlord's own expense, in which case this Lease shall remain
in full force and effect. Landlord shall notify Tenant of such election
within thirty (30) days after Tenant's notice of the occurrence of total or
substantial destruction. If Landlord so elects, Landlord shall rebuild the
Property at Landlord's sole expense, except that if the destruction was
caused by an act or omission of Tenant, Tenant shall pay Landlord the
difference between the actual cost of rebuilding and any insurance proceeds
received by Landlord.
Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed
or damaged and Landlord or Tenant repairs or restores the Property pursuant
to the provisions of this Article Seven, any rent payable during the period of
such damage, repair and/or restoration shall be reduced according to the
degree, if any, to which Tenant's use of the Property is impaired. However,
the reduction shall not exceed the sum of one year's payment of Base Rent,
insurance premiums and real property taxes. Except for such possible
reduction in Base Rent, insurance premiums and real property taxes, Tenant
shall not be entitled to any compensation, reduction, or reimbursement from
Landlord as a result of any damage, destruction, repair, or restoration of or
to the Property.
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Section 7.04. WAIVER. Tenant waives the protection of any statute, code
or judicial decision which grants a tenant the right to terminate a lease in
the event of the substantial or total destruction of the leased property.
Tenant agrees that the provisions of Section 7.02 above shall govern the
rights and obligations of Landlord and Tenant in the event of any substantial
or total destruction to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of
eminent domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on
the date the condemning authority takes title or possession, whichever occurs
first. If more than twenty percent (20%) of the floor area of the building in
which the Property is located, or which is located on the Property is taken,
either Landlord or Tenant may terminate this Lease as of the date the
condemning authority takes title or possession, by delivering written notice
to the other within ten (10) days after receipt of written notice of such
taking (or in the absence of such notice, within ten (10) days after the
condemning authority takes title or possession). If neither Landlord nor
Tenant terminates this Lease, this Lease shall remain in effect as to the
portion of the Property not taken, except that the Base Rent and Additional
Rent shall be reduced in proportion to the reduction in the floor area of the
Property. Any Condemnation award or payment shall be distributed in the
following order: (a) first, to any ground lessor, mortgagee or beneficiary
under a deed of trust encumbering the Property, the amount of its interest in
the Property; (b) second, to Tenant, only the amount of any award
specifically designated for loss of or damage to Tenant's trade fixtures or
removable personal property; and (c) third, to Landlord, the remainder of
such award, whether as compensation for reduction in the value of the
leasehold, the taking of the fee, or otherwise. If this Lease in not
terminated, Landlord shall repair any damage to the Property caused by the
Condemnation, except that Landlord shall not be obligated to repair any
damage for which Tenant has been reimbursed by the condemning authority. If
the severance damages received by Landlord are not sufficient to pay for such
repair, Landlord shall have the right to either terminate this Lease or make
such repair at Landlord's expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property or
of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation
of law, or act of Tenant, without Landlord's prior written consent, which
shall not be unreasonably withheld, except as provided in Section 9.02 below.
Landlord has the right to grant or withhold its consent as provided in
Section 9.05 below. Any attempted transfer without consent shall be void and
shall constitute a non-curable breach of this Lease. If Tenant is a
partnership, any cumulative transfer of more than twenty percent (20%) of the
partnership interests shall require Landlord's consent. If Tenant is a
corporation, any change in the ownership of a controlling interest of the
voting stock of the corporation shall require Landlord's consent.
Section 9.02. TENANT AFFILIATE. Tenant may assign this Lease or sublease
the Property, without Landlord's consent, to any corporation which controls,
is controlled by or is under common control with Tenant, or to any
corporation resulting from the merger of or consolidation with Tenant
("Tenant's Affiliate"). In such case, any Tenant's Affiliate shall assume in
writing all of Tenant's obligations under this Lease.
Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this
Article Nine, whether with or without Landlord's consent, shall release
Tenant or change Tenant's primary liability to pay the rent and to perform
all other obligations of Tenant under this Lease. Landlord's acceptance of
rent from any other person is not a waiver of any provision of this Article
Nine. Consent to one transfer is not a consent to any subsequent transfer. If
Tenant's transferee defaults under this Lease, Landlord may proceed directly
against Tenant without pursuing remedies against the transferee. Landlord may
consent to subsequent assignments or modifications of this Lease by Tenant's
transferee, without notifying Tenant or obtaining its consent. Such action
shall not relieve Tenant's liability under this Lease.
Section 9.04. OFFER TO TERMINATE. If Tenant desires to assign the Lease
or sublease the Property, Tenant shall have the right to offer, in writing,
to terminate the Lease as of a date specified in the offer. If Landlord
elects in writing to accept the offer to terminate within twenty (20) days
after notice of the offer, the Lease shall terminate as of the date specified
and all the terms and provisions of the Lease governing termination shall
apply. If Landlord does not so elect, the Lease shall continue in effect
until otherwise terminated and the provisions of Section 9.05 with respect to
any proposed transfer shall continue to apply.
Section 9.05. LANDLORD'S CONSENT
(a) Tenant's request for consent to any transfer described in Section
901 shall set forth in writing the details of the proposed transfer,
including the name, business and financial condition of the prospective
transferee, financial details of the proposed transfer (e.g., the term of and
the rent and security deposit payable under any proposed assignee or
sublease), and any other information Landlord deems relevant. Landlord shall
have the right to withhold consent, if reasonable, or to grant consent, based
on the following factors: (i) the business of the proposed assignee or
subtenant and the proposed use of the Property, (ii) the net worth and
financial reputation of the proposed assignee or subtenant, (iii) Tenant's
compliance with all of its obligations under the Lease; and (iv) such other
factors as Landlord may reasonably deem relevant. If Landlord objects to a
proposed assignment solely because of the net worth and/or financial
reputation of the proposed assignee, Tenant may nonetheless sublease (but not
assign), all or a portion of the Property to the proposed transferee, but
only on the other terms of the proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under the Lease
the Landlord's Share (stated in Section 1.13) of the Profit (defined below)
on such transaction as and when received by Tenant, unless Landlord gives
written notice to Tenant and the assignee or subtenant that Landlord's Share
shall be paid by the assignee or subtenant to Landlord directly. The "Profit"
means (A) all amounts paid to tenant for such assignment or sublease,
including "key" money, monthly rent in excess of the monthly rent payable
under the Lease, and all fees and other consideration paid for the assignment
or sublease, including fees under any collateral agreements, loss (B) costs
and expenses directly incurred by Tenant in connection with the execution and
performance of such assignment or sublease for real estate broker's
commissions and costs of renovation or construction of tenant improvements
required under such assignment or sublease. Tenant is entitled to recover
such costs and expenses before tenant is obligated to pay the Landlord's
Share to Landlord. The Profit in the
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case of a sublease of less than all the Property is the rent allocable
to the subleased space as a percentage on a square footage basis.
(ii) Tenant shall provide Landlord a written statement certifying all
amounts to be paid from any assignment or sublease of the Property
within thirty (30) days after the transaction documentation is signed,
and Landlord may inspect Tenant's books and records to verify the
accuracy of such statement. On written request, Tenant shall promptly
furnish to Landlord copies of all the transaction documentation, all
of which shall be certified by Tenant to be complete, true and correct.
Landlord's receipt of Landlord's Share shall not be a consent to any
further assignment or subletting. The breach of Tenant's obligation
under this Paragraph 9.05(b) shall be a material default of the Lease.
Section 9.06. NO MERGER. No merger shall result from Tenant's sublease of
the Property under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants
and conditions.
Section 10.02. DEFAULTS. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the
Property results in the cancellation of any insurance described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge when due;
(c) If Tenant fails to perform any of Tenant's non-monetary obligations
under this Lease for a period of thirty (30) days after written notice from
Landlord, provided that if more than thirty (30) days are required to complete
such performance, Tenant shall not be in default if Tenant commences such
performance within the thirty (30) day period and thereafter diligently pursues
its completion. However, Landlord shall not be required to give such notice if
Tenant's failure to perform constitutes a non-curable breach of this Lease. The
notice required by this Paragraph is intended to satisfy any and all notice
requirements imposed by law on Landlord and is not in addition to any such
requirement.
(d)(i) If Tenant makes a general assignment or general arrangement for the
benefit of creditors; (ii) if a petition for adjudication of bankruptcy or
for reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is
appointed to take possession of substantially all of Tenant's assets located
at the Property or of Tenant's interest in this Lease and possession is not
restored to Tenant within thirty (30) days; or (iv) if substantially all of
Tenant's assets located at the Property or of Tenant's interest in this Lease
is subjected to attachment, execution or other judicial seizure which is not
discharged within thirty (30) days. If a court of competent jurisdiction
determines that any of the acts described in this subparagraph (d) is not a
default under this Lease, and a trustee is appointed to take possession (or
if Tenant remains a debtor in possession) and such trustee or Tenant
transfers Tenant's interest hereunder, then Landlord shall receive, as
Additional Rent, the excess, if any, of the rent (or any other consideration)
paid in connection with such assignment or sublease over the rent payable by
Tenant under this Lease.
(e) If any guarantor of the Lease revokes or otherwise terminates, or
purports to revoke or otherwise terminate, any guaranty of all or any portion
of Tenant's obligations under the Lease. Unless otherwise expressly
provided, no guaranty of the Lease is revocable.
Section 10.03. REMEDIES. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Property to Landlord. In such event, Landlord shall
be entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default, including (i) the worth at the time of the award of the unpaid
Base Rent, Additional Rent and other charges which Landlord had earned at the
time of the termination; (ii) the worth at the time of the award of the amount
by which the unpaid Base Rent, Additional Rent and other charges which Landlord
would have earned after termination until the time of the award exceeds the
amount of such rental loss that Tenant proves Landlord could have reasonably
avoided; (iii) the worth at the time of the award of the amount by which the
unpaid Base Rent, Additional Rent and other charges which Tenant would have paid
for the balance of the Lease Term after the time of award exceeds the amount of
such rental loss that Tenant proves Landlord could have reasonably avoided; and
(iv) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under the
Lease or which in the ordinary course of things would be likely to result
therefrom, including, but not limited to, any costs or expenses Landlord incurs
in maintaining or preserving the Property after such default, the cost of
recovering possession of the Property, expenses of reletting, including
necessary renovation or alteration of the Property, Landlord's reasonable
attorneys' fees incurred in connection therewith, and any real estate commission
paid or payable. As used in subparts (i) and (ii) above, the "worth at the time
of the award" is computed by allowing interest on unpaid amounts at the rate of
fifteen percent (15%) per annum, or such lesser amount as may then be the
maximum lawful rate. As used in subpart (iii) above, the "worth at the time of
the award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of the award, plus one percent
(1%). If Tenant has abandoned the Property, Landlord shall have the option of
(i) retaking possession of the Property and recovering from Tenant the amount
specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph
10.03(b);
(b) Maintain Tenant's right to possession, in which case this Lease shall
continue in effect whether or not Tenant has abandoned the Property. In such
event, Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to recover the rent as it
becomes due;
(c) Pursue any other remedy now or hereafter available to Landlord under
the laws or judicial decisions of the state in which the Property is located.
Section 10.04. REPAYMENT OF "FREE" RENT. If this Lease provides for a
postponement of any monthly rental payments, a period of "free" rent or other
rent concession, such postponed rent or "free" rent is called the "Abated
Rent". Tenant shall
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be credited with having paid all of the Abated Rent on the expiration of the
Lease Term only if Tenant has fully, faithfully, and punctually performed all
of Tenant's obligations hereunder, including the payment of all rent (other
than the Abated Rent) and all other monetary obligations and the surrender of
the Property in the physical condition required by this Lease. Tenant
acknowledges that its right to receive credit for the Abated Rent is
absolutely conditioned upon Tenant's full, faithful and punctual performance
of its obligations under this Lease. If Tenant defaults and does not cure
within any applicable grace period, the Abated Rent shall immediately become
due and payable in full and this Lease shall be enforced as if there were no
such rent abatement or other rent concession. In such case Abated Rent shall
be calculated based on the full initial rent payable under this Lease.
Section 10.05. AUTOMATIC TERMINATION. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filling of an unlawful detainer
action against Tenant. On such termination, Landlord's damages for default
shall include all costs and fees, including reasonable attorneys' fees that
Landlord incurs in connection with the filing, commencement, pursuing and/or
defending of any action in any bankruptcy court or other court with respect to
the Lease; the obtaining of relief from any stay in bankruptcy restraining any
action to evict Tenant; or the pursuing of any action with respect to Landlord's
right to possession of the Property. All such damages suffered (apart from Base
Rent and other rent payable hereunder) shall constitute pecuniary damages which
must be reimbursed to Landlord prior to assumption of the Lease by Tenant or any
successor to Tenant in any bankruptcy or other proceeding.
Section 10.06. CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. SUBORDINATION. Landlord shall have the right to
subordinate this Lease to any ground lease, deed of trust or mortgage
encumbering the Property, any advances made on the security thereof and any
renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded. Tenant shall cooperate with Landlord and any lender
which is acquiring a security interest in the Property or the Lease. Tenant
shall execute such further documents and assurances as such tender may require,
provided that Tenant's obligations under this Lease shall not be increased in
any material way (the performance of ministerial acts shall not be deemed
material), and Tenant shall not be deprived of its rights under this Lease.
Tenant's right to quiet possession of the Property during the Lease Term shall
not be disturbed if Tenant pays the rent and performs all of Tenant's
obligations under this Lease and is not otherwise in default. If any ground
lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of
its ground lease, deed of trust or mortgage and gives written notice thereof to
Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or
mortgage whether this Lease is dated prior or subsequent to the date of said
ground lease, deed of trust or mortgage or the date of recording thereof.
Section 11.02. ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property upon the transfer
of Landlord's interest.
Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such attornment
or subordination or agreement to do so. If Tenant fails to do so within ten
(10) days after written request, Tenant hereby makes, constitutes and
irrevocably appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
Section 11.04. ESTOPPEL CERTIFICATES.
(a) Upon Landlord's written request, Tenant shall execute, acknowledge
and deliver to Landlord a written statement certifying: (i) that none of the
terms or provisions of this Lease have been changed (or if they have been
changed, stating how they have been changed); (ii) that this Lease has not
been cancelled or terminated; (iii) the last date of payment of the Base Rent
and other charges and the time period covered by such payment; (iv) that
Landlord is not in default under this Lease (or, if Landlord is claimed to be
in default, stating why); and (v) such other representations or information
with respect to Tenant or the Lease as Landlord may reasonably request or
which any prospective purchaser or encumbrancer of the Property may require.
Tenant shall deliver such statement to Landlord within ten (10) days after
Landlord's request. Landlord may give any such statement by Tenant to any
prospective purchaser or encumbrancer of the Property. Such purchaser or
encumbrancer may rely conclusively upon such statement as true and correct.
(b) If Tenant does not deliver such statement to Landlord within such
ten (10) day period, Landlord, and any prospective purchaser or encumbrancer,
may conclusively presume and rely upon the following facts: (i) that the
terms and provisions of this Lease have not been changed except as otherwise
represented by Landlord; (ii) that this Lease has not been cancelled or
terminated except as otherwise represented by Landlord; (iii) that not more
than one month's Base Rent or other charges have been paid in advance; and
(iv) that Landlord is not in default under the Lease. In such event, Tenant
shall be estopped from denying the truth of such facts.
Section 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) days after
written request from Landlord, Tenant shall deliver to Landlord such financial
statements as Landlord reasonably requires to verify the net worth of Tenant or
any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall
deliver to any lender designated by Landlord any financial statements required
by such lender to facilitate the financing or refinancing of the Property.
Tenant represents and warrants to Landlord that each such financial statement is
a true and accurate statement as of the date of such statement. All financial
statements shall be confidential and shall be used only for the purposes set
forth in this Lease.
ARTICLE TWELVE: LEGAL COSTS
Section 12.01. LEGAL PROCEEDINGS. If Tenant or Landlord shall be in
breach or default under this Lease, such party (the "Defaulting Party") shall
reimburse the other party (the "Nondefaulting Party") upon demand for any costs
or expenses that the Nondefaulting Party incurs in connection with any breach or
default of the Defaulting Party under this Lease, whether or not suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a
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settlement, enforcement of rights or otherwise. Furthermore, if any action for
breach of or to enforce the provisions of this Lease is commenced, the court in
such action shall award to the party in whose favor a judgment is entered, a
reasonable sum as attorneys' fees and costs. The losing party in such action
shall pay such attorneys' fees and costs. Tenant shall also indemnify Landlord
against and hold Landlord harmless from all costs, expenses, demands and
liability Landlord may incur if Landlord becomes or is made a party to any claim
or action (a) instituted by Tenant against any third party, or by any third
party against Tenant, or by or against any person holding any interest under or
using the Property by license of or agreement with Tenant; (b) for foreclosure
of any lien for labor or material furnished to or for Tenant or such other
person; (c) otherwise arising out of or resulting from any act or transaction of
Tenant or such other person; or (d) necessary to protect Landlord's interest
under this Lease in a bankruptcy proceeding, or other proceeding under Title 11
of the United States Code, as amended. Tenant shall defend Landlord against any
such claim or action at Tenant's expense with counsel reasonably acceptable to
Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any
legal fees or costs Landlord incurs in any such claim or action.
Section 12.02. LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable
attorneys' fees incurred in connection with Tenant's request for Landlord's
consent under Article Nine (Assignment and Subletting), or in connection with
any other act which Tenant proposes to do and which requires Landlord's consent.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. NON-DISCRIMINATION. Tenant promises, and it is a condition
to the continuance of this Lease, that there will be no discrimination against,
or segregation of, any person or group of persons on the basis of race, color,
sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) As used in this Lease, the term "Landlord" means only the current
owner or owners of the fee title to the Property or Project or the leasehold
estate under a ground lease of the Property or Project at the time in question.
Each Landlord is obligated to perform the obligations of Landlord under this
Lease only during the time such Landlord owns such interest or title. Any
Landlord who transfers its title or interest is relieved of all liability with
respect to the obligations of Landlord under this Lease to be performed on or
after the date of transfer. However, each Landlord shall deliver to its
transferee all funds that Tenant previously paid if such funds have not yet been
applied under the terms of this Lease.
(b) Tenant shall give written notice of any failure by Landlord to perform
any of its obligations under this Lease to Landlord and to any ground lessor,
mortgagee or beneficiary under any deed of trust encumbering the Property whose
name and address have been furnished to Tenant in writing. Landlord shall not
be in default under this Lease unless Landlord (or such ground lessor, mortgagee
or beneficiary) fails to cure such non-performance within thirty (30) days after
receipt of Tenant's notice. However, if such non-performance reasonably
requires more than thirty (30) days to cure, Landlord shall not be in default if
such cure is commenced within such thirty (30)-day period and thereafter
diligently pursued to completion.
(c) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Property and the Project,
and neither the Landlord nor its partners, shareholders, officers or other
principals shall have any personal liability under this Lease.
Section 13.03. SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 13.04. INTERPRETATION. The captions of the Articles or Sections
of this Lease are to assist the parties in reading this Lease and are not a part
of the terms or provisions of this Lease. Whenever required by the context of
this Lease, the singular shall include the plural and the plural shall include
the singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission.
Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This
Lease is the only agreement between the parties pertaining to the lease of the
Property and not other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06. NOTICES. All notices required or permitted under this
Lease shall be in writing and shall be personally delivered or sent by certified
mail, return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.03 above, except that upon
Tenant's taking possession of the Property, the Property shall be Tenant's
address for notice purposes. Notices to Landlord shall be delivered to the
address specified in Section 1.02 above. All notices shall be effective upon
delivery. Either party may change its notice address upon written notice to the
other party.
Section 13.07. WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
Section 13.08. NO RECORDATION. Tenant shall not record this Lease without
prior written consent from Landlord. However, either Landlord or Tenant may
require that a "Short Form" memorandum of this Lease executed by both parties be
recorded. The party requiring such recording shall pay all transfer taxes and
recording fees.
Section 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
Section 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a
corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person or entity signing this Lease for Tenant represents and warrants that he
or it is a general
- -C- 1988 Southern California 11 Initials [illegible]
Chapter of the [LOGO] -------------
Society of (MULTI-TENANT NET FORM)
Industrial and [illegible]
Office Realtors, Inc. -------------
<PAGE>
partner of the partnership, that he or it has full authority to sign for the
partnership and that this Lease binds the partnership and all general partners
of the partnership. Tenant shall give written notice to Landlord of any general
partner's withdrawal or addition. Within thirty (30) days after this Lease is
signed, Tenant shall deliver to Landlord a copy of Tenant's recorded statement
of partnership or certificate of limited partnership.
Section 13.11 JOINT AND SEVERAL LIABILITY. All parties signing this Lease
as Tenant shall be jointly and severally liable for all obligations of Tenant.
Section 13.12. FORCE MAJEURE. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions.
Section 13.13. EXECUTION OF LEASE. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14. SURVIVAL. All representations and warranties of Landlord
and Tenant shall survive the termination of this Lease.
ARTICLE FOURTEEN: BROKERS
[OMITTED]
ARTICLE FIFTEEN: COMPLIANCE
The parties hereto agree to comply with all applicable federal, state and
local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this Agreement,
including, but not limited to, the 1964 Civil Rights Act and all amendments
thereto, the Foreign Investment In Real Property Tax Act, the Comprehensive
Environmental Response Compensation and Liability Act, and The Americans With
Disabilities Act.
ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED HERETO
OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED, PLEASE
DRAW A LINE THROUGH THE SPACE BELOW.
- -C- 1988 Southern California 12 Initials [illegible]
Chapter of the [LOGO] -------------
Society of (MULTI-TENANT NET FORM)
Industrial and [illegible]
Office Realtors, Inc. -------------
<PAGE>
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialled all Riders
which are attached to or incorporated by reference in this Lease.
"LANDLORD"
Signed on Sept. 26, 1996 Palo Cristi Airpark II, L.L.C.
----------------------------------------
at Palo Cristi Investments, Inc.
---------------------------- -----------------------------------------
Managing Member
By:
-----------------------------------
Its: Scott LeMarr, its President
-----------------------------------
By: /s/ Scott LeMarr
-----------------------------------
Its:
-----------------------------------
"TENANT"
Signed on Sept 26, 1996 Benefit Resources, Inc.
----------------------------------------
at
---------------------------- ----------------------------------------
By: /s/ Earl Wiklund
-----------------------------------
Its: Earl Wiklund
-----------------------------------
By: Acting in the capacity of its
-----------------------------------
Chief Financial Officer
Its:
-----------------------------------
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH A
PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON
WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE
POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE
TANKS.
THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE DIRECTION
OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE
REALTORS [REGISTERED TRADEMARK], INC. NO REPRESENTATION OR RECOMMENDATION IS
MADE BY THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE
REALTORS, [REGISTERED TRADEMARK] INC., ITS LEGAL COUNSEL. THE REAL ESTATE
BROKERS NAMED HEREIN, OR THEIR EMPLOYEES OR AGENTS, AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT OR TAX CONSEQUENCES OF THIS LEASE OR OF THIS TRANSACTION. LANDLORD
AND TENANT SHOULD RETAIN LEGAL COUNSEL TO ADVISE THEM ON SUCH MATTERS AND SHOULD
RELY UPON THE ADVICE OF SUCH LEGAL COUNSEL.
- -C- 1988 Southern California 13 Initials [illegible]
Chapter of the [LOGO] -------------
Society of (MULTI-TENANT NET FORM)
Industrial and [illegible]
Office Realtors, Inc. -------------
<PAGE>
RIGHT OF FIRST REFUSAL. Provided Tenant is not then in default, Tenant
shall have a right of first refusal with respect to unleased space contiguous
to the Property. In the event Landlord desires to lease available contiguous
space to a third party, Landlord shall first by written notice offer the space
to Tenant on all of the same terms and conditions. Tenant shall have five
business days to accept the offer by written notice hand-delivered to
Landlord. If Tenant does not accept the offer within that period of time,
Landlord shall be free to lease the space to the third party. Landlord may
modify the terms of the lease, except principal economic terms, during
negotiation with the third party without reoffering the space to Tenant.
Notwithstanding anything to the contrary, Tenant shall not be entitled to
exercise a right of first refusal during the last 12 months of the lease
term.
Initials illegible
----------
Initials illegible
----------
<PAGE>
Exhibit "A"
Diagram of Project Analysis
Initials /s/ illegible
-------------
Initials /s/ illegible
-------------
<PAGE>
Exhibit "B"
Diagram of New Office Space
Initials /s/ illegible
-------------
Initials /s/ illegible
-------------
<PAGE>
PALO CRISTI AIRPARK II, L.L.C.
STANDARD TENANT IMPROVEMENTS AND ALLOWANCES
<TABLE>
<S> <C> <C>
+ LIGHTING FIXTURES Warehouse Open Tube Fluorescent
Office 2'x4' Acrylic Prismatic
Lens, Lay-in Fluorescent
+ DOORS Main Entrance Color Patina
(See Color Board)
Secondary Metal Ext. Painted
Interior Natural Finish Birch
+ DOOR HARDWARE General Brushed Chrome Plate,
Lever Style
+ CABINETS Per Exhibit B and Tenant
Improvements to Exist.
Bldg. drawings dated
9-23-96
+ WINDOW COVERINGS Building Standard
+ TELEPHONE AND COMPUTER PREWIRE Per the drawing attached.
Materials and workmanship
to be suitable and
functional for Tenant's
standard intended
purposes.
</TABLE>
EXHIBIT "C" Initials illegible
----------
Initials illegible
----------
<PAGE>
PALO CRISTI AIRPARK II, L.L.C.
STANDARD TENANT IMNPROVEMENTS AND ALLOWANCES
<TABLE>
<S> <C> <C>
1ST FLOOR 2ND FLOOR
--------- ---------
EXTERIOR GLAZING Solar Grey Dark Grey
GLAZING MULLIONS Color Patina Color Dark Bronze
INTERIOR FINISHES
+ FLOORS: Bathrooms ALLOWANCE not to
exceed $2,000
All Other Floors ALLOWANCE not to
exceed $1.50 per
square foot
+ BASE General All Areas 4" Rubber Base
Group Toilet Rooms Ceramic Tile of Vinyl
+ WALLS Warehouse Unpainted Masonry
Interior Partitions Painted Drywall
+ WAINSCOTS Individual Toilet Plastic Laminate
Rooms Ceramic Tile
Group Toilet Rooms
+ TOILET ROOM ACCESSORIES Group Toilet Rooms Metal Partitions
General All Toilet Paper Tissue Holder
Rooms Roll Tissue Holder
Liquid Soap Dispenser
Grab Bars
Mirror w/Shelf
+ CEILINGS Warehouse Exposed, Insulated Roof
Construction
Showroom Areas Acoustical Tile Lay-in
Office Areas Acoustical Tile Lay-in
</TABLE>
EXHIBIT "C" Initials /s/ illegible
-------------
Initials /s/ illegible
-------------
<PAGE>
Telephone and Computer Prewire Drawing
Initials /s/ illegible
-------------
Initials /s/ illegible
-------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,783,514
<SECURITIES> 0
<RECEIVABLES> 1,362,928
<ALLOWANCES> 36,622
<INVENTORY> 0
<CURRENT-ASSETS> 6,385,404
<PP&E> 2,965,153
<DEPRECIATION> 2,052,150
<TOTAL-ASSETS> 10,909,175
<CURRENT-LIABILITIES> 7,909,121
<BONDS> 0
0
0
<COMMON> 74,591
<OTHER-SE> 609,897
<TOTAL-LIABILITY-AND-EQUITY> 10,909,175
<SALES> 0
<TOTAL-REVENUES> 6,071,306
<CGS> 0
<TOTAL-COSTS> 6,532,373
<OTHER-EXPENSES> 507,676
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 279,124
<INCOME-PRETAX> (968,743)
<INCOME-TAX> 4,800
<INCOME-CONTINUING> (973,543)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (973,543)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
