SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
or
TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file No. 0-12641
[GRAPHIC OMITTED]
IMAGING TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0021693
(State or other jurisdiction of incorporation
or organization) (IRS Employer ID No.)
15175 INNOVATION DRIVE
SAN DIEGO, CALIFORNIA 92128
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (619) 613-1300
Check 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 past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No
The number of shares outstanding of the registrant's common stock as of May 7,
1999, was 19,821,955.
<PAGE>
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
March 31, 1999 (unaudited) and June 30, 1998 (audited) 2
Consolidated Statements of Operations
Three months ended March 31, 1999 and 1998 (unaudited) 3
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998 (unaudited) 4
Notes to Consolidated Financial Statements. 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 22
<PAGE>
<TABLE>
<CAPTION>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
MARCH 31, JUNE 30,
1999 1998
<S> <C> <C>
Current assets
Cash $ 368 $ 3,023
Accounts receivable, net 3,848 4,133
Inventories 2,896 6,287
Prepaid expenses and other 1,256 1,401
---------- ----------
Total current assets 8,368 14,844
Property and equipment, net 1,217 1,525
Capitalized software, net 6,356 3,655
Other 1,669 937
---------- ----------
Total Assets $ 17,610 $ 20,961
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Borrowings under bank lines of credit $ 4,602 $ 5,203
Short-term debt 2,581 1,998
Current portion of long-term debt 1,342 903
Accounts payable 2,518 5,027
Accrued expenses 1,747 1,398
---------- ----------
Total current liabilities 12,790 14,529
Long-term debt, less current portion 2,152 1,828
---------- ----------
Total liabilities 14,942 16,357
---------- ----------
Shareholders' equity (deficit)
Series A preferred stock, $1,000 par value, 7,500 shares
authorized, 420.5 shares issued and outstanding 420 420
Series C preferred stock, $1,000 par value, 1,200 shares
authorized, 236 shares issued and outstanding - 2,360
Series D preferred stock, $1,000 par value, 1,200 shares
authorized, 875 issued and outstanding 875
Series E preferred stock, $1,000 par value, 1,250 shares
authorized, 881 issued and outstanding 881
Common stock, $0.005 par value, 100,000,000 shares authorized;
19,800,815 shares issued and outstanding 99 62
Paid-in capital 41,355 35,859
Shareholder loans (110) (110)
Accumulated deficit (40,852) (33,987)
---------- ----------
Total shareholders' equity (deficit) 2,668 4,604
---------- ----------
$ 17,610 $ 20,961
========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
<TABLE>
<CAPTION>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH MARCH MARCH MARCH
31, 1999 31, 1998 31, 1999 31,1998
<S>
Revenues <C> <C> <C> <C>
Sales of products $3,230 $9,275 $14,146 $23,776
Engineering fees 110 1,497 505 4,544
Licenses and royalties 320 - 483 -
--------- --------- -------- --------
3,660 10,772 15,134 28,320
--------- --------- -------- --------
Costs and expenses
Costs of products sold 2,504 6,864 9,860 17,053
Selling, general, and administrative 2,868 2,500 10,184 6,807
Cost of engineering fees 215 566 1,030 1,720
--------- --------- --------- --------
5,587 9,930 21,074 25,580
--------- --------- --------- --------
Income (loss) from operations (1,927) 842 (5,940) 2,740
Other expense
Interest, net (368) (71) (911) (115)
---------- --------- --------- --------
Income (loss) before income taxes (2,295) 771 (6,851) 2,625
Income tax expense - 350 (14) 346
---------- --------- --------- --------
Net income (loss) $(2,295) $1,121 $ (6,865) $ 2,971
========== ========= ========= ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
<TABLE>
<CAPTION>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
1999 1998
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $(6,865) $2,971
Adjustments to reconcile net income (loss)
to net cash from operating activities
Depreciation and amortization 579 499
Income tax benefit - (350)
Changes in operating assets and liabilities
Accounts receivable 285 (7,329)
Inventories 3,391 (1,230)
Prepaid expenses and other (587) (1,776)
Accounts payable and accrued expenses (2,160) 897
------- --------
Net cash from operating activities (5,357) (6,318)
------- --------
Cash flows from investing activities
Cash acquired in merger - 38
Capitalized software (2,901) (1,868)
Capital expenditures (71) (285)
------- --------
Net cash from investing activities (2,972) (2,115)
------- --------
Cash flows from financing activities
Net borrowings under bank lines of credit (601) 3,741
Net borrowings under short-term notes payable 2,642 -
Net proceeds from issuance of common stock 2,034 1,319
Net proceeds from issuance of preferred stock 3,506 5,000
Collection of shareholder loan - 5
Redemption of preferred stock (2,228) -
Issuance of long term debt 675 -
Repayment of long-term debt (354) (109)
------- -------
Net cash from financing activities 5,674 9,956
------- -------
Net increase (decrease) in cash (2,655) 1,523
Cash, beginning of period 3,023 255
------- -------
Cash, end of period $ 368 $1,778
======= ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of
Imaging Technologies Corporation and Subsidiaries (the "Company" or "ITEC") have
been prepared pursuant to the rules of the Securities and Exchange Commission
(the "SEC") for quarterly reports on Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These financial statements and notes herein are unaudited, but in
the opinion of management, include all the adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the Company's
financial position, results of operations, and cash flows for the periods
presented. These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the years ended
June 30, 1998, 1997, and 1996 included in the Company's annual report on Form
10-K filed with the SEC. Interim operating results are not necessarily
indicative of operating results for any future interim period or for the full
year.
NOTE 2. GOING CONCERN CONSIDERATIONS
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. At March 31, 1999, and for the nine
months then ended, the Company had a net loss and negative working capital which
raise substantial doubt about its ability to continue as a going concern. The
losses have resulted primarily from an inability to achieve product sales
targets due to insufficient working capital, a sharp decline in contract revenue
because many OEM customers are experiencing financial difficulties relating to
the Asian crisis, and relatively high operating costs in relation to current
sales levels. The Company is taking a new strategic direction whereby it will
manufacture imaging products under its own name. The Company is in the process
of consolidating and restructuring these operations to conform to the new
strategic plan. While management believes that these new products will be well
received by the market, the Company must continue to obtain additional funds to
provide adequate working capital and finance operations. However, no assurance
can be given that the financing will be obtained and that the Company will
achieve profitable operations. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
NOTE 3. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share ("Basic EPS") excludes dilution and is
computed by dividing net income (loss) available to common shareholders (the
"numerator") by the weighted average number of common shares outstanding (the
"denominator") during the period. Diluted earnings (loss) per common share
("Diluted EPS") is similar to the computation of Basic EPS except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. In addition, in computing the dilutive effect of convertible securities,
the numerator is adjusted to add back the after-tax amount of interest
recognized in the period associated with any convertible debt. The computation
of Diluted EPS does not assume exercise or conversion of securities that would
have an antidilutive effect on net earnings (loss) per share. The following is a
reconciliation of Basic EPS to Diluted EPS:
EARNINGS (LOSS) SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
MARCH 31, 1998
Net income $ 2,971
Preferred dividends (16)
-------
Basic EPS 2,955 11,048 $ 0.27
Effect of options and warrants - 739
Effective of convertible notes payable 64
Effect of convertible preferred stock 16 1,425
------- ------
Diluted EPS $ 2,971 13,276 $ 0.22
======= ======
5
<PAGE>
EARNINGS (LOSS) SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
MARCH 31, 1999
Net loss $ (6,865)
Preferred dividends (16)
------
Basic and diluted EPS $ (6,881) 13,208 $(0.52)
====== ======
NOTE 4. INVENTORIES
MARCH 31, JUNE 30,
1999 1998
Inventories
Materials and supplies $ 300 $2,081
Finished goods 2,596 4,206
------ ------
$2,896 $6,287
====== ======
NOTE 5. BANK LINES OF CREDIT
In September 1998, Imperial Bank ceased funding under the lines of credit and
notified the Company that it intended to terminate its banking relationship with
the Company. After further discussions, on November 4, 1998 the Company and
Imperial Bank executed a Forbearance Agreement pursuant to which Imperial Bank
has resumed funding to the Company under the lines of credit and the Company has
agreed to repay all outstanding indebtedness owed to Imperial Bank. Although the
Company is in discussions with several lenders regarding new financing for the
Company, there can be no assurance that the Company will secure new financing.
The failure of Imperial Bank to continue to provide funding to the Company under
the lines of credit or the failure of the Company to secure sufficient new
financing to repay all indebtedness owed to Imperial Bank, would have a material
adverse effect on the Company.
NOTE 6. SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK
In September 1998, the Company redeemed all outstanding shares of the Series C
Convertible Preferred Stock (Series C Shares). Owners of the Series C Shares
received $2.23 million in cash and $1 million in subordinated notes. The Company
financed the redemption through a $4.38 million private placement of newly
issued shares of common stock and subordinated notes.
The $4.38 million in funding came from several private investors, one of whom is
a director of the Company. In exchange, the Company issued a total of 500,000
shares of the Company's common stock at a price of $2.50 per share and
subordinated promissory notes in the amount of $3.13 million. All of the
promissory notes bear interest at 16% per year. A portion of the notes,
$675,000, mature in two years and are convertible, at the option of each
investor, at any time into shares of Company common stock at $2.025 per share
(subject to adjustment under certain circumstances). The remaining notes, $2.45
million, mature in one year and are not convertible. On March 30, 1999 the
holder of one of these convertible notes exchanged his note in the principal of
$950,000 and all accrued interest for 2,000,000 shares of the Company's common
stock. The Company also issued warrants to the investors as part of the
financing. The warrants authorize the purchase of 490,000 shares of common stock
at an exercise price of $2.025 per share. This price is based on the average of
the closing bid prices for ITEC's common stock for the five trading days ended
September 14, 1998.
NOTE 7. SERIES D AND SERIES E CONVERTIBLE PREFERRED STOCK
As of January 13, 1999, the Company entered into a Securities Purchase Agreement
(the "Series D Agreement") with certain investors contemplating a potential
funding of up to $2.4 million (the "Series D Funding"). The Series D Funding
provided for the private placement by the Company of up to 1,200 units (the
"Units"), each Unit consisting of (i) one share of Series D Convertible
Preferred Stock (the "Series D Stock") and (ii) 2,000 warrants (the "Series D
Warrants" and, collectively, with the Series D Stock, the "Series D Securities")
exercisable for shares of Common Stock. Pursuant to the Series D Agreement,
6
<PAGE>
the Company has issued and sold or shall sell and issue to the investors the
Series D Stock and the Series D Warrants in the following amounts: (i)
$1,800,000 of the stated value of the Series D Stock has been issued and sold;
and (ii) $600,000 of the stated value of the Series D Stock will be funded on a
date after the Company, among other things, (a) provides a written notice to the
investors requiring such investors to purchase up to $600,000 of the stated
value of the Series D Stock and (b) has an effective registration statement (the
"Registration Statement") filed with the Securities and Exchange Commission (the
"SEC"). The Series D Stock is convertible into shares of the Company's Common
Stock at the lesser of (A) $.50 and (B) an amount equal to 70 percent of the
closing bid price per share of Common Stock on the Nasdaq SmallCap Market (the
"Series D Closing Price") for the three trading days having the lowest closing
price during the 30 trading days prior to the date on which the investor gives
to the Company a notice of conversion of Series D Stock; except that all Series
D Stock converted prior to February 26, 1999 would be converted at $.50.
However, each of the investors has agreed that in no event shall it be permitted
to convert any shares of Series D Stock in excess of the number of such shares
upon the conversion of which, the sum of (i) the number of shares of Common
Stock owned by such investor (other than shares of Common Stock issuable upon
conversion of Series D Stock or upon exercise of Series D Warrants) plus (ii)
the number of shares of Common Stock issuable upon conversion of such shares of
Series D Preferred Stock or exercise of Series D Warrants, would be equal to or
exceed 9.999 percent of the number of shares of Common Stock then issued and
outstanding, including the shares that would be issuable upon conversion of the
Series D Stock or exercise of Series D Warrants held by such investor. Each
investor in Series D Stock shall have the right to vote, except as otherwise
required by Delaware law, on all matters on which holders of Common Stock have
the right to vote on with each such investor having the right to cast one vote
for each whole share of Common Stock into which each share of the Series D
Preferred Stock held by such investor is convertible immediately prior to the
record date for the determination of stockholders entitled to vote; provided,
however, that in no event shall a holder be entitled to vote more than 9.999
percent of the number of shares entitled to be voted on any matter. Upon the
completion of each tranche of Series D Funding, each of the investors will
receive the number of Series D Warrants that directly corresponds with the
dollar amount such investor invested in such tranche; the Series D Warrants are
immediately exercisable upon issuance at an exercise price of $.875 per share
and expire five years after the date of their issuance.
As of February 2, 1999, the Company entered into a Securities Purchase Agreement
(the "Series E Agreement") with certain investors (including one of whom is a
director of the Company) contemplating a potential funding and exchange of
indebtedness of up to $4,655,000 and as of February 18, 1999, the Company has
entered into an Exchange Agreement (the "Exchange Agreement") with certain
investors contemplating a potential exchange of indebtedness of approximately
$1,150,000 (the Series E Agreement and the Exchange Agreement being together the
"Series E Funding"). The Series E Funding provides for the private placement by
the Company of up to 1,250 units (the "Units"), each Unit consisting of (i) one
share of Series E Convertible Preferred Stock (the "Series E Stock") and (ii)
5,000 warrants (the "Series E Warrants" and, collectively, with the Series E
Stock, the "Series E Securities") exercisable for shares of Common Stock.
Pursuant to the Series E Agreement, the Company issued and sold to the investors
the Series E Securities in the following amounts: $3,420,000 in cash and
$1,235,000 in exchange and/or cancellation of indebtedness, and pursuant to the
Exchange Agreement, the Company contemplates issuing to the investors Series E
Securities in exchange and/or cancellation of indebtedness of approximately
$1,150,000. All of the investors of the Series E Agreement funded at the time of
execution of the Series E Agreement except that two of the investors agreed to
purchase the Series E Securities in three tranches which have all been funded.
All of the investors of the Exchange Agreement would exchange their indebtedness
for Series E Securities within five days of the Company obtaining Shareholder
Approval. The Series E Stock is convertible into shares of the Company's Common
Stock at the lesser of (A) $.50 and (B) an amount equal to 70 percent of the
closing bid price per share of Common Stock on the Nasdaq SmallCap Market (the
"Series E Closing Price") for the three trading days having the lowest closing
price during the 30 trading days prior to the date on which the applicable
investor gives to the Company notice of conversion of Series E Stock; except
that all Series E Stock converted prior to February 26, 1999 would be converted
at $.50. Each investor in Series E Stock shall have the right to vote, except as
otherwise required by Delaware law, on all matters on which holders of Common
Stock have the right to vote on with each such investor having the right to cast
one vote for each whole share of Common Stock into which each share of the
Series E Preferred Stock held by such investor is convertible immediately prior
to the record date for the determination of stockholders entitled to vote. Upon
the Series E Funding, each of the investors will receive the number of Series E
Warrants that directly corresponds with the dollar amount such investor invested
in the Series E Funding, except that Tranche Investors will receive the number
of Series E
7
<PAGE>
Warrants that directly corresponds with the dollar amount such investor invested
in each completed tranche; the Series E Warrants are immediately exercisable
upon issuance at an exercise price of $.875 per share and expire five years
after their date of issuance.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Quarterly Report on Form 10-Q. The discussion of the Company's business
contained in this Quarterly Report on Form 10-Q may contain certain projections,
estimates and other forward-looking statements that involve a number of risks
and uncertainties, including those discussed below at "Risks and Uncertainties."
While this outlook represents management's current judgment on the future
direction of the business, such risks and uncertainties could cause actual
results to differ materially from any future performance suggested below. The
Company undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements to reflect events or circumstances
arising after the date hereof.
OVERVIEW
Imaging Technologies Corporation develops, manufactures, and distributes
high-quality digital imaging solutions. The Company produces a wide range of
printer and imaging products for use in graphics, printing, and publishing and
other niche business and technical markets. Beginning with a core technology in
the design and development of Adobe(R) PostScript(R) controllers for non-impact
printers and multifunction peripherals, the company has expanded its product
offerings to include monochrome and color printers, printer controllers,
external print servers, and software to improve the accuracy of color
reproduction.
During the past 12 months, ITEC has undertaken a significant realignment of the
Company's operations around its core imaging businesses. The Company has shifted
its focus away from some of its traditional revenue sources, consolidated
facilities, and introduced new products, and has been required to make
expenditures to support these changes. The Company's business has been in a
transitional phase and there have been important short-term operational and
liquidity challenges. Accordingly, quarter-to-quarter financial comparisons may
be of limited usefulness now and for the next several quarters due to these
important changes in the Company's business.
Historically, a portion of the Company's income was derived from non-recurring
engineering fees and royalty income from a relatively small number of OEM
customers. Over the past three years, the Company has experienced shortfalls in
income as a result of engineering contracts with OEM manufacturers for products
that were never introduced into the market and shipped, or were cancelled by the
customer before ITEC completed the deliverables portion of the contract. The
timing and amount of income from these customers ultimately depended on sales
levels and shipping schedules for the OEM products into which the Company's
products were incorporated. The Company had no control over the shipping date or
volumes of products shipped by its OEM customers, and there was no assurance
that any OEM would continue to ship products that incorporate the Company's
technology. Failure of these OEMs to achieve significant sales of products
incorporating the Company's technology and fluctuations in the timing and volume
of such sales had a materially adverse effect on the Company. These events
culminated in a year-end loss from operations in fiscal 1998 and special
restructuring charges taken against earnings. The Company has reported losses in
the first three fiscal quarters of 1999.
The Company's current strategy is to develop and commercialize its own
technology. The Company intends to increase penetration of its current target
markets and to continue pursuing clearly defined commercial market opportunities
that enable it to leverage its core technologies. The Company has established a
number of strategic partnerships with industry leaders, such as Adobe Systems
and NEC Electronics for product development, marketing and sales. Through these
strategic partnerships, ITEC seeks to obtain specific market knowledge and
enhanced understanding of market demands and needs, access to funding for
continued product development, product and customer validation, and a
8
<PAGE>
channel for market penetration. Independent of the strategic partnerships, the
company is also funding internal development and continues to introduce new
products and product enhancements for its core markets.
To expedite a turnaround in its earnings, during the third quarter the Company
signed an agreement with Pen Interconnect (NASDAQ: PENC) for a manufacturing
outsourcing agreement. Pen Interconnect, through its InCirT Technologies
contract manufacturing division in Irvine, California, has begun providing
high-volume manufacturing, test, and order fulfillment services to ITEC. ITEC's
plan is to contract the manufacturing of the company's color and monochrome
printers and image management printer controller boards to Pen Interconnect. The
goal is to complete the orders in the Company's backlog, expand its product mix,
and focus its efforts on technology development without the overhead of a
manufacturing center.
To execute successfully its current strategy, the Company also has improved its
working capital position. To address the Company's working capital needs, on
September 17, 1998, the Company raised an aggregate of $4.38 million through the
issuance of shares of its Common Stock and subordinated notes to several private
investors. During the third quarter of fiscal 1999, the Company obtained
approximately $5.2 million in cash through private placements of its capital
stock. The placement involved the issuance of Series D and E Securities with
certain accredited and institutional investors. In addition, the company
converted approximately $2.0 million of debt into equity. These offerings and
conversions have resulted in the issuance of additional shares and warrants.
ITEC is using the funds raised for working capital to expand product shipments
to meet worldwide customer demand for the Company's printers, image management
print controllers, color print servers and color management software.
CORPORATE RESTRUCTURING
Beginning in April 1998, the Company has been implementing a plan to realign the
management and create a divisional structure within the organization. ITEC
consolidated all of its independent operating subsidiaries under a single
financial and operational structure. The Company undertook this restructuring
based in part upon its belief that by breaking down the barriers between the
subsidiaries and organizing the Company around functions the Company would be
able to improve the effectiveness of its established sales channels and to
enhance cross-selling opportunities. The Company also believes that this
structure will improve the management and commercialization of its technology
base.
In addition to the structural realignment, ITEC has been in the process of
consolidating its facilities to increase efficiencies and reduce costs.
During the second fiscal quarter of fiscal 1999, the Company disposed of its
McMican Corporation memory products manufacturing subsidiary, and in the third
quarter sold its Prima International subsidiary, a PC Card and storage products
distributor. These moves were part of the ongoing realignment of the Company's
operations around its core imaging businesses, focusing on markets and products
that produce a higher return on investment.
The consolidation process culminated in April 1999 with the opening of a single
facility in San Diego, California. This facility houses all of ITEC's U.S.
operations previously located in seven separate complexes in Northern and
Southern California. ITEC will initially occupy 45,000 square feet of the
60,000-square-foot building with the option to expand as the Company grows.
Consolidating into one facility reduces the amount of space the Company occupies
by 35%, representing savings of 45% in lease payments over 1998. ITEC has
decreased its staff by 50% worldwide over last year through outsourcing and the
elimination of redundant positions. By streamlining operations and locating
manufacturing and distribution in one centralized plant, the Company expects to
eventually realize annualized savings in excess of $1.5 million, primarily as a
result of workforce reductions, decreased factory space requirements, and the
elimination of duplicate operations and the outsourcing strategy.
9
<PAGE>
RESULTS OF OPERATIONS
NET REVENUES
Revenues were $3.7 million and $10.8 million for the quarters ended March 31,
1999 and 1998, respectively. Sales of product were $3.2 million and $9.3 million
for the quarters ended March 31, 1999 and 1998, respectively. For the nine
months ended March 31, 1999 sales of product were $ 14.1 million compared to $
23.8 million for the nine months ended March 31, 1998. The decrease in product
sales from 1998 to 1999 was due primarily to a decrease in sales of printer
products. Engineering fees were $0.1 million and $1.5 million for the quarters
ended March 31, 1999 and 1998, respectively. For the nine months ended March 31,
1999 engineering fees were $ 0.5 million compared to $ 4.5 million for the nine
months ended March 31, 1999. The decrease in 1999 compared to 1998 was primarily
the result of the Company's change in strategic direction, focusing more on
internal product development and sales and less on engineering for third
parties. License fees were $0.3 million for the quarter ended March 31, 1999 and
the Company did not recognize any license fees during the quarter ended March
31, 1998. For the nine months ended March 31, 1999 license fees were $ 0.5
compared to $ 0.0 million for the nine months ended March 31, 1998.
COST OF PRODUCTS SOLD
Cost of products sold were $2.5 million or 78% of product sales and $6.9 million
or 74% of product sales for the quarters ended March 31, 1999 and 1998,
respectively. For the nine months ended March 31, 1999 cost of products sold
were $9.9 million compared to $17.1 million for the nine months ended March 31,
1998. The percentage increase in 1999 as compared to 1998 was primarily due to
end of life product sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $2.9 million and $2.5 million
for the quarters ended March 31, 1999 and 1998, respectively. For the nine
months ended March 31, 1999 selling, general and administrative expenses were
$10.2 million compared to $6.8 million for the nine months ended March 31, 1998.
Selling, general and administrative expenses consisted primarily of salaries and
commissions of sales and marketing personnel, salaries and related costs for
general corporate functions, including finance, accounting, facilities and
legal, advertising and other marketing related expenses, and fees for
professional services. The increase in SG&A costs are mainly attributable to in
increase in administrative personnel and overhead expenses incurred as part of
the acquisitions in Fiscal year 1998.
COST OF ENGINEERING
Engineering costs were $0.2 million and $0.6 million for the quarters ended
March 31, 1999 and March 31, 1998. For the nine months ended March 31, 1999
engineering costs were $ 1.0 million compared to $ 1.7 million for the nine
months ended March 31, 1998. The increase in costs as a percentage of
engineering revenues from 1999 compared to 1998 resulted primarily from the
reduction of billable engineering contracts.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations primarily through cash
generated from operations, debt financing, and from the sale of equity
securities. In August 1997, the Company completed a private placement of 500
shares of Series C Convertible Preferred Stock providing aggregate proceeds of
$5.0 million. A portion of the shares was converted by the holders and on
September 18, 1998, the Company redeemed all 237 outstanding shares of the
Series C Convertible Preferred Stock. The Company paid $2.23 million in cash,
issued $1.0 million in subordinated promissory notes and warrants to purchase
300,000 shares of Common Stock to the holders of the Series C Convertible
Preferred Stock in connection with the redemption.
During the third quarter of fiscal 1999, the Company obtained approximately $5.2
million in cash through the issuance of Series D and E Securities in private
placements with certain accredited and institutional investors. The Company is
using these funds to increase its working capital, sustain current operations,
introduce new products, and support the transition to a new strategic model
following the recent completion of a one-year corporate reorganization and
restructuring effort.
10
<PAGE>
To the extent the Company receives cash from collections of accounts receivable
from its customers, distributors and OEMs, any increase in the amount of
international sales is likely to increase accounts receivable balances due to
traditionally slower payments by international customers. Any failure of the
Company's customers, distributors or OEMs to pay, or any significant delay in
the payment of, a material portion of the amounts owing to the Company would
have an adverse effect on the Company.
As of March 31, 1999, the Company had a deficit working capital of $4.4 million,
a decrease of $4.1 million as compared to June 30, 1998. The decrease is
primarily the result of the operating loss and the decrease in accounts
receivable and inventories.. The Company's other principal source of liquidity
at March 31, 1999, were lines of credit with Imperial Bank aggregating $7
million. Borrowing under these lines of credit at March 31, 1999 totaled $4.6
million. The Company also has a term loan with Imperial Bank, the principal
balance of which at March 31, 1999, was $2.2 million. The lines of credit and
the term loan bear interest at Imperial Bank's prime rate plus 0.75% per annum.
The applicable interest rate at March 31, 1999, was 9.25%. The Company's
obligations under the lines of credit and the term loan are secured by all of
the Company's accounts receivable, inventories, and other assets. In September
1998, Imperial Bank ceased funding under the lines of credit and notified the
Company that it intended to terminate its banking relationship with the Company.
After further discussions, on November 4, 1998 the Company and Imperial Bank
executed a Forbearance Agreement pursuant to which Imperial Bank has resumed
funding to the Company under the lines of credit and the Company has agreed to
repay all outstanding indebtedness owed to Imperial Bank. Although the Company
is in discussions with several lenders regarding new financing for the Company,
there can be no assurance that the Company will secure new financing. The
failure of Imperial Bank to continue to provide funding to the Company under the
lines of credit or the failure of the Company to secure sufficient new financing
to timely repay all indebtedness owed to Imperial Bank would have a material
adverse effect on the Company.
Net cash used in operating activities decreased to $5.4. million during the nine
months ended March 31, 1999, from $6.3 million during the nine months ended
March 31, 1998.
Net cash used in investing activities increased to $3.0 million during the nine
months ended March 31, 1999, from $2.1 million during the nine months ended
March 31, 1998.
The Company has no material commitments for capital expenditures. The Company's
5% convertible preferred stock (which ranks prior to the Company's common
stock), carries cumulative dividends, when and as declared by the Company's
Board of Directors (but such dividends may only be paid out of surplus or net
profits legally available for the payment thereof), at an annual rate of $50.00
per share. The aggregate amount of such dividends in arrears at March 31, 1999,
was approximately $0.6 million, which amount has not been declared by the
Company's Board of Directors.
The Company's capital requirements depend on numerous factors, including market
acceptance of the Company's products, the scope and success of the Company's
product development efforts, the resources the Company devotes to marketing and
selling its products, and other factors. The Company anticipates that its
capital requirements will increase in future periods as it continues to develop
new products and increases its sales and marketing efforts. The report of the
Company's independent auditors accompanying the Company's June 30, 1998
financial statements includes an explanatory paragraph indicating there is a
substantial doubt about the Company's ability to continue as a going concern,
due primarily to the decreases in the Company's working capital and net worth.
To address the Company's working capital needs, on September 17, 1998, the
Company raised an aggregate of $4.38 million through the issuance of shares of
its Common Stock and subordinated notes to several private investors. This
working capital infusion was followed with private placements in the third
quarter of fiscal 1999 that raised approximately $5.2 million in cash through
the issuance of Series D and E Securities to certain accredited and
institutional investors. During the same period, approximately $2.0 million of
debt was converted to equity. These additions and changes to the Company's
capital structure have improved ITEC's working capital position and support the
company's ability to pursue its current strategy of capitalizing on its
technologies.
11
<PAGE>
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two-digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The Company
has procured a new business system that is year 2000 compliant and plans are to
implement the new system for the 2000 fiscal year.
Management does not anticipate that the Company will incur significant operating
expenses or be required to invest heavily in other computer systems improvements
to be year 2000 compliant. The Company plans to devote the necessary resources
to resolve significant year 2000 issues in a timely manner; however, if the
Company, its customers, vendors or others with whom it does significant business
are unable to resolve external processing issues in a timely manner, it could
result in material adverse effect on the Company.
The Company has performed an analysis of all of its products manufactured after
January 1, 1997 and has determined that all such products are year 2000
compliant. This analysis covered the Company's printer controller technology,
laser and dye- sublimation printers, as well as software products and computer
and digital camera memory modules. The Company's printers do not currently
contain any internal clock devises that monitor or recognize the change of the
date and therefore the change of year from 1999 to 2000 should not effect their
operation. However, software drivers are used to modify and direct the output
and performance of these printers. While these drivers do not generate
time-specific codes, they mirror time codes resident in the applicable operating
system. In the event a modification is required to a software driver to
accommodate year 2000 modifications instituted by a manufacturer of a software
package, computer platform or operating system that the Company is currently
supporting, the Company currently plans to update that driver free-of-charge and
make it available to customers for down-loading from the Internet.
RISKS AND UNCERTAINTIES; FUTURE CAPITAL NEEDS
There can be no assurance with respect to the Company's future profitability or
revenue growth. Losses may occur on a quarterly or annual basis for a number of
reasons outside the Company's control. See "Potential Fluctuation in Quarterly
Performance." The growth of the Company's business will require the commitment
of substantial capital resources. If funds are not available from operations,
the Company will need additional funds. The Company may seek such additional
funding through public and private financing, including debt or equity
financing. Adequate funds for these purposes, whether through financial markets
or from other sources, may not be available when needed or, if available, not on
terms acceptable to the Company. Insufficient funds may require the Company to
delay, reduce or eliminate some or all of its planned activities. See
"--Liquidity and Capital Resources."
POTENTIAL FLUCTUATION IN QUARTERLY PERFORMANCE
The Company's quarterly operating results can fluctuate significantly depending
on factors such as the timing of product announcements and subsequent
introductions of products by the Company and its competitors, availability and
cost of components, timing of shipments of the Company's products, mix of
product families shipped, market acceptance of new products, seasonality,
currency fluctuations, changes in prices by the Company and its competitors, and
price protection for selling price reductions offered to distributors and OEMs.
In addition, the timing of expenditures for staffing and related support costs,
advertising, trade show attendance, promotion, research and development
expenditures, and, of course, changes in general economic conditions can impact
quarterly performance. Any one of these factors could have a material adverse
effect on the Company's results of operations. The Company may experience
significant quarterly fluctuations in total revenues as well as operating
expenses with respect to future new product introductions. In addition, the
Company's component purchases, production and spending levels are based upon
forecast demand for the Company's products. Accordingly, any inaccuracy in
forecasting could adversely affect the Company's financial condition and results
of operations. Demand for the Company's products could be adversely affected by
a slowdown in the overall demand for computer systems, printer products or
digitally printed images. The Company's failure to complete shipments during a
quarter could have a material adverse effect on the Company's results of
operations for that quarter. Quarterly results are not necessarily indicative of
future performance for any particular period.
12
<PAGE>
HIGHLY COMPETITIVE INDUSTRY
The markets for the Company's products are highly competitive and rapidly
changing. Some of the Company's current and prospective competitors have
significantly greater financial, technical, manufacturing and marketing
resources than the Company. The Company's ability to compete in its markets
depends on a number of factors within and outside its control, including the
success and timing of product introductions by the Company and its competitors,
selling prices, product performance, product distribution, marketing ability and
customer support. A key element of the Company's strategy is to provide
competitively priced quality products. There can be no assurance that the
Company's products will continue to be competitively priced. The Company has
reduced prices on certain of its products in the past and will likely continue
to do so in the future. Price reductions, if not offset by similar reductions in
product costs, will affect gross margins and may adversely affect the Company's
financial condition and results of operations. See "Short Product Lives and
Technological Change."
SHORT PRODUCT LIVES AND TECHNOLOGICAL CHANGE
The markets for the Company's products are characterized by rapidly evolving
technology, frequent new product introductions and significant price
competition. Consequently, short product life cycles and reductions in unit
selling prices due to competitive pressures over the life of a product are
common. The Company's future success will depend on its ability to continue to
develop and manufacture competitive products and achieve cost reductions for its
existing products. In addition, the Company monitors new technology developments
and coordinates with suppliers, distributors and dealers to enhance existing
products and lower costs. Advances in technology will require increased
investment to maintain the Company's market position. The Company's financial
condition and results of operations could be adversely affected if the Company
is unable to develop and manufacture new, competitive products in a timely
manner.
DEVELOPING MARKETS AND APPLICATIONS
The markets for the Company's products are relatively new and are still
developing. The Company believes that there has been growing market acceptance
for color printers and related technologies and supplies. There can be no
assurance that such markets will continue to grow. Other technologies are
constantly evolving and improving. There can be no assurance that products based
on these other technologies will not have a material adverse effect on the
demand for the Company's products.
DEPENDENCE ON ADOBE RELATIONSHIP
The Company's relationship with Adobe as an authorized Co-development Partner to
implement the inclusion of Adobe's PostScript language on printer controllers
and in software products is an integral part of its business strategy. There can
be no assurance that this relationship will be successful or that it will remain
in force for some time to come. Loss of the Adobe relationship could have a
substantial negative effect on future revenues.
DEPENDENCE UPON SUPPLIERS
At present, many of the Company's products use technology licensed from outside
suppliers. The Company relies heavily on Adobe for upgrades and support of the
PostScript language. In the case of its font products, the Company licenses such
fonts from outside suppliers, including Adobe, who also own the intellectual
property rights to such fonts. The reliance on third-party suppliers involves
risk, including limited control over potential hardware and software
incompatibilities with the Company's products. Furthermore, there can be no
assurance that all of the suppliers of products marketed by the Company will
continue to license their products to the Company indefinitely, or that these
suppliers will not license to other companies simultaneously.
RISKS RELATED TO ACQUISITIONS
During Fiscal 1998, ITEC made a number of acquisitions to complement its
technical position in the imaging market. CSI, a producer of color management
software was acquired in a stock transaction. ITEC also acquired the assets of
AMT, the European sales and distribution subsidiary of Singapore-based Lam Soon.
AMT had been ITEC's master stocking distributor of printers and supplies in the
EC and on the European Continent. The Company's future performance will depend
in part on its ability to integrate and grow these acquired businesses.
13
<PAGE>
Acquisitions involve a number of risks, including: the integration of acquired
products and technologies in a timely manner; the integration of businesses and
employees with the Company's business; the management of
geographically-dispersed operations; adverse effects on the Company's reported
operating results from acquisition-related charges and amortization of goodwill;
potential increases in stock compensation expense and increased compensation
expense resulting from newly- hired employees; the diversion of management
attention; the assumption of unknown liabilities; potential disputes with the
sellers of one or more acquired entities; the inability of the Company to
maintain customers or goodwill of an acquired business; the need to divest
unwanted assets or products; and the possible failure to retain key acquired
personnel. Client satisfaction or performance problems with an acquired business
could also have a material adverse effect on the reputation of the Company as a
whole, and any acquired business could significantly under perform relative to
the Company's expectations. The Company is currently facing all of these
challenges and its ability to meet them over the long term has not been
established. As a result, there can be no assurance that the Company will be
able to integrate acquired businesses, products or technologies successfully or
in a timely manner in accordance with its strategic objectives, which could have
a material adverse effect on the Company.
In order to grow its business, the Company may continue to acquire businesses
that it believes are complementary. The successful implementation of this
strategy depends on the Company's ability to identify suitable acquisition
candidates, acquire such companies on acceptable terms, integrate their
operations and technology successfully with those of the Company, retain
existing customers and maintain the goodwill of the acquired business. There can
be no assurance that the Company will be able to identify additional suitable
acquisition candidates, acquire any such candidates on acceptable terms,
integrate their operations or technology successfully, or retain customers or
maintain the goodwill of the acquired business. Moreover, in pursuing
acquisition opportunities, the Company may compete for acquisition targets with
other companies with similar growth strategies. Some of these competitors may be
larger and have greater financial and other resources than the Company.
Competition for these acquisition targets likely could also result in increased
prices of acquisition targets and a diminished pool of companies available for
acquisition. In addition, the Company would likely face the same integration
issues described above with respect to any future acquisitions. If the Company
is unable to manage internal or acquisition- based growth effectively, the
Company would be materially and adversely affected.
Due to all of the foregoing, the Company's execution on an acquisition strategy
or any individual completed or future acquisition may have a material adverse
effect on the Company. In addition, if the Company issues equity securities as
consideration for any future acquisitions, existing stockholders will experience
further ownership dilution and such equity securities could have rights,
preferences, privileges or other rights superior to those of the Common Stock.
See "--Future Capital Needs," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent, in part, on its ability to attract and
retain qualified management and technical personnel. Competition for such
personnel is intense, and the inability to attract additional key employees or
the loss of one or more key employees could adversely affect the Company. There
can be no assurance that the Company will retain its key personnel.
COMPONENT AVAILABILITY AND COST; DEPENDENCE ON SINGLE SOURCES
ITEC presently outsources the production of most of its manufactured products
through a vendor located in California. This vendor assembles products,
utilizing components purchased by the Company from other sources or from its own
internal inventory. The terms of supply contracts are negotiated separately in
each instance. The Company believes that its present vendor has sufficient
capacity to meet projected market demand for the Company's products or that
alternate production sources are available without undue disruption. ITEC has
not experienced any difficulty over the past several years in engaging
contractors or in purchasing components.
ITEC's contract vendors generally perform multi-step quality control testing
prior to shipping their products to the Company. ITEC, in turn, includes
appropriate software, performs additional tests on the products, then packages
and ships products into the distribution channels. In addition to buying such
items as printed circuit boards and other components from outside vendors, the
Company purchases and/or licenses software programs, including operating systems
and intellectual property
14
<PAGE>
modules (pre-written software code to execute a specifically defined operation).
ITEC purchases these products from vendors who have licenses to sell such
software to the Company from the originators of such software, and has, from
time to time, directly licensed system software that is either embedded or
otherwise incorporated in certain ITEC products.
While most components are available locally from multiple vendors, certain
components used in the Company's products are only available from single
sources. Although alternate suppliers are readily available for many of these
components, for some components the process of qualifying replacement suppliers,
replacing tooling or ordering and receiving replacement components could take
several months and cause substantial disruption to the Company's operations. Any
significant increase in component prices or decrease in component availability
could have a material adverse effect on the Company.
POSSIBILITY OF CHALLENGE TO COMPANY'S PRODUCTS OR INTELLECTUAL PROPERTY RIGHTS
The Company's software products, hardware designs, and circuit layouts are
copyrighted. However, copyright protection does not prevent other companies from
emulating the features and benefits provided by the Company's software, hardware
designs or the integration of the two. The Company protects its software source
code as trade secrets and makes its Company proprietary source code available to
OEM customers only under limited circumstances and specific security and
confidentiality constraints. In many product hardware designs, the Company
develops ASICs which encapsulate proprietary technology and are installed on the
circuit board. This can serve to significantly reduce the risk of duplication by
competitors, but in no way ensures the complete lack of potential for a
competitor to replicate a feature or the benefit in a similar product. The
Company currently holds no patents. Because computer and printer imaging
technology is such a rapidly changing business environment, the Company believes
the effectiveness of patents, trade secrets, and copyright protection are less
important in influencing long term success than the experience of the Company's
technical team, contractual relationships, and a continuous focus on technical
advancement.
The Company has obtained U.S. registration for several of its trade names or
trademarks, including: PCPI, NewGen, ColorBlind, LaserImage, ColorImage,
ImageScript, ImageFont, ImagePress, and ImageNet. These trade names are used to
distinguish the Company's products in the marketplace. Pending trademarks for
which registration is currently being sought include: dfilm, Xtinguisher,
ChroMATCH, ChromaxPro, ImagerPro, DuoSetter, ImagerPlus, and DesignXP.
From time to time, certain competitors have asserted patent rights relevant to
the Company's business. The Company expects that this will continue. The Company
carefully evaluates each assertion relating to its products. If the Company is
not successful in establishing that asserted rights have not been violated, the
Company could be prohibited from marketing the products that incorporate such
technology. The Company could also incur substantial costs to redesign its
products or to defend any legal action taken against the Company. If the
Company's products should be found to infringe upon the intellectual property
rights of others, the Company could be enjoined from further infringement and be
liable for any damages. The Company relies on a combination of trade secret,
copyright and trademark protection and non-disclosure agreements to protect its
proprietary rights. There can be no assurance, however, that the measures
adopted by the Company for the protection of its intellectual property will be
adequate to protect its interests, or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technologies.
INTERNATIONAL OPERATIONS
The Company conducts business globally. Accordingly, the Company's future
results could be adversely affected by a variety of uncontrollable and changing
factors including foreign currency exchange rates; regulatory, political or
economic conditions in a specific country or region; trade protection measures
and other regulatory requirements; government spending patterns; and natural
disasters, among other factors. In Fiscal 1998, the Company experienced contract
cancellations and the write-off of significant receivables related to continuing
economic deterioration in foreign countries, particularly in Asian countries.
Any or all of these factors could have a material adverse impact on the
Company's future international business in these or other countries and on the
Company's financial condition and results of operations.
DEPENDENCE ON EXPORT SALES
The Company intends to pursue international markets as key avenues for growth
and to increase the percentage of sales generated in international markets. In
Fiscal 1998, 1997, and 1996, sales outside the United States represented
15
<PAGE>
approximately 56%, 57% and 81% of the Company's net sales, respectively. In
1998, the Company established a European Headquarters to facilitate its European
sales operations. Located in Bracknell, Berkshire, near London, ITEC Europe
provides both sales and support functions to customers within the United
Kingdom, EC and Eastern European Block for ITEC's printer and imaging products.
In addition, at the close of Fiscal 1998, ITEC acquired the European-based
assets and operations of AMT. AMT was the European sales and distribution arm of
Singapore-based Lam Soon, manufacturer of dot matrix, laser and inkjet printers
and plotters for specialized applications.
The Company expects export sales to continue to represent a significant portion
of its sales. International sales and operations are subject to risks such as
the imposition of governmental controls, export license requirements,
restrictions on the export of critical technology, currency exchange
fluctuations, political instability, trade restrictions, changes in tariffs,
difficulties in staffing and managing international operations and collecting
accounts receivable. In addition, the laws of certain countries do not protect
the Company's products and intellectual property rights to the same extent as
the laws of the United States. As the Company continues to expand its
international business, there can be no assurance that these factors will not
have an adverse effect on the Company.
RELIANCE ON INDIRECT DISTRIBUTION
The Company's products are marketed and sold through an established distribution
channel of VARs, manufacturer's representatives, retail vendors, and systems
integrators. ITEC has a network of dealers and distributors in the United States
and Canada, in the EC and on the European Continent, as well as a growing number
of resellers in Africa, Asia, the Middle East, Latin America, and Australia.
ITEC supports its worldwide distribution network and end-user customers through
centralized manufacturing, distribution, and repair operations headquartered in
San Diego, which serve North and South America, the Pacific Rim and Asia. In
addition, ITEC Europe Ltd., located in a suburb of London, manages distribution
and service for customers in Europe, Africa and the Middle East. As of March 31,
1999, the Company directly employed 17 individuals involved in marketing and
sales activities. The sales and marketing operation is headquartered in ITEC's
Silicon Valley offices in Northern California.
The Company's sales are principally made through distributors which may carry
competing product lines. Such distributors could reduce or discontinue sales of
the Company's products which could have a material adverse effect on the
Company's financial condition and results of operations. There can be no
assurance that these independent distributors will devote the resources
necessary to provide effective sales and marketing support of the Company's
products. In addition, the Company is dependent upon the continued viability and
financial stability of these distributors, many of which are small organizations
with limited capital. These distributors, in turn, are substantially dependent
on general economic conditions and other unique factors affecting the Company's
markets. The Company believes that its future growth and success will continue
to depend in large part upon its distribution channels. There can be no
assurance that actual bad debts from the Company's distributors will not exceed
recorded allowances resulting in a material adverse effect on the Company's
financial condition and results of operations. To expand its distribution
channels, the Company has entered into select OEM arrangements that allow it to
address specific market segments or geographic areas. In order to prevent
inventory write-downs, to the extent that OEM customers do not purchase products
as anticipated, the Company may need to convert such products to make them
salable to other customers.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock historically has fluctuated
significantly. The Company believes that factors such as general stock market
trends, announcements of developments related to the Company's business,
fluctuations in the Company's operating results, general conditions in the
computer peripheral market and the markets served by the Company or in the
worldwide economy, a shortfall in revenue or earnings from securities analysts'
expectations, announcements of technological innovations or new products or
enhancements by the Company or its competitors, developments in patents or other
intellectual property rights and developments in the Company's relationships
with its customers and suppliers could cause a further significant fluctuation
in the price of the Company's Common Stock. In addition, in recent years the
stock market in general, and the market for shares of technology stocks in
particular, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies.
16
<PAGE>
There can be no assurance that the market price of the Company's Common Stock
will not experience significant fluctuations that are unrelated to the Company's
operating performance.
ABSENCE OF DIVIDENDS
No cash dividends have been paid on the Company's Common Stock to date and the
Company does not anticipate paying cash dividends in the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about February 2, 1999, American Industries, Inc., Ellison Carl Morgan and
entities related to Ellison Carl Morgan (the "Plaintiffs") filed a lawsuit
against the Company and certain officers and directors of the Company in the
circuit court of the State of Oregon for the county of Multnomah, alleging that
the Company and the other defendants violated certain Oregon Securities Laws in
connection with the Plaintiffs' investments in the Company, breached the
contracts with the Plaintiffs and committed fraud in connection with such
contracts. Plaintiffs seek to recover for all of their investments in the
Company made between November 14, 1997 and December 10, 1998, which Plaintiffs
estimate to be in excess of $5 million. The Company believes the claims are
without merit and intend to vigorously defend against them.
Furthermore, from time to time, the Company may be involved in litigation
relating to claims arising out of its operations in the normal course of
business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities.
As of January 13, 1999, the Company entered into a Securities Purchase Agreement
(the "Series D Agreement") with certain investors contemplating a potential
funding of up to $2.4 million (the "Series D Funding"). The Series D Funding
provided for the private placement by the Company of up to 1,200 units (the
"Units"), each Unit consisting of (i) one share of Series D Convertible
Preferred Stock (the "Series D Stock") and (ii) 2,000 warrants (the "Series D
Warrants" and, collectively, with the Series D Stock, the "Series D Securities")
exercisable for shares of Common Stock. Pursuant to the Series D Agreement, the
Company has issued and sold or shall sell and issue to the investors the Series
D Stock and the Series D Warrants in the following amounts: (i) $1,800,000 of
the stated value of the Series D Stock has been issued and sold; and (ii)
$600,000 of the stated value of the Series D Stock will be funded on a date
after the Company, among other things, (a) provides a written notice to the
investors requiring such investors to purchase up to $600,000 of the stated
value of the Series D Stock and (b) has an effective registration statement (the
"Registration Statement") filed with the Securities and Exchange Commission (the
"SEC"). The Series D Stock is convertible into shares of the Company's Common
Stock at the lesser of (A) $.50 and (B) an amount equal to 70 percent of the
closing bid price per share of Common Stock on the Nasdaq SmallCap Market (the
"Series D Closing Price") for the three trading days having the lowest closing
price during the 30 trading days prior to the date on which the investor gives
to the Company a notice of conversion of Series D Stock; except that all Series
D Stock converted prior to February 26, 1999 would be converted at $.50.
However, each of the investors has agreed that in no event shall it be permitted
to convert any shares of Series D Stock in excess of the number of such shares
upon the conversion of which, the sum of (i) the number of shares of Common
Stock owned by such investor (other than shares of Common Stock issuable upon
conversion of Series D Stock or upon exercise of Series D Warrants) plus (ii)
the number of shares of Common Stock issuable upon conversion of such shares of
Series D Preferred Stock or exercise of Series D Warrants, would be equal to or
exceed 9.999 percent of the number of shares of Common Stock then issued and
outstanding, including the shares that would be issuable upon conversion of the
Series D Stock or exercise of Series D Warrants held by such investor. Each
investor in Series D Stock shall have the right to vote, except as otherwise
required by Delaware law, on all matters on which holders of Common Stock have
the right to vote on with each such investor having the right to cast one vote
for each whole share of Common Stock into which each share of the Series D
Preferred Stock held by such investor is convertible immediately prior to the
record date for the determination of stockholders entitled to vote; provided,
however, that in no event shall a holder be entitled to vote more than 9.999
percent of the number of shares entitled to be voted on any matter. Upon the
completion of each tranche of Series D Funding, each of the investors will
receive the number of Series D Warrants that directly corresponds with the
dollar amount such investor invested in such tranche; the Series D Warrants are
immediately exercisable upon issuance at an exercise price of $.875 per share
and expire five years after the date of their issuance.
As of February 2, 1999, the Company entered into a Securities Purchase Agreement
(the "Series E Agreement") with certain investors (including one of whom is a
director of the Company) contemplating a potential funding and exchange of
18
<PAGE>
indebtedness of up to $4,655,000 and as of February 18, 1999, the Company has
entered into an Exchange Agreement (the "Exchange Agreement") with certain
investors contemplating a potential exchange of indebtedness of approximately
$1,150,000 (the Series E Agreement and the Exchange Agreement being together the
"Series E Funding"). The Series E Funding provides for the private placement by
the Company of up to 1,250 units (the "Units"), each Unit consisting of (i) one
share of Series E Convertible Preferred Stock (the "Series E Stock") and (ii)
5,000 warrants (the "Series E Warrants" and, collectively, with the Series E
Stock, the "Series E Securities") exercisable for shares of Common Stock.
Pursuant to the Series E Agreement, the Company issued and sold to the investors
the Series E Securities in the following amounts: $3,420,000 in cash and
$1,235,000 in exchange and/or cancellation of indebtedness, and pursuant to the
Exchange Agreement, the Company contemplates issuing to the investors Series E
Securities in exchange and/or cancellation of indebtedness of approximately
$1,150,000. All of the investors of the Series E Agreement funded at the time of
execution of the Series E Agreement except that two of the investors agreed to
purchase the Series E Securities in three tranches which have all been funded.
All of the investors of the Exchange Agreement would exchange their indebtedness
for Series E Securities within five days of the Company obtaining Shareholder
Approval. The Series E Stock is convertible into shares of the Company's Common
Stock at the lesser of (A) $.50 and (B) an amount equal to 70 percent of the
closing bid price per share of Common Stock on the Nasdaq SmallCap Market (the
"Series E Closing Price") for the three trading days having the lowest closing
price during the 30 trading days prior to the date on which the applicable
investor gives to the Company notice of conversion of Series E Stock; except
that all Series E Stock converted prior to February 26, 1999 would be converted
at $.50. Each investor in Series E Stock shall have the right to vote, except as
otherwise required by Delaware law, on all matters on which holders of Common
Stock have the right to vote on with each such investor having the right to cast
one vote for each whole share of Common Stock into which each share of the
Series E Preferred Stock held by such investor is convertible immediately prior
to the record date for the determination of stockholders entitled to vote. Upon
the Series E Funding, each of the investors will receive the number of Series E
Warrants that directly corresponds with the dollar amount such investor invested
in the Series E Funding, except that Tranche Investors will receive the number
of Series E Warrants that directly corresponds with the dollar amount such
investor invested in each completed tranche; the Series E Warrants are
immediately exercisable upon issuance at an exercise price of $.875 per share
and expire five years after their date of issuance.
The offers and sales to the Series D and E investors were made pursuant to a
claim of exemption under Section 4(2) of the Securities Act, as amended (the
"Securities Act"). The Company did not use any general advertisement or
solicitation in connection with the offer or sale of the Series D and E
Securities to the Series D and E investors. Each of the Series D and E investors
represented and warranted, among other things, that he or it was purchasing the
Series D and E Securities, as applicable, for investment purposes and not with a
view to distribution and that he or it was an "accredited investor" (as defined
in Regulation D promulgated by the SEC). Appropriate legends were affixed to the
certificates for each of the Series D and E Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(b) The Company has no material commitments for capital expenditures. The
Company's 5% convertible preferred stock (which ranks prior to the Company's
common stock), carries cumulative dividends, when and as declared by the
Company's Board of Directors (but such dividends may only be paid out of surplus
or net profits legally available for the payment thereof), at an annual rate of
$50.00 per share. The aggregate amount of such dividends in arrears at March 31,
1999, was approximately $0.6 million, which amount has not been declared by the
Company's Board of Directors.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Certificate of Amendment of Certificate of Incorporation, filed with
the Secretary of State of the State of Delaware on January 12, 1999
as incorporated by reference to Exhibit 3.1 to the Company's Report
on Form 10-Q for the period ended December 31, 1998.
3.2 Certificate Eliminating Reference to Certain Series of Shares of
Stock from the Certificate of Incorporation, filed with the Secretary
of State of the State of Delaware on January 12, 1999 as incorporated
by reference to Exhibit 3.2 to the Company's Report on Form 10-Q for
the period ended December 31, 1998.
4.1 Certificate of Designation, Powers, Preferences and Rights of the
Series of Preferred Stock to be Designated Series D Convertible
Preferred Stock, filed with the Secretary of State of the State of
Delaware on January 13, 1999 as incorporated by reference to Exhibit
3.3 to the Company's Report on Form 10-Q for the period ended
December 31, 1998.
4.2 Certificate of Designation, Powers, Preferences and Rights of the
Series of Preferred Stock to be Designated Series E Convertible
Preferred Stock, filed with the Secretary of State of the State of
Delaware on January 28, 1999 as incorporated by reference to Exhibit
3.4 to the Company's Report on Form 10-Q for the period ended
December 31, 1998.
10.1 Securities Purchase Agreement, dated as of January 13, 1999, by and
among the Company and the applicable parties named therein as
incorporated by reference to Exhibit 10.3 to the Company's Report on
Form 10-Q for the period ended December 31, 1998.
10.2 Registration Rights Agreement, dated as of January 13, 1999, by and
among the Company and the applicable parties named therein as
incorporated by reference to Exhibit 10.4 to the Company's Report on
Form 10-Q for the period ended December 31, 1998.
10.3 Form of Warrant to Purchase Shares of Common Stock of the Company at
$.875 per share, dated January 13, 1999, between the Company and each
of the applicable parties named in Exhibit 10.3 hereto as
incorporated by reference to Exhibit 10.5 to the Company's Report on
Form 10-Q for the period ended December 31, 1998.
10.4 Securities Purchase Agreement, dated as of February 2, 1999, by and
among the Company and the applicable parties named therein as
incorporated by reference to Exhibit 10.6 to the Company's Report on
Form 10-Q for the period ended December 31, 1998.
10.5 Registration Rights Agreement, dated as of February 2, 1999, by and
among the Company and the applicable parties named therein as
incorporated by reference to Exhibit 10.7 to the Company's Report on
Form 10-Q for the period ended December 31, 1998.
10.6 Form of Warrant to Purchase Shares of Common Stock of the Company at
$.875 per share, dated February 2, 1999, between the Company and each
of the applicable parties named in Exhibit 10.6 hereto as
incorporated by reference to Exhibit 10.8 to the Company's Report on
Form 10-Q for the period ended December 31, 1998.
10.7 Exchange Agreement, dated as of February 18, 1999, by and among the
Company and the applicable parties named therein as incorporated by
reference to Exhibit 10.9 to the Company's Report on Form 10-Q for
the period ended December 31, 1998.
20
<PAGE>
10.8 Partial Settlement Agreement, dated March 30, 1999 by and between
ITEC and the party listed on the signature page thereto as
incorporated by reference to Exhibit 4.14 to the Company's
Registration Statement on Form S-3 as filed with the Securities and
Exchange Commission on May 3, 1999.
10.9 Lease Letter Agreement, dated March 1, 1999, by and among ITEC,
Carmel Mountain #8 Associates, L.P. and Carmel Mountain Environmental
L.L.C. as incorporated by reference to Exhibit 4.11 to the Company's
Registration Statement on Form S-3 as filed with the Securities and
Exchange Commission on May 3, 1999.
10.10 Standard Industries/Commercial Single-Tenant Lease-Net, dated
February 22, 1999 and addendum thereto, dated March 5, 1999, by and
between Carmel Mountain #8 Associates, L.P. and ITEC.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K with the SEC on February
26, 1999 in connection with unaudited financial statements as of January 31,
1999.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 1999
IMAGING TECHNOLOGIES CORPORATION (Registrant)
By: /s/ BRIAN BONAR
- --------------------------------
Brian Bonar
Chief Executive Officer
(Principal Executive Officer)
By: /s/ CHRISTOPHER W. MCKEE
- --------------------------------
Christopher W. McKee
Vice President of Finance and Operations
(Principal Financial and Accounting Officer)
22
<PAGE>
EXHIBIT INDEX
3.1 Certificate of Amendment of Certificate of Incorporation, filed with
the Secretary of State of the State of Delaware on January 12, 1999
as incorporated by reference to Exhibit 3.1 to the Company's Report
on Form 10-Q for the period ended December 31, 1998.
3.2 Certificate Eliminating Reference to Certain Series of Shares of
Stock from the Certificate of Incorporation, filed with the Secretary
of State of the State of Delaware on January 12, 1999 as incorporated
by reference to Exhibit 3.2 to the Company's Report on Form 10-Q for
the period ended December 31, 1998.
4.1 Certificate of Designation, Powers, Preferences and Rights of the
Series of Preferred Stock to be Designated Series D Convertible
Preferred Stock, filed with the Secretary of State of the State of
Delaware on January 13, 1999 as incorporated by reference to Exhibit
3.3 to the Company's Report on Form 10-Q for the period ended
December 31, 1998.
4.2 Certificate of Designation, Powers, Preferences and Rights of the
Series of Preferred Stock to be Designated Series E Convertible
Preferred Stock, filed with the Secretary of State of the State of
Delaware on January 28, 1999 as incorporated by reference to Exhibit
3.4 to the Company's Report on Form 10-Q for the period ended
December 31, 1998.
10.1 Securities Purchase Agreement, dated as of January 13, 1999, by and
among the Company and the applicable parties named therein as
incorporated by reference to Exhibit 10.3 to the Company's Report on
Form 10-Q for the period ended December 31, 1998.
10.2 Registration Rights Agreement, dated as of January 13, 1999, by and
among the Company and the applicable parties named therein as
incorporated by reference to Exhibit 10.4 to the Company's Report on
Form 10-Q for the period ended December 31, 1998.
10.3 Form of Warrant to Purchase Shares of Common Stock of the Company at
$.875 per share, dated January 13, 1999, between the Company and each
of the applicable parties named in Exhibit 10.3 hereto as
incorporated by reference to Exhibit 10.5 to the Company's Report on
Form 10-Q for the period ended December 31, 1998.
10.4 Securities Purchase Agreement, dated as of February 2, 1999, by and
among the Company and the applicable parties named therein as
incorporated by reference to Exhibit 10.6 to the Company's Report on
Form 10-Q for the period ended December 31, 1998.
10.5 Registration Rights Agreement, dated as of February 2, 1999, by and
among the Company and the applicable parties named therein as
incorporated by reference to Exhibit 10.7 to the Company's Report on
Form 10-Q for the period ended December 31, 1998.
10.6 Form of Warrant to Purchase Shares of Common Stock of the Company at
$.875 per share, dated February 2, 1999, between the Company and each
of the applicable parties named in Exhibit 10.6 hereto as
incorporated by reference to Exhibit 10.8 to the Company's Report on
Form 10-Q for the period ended December 31, 1998.
10.7 Exchange Agreement, dated as of February 18, 1999, by and among the
Company and the applicable parties named therein as incorporated by
reference to Exhibit 10.9 to the Company's Report on Form 10-Q for
the period ended December 31, 1998.
10.8 Partial Settlement Agreement, dated March 30, 1999 by and between
ITEC and the party listed on the signature page thereto as
incorporated by reference to Exhibit 4.14 to the Company's
Registration Statement on Form S-3 as filed with the Securities and
Exchange Commission on May 3, 1999.
10.9 Lease Letter Agreement, dated March 1, 1999, by and among ITEC,
Carmel Mountain #8 Associates, L.P. and Carmel Mountain Environmental
L.L.C. as incorporated by reference to Exhibit 4.11 to the Company's
Registration Statement on Form S-3 as filed with the Securities and
Exchange Commission on May 3, 1999.
10.10 Standard Industries/Commercial Single-Tenant Lease-Net, dated
February 22, 1999 and addendum thereto, dated March 5, 1999, by and
between Carmel Mountain #8 Associates, L.P. and ITEC.
27.1 Financial Data Schedule.
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only
February 22, 1999, is made by and between Carmel Mountain #8 Associates, L.P., a
California Limited Partnership ("Lessor") and Imaging Technologies Corporation,
a Delaware Corporation ("Lessee"), (collectively the "Parties," or individually
a "Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 15175 Innovation Drive located in the County of San Diego, State of
California, and generally described as (describe briefly the nature of the
property and, if applicable, the "Project", if the property is located within a
Project) an approximately 56,693 sqaure foot industrial/R7D building located in
the Carmel Mountain Ranch ("Premises"). (See also Paragraph 2)
1.3 Term: Seven (7) years and 0 months ("Original Term") commencing
April 1, 1999 ("Commencement Date") and ending March 31, 2006 ("Expiration
Date"). (See also Paragraph 3)
1.4 Early Possession: March 1, 1999 ("Early Possession Date"). (See
also Paragraphs 3.2 and 3.3)
1.5 Base Rent: $40,500 per month ("Base Rent"), payable on the first
(1st) day of each month commencing April 1, 1999 (See also Paragraph 4) [X] If
this box is checked, there are provisions in this Lease for the Base Rent to be
adjusted.
1.6 Base Rent Paid Upon Execution: $40,500 as Base Rent for the period
April 1, 1999 through April 30, 1999.
1.7 Security Deposit: $40,500 ("Security Deposit"). (See also Paragraph
5)
1.8 Agreed Use: General office and related activities as permitted
under existing zoning. (See also Paragraph 6)
1.9 Insuring Party. Lessor is the "Insuring Party" unless otherwise
stated herein. (See also Paragraph 8).
-1-
<PAGE>
1.10 Real Estate Brokers: (See also Paragraph 15).
(a) Representation: The following real estate brokers
(collectively, the "Broker") and brokerage relationships exist in this
transaction (check applicable boxes):
[X] CB Richard Ellis, Inc. represents Lessor exclusively ("Lessor's Broker");
[X] J. Steve Tiritilli Real Estate Brokerage represents Lessee exclusively
("Lessee's Broker"); or
[ ] __________________________ represents both Lessor and Lessee ("Dual
Agency").
(b) Payment to Brokers: Upon execution and delivery of this
Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in their
separate written agreement.
1.11 Guarantor. The obligations of the Lessee under this Lease are to
be guaranteed by None ("Guarantor"). (See also Paragraph 37)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through 57 and Exhibits "A", "B" and "C", all of
which constitute a part of this Lease.
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this lease, or that may have
been used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.
2.2 Condition. Lessor shall deliver the premises to Lessee broom clean
and free of debris on the Commencement Date or the Early Possession Date,
whichever first occurs ("Start Date"), and, so long as the required service
contracts described in Paragraph 7.1(b) below are obtained by Lessee within
thirty (30) days following the Start Date, warrants that the existing
electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air
conditioning systems ("HVAC"), loading doors, if any, and all other such
elements in the Premises, other than those constructed by Lessee, shall be in
good operating condition on said date and that the structural elements of the
roof, bearing walls and foundation of any buildings on the Premises (the
"Building") shall be free of material defects. If a non-compliance with said
warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation
with respect to such matter, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same at
Lessor's expense.
2.3 Compliance. Lessor warrants that the improvements on the Premises
comply with all applicable laws, covenants or restrictions of record, building
codes, regulations and ordinances ("Applicable Requirements") in effect on the
Start Date. Said warranty does not apply to the use
-2-
<PAGE>
to which Lessee will put the Premises or to any Alternations or Utility
Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee.
NOTE: Lessee is responsible for determining whether or not the zoning is
appropriate for Lessee's intended use, and acknowledges that past uses of the
Premises may no longer be allowed. If the Premises do not comply with said
warranty, Lessor shall, except as otherwise provided, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within
following the Start Date, correction of that non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense. If the Applicable
Requirements are hereafter changed (as opposed to being in existence at the
Start Date, which is addressed in Paragraph 6.2(e) below) so as to require
during the term of this Lease the construction of an addition to or an
alteration of the Building, the remediation of any Hazardous Substance, or the
reinforcement or other physical modification of the Building ("Capital
Expenditure"), Lessor and Lessee shall allocate the cost of such work as
follows:
(a) Subject to paragraph 2.3(c) below, if such Capital
Expenditures are required as a result of the specific and unique use of the
Premises by Lessee as compared with uses by tenants in general, Lessee shall be
fully responsible for the cost thereof, provided, however that if such Capital
Expenditure is required during the last two (2) years of this Lease and the cost
thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this
Lease unless Lessor notifies Lessee, in writing, within ten (10) days after
receipt of Lessee's termination notice that Lessor has elected to pay the
difference between the actual cost thereof and the amount equal to six (6)
months' Base Rent. If Lessee elects termination, Lessee shall immediately cease
the use of the Premises which requires such Capital Expenditure and deliver to
Lessor written notice specifying a termination date at least ninety (90) days
thereafter. Such termination date shall, however, in no event be earlier than
the last day that Lessee could legally utilize the Premises without commencing
such Capital Expenditure.
(b) If such Capital Expenditure is not the result of the
specific and unique use of the Premises by Lessee (such as, governmentally
mandated seismic modifications), then Lessor and Lessee shall allocate the
obligation to pay for such costs pursuant to the provisions of Paragraph 7.1(c);
provided, however, that if such Capital Expenditure is required during the last
two years of this Lease or if Lessor reasonably determines that it is not
economically feasible to pay its share thereof, Lessor shall have the option to
terminate this Lease upon ninety (90) days prior written notice to Lessee unless
Lessee notifies Lessor, in writing, within ten (10) days after receipt of
Lessor's termination notice that Lessee will pay for such Capital Expenditure.
If Lessor does not elect to terminate, and fails to tender its share of any such
Capital Expenditure, Lessee may advance such funds and deduct same, with
Interest, from Rent until Lessor's share of such costs have been fully paid. If
Lessee is unable to finance Lessor's share, or if the balance of the Rent due
and payable for the remainder of this Lease is not sufficient to fully reimburse
Lessee on an offset basis, Lessee shall have the right to terminate this Lease
upon thirty (30) days written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning
Capital Expenditures are intended to apply only to non-voluntary, unexpected,
and new Applicable Requirements. If the
-3-
<PAGE>
Capital Expenditures are instead triggered by Lessee as a result of an actual or
proposed change in use, change in intensity of use, or modification to the
Premises then, and in that event, Lessee shall be fully responsible for the cost
thereof, and Lessee shall not have any right to terminate this Lease.
2.4 Acknowledgments. Lessee acknowledges that: (a) it has been advised
by Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements), and their suitability for Lessee's intended use, (b) Lessee has
made such investigation as it deems necessary with reference to such matters and
assumes all responsibility therefor as the same relate to its occupancy of the
Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Lease. In addition, Lessor acknowledges that: (a)
Broker has made no representations, promises or warranties concerning Lessee's
ability to honor the Lease or suitability to occupy the Premises, and (b) it is
Lessor's sole responsibility to investigate the financial capability and/or
suitability of all proposed tenants.
2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this Lease
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall, however, be in effect
during such period. Any such early possession shall not affect the Expiration
Date.
3.3 Delay In Possession. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not, however,
be obligated to pay Rent or perform its other obligations until it receives
possession of the Premises. If possession is not delivered within six (60) days
after the Commencement Date, Lessee may, at its option, by notice in writing
within (10) days after the end of such sixty (60) day period, cancel this Lease,
in which event the Parties shall be discharged from all obligations hereunder.
If such written notice is not received by Lessor within said ten (10) day
period, Lessee's right to cancel shall terminate. Except as otherwise provided,
if possession is not tendered to Lessee by the Start Date and Lessee does not
terminate this Lease, as aforesaid, any period of rent abatement that Lessee
would otherwise have enjoyed shall run from the date of delivery of possession
and continue for a period equal to what
-4-
<PAGE>
Lessee would otherwise have enjoyed under the terms hereof, but minus any days
of delay caused by the acts or omissions of Lessee. If possession of the
Premises is not delivered within four (4) months after the Commencement Date,
this Lease shall terminate unless other agreements are reached between Lessor
and Lessee, in writing.
3.4 Lessee Compliance. Lessor shall not be required to tender
possession of the Premises to Lessee until Lessee complies with its obligation
to provide evidence of insurance (Paragraph 8.5). Pending delivery of such
evidence, Lessee shall be required to perform all of its obligations under this
Lease from and after the Start Date, including the payment of Rent,
notwithstanding Lessor's election to withhold possession pending receipt of such
evidence of insurance. Further, if Lessee is required to perform any other
conditions prior to or concurrent with the Start Date, the Start Date shall
occur but Lessor may elect to withhold possession until such conditions are
satisfied.
4. Rent.
4.1 Rent Defined. All monetary obligations of Lessee to Lessor under
the terms of this Lease (except for the Security Deposit) are deemed to be rent
("Rent").
4.2 Payment. Lessee shall cause payment of Rent to be received by
Lessor in lawful money of the United States, without offset or deduction (except
as specifically permitted in this Lease), on or before the day on which it is
due. Rent for any period during the term hereof which if for less than one (1)
full calendar month shall be prorated based upon the actual number of days of
said month. Payment of Rent shall be made to Lessor at its address stated herein
or to such other persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount then due shall
not be a waiver of Lessor's rights to the balance of such Rent, regardless of
Lessor's endorsement of any check so stating.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the
Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of said
Security Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefor deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. If the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional moneys with Lessor so that the total amount of the Security
Deposit shall at all times bear the same proportion to the increased Base Rent
as the initial Security Deposit bore to the initial Base Rent. Should the Agreed
Use be amended to accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right to increase the
Security Deposit to the extent necessary, in Lessor's reasonable judgment, to
account for any increased wear and tear that the Premises may suffer as a result
thereof. If a change in control of Lessee occurs during this Lease and following
such change the financial condition of Lessee is, in Lessor's reasonable
judgment,
-5-
<PAGE>
significantly reduced, Lessee shall deposit such additional monies with Lessor
as shall be sufficient to cause the Security Deposit to be at a commercially
reasonable level based on said change in financial condition. Lessor shall not
be required to keep the Security Deposit separate from its general accounts.
Within fourteen (14) days after the expiration or termination of this Lease, if
Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise
within thirty (30) days after the premises have been vacated pursuant to
Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit
not used or applied by Lessor. No part of the Security Deposit shall be
considered to be held in trust, to bear interest or to be prepayment for any
monies to be paid by Lessee under this Lease.
6. Use.
6.1 Use. Lessee shall use and occupy the Premises only for the Agreed
Use, or any other legal use which is reasonably comparable thereto, and for no
other purpose. Lessee shall not use or permit the use of the Premises in a
manner that is unlawful, creates damage, waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to neighboring properties. Lessor
shall not unreasonably withhold or delay its consent to any written requires for
a modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which notice
shall include an explanation of Lessor's objections to the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous
Substance" as used in this Lease shall mean any product, substance, or waste
whose presence, use, manufacture, disposal, transportation, or release, either
by itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety or welfare,
the environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, and/or crude oil or any products, by-products or fractions
thereof. Lessee shall not engage in any activity in or on the Premises which
constitutes a Reportable Use of Hazardous Substances without the express prior
written consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements. "Reportable Use" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, so long
-6-
<PAGE>
as such use is in compliance with all Applicable Requirements, is not a
Reportable Use, and does not expose the Premises or neighboring property to any
meaningful risk of contamination or damage or expose Lessor to any liability
therefor. In addition, Lessor may condition its consent to any Reportable Use
upon receiving such additional assurances as Lessor reasonably deems necessary
to protect itself, the public, the Premises and/or the environment against
damage, contamination, injury and/or liability, including, but not limited to,
the installation (and removal on or before Lease expiration or termination) of
protective modifications (such as concrete encasements) and/or increasing the
Security Deposit.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises, other than as previously consented to by Lessor,
Lessee shall immediately give written notice of such fact to Lessor, and provide
Lessor with a copy of any report, notice, claim or other documentation which it
has concerning the presence of such Hazardous Substance.
(c) Lessee Remediation. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any Hazardous
Substance brought onto the Premises during the term of this Lease, by or for
Lessee, or any third party.
(d) Lessee Indemnification. Lessee shall indemnify, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless
from and against any and all loss of rents and/or damages, liabilities,
judgments, claims, expenses, penalties, and attorneys' and consultants' fees
arising out of or involving any Hazardous Substance brought onto the Premises by
or for Lessee, or any third part (provided, however, that Lessee shall have no
liability under this Lease with respect to underground migration of any
Hazardous substance under the Premises from adjacent properties). Lessee's
obligations shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by Lessee, and the cost of investigation, removal, remediation,
restoration and/or abatement, and shall survive the expiration or termination of
this Lease. No termination, cancellation or release agreement entered into by
Lessor ad Lessee shall release Lessee from its obligations under this Lease with
respect to Hazardous Substances, unless specifically so agreed by Lessor in
writing at the time of such agreement.
(e) Lessor Indemnification. Lessor and its successors and
assigns shall indemnify, defend, reimburse and hold Lessee, its employees and
lenders, harmless from and against any and all environmental damages, including
the cost of remediation, which existed as result of Hazardous Substances on the
Premises prior to the Start Date or which are caused by the gross negligence or
willful misconduct of Lessor, its agents or employees. Lessor's obligations, as
and when required by the Applicable Requirements, shall include, but not be
limited to, the cost of
-7-
<PAGE>
investigation, removal, remediation, restoration and/or abatement, and shall
survive the expiration or termination of this Lease.
(f) Investigations and Remediations. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Start Date, unless such
remediation measure is required as a result of Lessee's use (including
"Alterations", as defined in paragraph 7.3(a) below) of the Premises, in which
event Lessee shall be responsible for such payment. Lessee shall cooperate fully
in any such activities at the request of Lessor, including allowing Lessor and
Lessor's agents to have reasonable access to the Premises at reasonable times in
order to carry out Lessor's investigative and remedial responsibilities.
(g) Lessor Termination Option. If a Hazardous Substance
Condition occurs during the term of this Lease, unless Lessee is legally
responsible therefor (in which case Lessee shall make the investigation and
remediation thereof required by the Applicable Requirements and this Lease shall
continue in full force and effect, but subject to Lessor's rights under
Paragraph 6.2(d) and Paragraph 13). Lessor may, at Lessor's option, either (i)
investigate and remediate such Hazardous Substance Condition, if required, as
soon as reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to remediate
such condition exceeds twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater, give written notice to Lessee, within thirty (30) days
after receipt by Lessor of knowledge of the occurrence of such Hazardous
Substance Condition, of Lessor's desire to terminate this Lease as of the date
sixty (60) days following the date of such notice. In the event Lessor elects to
give a termination notice, Lessee may, within ten (10) days thereafter, give
written notice to Lessor of Lessee's commitment to pay the amount by which the
cost of the remediation of such Hazardous Substance Condition exceeds an amount
equal to twelve (12) times the monthly Base Rent or $100,000, whichever is
greater. Lessee shall provide Lessor with said funds or satisfactory assurance
thereof within thirty (30) days following such commitment. In such event, this
Lease shall continue in full force and effect, and Lessor shall proceed to make
such remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time provided, this Lease shall terminate as of the
date specified in Lessor's notice of termination.
6.3 Lessee's Compliance with Applicable Requirements. Except as
otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within ten (10) days after receipt of Lessor's written request, provided
Lessor with copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved)
-8-
<PAGE>
of any threatened or actual claim, notice, citation, warning, complaint or
report pertaining to or involving the failure of Lessee or the Premises to
comply with any Applicable Requirements.
6.4 Inspection; Compliance. Lessor and Lessor's "Lender" (as defined in
Paragraph 30 below) and consultants shall have the right the enter into Premises
at any time, in the case of an emergency, and otherwise at reasonable times, for
the purpose of inspecting the condition of the Premises and for verifying
compliance by Lessee with this Lease. The cost of any such inspections shall be
paid by Lessor, unless a violation of Applicable Requirements, or a
contamination is found to exist or be imminent, or the inspection or ordered by
a governmental authority. In such case, Lessee shall upon request reimburse
Lessor for the cost of such inspections, so long as such inspection is
reasonably related to the violation or contamination.
7. Maintenance; Repairs, Utility Installations; Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
(a) In General. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition and repair
(whether or not the portion of the Premises requiring repairs, or the means of
repairing the same, are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises), including, but
not limited to, all equipment or facilities, such as plumbing, heating,
ventilating, air-conditioning, electrical, lighting facilities, boilers,
pressure vessels, fire protection system, fixtures, walls (interior and
exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass,
skylights, landscaping, driveways, parking lots, fences, retaining walls, signs,
sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in
keeping the Premises in good order, condition and repair, shall exercise and
perform good maintenance practices, specifically including the procurement and
maintenance of the service contracts required by Paragraph 7.1(b) below.
Lessee's obligations shall include restorations, replacements or renewals when
necessary to keep the Premises and all improvements thereon or a part thereof in
good order, condition and state of repair. Lessee shall, during the term of this
Lease, keep the exterior appearance of the Building in a first-class condition
consistent with the exterior appearance of other similar facilities of
comparable age and size in the vicinity, including, when necessary, the exterior
repainting of the Building.
(b) Service Contracts. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation systems, (v) roof covering and
drains, (vi) driveways and parking lots, (vii) clarifiers, (viii) basic
-9-
<PAGE>
utility feed to the perimeter of the Building, and (ix) any other equipment, if
reasonably required by Lessor.
(c) Replacement. Subject to Lessee's indemnification of Lessor
as set forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if the Basic Elements described in Paragraph 7.1(b) cannot be
repaired other than at a cost which is in excess of 50% of the cost of replacing
such Basic Elements, then such Basic Elements shall be replaced by Lessor, and
the cost thereof shall be prorated between the Parties and Lessee shall only be
obligated to pay, each month during the remainder of the term of this Lease, on
the date on which Base Rent is due, an amount equal to the product of
multiplying the cost of such replacement by a fraction, the numerator of which
is one, and the denominator of which is the number of months of the useful life
of such replacement as such useful life is specified pursuant to Federal income
tax regulations or guidelines for depreciation thereof (including interest on
the unamortized balance as is then commercially reasonable in the judgment of
Lessor's accountants), with Lessee reserving the right to prepay its obligation
at any time.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation),
it is intended by the Parties hereto that Lessor have no obligation, in any
manner whatsoever, to repair and maintain the Premises, or the equipment
therein, all of which obligations are intended to be that of the Lessee. It is
the intention of the Parties that the terms of this Lease govern the respective
obligations of the Parties as to maintenance and repair of the Premises, and
they expressly waive the benefit of any statute now or hereafter in effect to
the extent it is inconsistent with the terms of this Lease.
7.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility
Installations" refers to all floor and window coverings, air lines, power
panels, electrical distribution, security and fire protection systems,
communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing
in or on the Premises. The term "Trade Fixtures" shall mean Lessee's machinery
and equipment that can be removed without doing material damage to the Premises.
The term "Alterations" shall mean any modification of the improvements, other
than Utility Installations or Trade Fixtures, whether by addition or deletion.
"Lessee Owned Alterations and/or Utility Installations" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or
Utility Installations to the Premises without Lessor's prior written consent.
Lessee may, however, make non-structural Utility Installations to the interior
of the Premises (excluding the roof) without such consent but upon notice to
Lessor, as long as they are not visible from the outside, do not involve
puncturing, relocating or removing the roof or any existing walls, and the
cumulative cost thereof during this Lease as extended does not exceed $50,000 in
the aggregate or $10,000 in any one year.
(b) Consent. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with
-10-
<PAGE>
detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring
all applicable governmental permits, (ii) furnishing Lessor with copies of both
the permits and the plans and specifications prior to commencement of the work,
and (iii) compliance with all conditions of said permits and other Applicable
Requirements in a prompt and expeditious manner. Any Alterations or Utility
Installations shall be performed in a workmanlike manner with good and
sufficient materials. Lessee shall promptly upon completion furnish Lessor with
as-built plans and specifications. For work which costs an amount equal to the
greater of one month's Base Rent, or $10,000, Lessor may condition its consent
upon Lessee providing a lien and completion bond in an amount equal to one and
one-half times the estimated cost of such Alteration or Utility Installation
and/or upon Lessee's posting an additional Security Deposit with Lessor.
(c) Indemnification. Lessee shall pay, when due, all claims
for labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility. If Lessee shall contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend and protect itself, Lessor and the Premises against the same and
shall pay and satisfy any such adverse judgment that may be rendered thereon
before the enforcement thereof. If Lessor shall require, Lessee shall furnish a
surety bond in an amount equal to one and one-half times the amount of such
contest lien, claim or demand, indemnifying Lessor against liability for the
same. If Lessor elects to participate in any such action, Lessee shall pay
Lessor's attorneys' fees and costs.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered a
part of the Premises. Lessor may, at any time, elect in writing to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
termination of this Lease, become the property of Lessor and be surrendered by
Lessee with the Premises.
(b) Removal. By delivery to Lessee of written notice from
Lessor not earlier than ninety (90) and not later than thirty (30) days prior to
the end of the term of this Lease, Lessor may require that any or all Lessee
Owned Alterations or Utility Installations be removed by the expiration or
termination of this Lease. Lessor may require the removal at any time of all or
any part of any Lessee Owned Alterations or Utility Installations made without
the required consent.
(c) Surrender/Restoration. Lessee shall surrender the Premises
by the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and in
good operating order, condition and state of repair, ordinary wear and
-11-
<PAGE>
tear excepted. "Ordinary wear and tear" shall not include any damage or
deterioration that would have been prevented by good maintenance practice.
Lessee shall repair any damage occasioned by the installation, maintenance or
removal of Trade Fixtures, Lessee Owned Alterations and/or Utility
Installations, furnishings, and equipment as well as the removal of any storage
tank installed by or for Lessee, and the removal, replacement, or remediation of
any soil, material or groundwater contaminated by Lessee. Trade Fixtures shall
remain the property of Lessee and shall be removed by Lessee. The failure by
Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without
the express written consent of Lessor shall constitute a holdover under the
provisions of Paragraph 26 below.
8. Insurance; Indemnity.
8.1 Payment For Insurance. Lessee shall pay for all insurance required
under Paragraph 8 except to the extent of the cost attributable to liability
insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per
occurrence. Premiums for policy periods commencing prior to or extending beyond
the Lessee term shall be prorated to correspond to the Lease term. Payment shall
be made by Lessee to Lessor within ten (10) days following receipt of an
invoice.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damaged based
upon or arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be on an
occurrence basis providing single limit coverage in an amount not less than
$2,000,000 per occurrence with an "Additional Insured-Managers or Lessors of
Premises Endorsement" and contained the "Amendment of the Pollution Exclusion
Endorsement" for damage caused by heat, smoke or fumes from a hostile fire. The
Policy shall not contain any intra-insured exclusions as between insured persons
or organizations, but shall include coverage for liability assumed under this
Lease as an "insured contract" for the performance of Lessee's indemnity
obligations under this Lease. The limits of said insurance shall not, however,
limit the liability of Lessee nor relieve Lessee of any obligation hereunder.
All insurance carried by Lessee shall be primary to and not contributory with
any similar insurance carrier by Lessor, whose insurance shall be considered
excess insurance only.
(b) Carried by Lessor. Lessor shall maintain liability
insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of,
the insurance required to be maintained by Lessee.
Lessee shall not be named as an additional insured therein.
8.3 Property Insurance - Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain
and keep in force a policy or policies in the name of Lessor, with loss payable
to Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the
Premises. The amount of such insurance shall be
-12-
<PAGE>
equal to the full replacement cost of the Premises, as the same shall exist from
time to time, or the amount required by any Lenders, but in no event more than
the commercially reasonable and available insurable value thereof. If Lessor is
the Insuring Party, however, Lessee Owned Alterations and Utility Installations,
Trade Fixtures, and Lessee's personal property shall be insured by Lessee under
Paragraph 8.4 rather by Lessor. If the coverage is available and commercially
appropriate, such policy or policies shall insure against all risks of direct
physical loss or damage (except the perils of flood and/or earthquake unless
required by a Lender), including coverage for debris removal and the enforcement
of any Applicable Requirements requiring the upgrading, demolition,
reconstruction or replacement of any portion of the Premises as the result of a
covered loss. Said policy or policies shall also contain an agreed valuation
provisions in lieu of any coinsurance clause, waiver of subrogation, and
inflation guard protection causing an increase in the annual property insurance
coverage amount by a factor of not less than the adjusted U.S. Department of
Labor Consumer Price Index for All Urban Consumers for the city nearest to where
the Premises are located. If such insurance coverage has a deductible clause,
the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall
be liable for such deductible amount in the event of an Insured Loss.
(b) Rental Value. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor with loss payable to Lessor and
any Lender, insuring the loss of the full Rent for one (1) year. Said insurance
shall provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide for
one full year's loss of Rent from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any coinsurance clause,
and the amount of coverage shall be adjusted annually to reflect the projected
Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee
shall be liable for any deductible amount in the event of such loss.
(c) Adjacent Premises. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are adjacent to the
Premises, the Lessee shall pay for any increase in the premiums for the property
insurance of such building or buildings if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
8.4 Lessee's Property/Business Interruption Insurance.
(a) Property Damage. Lessee shall obtain and maintain
insurance coverage on all of Lessee's personal property. Trade Fixtures, and
Lessee Owned Alterations and Utility Installations. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for the
replacement of personal property, Trade Fixtures and Lessee Owned Alterations
and Utility Installations. Lessee shall provide Lessor with written evidence
that such insurance is in force.
(b) Business Interruption. Lessee shall obtain and maintain
loss of income and extra expense insurance in amounts as will reimburse Lessee
for direct or indirect loss of earnings
-13-
<PAGE>
attributable to all perils commonly insured against by prudent lessees in the
business of Lessee or attributable to prevention of access to the Premises as a
result of such perils.
(c) No Representation of Adequate Coverage. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 Insurance Policies. Insurance required herein shall be by companies
duly licensed or admitted to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+. V, as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender. Lessee
shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after thirty (30) days prior
written notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. Such policies shall be for a term of at least
one year, or the length of the remaining term of this Lease, whichever is less.
If either Party shall fail to procure and maintain the insurance required to be
carried by it, the other Party may, but shall not be required to, procure and
maintain the same.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages against the other, for loss of or damage
to its property arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductibles applicable
hereto. The Parties agree to have their respective property damage insurance
carriers waive any right to subrogation that such companies may have against
Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.
8.7 Indemnity. Except for Lessor's gross negligence or willful
misconduct, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or
liabilities arising out of, involving, or in connection with, the use and/or
occupancy of the Premises by Lessee. If any action or proceeding is brought
against Lessor by reason of any of the foregoing matters. Lessee shall upon
notice defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be defended or indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees,
-14-
<PAGE>
contractors, invitees, customers, or any other person in or about the Premises,
whether such damage or injury is caused by or results from fire, steam,
electricity, gas, water or rain, or from the breakage, leakage, obstruction or
other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or
lighting fixtures, or from any other cause, whether the said injury or damage
results from conditions arising upon the Premises or upon other portions of the
Building of which the Premises are a part, or from other sources or places.
Lessor shall not be liable for any damages arising from any act or neglect of
any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction
to the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in six (6) months or
less from the date of the damage or destruction. Lessor shall notify Lessee in
writing within thirty (30) days from the date of the damage or destruction as to
whether or not the damage is Partial or total.
(b) "Premises Total Destruction" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which cannot reasonably be repaired in six (6)
months or less from the date of the damage or destruction. Lessor shall notify
Lessee in writing within thirty (30) days from the date of the damage or
destruction as to whether or not the damage is Partial or Total.
(c) "Insured Loss" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of Applicable Requirements, and
without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence
or discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease
-15-
<PAGE>
shall continue in full force and effect; provided, however, that Lessee shall,
at Lessor's election, make the repair of any damage or destruction the total
cost to repair of which is $10,000 or less, and, in such event, Lessor shall
make any applicable insurance proceeds available to Lessee on a reasonable basis
for that purpose. Not withstanding the foregoing, if the required insurance was
not in force or the insurance proceeds are not sufficient to effect such repair,
the Insuring Party shall promptly contribute the shortage in proceeds (except as
to the deductible which is Lessee's responsibility) as and when required to
complete said repairs. In the event, however, such shortage was due to the fact
that, by reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, the party responsible for making the repairs shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect. If such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to: (i) make
such restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or have this Lease terminate thirty (30) days thereafter, Lessee shall
not be entitled to reimbursement of any funds contributed by Lessee to repair
any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be
some insurance coverage, but the net proceeds of any such insurance shall be
made available for the repairs if made by either Party.
9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice. In the event Lessor elects to terminate this Lease, Lessee shall
have the right within ten (10) days after receipt of the termination notice to
give written notice to lessor of Lessee's commitment to pay for the repair of
such damage without reimbursement from Lessor. Lessee shall provide Lessor with
said funds or satisfactory assurance thereof within thirty (30) days after
making such commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall terminate sixty (60) days
following such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct or Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.
-16-
<PAGE>
9.5 Damage Near End of Term. If at any time during the last six (6)
months of this Lease there is damage for which the cost to repair exceeds one
(1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this
Lease effective sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty (30) days after
the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee
at that time has an exercisable option to extent this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten days after Lessee's receipt of Lessor's written notice
purposing to terminate this Lease, or (ii) the day prior to the date upon which
such option expires. If Lessee duly exercises such option during such period and
provides Lessor with funds (or adequate assurance thereof) to cover any shortage
in insurance proceeds, Lessor shall, at Lessor's commercially reasonable
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during such period, then this Lease shall
terminate on the date specified in the termination notice and Lessee's option
shall be extinguished.
9.6 Abatement of Rent: Lessee's Remedies.
(a) Abatement. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which Lessee
is not responsible under this Lease, the Rent payable by Lessee for the period
required for the repair, remediation or restoration of such damage shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired, but not to exceed the proceeds received from the Rental Value
insurance. All other obligations hereunder shall be performed by Lessee, and
Lessor shall have no liability for any such damage, destruction, remediation,
repair or restoration except as provided herein.
(b) Remedies. If Lessor shall be obligated to repair or
restore the premises and does not commence, in a substantial and meaningful way,
such repair or restoration within ninety (90) days after such obligation shall
accrue, Lessee may, at any time prior to the commencement of such repair or
restoration, give written notice to Lessor and to any Lenders of which Lessee
has actual notice, of Lessee's election to terminate this Lease on a date not
less than sixty (60) days following the giving of such notice. If Lessee gives
such notice and such repair or restoration is not commenced within thirty (30)
days thereafter, this Lease shall terminate as the date specified in said
notice. If the repair or restoration is commenced with said thirty (30) days,
this Lease shall continue in full force and effect. "Commence" shall mean either
the unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.7 Termination-Advance Payments. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payments made by Lessee
to Lessor, Lessor shall, in addition, return to
-17-
<PAGE>
Lessee so much of Lessee's Security Deposit as has not been, or is not then
required to be, used by Lessor.
9.8 Waive Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 Definition of "Real Property Taxes." As used herein, the term
"Real Property Taxes" shall include any form of assessment: real estate,
general, special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises. Lessor's right to other income therefrom, and/or Lessor's business
of leasing, by any authority having the direct or indirect power to tax and
where the funds are generated with reference to the Building address and where
the proceeds so generated are to be applied by the city, county or other local
taxing authority of a jurisdiction within which the Premises are located. The
term "Real Property Taxes" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring during
the term of this Lease, including but not limited to, a change in the ownership
of the Premises.
10.2
(a) Payment of Taxes. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to Paragraph
10.2(b), all such payments shall be made at least ten (10) days prior to any
delinquency date. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes shall cover any
period of time prior to or after the expiration of termination of the Lease.
Lessee's share of such taxes shall be prorated to cover only that portion of the
tax bill applicable to the period that this Lease is in effect, and Lessor shall
reimburse Lessee for any overpayment. If Lessee shall fail to pay any required
Real Property Taxes, Lessor shall have the right to pay the same, and Lessee
shall reimburse Lessor therefor upon demand.
(b) Advance Payment. In the event Lessee incurs a late charge
on any Rent payment, Lessor may, at Lessor's option, estimate the current Real
Property Taxes, and require that such taxes be paid in advance to Lessor by
Lessee, either: (i) in a lump sum amount equal to the installment due, at least
twenty (20) days prior the applicable delinquency date, or (ii) monthly in
advance with the payment of the Base Rent. If Lessor elects to require payment
monthly in advance, the monthly payment shall be an amount equal to the amount
of the estimated installment of taxes divided by the number of months remaining
before the month in which said installment becomes delinquent. When the actual
amount of applicable tax bill is known, the amount of such equal monthly advance
payments shall be adjusted as required to provide the funds needed to pay the
-18-
<PAGE>
applicable taxes. If the amount collected by Lessor is insufficient to pay such
Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such
additional sums as are necessary to pay such obligations. All moneys paid to
Lessor under this Paragraph may be intermingled with other moneys of Lessor and
shall not bear interest. In the event of a Breach by Lessee in the performance
of its obligations under this Lease, then any balance of funds paid to Lessor
under the provisions of this Paragraph may at the option of Lessor, be treated
as an additional Security Deposit.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information may
be reasonably available.
10.4 Personal Property Taxes. Lessee shall pay, prior to delinquency,
all taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessee's property within ten (10) days
after receipt of a written statement.
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operating of law
assign, transfer, mortgage or encumber (collectively, "assign or assignment") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent.*
(b) A change in the control of Lessee shall constitute an
assignment requiring consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
- ------------------
* which shall not be unreasonably withheld.
-19-
<PAGE>
(c) The involvement of Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale, acquisition,
financing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee by an amount
greater than twenty-five percent (25%) of such Net Worth as it was represented
at the time of the execution of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, whichever was or
is greater, shall be considered an assignment of this Lease to which Lessor may
withhold its consent. "Net Worth of Lessee" shall mean the net worth of Lessee
(excluding any guarantors) established under generally accepted accounting
principles.
(d) An assignment or subletting without consent shall, at
Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a noncurable
Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30)
days written notice, increase the monthly Base Rent to one hundred ten percent
(110%) of the Base Rent in effect. Further, in the event of such Breach and
rental adjustment, (i) the purchase price of any option to purchase the Premises
held by Lessee shall be subject to similar adjustment to one hundred ten percent
(110%) of the price previously in effect, and (ii) all fixed and non-fixed
rental adjustments scheduled during the remainder of the Lease term shall be
increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not: (i) be effective without the express written assumption by
such assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) after the primary
liability of Lessee for the payment or Rent or for the performance of any other
obligations to be performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
-20-
<PAGE>
(d) In the event of any Default or Breach by Lessee, Lessor
may proceed directly against Lessee, any Guarantors or anyone else responsible
for the performance of Lessee's obligations under this Lease, including any
assignee or sublessee, without first exhausting Lessor's remedies against any
other person or entity responsible therefore to Lessor, or any security held by
Lessor.
(e) Each request for consent to assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a fee of
$1,000 or ten percent (10%) of the current monthly Base Rent applicable to the
portion of the Premises which is the subject of the proposed assignment of
sublease, whichever is greater, as consideration for Lessor's considering and
processing said request. Lessee agrees to provide Lessor with such other or
additional information and/or documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed to
have assumed and agreed to conform and comply with each and every term,
covenant, condition and obligation herein to be observed or performed by Lessee
during the term of said assignment of sublease, other than such obligations as
are contrary to or inconsistent with provisions of an assignment or sublease to
which Lessor has specifically consented to in writing.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all Rent payable on any sublease, and Lessor may collect
such Rent and apply same toward Lessee's obligations under this Lease; provided,
however, that until a Breach shall occur in the performance of Lessee's
obligations, Lessee may collect said Rent. Lessor shall not, by reason of the
foregoing or any assignment of such sublease, nor by reason of the collection of
Rent, be deemed liable to the sublessee for any failure of Lessee to perform and
comply with any of Lessee's obligations to such sublessee. Lessee hereby
irrevocably authorizes and directs any such sublessee, upon receipt of a written
notice from Lessor stating that a Breach exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor all Rent due and to become due
under the sublease. Sublessee shall rely upon any such notice from Lessor and
shall pay Rents to Lessor without any obligation or right to inquire as to
whether such Breach exists, notwithstanding any claim from Lessee to the
contrary.
(b) In the event of a Breach of Lessee, Lessor may, at its
option, require sublessee to attorn to Lessor, in which event Lessor shall
undertake the obligations of the sublessor under such sublease from the time of
the exercise of said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents of security deposit
paid by such sublessee to such sublessor or for any prior Defaults or Breaches
of such sublessor.
-21-
<PAGE>
(c) Any matter requiring the consent of the sublessor under a
sublease shall require the consent of Lessor.*
(d) No sublessee shall further assign or sublet all or any
part of the Premises without Lessor's prior written consent.*
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. A "Default" is defined as a failure by the Lessee
to comply with or perform any of the terms, covenants, conditions or rules under
this Lease. A "Breach" is defined as the occurrence of one or more of the
following Defaults, an the failure of Lessee to cure such Default within any
applicable grace period:
(a) The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of security, or where
the coverage of the property insurance described in Paragraph 8.3 is jeopardized
as a result thereof, or without providing reasonable assurances to minimize
potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether to Lessor or
to a third party, when due, to provide reasonable evidence of insurance of
surety bond, or to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) business days following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service contracts,
(iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) any document requested under Paragraph 42 (easements),
or (viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice to Lessee.
- ---------------------
* not to be unreasonably withheld.
-22-
<PAGE>
(d) A Default by Lessee as to the terms, covenants, conditions
or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said (30) day period
and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the
making of any general arrangement or assignment for the benefit of creditors:
(ii) becoming a "debtor" as defined in 11 U.S.C. ss. 101 or any successor
statute thereof (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days: provided, however, in the event that any
provision of this subparagraph (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.
(f) The discovery that any financial statement of Lessee or of
any Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this
Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within sixty (60) days following
written notice of any such event, to provide written alternative assurance or
security, which, when coupled with the then existing resources of Lessee, equals
or exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any of its affirmative duties
or obligations, within ten (10) days after written notice (or in case of an
emergency, without notice), Lessee may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach:
-23-
<PAGE>
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration and alteration of the Premises, reasonable attorneys'
fees, and that portion of any leasing commission paid by Lessor in connection
with this Lease applicable to the unexpired term of this Lease. The worth at the
time of award of the amount referred to in provision (iii) of the immediately
preceding sentence shall be computed by discounting such amount at the discount
rate of the Federal Reserve Bank of the District within which the Premises are
located at the time of award plus one percent (1%). Efforts by Lessor to
mitigate damages caused by Lessee's Breach of this Lease shall not waive
Lessor's right to recover damages under Paragraph 12. If termination of this
Lease is obtained through the provisional remedy of unlawful detainer, Lessor
shall have the right to recover in such proceeding any unpaid Rent and damages
as are recoverable therein, or Lessor may reserve the right to recover all or
any part thereof in a separate suit. If a notice and grace period required under
Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to
perform or quit given to Lessee under the unlawful detainer statute shall also
constitute the notice required by Paragraph 13.1. In such case, the applicable
grace period required by Paragraph 13.1 and the unlawful detainer statute shall
run concurrently, and the failure of Lessee to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful detainer
and a Breach of this Lease entitling Lessor to the remedies provided for in this
Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or assign,
subject only to reasonable limitations. Acts of maintenance, efforts to relet,
and/or the appointment of a receiver to protect the Lessor's interests, shall
not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under
the laws or judicial decisions of the state wherein the Premises are located.
The expiration or termination of this Lease and/or the termination of Lessee's
right to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture. Any agreement for free or abated rent or
other charges, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering into this
Lease, all of which concessions are hereinafter referred
-24-
<PAGE>
to as "Inducement Provisions," shall be deemed conditioned upon Lessee's full
and faithful performance of all of the terms, covenants and conditions of this
Lease. Upon Breach of this Lease by Lessee, any such Inducement Provisions shall
automatically be deemed deleted from this Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement Provision
shall be immediately due and payable by Lessee to Lessor, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or
the cure of the Breach which initiated the operation of this paragraph shall not
be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within five (5) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to ten percent (10%) of each such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of such late
payment. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent the exercise of any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of Base Rent, then notwithstanding any
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 Interest. Any monetary payment due Lessor hereunder, other than
late charges, not received by Lessor, when due as to scheduled payments (such as
Base Rent) or within thirty (30) days following the date on which it was due for
non-scheduled payment, shall bear interest from the date when due, as to
scheduled payments, or the thirty-first (31st) day after it was due as to
non-scheduled payments. The interest ("Interest") charged shall be equal to the
prime rate reported in the Wall Street Journal as published closest prior to the
date when due plus four percent (4%), but shall not exceed the maximum rate
allowed by law. Interest is payable in addition to the potential late charge
provided for in Paragraph 13.4.
13.6 Breach by Lessor.
(a) Notice of Breach. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and any Lender whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are reasonably
required for its performance, then Lessor shall not be in breach if
-25-
<PAGE>
performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
(b) Performance by Lessee on Behalf of Lessor. In the event
that neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to the greater of one month's Base
Rent or the Security Deposit, and to pay an excess of such expense under
protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall
document the cost of said cure and supply said documentation to Lessor.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "Condemnation"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building portion of the
premises, or more than twenty-five percent (25%) of the land area portion of the
premises not occupied by any building, is taken by Condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in proportion
to the reduction in utility of the Premises caused by such Condemnation.
Condemnation awards and/or payments shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any compensation for Lessee's
relocation expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All alterations and Utility installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefor. In the event that this Lease is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.
15. Brokers' Fees.
15.1 Assumption of Obligations. Any buyer or transferee of Lessor's
interest in this Lease shall be deemed to have assumed Lessor's obligation
hereunder. Each Broker shall be a third party beneficiary of the provisions of
Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts
due as and for commissions pertaining to this Lease when due, then such amounts
shall accrue Interest.
15.2 Representations and Indemnities of Broker Relationships. Lessee
and Lessor each represent and warrant to the other that it has had no dealings
with any person, firm, broker or
-26-
<PAGE>
finder (other than the Brokers, if any) in connection with this Lease, and that
no one other than said named Brokers is entitled to any commission or finder's
fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify,
protect, defend and hold the other harmless from and against liability for
compensation or charges which may be claimed by any such unnamed broker, finder
or other similar party by reason of any dealings or actions of the indemnifying
Party, including any costs, expenses, attorney's fees reasonably incurred with
respect thereto.
16. Estoppel Certificates.
(a) Each party (as "Responding Party") shall within ten (10)
days after written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "Estoppel Certificate" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
(b) If the Responding Party shall fail to execute or deliver
the Estoppel Certificate within such ten day period, the Requesting Party may
execute an Estoppel Certificate stating that: (i) the Lease is in full force and
effect without modification except as may be represented by the Requesting
Party, (ii) there are no uncured defaults in the Requesting Party's performance,
and (iii) if Lessor is the Requesting Party, not more than one month's rent has
been paid in advance. Prospective purchasers and encumbrancers may rely upon the
Requesting Party's Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said Certificate.
(c) If Lessor desires to finance, refinance, or sell the
Premises, or any part thereof, Lessee and all Guarantors shall deliver to any
potential lender or purchaser designated by Lessor such financial statements as
may be reasonably required by such lender or purchaser, including but not
limited to Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. Definition of Lessor. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, and subject to the provisions of Paragraph
20 below, the original Lessor under this Lease, and all subsequent holders of
the Lessor's interest in this Lease shall remain liable and responsible with
regard to the potential duties and liabilities of Lessor pertaining to Hazardous
Substances as outlined in Paragraph 6 above.
-27-
<PAGE>
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Days. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. Limitation on Liability. Subject to the provisions of Paragraph 17 above,
the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor, the individual partners of Lessor or its or their
individual partners, directors, officers or shareholders, and Lessee shall look
to the Premises, and to no other assets of Lessor, for the satisfaction of any
liability of Lessor with respect to this Lease, and shall not seek recourse
against the individual partners of Lessor, or its or their individual partners,
directors, officers or shareholders, or any of their personal assets for such
satisfaction.
21. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. The liability (including court costs and Attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by courier)
or may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
-28-
<PAGE>
23.2 Date of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantee next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the Postal Service or courier. Notices transmitted by
facsimile transmission or similar means shall be deemed delivered upon telephone
confirmation of receipt, provided a copy is also delivered via delivery or mail.
If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed
received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by
Lessee may be accepted by Lessor on account of moneys or damages due Lessor,
notwithstanding any qualifying statements or conditions made by Lessee in
connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Basic Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions; Construction of Agreement. All provisions of this
Lease to be observed or performed by Lessee are both covenants and conditions.
In construing this Lease, all headings and titles are for the convenience of the
parties only and shall not be considered a part of this Lease. Whenever required
by the context, the singular shall include the plural and vice versa. This Lease
shall not be construed as if prepared by one of the parties, but rather
according to its fair meaning as a whole, as if both parties had prepared it.
-29-
<PAGE>
29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed or trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter place upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lessor's Lender") shall have no liability or obligation to
perform any of the obligations of Lessor under this Lease. Any Lender may elect
to have this Lease and/or any Option granted hereby superior to the lien of its
Security Device by giving written notice thereof to Lessee, whereupon this Lease
and such Options shall be deemed prior to such Security Device, notwithstanding
the relative dates of the documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission or any prior lessor or with respect to events occurring
prior to acquisition of ownership; (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereto and attorns to the record owner of the
Premises. Further, within sixty (60) days after the execution of this Lease,
Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which is secured
by the Premises. In the event that Lessor is unable to provide the
Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at
Lessee's option, directly contact Lessor's lender and attempt to negotiate for
the execution and delivery of a Non-Disturbance Agreement.
30.4 Self-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.
-30-
<PAGE>
31. Attorneys' Fees. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such
fees may be awarded in the same suit or recovered in a separate suit, whether or
not such action or proceeding is pursued to decision or judgment. The term,
"Prevailing Party" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be, whether
by compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fees award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be
entitled to attorneys' fees, costs and expenses incurred in the preparation and
service of notices of Default and consultations in connection therewith, whether
or not a legal action is subsequently commenced in connection with such Default
or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises as Lessor may deem necessary.
All such activities shall be without abatement of rent or liability to Lessee.
Lessor may at any time place on the Premises any ordinary "For Sale" signs and
Lessor may during the last six (6) months of the terms hereof place on the
Premises any ordinary "For Lease" signs. Lessee may at any time place on or
about the Premises any ordinary "For Sublease" sign.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, any auction
upon the Premises without Lessor's prior written consent. Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether to
permit an auction.
34. Signs. Except for ordinary "For Sublease" signs, Lessee shall not place any
sign upon the Premises without Lessor's prior written consent. All signs must
comply with all Applicable Requirements.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. Consents. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs
and expenses (including but not limited to architects', attorneys', engineers'
and other consultants' fees) incurred in the consideration of, or response to, a
-31-
<PAGE>
request by Lessee for any Lessor consent, including but not limited to consents
to an assignment, a subletting or the presence or use of a Hazardous Substance,
shall be paid by Lessee upon receipt of an invoice and supporting documentation
therefor. Lessor's consent to any act, assignment or subletting shall not
constitute an acknowledgment that no Default or Breach by Lessee of this Lease
exists, not shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent. The failure to specify herein any particular
condition to Lessor's consent shall not preclude the imposition by Lessor at the
time of consent of such further or other conditions as are then reasonable with
reference to the particular matter for which consent is being given. In the
event that either Party disagrees with any determination made by the other
hereunder and reasonably requests the reasons for such determination, the
determining party shall furnish its reasons in writing and in reasonable detail
within ten (10) business days following such request.
37. Guarantor.
37.1 Execution. The Guarantors, if any, shall each execute a guaranty
in the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.
37.2 Default. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses, upon request to provide: (a) evidence of the
execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, (b) current financial statements, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. Quite Possession. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.
39. Options.
39.1 Definition. "Option" shall mean: (a) the right to extend the term
of or renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.
39.2 Options Personal To Original Lessee. Each Option granted to Lessee
in this Lease is personal to the original Lessee, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the original
Lessee is in full possession of the Premises and, if requested by Lessor, with
Lessee certifying that Lessee has no intention of thereafter assigning or
subletting.
-32-
<PAGE>
39.3 Multiple Options. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later Option cannot be exercised unless
the prior Options have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option: (i)
during the period commencing with the giving of any notice of Default and
continuing until said Default is cured, (ii) during the period of time any Rent
is unpaid (without regard to whether notice thereof is given Lessee), (iii)
during the time Lessee is in Breach of this Lease, or (iv) in the event that
Lessee has been given three (3) or more notices of separate Default, whether or
not the Defaults are cured, during the twelve (12) month period immediately
preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or
effect, notwithstanding Lessee's due and timely exercise of the Option, if,
after such exercise and prior to the commencement of the extended term, (i)
Lessee fails to pay Rent for a period of thirty (30) days after such Rent
becomes due (without any necessity of Lessor to give notice thereof), (ii)
Lessor gives to Lessee three (3) or more notices of separate Default during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease.
40. Multiple Buildings. If the Premises are a party of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including the care and cleanliness of the
grounds and including the parking, loading and unloading of vehicles, and that
Lessee will pay its fair share of common expenses incurred in connection
therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises. Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
-33-
<PAGE>
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay.
44. Authority. If either Party hereto is a corporation, trust, limited liability
company, partnership, or similar entity, each individual executing this Lease on
behalf of such entity represents and warrants that he or she is duly authorized
to execute and deliver this Lease on its behalf. Each party shall, within thirty
(30) days after request, deliver to the other party satisfactory evidence of
such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Offer. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee's obligations
hereunder, Lessee agrees to make such reasonable non-monetary modifications to
this Lease as may be reasonably required by a Lender in connection with the
obtaining of normal financing or refinancing of the Premises.
48. Multiple Parties. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. Mediation and Arbitration of Disputes. An Addendum requiring the Mediation
and/or the Arbitration of all disputes between the Parties and/or Brokers
arising out of this Lease [ ] is [X] is not attached to this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES
-34-
<PAGE>
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES, SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO:
THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE
PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND
OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S
INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: |Executed at: San Diego, California
on: |on: March 5, 1999
By LESSOR: |By LESSEE:
|
Carmel Mountain #8 Associates, L.P., |Imaging Technologies Corporation,
A California limited partnership | a Delaware Corporation
By: Chancellor Development Corporation, |By: /s/ Brian Bonar
a California corporation, |Name Printed: Brian Bonar
General Partner |Title: Chief Executive Officer
By: /s/ Roger A.P. Joseph |
Roger A.P. Joseph |
Its: President |
Date: March 5, 1999 |By: /s/ Christopher W. McKee
|Named Printed: Christopher W. McKee
|Title: Vice President of Finance
| and Operations
Carmel Mountain Environmental LLC, |Address: 11031 Via Frontera
a California limited liability company | San Diego, CA 92127
|
|Telephone: (619) 613-1300
By: /s/ Bruce E. Tabb |Facsimile: (619) 613-1311
Bruce E. Tabb |Federal ID No. 33-0021693
Its: Managing Member |
Telephone: (619) 457-4501 |
Facsimile: (619) 457-4511 |
|
|
-35-
<PAGE>
NOTE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So.
Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777.
Fax No. (213) 687-8616
-36-
<PAGE>
Page 1 of 3
ADDENDUM
THIS IS AN ADDENDUM TO THAT CERTAIN INDUSTRIAL BUILDING LEASE DATED FEBRUARY 22,
1999, BY AND BETWEEN CARMEL MOUNTAIN #8 ASSOCIATES, L.P., A CALIFORNIA LIMITED
PARTNERSHIP, AS LESSOR, AND IMAGING TECHNOLOGIES CORPORATION, A DELAWARE
CORPORATION, AS LESSEE, FOR THE PROPERTY LOCATED AT 15175 INNOVATION DRIVE, CITY
OF SAN DIEGO, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA.
- --------------------------------------------------------------------------------
Page 1 of 3
50. Base Rental Adjustment.
(a) The Base Rent shall be $40,500.00 per month for the
period from April 1, 1999 through March, 2000.
(b) The Base Rent shall be $50,754.00 per month for the
period from April 1, 2000 through March, 2001.
(c) The Base Rent shall be $52,784.16 per month for the
period from April 1, 2001 through March, 2002.
(d) The Base Rent shall be $54,895.53 per month for the
period from April 1, 2002 through March, 2003.
(e) The Base Rent shall be $57,091.35 per month for the
period from April 1, 2003 through March, 2004.
(f) The Base Rent shall be $59,375.00 per month for the
period from April 1, 2004 through March, 2005.
(g) The Base Rent shall be $61,750.00 per month for the
period from April 1, 2005 through March, 2006.
51. Signage. Lessee shall have the exclusive sign rights on the building and
monument area where designated, as well as the right to install directional
signage at the main entrance subject to the Project's Covenants, Conditions, and
Restrictions, Lessor's approval (which shall not be unreasonably withheld), and
all other governmental approvals. Lessee shall pay for all costs relating to the
design, installation, permitting and removal of said signage.
<PAGE>
Page 2 of 3
52. Delivery of Service Contracts. Lessor shall provide Lessee a list of all
vendors and copies of their maintenance service contracts currently performing
service for the Premises within ten (10) days of mutual execution of the Lease.
53. Property Owners Association Fees. Lessee shall pay for the Property Owners
Association Fees for the Premises, which are estimated at approximately $445.00
per month.
54. St. Bernard Software Lease. Lessee is aware that a portion of the Premises
is currently under a Lease Agreement with St. Bernard Software, Inc. ("Tenant"),
who is obligated to pay rent on the subject Premises through and including April
30, 1999, unless terminated earlier by Landlord. As of May 1, 1998, Tenant has
been holding over pursuant to Section 26 of their Lease. The monthly rental rate
due and payable by Tenant, to Landlord is $2,058.94. By the terms of their
agreement with Tenant (see attached Exhibit "C," "Holdover at Leased Premises,
15175 Innovation Drive, San Diego"), Landlord has the right to serve Tenant with
a thirty (30) day notice to vacate the Premises at any time during the Lease
Term. This right is non-reciprocal. This Agreement shall be assigned to Lessee
beginning April 1, 1999 and Lessee shall be entitled to any rental income from
Tenant as a result of this Agreement from that date forward.
55. Palomar Pomerado Health Systems Parking Spaces. Lessee is aware that Lessor
has deeded to the adjacent property owner, Palomar Pomerado Health Systems,
approximately twenty-six (26) parking spaces designated as "NOT A PART" on the
attached Exhibit "A" and that these spaces are not a part of the Premises
described in Paragraph 1.2 of the Lease.
56. Management Fee. Lessee shall pay to Lessor, on the first day of each month
during the term hereof, $650.00 for Lessor's management of the Premises. Lessor
reserves the right in its sole discretion to adjust this fee upward, should
Lessor determine that this amount is not adequate to cover Lessor's costs to
manage the Premises.
57. Premises Condition. Subject to the provisions of Paragraph 2.2 of the lease,
Lessee shall accept the Premises in an "as is" condition with all systems in
good working order and repair as of the start date. Lessee shall have fifteen
(15) days from the start date to notify Lessor in writing of any non-compliance
with Lessor's warranty described in Paragraph 2.2 of the Lease.
LESSOR: LESSEE:
Carmel Mountain #8 Associates, L.P., Imaging Technologies Corporation,
a California limited partnership a Delaware corporation
By: Chancellor Development Corporation,
a California corporation,
General Partner
<PAGE>
Page 3 of 3
By: /s/ Roger A.P. Joseph By: /s/ Brian Bonar
--------------------- ---------------------------
Roger A.P. Joseph Brian Bonar
Its: President Title: Chief Executive Officer
Date: March 5, 1999 Date: March 5, 1999
Carmel Mountain Environmental LLC,
a California limited liability company
By: /s/ Bruce E. Tabb By: /s/ Christopher W. McKee
----------------- ---------------------------
Bruce E. Tabb Christopher W. McKee
Its: Managing Member Title: Vice President of Finance
Date: March 5, 1999 and Operations
Date: March 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000725394
<NAME> IMAGING TECHNOLOGIES CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 368,000
<SECURITIES> 0
<RECEIVABLES> 3,848,000
<ALLOWANCES> 295
<INVENTORY> 2,896,000
<CURRENT-ASSETS> 8,368,000
<PP&E> 1,217,000
<DEPRECIATION> 269
<TOTAL-ASSETS> 17,610,000
<CURRENT-LIABILITIES> 12,790,000
<BONDS> 0
0
2,176,000
<COMMON> 99,000
<OTHER-SE> 393,000
<TOTAL-LIABILITY-AND-EQUITY> 17,610,000
<SALES> 3,230,000
<TOTAL-REVENUES> 3,660,000
<CGS> 2,504,000
<TOTAL-COSTS> 5,587,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 368,000
<INCOME-PRETAX> (2,295,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,295,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,295,000)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.52)
</TABLE>
