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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: September 30, 1997
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OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-14306
INTERCELL CORPORATION
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(Exact name of registrant as specified in its charter)
Colorado 84-0928627
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(State of other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
370 Seventeenth Street, Suite 3290
Denver, Colorado 80202
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(Address and zip code of principal executive office)
Registrant's telephone number, including area code: (303) 592-1010
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of the close of trading on January 30, 1998, there were 32,612,075
common shares outstanding, 31,921,534 of which were held by non-affiliates. The
aggregate market value of the non-affiliated common shares, based on the average
closing bid and asked prices on January 30, 1998, was approximately $3,192,153.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
Intercell Corporation (the "Company") was incorporated under the laws of
Colorado on October 4, 1983, and was originally engaged in the marketing of
business and cellular telephone equipment. This business was discontinued and
all remaining assets of the Company were liquidated or otherwise abandoned
during 1991, and all obligations of the Company were paid or otherwise
satisfied.
From 1991 until the acquisition of Modern Industries, Inc., on July 7,
1995, (which subsequently changed its name to Energy Corporation ("Energy")),
the Company was generally inactive and reported no operating revenues prior to
the fiscal year ending December 31, 1994. During that time period, the Company
considered various new business and investment opportunities involving,
primarily, companies engaged in specialty lines of business in the wireless
communications and electronic technology industries.
On July 7, 1995, the Company purchased all of the assets and liabilities of
Energy. Energy's principal asset was its wholly owned subsidiary California
Tube Laboratory, Inc. ("CTL"). This transaction was accounted for as an
acquisition of the Company by Energy and, as such, the historical financial
statements contained herein reflect the financial statements of Energy. The
Company is currently negotiating the sale of CTL to an unaffiliated party on
terms and conditions to be determined. See "-Recent Acquisitions, Dispositions
and Transactions-Disposition of CTL." The results of operations of the Company
have been included only since the date of such acquisition. See "INDEX TO
FINANCIAL STATEMENTS."
As a result of the acquisition of Energy and additional acquisitions and
dispositions made during the 1996 and 1997 fiscal years (see "-Recent
Acquisitions, Dispositions and Transactions"), the Company is currently engaged
in three lines of business: (i) the testing and assembly of memory modules; (ii)
the manufacture and rebuilding of specialty electron power tubes; and (iii) the
proposed design, development, validation and qualification of the manufacturing
process specific to a proposed product that will use the Company's patented
particle interconnect technology (the "PI Technology") and a proprietary trade
secret electroplating process (the "Proprietary Electroplating Process").
The Company's operations are or will be conducted by and through its wholly
owned subsidiaries or majority owned subsidiaries, Sigma 7 Corporation ("Sigma
7"), CTL and Particle Interconnect Corporation ("PI Corp.").
The Company's officers and directors are responsible for the oversight of
the Company and its subsidiaries (i.e., Sigma 7, CTL and PI Corp.), and for
resolving any conflicts of interest
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that may arise between the Company and its subsidiaries or among the
subsidiaries. The officers and directors of each subsidiary are responsible for
the day to day operations of that subsidiary and, in turn, are accountable to
the Company, as the sole or majority controlling shareholder of each subsidiary.
Major decisions relating to the scope of each subsidiary's operations or a
subsidiary's capital needs are reviewed and approved by the Company's board of
directors in accordance with relevant law. However, notwithstanding the
foregoing, in view of the affiliations among the Company and its affiliates, no
assurance can be given that any such conflicts can be resolved to the
satisfaction of all parties involved.
The statements contained in this Form 10-K, if not historical, are forward-
looking statements and involve risks and uncertainties that could cause actual
results to differ materially from the results, financial or otherwise, or other
expectations described in such forward-looking statements. Therefore, forward-
looking statements should not be relied upon as a prediction of actual future
results or occurrences. In this regard, see "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-General" and "-Trends
and Uncertainties."
RECENT ACQUISITIONS,
DISPOSITIONS AND TRANSACTIONS
DISPOSITION OF CTL.
The Company is currently negotiating the sale of CTL to an unaffiliated
party on terms and conditions to be determined. Presently, such terms and
conditions provide for the purchase of all of the issued and outstanding stock
of CTL in exchange for a cash payment to the Company in the amount of
approximately $2,100,000 and the cancellation of certain indebtedness. The
carrying amount of the net assets of CTL, excluding intercompany accounts, was
approximately $2,500,000 as of September 30, 1997. Such sale is expected to be
consummated in the near future.
DISPOSITION OF INTERCELL WIRELESS CORP. AND CELLULAR MAGNETICS, INC.
Until recently, the Company had anticipated pursuing a new line of business
involving the development and manufacture of shielded cellular phone antennas.
The Company had obtained the rights to certain patent applications relating to
the Antenna Technology that the Company jointly developed with the
Telecommunications Research Center at Arizona State University ("ASU"). The
Antenna Technology was designed to reduce actual or perceived potential health
hazards that may be associated with exposure to electromagnetic signals by using
a "shielded" antenna.
Based on subsequent evaluations of the Antenna Technology by the Company
and the review of the Antenna Technology by an independent investment banking
company, the Company determined that it was in the Company's best interest to
divest itself of the proposed design, development and production of the Antenna
Systems conducted by its wholly owned
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subsidiary Intercell Wireless Corp. ("Intercell Wireless"), as well as the
manufacture of miniature and non-miniature coils, transformers and other
electronic assemblies conducted by its wholly owned subsidiary Cellular
Magnetics, Inc. ("Cellular Magnetics"). On July 18, 1997, the Company sold all
of its right, title and interest in the Antenna Technology and its wholly owned
subsidiaries (the "Antenna Transaction") to Intercell Technologies Corporation
("ITC"), a Colorado corporation, of which Terry W. Neild and Lou L. Ross own a
controlling interest. At the time the transaction was proposed, Mr. Neild was a
director and Executive Vice President of the Company and Mr. Ross was a
consultant to the Company. As consideration for the sale, the Company received
shares of ITC common stock, shares of the Company's common stock and certain
promissory notes. The total consideration received was recorded at the net book
value of assets sold, transferred or assigned due to uncertainties with respect
to realization of the consideration received.
ACQUISITION OF SIGMA 7
On June 6, 1997, the Company acquired 4,500,000 shares of Sigma 7's common
stock in exchange for the payment of $550,000 for the shares and for providing
approximately $1,985,000 in additional financing, consisting primarily of
secured loans and standby letters of credit. The funds were used for inventory
purchases, standby letters of credit to a major memory manufacturer, payment of
obligations, the settlement of litigation, working capital and the redemption of
preferred stock from two individuals holding such preferred stock. As a result
of the transaction, the Company acquired approximately 90% of the 5,000,000
issued and outstanding common shares of Sigma 7. In addition, the Company has
issued 1,000 shares of a new class of its Series D Preferred Stock (the
"Preferred Series"), to the holders of certain preferred shares of BMI, to
eliminate such preferred shares of BMI. For the purposes of this exchange, the
Series D Preferred Stock was valued at $2,500 per share. The transaction was
accounted for by the purchase. As a result, the cash purchase price for Sigma 7
was allocated to assets acquired based on their estimated fair values at the
date of the transaction.
ACQUISITION AND DISPOSITION OF M.C. DAVIS
Effective September 30, 1996, the Company, through its wholly owned
subsidiary Cellular Magnetics, an Arizona corporation, acquired AC Magnetics,
Inc., an Arizona corporation doing business as M.C. Davis Company ("M.C.
Davis"), for an aggregate purchase price of $1,800,000, comprised of a cash
payment equal to $800,000 and the issuance of 277,778 shares of the Company's
restricted Common Stock at a fair value of approximately $1,000,000. The
transaction was accounted for by the purchase method. M.C. Davis was acquired
by the Company to provide industrial engineering and production capabilities for
the Antenna Technology. M.C. Davis has production facilities located in Arizona
City, Arizona and Sonora, Mexico and has been engaged in the production of
miniature and subminiature electronic components since 1968. The Company sold
Cellular Magnetics to ITC effective July 18, 1997.
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PARTICLE INTERCONNECT TRANSACTION
On September 3, 1996, the Company completed the merger (the "PI Merger") of
Particle Interconnect Inc., a California corporation ("Particle California"),
with and into the Company's wholly owned Colorado subsidiary, Particle
Interconnect Corporation ("PI Corp."). The PI Merger resulted in PI Corp.
obtaining all of the properties, assets, liabilities and business operations of
Particle California, including, the entire right, title and interest in and to
the improvements of seven United States patents and six patent applications
involving the PI Technology and the Proprietary Electroplating Process. In
exchange for the PI Technology and the Proprietary Electroplating Process, the
Company issued 1,400,000 shares of Common Stock to the shareholders of Particle
California in a transaction not involving a public offering. The PI Merger was
accounted for as an immaterial pooling-of-interest.
In connection with the realization of a change in business strategy and
objective which occurred in September 1997, PI Corp. determined that certain
leasehold improvements, manufacturing equipment, raw materials and office
furniture and equipment were no longer necessary to achieve its objectives and,
accordingly, such leasehold improvements, manufacturing equipment, raw materials
and office furniture and equipment were sold between September 19, 1997 and
October 3, 1997 to non-affiliated parties for approximately $50,000 which
resulted in a loss of approximately $370,000.
Effective October 14, 1997, the Company entered into an agreement with Dr.
Herbert J. Neuhaus, Managing Director of PI Corp., and Mr. Ronald A. Morley, an
employee of the Company, to form a new entity to increase the likelihood of
obtaining additional funding for the development of the PI Technology and to
increase the probability of engaging an industry partner, with sufficient
personnel and financial resources to successfully commercialize the PI
Technology. PI Corp. will transfer all of its intellectual property, which has
a book value of zero, to the new entity for the Company's 72.5% interest and
ownership in the new entity. The remaining 27.5% will be owned by Dr. Herbert
J. Neuhaus and Ronald A. Morley who will become executive officers and directors
of the new entity. The Company deemed it an important part of its new policy of
making each subsidiary a self-financed operation to provide such ownership to
Dr. Herbert J. Neuhaus and Ronald A. Morley to provide them an incentive to
devote their time, expertise and industry contacts to obtain an industry partner
and financing for the commercialization of the PI Technology and PI Corp.'s
proprietary electroplating technology. The Company has not calculated the
amount of compensation expense related to this transaction as the fair value of
the net assets being transferred to the new entity has not been determined.
KENNETH S. BAHL SETTLEMENT
The company recently reached a resolution to the purported assignment of a
one-half interest in certain patents underlying the PI Technology from Mr.
Difrancesco to Mr. Kenneth S. Bahl in February 1991. Mr. Bahl received $172,500
and 250,000 shares of Common Stock. The Company now owns the full and
unconditional rights to the PI Technology.
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RIGHT TO DUAL RESONANCE CELLULAR PHONE ANTENNA
On November 15, 1995, the Company entered into an agreement with Arizona
State University ("ASU") in connection with the development of a new form of
cellular phone antenna with certain features designed to reduce potential health
hazards that may be associated with electromagnetic signals and to increase
transmittal reception and range of cellular telephones. The Agreement required
the Company to pay to ASU a total amount of approximately $78,000. On June 5,
1996, Dr. El-Badawy El-Sharawy ("Dr. Sharawy"), a tenured professor of ASU,
assigned to the Company, on a royalty-free basis, his entire right, title and
interest in, and to improvements on his U.S. Patent application entitled "Dual
Resonance Antenna with Portable Telephone Therewith" (the "Dual Resonance
Application"), and any and all patent applications thereon for nominal
consideration. The Company subsequently sold the rights to the Antenna
Technology to ITC effective July 18, 1997.
MISCELLANEOUS TRANSACTIONS
Arizcan Properties, Ltd. On March 13, 1996, Arizcan Properties, Ltd., a
wholly owned subsidiary of the Company ("Arizcan"), entered into an agreement
with a group, including certain minority shareholders of the Company, to acquire
a 94-acre development property located in Pinal County, Arizona for a total
purchase price of $1,424,362. This transaction was completed on June 18, 1996.
As consideration, the Company issued 400,000 shares of restricted Common Stock
at a fair value of $2.50 per share, and made cash payments of $57,000. In
addition, Arizcan assumed first and second mortgages on the property totaling
$367,000. The Company acquired this property for the purpose of constructing a
manufacturing facility for the products developed under the Antenna Technology.
Due the Company's acquisition of M.C. Davis in 1996, this property was no longer
required for manufacturing purposes and it is currently being held for sale.
Asia Skylink Corp. On December 29, 1994, the Company executed an Asset
Purchase Agreement with Asia Skylink Corp., to acquire certain microwave
transmission and associated support equipment, in exchange for 210,000 shares of
the Company's Series A Preferred Stock (the "Series A Preferred Stock"). On
August 30, 1996, in return for the cancellation of all of the Series A Preferred
Stock outstanding, the Company re-assigned the microwave transmission and
associated support equipment to the original seller and paid the holders of the
Series A Preferred Stock an aggregate of $40,000 as storage charges for the
period July 7, 1995 through August 30, 1996.
MEMORY MODULE PRODUCTS
OVERVIEW
The Company, through Sigma 7, is primarily engaged in the testing and
assembly of standard semi-conductor memory module products. Through its
development of proprietary testing technologies, the Company can purchase memory
integrated circuits (also referred to as
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"die" or "chips") at the wafer level, before they are tested and sorted and use
these memory chips to produce standard SIMMs (Single Inline Memory Modules), as
well as other products. The Company does not manufacture memory chips or, at
this time, package such memory chips; rather, the Company has entered into
various wafer program agreements with certain major semiconductor manufacturers,
wherein such manufacturers have agreed to sell to the Company, at a discount,
packaged, untested memory chips at the wafer level. The Company believes that
this gives it a cost advantage over competitors in the same marketplace. The
Company is also in the engineering phase for production of DIMMs (Dual Inline
Memory Modules) with respect to future products, and has entered the final
engineering phase for production of chip on board ("COB") memory modules.
The Company has submitted a patent application for new technology that
enables it to use faulty memory products, typically the cause of yield and
margin problems for conventional manufacturers, in producing fully functional
memory modules (the "Patch Technology"). If successful in production, this
Patch Technology is expected to provide significant competitive advantages to
the Company by driving down material costs and, when used to "patch" COB will,
it is believed, represent a significant segment of business for the Company,
since it allows COB to be readily salvaged without damaging the printed circuit
board. This new technology, coupled with the wafer program, could potentially
lower the Company's cost of goods sold compared to traditional memory module
manufacturers, resulting in larger gross profit margins upon the sale of its
products.
THE SEMICONDUCTOR MEMORY INDUSTRY
Overview
The demand for semiconductor memory devices in digital electronic systems
has substantially increased over the last several years as a result of the
increasing importance of memory in determining system performance. Memory
integrated circuits encompass several types of devices designed to perform
specific functions within computer and other electronic systems. The three most
significant categories of semiconductor memory are Dynamic Random Access Memory
("DRAM"), Static Random Access Memory ("SRAM") and nonvolatile memory, including
Flash memory. DRAM provides large capacity "main" memory; SRAM provides
specialized high-speed memory; and Flash and other nonvolatile memory provide
low-power memory which retains data after a system is turned off. In addition,
within each of these broad categories of memory products, semiconductor
manufacturers are offering an increasing variety of memory devices which are
designed for application-specific uses.
Memory Module Market
Memory modules are compact circuit board assemblies consisting of DRAM,
SRAM, Flash or other semiconductor memory devices and related circuitry. The
use of memory modules enables original equipment manufacturers ("OEMs") to offer
a relatively easy path for upgradeability of a personal computer or work
station, a feature of system design which is
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increasingly required by end users. To achieve this upgradeability and
flexibility, both personal computer ("PC") and communications OEMs frequently
design their systems to use memory modules as a "daughter card," reducing the
need to include memory devices on the motherboard.
The market for memory modules includes both standard and specialty modules.
The high-volume standard memory module market includes modules that can be
sourced from many module suppliers, and are designed to be incorporated into a
wide variety of equipment. These modules employ designs meeting widely used
industry specifications primarily utilizing DRAM memory and are available with a
variety of options to address the needs of multiple OEMs. Standard memory
modules are typically used in desktop personal computers and printers and are
sold both to OEMs and through computer resellers directly to end users.
Specialty memory modules include both custom and application specific
modules. These modules are usually based on either DRAM, SRAM or Flash
technologies and may include additional control circuitry. Specialty memory
modules are typically sourced (purchased) from a limited number of suppliers and
are generally used in mobile computers, work stations and telecommunications
devices such as routers and switches, and are primarily sold to OEMs.
As the variety of memory devices available to address specific applications
has expanded, the design and manufacture of memory modules has increasingly
become an area in which electronics OEMs employ outsourcing strategies. The
suppliers of memory modules include semiconductor manufacturers which maintain
captive memory module production capabilities and independent memory module
manufacturers which source memory devices from a wide variety of suppliers.
Because independent manufacturers, such as the Company, do not produce
their own semiconductor devices, they have the ability to mix and match devices
from a variety of semiconductor suppliers in a single memory module.
Independent manufacturers of memory modules currently address two primary market
segments: the OEM channel and the reseller channel. Suppliers to the OEM
channel typically offer custom and application-specific modules to the work
station and telecommunications industries, as well as standard memory modules
for use by computer and peripheral OEMs. Suppliers to the reseller channel
typically offer standard DRAM memory modules as an upgrade product sold through
computer distributors and retail channels.
Industry Technology
It is common practice in the industry to use an excess number of partially
good chips, packages or modules to assemble a complete memory unit that normally
would require a lesser number of parts. For example, a 1 megabyte ("M" or
"MByte") x9 SIMM can be made with three partially good 1Mx3 DRAM chips in lieu
of two flawless 1Mx4 chips and one flawless 1Mx1 chip. The identification,
isolation and combination of operating segments of partially defective chips,
packages or modules often requires complex procedures and bulky circuits due
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to the great number of possible combinations. The new higher density memory
modules have compounded the complexity of such combinations.
Due to economies of scale, the production of flawed memory chips by
semiconductor manufacturers is an integral part of their wafer manufacturing and
packaging process. Approximately 7-8% of all computer chips are defective at
the wafer level, with an additional 7-8% of memory chips being found defective
after packaging. Despite semiconductor manufacturers use of increasingly
sophisticated or refined techniques to improve the quality of their chips,
defects are still detected in chips before or after they are encapsulated into
packages or assembled on chip on board ("COB") modules (i.e., where the
packaging step is avoided and the bare die are attached directly to the PC
board).
The high cost of high-density chips makes the use of less-than-perfect
chips economically desirable. The Company is aware of three companies that
manufacture memory modules using partial memory chips. The Company believes the
Patch Technology as well as its extensive design and manufacturing expertise
provides it with a competitive advantage over other memory module manufacturers
that use partial memory chips.
THE COMPANY'S PATCH TECHNOLOGY
The Company's Patch Technology is predicated upon the fact that the
combination or re-routing of input/output ("I/O") lines between chips, packages
or modules is subject to mechanical limitations both in terms of circuit size
and the number of cross-over leads that can be crowded upon a printed circuit
("PC board"). These limitations require some trade-offs between the types,
sizes and distribution of chips and packages that can be used to assemble a
particular memory unit. The Patch Technology provides a logical approach to the
combination of chips and/or packages using decision-guiding programs as well as
versatile I/O line combining hardware.
Upon receiving a shipment of packaged memory chips, the Company retests the
chips, using industry standard testers, to identify non-flawed chips and
operating segments of flawed memory chips, and then sorts and classifies the
flawed chips as to type, number and concentration of working quadrants within
the chips. The Company attaches a computer generated bar code, disclosing all
relevant characteristics, to all tested memory chips and assembled memory
modules in order to ensure accurate tracking, inventory control and product
quality. For flawed chips, the Company uses its proprietary Patch Technology.
The Patch Technology uses a systematic, logical process to design and assemble
the memory modules by combining their working segments in the most effective
manner in a cohesive memory assembly in order to make the module fully
functional.
An integral part of this process is the use of proprietary PC boards that
provide the Company with a large number of alternative patching connections.
The PC boards are designed by the Company's engineers and manufactured by third
parties.
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Testing
In order to ensure the highest quality of memory modules, the Company has
developed an intensive burn-in and multi-level memory module testing program
which it believes is more extensive than common industry practice. After
initial sort and classification testing, the Company tests completed memory
modules on industry standard testers. The Company then conducts high
temperature and voltage burn-in to eliminate early field failures. The memory
modules are then tested on Pentium/TM//133 boards that run a pattern test
program using proprietary software developed by the Company for up to 16 hours.
This process is constantly updated as new mother boards and central processing
units become available. The Company also conducts more than a one hour local
area network based test under Windows 95/TM/ at 60 nano seconds, a Windows
95/TM/ screen test and a final test screen with the Company's Xincom testers.
THE COMPANY'S PRODUCTS
Current Products and Markets
Currently, the Company offers custom and application-specific memory
modules, as well as standard memory modules that comply with industry standards
established by the Joint Electronic Development Engineering Council. The custom
and application-specific memory modules and standard memory modules accounted
for approximately 7% and 13%, respectively of the Company's net revenues in
fiscal year 1997. The Company's PC boards comply with industry standards
established by the Personal Computer Memory Card International Association.
Although the Company currently uses the Patch Technology on a limited basis,
currently its primary focus is on assembling modules composed on 4X4 memory
chips using non-flawed chips. The bulk of these memory modules are 4X32 memory
modules, with certain limited variations to use old inventory.
The Company's memory modules include DRAM and Flash memory. The Company
offers a comprehensive line of DRAM memory modules, including a wide range of
SIMMs. The Company's DRAM modules are available in various configurations of up
to 72 pins and densities of up to 16 MBytes. Many of these products are offered
in both 5.0 volt and 3.3 volt versions, with fast page mode ("Fast Page") and
extended data output ("EDO") architectures. The majority of the Company's
products are standard SIMM memory modules. The Company also produces a limited
amount of standard VGA memory modules using partial memory chips.
The Company sells the completed memory modules under the Company name and
with full service support and industry standard product warranties (e.g., if a
memory module is determined to be defective within one year, it will be
replaced, upon return, at no cost). Until recently, the Company sold the
majority of its memory modules to independent memory resellers. The Company has
recently ceased this practice and now sells its memory modules to small OEMs and
memory distributors in the computer industry. The Company will continue its
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attempts to expand its distribution network to include additional wholesale and
retail outlets that sell computer equipment as well as small and medium sized
OEMs.
In order to obtain market share, the Company currently sells its memory
modules at a discount, usually $1.00 to $1.50 per module. While the Company
currently intends to continue this practice, it plans to reduce the discount to
$.50 per memory module in the future.
Future Products
The Company is currently engineering DIMMs for production. Tooling and
testing software design are underway. Current plans call for DIMM production to
integrate into the production process by February 1998. The Company intends to
enter the DIMM market because it believes such products offer higher margins and
less intense competition. In addition to the above products, the Company is
currently designing proprietary PC boards for use in assembling memory modules
using static DRAM and SRAM memory chips.
The Company believes the COB memory module market provides the greatest
opportunity for using the Patch Technology. The Company believes the Patch
Technology is the only viable method for using partial memory chips to
manufacture COB memory modules and to correct defective COB memory modules
already manufactured. As noted above, due to the nature of the semiconductor
manufacturing process, between 7-8% of all die manufactured are found to be
defective after initial wafer level testing. On 16 chip 2X32 or 8X32 COB memory
modules, up to 80% of such modules could have a single die fail.
The Patch Technology will enable the Company to repair flawed COB memory
modules without detaching the memory chips currently encapsulated on the module.
If the Patch Technology proves effective, the Company can offer substantial cost
savings to COB memory module OEMs, which savings the Company does not believe
its competitors can match without using the Patch Technology. The Company
believes it can obtain substantial cost savings using the Patch Technology based
on the Company's estimates of basic yields for packaging full wafers and testing
full wafers and bare die at the Company's facilities. Since the Company has not
entered this market to date, the validity and accuracy of the such estimates
cannot be reasonably determined.
To assemble COB memory modules using the Patch Technology, the Company will
be required to obtain a regular source of supply of whole wafers and bare,
unpackaged die from semiconductor manufacturers and obtain additional bare die
burn-in and testing equipment, which it can lease. The Company has entered into
discussions with certain major semiconductor manufacturers to obtain a regular
supply of whole wafers and bare die. The Company will also be required to
design, and currently is in the process of designing, proprietary PC boards for
use in assembling COB memory modules.
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COMPETITION
The memory module industry is intensely competitive, comprised of a large
number of competitive companies, several of which have achieved a substantial
share of their respective markets. Generally, all of the Company's competitors
in this market have substantially greater financial, marketing, technical,
distribution and other resources, greater name recognition, lower cost
structures and larger customer bases than the Company. The Company currently
indirectly competes with numerous, well established foreign and domestic
companies engaged in the fabrication of wafers, some of which maintain captive
memory module production, divisions, subsidiaries or capabilities, including
Fujitsu Ltd., Hitachi, Ltd., Hyundai Electronics, Co., Micron Technologies,
Inc., Motorola, Inc., NEC Corp., Samsung Semiconductors, Inc., LG Semicon,
Siemens, and Texas Instruments Incorporated. In the OEM memory module market,
the Company competes against semiconductor manufacturers that maintain captive
memory module production capabilities, including Integrated Device Technology,
Inc., Micron Electronics, Inc. (a subsidiary of Micron Technology Inc.) and
Multichip Technology, Inc. (a division of Cypress Semiconductor Corporation).
The Company also competes with independent memory module manufacturers,
including Celestica, Inc., PNY Electronics, Inc. and Simple Technology
Incorporated. In the computer systems reseller market for memory modules, the
Company competes with Kingston Technology, Inc., Viking Technology, Inc. and
Vision Tek, Inc. The Company faces competition from current and prospective
customers that evaluate the Company's capabilities against the merits of
manufacturing products internally. In addition, the Company competes and
expects to continue to compete with certain of its suppliers. These suppliers
may have the ability to manufacture competitive products at lower costs than the
Company as a result of their higher levels of integration. The Company also
faces and may face competition from new and emerging companies that have
recently entered or may in the future enter the markets in which the Company
serves.
The Company expects its competitors to continue to improve the performance
of their current products, to reduce their current product sales prices and to
introduce new products that may offer greater performance and improved pricing,
any of which could cause a decline in sales or loss of market acceptance of the
Company's products and thereby have a material adverse effect on the Company's
business, financial condition and results of operations.
There can be no assurance that enhancements to or future generations of
competitive products will not be developed that offer superior prices and
technical performance features compared to the Company's products. To be
competitive, the Company must continue to provide technologically advanced
products and manufacturing services, maintain quality levels, offer flexible
delivery schedules, deliver finished products on a reliable basis and compete
favorably on the basis of price. In addition, increased competitive pressure
has led in the past and may continue to lead to intensified price competition,
resulting in lower prices and gross margin, which could materially adversely
affect the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to compete successfully
in the future.
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THE COMPANY'S ELECTRON TUBE PRODUCTS
OVERVIEW OF COMPANY'S ELECTRON TUBE BUSINESS
The Company manufactures and rebuilds electron power tubes in numerous
forms and models which service the frequency range of 200 KHz to 18,000 MHz.
Currently, the Company provides rebuilt and new electron tubes to a wide variety
of customers who use microwave technology in various types of applications,
including AM and VHF radio, television, linear accelerators, radar, electron
guns and industrial microwave and heating use. This line of business will
continue to be conducted by and through the Company's wholly owned subsidiary,
CTL. The Company is currently negotiating the sale of CTL to an unaffiliated
party on terms and conditions to be determined. See "-Recent Acquisitions,
Dispositions and Transactions, Disposition of CTL." The Company believes that
it is one of the more significant domestic companies engaged in rebuilding
electron power tubes in the United States.
ELECTRON TUBE INDUSTRY BACKGROUND AND TECHNOLOGY
General
Electron power tubes or electron tubes are enclosed tubes, in which
electrons act as the principal conductors of current between at least two
electrodes. Electron tubes fall into two categories, oscillators and
amplifiers. Oscillators are typically magnetrons and power grid tubes (triodes
and tetrodes) and amplifiers are klystrons and traveling wave tubes. Electron
power tubes are commonly identified by reference to the frequency band of the
electromagnetic spectrum (generally the L-band through KU-band) within which
they operate.
Electron tubes are used in a wide variety of products, including induction
heating and AM radio transmission using the 200 KHz to the 500 MHz range; VHF
radio and television and linear accelerators using the 500 MHz to 600 MHz range;
industrial microwave cooking and heating which use the 400 MHz to 2,450 MHz
range; and radar and electron guns using the 3,000 MHz to 18,000 MHz range. See
"-The Company's Electron Tube Products."
Electron and vacuum tubes are generally recognized as the dominant
technology for the generation of high power radio frequency ("RF") and
microwaves. Consequently, these tubes are used by many companies for widely
varying applications. The manufacturing and rebuilding of these units is a
significant industry.
The Company has focused on creating its own "niche" in this large industry.
Discussed below is relevant industry information for that segment of the
microwave technology industry in which the Company is engaged. The Company is
not aware of any industry trade associations or government statistics that
describe the electron tube industry segments in which the Company currently
competes. The information in the tables below is management's estimate of the
world-wide market for the industry segments in which the Company competes based
on its knowledge
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of industry needs and the activities of other competitors in the industry.
Accordingly, the information below should be considered a rough approximation.
Magnetron Tubes
A "magnetron tube" is a vacuum tube in which the flow of electrons is
controlled by an exterior applied magnetic field to generate power at microwave
frequencies (400 MHz to 18,000 MHz). Magnetrons are generally categorized as
either continuous wave ("CW") or pulsed ("Pulsed") units. CW magnetrons are
used primarily in heating and drying applications. Pulsed magnetrons are used
primarily in measuring devices, such as radar and other applications.
New and rebuilt magnetron tubes are used in both commercial and military
radar units, high power industrial heating equipment and for medical and
industrial x-ray machines. The radar market consists of civilian weather radar
and military airborne and ground-based radar systems, among others. Industrial
heating magnetrons are used in food processing and drying systems at L-band
(between 500 MHz and 2,000 MHz) and S-band (approximately 2,000-4,000 MHz)
frequency levels. Microwave heating is used for food cooking, drying and
processing, wood glue drying, waste management, clothes drying, oil reclamation
and plasma generation for production of diamond films.
Magnetrons used in x-ray equipment typically operate in the S-band or X-
band frequency range, focusing a beam of electrons on a tungsten target, which
produces x-rays.
Annual Market (New and Rebuilt)
-------------------------------
Pulsed Magnetrons (Radar and Medical) $35.5 million
CW Magnetrons (Industrial use) 4.1 million
Klystron Tubes
A "klystron tube" is an electron tube in which bunching of electrons is
produced by electric fields, which are then used for the amplification of
microwave energy. Klystrons tubes (both external cavity and internal cavity)
are commonly used in UHF television transmission, medical and nonmedical
accelerators, and navigational equipment. Klystron tubes are rebuilt for
television broadcasting firms and are used to transmit data from the studio
transmitter to land-based receivers, such as television, and from satellite
uplinks to satellites for further transmission. Some types of clinical x-ray
machines use klystron tubes, which can also be rebuilt.
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<TABLE>
<CAPTION>
Published
Annual Annual Approximate Company
New Units Units New Price/*/
Produced Rebuilt Price Rebuilt
-------------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
Television Broadcasting 2,500 50 $40,000 $16,000
Transmission of Data 2,000 10 13,000 6,000
Medical Use 200 or more 6 40,000 15,000
Navigation 400 or more 25 12,000 4,000
_______________
/*/Subject to change depending on prevailing market and other financial conditions.
</TABLE>
Power Grid Tubes
Power grid tubes, also known as triode or tetrode tubes, are used in the
steel industry for radio frequency ("RF") heating and welding of all types of
steel products. They are also used in radio and VHF television transmission,
environmental test equipment and as switch tubes in high voltage pulsers. A
"triode tube" is an electron tube with three electrodes: an anode, a cathode and
a controlling grid; "tetrode tubes" are similar to triode tubes except that they
have four electrodes: an anode, cathode, a control grid and an additional grid.
Annual Rebuilt Market
---------------------
Power Grid $20 million
Other Industry Products
An "electron gun" is an electron-emitting cathode with its surrounding
assembly for directing, controlling and forcing a stream of electrons to a
target. A "linear accelerator" is a device in which charged particles are
accelerated in a straight line by successive impulses from a series of
alternating electric fields. One of the principal uses of linear accelerators
is in the medical field for the generation of high energy x-rays for the
therapeutic treatment of tumors.
THE COMPANY'S ELECTRON TUBE PRODUCTS
The Company, through CTL, manufactures and rebuilds a wide variety of
electron tubes in numerous iterations and models that service the frequency
range of 200 KHz to 18,000 MHz with power levels of up to three million watts.
The Company's product lines operate within the following frequency bands: HF and
UHF bands - 200 KHz to 1,000 MHz, L-band 500 MHz to 2,000 MHz; S-band 2,000 MHz
to 4,000 MHz; C-band 4,000 MHz to 8,000 MHz; X-band 7,000 MHz to 12,000 MHz and
Ku-band 12,000 MHz to 18,000 MHz. The Company primarily manufactures and
rebuilds electron power tubes categorized as follows: CW (continuous waive)
magnetrons, pulsed magnetrons, klystrons, power grid tubes (triodes and
tetrodes), linear accelerators guides and electron guns.
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The Company offers warranties for its rebuilt electron tubes that meet or
exceed the original manufacturer's warranty. The rebuilt electron tubes can be
purchased for approximately one half the cost of a new tube and are often
technologically superior to a new tube due to the Company's analysis of the
reasons for failure of the original manufacturers technology, which analysis
often results in the usage of components incorporating the latest technological
improvements, designs and performance specifications. The Company also
manufactures new electron power tubes for use in the industry.
The Company rebuilds and manufactures new electron tubes in the following
industry segments:
Magnetrons
General. The Company believes that it is one of the major suppliers of L-
band (operating in the 915 MHz frequency range), CW magnetrons in the world.
The Company services and sells magnetrons with power levels from 5 KW through 75
KW. It has developed its own 30 KW S-band, CW magnetron, which is used
primarily for industrial heating applications. The Company believes that this
product has the highest power rating at this frequency in the industry.
The Company is not considered a major supplier in the medical x-ray market,
since such market is essentially dominated by two major companies, Varian
Medical and Siemens Medical. The electron power tubes utilized by Varian
Medical and Siemens Medical operate in the S-band frequency range and are used
for diagnostic x-ray machines. Because the Company does not manufacture
electron power tubes operating in the S-band frequency range for the medical x-
ray market, it only offers repair services for these electron power tubes.
The Company, however, believes that it can effectively compete in the X-
band industrial and "medical systems" x-ray market (a relatively new, small and
growing market), where new magnetron tubes are being manufactured for use in
therapeutic x-ray systems, which systems are typically used in newer treatment
methods for certain cancer patients. To the knowledge of the Company, it
manufactures the only magnetron operating in the X-band frequency range, which
is used in x-ray machines for therapeutic medical applications. The Company
supplies magnetron tubes, operating in the X-band frequency range, for
therapeutic x-ray applications for companies such as Accuray, Schonberg Research
and Intraop.
Rebuilding Process. The rebuilding of magnetrons includes an incoming cold
test involving a microwave reflectometer, a hot test, disassembly and inspection
of the internal structure. Generally at a minimum, and if required, the cathode
heater assembly is replaced. Other damaged sub-assemblies can be replaced
depending on the cost effectiveness of such a repair. This product line
accounted for approximately 56% of the Company's net revenues in fiscal year
1997. Approximately 29% of these net revenues are generated from the
manufacturing and sale of new magnetrons, with the remaining 27% derived from
rebuilding magnetrons.
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Klystrons and Linear Accelerators
General. The Company's rebuilding program for klystrons has, until
recently, been limited by a lack of suitable testing equipment. The Company has
recently obtained two test sets for klystron data transmission tubes and has
purchased a surplus television transmitter to test television klystrons. The
Company has entered into an agreement with a manufacturer of x-ray machines to
test the Company's rebuilt klystrons for the medical market. This line of
products accounted for less than 4% of the Company's net revenues in fiscal year
1997.
Rebuilding Process. The rebuilding process includes opening the vacuum
envelopes either by machining in the case of ceramic insulator tubes or by
cutting the glass on those tubes with glass insulators. The grids are removed
and salvaged and the cathodes are replaced. Typically, cathodes are directly
heated tungsten or thoriated tungsten filaments. These are replaced and
processed, the cleaned grids replaced and the envelope resealed. Tubes are then
pumped and baked for 48-hours, at which time they are burned-in and tested. All
klystron tubes are cleaned and finished in bright nickel plate. Workmanship and
material warranties prorated over 3,000 hours are provided with every klystron
tube. In rebuilding linear accelerators, as with klystron tubes, the electron
gun is removed and rebuilt, then the rebuilt unit is pumped, boiled and
processed.
High Power and High Frequency Triodes and Tetrodes
The Company believes that it is one of the major rebuilders of high power
and high frequency triode and tetrode tubes in the world. These units are
available with power output ranging from 10KW up to 300KW. These units
comprised approximately 4% of the net revenues of the Company in fiscal year
1997.
Electron Guns
The Company rebuilds various sizes and powers of electron guns up to 120
KV, 20A gridded electron sources for research application. Rebuilt electron
guns are also used on rebuilt medical accelerators. The rebuilding of electron
guns typically requires the removal of the old cathode and heater structure and
the replacement with a new unit. The electron gun is rebuilt under vacuum
conditions.
COMPANY ELECTRON TUBE STRATEGY
The Company, as one of the largest rebuilders of electron tubes in the
industry, intends to continue to strengthen its reputation for quality, customer
service, warranty and the performance of its rebuilt electron tubes by
continuing to emphasize these business characteristics.
For magnetron tubes, the Company concentrates on markets where the unit
price is high and competition is the least. For power grid tubes (i.e., triode
and tetrode tubes), the Company
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concentrates on the high power, and more expensive units where new tubes are no
longer manufactured and rebuilding is necessary to avoid replacement of large,
expensive equipment. With the addition of two new test sets for klystron tubes,
the Company also intends to focus more heavily on this segment of the market.
ELECTRON TUBE SALES AND MARKETING
The Company recently hired a full-time, experienced marketing employee to
increase the Company's existing market and to create new markets for its
products and services. The efforts of such employee, to date, have resulted in
an increase in new orders from existing and new customers.
CUSTOMERS
The Company currently has approximately 150 customers in its electron tube
business and has shipped over 25,000 electron tubes to 500 customers. The
Company's client base is comprised of industrial companies, commercial service
firms and government agencies in the United States, Canada, Mexico, Europe, Asia
and Australia. The two largest customers of the Company, Hughes Aircraft, Inc.
and Ferrite Components System, accounted for approximately 14% and 15%,
respectively, of its annual revenues for fiscal year 1997. The loss of any one
such customer could have a materially adverse effect on the business of the
Company.
MANUFACTURING OF THE ELECTRON TUBES
The Company entered into an agreement with the City of Watsonville,
California for the lease of a 21,600 square foot manufacturing facility. The
Company completed its move to this new facility in November 1997. The Company
occupies approximately 12,000 square feet of the building and is subletting the
remainder at an amount equal to its cost per square foot until such time as it
requires the additional space. Upon completion of the Watsonville manufacturing
facility, the Company intends to apply for ISO 9000 certification, which will
enable it to more effectively compete in overseas markets.
Since the Company is engaged in manufacturing and rebuilding of electron
tubes designed by major manufacturers of such tubes, the Company does not
experience and does not contemplate encountering any substantial difficulties
relating to the sources or availability of materials with which to conduct its
principal business operations. The components to remanufacture and rebuild
these tubes are commonly available from numerous sources.
BACKLOG OF ELECTRON TUBES
As of September 30, 1997, the Company's production backlog represented by
customer orders in its electron tube business was approximately $1,900,000. For
the preceding year ended (or equivalent) September 30, 1996, the Company had
approximately $1,500,000 in firm backlog. The Company anticipates completing
all production backlog during its current fiscal
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<PAGE>
year. There is no guarantee, however, that the Company will recognize sales
from any or all of the backlog orders.
ELECTRON TUBE COMPETITION
The Company is engaged in a very narrow segment of the microwave technology
industry, the rebuilding of electron and microwave tubes, and has attempted to
avoid direct competition with the major manufacturers of microwave products.
The manufacturing of new microwave products is dominated by several very large
companies in the United States and internationally. These companies, however,
have not chosen to dedicate their resources to the rebuilding of such products
or the manufacture of the electron tube the Company manufactures.
The principal competitors of the Company are relatively few, but have with
the Company, significant segments of the narrow market area in which the Company
competes. Principal among these competitors are Litton Industries, Varian
Associates, English Electric Valve and Burle Industries, Inc. Although there
are a few small competitors, management believes that, based upon the Company's
latest internal market information, it has the largest market share in certain
product lines, such as the CW magnetrons.
Because of its perceived reputation for quality, customer service, warranty
and the performance of its new and rebuilt units, the Company believes that it
offers a competitive advantage equal to or superior to what is otherwise
provided by its competitors.
PRODUCT DEVELOPMENT OF ELECTRON TUBES
Research and development activities to be conducted for the Company with
respect to electron tubes will be conducted through institutions or other firms
qualified to conduct such research and development activities as independent
contractors to the Company. To the extent that the Company does engage in
business activities which will require research and development, it will seek to
decrease such costs by entering into joint ventures or other types of business
relationships wherein the costs of research and development activities will be
paid for by other parties, who in consideration of such payments will enjoy
partial ownership or other rights relating to any technologies or products which
might develop from such research and development.
THE COMPANY'S PARTICLE INTERCONNECT TECHNOLOGY
OVERVIEW OF PI TECHNOLOGY
The Company proposes to pursue a new line of business involving the
development and licensing of high performance, low-cost interconnect products.
The Company's PI Technology utilizes patents procured and owned by the Company
for the production of electronic interconnect products. The Company's
Proprietary Electroplating Process will be transferred to strategic partners
that will use the PI Technology to mount, package or attach electronic
18
<PAGE>
devices and other products utilizing the PI Technology. This new line of
business will be conducted through the Company's wholly owned subsidiary, PI
Corp.
PI TECHNOLOGY INDUSTRY BACKGROUND
Electronics Industry Trends
Over the past decade, consumers and OEMs have demanded electronic products
that provide a significant increase in performance accompanied by reduced size,
weight and cost. These factors have forced manufacturers to produce smaller,
lighter and higher performing components while reducing their costs in order to
remain competitive. New developments in printed circuit boards (including
flexible circuitry), integrated circuits ("ICs"), IC packaging techniques, and
new forms of interconnect assemblies for connecting the various electronic
components, have contributed to the ability of electronic system manufacturers
to accomplish these objectives.
As these products have decreased in size and increased in complexity,
conventional techniques of connecting their components together have begun to
become inadequate. The conventional methods of interconnecting electronic
components in a rematable fashion have limits to the miniaturization the
electronic components can tolerate, while at the same time remaining cost
effective. The interconnect industry that serves the PC, automotive,
communication and work station markets is aggressively pursuing technologies
that will allow it to move to the next level of performance and size.
Integrated Circuits
The Company believes that market trends in IC packaging will lead to
increased demand for emerging high density substrates. ICs have historically
been packaged by connecting the silicon die to a lead frame or by bonding the
silicon die to an interconnect substrate using fine wires. As ICs are becoming
increasingly powerful, they produce more heat and require a significantly
greater number of input/output ("I/O") electrical connections to attach the
silicon die, thus placing substantially greater demands on the IC packaging
materials. For instance, a typical IC six years ago required up to
approximately 80 I/O connections to the silicon die, whereas today typical ICs
require up to approximately 250 I/O connections. The number of high density IC
packages requiring more than the typical 250 I/O connections to the silicon die
increased from an estimated 240 million in 1990 to an estimated 777 million in
1995, based on published industry information. Market demands are currently
forcing certain IC toward 1,000 I/O connections. Further, IC packaging demands
arise when multiple silicon dies are integrated into one powerful package, known
as a "Multi Chip Module" or "MCM."
The international interconnect market in 1995 was estimated by an
independent research organization, to be $26.3 billion. The Company believes
that the typical integrated circuit package is a 40 billion unit per year
market.
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<PAGE>
The Company believes, based on interviews and contact with industry leaders
and experts, that the PI Technology has the potential and the capability to
solve this miniaturization problem and allow electronics manufacturers to move
to the next level of high-performance, low cost interconnect systems.
PI TECHNOLOGY-TECHNOLOGY AND PRODUCTS
General
Interconnect technology has not kept pace with micro-miniaturization in the
electronics industry. Thus, component packages and the connectors used to form
an electrical and/or mechanical interface between various components and
assemblies in electronic products are now the most expensive portion of such
products. Component packages, connectors, sockets, plugs and the like are also
the bulkiest and heaviest portion of such products.
Conventional interconnect technology complicates the electronic equipment
design and manufacturing processes by introducing special considerations into
such processes with regard to component placement, heat generation, power loss,
and signal propagation delay (the time it takes a signal to traverse a given
distance). These considerations have an adverse impact on potential gains in
performance being realized by new and emerging technologies.
Wiping Action Technology
Wiping Action Technology is still the prevailing means for interconnecting
electronic components. Wiping action interconnect technology (for example,
sockets, plugs, and needle pins) forms a temporary electrical interconnect and
thus readily allows the remating of various components and assemblies (for
example, when replacing or upgrading a memory module in a PC). A problem with
using such technology is that it is subject to the persistent formation of
oxides (a non-conductive material) along a contacting surface, which increases
contact resistance. In time, these oxides build up, hastening connection
failure and thus equipment failure.
Wiping action technology is only available in the form of various
connectors and sockets. These devices usually provide a contact surface formed
from a limited range of special metals, alloys, and other expensive materials,
suitable for maintaining a sliding connection. The devices themselves have
interfering electrical properties due to their size and orientation on a circuit
board, among others, and thus degrade signal propagation through the
interconnect (by introducing resistive, capacitive, and inductive components
into the signal path).
Wiping action technology provides high ohmic connections that produce
excessive and unwanted wear and heat, and therefore contribute to equipment
failure while wasting energy. The wiper mechanism, as in the case of a socket,
requires significant space on a circuit board. Thus, potential circuit
operating speeds are degraded due to propagation delays. In addition, sockets,
plugs, and similar interconnect devices are only available in a limited number
of
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<PAGE>
configurations and materials. Thus, the evolution of electronic technology is
constrained by the limitations wiper interconnects impose upon a designer.
Additionally, wiper interconnects are unreliable in punishing environments
such as that in which a laptop computer is used. Wiper connections subject to
shock, intense vibration, temperature extremes, and/or high levels of
contamination tend to induce disruption in the continuity of connections made at
a wiper interconnect. As wiper interconnects are mechanical devices, they
corrode and are subject to wear. Thus, they have a limited useful life.
Identification of Problem
The Company and others in the industry are aware of the physical
constraints imposed upon the development of new products using existing
technologies. The problem is simple to identify and define, but difficult to
solve. As IC packages increase in I/O count and complexity while remaining
constant or decreasing in physical size, a problem arises in accommodating this
complexity in a reliable, technically efficient fashion. Whether the package is
connected to the device via solder, adhesive or socket, the connection process
as I/O counts move ever higher becomes difficult to achieve.
Designers of rematable connections, however, find this issue especially
troubling. As pin counts rise, the amount of force the device to package
interface must support also increases. Using conventional contact technology
like a gold to gold wiping connection, contact force measures around 40 grams
per contact. When IC packages had I/O counts of 100, this force was easy to
accommodate, but as I/O counts move toward 1,000 and beyond, current contact
technologies are inadequate. For example, at 40 grams per contact, a 1,000 I/O
BGA socket must effectively accommodate 40 kg of force, equivalent to half the
weight of an average man.
Requiring a plastic substrate, barely 2 cm on a side to support half the
weight of a man is unreasonable, even with today's excellent plastic
technologies. Such force, concentrated in a small space contained by petroleum
based products that are almost always re-heated is very likely to fail because
of board warp, package warp, or outright physical failure.
This difficulty, when coupled with increasing intolerance from the market
to pay premium prices, presents today's socket manufacturer with an immense
task: create a socket that can:
. Accommodate very high I/O count devices.
. Receive high speed devices without seriously degrading their performance
(have as short a circuit path as possible).
. Be very low cost.
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The Company's Solution
The Company believes that its PI Technology provides a cost effective
solution to solving this industry-wide problem. As discussed below, the
Company believes the PI Technology can establish reliable, rematable connections
at only 10 grams of force. This means that only 10 kg versus 40 to 80 kg of
force is required to interconnect a 1,000 I/O IC socket with the underlying
substrate. The Company believes this reduction in force may enable
manufacturers to connect complex ICs to products through the next several
generations of electronics.
Additionally, the connection pathway provided by a connection using the PI
Technology is exceptionally short and has very low resistance. These features
allow the connection of very high speed ICs without seriously degrading their
performance as conventional techniques sometimes do. Moreover, the Company
believes that the PI Technology can be applied using its Proprietary
Electroplating Process at a very low cost.
There is no assurance, however, that the market place will accept the PI
Technology or that the Company can successfully complete a testing program
before it can market the PI Technology. Unforeseen technical problems arising
out of such testing could adversely affect the Company's ability to develop a
commercially acceptable version of the PI Technology.
THE COMPANY'S PI TECHNOLOGY
Overview
Background. The PI Technology was conceived in 1986, with the initial
patent thereon issued in 1987. A major aerospace firm took a special evaluation
contract in August 1988 to use the PI Technology for the development of the
Space Defense Initiative ("SDI") "Super Computer Program" and for use in other
portions of the SDI ("Star Wars") Programs. The results of the SDI Programs
demonstrated that the PI Technology could meet and surpass military IC packaging
and interconnect requirements, designated MIL-STD 883C and MIL-STD 38510, which
the Company believes are more stringent than the requirements in the commercial
marketplace.
The Company received the rights to seven patents and six patent
applications and the Proprietary Electroplating Process from Particle
California. See "BUSINESS-Recent Acquisitions, Dispositions and Transactions."
Five companies operate under licenses from the Company to use the PI Technology.
These licensees use the PI Technology to produce products that do not currently
compete with products the Company believes potential licensees of the PI
Technology will produce; however, nothing in the license agreements would
prohibit these companies from doing so in the future, provided the licensees
have a right to use the PI Technology in that field.
General. The PI Technology utilizes patents owned by the Company for
bonding and joining metal surfaces to enhance electrical connectivity. The
Company's core product is similar
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<PAGE>
to "conductive sandpaper" in appearance, and is formed by attaching conductive
diamond particles to a panel. The "conductive sandpaper" creates a socket or
connector for electronic devices, and may replace the use of soldering to create
such connections.
Operation of the Technology
PI Technology begins with metallized, doped diamond particles which have
been closely screened as to size. The particles are tightly classified in sizes
ranging from 10 microns to 125 microns, depending upon the end-product
application. Small particle size, 8 to 12 micron range, are for small pad
sizes, less than 5 mm in diameter, and have a small amount of penetration.
Medium particle size, in the 20 to 30 micron range, are for medium pads sizes, 5
mm to 100 mm in diameter, and have a medium amount of penetration. Large
particle size, 115 to 135 micron range, are for large pads sizes, greater than
100 mm in diameter, and have a large amount of penetration.
These electrically conductive diamond particles are attached onto contact
sites using standard masking and electroplating processes. The embedded
particles create a surface with many points that provide numerous parallel
electrical paths by penetrating though an oxide without requiring the wiping
action of conventional contacts. The Company believes that its non-wiping
action, oxide penetrating PI Technology are capable of penetrating surface
contamination and oils to create a gas-tight electrical contact.
The diamond particles concentrate insertion force transmitted by a contact
into a very small area or point. This gives the diamond particle the force per
square inch required to pierce oxides and other contaminants on most surfaces
without requiring large amounts of force on the contact. Reliable, gas-tight
connections can be made with PI Technology with as little as 10 grams of force
per contact. This low-level of force is sufficient to drive the particles into
the mating surface (for example a I/O pad on a silicon die) and provide low
contact resistance. Moreover, the diamond particles do very little damage to
the mating surface. This provides very long remate life with very little
degradation of the connection. Since there is no wiping action, contact
coatings stay substantially intact.
These particles can be applied to many different substrates; flexible,
rigid, metallic and non-metallic. This ability coupled with the very low
contact force gives the capability to make reliable connectors out of materials
that could collapse if exposed to the normally required contact forces.
COMPANY PI TECHNOLOGY STRATEGY
The PI Technology has application in many different industries where
electrical connections and interconnections are made. The Company initially has
selected the electronic interconnect industry as the primary industry in which
to license the PI Technology and Proprietary Electroplating Process. The PI
Technology has been in use in the connector industry for several years, mainly
in test and burn-in socket applications by licensees of the PI
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<PAGE>
Technology. There is a current demand in the connector industry for reliable
Ball Grid Array (BGA) and Land Grid Array (LGA) production sockets as well as
other forms of Z-axis interconnect such as direct chip attachment and MCMs. The
Company believes the PI Technology offers immediate advantages for these
products. As a result, the Company has developed the following short term and
long term strategies.
Initially, the Company planned to develop full production capacity to
produce panels using the PI Technology. Because of the large capital investment
required to develop full production capacity, however, the Company has decided
to license the PI Technology and Proprietary Electroplating Technology to
interconnect manufacturers and assist such manufacturers in the development,
testing and qualification of the PI Technology for that specific product line.
The Company's primary objective is to provide this service to numerous connector
manufacturers, in competing and non-competing applications.
The Company believes that entering into joint venture relations with a
leading connector manufacturer or a leading electronic technology OEM is the
only practicable method of bringing the PI Technology to market given the
Company's current capital position. The Company believes that such
relationships are necessary to gain worldwide access for the PI Technology
(i.e., the Company believes approximately 60% of its potential market for Z-axis
interconnects exists outside the United States). The Company contemplates that
a licensee or joint venture partner will provide access to its existing
distribution channels and be responsible for marketing and engineering costs for
the relevant Z-axis package. In many cases the Company will attempt to
establish long term strategic alliances with these industry leaders to continue
development and manufacture of new products that will incorporate the PI
Technology. While the Company continues to discuss such relationships and
alliances with industry participants, no agreements or understandings exist
currently, and there can be no assurances given that any such relationships or
alliances will be established or if established that they would be profitable to
the Company.
As these business relationships mature, the Company intends to begin
expansion into other industries in a similar fashion. The Company currently
contemplates that some of these industries will include the printed circuit
board ("PCB") industry with alternative interconnect attachment solutions,
automotive electronics and the utility power industry (splices and switches).
PI Technology Sales and Marketing
Phase I Corporate Image. The Company, as an emerging Company with respect
to the design, marketing and licensing of its PI Technology must become
recognized in the industry. The Company's focus on establishing a solid
corporate image is based on management's belief that OEMs and suppliers to OEMs
will not put their own production schedules and reputations at risk with
companies they feel are unstable regardless of how revolutionary the product or
service may be. This is exceptionally true in the connector industry. The
Company believes that it has had success at projecting an image acceptable to
the industry as evidenced by the willingness of industry leaders to enter
teaming and strategic alliance discussions with the
24
<PAGE>
Company. The Company will continue to use conventional methods such as
attending industry conventions, meeting with high-level executives in the
industry's leading companies and contacting key analysts in the industry to
enhance and stabilize the Company's corporate image. In the future the Company
expects to expand its efforts to include:
. Traveling to meet individually with key executives.
. Generating interest through the trade press and presentations at trade
shows.
. Exhibiting with display booths at certain industry trade shows.
. Publishing and publicizing test results as they become available.
The Company believes this approach will provide it with an image that will
enhance the formation of relationships with key industry leaders.
Phase II - Forming Strategic Alliances. The Company believes that
establishment of a sound business image and an appropriate level of exposure for
PI Technology in the market place is only the first step in successfully
penetrating the market through a strategic partner. To succeed with this
approach, the Company must select an appropriate licensee or partner, convince
this partner of the viability and advantages of the PI Technology at its
Proprietary Electroplating Process, negotiate a mutually beneficial agreement,
and perform on the agreement. The Company can provide no guarantee that it can
accomplish these tasks.
In each industry in which the Company decides to compete, the Company will
select market leaders that have key characteristics such as:
. Significant market share and strong distribution channels.
. Manufacturing competencies that compliment that of the Company.
. A corporate culture that allows them to quickly respond to a new
technology.
. Sufficient capital and sales strength.
The Company has entered into preliminary discussions with two industry
leaders that satisfy all of the above criteria, however, the Company can provide
no assurances that any agreements will be consummated or, if consummated, that
such agreements will prove profitable.
Phase III - Penetrate Other Industries and Application Areas. Combinations
of the Company's intended strategies in Phases I and II above will be used in
Phase III to allow access to all the markets where PI Technology is potentially
viable. The steps the Company has taken and will take in the electronics
industry in Phases I and II, will be repeated in other industries in which the
Company may compete.
25
<PAGE>
PI TECHNOLOGY COMPETITION
Competition in the electronic connector market is fierce. The principal
competitive factors are product quality, performance, price and service.
Multinational connector manufacturers (such as Berg Electronic, AMP, 3M, Molex
and Yamaichie), and major OEM electronic technology leaders (such as Intel,
Siemens and IBM), each with established manufacturing facilities and tremendous
economies, compete with each other daily on both price and quality. In the
event the Company enters into a license or joint venture relationship with a
major connector manufacturer, its products will directly compete with the
products of the other connector manufacturers. The Company's current approach
of licensing or partnering rather than competing with these large firms means
that it will not directly compete with such well established leaders. The
Company, however, will face competition to its PI Technology primarily through
the development of competing technologies and technologies that currently exist.
There currently exists approximately 28 different sources/technologies for
use in creating Z-axis interconnects. These technologies include: dendrite
crystals, gold dot technology, fuzz button technology, elastromerics, z-axis
conductive adhesives and others. These technologies are currently produced by
materials suppliers, flexible and rigid PCB manufacturers, as well as
electronics manufacturers who produce their own materials and interconnect
systems. Many of these competitors have substantially greater financial and
other resources than the Company. The Company believes that each technology
currently has unacceptable limitations with regard to electrical/mechanical
performance, manufacturability or cost as compared to the PI Technology.
The risk of organizations developing new and competitive technologies also
exists. The Company will continually monitor the technical environment to
identify these risks early and develop strategies to respond to them quickly.
PI TECHNOLOGY PRODUCT DEVELOPMENT
While the Company believes the area of quickest return and greatest initial
growth is in the Z-axis electronic interconnect market, PI Technology has
applications in many other areas. These areas include:
. Manufacture of complex PCB cards at low costs.
. Heat Dissipation Products (Heat Sinks).
. High Voltage Splicing Products.
. High Voltage Contractors and Switches.
26
<PAGE>
The Company will consider researching the potential of these markets and
develop appropriate manufacturing and penetration strategies for them, as
discussed in "-Company Strategy" above, whenever the electronic connector market
begins to show signs of maturation with declining profit margins, increased
competition and lack of opportunity.
GOVERNMENT REGULATION
The various business operations of the Company are subject to numerous
federal, state and local laws and regulations, including those relating to the
use and disposal of hazardous substances. Specifically, the operations of CTL,
PI Corp. and Sigma 7 involve the use and handling of environmentally hazardous
substances. The use of hazardous substances is subject to extensive and
frequently changing federal, state and local laws and substantial regulation
under these laws by governmental agencies, including the United States
Environmental Protection Agency, various state agencies and county and local
authorities acting in conjunction with federal and state authorities. Among
other things, these regulatory bodies impose restrictions to control air, soil
and water pollution. Furthermore, amendments to statutes and regulations and
the Company's expansion into new areas could require the Company to continually
modify or alter methods of operations at costs which could be substantial. The
Company believes that it is in substantial compliance with all material federal
and state laws and regulations governing its operations.
The Company believes that its Proprietary Electroplating Process will be
subject to less environmental regulation because the Company's Proprietary
Electroplating Process does not use a lead based interconnect technology and
generates less hazardous waste compared to current industry practices due to
improvements made in the Company's electroplating process.
Compliance with federal and state environmental laws and regulations did
not have a material effect on the Company's capital expenditures, earnings or
competitive position during fiscal year ended September 30, 1997. The Company
has become aware of certain ground water and soil contamination at the Santa
Cruz facility formerly occupied by CTL. The company has engaged a consultant to
determine the extent of the contamination and the cost to remediate. However,
until the buildings at the facility have been removed, further site
characterization and an estimate of the cost to remediate cannot be determined.
INTELLECTUAL PROPERTY
PATCH TECHNOLOGY AND PARTICLE INTERCONNECT TECHNOLOGY
The Company will rely on a combination of patents, patent applications,
trademarks, copyrights and trade secrets to establish and protect its
proprietary rights in the Patch Technology, PI Technology and the Proprietary
Electroplating Process. The electron tube technology utilizes no intellectual
property rights belonging to the Company. The Company currently owns seven U.S.
patents (which expire from February 14, 2006 to October 15, 2013)
27
<PAGE>
on the PI Technology and seven patent applications, six related to the PI
Technology and one relating to the Patch Technology.
Prior to the Company's acquisition of Particle California, Mr. Louis
DiFrancesco, the inventor of the PI Technology, or companies he controlled,
granted exclusive and nonexclusive licenses to use the patents and patent
applications on the PI Technology to the following Companies: Exatron Automatic
Test Equipment Inc., with an exclusive license to use the PI Technology in the
field of sockets for use in the automated handling and testing of integrated
circuits and a non-exclusive license to use the PI Technology in the field of
electrically conductive components; a non-exclusive license to Acsist Associates
Inc., now known as Johnson-Matthey Semiconductor Packagings, Inc., to use the PI
Technology in the field of laminate-based substrate products; an exclusive
license to Micro Module Systems, Inc., to use the PI Technology in the field of
MCM-D thin film substrates, except attached or associated products including
integrated circuits, sockets, lids, heat sinks, housings and printed circuit
boards; a non-exclusive license to Multiflex Inc., to use the PI Technology in
the field of laminate-based substrates and metal substrates; and a non-exclusive
license to Myers Consulting Inc., to use the PI Technology in the field of
laminate-based substrates, metal substrates, and wafer or semi-conductor
products. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-Trends and Uncertainties."
Subsequent to date of the Company's acquisition of Particle California, the
Company became aware of a purported assignment on February 14, 1991 of a one-
half interest, title and right to the then patent application, which is now U.S.
Patent No. 5,083,697 (a basic patent underlying the PI Technology) made by Mr.
Louis Difrancesco, the inventor of the PI Technology, to Mr. Kenneth Bahl. The
company recently reached a resolution to the purported assignment of a one-half
interest in certain patents underlying the PI Technology from Mr. Difrancesco to
Mr. Kenneth S. Bahl in February 1991. The Company now owns the full and
unconditional rights to the PI Technology. See "-Recent Acquisitions,
Dispositions and Transactions-Kenneth S. Bahl Settlement."
Consequently, PI retains the right, subject to any interest which Mr. Bahl
may retain, to exclude all other companies from using the patented technology
without a license. Concomitantly the Company may license such other companies
as it chooses, provided the licenses are consistent with the exclusive licenses
previously granted and other licensing restrictions that may appear in such
prior licenses.
As of September 30, 1997, the Company has filed one patent application
titled "Memory Module Assembly Using Partially Defective Chips," relating to the
Patch Technology. The Company can provide no assurance that a patent will be
issued or that, if issued, such patent will provide adequate protection to the
Company with respect to its products.
The Company also owns certain proprietary techniques and trade secrets
relating to a Proprietary Electroplating Process. The Company recognizes the
benefits associated with
28
<PAGE>
developing a portfolio of corporate intellectual property, particularly during
the new product development process, and is pursuing patentability searches and
activities on several technologies. There can be no assurance that patents will
be issued from any of the pending applications, or that any claims allowed from
existing or pending patents will be sufficiently broad enough to protect the
Company's technology. While the Company intends to vigorously protect its
intellectual property rights, there can be no assurance that any patents held by
the Company will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide competitive advantages to the Company.
Litigation may be necessary to enforce the Company's patents, patent
applications, trade secrets, licenses and other intellectual property rights, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business and results of operations regardless of the
final outcome of the litigation. Despite the Company's efforts to maintain and
safeguard its proprietary rights, there can be no assurances that the Company
will be successful in doing so or that the Company's competitors will not
independently develop or patent technologies that are substantially equivalent
or superior to the Company's technologies.
The semiconductor and interconnect industries are characterized by
uncertain and conflicting intellectual property claims. The Company has in the
past and may in the future become aware of the intellectual property rights of
others that it may be infringing, although it does not believe that it is
infringing any third party proprietary rights at this time. To the extent that
it deems necessary, the Company may license the right to use certain technology
patented by others in certain products that it manufactures. There can be no
assurance that the Company will not in the future be notified that it is
infringing other patent and/or intellectual property rights of third parties.
In the event of such infringement, there can be no assurance that a license to
the technology in question could be obtained on commercially reasonable terms,
if at all, that litigation will not occur or that the outcome of such litigation
will not be adverse to the Company. The failure to obtain necessary licenses or
other rights, the occurrence of litigation arising out of such claims or an
adverse outcome from such litigation could have a material adverse effect on the
Company's business. In any event, patent litigation is expensive, and the
Company's operating results could be materially adversely affected by any such
litigation, regardless of its outcome.
The Company also seeks to protect its trade secrets and proprietary
technology, in part, through confidentiality and non-competition agreements,
among other practices and procedures, with employees, consultants and other
parties. There can be no assurance that these agreements will not be breached,
that the Company will have adequate remedies for any breach, or that the
Company's trade secrets, such as the Proprietary Electroplating Process, will
not otherwise become known to or independently developed by others. In
addition, the laws of some foreign countries do not offer protection of the
Company's proprietary rights to the same extent as do the laws of the United
States.
29
<PAGE>
EMPLOYEES
As of September 30, 1997, the Company and its subsidiaries had
approximately 81 employees. None of the Company's employees is represented by a
labor union or is subject to a collective bargaining agreement. The Company
believes that its relations with its employees are satisfactory.
ITEM 2. PROPERTIES
PRINCIPAL EXECUTIVE OFFICES
The principal executive office of the Company is located at 370 Seventeenth
Street, Suite 3290, Denver, Colorado 80202. The monthly lease payments are
$1,834.18.
SIGMA 7
With the exception of its proprietary PC boards manufactured by third
parties, Sigma 7 currently assembles all of its products in a 33,938 square foot
facility located at 6610 Nancy Ridge Dr., San Diego, California. Sigma 7's
executive offices are also located at this facility. The Company estimates the
facility has a capacity to remove and attach from PC boards over 400,000
computer chips per month and the ability to test 196,550 chips per month. The
facility currently operates 24 hours per day, using three eight-hour shifts.
The Company's facility in San Diego is leased from an unaffiliated party,
which lease expires in June of 1999. The monthly lease payments are $17,647.76.
The Company is actively considering possible subleasing of excess space in order
to further reduce overhead cost. The Company believes that the current lease
terms are very favorable to the Company as the lease rate per square foot under
the Company's lease is significantly below the per square foot rental cost being
charged on similar facilities.
CTL
The Company's manufacturing facilities are located at 125 Aviation Way,
Watsonville Municipal Airport, City of Watsonville, California, and consists of
approximately 21,600 square feet. The Company currently leases this facility
pursuant to a lease agreement dated June 16, 1995 with the City of Watsonville,
California. Construction of this facility began in March 1996, and the Company
completed its move to this new facility in January of 1998. The Company
occupies approximately 12,000 square feet at the facility and is subletting the
remainder at an amount equal to its cost per square foot until such time as it
requires additional space. The lease is for a period of 15 years with an option
to renew for three successive five-year terms. The total lease cost is
approximately $15,000 per month, exclusive of any sublease revenues. The
Company is currently negotiating the sale of CTL to an unaffiliated party on
terms and conditions to be determined. See "-Recent Acquisitions, Dispositions
and Transactions -Disposition of CTL."
30
<PAGE>
PI CORP.
The Company originally conducted its operations on a 45,000 square feet,
10-acre site located at 3550 South Marksheffel Road, Colorado Springs, Colorado.
In September 1997, the Company prematurely terminated on this lease and the
landlord took possession on October 4, 1997, prior to which the Company removed
all assets and equipment from the building. The research and development
equipment is currently being held in rented storage, and management, financial
and clerical activities are being conducted at temporary facilities. As
discussed in item 1, the Company entered into an agreement to form a new
corporation with Dr. Herbert J. Neuhaus and Ronald A. Morley in order to better
promote the likelihood of obtaining an industry partner and financing to secure
the successful commercialization of the PI Technology. The corporation,
Microlink Technologies Corporation, entered into a lease agreement, which the
Company guaranteed, dated October 14, 1997, to lease approximately 4,000 sq.
feet for a term of three years commencing November 1, 1997 and ending October
31, 2000 at a monthly rental of $1,833.33. The facility is located at 2291-C&D
Waynoka Road, Colorado Springs, Colorado 80915.
ITEM 3. LEGAL PROCEEDINGS
On September 30, 1997, the landlord of the property formerly occupied by PI
Corp. at 3550 S. Marksheffel Road, Colorado Springs, Colorado, filed a complaint
against, among others, Particle Interconnect Corporation and the Company,
seeking damages for premature termination of the lease which includes a rental
payment of $23,823.38 for the month of September 1997, and monthly rental
payments of $23,587.50 for the months of October 1997 through July 1998. The
Company has settled the dispute with the landlord and its remaining liability on
the settlement is approximately $186,000. Further, the Company has reason to
believe, based upon representations made by the landlord, that such liability
may be significantly reduced as a result of the landlord re-leasing the premises
to another party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no meetings of security holders during the period covered by
this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock is presently traded on the over-the-counter market on the
OTC Bulletin Board maintained by the National Association of Securities Dealers,
Inc. (the "NASD") The NASDAQ symbol for the Common Stock is "INCE." The
following table sets forth the range of high and low bid quotations for the
Common Stock of each full quarterly period during
31
<PAGE>
the fiscal year or equivalent period for the fiscal periods indicated below.
The quotations were obtained from information published by the NASD and reflect
interdealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
1996 Fiscal Year Ask Bid
------------------------- ------- -------
<S> <C> <C>
December 31, 1995 $ 1.625 $ .625
March 31, 1996 1.9375 1.00
June 30, 1996 5.75 2.00
September 30, 1996 5.50 2.75
1997 Fiscal Year
- -------------------------
December 31, 1996 $ 4.00 $ 3.875
March 31, 1997 2.4375 2.0625
June 30, 1997 .50 .375
September 30, 1997 .270 .220
</TABLE>
As of January 30, 1998, there were approximately 480 holders of record of
the Company's Common Stock. Based upon information provided to the Company by
persons holding securities for the benefit of others, it is estimated that the
Company has in excess of 4,500 beneficial owners of its Common Stock as of that
date.
DIVIDEND POLICY
While there currently are no restrictions prohibiting the Company from
paying dividends to its shareholders, the Company has not paid any cash
dividends on its Common Stock in the past and does not anticipate paying any
dividends in the foreseeable future. Earnings, if any, are expected to be
retained to fund future operations of the Company. There can be no assurance
that the Company will pay dividends at any time in the future.
RECENT SALES OF UNREGISTERED SECURITIES
The Company made the following unregistered sales of its securities from
October 1, 1994 through September 30, 1997.
32
<PAGE>
<TABLE>
<CAPTION>
TITLE OF
DATE OF SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
------------ ---------- ------ ------------- ---------
<S> <C> <C> <C> <C>
(1) 7/7/95 Common 5,412,191 Assets & Liabilities of Modern Industries, Inc.
Modern Industries
Recorded at $3,093,000
(2) 7/7/95 Options to Purchase 1,600,000 Agreement to serve as Terry W. Neild
Common Shares directors, officers and Gordon J. Sales
counsel to Registrant Mark S. Pierce
Corporate Advisors, Inc.
(3) 11/9/95 Options to Purchase 700,000 Agreement to serve as Gordon J. Sales
Common Stock, at Officers, Directors & Mark S. Pierce
an exercise price of Counsel to the Company Terry W. Neild
$.50 per share Corporate Advisors, Inc.
(4) 11/9/95 Options to Purchase 265,000 Agreement to Continue 10 Employees of California Tube
Common Stock, at Employment at CTL and to Laboratories, Inc.;
an exercise price of provide consulting services S. Wilde and Alan M. Smith
$.50 per share to the Company
(5) 12/22/95 Options to Purchase 716,180 Agreement to Provide 1. Communique Media Services,
Common Stock, at Consulting Services to the Ltd.
an exercise price of Company 2. Financial Power Network, Inc.
$.50 per share 3. James O. Gray
4. Admiral House
(6) 2/1/96 Options to Purchase 800,000 Agreement to provide James O. Gray
Common Stock, at consulting services to the L.L. Ross
an exercise price of Company and for past Wendy S. Gobbett
$.75 per share for services of consultants
650,000 shares and
$1.25 per share for
150,000 shares
(7) 3/3/96 Common Stock 96,606 Legal Services - valued at Corporate Consultancy Services,
$39,751 Ltd.
(8) 3/28/96 Common Stock 126,761 Contribution to ESOP California Tube Laboratory, Inc.
valued at $1.25 per share Stock Bonus Employee Stock
for $158,451.15 Ownership Plan & Trust
(9) 3/29/96 Options to Purchase 550,000 Agreement to provide Quidquia Management
Common Stock, at consulting services to the Rocha Holdings, Ltd.
an exercise price of Company
$.50 per share for
300,000 shares and
$.75 per share for
250,000 shares
(10) 5/9/96 Common Stock 400,000 Conveyance of Land, Sonora Station, Ltd.
Recorded at $1,000,000 Muriel J. Fulton
Barbara J. Drew
Darren Begley
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
TITLE OF
DATE OF SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
------------ ---------- ------ ------------- ---------
<S> <C> <C> <C> <C>
(11) 6/3/96 Options to Purchase 380,000 As consideration for past David Blank
Common Stock, at services as employees of James Martin
an exercise price of CTL Lance Mullins
$.50 per share Tony Wynn
(12) 6/12/96 Options to Purchase 400,000 As consideration for Jeffrey Halbirt
Common Stock, at consulting services and as Alan M. Smith
an exercise price of an incentive to remain an
$.50 per share officer of the Company
(13) 5/17/96 Common Stock 14,780 Legal Services - valued at Charmirathor, Inc.
$16,554
(14) 7/10/96 Series B Preferred 1,000 $10,000,000 Accredited Investors who are Non-
Stock and attached U.S. Persons (23)
Warrants to acquire 761,905
shares of Common
Stock
(15) 7/10/96 Warrants to acquire 330,159 Services as Placement Swartz Investments, LLC
Common Stock, at Agent
a price of $3.9375
per share
(16) 9/3/96 Common Stock 1,400,000 Exchange of shares of Five (5) shareholders of Particle
Particle Interconnect, Inc. Interconnect, Inc.
in a Triangular Merger,
which was accounted for
as an immaterial pooling
of interests.
(17) 9/3/96 Options to Purchase 800,000 Agreement to serve as Alan M. Smith
Common Stock, at Officers, Counsel or Corporate Advisors, Inc.
an exercise price of Consultant to Company 521508 B.C. Ltd.
$4.00 per share
(18) 9/3/96 Options to Purchase 230,000 Agreement to serve as Certain employees of PI Corp.
Common Stock, at officers or employees of
an exercise price of the Company.
$4.00 per share
(19) 10/8/96 Common Stock 277,778 Exchange of shares of Three (3) shareholders of
A.C. Magnetics, Inc. in A.C. Magnetics, Inc.
Triangular Merger, with a
total share value of
$1,000,000.
(20) 12/16/96 Series C Preferred 525 $ 5,250,000 Accredited Investors (11)
Stock and attached 530,771
Warrants to acquire
Common Stock
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
TITLE OF
DATE OF SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
------------ ---------- ------ ------------- ---------
<S> <C> <C> <C> <C>
(21) 12/16/96 Warrants to acquire 214,615 Services as Placement Swartz Investments, LLC and
Common Stock Agent Assignees
(22) 7/3/97- Common Stock 7,412,156 Conversion of 231 Shares Accredited Investors (9)
7/14/97 of Series C Preferred
Stock
(23) 9/11/97 Series D Preferred 1,080 Preferred Shares of BMI Robert J. Macri
Stock Burford B. Wiley
_______________
</TABLE>
/(1)/ During the period commencing September, 1996 through January 31, 1997,
certain holders of the Series B Preferred Stock, pursuant to the Certificate of
Designation, converted a total of 810 shares of Series B Preferred Stock into
2,636,530 shares of Common Stock which were issued without registration pursuant
to the exemption provided by Regulation S.
UNDERWRITERS
Other than Swartz Investments, LLC ("Swartz"), no underwriter or selling or
placement agent was involved in any of the transactions described above. Swartz
was engaged as selling agent in connection with the sale of the Series B
Preferred Stock and Series C Preferred Stock and was paid compensation
equivalent to 11% of the aggregate funds raised in such placements. In
addition, it received warrants to purchase shares of Common Stock equal to 10%
of the aggregate securities sold, assuming that the holders of the Series B
Preferred Stock and Series C Preferred Stock and related warrants, converted
their Series B and Series C Preferred Stock or exercised their warrants at the
Fixed Conversion Price.
EXEMPTION FROM REGISTRATION CLAIMED
All of the sales by the Company of its unregistered securities (except for
those described in Item 14, which were made pursuant to Regulation S and those
described in Item 20, which were made pursuant to Rule 506 of Regulation D
adopted under the Securities Act of 1933, as amended) were made by Registrant in
reliance upon Section 4(2) of the Securities Act of 1933, as amended. All of
the individuals who purchased the unregistered securities were all known to the
Company and its management, through pre-existing business relationships, as long
standing business associates, friends, employees, relatives or members of the
immediate family of management. All purchasers were provided access to all
material information which they requested and all information necessary to
verify such information and were afforded access to management of the Company in
connection with their purchases. All purchasers of the unregistered securities
acquired such securities for investment and not with a view toward distribution,
acknowledging such intent to the Company. All certificates or agreements
representing such securities that were issued contained restrictive legends,
prohibiting further transfer of the certificates or agreements representing such
securities, without such securities either being first registered or otherwise
exempt from registration in any further resale or disposition.
35
<PAGE>
The sale of 1,000 shares of convertible Class B Preferred Stock was made
pursuant to and in compliance with Regulation S. The offering was restricted to
and entirely purchased by twenty-three (23) institutional accredited investors.
Extensive documentation was prepared and utilized to insure compliance with the
terms, conditions and provisions of Regulation S. All purchasers and the
Registrant were represented by their own independent counsel, tax advisors,
accounting firms and other advisors. The Company undertook and implemented
control procedures to assure compliance with the terms and conditions of
Regulation S.
The sale of 525 shares of Convertible Class C Preferred Stock was made
pursuant to and in compliance with Rule 506 of Regulation D. The offering was
restricted to and entirely purchased by 11 institutional accredited investors.
Extensive documentation was prepared and utilized to insure compliance with the
terms, conditions and provisions of Regulation D. All purchasers, including the
Company, were represented by their own independent counsel, tax advisors,
accounting firms and other advisors. The Company and its transfer agent
undertook and implemented control procedures to assure compliance with the terms
and conditions of Regulation D.
ITEM 6. SELECTED FINANCIAL DATA
On December 4, 1995, the Company changed its fiscal year end from December
31, 1995 to September 30, 1995 due to the acquisition of the assets and
liabilities of Energy on July 7, 1995 for 5,412,191 shares of Common Stock,
which represented 52% of the Common Stock outstanding at that time. As a
result, for accounting purposes, Energy was considered the acquiring corporation
and the comparative information presented herein represents that of Energy prior
to July 7, 1995 and Energy and the Company subsequent to such date. See
"BUSINESS-Recent Acquisitions, Dispositions and Transactions," and "INDEX TO
FINANCIAL STATEMENTS."
The following selected consolidated financial data should be read in
conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Form 10-K. The Consolidated
Statements of Operations data presented below for the fiscal year ended
September 30, 1997 and September 30, 1996 and the eleven months ended September
30, 1995 and the Consolidated Balance Sheet data as of September 30, 1997 and
1996 have been derived from the Company's Consolidated Financial Statements
included in this Form 10-K. The Consolidated Financial Statements as of and for
the fiscal year ended September 30, 1997, and 1996 and the eleven months ended
September 30, 1995 were audited by KPMG Peat Marwick LLP, independent certified
public accountants. The Consolidated Financial Statements, as of and for the
fiscal year ended October 31, 1994 were audited by Mark Shelley, CPA,
independent public accountant. The Statements of Operations data set forth
below for the years ended October 31, 1994 and 1993 and the Balance Sheet data
set forth below at September 30, 1995 and October 31, 1994 and 1993 are derived
from audited financial statements not included in this Form 10-K.
36
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Year Year Eleven Year Year
Ended Ended Months Ended Ended Ended
9/30/97 9/30/96 9/30/95/(1)/ 10/31/94 10/31/93
------------ ----------- ------------- ---------- ----------
Total net sales $ 7,729,000 $ 3,405,000 $ 3,768,000 $2,066,000 $ 60,000
Costs & expenses 24,210,000 8,688,000 5,089,000 2,428,000 142,000
Net loss (16,481,000) (5,283,000) (1,321,000) (362,000) (82,000)
Deemed preferred stock
dividend relating to
in-the-money conversion 1,072,000 1,625,000 -- -- --
Accretion on Preferred Stock 460,000 -- -- -- --
Net loss applicable to common
Stockholders (18,013,000) (6,908,000) -- -- --
Net loss per common share $(0.99) $(0.54) $(0.18) $(0.08) $(0.04)
Weighted average
Number of common
shares outstanding 18,114,038 13,072,683 7,391,275 4,828,007 2,066,979
At period end:
Current assets 3,541,000 $10,625,000 $ 1,796,000 $1,499,000 $ 4,000
Current liabilities 3,655,000 2,060,000 1,799,000 1,621,000 82,000
Working capital (deficit) (114,000) 8,565,000 (3,000) (122,000) (78,000)
Total assets 7,055,000 13,826,000 3,069,000 3,141,000 51,000
Long-term debt 16,000 86,000 48,000 48,000 175,000
Stockholders' equity (deficit) $ 3,384,000 $11,680,000 $ 1,222,000 $1,472,000 $ (206,000)
Cash dividends per
common share -- -- -- -- --
_______________
See also "BUSINESS-Recent Acquisitions, Dispositions and Transactions."
/(1)/ On December 4, 1995, the Company changed its fiscal year end from December 31 to September 30. The comparative
information presented herein represents that of Energy which was deemed to be the acquiring company in the July 7, 1995
transaction. Energy's fiscal year end was previously October 31.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the "SELECTED
CONSOLIDATED FINANCIAL DATA" and "INDEX TO FINANCIAL STATEMENTS."
The statements contained in this Form 10-K, if not historical, are forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995, and involve risks and uncertainties that could cause actual
results to differ materially from the results, financial or otherwise, or other
expectations described in such forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of the Company's business include those, among others, discussed under
"-Trends and Uncertainties" below. Any forward-looking statement or statements
speak only
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as of the date on which such statement was made, and the Company undertakes no
obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events. Therefore, forward-looking
statements should not be relied upon as a prediction of actual future results.
From 1991 through the fiscal year ended December 31, 1994, the Company was
generally inactive and reported no operating revenues. In July 1995, the
Company completed the acquisition of Energy and its wholly owned subsidiary CTL.
See "Business-Overview." The Company substantially expanded the scope of its
business and revised its business strategy subsequent to the Energy transaction
through the acquisition of certain patents, patent applications, proprietary
technology and operations relating to the Antenna Technology, the PI Technology
and the Patch Technology. During this time, the Company has been engaged
primarily in directing, supervising and coordinating the Company's activities in
the continuing developments of its new lines of business, in addition to the
recruitment of management and technical personnel and raising new capital to
fund its operations.
The primary asset acquired in the Energy transaction, its wholly owned
subsidiary CTL, continued to generate positive cash flows in the 1997 fiscal
year. Sales increased 36.7% over the 1996 fiscal year. This increase in sales
was primarily attributable to new defense-related contracts entered into in the
final quarter of the 1996 fiscal year for which production commenced in the
first quarter of the 1997 fiscal year and continued through the second and third
quarters. Production capacity constraints continued throughout the year at the
Company's Santa Cruz, California manufacturing facility. The Company completed
its move to new the production facility in January of 1998, and anticipates that
such move should eliminate the production capacity constraints.
On November 15, 1995, the Company entered into a research and development
agreement with ASU for the development of the Antenna Technology. The Company
had obtained the rights to certain patent applications relating to the Antenna
Technology and had developed several working prototypes of the External Antenna.
The Company had anticipated commencing commercial production of both an External
Antenna and Internal Antenna in the 1997 fiscal year.
On September 30, 1996, the Company formed a wholly owned subsidiary,
Cellular Magnetics, Inc. which acquired all the assets and liabilities of M.C.
Davis in exchange for 277,778 shares of Common Stock valued at $1,000,000 and
$800,000 in cash. While the Company had initially considered constructing its
own manufacturing facility for the manufacture of antenna products, this
acquisition, accounted for by the purchase method of accounting provided the
Company with both a facility for the immediate production of products using its
Antenna Technology and an established manufacturing facility. The Company
intended to continue to produce the miniature and subminiature electronic
components previously produced by M.C. Davis and did not anticipate that the
production of the Antenna Technology would significantly impact its ability to
manufacture these electronic assemblies.
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Based on subsequent evaluations of the Antenna Technology by the Company
and an independent investment banking company, the Company determined that it
was in its best interest to divest itself of the proposed design, development
and production of the Antenna Systems conducted by its wholly owned subsidiary
Intercell Wireless Corp., as well as the manufacture of miniature and non-
miniature coils, transformers and other electronic assemblies conducted by its
wholly owned subsidiary Cellular Magnetics, Inc. On July 18, 1997, the Company
sold all of its right, title and interest in the Antenna Technology and its
wholly owned subsidiaries Intercell Wireless Corp. and Cellular Magnetics, Inc.
to Intercell Technologies Corporation ("ITC"). As consideration for the sale,
the Company received 6,269,226 shares of ITC stock, 1,100,111 shares of the
Company's Common Stock and two Promissory Notes in the amounts of $2,200,000 and
$375,000, respectively. As a result of uncertainties with respect to the
realization of the consideration received, no gain was recognized on the
transaction. In the event of default by ITC on the promissory notes, the
ownership of Cellular Magnetics, Inc. will revert back to the Company.
Subsequent to the transaction with ITC, the Company evaluated the recoverability
of its investment in and advances to and concluded that an impairment charge of
$835,000 was necessary to reflect continued uncertainties regarding realization
of its investments in and advances to ITC.
To diversify the Company's operations and to capitalize on a new and
emerging technology, the Company formed a wholly owned subsidiary, PI Corp. in
September 1996, which merged with Particle Interconnect, Inc., a California
corporation ("Particle California"). The Company exchanged 1,400,000 shares of
Common Stock for all of the outstanding stock of Particle California. The
transaction was accounted for as an immaterial pooling-of-interest as the prior
operations of Particle California are not material to the Company's consolidated
financial position, results of operations or cash flows. Accordingly, the
consolidated financial statements for the periods prior to the date of
acquisition have not been restated, except for loss per common share
information. From the date of the merger, PI Corp. has been engaged primarily
in the construction of production capabilities at its plant and the continuing
development of the technology. PI Corp. originally expected to commence
commercial production in 1997. Due to high costs associated with continuing
product development and testing, construction of production capabilities and of
market penetration, the Company realigned its operations in September of 1997 to
focus solely on the testing, validation and refinement of the PI Technology.
Accordingly, the Company has discontinued its efforts to establish production
capabilities and has recorded a loss on the abandonment of the related
production assets of $801,000 in 1997. The Company believes that a significant
requirement for introducing products utilizing the PI Technology into the market
will be entering into joint venture, co-manufacturing, licensing or other
similar arrangements with existing manufacturers or distributors in this field.
Effective June 6, 1997, the Company acquired a controlling interest in
Sigma 7 Corporation. Sigma 7 conducts its business through its subsidiary BMI
Acquisition Group, Inc. BMI has developed and currently utilizes a proprietary
patch technology to produce fully functional computer memory modules from
defective memory chips. The Company acquired control of Sigma 7 through the
acquisition of 90% of the 5,000,000 issued and outstanding
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<PAGE>
shares of Sigma 7's common stock in exchange for the payment of $550,000 and by
providing approximately $1,985,000 in additional financing, consisting primarily
of secured loans and standby letters of credit. In addition, the Company issued
1,000 shares of Series D Preferred Stock at $2,500 per share to holders of
certain preferred shares of BMI to eliminate such preferred shares. The
transaction was accounted for by the purchase method of accounting. The cash
purchase price for Sigma 7 was allocated to the net assets acquired based on
their estimated fair values. The purchase price for Sigma 7 was allocated to
the net assets acquired based on their estimated fair values. In connection
with the Acquisition, a portion of the purchase price was allocated to the value
of its in-process research and development projects. From the date of its
acquisition through September 30, 1997, Sigma 7 experienced operating losses of
approximately $7,100,000. As a result of such losses and uncertainties as to
when the subsidiary will generate operating profits and cash flows, as of
September 30, 1997, the Company determined that the goodwill recorded on the
acquisition of Sigma 7 may not be recoverable. Accordingly the balance of
goodwill remaining, $2,300,000 was written off.
On July 7, 1996, the Company completed an offering pursuant to Regulation S
under the Securities Act (the "Regulation S Offering") of 1,000 shares of its
Series B Preferred Stock, with attached warrants, pursuant to which it received
net proceeds of $8,900,000. The Series B Preferred Stock is convertible into
Common Stock at the exchange rate in effect at the date of conversion, as
described in the preferred stock agreements. At the date of issuance, the
exchange rate was equal to 85% of the then prevailing market rate, resulting in
a deemed dividend of $1,765,704. The Company recognized $140,000 and $1,625,000
of the dividend in its fiscal 1997 and 1996 net loss per common share
calculation, respectively. The amount recognized was calculated on a pro rata
basis over the period beginning with the issuance of the security to the first
date conversion could occur. In addition, the conversion terms include a
beneficial adjustment to the exchange rate equal to the original issue price
plus 10% of the original issue price per annum since July 10, 1996. The
beneficial adjustment is treated as an accretion on the Series B preferred
stock. For the year ended September 30, 1997, the amount of the accretion was
$193,000. The amount of the accretion on the Series B preferred for the year
ended September 30, 1996 was not significant.
On December 15, 1996, the Company completed an offering pursuant to
Regulation D to institutional investors of 525 shares of its Series C Preferred
Stock, with attached warrants, pursuant to which it received net proceeds of
$4,672,500. The Series C Preferred Stock is convertible into Common Stock at
the exchange rate in effect at the date of conversion, as described in the
preferred stock agreements. At the date of issuance, the exchange rate was
equal to 85% of the prevailing market rate, resulting in a deemed dividend of
$932,064 which the Company recognized in its fiscal 1997 net loss per common
share calculation. In addition, the conversion terms include a beneficial
adjustment to the exchange rate equal to the original issue price plus 8% of the
original issue price per annum since December 16, 1996. The beneficial
adjustment is treated as an accretion on the Series C preferred stock. For the
year ended September 30, 1997, the amount of the accretion was $267,000.
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<PAGE>
To further improve the Company's working capital position, the Company
issued $1,500,000 in convertible debt and warrants in December 1997. The debt
requires quarterly interest payments at 9% per annum. $750,000 of this
convertible debt matures on December 1, 1999 and may be converted at the option
of the holder after 60 days from the date of issuance at a conversion price per
share equal to the lessor of 85% of the market price as defined, or $0.75. The
other $750,000 of convertible debt matures on April 1, 1999 and may be converted
at the option of the holder any time after the sixth business day following the
maturity date at a conversion price for each share of common stock at 85% of the
market price as defined. At the date of issuance, there was a discount related
to the beneficial conversion feature. The discount will increase the effective
interest rate of the security causing an additional charge to interest expense.
See "-Liquidity and Capital Resources" below.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1996.
Net Sales. Net sales, derived from the Company's subsidiary operations CTL,
Cellular Magnetics, Inc. ("CMI") and Sigma 7, increased 127% to $7,729,000 from
$3,405,000. This increase was due to new defense-related contracts for electron
power tubes entered into in the final quarter of the 1996 fiscal year for which
production commenced in the first quarter of the 1997 fiscal year and continued
through the second and third quarters and the inclusion of sales of electronic
assemblies ($1,480,000) and sales of computer memory modules ($1,594,000) in the
1997 fiscal year.
In the 1997 fiscal year, net sales of new magnetrons totaled $2,055,000,
accounting for 44% of electron tube sales, compared with $1,436,000 or 42% of
electron tube sales in 1996. Net sales from rebuilding of magnetrons increased
from $1,403,000 or 41% of electron tube sales in 1996 to $2,005,000 or 43% in
1997. The maintenance of the sales mix from 1996 to 1997 indicates the
continuity of the Company's focus on new and more complex tube types such as
certain pulse magnetrons initiated in the 1996 fiscal year. The increases in
sale reflects the Company's success in obtaining new contracts in 1997 for the
production of both new and rebuilt pulse magnetrons.
The Company experienced an increase in gross margins in the electron tube
business to 20% in the 1997 fiscal year from 17% in 1996. This increase was due
primarily to improved efficiencies in the production of new tube types in 1997
as direct labor costs decreased to 23% of net sales in 1997 compared to 30% in
1996, while direct material costs decreased to 25% in 1997 compared to 29% in
1996. The Company continued to experience capacity constraints in its Santa
Cruz, California manufacturing facility and incurred additional costs related to
moving production facilities in Watsonville, California.
In December 1997, the Company signed a letter of intent to sell its
electron tube manufacturing subsidiary, CTL, and negotiations regarding this
sale are ongoing. The Company
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<PAGE>
intends to use the proceeds from this sale to further the development of the PI
Technology and to provide working capital for the Company's other operations.
See "-Recent Acquisitions, Dispositions and Transactions, Disposition of CTL."
The Company recorded sales of electronic assemblies of $1,480,000 and gross
profit of $441,000 or 30% of sales in 1997. The Company acquired the electronic
assemblies business on September 30, 1996 and accordingly recorded no sales from
this business in the 1996 fiscal year. In July 1997, the Company sold its
electronic assemblies manufacturing subsidiary to Intercell Technologies
Corporation in conjunction with the sale of the Antenna Technology.
Sales of computer memory modules in the period from June 6, 1997, the date
of acquisition of Sigma 7, to the fiscal year end totaled $1,594,000. The cost
of goods sold was $3,251,000. This negative gross margin of $1,657,000 or 104%
of sales resulted from the high costs of developing ongoing improvements to the
testing and production processes, training of new employees as the Company moved
from one shift to three shifts per day, and an industry wide decline in the
price of computer memory modules. The Company anticipates that the
inefficiencies experienced in the production process will be eliminated by the
second quarter of 1998. In addition, the Company intends to focus on higher
value-added components such as DRAM and COB memory modules in the future. The
Company acquired the memory module business in June of 1997 and accordingly, did
not record sales from this business in the 1996 fiscal year.
In July, the Company entered into a stock purchase agreement to sell,
transfer, assign, and deliver certain assets, liabilities, rights and
obligations of the Company related to its antenna technology, including its
wholly owned subsidiaries CMI and Intercell Wireless Corp., to Intercell
Technologies Corporation ("ITC") a Colorado corporation, in exchange for
6,269,226 shares and warrants of ITC common stock, 1,100,000 shares of the
Company's common stock, and two notes receivable of $2.2 million and $375,000,
respectively. The $2.2 million note is accrued by all of the outstanding shares
of CMI and accrues interest at 10% per annum. Principal and interest payments
of $69,000 are due quarterly with a final payment of $1.2 million due in May
2007. The $375,000 note accrues interest at 10% and is due in full on November
30, 1997. Payment of this note was subsequently extended by the Company to
January 15, 1998. As a result of the uncertainties with respect to realization
of the consideration received, no gain was recognized on the transaction. The
Company will account for its investment in and advance to ITC by the cost
recovery method. Subsequent to the transaction with ITC, the Company evaluated
the recoverability of its investments in and advances to and concluded that an
impairment charge of $835,000 was necessary to reflect continued uncertainties
regarding realization of its investment in and advances to ITC.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SGA") expenses increased 60% to $9,077,000 in 1997 compared to
$5,683,000 in 1996. This increase was primarily attributable to the inclusion
of general, selling and administrative expenses for the Company's new electronic
components, cellular antenna, particle interconnect and memory module operations
for the first time in the 1997 fiscal year, the buy out of four
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<PAGE>
management contracts ($920,000), the acquisition of Sigma 7 and sale of
Intercell Wireless and Cellular Magnetics, additional legal and accounting costs
in the 1997 fiscal year related to the filing of a Registration Statement on
Form S-1 in January 1997, and the inclusion of compensation recognized on the
transfer of stock options from three principal shareholders to an officer and
director of the Company ($530,000) in the first quarter of the 1997 fiscal year.
In fiscal year 1996, the principal component of general, selling and
administrative expenses related to compensation expenses of $3,686,000 resulting
from vesting stock options granted to the Company's officers, directors,
employees and consultants in 1996 at the exercise prices below the fair market
value of the Common Stock on the date of grant.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
1,398% to $1,318,000 in 1997 from $88,000 in 1996. This increase was due to
continuing development of the Antenna Technology to the date of disposition of
this technology on July 18, 1997 ($213,000) and the PI Technology ($1,105,000).
In the 1996 fiscal year, research and development expenses related to the
Antenna Technology only.
In addition to direct expenditures on research and development, the Company
wrote off in-process research and development costs of $2,022,000. In
connection with the acquisition of Sigma 7, a portion of the purchase price was
allocated to the value of in-process research and development projects. These
projects involved the research and development of new products and significant
extensions and improvements to existing products which had not demonstrated
their technological feasibility as of the acquisition date and did not have an
alternative future use. Accordingly, immediately upon consummation of the
transaction, the value associated with these projects was charged to expense.
GOODWILL. On the acquisition of Sigma 7, the total purchase price was
allocated to the net assets acquired based on estimated fair values. $2,495,000
in goodwill was recorded on this date. From the date of its acquisition through
September 30, 1997, Sigma 7 experienced operating losses of approximately
$7,100,000. As a result of such losses and uncertainties as to when the
subsidiary will generate operating profits and cash flows, as of September 30,
1997, the Company determined that the goodwill recorded on the acquisition of
Sigma 7 may not be recoverable. Accordingly the balance of goodwill remaining,
$2,300,000 was written off.
ABANDONMENT OF ASSETS ON REALIGNMENT OF OPERATIONS. In September 1997,
the Company announced a plan to realign the operations and activities of PI
Corp. in order to reduce the amount of funding required to complete development
activities and market PI Corp. products. In connection with this plan, the
Company recorded a charge of $801,000 related to the write-off of manufacturing
equipment ($599,000) and a lease abandonment ($202,000). PI Corp. commenced
implementation of the plan during September 1997.
IMPAIRMENT CHARGE ON INVESTMENT AND ADVANCES TO INTERCELL TECHNOLOGIES
CORPORATION. In July, the Company entered into a stock purchase agreement to
sell, transfer, assign, and deliver certain assets, liabilities, rights and
obligations of the Company related to its antenna technology, including its
wholly owned subsidiaries CMI and Intercell Wireless Corp., to
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<PAGE>
Intercell Technologies Corporation ("ITC") a Colorado corporation, in exchange
for 6,269,226 shares and warrants of ITC common stock, 1,100,000 shares of the
Company's common stock, and two notes receivable of $2.2 million and $375,000,
respectively.
Subsequent to the transaction with ITC the Company evaluated the
recoverability of its investment in and advances to ITC and concluded that an
impairment charge of $ 35,000 was necessary to reflect continued uncertainties
regarding realization of its investment in and advances to ITC. The $835,000
charge represents the difference between the carrying amount of the investment
in and advances to ITC and the estimated fair value of assets collaterlizing
such advances.
INTEREST INCOME AND EXPENSE. Interest income of $258,000 was earned on cash
and short-term investments in the 1997 fiscal year, compared to $36,000 in the
1996 fiscal year. This increase was due to the investment of undeployed cash
resources realized through the sale of its Series B and C Preferred Stock in
low-risk, interest-bearing securities. Interest expense of $179,000 was recorded
in fiscal 1997 compared to $90,000 in 1996. This increase in expense related
primarily to liabilities incurred by Sigma 7 in the continuing development and
manufacture of computer memory modules.
INCOME TAXES. As of September 30, 1997, the Company had a net operating
loss carryover for federal and state income tax purposes of approximately
$20,346,000 and $13,525,000, respectively. The federal net operating losses
expire from 2007 to 2011. The benefit of these net operating loss carryforwards
has not been recorded by the Company as it is uncertain that the Company will
generate sufficient income in future periods to utilize the loss carryforwards.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1995 (ELEVEN MONTHS).
Net Sales. Net sales, derived solely from the operations of CTL, decreased
9.6% in 1996 to $3,405,000 from $3,768,000 in 1995. This decrease in sales was
generally due to a combination of a change in the Company's product mix and the
delayed timing of sufficient orders which were originally planned for the fourth
quarter of 1996, but were not placed until the end of the 1996 calendar year.
In the 1996 fiscal year, net sales of new magnetrons totaled $1,436,000,
accounting for 42% of sales, compared with $1,455,000 or 39% of net sales in
1995. Net revenues from rebuilding of magnetrons decreased from $1,849,000 or
49% of net sales in 1995 to $1,403,000 or 41% of net sales in 1996. This shift
in sales mix was due primarily to the Company's focus on new and more complex
tube types such as certain Pulse magnetrons in an attempt to broaden the
Company's product line and a slow down in orders for rebuilt magnetrons for the
food processing industry in the last two quarters of 1996.
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The Company obtained a significant contract for the manufacture of new and
rebuilt Pulse magnetrons in June of 1996. However, the initial order under this
contract was not placed until September 1996. As a result, sales were not
recorded under this contract until the first quarter of fiscal 1997, resulting
in a significant increase in sales in the first quarter of 1997 over the final
quarter of 1996.
In conjunction with the changes in sales mix noted above, the Company
experienced a decrease in gross margins to 17% in the 1996 fiscal year from 23%
in 1995. This decrease was due to the increased development time and costs
associated with the new and more complex tube types now being constructed by the
Company. In particular, direct labor costs increased to 34% of net sales in
1996 compared to 30% in 1995, while direct materials costs increased to 26% in
1996 from 25% in 1995.
Allowance for Doubtful Accounts. The Company's allowance for doubtful
accounts increased from $81,000 in 1995 to $255,000 in 1996. This increase was
primarily a result of the return of certain Pulse magnetrons, a new product of
the Company, for which rework was requested by the purchasers.
Selling, General and Administrative Expense. Selling, general and
administrative ("SGA") expenses increased 331.5% from $1,317,000 in 1995 to
$5,683,000 in 1996. This increase is primarily attributable to an increase in
compensation expense of $3,686,000 resulting from the vesting of stock options
to purchase an aggregate of 4,841,000 shares of Common Stock granted to the
Company's officers, directors, employees and consultants in 1996 at exercise
prices below the fair value of the Common Stock on the date of grant. The
Company recorded deferred compensation expense of $4,017,000 based on these
grants. The options were granted as an incentive to such persons at a time when
the Company did not have sufficient funds to otherwise compensate such persons.
In addition to the above, SGA expenses increased in 1996 due to higher
legal and audit costs ($387,000 in 1996 compared to $102,000 in 1995) associated
with the Company's acquisitions, financings and compensation arrangements, and
increased compensation paid to management and administrative personnel.
Research and Development. Research and development expenses increased from
$0 in 1995 to $88,000 in 1996. This increase was attributable entirely to costs
associated with research and development of the Company's Antenna Systems.
Interest Income and Expense. The Company earned interest income of $36,000
in 1996 compared to $0 in 1995. This increase was due to the investment in
Treasury Bills of undeployed cash resources realized through the sale of its
Series B Preferred Stock.
Interest expense increased to $90,000 in 1996 compared to $88,000 in 1995
due to continued bank financing and outstanding notes payable to related
parties. The Company repaid these financings and notes with the proceeds
received from the Series B Preferred Stock.
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Net Operating Loss Carryforwards for Tax Purposes. As of September 30,
1996, the Company had a net operating loss carryover for federal and California
income tax purposes of approximately $7,376,000 and $3,463,000, respectively.
The federal net operating losses expire from 2007 to 2011. The California net
operating losses expire from 2000 to 2001. The benefit of these net operating
loss carryforwards was not recorded by the Company as it was uncertain that the
Company would generate sufficient income in future periods to utilize the loss
carryforwards.
ELEVEN MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED
OCTOBER 31, 1994.
On July 7, 1995, the Company acquired all of the assets and assumed all of
the liabilities of Energy through the issuance of 5,412,191 shares of Common
Stock. The principal asset acquired in this transaction was all of the issued
and outstanding common stock of CTL. Energy had acquired its investment in CTL
on May 1, 1994. In accordance with generally accepted accounting principles,
the results of operations disclosed in the Company's audited consolidated
financial statements include CTL's operations for the 11-month period ended
September 30, 1995 for the 1995 fiscal year and for the six-month period ended
October 31, 1994 for the comparative 1994 fiscal year.
Net Sales and Gross Margins. The Company's net sales of $3,768,000, which
are attributable entirely to the operations of CTL, increased 82% in the 1995
fiscal year compared to net sales of $2,066,000 in 1994. This increase was due
primarily to the inclusion in the financial statements of 11 months of CTL's
operations in 1995 compared to only six months in fiscal 1994 as described
above. Monthly sales in both the 1995 and 1994 fiscal years average
approximately $340,000 due to capacity limitations at CTL's manufacturing
facilities.
Although CTL's average monthly sales remained constant in the 1995 and 1994
fiscal years, the Company experienced a decline in gross margins on sales of
electron tubes to 23% of net sales in 1995 from 42% in 1994. This decrease was
due primarily to increased costs associated with the development and manufacture
of new types of tubes. In addition, the Company sold a greater percentage of
new tubes relative to rebuilt tubes in the 1995 fiscal year compared to 1994.
As new tubes carry a lower gross margin than rebuilt tubes, an overall decline
in gross margins was experienced.
Selling, General and Administrative Expenses. SGA expenses increased by
11% in the 1995 fiscal year due to increased consulting, legal and audit costs
associated with the Energy transaction and the Company's financing activities.
Interest Expense. Interest expense increased to $88,000 in 1995 from
$3,000 in 1994 primarily due to an increase in notes payable to former owners of
CTL and other third parties. Loss on Investments. During fiscal 1995, the
Company purchased approximately 15% of the outstanding stock of American
Microcell for 712,571 shares of common stock at a deemed price of approximately
$0.70 per share, or $500,000. American Microcell was engaged in the
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research and development of improved technologies for cellular phones. However,
American Microcell proved unsuccessful in its efforts to finance continuing
development of the technologies acquired, and the rights to these technologies
reverted to the original developers. Accordingly, the Company wrote off its
investment in American Microcell in fiscal 1995.
In addition, the Company sold certain microwave technology rights to a
related party for a note in the face amount of $1,250,000. Due to concerns
about collectibility, the Company reserved the remaining carrying value in
fiscal 1995. In addition, related deferred development costs totalling $44,631
were written off in fiscal 1995. Losses on investment in fiscal 1994 were not
significant.
Net Operating Loss Carryforwards for Tax Purposes. As of September 30,
1995 the Company had a net operating loss carryover for federal and California
income tax purposes of approximately $1,083,000 and $317,000, respectively. The
federal net operating losses expire from 2007 to 2010. The California net
operating losses expire in 2000. The benefit of these net operating loss
carryforwards has not been recorded by the company as it is uncertain that the
Company will generate sufficient income in future periods to utilize the loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had cash and cash equivalents on hand
of $107,000 as compared to $4,224,000 at September 30, 1996. This decrease in
working capital was primarily due to costs associated with the acquisition of
Sigma 7, the continuing development of the Antenna, PI and Patch technologies
and legal and accounting costs related to the filing of a Registration Statement
on Form S-1 in January 1997. In addition, the Company bought out four
management contracts ($920,000) and incurred general, selling and administrative
expenses for the Company's new electronic components, cellular antenna, particle
interconnect and memory module operations in the 1997 fiscal year. To offset
these cash disbursements, the Company received net proceeds of $4,672,000 from
the issuance of Series C Preferred Stock and warrants and $150,000 from sales of
Common Stock.
The Company acquired net assets comprised of working capital and property,
plant and equipment, and recorded related goodwill and other intangibles,
totalling $550,000 in 1997 as a result of the acquisition of Sigma 7.
In the 1998 fiscal year, the Company intends to dispose of surplus and
nonperforming assets in order to generate working capital for the continuing
development of the PI Technology and Patch Technology. In December 1997, the
Company signed a letter of intent to sell its electron tube manufacturing
subsidiary, CTL. See "-Recent Acquisitions, Dispositions and Transactions,
Disposition of CTL." Negotiations regarding this sale are continuing. The
Company also intends to dispose of its investment land held for sale at the
earliest opportunity.
The Company believes that current and known future capital resources,
including those derived from the transactions described above, will be adequate
to fund its operations over the
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next 12 months. The Company also believes that sales of its PI Corp. products,
currently anticipated to commence in the 1998 fiscal year, in combination with
the sales of memory modules of Sigma 7 will provide sufficient funds to meet the
Company's capital requirements for the next two years. This assumption is based
on the Company's belief that it will be successful in entering into a joint
venture, co-manufacturing, licensing or other similar arrangement with existing
connector manufacturers with respect to the manufacture of PI Corp. products.
The failure to enter into such relationships could result in the Company
requiring substantial additional capital and resources to bring the PI Corp.
products to market.
To the extent the Company's operations are not sufficient to fund the
Company's capital requirements, the Company may enter into a revolving loan
agreement with a financial institution, or attempt to raise additional capital
through the sale of additional capital stock or through the issuance of debt.
At the present time the Company does not have a revolving loan agreement with
any financial institution nor can the Company provide any assurances that it
will be able to enter into any such agreement in the future or be able to raise
funds through the further issuance of debt or equity in the Company.
In the 1998 fiscal year, the Company expects to make capital expenditures
of approximately $2,000,000. These expenditures will be made to complete CTL's
new manufacturing facility in Watsonville, California, and to purchase new
equipment for the Company's manufacturing plant in San Diego, in connection with
the manufacture of the memory modules.
TRENDS AND UNCERTAINTIES
As of result of its activities in 1997, the Company believes that it has
positioned itself for long-term success through the acquisition of Sigma 7, by
restructuring the business utilizing the PI Technology and the Proprietary
Electroplating Process and by initiating a program to dispose of nonperforming
business segments. The Company's activities in fiscal 1998 will focus on
bringing the PI Technology to market and on expanding the existing markets for
its memory module products. However, the future operating results of the
Company are subject to certain trends and uncertainties within the industries in
which the Company is operating and within the Company itself.
OVERVIEW
In general, the Company has a limited operating history that is relevant to
its current business. The Company does not anticipate producing significant
operating revenues until such time, if ever, as products developed using the PI
and Patch Technologies are completely developed, manufactured in commercial
quantities and available for commercial delivery, and accepted in the
marketplace. There can be no assurance that the Company's technologies and
products, if developed and manufactured, will be able to compete successfully in
the marketplace and/or generate significant revenue. The Company anticipates
incurring significant costs in connection with the development of its
technologies and proposed products and there is no
48
<PAGE>
assurance that the Company will achieve significant revenues to offset
anticipated operating costs. Included in such costs are research and
development expenses, marketing costs, increased capital expenditures for the
expansion of its manufacturing facilities and the research and development of
its products, and general and administrative expenses.
Inasmuch as the Company will continue to have high levels of operating
expenses and will be required to make significant expenditures in connection
with its continued research and development activities, the Company anticipates
that such losses will continue until such time, if ever, as the Company is able
to generate sufficient revenues to exceed its total costs of operation.
SPECIFIC TRENDS AND/OR UNCERTAINTIES
The Company's PI Technology is currently in the development stage and the
marketability of the PI Corp. products has not yet been tested. The PI
Technology is currently being utilized by third parties in limited applications
under licenses granted from Louis DiFrancesco, the developer of the PI
Technology, or from companies he previously controlled such as Particle
California. The widespread acceptance of the PI Technology and the PI Corp.
products by the market has yet to be tested by the Company. In addition, no
prediction can be made as to competitive responses in the marketplace should the
PI Technology and the PI Corp. products prove successful. Moreover, the
licensees of the PI Technology could compete directly with the Company in the
markets it intends to enter. If such licensees desire to do so, the Company,
and not Mr. Difrancesco, would receive any increase in royalty payments due to
such success.
The semiconductor memory market is subject to rapid technological change,
frequent new product introductions and enhancements, product obsolescence and
changes in end-user requirements. This market may be eroded or replaced with
other forms of technology. The Company's ability to be competitive in this
market will depend in significant part upon its ability to successfully
manufacture, market and sell its semiconductor products on timely and cost-
efficient basis that responds to changing customer requirements. Any success of
the Company in developing new or enhanced products will depend upon a variety of
factors, including new product selection, integration of various elements of its
complex technology, timely and efficient completion of designs, timely and
efficient implementation of manufacturing and assembly processes, and
development of competitive products by competitors. The Company may experience
delays from time to time in the development and introduction of its DIMM and COB
memory module product lines. Moreover, there can be no assurance that the
Company will be successful in selecting, developing, manufacturing and marketing
new products or that errors will not be found in the Company's new products
after commencement of commercial shipments, if any, which could result in the
loss of or delay in market acceptance. The inability of the Company to
introduce in a timely manner products that satisfy market demands could have a
material adverse effect on the Company's business, financial condition and
results of operations.
49
<PAGE>
The Company is currently operating in three diverse businesses with
different operating and management requirements. As the operations of the
Company expands there will be a requirement for increased management expertise.
The Company is currently seeking to expand its management complement,
particularly in the marketing field, to cope with the anticipated growth in the
Company's operations.
PENDING ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" (SFAS
No. 128). SFAS No. 128 establishes a different method of computing net income
per share than is currently required under the provisions of Accounting
Principles Board Opinion No. 15. Under SFAS No. 128, the Company will be
required to present both basic net loss per share and diluted net loss per
share. Basic and diluted net loss per share is expected to be comparable to net
loss per share as presented in the accompanying consolidated financial
statements. The Company plans to adopt SFAS No. 128 in its fiscal quarter
ending December 31, 1997 and at that time all historical net loss per share data
presented will be restated to conform to the provisions of SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. It does
not, however, require a specific format for the statement, but requires the
Company to display an amount representing total comprehensive income for the
period in that financial statement. The Company is in the process of
determining its preferred format. This Statement is effective for fiscal years
beginning after December 15, 1997.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Statement establishes
standards for the manner in which public business enterprises report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to stockholders. This Statement is effective for
financial statements for periods beginning after December 15, 1997, and the
Company is currently evaluating the impact of the Statement on the reporting of
its segment information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and related financial information
required to be filed are indexed on page F-2 and are incorporated herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
50
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and significant employees of the Company
are as follows:
<TABLE>
<CAPTION>
Name and Age Position Period of Service
- ------------------------------ ---------------------------------- -----------------------------
<S> <C> <C>
Paul H. Metzinger (58) Director, President and Chief May 28, 1997 to Present
Executive Officer
Charles E. Bauer, Ph.D. (46) Director Chief Operations Officer
from
May 28, 1997 to October 1,
1997 and Director from
November 22, 1996 to Present
Alan M. Smith (46) Director, Secretary, Treasurer July 7, 1995 to Present and
and Director since June 1996 to
Chief Financial Officer Present
Gilbert Olachea (42) Executive Director of Product September 2, 1997 to Present
Development
Herbert J. Neuhaus (38) Managing Director of Particle August 18, 1997 to Present
Interconnect Corporation
James D. Martin (40) Vice President, CTL February 1977 to Present
Anthony P. Wynn (53) Vice President, CTL January 1979 to Present
David E. Blank (62) Vice President, CTL July 1989 to Present
</TABLE>
The directors hold office until the next annual meeting of shareholders and
until their successors have been duly elected and qualified. The officers are
elected by the Board of Directors at its annual meeting immediately following
the shareholders' annual meeting and hold office until they resign or are
removed from office. There are no family relationships that exist between any
director, executive officer, significant employee or person nominated or chosen
by the Company to become a director or executive officer. The Company has not
established an executive committee of the Board of Directors or any committee
that would serve similar functions such as an audit, incentive compensation or
nominating committee.
BIOGRAPHICAL INFORMATION ON OFFICERS
AND DIRECTORS AND SIGNIFICANT EMPLOYEES
PAUL H. METZINGER. Mr. Metzinger has been President, Chief Executive
Officer and a director of the Company since May 28, 1997. In addition, he has
been a director of Sigma 7 since June 6, 1997 and has served as President and
Chief Executive Officer and a director of Sigma 7 since August 21, 1997. Mr.
Metzinger is currently serving as Chief Executive Officer of Sigma 7 on an
interim basis
51
<PAGE>
until Sigma 7 can locate a permanent qualified CEO. Prior to becoming a
director and officer of the Company, Mr. Metzinger served as Intercell's General
Counsel and has practiced securities law and represented large and small public
companies for over 25 years.
CHARLES E. BAUER, PH.D. Dr. Bauer has served as Chief Operating Officer of
the Company since May 28, 1997 to October 1, 1997 when he resigned. He has
served as a director of the Company since November 22, 1996 to the present. Dr.
Bauer served as a director and Chief Executive Officer of Sigma 7 from June 6,
1997 to August 21, 1997. Dr. Bauer has been the Managing Director of TechLead
Corporation, an international consulting firm, since 1990. During his career,
Dr. Bauer has served as Director, Research and Technology of MicroLithics
Corporation, Golden, Colorado. At MicroLithics Corporation, Dr. Bauer was
responsible for a variety of technology programs with the Coors Advanced
Electronics Group, including, MicroLithics Coors Electronic Packaging Company,
two internal research groups of the Coors Ceramic Company and a joint venture
with W. R. Grace & Company. From 1978 through 1989 he was employed by
Tektronix, Incorporated, Beaverton, Oregon, in various capacities as a Material
Scientist/Engineer, Materials Science/Engineering Manager, Engineering
Scientific Manager, Bipolar Products Packaging Unit Manager and Integrated
Circuit Packaging Operations Manager.
Dr. Bauer received his BS in Materials Science and Engineering from
Stanford University in 1972, his MS in Metallurgical Engineering from Ohio State
University in 1975, his PhD in Materials Science and Engineering from Oregon
Graduate Center, Beaverton, Oregon in 1980 and his MBA from the University of
Portland in 1988.
Dr. Bauer has served as Assistant Adjunct Professor in Mechanical
Engineering and Business Administration with the University of Portland, as an
Associate Professor (visiting) in Mechanical Engineering with Florida
International University, Miami, Florida and is currently associated as
Assistant Adjunct Professor, with dual appointment in Mechanical Engineering and
Electrical and Computing Engineering with the University of Colorado. He is
currently Director, Industrial Relations for the Center for Advance
Manufacturing and Packaging of Microwave, Optical and Digital Electronics for
the University of Colorado.
Dr. Bauer served as the President of the Rocky Mountain Chapter of ISHM,
The Microelectronic Society (ISHM) (1995-96). He has received the Fellow of
Society Award of ISHM (1993) and served as National Technical Vice President
(1988-90). Dr. Bauer is a Director and the Secretary of the Surface Mount
Technology Association (SMTA) and served as President of the Rocky Mountain
Chapter (1995-96). Dr. Bauer has been a member of the following professional
societies: ASM International (ASM) since 1971, International Electronics
Packaging Society (IEPS) since 1983.
Dr. Bauer holds one U.S. Patent on Multilayer Interconnect Circuitry and
has five Patent Applications pending, relating to interconnect circuitry and
packaging. Dr. Bauer has published over 50 technical papers and presentations
in journals and conferences around the world. He founded and is currently
General Chair of Pan Pacific Microelectronics Symposium and Chip Scale Packaging
Advanced Technology Workshop.
52
<PAGE>
ALAN M. SMITH. Mr. Smith has been Secretary, Treasurer and Chief Financial
Officer of the Company since July 7, 1995 and a director since June 12, 1996.
Mr. Smith is a Chartered Accountant practicing in Vancouver, British Columbia,
Canada. Mr. Smith established a financial consulting practice in Vancouver,
Canada in 1985 and in 1990 obtained his license to practice as an independent
accountant. He has been a member of the Institute of Chartered Accountants of
Ontario since 1978 and of the Institute of Chartered Accountants of British
Columbia since 1981. Mr. Smith devotes substantially all of his professional
time to the business affairs of the Company.
SIGNIFICANT EMPLOYEES
The Company considers the following individuals as significant employees of
the Company.
GILBERT OLACHEA. Executive Director of Product Development of Intercell
Corporation since September 2, 1997. Although currently employed by Intercell
Corporation, Mr. Olachea will be devoting substantially all of his time in the
next few months as the Operating Executive of Sigma 7. From July 1993 to
September 1, 1997, Mr. Olachea served as Vice President Corporate Marketing and
Communications of Amkor Electronics, the world's largest service and product IC
package provider in the semiconductor industry. At Amkor, Mr. Olachea had
management responsibility for company market positioning, new product
implementation and training, public relations and authoring technical articles.
Mr. Olachea coordinated sales, customer service and technical teams to effect a
successful promotion and communication of products, service and value to
customers. His efforts contributed to a marked increase in brand equity, market
awareness and revenue of Amkor. From August 1988 to July 1993 Mr. Olachea
served as Regional Account Manager for Amkor.
HERBERT J. NEUHAUS. Dr. Neuhaus has been Managing Director of Particle
Interconnect Corporation since August 18, 1997. From August 1989 to August
1997, he was associated with the Electronic Material Venture Group in the New
Business Development Department of Amoco Chemical Company, Naperville, Illinois.
While associated with Amoco Chemical Company he held among other positions:
Business Development Manager/Team Leader; Project Manager-High Density
Interconnect; Product Manager MCM Products and as a research scientist.
During his tenure with Amoco, his professional efforts and responsibilities
were directed towards the identification, analysis and development of new market
opportunities for Amoco's electronic materials products, the development of new
applications for such products, including multichip module products, polymide
coatings and processes for multichip module applications.
Dr. Neuhaus received his Ph.D. degree in Physics from the Massachusetts
Institute of Technology, Cambridge, Massachusetts in 1989 and his BS in Physics
from Clemson University, Clemson, South Carolina in 1980.
Dr. Neuhaus is associated with numerous professional associations and has
served with such associations in the capacity of project leader or the technical
chair for conferences. Dr. Neuhaus will devote substantially all of his
professional efforts to the business affairs of Particle Interconnect
Corporation.
53
<PAGE>
JAMES D. MARTIN, VICE PRESIDENT, CTL. Mr. Martin has been employed by CTL
since February, 1977 and has served as Vice President of CTL since 1993. He has
worked in every department of CTL from production and sales to customer service.
Mr. Martin provides technical support to customers in this highly technical
business and organizes and runs production lines for rebuilding triodes,
cyclotrons and medical linear accelerators.
ANTHONY P. WYNN, VICE PRESIDENT, CTL. Mr. Wynn has served as Vice
President of CTL since January, 1979. Mr. Wynn is a design engineer responsible
for developing a 50KW L-band magnetron and rebuilds high power magnetrons,
cyclotrons, triodes, medical linear accelerators, electron guns and ion pumps.
He has worked with English Electric Valve Co. (U.K.) and Litton Industries
(U.S.) as a professional microwave engineer in the magnetron tube divisions.
DAVID E. BLANK, VICE-PRESIDENT, CTL. Mr. Blank has been Vice-President of
Engineering at CTL since July, 1989. A graduate of Brunel College, London
University, England and a member of the Institute of Mechanical Engineers, he
has worked in senior engineering positions with Varian Associates, EEV Inc.'s
Relmag Division of Litton Industries. He has designed and developed numerous
magnetrons at various power levels during his career.
SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, and the
rules thereunder require the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission and to furnish the Company with copies.
Based solely on its review of the copies of the Section 16(a) forms
received by it, or written representations from certain reporting persons, the
Company believes that, during the last fiscal year, all Section 16(a) filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with, with the exception of Dr. Charles E.
Bauer's Form 5 for the last fiscal year. Dr. Charles E. Bauer failed to report
two transactions on a timely basis. Dr. Charles E. Bauer's failure to timely
file a report was a failure known by the Company.
54
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning compensation
paid by the Company to the Chief Executive Officer ("CEO") and any other
executive officer whose total annual salary and bonus exceeded $100,000 for the
fiscal year ended September 30, 1997 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------------- --------------------
Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Options (#) Compensation($)
- ------------------------------------ ------------ ------------------- -------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C>
Paul H. Metzinger, 1997 $70,000/(1)/ -0- 2,350,000/(1)/ -0-
Director, President and
Chief Executive Officer
Gordon J. Sales, Former 1997 50,000 -0- -0- $400,000
Director, President 1996 105,917 -0- 200,000/(3)/ -0-
and Chief Executive 1995 -0- -0- 500,000/(3)/ $ 82,265/(2)/
Officer/(6)/
Alan M. Smith, Director, 1997 146,667 -0- 1,850,000 -0-
Secretary, Treasurer and 1996 93,371 -0- 500,000/(4)/ -0-
Chief Financial Officer 1995 15,000 -0- -0- 40,000/(5)/
Dr. Charles E. Bauer/(7)/ 1997 66,666 -0- 1,600,000 -0-
Director, former Chief
Operating Officer
Terry W. Neild, former 1997 80,000 -0- -0- -0-
Director and Executive Vice 1996 40,000 -0- 200,000/(3)/ -0-
President/(6)/ 1995 -0- -0- 500,000/(3)/ -0-
</TABLE>
55
<PAGE>
________________
/(1)/ Paul Metzinger was elected President and Chief Executive Officer on May
28, 1997. He is compensated pursuant to a written Employment Agreement, dated
June 1, 1997 at an annual salary of $210,000.00. For the period June 1, 1997 to
September 30, 1997, Mr. Metzinger was paid $70,000. The wife of Mr. Metzinger is
the holder of presently exercisable options to acquire 650,000 shares at $0.50
per share and 1,700,000 shares at $0.3750 per share issued September 30, 1997
and expiring September 30, 2007. Mr. Metzinger should be deemed the beneficial
owner of such shares.
/(2)/ Received as compensation as an officer of CTL.
/(3)/ An option to purchase 500,000 shares of Common Stock was originally
granted to Messrs. Sales and Neild on July 7, 1995 at an exercise price of $.625
per share. On November 9, 1995 these options were repriced at an exercise price
of $.50 per share. Concurrently, an option to purchase an additional 200,000
shares of Common Stock was granted by the Company to Messrs. Sales and Neild at
the same exercise price. Messrs. Sales and Neild each subsequently transferred
options to purchase 50,000, of the 200,000 shares originally granted to them to
Alan M. Smith as a gift on October 21, 1996.
/(4)/ Mr. Smith is the holder of presently exercisable options to acquire
150,000 shares at $0.50 per share and 1,700,000 at $0.3750 per share, issued
September 30, 1997 and expiring September 30, 2007. Of the 500,000 options
issued to him by the Company in the fiscal year ended September 30, 1996, Mr.
Smith exercised 150,000 of such options in the fiscal year ended September 30,
1996 leaving a balance of 350,000 shares subject to option. These 350,000 shares
subject to option were canceled and re-issued as a new option on September 30,
1997, expiring September 30, 2007 and are included in the 1,850,000 shares shown
as issued by the Company in 1997. Mr. Smith owns an additional, presently
exercisable option to acquire 150,000 shares at $0.50 per share, issued with a
new term commencing September 30, 1997, expiring September 30, 2007, which he
received from three other individuals on October 21, 1996. This 150,000 option
has not been included in this table as the option was not granted by the
Company.
/(5)/ Received as compensation as a consultant to Energy Corporation and CTL.
/(6)/ Messrs. Sales and Neild resigned as directors and officers of the Company
effective May 28, 1997.
/(7)/ Dr. Bauer served as Chief Operations Officer from June 1, 1997 until he
resigned on October 1, 1997. The compensation shown was paid pursuant to his
Employment Agreement which was terminated effective September 30, 1997.
The foregoing compensation table does not include certain fringe benefits
made available on a nondiscriminatory basis to all Company employees such as
group health insurance, dental insurance, long-term disability insurance,
vacation and sick leave. In addition, the Company makes available certain non-
monetary benefits to its executive officers with a view to acquiring and
retaining qualified personnel and facilitating job performance. The Company
considers such benefits to be ordinary and incidental business costs and
expenses. The aggregate value of such benefits in the case of each executive
officer listed in the above table, which cannot be precisely ascertained but
which is less than 10% of the cash compensation paid to each such executive
officer, is not included in such table.
OPTION GRANTS TABLE
The following table provides information relating to the grant of stock
options to the Company's executive officers during the fiscal year ended
September 30, 1997.
56
<PAGE>
<TABLE>
<CAPTION>
OPTION GRANTS IN THE LAST FISCAL YEAR
Potential Realizable Value at Assumed
Annual Rates of Stock Price
Individual Grants Appreciation for Option Term/(1)/
- -------------------------------------------------------------------------------------------- --------------------------------------
Percent of
Total/(7)/
Number of Options Fair
Securities Granted to Market
Underlying Employees Value on
Options in Fiscal Exercise Grant Expiration
Name Granted(#) Year/(3)/ Price($/sh) Date/(2)/ Date 0% ($)/(8)/ 5% ($)/(8)/ 10% ($)
- --------------------------- -------------- ---------- ---------- --------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul H. Metzinger 650,000 9.80 0.50 0.2450 9/30/07 (165,750.00) (65,599.00) 88,503.00
1,700,000/(6)/ 25.64 0.3750 0.2450 9/30/07 (221,000.00) 40,935.00 442,794.00
Alan M. Smith/(4)/ 150,000 2.26 0.50 0.2450 9/30/07 (38,250.00) (15,138.00) 20,320.00
1,700,000/(6)/ 25.64 0.3750 0.2450 9/30/07 (221,000.00) 40,935.00 442,794.00
Charles E. Bauer/(5)/ 100,000 1.51 0.3750 0.2450 9/30/07 (13,000.00) 2,408.00 26,047.00
1,500,000/(6)/ 22.62 0.3750 0.2450 9/30/07 (195,000.00) 36,119.00 390,700.00
_______________
/(1)/ Potential realizable value is based on an assumption that the stock price of the Common Stock appreciates at the annual rate
shown (compounded annually) from the date of grant until the end of the ten-year option term. These numbers are calculated based
on the requirements promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future
stock price growth which may or may not occur.
/(2)/ Computed based on the average closing bid and asked prices on the date the options were granted.
/(3)/ All options granted were immediately exercisable on the date of grant, September 30, 1997.
/(4)/ Mr. Smith owns an additional, presently exercisable option to acquire 150,000 shares at $0.50 per share, issued with a new
term commencing September 30, 1997, expiring September 30, 2007, which he received from three other individuals on October 21,
1996. This 150,000 option has not been included in this table as the option was not granted by the Company.
/(5)/ Charles Bauer resigned as an Officer of the Company on October 1, 1997.
/(6)/ Unless exercised within 90 days of resignation or termination, as an officer, these options are forfeited by the holders
unless specifically provided otherwise in writing by the parties.
/(7)/ Based on a total of 6,831,000 options granted in the fiscal year ended September 30, 1997.
/(8)/ Numbers in parentheses are negative numbers.
</TABLE>
AGGREGATED OPTION EXERCISE AND FISCAL YEAR-END OPTION TABLE
The following table provides information relating to the exercise of stock
options during the fiscal year ended September 30, 1997 by the Company's
executive officers and the 1997 fiscal year-end value of unexercised options.
57
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR,
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options Options
at FY-End/(1)/ at FY-End($)/(1)/
---------------- -----------------
Shares
Acquired onValue Exercisable/ Exercisable/
Name Exercise(#)Realized( )$Unexercisable Unexercisable
---------------- -------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Paul H. Metzinger -0- -0- 2,350,000/0 $ 575,750/0
Gordon J. Sales/(2)/ -0- -0- 650,000/0 159,250/0
Alan M. Smith -0- -0- 1,850,000/0/(3)/ 453,250/0/(3)/
Terry W. Neild/(2)/ -0- -0- 650,000/0 159,250/0
Charles E. Bauer/(4)/ -0- -0- 1,600,000/0 392,000/0/(4)/
</TABLE>
_______________
/(1)/ The average of the closing bid and asked price of the Common Stock on
September 30, 1997 ($.245) was used to calculate the option value.
/(2)/ Messrs. Sales and Neild resigned as Directors and officers of the Company
effective May 28, 1997.
/(3)/ Does not include 150,000 unexercised presently exercisable options held by
Alan Smith, which he received from three individuals and not the Company.
/(4)/ Charles E. Bauer resigned as officer of the Company effective October 1,
1997.
DIRECTOR COMPENSATION
Non-employee directors of the Company have in the past and will in the
future receive $1,500 for their attendance at each regular or special meeting of
the Board of Directors. In addition, the Board of Directors intends to grant
non-employee directors options to purchase shares of Common Stock on a case-by-
case basis in the future. The basis for determining the number of options to
award future non-employee directors of the Company will be based on a variety of
factors including the following: experience of the director in the industries
the Company currently competes; previous management experience; the size of the
entity the director is currently or was formerly associated with; and the
overall value the current Board of Directors believes that non-employee director
will provide to the Company.
EMPLOYMENT AGREEMENTS
On May 28, 1997, the Company entered into certain employment agreements
(the "Employment Agreements") with Paul H. Metzinger to serve as President and
Chief Executive Officer of the Company, Alan M. Smith to serve as Chief
Financial Officer of the Company, and Charles E. Bauer to serve as Chief
Operating Officer of the Company (collectively, the "Employees" and individually
an "Employee"). The Employment Agreements are for a period of one year
beginning June 1, 1997. Any extension or renewal of the Employment Agreements
must occur at least three months prior to the end of the initial term or any
renewal term and absent mutual agreement of the parties, the failure to conclude
such extension or renewal by
58
<PAGE>
such date shall be deemed notice to the Company and the Employee, that the
relevant Employment Agreement shall not be extended. Under each Employment
Agreement, Messrs. Smith and Bauer will receive an annual salary of $200,000 and
Mr. Metzinger will receive an annual salary of $210,000 (each referred to as an
"Annual Salary") for the first year. If an Employment Agreement is subsequently
extended by the Board, each Employee's Annual Salary will increase by the
amount, if any, in which the Consumer Price Index increased during the previous
year. Each Employee also is entitled to participate in the Company's bonus and
stock option plans and participate in the customary employee benefits programs
maintained by the Company, including health, life and disability insurance to
the extent provided to other senior executives of the Company.
The Company or an Employee may terminate the applicable Employment
Agreement at any time with or without cause. In the event the Company
terminates an Employment Agreement for cause or an Employee terminates his
Employee Agreement without cause, all of such Employee's rights to compensation
would cease upon the date of his termination. If the Company terminates an
Employment Agreement without cause, the Employee terminates his Employment
Agreement for cause, or in the event of a change in control, the Company will
pay to the Employee all compensation and other benefits that would have accrued
and/or been payable to the Employee during the full term of the Employment
Agreement.
A change of control is considered to have occurred when, as a result of any
type of corporate reorganization, execution of proxies, voting trusts or similar
arrangements, a person or group of persons (other than incumbent officers,
directors and principal shareholders of the Company) acquires sufficient control
to elect more than a majority of the Company's Board of Directors, acquires 50%
or more of the voting shares of the Company, or the Company adopts a plan of
dissolution of liquidation. The Employment Agreements also include a non-
compete and non-disclosure provisions in which each Employee agrees not to
compete with or disclose confidential information regarding the Company and its
business during the term of the Employment Agreement and for a period of one
year thereafter.
ADDITIONAL EMPLOYMENT AGREEMENTS. The Company, through its wholly owned
subsidiaries, has also entered into employment agreements with the following
individuals, among others, Dr. Herbert J. Neuhaus and Gilbert Olachea.
COMPENSATION PURSUANT TO PLANS
STOCK OPTION PLANS
During the fiscal year ended September 30, 1997, the Company granted
options to purchase 6,831,000 shares of common stock to directors, officers,
employees and consultants of the Company and its subsidiaries. As of September
30, 1997, 8,952,000 options are exercisable.
59
<PAGE>
The Company has one Stock Option Plan titled the Intercell Corporation 1995
Compensatory Stock Option Plan (the "1995 Plan"). The Company has reserved
14,000,000 shares of common stock for issuance under the 1995 Plan.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The Company does not have a compensation committee, all decisions on the
compensation of executive officers and directors of the Company are made by the
full Board of Directors. In the preceding fiscal year, the following members of
the Board of Directors participated in discussions involving the compensation of
executive officers of the Company: Messrs. Sales, Neild, Smith and Metzinger.
60
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of outstanding shares of Common Stock as of November 30, 1997, by (i)
each person known by the Company to own beneficially 5% or more of the
outstanding shares of Common Stock, (ii) the Company's directors, Chief
Executive Officer and executive officers whose total compensation exceeded
$100,000 for the last fiscal year, and (iii) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
Name and Address of Percentage of
Beneficial Owner Number of Shares Class/(5)/
- ---------------- ----------------- -----------
<S> <C> <C>
Paul H. Metzinger, President,
Chief Executive Officer and Director
370 Seventeenth Street, Suite 3290
Denver, CO 80202 2,852,541/(1)/ 8.72%
Alan M. Smith, Chief Financial Officer and Director
999 West Hastings St., Suite 1750
Vancouver, B.C., V6C 2W2 2,188,000/(2)/ 6.76
Cheri L. Perry
3236 Jellison Street
Wheat Ridge, CO 80033 2,852,541/(1)/ 8.72
Charles E. Bauer, Chief Operating Officer and Director
31321 Island Drive
Evergreen, CO 80439 1,600,000/(3)(4)/ 5.00
All officers and directors as a group (3 persons) 6,640,541/(5)/ 18.28
</TABLE>
_______________
/(1)/ Includes the following shares and options currently held by corporations
whose sole shareholder, president and director is Cheri L. Perry, the wife of
Mr. Metzinger: 419,340 shares owned of record and beneficially; 650,000 shares
of common stock subject to a presently exercisable option, exercisable at $.050
per share, issued September 30, 1997, expiring September 30, 2007; and 1,700,000
shares of common stock subject to a presently exercisable option, exercisable at
$0.3750 per share, issued September 30, 1997, expiring September 30, 2007. Mr.
Metzinger owns directly, of record and beneficially, 83,201 shares of common
stock. His wife should be deemed the beneficial owner of such shares. Mr.
Metzinger's and his wife's stock ownership are not duplicated in this
computation.
/(2)/ Includes 300,000 shares of common stock subject to a presently exercisable
option, exercisable at $0.50 per share, issued September 30, 1997, expiring
September 30, 2007 and 1,700,000 shares of common stock subject to a presently
exercisable option exercisable at $0.3750 per share, issued September 30, 1997,
expiring September 30, 2007.
/(3)/ Includes 1,600,000 shares of common stock subject to a presently
exercisable option, exercisable at $0.3750 per share, issued September 30, 1997,
expiring on September 30, 2007.
/(4)/ Charles E. Bauer resigned as an Officer on October 1, 1997.
/(5)/ Based on 30,371,075 shares of common stock issued and outstanding on
September 30, 1997. The total number of shares outstanding is increased to
reflect the number of shares underlying individual options in computing that
individual or group percentage ownership interest in the Company. Mr.
Metzinger's and his wife's stock ownership are not duplicated in this
computation.
61
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of September 30, 1996, the Company had an outstanding promissory note
due to Jerry W. Tooley, the Chief Financial Officer of Cellular Magnetics in the
amount of $80,000 with an interest rate of 8%, due annually. The promissory
note was issued as part of the consideration paid for the purchase of M.C. Davis
consummated on September 30, 1996. This note was repaid in October 1996.
The Company had noninterest bearing notes payable totaling $800,000 due to
the former owners of M.C. Davis in consideration for the purchase of M.C. Davis
consummated on September 30, 1996. These notes were repaid in October 1996.
The Company leases an office from Alan M. Smith, Ltd., a company controlled
by Alan M. Smith, an executive officer and director of the Company. The Company
leases this office space pursuant to a lease that expires on July 31, 2001. The
monthly lease payments are $3,000. The Company believes that the lease payments
are on terms at least as favorable as could be obtained from an independent
lessor.
On July 8, 1996, Energy, which does not currently conduct any operations
and whose only assets consist of the Company's Common Stock, and the Company
entered into a certain Plan of Liquidating Dissolution (the "Plan"). The Plan
was approved by a majority of the shareholders of Energy on October 21, 1996 in
accordance with the provisions of the Delaware General Corporation Law. Under
the Plan, the Company agreed to distribute the shares of Common Stock issued to
the shareholders of Energy over a period of three years. The Company, with the
concurrence of Energy, decided to change the timing of the distribution due to
the substantial decline in the market price of the Company's common stock.
Accordingly, the 5,412,191 shares of Common Stock owned by Energy were
distributed to the beneficial owners of the shares of common stock of Energy as
of July 8, 1996, pro-rata as follows: 902,032 on or about May 5, 1997 and the
remainder on August 19, 1997.
521508 B.C. Ltd. (the beneficiaries of which are the adult children of Mr.
Gordon J. Sales and the father-in-law of Mr. Terry W. Neild), the Blonde Bear
Trust, the beneficiary of which is the spouse of Alan M. Smith and Messrs. James
D. Martin, Anthony P. Wynn and David E. Blank, significant employees of the
Company, own shares of Energy and will receive approximately 247,632, 119,000,
20,000, 20,000 and 20,000 shares of Common Stock, respectively, in the
distribution. The Blonde Bear Trust has an independent trustee and Mr. Smith
does not have the authority to revoke the trust or direct the trustee in the
voting or disposition of the trust proceeds. Accordingly, Mr. Smith disclaims
any beneficial ownership interest in the shares of Common Stock the trust will
receive from Energy.
During the fiscal year ended September 30, 1997, the Company sold its
wholly owned subsidiaries, Intercell Wireless Corp. and Cellular Magnetics,
Inc., including all of its right title and interest in the antenna technology to
Intercell Technologies Corporation, a Colorado corporation on July 18, 1997.
Terry W. Neild, former director and officer of the Company and
62
<PAGE>
Louis L. Ross, a former consultant to the Company, owns a controlling interest
in Intercell Technologies Corporation. See "BUSINESS-Recent Acquisitions,
Dispositions and Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report.
1. FINANCIAL STATEMENTS. See Index to Financial Statements and
Schedule on page F-2 of this Report.
2. FINANCIAL STATEMENT SCHEDULES. See Index to Financial Statements
and Schedule on page F-2 of this Report. All other schedules are
omitted since they are not required, are inapplicable, or the
required information is included in the financial statements or
notes thereto.
3. EXHIBITS. The following is a complete list of exhibits filed as
part of this Form 10-K. Exhibit numbers correspond to the
numbers in the Exhibit Table of Item 601 of Regulation S-K.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1/(7)/ Agreement and Plan of Reorganization, dated July 7, 1995, between
the Company and Modern Industries, Inc.
2.2/(3)/ Plan and Agreement of Merger dated September 3, 1996, by and
between Particle Interconnect, Inc., Particle Interconnect
Corporation and the Company.
2.3/(4)/ Agreement and Plan of Merger dated October 14, 1996, by and
between AC Magnetics, Inc., doing business as M.C. Davis Company,
Cellular Magnetics, Inc. and the Company.
2.4/(5)/ Stock Purchase Agreement dated July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation and Addendum
to Stock Purchase Agreement.
2.5/(6)/ Stock Sale and Purchase Agreement dated June 6, 1997 between
Intercell Corporation and Sigma 7 Corporation.
2.6* Offer for Development Agreement of Microlink Technologies
Corporation.
63
<PAGE>
3.1/(7)/ Articles of Incorporation of the Company, and all amendments
thereto, as amended.
3.2/(7)/ Bylaws of the Company.
4.1/(7)/ Form of Common Stock Certificate.
4.2 Certificate of Designation for Series B Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and incorporated herein by reference.
4.3/(1)/ Specimen of Warrant attached to Series B Preferred Stock.
4.4 Certificate of Designation for Series C Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and is incorporated herein by reference.
4.5/(7)/ Form of Warrant attached to Series C Preferred Stock.
4.6/*/ Certificate of Designation for Series D Preferred Stock
4.7/(7)/ Specimen of Registration Rights Agreement for Series B Preferred
Stock.
4.8/(7)/ Specimen of Registration Rights Agreement for Series C Preferred
Stock.
4.9/(7)/ Plan of Liquidating Dissolution of Energy Corporation dated July
8, 1996.
10.1/(2)/ 1995 Compensatory Stock Option Plan.
10.2/(7)/ Assignment Agreement dated September 3, 1996, assigning certain
Patents and Patent Applications and trade secrets relating to the
PI Technology to the Company, as assignee, and Particle
Interconnect, Inc. as assignor.
10.3/(7)/ Assignment Agreement dated June 5, 1996, assigning the Patent
Application for the Antenna Technology to the Company, as
assignee, and El-Badawy Amien El-Sharaway, as assignor.
10.4/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Gordon J. Sales and the Company.
10.5/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Alan M. Smith and the Company.
64
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.6/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Terry W. Neild and the Company.
10.7/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 22, 1996 between Steven D. Clark and PI Corp.
10.8/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Lawrence DiFrancesco and PI Corp.
10.9/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Patricia H. Grihalva and PI Corp.
10.10/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between Jerry W. Tooley and Cellular Magnetics.
10.11/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between David Putnam and Cellular Magnetics.
10.12/(5)/ Warrant Agreement dated as of July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation.
10.13/(5)/ Royalty Agreement dated as of July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation.
10.14/(5)/ $2,200,000 Promissory Note dated as of July 18, 1997 between
Intercell Technologies Corporation and Intercell Corporation.
10.15/(5)/ Stock Pledge and Security Agreement dated July 18, 1997 between
Intercell Corporation and Intercell Technologies Corporation.
10.16* Microlink Technologies Corporation Standard Industrial Lease.
10.17* Sigma 7 Corporation Lease.
10.18* CTL Lease
11* Statement regarding Computation of Per Share Earnings.
21/(7)/ Subsidiaries of the Company.
23* Consent of KPMG Peat Marwick LLP
65
<PAGE>
27* Financial Data Schedule.
_________________
* Filed herewith.
/(1)/ Incorporated by reference to the Company's Current Report on Form 8-K
dated July 10, 1996.
/(2)/ Incorporated by reference to the Company's Current Registration Statement
on Form S-8, Registration No. 333-604, effective January 24, 1996.
/(3)/ Incorporated by reference to the Company Current Report on Form 8-K dated
September 3, 1996.
/(4)/ Incorporated by reference to the Company Current Report on Form 8-K dated
October 14, 1996.
/(5)/ Incorporated by reference to the Company Current Report on Form 8-K dated
July 18, 1997.
/(6)/ Incorporated by reference to the Company Current Report on Form 8-K dated
May 28, 1997.
/(7)/ Incorporated by reference to the Company Annual Report on Form 10-K for
the year ended September 30, 1996.
(b) Reports on Form 8-K:
1. Form 8-K dated August 4, 1997 regarding the disposition of Intercell
Wireless Corp. and Cellular Magnetics, Inc., doing business as M.C.
Davis Company.
2. Form 8-K/A-1 dated September 23, 1997 regarding the acquisition of
Sigma 7 Corporation.
66
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INTERCELL CORPORATION, (a Colorado corporation)
Date: February 3, 1998 By /s/ Paul H. Metzinger
---------------------
Paul H. Metzinger, Director, Chief Executive
Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and the capacities and on the dates indicated.
Date: February 3, 1998 By /s/ Paul H. Metzinger
------------------------------------------------
Paul H. Metzinger, Director, Chief Executive
Officer and President
Date: February 3, 1998 By /s/ Alan M. Smith
------------------------------------------------
Alan M. Smith, Director, Chief Financial
Officer, Secretary and Treasurer
Date: February 3, 1998 By
------------------------------------------------
Charles E. Bauer, Director
67
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
September 30, 1997 and 1996 and 1995
(With Independent Auditors' Reports Thereon)
F-1
<PAGE>
FINANCIAL STATEMENTS AND SCHEDULE
INTERCELL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Reports.......................................................... F-3
Consolidated Balance Sheets - September 30, 1997 and September 30, 1996................ F-4
Consolidated Statements of Operations - Year ended September 30, 1997, Year ended
September 30, 1996 and Eleven-month period ended September 30, 1995................... F-5
Consolidated Statements of Stockholders' Equity - Year ended September 30, 1997, Year
ended September 30 1996 and Eleven-month period ended September 30, 1995.............. F-6
Consolidated Statements of Cash Flows - Year ended September 30, 1997, Year ended
September 30, 1996 and Eleven-month period ended September 30, 1995................... F-7
Notes to Consolidated Financial Statements............................................. F-8
Schedule II - Valuation and Qualifying Accounts........................................ F-31
</TABLE>
The remaining schedules for which provision is made in Regulation S-X are
not required under the instructions contained therein, are inapplicable, or
the information required is included in the financial statements or
footnotes.
F-2
<PAGE>
Independent Auditors' Report
- ----------------------------
The Stockholders and Board of Directors
Intercell Corporation:
We have audited the accompanying consolidated balance sheets of Intercell
Corporation and subsidiaries (the Company), formerly Modern Industries, Inc.
and subsidiaries, as of September 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended and for the eleven-month period ended September 30, 1995.
In connection with our audits of the aforementioned consolidated financial
statements, we have also audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Intercell
Corporation and subsidiaries as of September 30, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended and for the
eleven-month period ended September 30, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to
the consolidated financial statements, the Company has suffered recurring losses
from operations and has a deficiency in working capital that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
January 16, 1998
F-3
<PAGE>
<TABLE>
<CAPTION>
INTERCELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
---------------------------
Assets 1997 1996
------ ------------- ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 107,000 $ 4,224,000
Short-term investments -- 3,063,000
Accounts receivable, less allowance for returns and
doubtful accounts of $262,000 and $255,000 in 1997
and 1996, respectively 734,000 746,000
Inventories 982,000 1,066,000
Prepaid expenses and other current assets 294,000 102,000
Investment land held for sale 1,424,000 1,424,000
------------ -----------
Total current assets 3,541,000 10,625,000
Property, plant and equipment, net 2,364,000 1,418,000
Investment in and advances to ITC 1,000,000 --
Goodwill and other intangible assets, net 122,000 1,583,000
Other assets 28,000 200,000
------------ -----------
$ 7,055,000 $13,826,000
============ ===========
Liabilities and Stockholders' Equity
------------------------------------a
Current liabilities:
Notes payable $ 542,000 $ 266,000
Notes payable to related parties 260,000 932,000
Current portion of long-term debt 17,000 120,000
Accounts payable and accrued liabilities 2,765,000 742,000
Accounts payable to related parties 71,000 --
------------ -----------
Total current liabilities 3,655,000 2,060,000
Long-term debt, less current portion 16,000 86,000
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock; 10,000,000 shares authorized:
Series B; 5 and 787 shares issued and outstanding as
of September 30, 1997 and 1996, respectively
(liquidation preference of $11,250 per share) 40,000 5,393,000
Series C; 167 shares issued and outstanding as of
September 30, 1997 (liquidation preference of
$10,667 per share) 1,217,000 --
Series D; 1,080 shares issued and outstanding as of
September 30, 1997 (liquidation preference of
$2,500 per share) 2,401,000 --
Warrants to acquire common stock 3,050,000 1,870,000
Common stock; no par value; 100,000,000 shares authorized;
30,371,075 and 15,734,229 shares outstanding as of
September 30, 1997 and 1996, respectively 21,285,000 12,187,000
Additional paid-in capital 2,996,000 1,765,000
Deferred compensation (3,000) (331,000)
Treasury stock, at cost; 1,100,000 shares as of
September 30, 1997 (385,000) --
Accumulated deficit (27,217,000) (9,204,000)
------------ -----------
Total stockholders' equity 3,384,000 11,680,000
------------ -----------
$ 7,055,000 $13,826,000
============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
INTERCELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
September 30, Eleven-Month Period
---------------------------- Ended September 30,
1997 1996 1995
------------- ------------- --------------------
<S> <C> <C> <C>
Net sales $ 7,729,000 $ 3,405,000 $ 3,768,000
Cost of goods sold 8,029,000 2,830,000 2,884,000
------------ ------------ -----------
Gross profit (loss) (300,000) 575,000 884,000
Operating expenses:
Selling, general, and 9,077,000 5,683,000 1,317,000
administrative expenses
Research and development 1,318,000 88,000 --
Charge relating to acquisition of
in-process 2,022,000 -- --
research and development
Impairment charge relating to
write off 2,300,000 -- --
of goodwill and other intangible
assets
Impairment charge on investment in
and 835,000 -- --
advances to ITC
Loss on abandonment of assets 801,000 -- --
------------ ------------ -----------
Operating loss (16,653,000) (5,196,000) (433,000)
Other income (expense):
Interest income 258,000 36,000 --
Interest expense (179,000) (90,000) (88,000)
Loss on investments -- -- (795,000)
Other (71,000) (33,000) (3,000)
------------ ------------ -----------
8,000 (87,000) (886,000)
------------ ------------ -----------
Loss before income taxes (16,645,000) (5,283,000) (1,319,000)
Income taxes -- -- 2,000
------------ ------------ -----------
(16,645,000) (5,283,000) (1,321,000)
Minority interest's share of loss in
consolidated subsidiary 164,000 -- --
------------ ------------ -----------
Net loss (16,481,000) (5,283,000) (1,321,000)
Deemed preferred stock dividend
relating 1,072,000 1,625,000 --
to in-the-money conversion terms
Accretion on preferred stock 460,000 -- --
------------ ------------ -----------
Net loss applicable to common $(18,013,000) $ (6,908,000) $(1,321,000)
stockholders ============ ============ ===========
Net loss per common share $(0.99) $(0.54) $(0.18)
============ ============ ===========
Weighted-average number of shares of
common stock outstanding 18,114,038 13,072,683 7,391,275
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997 AND 1996,
AND ELEVEN-MONTH PERIOD ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Convertible
Preferred Stock Warrants to Common Stock
---------------------- Acquire -------------------------
Shares Amount Common Stock Shares Amount
-------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Balances as of October 31, 1994 - $ - - 4,419,729 $ 13,000
Shares issued in lieu of interest
payment to related party - - - 17,819 -
Shares issued in exchange for
investment in American Microcell - - - 712,751 2,000
Shares issued in private placement - - - 85,530 -
Contribution to ESOP - - - 176,362 1,000
Conversion of additional paid-in
capital to common stock - - - - 3,093,000
Acquisition of Intercell 210,000 250,000 - 4,997,053 -
Net loss - - - - -
-------- ----------- ------------- ---------- -----------
Balances as of September 30, 1995 210,000 250,000 - 10,409,244 3,109,000
Repurchase of shares of Series A
preferred stock (210,000) (250,000) - - -
Shares of Series B preferred stock
and warrants issued in private
placement, net of issuance costs
of $1,100,000 1,000 5,265,000 1,870,000 - -
Shares issued in exchange for land - - - 400,000 1,000,000
Contribution to ESOP - - - 126,761 158,000
Shares issued to effect business
combination with Particle
Interconnect, Inc. treated as an
immaterial pooling - - - 1,400,000 8,000
Deferred compensation related to
stock option grants - - - - 4,017,000
Amortization of deferred
compensation - - - - -
Exercise of stock options - - - 2,295,180 1,342,000
Conversion of Series B preferred
stock to common stock (213) (1,497,000) - 588,880 1,497,000
Shares issued in exchange for
services - - - 236,386 56,000
Shares issued for acquisition of
M.C. Davis - - - 277,778 1,000,000
Amortization of deemed dividend - 1,625,000 - - -
Net loss - - - - -
-------- ----------- ------------- ---------- -----------
Balances as of September 30, 1996 787 5,393,000 1,870,000 15,734,229 12,187,000
Shares of Series C preferred stock
and warrants issued in private
placement, net of issuance costs
of $577,500 525 2,560,000 1,180,000 - -
Deferred compensation related to
stock option grants - - - - 148,000
Compensation recorded on transfer
of stockholder options - - - - 530,000
Amortization of deferred
compensation - - - - -
Exercise of stock options - - - 200,000 150,000
Conversion of Series B preferred
stock to common stock (782) (5,686,000) - 4,962,271 5,686,000
Conversion of Series C preferred
stock to common stock (358) (2,542,000) - 9,449,575 2,542,000
Shares issued in exchange for
services - - - 25,000 42,000
Shares of Series D preferred
stock issued in connection with
acquisition of Sigma 7 1,000 2,223,000 - - -
Shares of Series D preferred
stock issued as payment for
covenant not to compete 80 178,000 - - -
Treasury shares received as
consideration for asset sale - - - - -
Accretion of preferred stock - 460,000 - - -
Amortization of deemed dividend - 1,072,000 - - -
Net loss - - - - -
-------- ----------- ------------- ---------- -----------
Balances as of September 30, 1997 1,252 $ 3,658,000 3,050,000 30,371,075 $21,285,000
======== =========== ============= ========== ===========
<CAPTION>
Additional Total
Paid-In Deferred Treasury Accumulated Stockholders'
Capital Compensation Stock Deficit Equity
---------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances as of October 31, 1994 2,276,000 - - (816,000) 1,473,000
Shares issued in lieu of interest
payment to related party 13,000 - - - 13,000
Shares issued in exchange for
investment in American Microcell 498,000 - - - 500,000
Shares issued in private placement 60,000 - - - 60,000
Contribution to ESOP 246,000 - - - 247,000
Conversion of additional paid-in
capital to common stock (3,093,000) - - - -
Acquisition of Intercell - - - - 250,000
Net loss - - - (1,321,000) (1,321,000)
--------- ----------- ------------- ----------- -----------
Balances as of September 30, 1995 - - - (2,137,000) 1,222,000
Repurchase of shares of Series A
preferred stock - - - - (250,000)
Shares of Series B preferred stock
and warrants issued in private
placement, net of issuance costs
of $1,100,000 1,765,000 - - - 8,900,000
Shares issued in exchange for land - - - - 1,000,000
Contribution to ESOP - - - - 158,000
Shares issued to effect business
combination with Particle
Interconnect, Inc. treated as an
immaterial pooling - - - (159,000) (151,000)
Deferred compensation related to
stock option grants - (4,017,000) - - -
Amortization of deferred
compensation - 3,686,000 - - 3,686,000
Exercise of stock options - - - - 1,342,000
Conversion of Series B preferred
stock to common stock - - - - -
Shares issued in exchange for
services - - - - 56,000
Shares issued for acquisition of
M.C. Davis - - - - 1,000,000
Amortization of deemed dividend - - - (1,625,000) -
Net loss - - - (5,283,000) (5,283,000)
--------- ----------- ------------- ----------- -----------
Balances as of September 30, 1996 1,765,000 (331,000) - (9,204,000) 11,680,000
Shares of Series C preferred stock
and warrants issued in private
placement, net of issuance costs
of $577,500 932,000 - - - 4,672,000
Deferred compensation related to
stock option grants - (148,000) - - -
Compensation recorded on transfer
of stockholder options - (530,000) - - -
Amortization of deferred
compensation - 1,006,000 - - 1,006,000
Exercise of stock options - - - - 150,000
Conversion of Series B preferred
stock to common stock - - - - -
Conversion of Series C preferred
stock to common stock - - - - -
Shares issued in exchange for
services - - - - 42,000
Shares of Series D preferred
stock issued in connection with
acquisition of Sigma 7 277,000 - - - 2,500,000
Shares of Series D preferred
stock issued as payment for
covenant not to compete 22,000 - - - 200,000
Treasury shares received as
consideration for asset sale - - (385,000) - (385,000)
Accretion of preferred stock - - - (460,000) -
Amortization of deemed dividend - - - (1,072,000) -
Net loss - - - (16,481,000) (16,481,000)
--------- ----------- ------------- ----------- -----------
Balances as of September 30, 1997 2,996,000 (3,000) (385,000) (27,217,000) 3,384,000
========= =========== ============= =========== ===========
</TABLE>
F-6
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
September 30, 11-Month
----------------------------- Period Ended
1997 1996 September 30, 1995
------------ ------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(16,481,000) $(5,283,000) $(1,321,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization on property and equipment 408,000 31,000 97,000
Amortization of intangible assets 380,000 28,000 --
Impairment of goodwill 4,572,000 -- --
Impairment of investment in and advances to ITC 835,000 -- --
Loss on abandonment/sale of property, plant and equipment 990,000 -- --
Minority interest (164,000) -- --
Loss on investments -- -- 795,000
Loss on sale of property -- 36,000 --
Common stock issued for interest/services 42,000 56,000 13,000
Shares of subsidiary issued for services 139,000 -- --
Accrual of ESOP contributions -- -- 158,000
Amortization of deferred compensation 1,006,000 3,686,000 --
Changes in operating assets and liabilities:
Accounts receivable (79,000) 47,000 (167,000)
Inventories 57,000 (28,000) (275,000)
Prepaid expenses and other current assets (152,000) 21,000 32,000
Accounts payable and accrued liabilities 1,071,000 (79,000) 344,000
Accounts payable to related parties -- (212,000) 123,000
------------ ----------- -----------
Net cash used in operating activities (7,376,000) (1,697,000) (201,000)
------------ ----------- -----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (1,671,000) (330,000) (31,000)
Other assets 193,000 (142,000) 9,000
Cash (paid) acquired in connection with acquisitions (486,000) 167,000 --
Proceeds from maturity of short-term investments 3,063,000 -- --
Purchase of short-term investments -- (3,063,000) --
Cash transferred/loaned to acquireror in disposition of subsidiary (562,000) -- --
Loans extended to subsidiary prior to acquisition (1,345,000) --- ---
Proceeds from sale of property, plant and equipment 50,000 174,000 --
------------ ----------- -----------
Net cash used in investing activities (758,000) (3,194,000) (22,000)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from (repayments of) loan payable to bank -- (190,000) 190,000
Repayments of notes payable to related parties (932,000) (495,000) (460,000)
Proceeds from notes payable 720,000 -- 110,000
Repayments of notes payable (339,000) (71,000) (40,000)
Payment of debt issuance costs (42,000) -- --
Repayments of long-term debt (212,000) (428,000) --
Proceeds from issuance of preferred stock and warrants 4,672,000 8,900,000 --
Proceeds from sale of common stock 150,000 1,342,000 60,000
------------ ----------- -----------
Net cash provided by (used in) financing activities 4,017,000 9,058,000 (140,000)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents (4,117,000) 4,167,000 (363,000)
Cash and cash equivalents beginning of year/period 4,224,000 57,000 420,000
------------ ----------- -----------
Cash and cash equivalents end of year/period $ 107,000 $ 4,224,000 $ 57,000
============ =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996, AND
ELEVEN-MONTH PERIOD ENDED SEPTEMBER 30, 1995
(1) DESCRIPTION OF BUSINESS
General
Intercell Corporation (the Company or Intercell) is a Colorado corporation
that invests in companies in the technology industry.
Acquisition of Energy Corporation (formerly known as Modern Industries,
Inc.)
In July 1995, Intercell entered into an Agreement and Plan of
Reorganization with Modern Industries, Inc., a Delaware corporation, which
subsequently changed its name to Energy Corporation (Energy). The Company
issued 5,412,191 shares of common stock to Energy in exchange for all of
the assets and liabilities of Energy and its wholly owned subsidiary,
California Tube Laboratory, Inc. (CTL).
The 5,412,191 shares issued to Energy represented approximately 52% of the
Company's outstanding common stock upon completion of the transaction. As
such, the transaction was treated for financial reporting purposes as a
purchase of Intercell by Energy. The assets of Intercell have been
recorded at their estimated fair value at the date of acquisition, and
Intercell's consolidated results of operations have been included in the
consolidated statements of operations subsequent to the date of the
acquisition. Energy's historical share amounts have been adjusted on a
retroactive basis in a manner similar to a reverse stock split.
Distribution of Common Stock
On July 8, 1996, Energy and the Company entered into a certain Plan of
Liquidating Dissolution (the Plan). The Plan was approved by a majority of
the stockholders of Energy on October 21, 1996. The 5,412,191 shares of
common stock owned by Energy were distributed in May and August 1997 to the
beneficial owners of the shares of common stock of Energy as of July 8,
1996. Energy was dissolved on November 21, 1996.
Acquisition of Particle Interconnect, Inc.
In September 1996, Intercell formed a wholly owned subsidiary, Particle
Interconnect Corp. (PI Corp.), a Colorado corporation, which merged with
Particle Interconnect, Inc. (Particle), a California corporation.
Particle, located in Colorado Springs, Colorado, is engaged in the
development and manufacturing of particle-coated substrates for integrated
circuits using patented particle interconnect technology (the PI
Technology) and a proprietary trade secret electroplating process (the
Proprietary Electroplating Process). At the time of the acquisition,
Particle owned rights to the PI Technology and the Proprietary
Electroplating Process, and was developing an initial production line for
the manufacture of particle-coated substrates at its manufacturing
facility. The Company exchanged 1,400,000 shares of Intercell common stock
for all of the outstanding stock of Particle. The transaction was
accounted for by the
F-8
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
pooling-of-interest method of accounting. At the date of acquisition, the
results of operations of Particle were not material to the Company's
consolidated financial position, results of operations, and cash flows.
Accordingly, the consolidated financial statements for periods prior to the
date of acquisition have not been restated, except for loss per common
share information. The weighted-average number of shares of common stock
outstanding and loss per common share has been restated for all periods
presented to reflect the 1,400,000 shares of common stock issued in the
transaction.
The book value of Particle at the date of acquisition was as follows:
<TABLE>
<S> <C>
Assets acquired $ 273,000
Liabilities assumed (424,000)
---------
Stockholders' deficit $(151,000)
=========
</TABLE>
At the date of acquisition, stockholders' deficit was comprised of $8,000
common stock and $(159,000) accumulated deficit.
As described in Note 13, the Company realigned the operations of P.I. Corp.
in September 1997, and recorded a loss on the abandonment of assets of
$801,000.
Acquisition and Disposition of Cellular Magnetics, Inc.
In September 1996, Intercell formed a wholly owned subsidiary, Cellular
Magnetics Inc. (CMI), an Arizona corporation, which acquired all the assets
and liabilities of A.C. Magnetics, Inc. dba M.C. Davis Co. Inc. (M.C.
Davis) in exchange for 277,778 shares of Intercell common stock (valued at
$1,000,000) and an $800,000 note. M.C. Davis is a manufacturer and
distributor of electrical devices and equipment with manufacturing
facilities near Phoenix, Arizona, and in the province of Sonora, Mexico.
The transaction was accounted for by the purchase method of accounting.
The results of operations for M.C. Davis have been included in the
Company's consolidated results of operations for the period from October 1,
1996 to July 17, 1997.
In July 1997, the Company entered into a stock purchase agreement to sell,
transfer, assign, and deliver certain assets, liabilities, rights, and
obligations of the Company related to its antenna technology, including its
wholly owned subsidiaries CMI and Intercell Wireless Corp., to Intercell
Technologies Corporation (ITC), a Colorado corporation, in exchange for
6,269,226 shares and warrants of ITC common stock, 1,100,000 shares of the
Company's common stock, and two notes receivable of $2.2 million and
$375,000, respectively. The $2.2 million note is secured by all of the
outstanding shares of CMI and accrues interest at 10% per annum. Principal
and interest payments of $69,000 are due quarterly with a final payment of
$1.2 million due in May 2007. The $375,000 note accrues interest at 10%,
is unsecured, and is due in full on November 30, 1997. Payment of this
note was subsequently extended by the Company to January 15, 1998. As a
result of uncertainties with respect to realization of the consideration
received, no gain was recognized on the transaction. The Company will
account for its investment in and advances to ITC by the cost recovery
method.
F-9
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a list of assets sold, including cash loaned and
liabilities transferred to ITC:
<TABLE>
<S> <C>
Cash $ 217,000
Accounts receivable 137,000
Inventories 239,000
Prepaid expenses and other current assets 7,000
Property, plant and equipment 349,000
Goodwill and other intangibles 1,026,000
Accounts payable (175,000)
----------
Net assets sold 1,800,000
Cash loaned to ITC 345,000
Sale of corporate office furniture 75,000
----------
Total assets sold, including cash loaned, and
liabilities transferred $2,220,000
==========
</TABLE>
Consideration recieved by the Company in connection with this sale was as
follows:
<TABLE>
<S> <C>
Intercell stock $ 385,000
ITC stock and notes receivable 1,835,000
----------
$2,220,000
==========
</TABLE>
In September 1997, the Company evaluated the recoverability of its
investment in ITC and concluded that an impairment charge of $835,000 was
necessary to reflect continued uncertainties regarding realization of its
investment in and advances to ITC. The $835,000 charge represents the
difference between the carrying amount of the investment in and advances to
ITC and the estimated fair value of assets collateralizing the advances.
Acquisition of Sigma 7 Corporation
In June 1997, the Company acquired a controlling interest in Sigma 7
Corporation (Sigma 7). Sigma 7 conducts its business through its
subsidiary BMI Acquisition Group, Inc. (BMI). BMI has developed and
currently utilizes a proprietary patch technology to produce fully
functional computer memory modules from defective memory chips. The
Company acquired control of Sigma 7 through the acquisition of 4,500,000
shares or 90% of Sigma 7's common stock in exchange for $550,000, and by
providing approximately $1,985,000 in additional financing, which consisted
primarily of secured loans and standby letters of credit. The transaction
was accounted for by the purchase method of accounting. The results of
Sigma 7 have been included in the Company's consolidated results of
operations from June 1, 1997 to September 30, 1997.
F-10
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total cash purchase price for Sigma 7 of $550,000 has been allocated to
the net assets acquired based on estimated fair values as follows:
<TABLE>
<S> <C>
Cash $ 64,000
Other current assets 264,000
Property, plant and equipment 1,145,000
Other assets 21,000
In-process research and development 2,022,000
Goodwill and other intangibles 2,495,000
Current liabilities assumed (1,199,000)
Other liabilities assumed (37,000)
Notes payable to Intercell (1,345,000)
Notes payable (355,000)
Minority interest of preferred and
common stock stockholders (2,525,000)
-----------
Cash paid for common stock $ 550,000
===========
</TABLE>
In connection with the Acquisition, a portion of the purchase price was
allocated to the value of in-process research and development projects.
These projects involved the research and development of new products and
significant extensions and improvements to existing products which had not
demonstrated their technological feasibility as of the acquisition date and
did not have an alternative future use. Accordingly, immediately upon
consummation of the transaction, the value associated with these projects
was charged to expense in accordance with Statement of Financial Accounting
Standards (SFAS) No. 2.
The following table presents unaudited pro forma results of operations as
if the acquisition of Sigma 7 had occurred on October 1, 1995. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisition
been made at the beginning of fiscal 1996 or of results which may occur in
the future. Prior to the acquisition, Sigma 7's year-end had been based on
a calendar year. The 1996 column represents Intercell for the year ended
September 30, 1996, and BMI for the period from January 1, 1996 to December
18, 1996, and Sigma 7 for the period from December 19, 1996 to December 31,
1996. The 1997 column represents Intercell for the year ended September
30, 1997, and Sigma 7 for the period from January 1, 1997 to June 1, 1997
(date of acquisition).
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net sales $ 8,511,000 $21,433,000
Operating loss 20,832,000 13,245,000
Net loss 21,097,000 13,091,000
Net loss per common share 1.25 1.13
</TABLE>
The Company subsequently exchanged 1,000 shares of Series D preferred stock
with a liquidation preference of $2,500 per share to holders of certain
preferred stock of BMI to eliminate such BMI preferred stock. The exchange
was recorded at the carrying amount of the minority interest of preferred
stockholders, which approximated the fair value of the Series D preferred
issued in the exchange.
F-11
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition the Company issued 80 shares of Series D preferred as partial
payment for a covenant not-to-compete between BMI shareholders and former
owners of Sigma 7. This liability was included in notes payable at the date
Intercell purchased Sigma 7. (See Note 7)
As of September 30, 1997, the Company determined that the goodwill recorded
in the Sigma 7 transaction is not recoverable based on the uncertainties
surrounding the subsidiary's future cash flows and wrote off the remaining
balance of approximately $2.3 million.
Change in Fiscal Year-End
During the 11-month period ended September 30, 1995, Intercell changed its
fiscal year-end to September 30. Previously, Intercell had an October 31
year-end. The accompanying consolidated financial statements include the
results of operations and cash flows of Intercell for the years ended
September 30, 1997 and 1996, and the 11-month period ended September 30,
1995.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly or majority owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated in
consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Cash Equivalents and Short-Term Investments
Cash equivalents are highly liquid investments with a maturity of less than
three months at the date of purchase. Short-term investments generally
consist of certificates of deposit and short-term debt securities with
maturities greater than three months and less than one year. As of
September 30, 1997, there were no cash equivalents or short-term
investments. As of September 30, 1996, the Company's investments consisted
of U.S. government treasury bills of $3,925,000 and certificates of deposit
of $126,000. As of September 30, 1996, investment securities of $988,000
and $3,063,000 were classified as cash equivalents and short-term
investment, respectively.
Investments in debt securities are classified as "available for sale."
Such investments are recorded at fair value which approximated carrying
value, and the cost of securities sold is determined based on the specific
identification method. Unrealized gains and losses, if any, are reported
as a component of stockholders' equity. Unrealized gains and losses were
not significant for any period presented.
F-12
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
Revenues are recognized when earned, generally upon product shipment.
Provision is made for estimated customer returns at the time of sale.
Inventories
Inventories generally are stated at the lower of cost (first in, first
out), or market. Costs incurred in the manufacture of new electron tubes
are recorded on a standard cost basis, which approximates the first-in,
first-out method, with the costs of raw materials, labor, and overheads
adjusted periodically when actual costs change. Each tube repair is unique
and is costed out on a specific item basis with costs accumulated as
incurred. Tubes rebuilt for the U.S. government follow governmental cost
allocation guidelines.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation expense is
provided by use of the accelerated and straight-line methods over the
estimated useful lives of the assets, generally 5 to 12 years for
furniture, equipment, software, and vehicles, and the shorter of the useful
life of the asset or the remaining lease term for leasehold improvements.
Accounting for Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of long-lived assets is measured by
comparison of its carrying amount to future net cash flows expected to be
generated from the operation and sale of the long-lived assets. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the long-lived
assets, including the allocated goodwill, exceeds its fair value. The
Company assesses the recoverability of the carrying amount of goodwill by
determining whether the carrying amount of goodwill can be recovered
through undiscounted future operating results of the acquired operation.
The amount of impairment, if any, is measured based on projected discounted
future operating results using a discount rate reflecting the Company's
average borrowing cost of funds.
As described in Note 1, the Company recorded goodwill and other intangibles
of $2,495,000 in connection with its acquisition of Sigma 7. The Company
subsequently has determined that the goodwill is not recoverable based on
the uncertainties surrounding future cash flows of Sigma 7. Accordingly,
the Company has written off the remaining goodwill balance as of September
30, 1997, of approximately $2.3 million. There were no adjustments to the
carrying value of long-lived assets in 1996 or 1995. Accumulated
amortization was $210,000 and $61,000 as of September 30, 1997 and 1996,
respectively.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, short-term investments,
accounts receivable, accounts payable, accrued liabilities, and notes
payable approximate fair values due to the short maturity of such
F-13
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
instruments. The fair value of the Company's advances to ITC cannot be
estimated as there is no public market for the notes and there are
uncertainties regarding future cash flows of the borrower.
Income Taxes
Income taxes are accounted for by the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Valuation allowances are established
when necessary to reduce deferred tax assets to amounts expected to be
realized.
Net Loss Per Common Share
Net loss per common share is computed by dividing the sum of net loss,
deemed preferred stock dividend and accretion of preferred stock by the
weighted-average number of common stock shares and dilutive common stock
equivalent shares outstanding during each period presented. Common stock
equivalent shares consist of stock options that are computed using the
treasury stock method.
Warranty
Intercell's products are generally warranted for a period of no longer than
one year. Estimated future costs of repair or replacement are reflected in
the accompanying consolidated financial statements.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings Per Share. SFAS No. 128 establishes a different
method of computing net income per share than is currently required under
the provisions of Accounting Principles Board (APB) Opinion No. 15. Under
SFAS No. 128, the Company will be required to present both basic net loss
per share and diluted net loss per share. Basic and diluted net loss per
share is expected to be comparable to net loss per share as presented in
the accompanying consolidated financial statements. The Company plans to
adopt SFAS No. 128 in its fiscal quarter ending December 31, 1997, and at
that time, all historical net loss per share data presented will be
restated to conform to the provisions of SFAS No. 128.
Reclassifications
Certain amounts in the accompanying 1996 and 1995 consolidated financial
statements have been reclassified in order to conform with the 1997
consolidated financial statement presentation.
F-14
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) BASIS OF PRESENTATION
The Company has suffered recurring losses from operations and has a
deficiency in working capital that raise substantial doubt about its
ability to continue as a going concern. Management has been working to
improve its results from operations and to obtain additional capital in
order to provide the funding necessary to complete research and development
activities on acquired technologies and bring products using such
technologies to market. Management is actively pursuing strategic
alliances, equity financing, and sales of nonstrategic assets to address
this issue, although there can be no assurance that these efforts will be
successful. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
(4) BALANCE SHEET COMPONENTS
Inventories
A summary of inventories follows:
September 30,
--------------------
1997 1996
-------- ----------
Raw materials $811,000 $ 711,000
Work in process 128,000 164,000
Finished goods 43,000 191,000
-------- ----------
$982,000 $1,066,000
======== ==========
Property, Plant, and Equipment
A summary of property, plant, and equipment follows:
September 30,
----------------------
1997 1996
---------- ----------
Furniture and fixtures $ 169,000 $ 339,000
Equipment and machinery 1,692,000 845,000
Land and buildings -- 282,000
Leasehold improvements 904,000 71,000
Software 18,000 --
Vehicles -- 23,000
---------- ----------
2,783,000 1,560,000
Less accumulated depreciation 419,000 142,000
---------- ----------
$2,364,000 $1,418,000
========== ==========
F-15
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Payable and Accrued Liabilities
A summary of accounts payable and accrued liabilities follows:
<TABLE>
<CAPTION>
September 30,
--------------------
1997 1996
---------- --------
<S> <C> <C>
Accounts payable $1,162,000 $376,000
Litigation reserves 244,000 --
Professional services 250,000 --
Accrued employee compensation 205,000 191,000
Accrued restructuring costs 202,000 --
Warranty reserves 173,000 130,000
Other liabilities 529,000 45,000
---------- --------
$2,765,000 $742,000
========== ========
</TABLE>
(5) SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended September 30, 1997 and 1996, and for the 11-month
period ended September 30, 1995, cash paid by the Company for interest was
$ 16,000, $87,000, and $15,000, respectively.
F-16
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of noncash investing and financing activities follows:
<TABLE>
<CAPTION>
Years Ended 11-Month
September 30, Period Ended
---------------------- September 30,
1997 1996 1995
---------- ---------- ---------------
<S> <C> <C> <C>
Shares issued in acquisition of Intercell $ -- $ -- $250,000
Shares issued in exchange for investment in American Microcell -- -- 500,000
Shares issued in exchange for microwave technology -- -- 250,000
Contribution to ESOP -- 158,000 247,000
Shares issued in lieu of interest payment to related party 42,000 -- 13,000
Shares issued in exchange for services -- 56,000 --
Shares issued in exchange for land -- 1,000,000 --
Debt assumed in land acquisition -- 367,000 --
Shares issues in acquisition of M.C. Davis -- 1,000,000 --
Debt incurred in acquisition of M.C. Davis -- 800,000 --
Shares issued in acquisition of Particle common stock and net
liabilities assumed, accounted for as an immaterial pooling -- 151,000 --
Repurchase of shares of Series A preferred stock -- 250,000 --
Deferred compensation related to stock option grants 678,000 4,017,000 --
Conversion of Series B preferred stock to common stock 5,686,000 1,497,000 --
Conversion of Series C preferred stock to common stock 2,542,000 -- --
Treasury shares received in disposition of CMI 385,000 -- --
Noncash consideration received on sale of CMI and Intercell
Wireless Corp. 1,273,000 -- --
Series D preferred stock issued in exchange for BMI preferred stock 2,500,000 -- --
Series D preferred stock issued as payment on noncompete agreements 200,000 -- --
Accretion on preferred stock 460,000 -- --
Amortization of deemed dividend on preferred stock 1,072,000 -- --
Shares of Sigma 7 issued for services 139,000 -- --
</TABLE>
(6) EQUIPMENT HELD FOR SALE
On December 29, 1994, Intercell executed an Asset Purchase Agreement with
Asia Skylink Corp. to acquire microwave transmission and associated support
equipment in exchange for 210,000 shares of Series A redeemable convertible
preferred stock. In August 1996, the shares were returned to the Company,
and the equipment was returned to Asia Skylink, Corp. No gain or loss was
recognized by the Company in connection with the reversal of this
transaction.
F-17
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) BORROWINGS
Notes Payable
Notes payable as of September 30, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Demand note payable $135,000 $
--
Interest bearing term notes 325,000 266,000
Noninterest bearing term notes 82,000 --
-------- --------
$542,000 $266,000
======== ========
</TABLE>
The demand note payable of $135,000 is unsecured and noninterest bearing.
Interest bearing term notes in the amount of $325,000 are outstanding as of
September 30, 1997. The notes are denominated in increments of $25,000,
are unsecured, accrue interest at 10% annually, and are due within one year
of issuance or upon an initial public offering (IPO) by Sigma 7, whichever
occurs first. In consideration for each $25,000 note, Sigma 7 has issued
4,000 shares of common stock in Sigma 7 and issued 4,000 warrants with the
right to purchase 4,000 shares of stock in Sigma 7 in the event of an IPO.
The exercise price shall equal 120% of the IPO price. The warrants expire
on November 5, 1999.
As of September 30, 1997, the Company also had two noninterest bearing term
notes payable of $41,000 each are due to the former owners of BMI in
exchange for a two-year covenant not to compete. Under the terms of the
original notes, principal of $144,000 each was due in payments of $6,000
per month through December 1998. As of September 30, 1997, only one
payment on the notes had been paid. As such, the notes were in default and
were due and payable. During September 1997, an agreement was signed with
the note holders whereby $200,000 of the notes were converted into Series D
preferred stock, and the remaining amount is due upon completion of an IPO
by Sigma 7. See further information on the Series D preferred stock at
Note 8.
As of September 30, 1996, the Company had a note payable of $266,000. The
note was unsecured, with principal and interest of 12% per annum due on
June 24, 1997. The note and accrued interest were paid in full in October
1996.
F-18
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
September 30,
-----------------
1997 1996
------- --------
<S> <C> <C>
Note payable to bank; interest at prime plus 2%;
collateralized by various assets; repaid in October 1996 $ -- $100,000
Note payable; noninterest bearing; collateralized
by building; assumed by purchasers of CMI -- 47,000
Note payable to bank; interest at 9.75%; collateralized
by a vehicle; repaid in October 1996 -- 15,000
Other 33,000 44,000
------- --------
33,000 206,000
Less current portion 17,000 120,000
------- --------
Long-term debt, net $16,000 $ 86,000
======= ========
</TABLE>
(8) STOCKHOLDERS' EQUITY
Preferred Stock
As of September 30, 1997 and 1996, the Company is authorized to issue
10,000,000 shares of preferred stock.
Series B Preferred
In July 1996, the Company issued 1,000 shares of Series B redeemable
convertible preferred stock (Series B preferred) and detachable warrants
for proceeds of $8,900,000 (net of issuance costs of $1,100,000). Each
share of Series B preferred is convertible into common stock at the
exchange rate in effect at the time of the conversion, as described in the
preferred stock agreements, and is subject to appropriate adjustment for
common stock splits, stock dividends, and other similar transactions.
Conversion of the Series B preferred is automatic after three years from
the original date of issuance. At the date of issuance, the exchange rate
was equal to 85% of the then prevailing market rate, resulting in a deemed
dividend of $1,764,704. The Company recognized $140,056 and $1,624,648 of
the dividend in its fiscal 1997 and 1996 net loss per common share
calculation, respectively. The amount recognized was calculated on a pro
rata basis over the period beginning with the issuance of the security to
the first date conversion could occur.
In addition, the conversion terms include a beneficial adjustment to the
exchange rate equal to the original issue price plus 10% of the original
issue price per annum since July 10, 1996. The beneficial adjustment is
treated as an accretion on the Series B preferred stock. For the year ended
September 30, 1997 the amount of accretion was $193,000. The amount of the
accretion on the Series B preferred for the year ended September 30, 1996,
was not significant.
F-19
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has the right to redeem the Series B preferred on or after July
11, 1997, at a price equal to 130% of the original issue price plus any
accrued and unpaid premium.
The Series B preferred contains a liquidation preference equal to the
original issue price plus 10% of the original issue price per annum to the
date of liquidation. Shares of Series B preferred are not entitled to
voting rights.
Each share of Series B preferred is accompanied by a detachable warrant to
purchase a number of shares of common stock of the Company equal to 30% of
the original aggregate purchase price of the shares of Series B preferred
divided by a fixed conversion rate of $3.9375 per share, exercisable 105
days after original issuance. The amount of proceeds allocated to the
warrants was based on the fair value of the warrants on the date of the
Series B preferred offering as determined using the Black-Scholes pricing
model. As of September 30, 1997, warrants to acquire 1,092,063 shares of
common stock were outstanding. The warrants will expire if not exercised
by July 1, 2001.
Series C Preferred
In December 1996, the Company issued 525 shares of no par value Series C
preferred stock (Series C preferred) and detachable warrants in a private
placement for $4,672,500 (net of issuance costs of $577,500).
Each share of Series C preferred is convertible into common stock at the
exchange rate in effect at the time of the conversion, as described in the
preferred stock agreements, and is subject to appropriate adjustment for
common stock splits, stock dividends, and other similar transactions.
Conversion of the Series C preferred is automatic upon the expiration of
three years from the original date of issuance. The Series C preferred is
convertible into common stock at the exchange rate in effect at the date of
conversion, as described in the preferred stock agreements. At the date of
issuance, the exchange rate was equal to 85% of the then prevailing market
rate, resulting in a deemed dividend of $932,000 that was recognized by the
Company in fiscal 1997. In addition, the conversion terms include a
beneficial adjustment to the exchange rate equal to the original issue
price plus 8% of the original issue price per annum since December 16,
1996. The beneficial adjustment is treated as an accretion on the Series C
preferred. For the year ended September 30, 1997 the amount of accretion
was $267,000. The Series C preferred are junior to the Company's shares of
Series B preferred and contain a liquidation preference equal to the
original issue price plus 8% of the original issue price per annum to the
date of liquidation. Shares of Series C preferred are not entitled to
voting rights.
Shares of Series C preferred, purchased in excess of certain quantities as
described in the preferred stock agreements, or purchased in addition to
previous purchases of shares of Series B preferred, are accompanied by
detachable warrants to purchase a number of shares of common stock of the
Company equal to between 25% and 50% of the original aggregate purchase
price of the shares of Series C preferred divided by a fixed conversion
rate of $3.25 per share, exercisable 105 days after original issuance. The
amount of proceeds allocated to the warrants was based on the fair value of
the warrants on the date of the Series C preferred offering as determined
using the Black-Scholes pricing model.
F-20
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series D Preferred
In September 1997, the Company issued 1,000 shares of Series D redeemable
convertible preferred stock (Series D preferred) in exchange for 1,000
shares of BMI preferred stock. Each share of Series D preferred is
convertible into common stock of Intercell beginning on January 1, 1999, at
the option of each holder, or automatically upon the affirmative vote of
the holders of a majority of the Series D preferred. Each share of Series
D preferred shall convert into that number of shares of Intercell which
would be acquired at the then current market price multiplied by the
conversion factor as described in the preferred stock agreements.
In January 2003, the exchange rate will be equal to 90% of the then
prevailing market rate, resulting in a deemed dividend of approximately
$300,000. The Company will recognize the dividend in its net income (loss)
per common share calculation over the period beginning with the date of
issuance through January 1, 2003. The amount of deemed dividend for the
period ended September 30, 1997, was not significant.
In the event the total number of shares issuable upon conversion exceeds
10% of the then issued and outstanding shares, Intercell shall, within 90
days of such event, redeem those Series D preferred, which, if converted,
would exceed the 10% limitation, at their face value, plus all accrued
dividends.
The Series D preferred shares contained a liquidation preference equal to
the sum of the deemed purchase price of $2,500 per share, and 6% of the
deemed purchase price per annum for the period from January 1, 1998 to the
date of the event of liquidation. Shares of Series D preferred shares are
not entitled to voting rights. Such shares are entitled to receive a
cumulative 6% dividend commencing January 1, 1998, are redeemable by
Intercell, and will receive registration rights permitting the resale of
not more than 20% of the outstanding Series D preferred shares in
connection with any registered, firm commitment to underwrite Intercell
common stock after December 31, 1998.
Stock Options
In July 1995, Intercell established a Compensatory Stock Option Plan (the
Option Plan) and reserved 5,000,000 shares of common stock for issuance
under the Option Plan. In June 1996 and September 1997, an additional
2,000,000 and 7,000,000 shares, respectively, were reserved for issuance
under the Option Plan. Incentive stock options can be granted under the
Option Plan, at prices not less than 110% of the fair market value of the
stock at the date of grant, and nonqualified options can be granted at not
less than 50% of the stock's fair market value at the date of grant or the
date the exercise price of any such option is modified. Vesting provisions
are determined by the Board of Directors. All stock options expire 10
years from the date of grant.
F-21
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's fixed stock option plan is as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------- September 30,
1997 1996 1995
--------------------------- --------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------- -------------- ----------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year/period 3,996,000 $ 1.56 1,600,000 $ 0.50 -- $ --
Granted 6,831,000 0.61 4,841,180 1.43 1,600,000 0.50
Forfeited (1,675,000) 2.01 (150,000) 1.00 -- --
Exercised (200,000) 0.75 (2,295,180) 0.58 -- --
---------- ---------- ---------
Outstanding at end of year/period 8,952,000 0.77 3,996,000 1.56 1,600,000 0.50
========== ========== =========
Options exercisable at end of
year/period 8,896,000 0.77 3,436,000 1.54 1,600,000 0.50
Weighted-average fair value of options
granted during the year/period at
market 0.098 1.03
Weighted-average fair value of options
granted during the year/period at less
than market -- 1.33
</TABLE>
The following table summarizes information about stock options outstanding
as of September 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------ ----------------------------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.38-0.50 7,710,000 9.64 years $ 0.41 7,660,000 $ 0.41
0.75-1.25 275,000 8.35 0.89 275,000 0.89
2.00-4.00 967,000 8.90 3.55 961,000 3.55
----------- -----------
8,952,000 9.52 0.77 8,896,000 0.77
=========== ===========
</TABLE>
Options granted during 1997 include 100,000 granted to a nonemployee for
consulting services. The options were granted at the market value on the
grant date, vested 1/12 per month and expire 10 years from the date of
grant. The Company recorded an expense of $148,000 related to the grant
based on the fair value of the option as determined using the Black-Scholes
pricing model.
Options granted during 1996 include 2,791,180 granted to nonemployees for
legal services, placement agent services, consulting services, and product
promotion services. Nonemployee stock options were generally granted at
discounts ranging from 15% to 90% of the quoted market value of the stock
on the date of grant, with prices ranging between $0.50 per share and $4.75
per share, and expire 10 years from the date of the
F-22
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
grant. Options to acquire 2,391,180 shares that were granted to
nonemployees were exercisable immediately upon grant. The remaining
options to acquire 400,000 shares vested in 1997.
The Company recorded deferred compensation of $678,000 and $4,017,000 in
1997 and 1996, respectively, for the difference between the exercise price
and the fair value of the common stock related to stock options granted.
Compensation expense of $1,006,000 in 1997 and $3,686,000 in 1996 has been
included in selling, general, and administrative expenses in the
accompanying consolidated statements of operations.
Accounting for Stock-Based Compensation Under SFAS No. 123
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations for its stock plans. Had
compensation cost for the Company's stock plan been determined based on the
fair value at the grant dates for awards under the plan consistent with the
method prescribed under SFAS No. 123, Accounting for Stock-Based
Compensation, the Company's net loss and net loss per share would have
changed to the pro forma amounts indicated below (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Net loss, as reported $16,481,000 $5,283,000
Net loss, pro forma 17,472,000 6,831,000
Net loss per share, as reported (0.99) (0.54)
Net loss per share, pro forma (1.05) (0.65)
</TABLE>
The fair value of each option grant issuable during 1997 and 1996 is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Expected dividend yield 0% 0%
Expected stock price votality 60% 60%
Risk-free interest rate 5.74% 5.62%
Expected life of options 1.50 years 1.50 years
</TABLE>
Pro forma net income reflects only options granted in 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation costs is reflected over the
options' vesting period and compensation cost for options granted prior to
October 1, 1995 is not considered.
F-23
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) EMPLOYEE STOCK OWNERSHIP PLAN
CTL established an Employee Stock Ownership Plan (the Employee Plan) and a
related trust for substantially all of its eligible employees. To
participate in the Employee Plan, employees must have worked at least 1,000
hours during the year and must be employed at the end of the plan year.
Participants do not vest until their third year of employment and then vest
20% per year during the next five years. Employer contributions are
discretionary and generally are based on a percentage of eligible payroll,
up to 15%. In 1996, the Company elected to contribute 126,761 shares of
the Company's common stock to the Employee Plan and recognized a charge to
income of $158,000. The Employee Plan was terminated at the end of fiscal
1996, and, as such, the Company did not make any contributions in 1997.
(10) INVESTMENT IN AMERICAN MICROCELL
During fiscal 1996, the Company acquired approximately 15% of the
outstanding stock of American Microcell in exchange for 712,751 shares of
common stock at a deemed value of approximately $0.70 per share. American
Microcell was engaged in the research and development of improved
technologies for cellular phones. However, American Microcell proved
unsuccessful in its efforts to finance continuing development of
technologies acquired, and the rights to these technologies reverted to the
original developers. Accordingly, the Company's investment in American
Microcell has been written off as a charge to income in the accompanying
1996 consolidated statement of operations.
(11) RELATED PARTY TRANSACTIONS
Notes Payable
As of September 30, 1997, the Company has outstanding promissory notes to
three current employees totaling $135,000. The notes do not accrue interest
and are payable on demand. Approximately $50,000 was repaid on the notes
during the first quarter of 1998.
The Company has two unsecured notes payable in the amount of $75,000 and
$50,000 due to a significant stockholder and a company controlled by the
significant stockholder, respectively. The notes bear interest at 10% per
annum and are due on October 3, 1997. The notes were repaid in full on the
due date.
As of September 30, 1996, the Company had an outstanding promissory note
due to a former owner and current president of M.C. Davis in the amount of
$80,000, bearing interest at 8%, due December 15, 1996. The note was
repaid in October 1996.
As of September 30, 1996, the Company had an outstanding promissory note
due to a former owner of Particle in the amount of $52,000, bearing
interest at 8%, due on demand. The note was paid in January 1997.
The Company had noninterest bearing notes payable totaling $800,000 due to
the former owners of M.C. Davis in consideration for the purchase of M.C.
Davis consummated on September 30, 1996 (see Note 1). The notes were
repaid in October 1996.
F-24
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Payable
As of September 30, 1997, approximately $71,000 was payable on account to a
company owned by the former owners of BMI.
Purchase of Land
During April 1996, the Company entered into an agreement with a related
party whereby in exchange for 400,000 shares of the Company's common stock
(valued at $1,000,000) and the assumption of mortgages of $367,000, the
Company acquired development land located in Arizona. In connection with
the exchange, the Company incurred acquisition costs of $57,000. The land,
including acquisition costs, is recorded on the accompanying 1997
consolidated balance sheet as investment land held for sale.
Purchase and Sale of Microwave Technology
In June 1994, the Company purchased one-half of the rights to a technology
that utilizes microwaves to enhance the production of oil wells for 178,188
shares of its common stock. The Company already owned the other one-half
interest in the technology. In January 1995, the Company sold these rights
to Reland International, Inc. (Reland) for certain royalty payouts and a
note receivable with a face amount of $1,250,000, bearing interest at 6%,
with accrued interest payable annually on or before January 15 of each
year, and principal payable on or before January 16, 2000. Due to concerns
about collectibility, this note and related accrued interest was written
off as a charge to income in the accompanying 1995 consolidated statement
of operations.
Operating Leases
CTL leases its principal facility on a month-to-month basis from a
significant stockholder. Monthly rental payments for the facility lease
are $10,000, and the lease expired in August 1999. The Company paid rent
related to this lease of $120,000, $118,000, and $106,000, during 1997,
1996, and 1995, respectively. Subsequent to year-end, the Company
terminated this lease and moved to a new building in Watsonville,
California.
The Company leases a facility in Vancouver, Canada, from a executive and
director of the Company with monthly rental payments of $3,000. The lease
expires in August 2001.
Grants of Stock and Stock Options to Related Party
In September 1997, the Company issued 80 shares of Series D preferred
shares as partial payment on noncompete agreements with two related
parties.
In September 1996, the Company granted options to purchase 400,000 shares
of common stock, with an exercise price of $4.00 per share, to a related
party in return for which the related party agreed to promote the sale of
the Company's products and services in Canada. The options vested
immediately and expire 10 years from the date of grant.
F-25
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space, manufacturing facilities, and certain
equipment under various operating lease agreements. Future minimum lease
payments and related sublease rentals receivable with respect to
noncancelable operating leases as of September 30, 1997, are as follows:
<TABLE>
<CAPTION>
Year Ending Rentals Receivable
September 30, Rental Payments Under Subleases
- ------------------ --------------- ------------------
<S> <C> <C>
1998 $ 486,000 $ 67,000
1999 472,000 67,000
2000 469,000 50,000
2001 374,000 --
2002 206,000 --
Thereafter 1,763,000 --
---------- --------
Total $3,770,000 $184,000
========== ========
</TABLE>
Rent expense under operating leases was approximately $715,000, $277,000,
and $145,000 during 1997, 1996, and 1995, respectively.
Litigation
The Company is subject to various legal proceedings and claims. In the
opinion of management, the ultimate liability with respect to these actions
will not materially affect the Company's consolidated financial position or
results of operations.
Environmental Liabilities
The Company has become aware of certain soil contamination at the Santa
Cruz facility formerly occupied by its electron tube manufacturing
subsidiary. The Company has engaged a consultant to determine the extent
of the contamination and the costs to remediate. However, until the
buildings at the facility have been removed, further site characterization
and an estimate of the cost to remediate cannot be determined. As such, no
amounts have been accrued for in the Consolidated Statement of Operations
for the year ended September 30, 1997.
(13) LOSS ON ABANDONMENT
In September 1997, the Company announced a plan to realign the operations
and activities of P.I. Corp. in order to reduce the amount of funding
required to complete development activities and market P.I. Corp. products.
In connection with the plan, the Company recorded a charge of $801,000
related to the write-off of manufacturing equipment ($599,000) and a lease
abandonment ($202,000). P.I. Corp. commenced implementation of the plan
during September 1997. As of September 30, 1997, the Company has
F-26
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
established a restructuring reserve of approximately $202,000 to accrue for
remaining P.I. Corp. lease payments.
(14) INCOME TAXES
The Company did not incur an expense for income taxes in 1997 and 1996. In
1995, income tax expense was $2,000.
Income tax expense differed from amounts computed by applying the federal
statutory income tax rate of 34% to pretax loss as a result of the
following:
<TABLE>
<CAPTION>
Years Ended
September 30,
-------------------------- 11-Month Period
Ended September 30,
1997 1996 1995
------------ ------------ ---------------------
<S> <C> <C> <C>
Computed "expected" tax benefit $(5,659,000) $(1,616,000) $(448,000)
State income taxes (1,495,000) (442,000) (81,000)
Change in valuation allowance 6,526,000 1,790,000 569,000
Net operating loss carryforwards for state
purposes note available for future utilization 628,000 268,000 --
Other -- -- (38,000)
----------- ----------- ---------
$ -- $ -- $ 2,000
=========== =========== =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are as follows:
<TABLE>
<CAPTION>
1997 1996
------------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryovers 9,490,000 3,678,000
Allowance for returns and doubtful accounts 47,000 47,000
Goodwill and other intanglbles 869,000 --
------------ ----------
10,406,000 3,725,000
Less valuation allowance (10,406,000) 3,725,000
------------ ----------
Net deferred tax assets $ -- $ --
============ ==========
</TABLE>
The change in the valuation allowance was an increase of $6,681,000 and
$3,156,000 in fiscal 1997 and 1996, respectively. Of this decrease in the
total valuation allowance for deferred tax assets, approximately $155,000
and $1,366,000 for 1997 and 1996, respectively, is related to net operating
loss carryforwards which are attributable to stock options. Since the
Company is entitled to a deduction for federal and state tax purposes
resulting from the exercise of nonqualified stock options and employees'
early dispositions of stock acquired through incentive stock options, a
portion of the deferred tax asset, when recognized by a reduction of the
valuation allowance, will be credited to additional paid-in capital. As of
September 30,
F-27
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997, approximately $1,521,000 of the deferred asset will be credited to
additional paid-in capital when recognized. The balance of the valuation
allowance applies primarily to those temporary differences that are
expected to be deductible at a point in the future when taxable income is
uncertain.
As of September 30, 1997, the Company had a net operating loss carryover
for federal and state income tax purpose of approximately $20,346,000 and
$13,525,000, respectively. The federal net operating losses expire from
2007 to 2011. The state net operating losses expire from 2000 to 2011.
The difference between the federal and state loss carryforwards results
primarily from a 50% limitation on California net operating losses.
The Tax Reform Act of 1986 and the California Conformity Act of 1987 impose
substantial restrictions on the utilization of net operating loss
carryforwards in the event of an ownership change, as defined by Internal
Revenue Code, Section 382. Any unused annual limitation can be carried
forward and added to the succeeding years annual limitation, subject to the
expiration dates discussed above.
(15) SIGNIFICANT CUSTOMER AND INDUSTRY SEGMENT INFORMATION
Two customers individually accounted for 10% or more of consolidated net
sales in 1996 and 1995. No customer individually accounted for 10% or more
of consolidated net sales in 1997. Sales and the related receivable
percentages to these customers as of September 30, 1996 and 1995, are
summarized as follows:
<TABLE>
<CAPTION>
Percentage of Percentage of
Net Sales Accounts Receivable
--------------- ---------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
---- ---- ---- ----
Customer A 14% 15% 6% 9%
Customer B 12% 12% 11% 12%
</TABLE>
During 1997, the Company manufactured products that fell into three major
industry segments. The first involves the production of fully functional
computer memory modules from defective memory chips. The second involves
the manufacture and rebuild of electron power tubes in various forms and
models. The third involves the production of electronic components. As
discussed in Note 1 to the consolidated financial statements, the Company
exited its electronics component business during 1997 through the sale of
its subsidiary, CMI. There were no sales between segments during any of
the years presented.
F-28
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Semiconductor Electronic Electronic
Memory Power Tubes Assemblies Other Total
-------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1997:
Net sales $ 1,594,000 $4,655,000 $1,480,000 $ -- $ 7,729,000
Operating income (loss) (6,975,000) 126,000 (6,000) (9,798,000) (16,653,000)
Identifiable assets 1,487,000 2,943,000 -- 2,625,000 7,055,000
Depreciation and amortization 157,000 131,000 60,000 60,000 408,000
Capital expenditures 49,000 771,000 32,000 819,000 1,671,000
1996:
Net sales -- 3,405,000 -- -- 3,405,000
Operating income (loss) -- 72,000 -- (5,268,000) (5,196,000)
Identifiable assets -- 2,923,000 2,150,000 8,753,000 13,826,000
Depreciation and amortization -- 41,000 -- 18,000 59,000
Capital expenditures -- 54,000 -- 219,000 273,000
1995:
Net sales -- 3,768,000 -- -- 3,768,000
Operating income (loss) -- 197,000 -- (630,000) (433,000)
Identifiable assets -- 2,646,000 -- 423,000 3,069,000
Depreciation and amortization -- 97,000 -- -- 97,000
Capital expenditures -- 31,000 -- -- 31,000
</TABLE>
(16) SUBSEQUENT EVENT
Formation of New
Entity
In October 1997, the Company entered into an agreement with the Managing
Director of PI Corporation, an employee of the Company, to form a new
entity to increase the likelihood of obtaining additional funding for
the development of the PI Technology, and to increase the probability of
engaging an industry partner with sufficient personnel and financial
resources to successfully commercialize the PI Technology. The Company
will transfer all of its intellectual property, which has a book value
of zero, to the new entity in exchange for an ownership interest of
72.5%. The remaining 27.5% will be owned by the Managing Director of
P.I. Corp. and the employee who will become executive officers and
directors of the new entity. The Company has not calculated the amount
of compensation expense related to this transaction as the fair value of
the net assets being transferred to the new entity has not yet been
determined.
Financing
In December 1997, the Company issued convertible debentures and attached
warrants for $1,500,000. The convertible debentures were, at the time of
issue, unsecured obligations of the Company.
F-29
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The $750,000 Series A-1 debenture requires quarterly interest payments at
9% per annum, beginning March 1, 1998, with the balance due on December 1,
1999. The debenture may be converted at the option of the holder after 60
days from the date of issuance at a conversion price per share equal to the
lessor of 85% of the market price as defined, or $0.75. In connection with
the convertible debt, three warrants were issued, each entitling the holder
to purchase 200,000 shares of common stock for $0.17, $0.50, and $1.00
respectively. The warrants expire three years from the date of issuance.
The Company has allocated debt proceeds to the warrants based on the fair
value of the warrants at the date of the debt offering as determined using
the Black-Scholes pricing model.
The $750,000 Series A-2 debenture pays interest quarterly at 9% per annum,
beginning June 1, 1998, with a maturity date of April 1, 1999. The debt
may be converted at the option of the holder any time at the end of six
business day following the maturity date, at a conversion price for each
share of common stock at 85% of the market price as defined pursuant to the
financing agreement. The Series A-2 debenture was to be funded on January
1, 1998.
The Series A-2 debenture funding was accelerated to December 31, 1997, at
the request of the Company. As consideration for such acceleration, the
Company provided security to the debenture holders for the entire
$1,500,000. The security consisted of an assignment of the Company's first
priority secured lien on the asset of Sigma 7, a first deed of trust on
property held for resale in Arizona and an assignment of the $2,200,000
note from ITC to the Company. In addition, the Company issued 1,000,000
shares of its common stock to the debenture holders.
Sale of Subsidiary
In December 1997, the Company signed a letter of intent to sell its
electron tube manufacturing subsidiary. Negotiations regarding this sale
are ongoing.
F-30
<PAGE>
INTERCELL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION> Balance Charged
at to
Beginning Costs and Balance at
Classification of Year Expenses Deductions End of Year
- -------------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for returns and doubtful
accounts
Eleven months ended September 30, 1995 $ 15 $ 81 $(15) $ 81
Year ended September 30, 1996 $ 81 $174 $ -- $255
Year ended September 30, 1997 $255 $ 7 $ -- $262
</TABLE>
F-31
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1/(7)/ Agreement and Plan of Reorganization, dated July 7, 1995, between
the Company and Modern Industries, Inc.
2.2/(3)/ Plan and Agreement of Merger dated September 3, 1996, by and
between Particle Interconnect, Inc., Particle Interconnect
Corporation and the Company.
2.3/(4)/ Agreement and Plan of Merger dated October 14, 1996, by and
between AC Magnetics, Inc., doing business as M.C. Davis Company,
Cellular Magnetics, Inc. and the Company.
2.4/(5)/ Stock Purchase Agreement dated July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation and Addendum
to Stock Purchase Agreement.
2.5/(6)/ Stock Sale and Purchase Agreement dated June 6, 1997 between
Intercell Corporation and Sigma 7 Corporation.
2.6* Offer for Development Agreement of Microlink Technologies
Corporation.
3.1/(7)/ Articles of Incorporation of the Company, and all amendments
thereto, as amended.
3.2/(7)/ Bylaws of the Company.
4.1/(7)/ Form of Common Stock Certificate.
4.2 Certificate of Designation for Series B Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and incorporated herein by reference.
4.3/(1)/ Specimen of Warrant attached to Series B Preferred Stock.
4.4 Certificate of Designation for Series C Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and is incorporated herein by reference.
4.5/(7)/ Form of Warrant attached to Series C Preferred Stock.
4.6/*/ Certificate of Designation for Series D Preferred Stock
4.7/(7)/ Specimen of Registration Rights Agreement for Series B Preferred
Stock.
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.8/(7)/ Specimen of Registration Rights Agreement for Series C Preferred
Stock.
4.9/(7)/ Plan of Liquidating Dissolution of Energy Corporation dated July
8, 1996.
10.1/(2)/ 1995 Compensatory Stock Option Plan.
10.2/(7)/ Assignment Agreement dated September 3, 1996, assigning certain
Patents and Patent Applications and trade secrets relating to the
PI Technology to the Company, as assignee, and Particle
Interconnect, Inc. as assignor.
10.3/(7)/ Assignment Agreement dated June 5, 1996, assigning the Patent
Application for the Antenna Technology to the Company, as
assignee, and El-Badawy Amien El-Sharaway, as assignor.
10.4/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Gordon J. Sales and the Company.
10.5/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Alan M. Smith and the Company.
10.6/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Terry W. Neild and the Company.
10.7/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 22, 1996 between Steven D. Clark and PI Corp.
10.8/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Lawrence DiFrancesco and PI Corp.
10.9/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Patricia H. Grihalva and PI Corp.
10.10/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between Jerry W. Tooley and Cellular Magnetics.
10.11/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between David Putnam and Cellular Magnetics.
10.12/(5)/ Warrant Agreement dated as of July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation.
10.13/(5)/ Royalty Agreement dated as of July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation.
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.14/(5)/ $2,200,000 Promissory Note dated as of July 18, 1997 between
Intercell Technologies Corporation and Intercell Corporation.
10.15/(5)/ Stock Pledge and Security Agreement dated July 18, 1997 between
Intercell Corporation and Intercell Technologies Corporation.
10.16* Microlink Technologies Corporation Standard Industrial Lease.
10.17* Sigma 7 Corporation Lease.
10.18* CTL Lease
11* Statement regarding Computation of Per Share Earnings.
21/(7)/ Subsidiaries of the Company.
23* Consent of KPMG Peat Marwick LLP
27* Financial Data Schedule.
_________________
* Filed herewith.
/(1)/ Incorporated by reference to the Company's Current Report on Form 8-K
dated July 10, 1996.
/(2)/ Incorporated by reference to the Company's Current Registration Statement
on Form S-8, Registration No. 333-604, effective January 24, 1996.
/(3)/ Incorporated by reference to the Company Current Report on Form 8-K dated
September 3, 1996.
/(4)/ Incorporated by reference to the Company Current Report on Form 8-K dated
October 14, 1996.
/(5)/ Incorporated by reference to the Company Current Report on Form 8-K dated
July 18, 1997.
/(6)/ Incorporated by reference to the Company Current Report on Form 8-K dated
May 28, 1997.
/(7)/ Incorporated by reference to the Company Annual Report on Form 10-K for
the year ended September 30, 1996.
<PAGE>
As Amended October 14, 1997
EXHIBIT 2.6
OFFER FOR DEVELOPMENT AGREEMENT
OF
MICROLINK TECHNOLOGIES CORPORATION
1. Form New Corporation
Microlink Technologies Corp. 15.0% Herb Neuhaus
Ownership 12.5 Ron Morley
72.5 Intercell Corporation
-----
100.0%
=====
2. Particle Interconnect Corporation transfers all of its Intellectual
Property to MTC after November 2, 1997 for Intercell Corporation's ownership in
MTC, which shall at that time be not less than 72.5%.
3. Herb Neuhaus President, Chief Executive Officer, Treasurer,
Director
Ronald Morley Vice-President of Sales & Marketing, Secretary,
Director
Paul H. Metzinger Director
4. Finance MTC.
Herb Neuhaus has indicated a "minimum operational level" budget of $325,000
(which includes $50,000 of current obligations excluding leases) for the period
September 30, 1997 to March 31, 1998.
Ronald Morley has committed, with the assistance of Herb Neuhaus and Paul
H. Metzinger, to pursue the financing, with the stated objective of receiving
substantive written offers, proposals or agreements-in-principle, on or before
December 31, 1997. At this point, the status of the entire program will be
reviewed.
(a) Intercell will advance $180,000 (less payments made since
September 20, 1997) to MTC to cover operations on or about October 17,
1997. Intercell Corporation commits to timely provide an additional
$140,000 for operations for months 4, 5 and 6, if required. Herb Neuhaus
will control the expenditure of such funds.
(b) MTC will obtain financing:
(i) Through direct sale of 20% of its equity for not less than
$350,000
<PAGE>
(ii) Through R&D funds of not less than $500,000 advanced by
sponsoring firms in an amount agreed between MTC and the sponsoring
firms, with such firms having (A) exclusive rights to purchase the IP
if successfully developed; (B) an option to acquire equity in MTC
(controlling or otherwise) for negotiated amounts, terms and
conditions; (C) exclusive licensing for a cash payment and royalty
payment; or (D) a combination of all of the above.
(c) Herb Neuhaus is of the opinion that the amount of financing is
sufficient to bring the technology to a marketable status.
5. Assuming financing is completed, as staged, ownership would be:
<TABLE>
<CAPTION>
Percent Shares Consideration
------- ------ -------------
<S> <C> <C> <C>
Herb Neuhaus 15.0% 15,000 $ 100.00
Ron Morley 12.5 12,500 100.00
Investors 20.0 20,000 350,000.00
Intercell Corporation 52.5/*/ 50,000 Transfer
------- ------- Technology and
100.0% 100,000 Physical Assets
======= =======
</TABLE>
_______________
/*/Intercell Corporation agrees to provide up to 2.5% equity interest to
outside consultants, if considered by all parties necessary to promote ITC's
success.
6. Any sale of the IP of MTC, or the sale or change of control of MTC, if
it occurs at any time within one year of the formation shall require that MTC or
Intercell Corporation pay Herb Neuhaus $120,000 in one lump sum to mitigate the
financial impact on him caused by his relocation and termination of employment
with Amoco. Intercell Corporation shall, as soon as possible, at its cost,
obtain a term life insurance policy on Herb Neuhaus, payable to his
beneficiaries in an amount of not less than $250,000.00. It is specifically
understood and agreed that when MTC is funded as herein provided, that MTC shall
pay all cost associated with such policy.
7. Herb Neuhaus' 100,000-share option in Intercell Corporation would vest
immediately. In addition Herb Neuhaus would agree to serve as President & Chief
Executive Officer, on the agreed terms and conditions as set forth in the Tech
Lead Letter, dated September 18, 1997. Ron Morley would continue as a salaried
employee of Intercell Corporation until otherwise changed by agreement of the
parties. He will devote substantially all of his time to the business activities
of MTC provided it shall bear full responsibility for all his costs incurred in
pursuing such business activities.
8. The equity ownership of Herb Neuhaus and Ron Morley in MTC would
increase pro rata for each percentage of equity of MTC they did not sell but
still raised not less than
2.6-2
<PAGE>
$350,000 (e.g., if they raised $350,000 by selling only 10% of MTC then each
would share equally in the 10% not sold). It is specifically understood and
agreed that if at any time within the six-month term of this Agreement Paul H.
Metzinger, on behalf of Intercell Corporation shall raise financing of not less
than $350,000.00 by utilizing part or all of the 20% equity reserved for
investors, then the equity ownership of Herb Neuhaus and Ron Morley shall remain
as set forth herein, but they shall lose all rights to any percentage of the
equity reserved for investors. Further, should Paul H. Metzinger, on behalf of
Intercell Corporation, manage to raise financing of $850,000.00 in such a manner
as to not require usage of the 20% allocated to the investors, then such
percentage shall remain vested in Intercell Corporation, the percentage equity
of Herb Neuhaus and Ron Morley shall remain as set forth herein, but Herb
Neuhaus and Ron Morley shall lose any rights to participation in any of the 20%
reverted to Intercell Corporation.
It is further specifically understood and agreed that if, during the term
of this Agreement, Herb Neuhaus and Ron Morley obtain financing of not less than
$850,000.00 for MTC without utilizing the 20% equity reserved for investors,
then they shall share equally such equity ownership.
9. Paul H. Metzinger will devote immediate attention to acquire funds to
settle out Ken Bahl and clear title to all IP.
10. Paul H. Metzinger will, with Herb Neuhaus and Ron Morley, consider the
desirability and advisability of creating or acquiring a public company to
facilitate these objectives.
11. If $350,000 is raised from investors, $150,000 would be returned to
Intercell Corporation.
2.6-3
<PAGE>
12. Unless otherwise agreed to, in writing, by all parties, if Herb
Neuhaus and Ron Morley fail to raise the private financing or obtain the R&D
funds, by March 31, 1998, they shall surrender their ownership of MTC back to
Intercell Corporation; provided they have been reimbursed for all accountable
expenses or paid other sums owed to them.
Dated: October 8, 1997 INTERCELL CORPORATION
By /s/ Paul H. Metzinger
------------------------------------------
Paul H. Metzinger, President and Chief
Executive Officer
Accepted and Agreed to this 8th day of October 1997.
By /s/ Herbert J. Neuhaus
------------------------------
Herbert J. Neuhaus, Ph.D.
By /s/ Ronald Morley
-------------------
Ronald Morley
2.6-4
<PAGE>
EXHIBIT 4.6
CERTIFICATE OF DESIGNATION OF
SERIES D PREFERRED STOCK
OF
INTERCELL CORPORATION
It is hereby certified that:
1. The name of the Company (hereinafter called the "Company") is
Intercell Corporation, a Colorado corporation.
2. The Certificate of Incorporation of the Company authorizes the
issuance of Ten Million (10,000,000) shares of preferred stock, no par value per
share, and expressly vests in the Board of Directors of the Company the
authority provided therein to issue any or all of said shares in one (1) or more
series and by resolution or resolutions to establish the designation and number
and to fix the relative rights and preferences of each series to be issued.
3. The Board of Directors of the Company, pursuant to the authority
expressly vested in it as aforesaid, has adopted the following resolutions
creating a Series D issue of Preferred Stock:
RESOLVED, that one thousand and eighty (1,080) of the Ten Million
(10,000,000) authorized shares of Preferred Stock of the Company shall be
designated Series D Preferred Stock, no par value per share, and shall possess
the rights and preferences set forth below:
Section 1. Designation and Amount. The shares of such series shall have
----------------------
no par value and shall be designated as Series D Preferred Stock (the "Series D
Preferred Stock") and the number of shares constituting the Series D Preferred
Stock shall be one thousand and eighty (1,080). The Series D Preferred Stock
shall have a Deemed Purchase Price of Two Thousand, Five Hundred Dollars
($2,500) per share.
Section 2. Rank. The Series D Preferred Stock shall rank: (i) junior to
----
any other class or series of outstanding Preferred Shares or series of capital
stock of the Company hereafter created specifically ranking by its terms senior
to the Series D Preferred Stock (collectively, the "Senior Securities"); (ii)
prior to all of the Company's Common Stock, no par value per share ("Common
Stock"); (iii) prior to any class or series of capital stock of the Company
hereafter created not specifically ranking by its terms senior to or on parity
with any Series D Preferred Stock of whatever subdivision (collectively, with
the Common Stock and the Existing Preferred Stock, "Junior Securities"); and
(iv) on parity with any class or series of capital stock of the Company
hereafter created specifically ranking by its terms on parity with
<PAGE>
the Series D Preferred Stock ("Parity Securities") in each case as to
distributions of assets upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary (all such distributions being referred
to collectively as "Distributions").
Section 3. Dividends. The Series D Preferred Stock shall bear a six
---------
percent (6%), cumulative dividend, commencing January 1, 1998. If such dividend
is not declared and paid, for any reason, the Deemed Purchase Price of the
Series D Preferred Shares shall be increased by such accrued dividend and shall,
at the option of the holder, be convertible into common stock of the Company or
otherwise redeemed.
Section 4. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of
the Company, either voluntary or involuntary, the Holders of shares of Series D
Preferred Stock shall be entitled to receive, immediately after any
distributions to Senior Securities required by the Company's Certificate of
Incorporation or any certificate of designation, and prior in preference to any
distribution to Junior Securities but in parity with any distribution to Parity
Securities, an amount per share equal to the sum of (i) the Series D Deemed
Purchase Price for each outstanding share of Series D Preferred Stock and (ii)
an amount equal to six percent (6%) of the Series D Demand Purchase Price per
annum for the period that has passed since January 1, 1998 to the date of the
event of liquidation, dissolution or winding up of the Company. If upon the
occurrence of such event, and after payment in full of the preferential amounts
with respect to the Senior Securities, the assets and funds available to be
distributed among the Holders of the Series D Preferred Stock and Parity
Securities shall be insufficient to permit the payment to such Holders of the
full preferential amounts due to the Holders of the Series D Preferred Stock and
the Parity Securities, respectively, then the entire assets and funds of the
Company legally available for distribution shall be distributed among the
Holders of the Series D Preferred Stock and the Parity Securities, pro rata,
based on the respective liquidation amounts to which each such series of stock
is entitled by the Company's Certificate of Incorporation and any certificate(s)
of designation relating thereto.
(b) Upon the completion of the distribution required by subsection
4(a), if assets remain in the Company, they shall be distributed to holders of
Junior Securities in accordance with the Company's Certificate of Incorporation
including any duly adopted certificate(s) of designation.
Section 5. Conversion. The record Holders of this Series D Preferred
----------
Stock shall have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. On and after January 1, 1999, each record
Holder of Series D Preferred Stock shall be entitled (at the times and in the
amounts set forth below) and subject to the Company's right of redemption set
forth in Section 6(a), at the office of the Company or any transfer agent for
the Series D Preferred Stock (the "Transfer Agent"), to convert (in multiples of
one (1) share of Preferred Stock) as follows:
4.6-2
<PAGE>
Each share of Series D Preferred Shares shall convert into that number of
common shares of the Company which could be acquired at the then current
market price of its common shares multiplied by the yearly factor indicated
in the following table:
<TABLE>
<CAPTION>
Year Factor
---- ------
<S> <C>
1999 1.5
2000 1.3
2001 1.1
2002 1.0
2003 and thereafter 0.9
</TABLE>
For this purpose market price shall be determined to be the average closing
price as published for the Company's common stock in daily financial
periodicals, if the common stock is listed for trading on any exchange or
on the NASDAQ Stock market, and if unlisted, then the average of the bid
and asked prices, for the thirty (30) trading day-period ending on the date
immediately preceding the date on which a Notice of Conversion is sent to
the Company by the holder of the Series D Preferred Shares; provided that
in no event may the total number of shares of the Company's common stock
issued upon conversion of the Series D Preferred Shares exceed ten percent
(10%) of the total number of shares of the Company's common stock
outstanding on the first date on which any holder of Series D Preferred
Shares sends a Notice of Conversion to the Company. In the event the total
number of shares, issuable upon conversion exceeds ten percent (10%) of the
then issued and outstanding common shares of the Company, the Company,
shall within ninety (90) days, of such event, redeem those Preferred Shares
which, if converted would exceed the ten percent (10%) limitation, at their
Deemed Purchase Price, plus all accrued dividends. The conversion price on
the applicable conversion date shall hereafter be referred to as the "Fixed
Conversion Price."
(b) Mechanics of Conversion. In order to convert Series D Preferred
Stock into full shares of Common Stock, the Holder shall (i) fax, on or prior to
11:59 p.m., Denver, Colorado time (the "Conversion Notice Deadline") on the date
of conversion, a copy of the fully executed notice of conversion ("Notice of
Conversion") to the Company at the office of the Company or its designated
transfer agent (the "Transfer Agent") for the Series D Preferred Stock stating
that the Holder elects to convert, which notice shall specify the date of
conversion, the number of shares of Series D Preferred Stock to be converted,
the applicable conversion price and a calculation of the number of shares of
Common Stock issuable upon such conversion (together with a copy of the front
page of each certificate to be converted) and (ii) surrender to a common courier
for delivery to the office of the Company or the Transfer Agent, the original
certificates representing the Series D Preferred Stock being converted (the
"Preferred Stock Certificates"), duly endorsed for transfer; provided, however,
that the Company shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless either the Preferred
Stock Certificates are delivered to the Company or its Transfer Agent as
provided above, or the Holder notifies the Company or its Transfer Agent that
such certificates have been lost, stolen or destroyed (subject to the
requirements of
4.6-3
<PAGE>
subparagraph (i) below). Upon receipt by Company of a facsimile copy of a
Notice of Conversion, Company shall immediately send, via facsimile, a
confirmation of receipt of the Notice of Conversion to Holder which shall
specify that the Notice of Conversion has been received and the name and
telephone number of a contact person at the Company whom the Holder should
contact regarding information related to the Conversion. In the case of a
dispute as to the calculation of the Conversion Rate, the Company shall promptly
issue to the Holder the number of Shares that are not disputed and shall submit
the disputed calculations to its outside accountant via facsimile within three
(3) days of receipt of Holder's Notice of Conversion. The Company shall cause
the accountant to perform the calculations and notify Company and Holder of the
results no later than forty-eight (48) hours from the time it receives the
disputed calculations. Accountant's calculation shall be deemed conclusive
absent manifest error.
(i) Lost or Stolen Certificates. Upon receipt by the Company of
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificates representing shares of Series D Preferred Stock, and (in the case
of loss, theft or destruction) of indemnity or security reasonably satisfactory
to the Company, and upon surrender and cancellation of the Preferred Stock
Certificate(s), if mutilated, the Company shall execute and deliver new
Preferred Stock Certificate(s) of like tenor and date. However, Company shalt
not be obligated to re-issue such lost or stolen Preferred Stock Certificates if
Holder contemporaneously requests Company to convert such Series D Preferred
Stock into Common Stock.
(ii) Delivery of Common Stock Upon Conversion. The Transfer Agent
or the Company (as applicable) shall, no later than the close of business on the
second (2nd) business day (the "Deadline") after receipt by the Company or the
Transfer Agent of a facsimile copy of a Notice of Conversion and receipt by
Company or the Transfer Agent of all necessary documentation duly executed and
in proper form required for conversion, including the original Preferred Stock
Certificates to be converted (or after provision for security or indemnification
in the case of lost or destroyed certificates, if required), issue and surrender
to a common courier for either overnight or (if delivery is outside the United
States) two (2) day delivery to the Holder at the address of the Holder as shown
on the stock records of the Company a certificate for the number of shares of
Common Stock to which the Holder shall be entitled as aforesaid.
(iii) No Fractional Shares. If any conversion of the Series D
Preferred Stock would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion,
in the aggregate, shall be the next lower number of shares.
(iv) Date of Conversion. The date on which conversion occurs (the
"Date of Conversion") shall be deemed to be the date set forth in such Notice of
Conversion, provided (i) that the advance copy of the Notice of Conversion is
faxed to the Company before
4.6-4
<PAGE>
11:59 p.m., Denver, Colorado time, on the Date of Conversion, and (ii) that the
original Preferred Stock Certificates representing the shares of Series D
Preferred Stock to be converted are surrendered by depositing such certificates
with a common courier, as provided above, and received by the Transfer Agent or
the Company as soon as practicable after the Date of Conversion. The person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record Holder or Holders of
such shares of Common Stock on the Date of Conversion.
(c) Reservation of Stock Issuable Upon Conversion. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the Series D Preferred Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all then outstanding
Series D Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of Series D Preferred Stock, the Company will
take such corporate action as may be necessary, to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose.
(d) Adjustment to Conversion Rate.
(i) Adjustment to Fixed Conversion Price Due to Stock Split,
Stock Dividend, Etc. If, prior to the conversion of all of the Series D
Preferred Stock, the number of outstanding shares of Common Stock is increased
by a stock split, stock dividend, or other similar event, the Fixed Conversion
Price shall be proportionately reduced, or if the number of outstanding shares
of Common Stock is decreased by a combination or reclassification of shares, or
other similar event, the Fixed Conversion Price shall be proportionately
increased.
(ii) Adjustment Due to Merger, Consolidation, Etc. If, prior to
the conversion of all Series D Preferred Stock, there shall be any merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Company shall
be changed into the same or a different number of shares of the same or another
class or classes of stock or securities of the Company or another entity or
there is a sale of all or substantially all the Company's assets, then the
Holders of Series D Preferred Stock shall thereafter have the right to receive
upon conversion of Series D Preferred Stock, upon the basis and upon the terms
and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such stock, securities and/or
other assets which the Holder would have been entitled to receive in such
transaction had the Series D Preferred Stock been converted immediately prior to
such transaction, and in any such case appropriate provisions shall be made with
respect to the rights and interests of the Holders of the Series D Preferred
Stock to the end that the provisions hereof (including, without limitation,
provisions for the adjustment of the Conversion Price and of the number of
shares issuable upon conversion of the Series D Preferred Stock) shall
thereafter be applicable, as nearly as may be practicable in relation to any
securities thereafter deliverable upon the exercise hereof.
4.6-5
<PAGE>
(iii) No Fractional Shares. If any adjustment under this
Section 5(f) would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion
shall be the next lower number of shares.
Section 6. Redemption by Company.
---------------------
(a) Company's Right to Redeem at its Election. At any time, the
Company shall have the right, in its sole discretion, to redeem ("Redemption at
Company's Election"), from time to time, any or all of the Series D Preferred
Stock; provided (i) Company shall first provide six (6) months advance written
notice as provided in subparagraph 6(b)(ii) below. If the Company elects to
redeem some, but not all, of the Series D Preferred Stock, the Company shall
redeem a pro-rata amount from each Holder of the Series D Preferred Stock.
(i) Redemption Price At Company's Election. The "Redemption
Price At Company's Election" shall be the Deemed Purchase Price.
For purposes hereof, "Deemed Purchase Price" shall mean the Series D Deemed
Purchase Price (as defined in Section 4(a)) of the shares of Series D Preferred
Stock being redeemed pursuant to this Section 6(a), together with the accrued
but unpaid dividends (as defined in Section 4(a)).
(ii) Mechanics of Redemption at Company's Election. The
Company shall effect each such redemption by giving at least six (6) months
prior written notice ("Notice of Redemption At Company's Election") to the
Holders of the Series D Preferred Stock selected for redemption, at the address
and facsimile number of such Holder appearing in the Company's Series D
Preferred stock register and to the Transfer Agent, which Notice of Redemption
At Company's Election shall be deemed to have been delivered three (3) business
days after the Company's mailing (by overnight or two (2) day courier, with a
copy by facsimile) of such Notice of Redemption At Company's Election. Such
Notice of Redemption At Company's Election shall indicate (i) the number of
shares of Series D Preferred Stock that have been selected for redemption, (ii)
the date which such redemption is to become effective (the "Date of Redemption
At Company's Election") and (iii) the Redemption Price At Company's Election, as
defined in subsection (a)(i) above.
(b) Company Must Have Immediately Available Funds or Credit
Facilities. The Company shall not be entitled to send any Redemption Notice and
begin the redemption procedure under Section 6(a) and unless it has:
(i) the full amount of the redemption price in cash,
available in a demand or other immediately available account in a bank or
similar financial institution; or
(ii) immediately available credit facilities, in the full
amount of the redemption price with a bank or similar financial institution; or
4.6-6
<PAGE>
(iii) an agreement with a standby underwriter willing to
purchase from the Company a sufficient number of shares of stock to provide
proceeds necessary to redeem any stock that is not converted prior to
redemption; or
(iv) a combination of the items set forth in (i), (ii) and
(iii) above, aggregating the full amount of the redemption price.
(c) Payment of Redemption Price.
(i) Each Holder submitting Preferred Stock being redeemed
under this Section 6 shall send their Series D Preferred Stock Certificates so
redeemed to the Company or its Transfer Agent, and the Company shall pay the
applicable redemption price to that Holder within five (5) business days of the
Date of Redemption at Company's Election. The Company shall not be obligated to
deliver the redemption price unless the Preferred Stock Certificates so redeemed
are delivered to the Company or its Transfer Agent, or, in the event one (1) or
more certificates have been lost, stolen, mutilated or destroyed, unless the
Holder has complied with Section 5(b)(i).
(d) Blackout Period. Notwithstanding the foregoing, the Company may
not either send out a redemption notice or effect a redemption pursuant to
Section 6(b) above during a Blackout Period (defined as a period during which
the Company's officers or directors would not be entitled to buy or sell stock
because of their holding of material non-public information), unless the Company
shall first disclose the non-public information that resulted in the Blackout
Period; provided, however, that no redemption shall be effected until at least
ten (10) days after the Company shall have given the Holder written notice that
the Blackout Period has been lifted.
Section 7. Voting Rights. The Holders of the Series D Preferred Stock
-------------
shall have no voting power whatsoever, except as otherwise provided by the
Colorado Business Corporation Act ("Colorado Law"), and no Holder of Series D
Preferred Stock shall vote or otherwise participate in any proceeding in which
actions shall be taken by the Company or the shareholders thereof or be entitled
to notification as to any meeting of the shareholders.
To the extent that under Colorado Law the vote of the Holders of the Series
D Preferred Stock, voting separately as a class, is required to authorize a
given action of the Company, the affirmative vote or consent of the Holders of
at least a majority of the shares of the Series D Preferred Stock represented at
a duly held meeting at which a quorum is present or by written consent of a
majority of the shares of Series D Preferred Stock (except as otherwise may be
required under Colorado Law) shall constitute the approval of such action by the
class. To the extent that under Colorado Law the Holders of the Series D
Preferred Stock are entitled to vote on a matter with holders of Common Stock,
voting together as one (1) class, each share of Series D Preferred Stock shall
be entitled to a number of votes equal to the number of shares of Common Stock
into which it is then convertible using the record date for the taking of such
vote of stockholders as the date as of which the Conversion Price is calculated.
Holders of the Series D Preferred Stock also shall be entitled to notice of all
shareholder meetings or written
4.6-7
<PAGE>
consents with respect to which they would be entitled to vote, which notice
would be provided pursuant to the Company's by-laws and applicable statutes.
Section 8. Protective Provision. So long as shares of Series D Preferred
--------------------
Stock are outstanding, the Company shall not without first obtaining the
approval (by vote or written consent, as provided by Colorado Law) of the
Holders of at least seventy-five percent (75%) of the then outstanding shares of
Series D Preferred Stock, and at least seventy-five percent (75%) of the then
outstanding Holders:
(a) alter or change the rights, preferences or privileges of the
Series D Preferred Stock so as to affect adversely the Series D Preferred Stock.
(b) create any new class or series of stock having a preference
over the Series D Preferred Stock with respect to Distributions (as defined in
Section 2 above) or increase the size of the authorized number of Series D
Preferred.
In the event Holders of at least seventy-five percent (75%) of the then
outstanding shares of Series D Preferred Stock and at least seventy-five percent
(75%) of the then outstanding Holders agree to allow the Company to alter or
change the rights, preferences or privileges of the shares of Series D Preferred
Stock, pursuant to subsection (a) above, so as to affect the Series D Preferred
Stock, then the Company will deliver notice of such approved change to the
Holders of the Series D Preferred Stock that did not agree to such alteration or
change (the "Dissenting Holders") and the Dissenting Holders shall have the
right for a period of thirty (30) business days to convert pursuant to the terms
of this Certificate of Designation as they exist prior to such alteration or
change or continue to hold their shares of Series D Preferred Stock.
Section 9. Status of Converted or Redeemed Stock. In the event any shares
-------------------------------------
of Series D Preferred Stock shall be converted or redeemed pursuant to Section 5
or Section 6 hereof, the shares so converted or redeemed shall be canceled,
shall return to the status of authorized but unissued Preferred Stock of no
designated series, and shall not be issuable by the Company as Series D
Preferred Stock.
Section 10. Preference Rights. Nothing contained herein shall be
-----------------
construed to prevent the Board of Directors of the Company from issuing one (1)
or more series of Preferred Stock with dividend and/or liquidation preferences
junior to the dividend and liquidation preferences of the Series D Preferred
Stock.
Section 11. Registration Rights. The Series D Preferred Shares shall have
-------------------
registration rights permitting the resale of not more than twenty percent (20%)
of the outstanding Series D
4.6-8
<PAGE>
Preferred Shares in connection with any registered, primary, firm commitment
underwriting of the Company's common stock, after December 31, 1998, unless
earlier converted or redeemed.
Signed on September 29, 1997
By: /s/ Paul H. Metzinger
--------------------------------------------
Paul H. Metzinger,
President & Chief Executive Officer
STATE OF COLORADO )
) SS.
COUNTY OF DENVER )
I, Kristi J. Kampmann, a Notary Public, hereby certify that on the 29th day
of September, 1997, Paul H. Metzinger, personally appeared before me, Kristi J.
Kampmann, who being by me first duly sworn declared that he is the person who
signed the foregoing, and that the statements therein contained are true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal on the date
hereinbefore mentioned.
My commission expires April 18, 2000.
/s/ Kristi J. Kampmann
--------------------------------------------
Notary Public
Kristi J. Kampmann
5250 S. Cherry Creek Dr. Apt. 18K
Denver, CO 80246
4.6-9
<PAGE>
EXHIBIT 10.16
STANDARD INDUSTRIAL LEASE
ARTICLE I
PARTIES
This Lease, dated October 14, 1997, is made by and between Springs
Industrial Group, LLC, owner of the premises (the "Lessor") and Microlink
Technologies Corp. (the "Lessee").
ARTICLE II
PREMISES
In consideration of the rents, covenants and agreements hereinafter
reserved and contained on the part of the Lessee to be observed and performed,
Lessor hereby leases to Lessee and Lessee hereby rents from Lessor, those
certain Premises (the "Premises") known as 2291-C & D Waynoka Road, Colorado
Springs, Colorado 80915, consisting of a space having measurements of
approximately 50 feet in width and 80 feet in depth, totaling approximately
4,000 square feet, for the term and upon the conditions and agreements
hereinafter set forth, and Lessor and Lessee hereby agree as follows:
ARTICLE III
TERM
The term of this Lease shall be for three years, commencing on November 1,
1997 and ending on October 31, 2000 unless sooner terminated pursuant to any
provision hereof.
DELAY IN COMMENCEMENT. Notwithstanding said commencement date, if for any
reason Lessor cannot deliver possession of the Premises to Lessee on said date,
Lessor shall not be subject to any liability thereof, nor shall failure affect
the validity of the Lease or the obligations of Lessee hereunder or extend the
term hereof, but in such case Lessee shall not be obligated to pay rent until
possession of the Premises is tendered to Lessee; provided, however, that Lessor
shall not have delivered possession of the Premises within 10 days from said
commencement date. Lessee may, at Lessee's option, by notice in writing to
Lessor within 10 days thereafter, cancel this Lease, in which event the parties
shall be discharged from all obligations hereunder. If Lessee occupies the
Premises prior to said commencement date, such occupancy shall be subject to all
provisions hereof; such occupancy shall not advance the termination date, and
Lessee shall pay rent for such period at the initial monthly rates set forth
below. If Lessor, by reason outside the reasonable control of Lessor, cannot
deliver said
10.16-1
<PAGE>
Premises within 10 days from said commencement date, Lessor may, at Lessor's
option, by notice in writing within 10 days thereafter, cancel this Lease.
ARTICLE IV
RENT
Lessee shall pay Lessor, without any prior demand thereof and without any
right of deduction or set-off whatsoever, a monthly rental of $1,833.33, in
advance, upon the first day of each calendar month during the first 12 months of
the term. The rental amount for years two and three of the lease shall increase
5% over the previous year's rental. The Lessee further agrees to pay, in
addition to the rent as provided herein, all privilege, sales, excise and other
taxes (except income taxes) imposed by state, federal or municipal authorities
upon the rentals herein provided to be paid by the Lessee to the Lessor. Said
payment shall be in addition to and accompanying each rental payment made by
Lessee to Lessor.
ARTICLE V
SECURITY DEPOSIT
Lessee shall deposit with Lessor, upon execution hereof, $1,833.33 as
security for Lessee's faithful performance of Lessee's obligations hereunder.
If Lessee fails to pay rent or other charges due hereunder or otherwise defaults
with respect to any provision of this Lease, Lessor may use, apply or retain all
or any portion of said deposit for the payment of any rent or other charge in
default or the payment of any other sum to which Lessor may become obligated by
reason of Lessee's default, or to compensate Lessor for any loss or damage which
Lessor may suffer thereby. If Lessor so uses or applies all of or any portion
of said deposit, Lessee shall, within 10 days after written demand thereof,
deposit cash with Lessor in an amount sufficient to restore said deposit to the
full amount herein above stated, and Lessee's failure to do so shall be a
material breach of this Lease. Lessor shall not be required to keep said
deposit separate from its general accounts. If Lessee performs all of Lessee's
obligations hereunder, said deposit, or so much thereof as has not theretofore
been applied by Lessor, shall be returned without payment of interest or other
increment for its use, to Lessee (or, at Lessor's option, the last assignee, if
any, of Lessee's interest hereunder) at the expiration of the term hereof, as it
may be altered or amended and after Lessee has vacated the Premises.
ARTICLE VI
USE
Section 6.01. USE. The Premises shall be used and occupied only for
Office, Warehouse and Light Manufacturing Facility and Lessee shall not use of
occupy the Premises or permit the same to be used for any other purpose.
10.16-2
<PAGE>
Section 6.02. COMPLIANCE WITH LAW. Lessee shall, at Lessee's expense,
comply promptly with all applicable statutes, ordinances, rules, regulations,
orders and requirements in effect during the term or any part of the term hereof
regulating the use by Lessee of the Premises. Lessee shall not use or permit
the use of the Premises in any manner that will tend to create waste or a
nuisance or, if there shall be more than one tenant of the building containing
the Premises, which shall tend to disturb such other tenants.
Section 6.03. CONDITION OF PREMISES. Lessee hereby accepts the Premises
in their condition existing as of the date of the execution hereof, subject to
all applicable zoning, municipal, county and state laws, ordinances and
regulations governing and regulating the use of the Premises, and accepts this
lease subject thereto and to all matters disclosed thereby and by any exhibits
attached hereto. Lessee acknowledges that neither Lessor not Lessor's Agent has
made any representation or warranty as to the suitability of the Premises for
the conduct of Lessee's business.
Section 6.04. LANDLORD'S IMPROVEMENTS TO THE SPACE. The space shall be
leased to the Tenant in as-is condition.
ARTICLE VII
MAINTENANCE, REPAIRS AND ALTERATIONS
Section 7.01. LESSOR'S OBLIGATIONS. Subject to the provisions of Article
IX and except for damage caused by any negligent or intentional act or omission
of Lessee, Lessee's Agents, employees or invitees, Lessor, at Lessor's expense,
shall keep in good order, condition and repair the foundations, exterior walls
and the exterior roof of the Premises. The Lessee shall give the Lessor prompt
notice of any defects or breakage in the structure, equipment, fixture or any
unsafe conditions upon or within the Premises. Lessee expressly waives the
benefits of any statute now or hereafter in effect which would otherwise afford
Lessee the right to make repairs at Lessor's expense or to terminate this Lease
because of Lessor's failure to keep the Premises in good order, condition and
repair.
Section 7.02. LESSEE'S OBLIGATIONS.
(a) Lessee shall, at its expense throughout the term of this Lease,
maintain, service, replace and keep in good repair the interior structures
and mechanical equipment, including such items as floors, ceilings, walls,
doors, glass, partitions and surrender same upon the expiration of the term
herein or renewal thereof in the same condition as received, ordinary wear
and tear excepted.
(b) On the last day of the term hereof, or on any sooner termination,
Lessee shall surrender the Premises to Lessor in the same condition as
received, broom clean, ordinary wear and tear excepted. Lessee shall
repair any damage to the Premises occasioned by the removal of its trade
fixtures, furnishings and equipment pursuant to
10.16-3
<PAGE>
Section 7.03, which repair shall include the patching and filling of holes
and repair of structural damage.
Section 7.03. ALTERATIONS AND ADDITIONS.
(a) Alterations may not be made to the Premises without the prior
written consent of the Lessor, and any alterations of the Premises,
excepting movable furniture and machinery and trade fixtures, shall become
part of the realty and belong to the Lessor upon termination of this Lease.
However, this shall not prevent the Lessee from installing trade fixtures,
machinery or other trade equipment in conformance with the local ordinances
provided the Premises are not damaged by the removal thereof. The Lessee
shall keep the Premises, the building and the property in which the
Premises are situated free from any liens arising out of any work performed
for, material furnished to or obligations incurred by the Lessee. It is
further understood and agreed that under no circumstance is the Lessee to
be deemed the Agent of the Lessor for any alteration, repair or operation
of the building upon the Premises, the same being done at the sole expense
of the Lessee, and all contractors, materialmen, mechanics and laborers are
hereby charged with notice that they must look to the Lessee only for the
payment of any charge for work done and materials furnished upon the
Premises during the term of this Lease.
(b) Lessor shall have the right to require removal of alterations and
additions but absent such demand, all improvements, additions and utility
installations, except trade fixtures and machines, shall remain the
property of Lessor. The above notwithstanding, Lessee shall have the right
to remove all improvements placed in the Premises other than plumbing,
electrical, walls, carpets and other like permanent improvements. Lessee
shall also have the right to install, at Lessee's expense, a vent through
the roof provided it is done in a workman like manner.
ARTICLE VIII
INDEMNITY
Section 8.01. LIABILITY INSURANCE. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease, a policy of
comprehensive public liability insurance insuring Lessor and Lessee against any
liability arising out of the Ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such Insurance shall be in an
amount not less than $100,000 for injury to or death of one person in any one
accident or occurrence and in any amount of not less than $300,000 for injury to
or death of more than one person in any one accident or occurrence. Such
insurance shall further insure Lessor and Lessee against liability for property
damage of at least $50,000. The limits of said Insurance shall not, however,
limit the liability of Lessee hereunder. In the event that the Premises
constitute a part of a larger property, said Insurance shall have a Lessor's
Protective Liability endorsement
10.16-4
<PAGE>
attached thereto. If Lessee shall fail to procure and maintain said Insurance,
Lessor may, but shall not be required to, procure and maintain the same, but at
the expense of Lessee.
Section 8.02. INSURANCE POLICIES. Insurance required hereunder shall be
in companies rated "AAA" or better in "Best's Insurance Guide." Lessee shall
deliver to Lessor copies of policies of liability insurance required under
Section 8.01 or certificates evidencing the existence and amounts of such
Insurance with loss payable clauses satisfactory to Lessor. No such policy
shall be cancellable or subject to reduction of coverage or other modification,
except after the expiration of such policies at which time Lessee must furnish
Lessor with renewals or "binder" thereof, or Lessor may order such Insurance and
charge the cost thereof to Lessee, which amount shall be payable by Lessee upon
demand. Lessee shall not do or permit to be done anything which shall
invalidate the Insurance policies referred to in Section 8.03.
Section 8.03. PROPERTY INSURANCE. Lessor shall obtain and keep in force
during the term of this Lease policy or policies of Insurance covering loss or
damage to the Premises in the amount of the full replacement value thereof,
providing protection against all perils included within the classification of
fire, extended coverage, vandalism, malicious mischief and special extended
perils (all risk).
Section 8.04. WAIVER OF SUBROGATION. Lessee and Lessor each hereby waives
any and all lights of recovery against the other or against the officers,
employees, Agents and representatives of the other for loss of or damage to such
waiving party or its property of others under its control, where such loss or
damage is insured under any Insurance policy in force at the time of such loss
or damage. Lessee and Lessor shall, upon obtaining the policies of Insurance
required hereunder, give notice to the Insurance carrier or carriers that the
foregoing mutual waiver of subrogation is contained in this Lease.
Section 8.05. INDEMNITY. Lessee shall indemnify and hold harmless Lessor
from and against any and all claims arising from Lessee's use of the Premises or
from the conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere, and shall
further indemnify and hold harmless Lessor from and against any and all claims
arising from any breach or default in the performance of any obligation on
Lessee's part to be performed under the terms of the Lease or arising from any
negligence of the Lessee or any of the Lessee's Agents, contractors or
employees, and from and against all costs, attorneys' fees, expenses and
liabilities incurred in the defense of any such claim or any action or
proceeding brought thereon and in case any action or proceeding be brought
against Lessor by reason of any such claim. Lessee, upon written notice from
Lessor, shall defend the same at Lessee's expense with counsel satisfactory to
Lessor. Lessee, as a material part of the consideration to Lessor, hereby
assumes all risk of damage to property or injury to persons in, upon or about
the Premises arising from any cause and Lessee hereby waives all claims in
respect thereof against Lessor.
Section 8.06. EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees
that Lessor shall not be liable for injury to Lessee's business or for any loss
of income therefrom or for
10.16-5
<PAGE>
damage to the goods, wares, merchandise or other property of Lessee, Lessee's
employees, invitees, customers or any other person in or about the Premises, nor
shall Lessor be liable for injury to the person of Lessee, Lessee's employees,
Agents or contractors, 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, sprinklers, wires, appliances,
plumbing, air conditioning or light fixtures or from any other cause whether the
said damage or injury results from conditions arising upon the Premises or upon
other portions of the building of which the Premises are a part or from other
sources or places, and regardless of whether the cause of such damage or injury
or the means of repairing the same is inaccessible to Lessee. Lessor shall not
be liable for any damages arising from any act or neglect of any other tenant,
occupant, if any, of the building in which the Premises are located. It shall
be the sole obligation of Lessee to insure its property, trade fixtures and
equipment located on the Premises from any and all loss or damage.
ARTICLE IX
DAMAGE OR DESTRUCTION
Section 9.01. DAMAGE OR DESTRUCTION. If, during the term of this Lease or
extension thereof, all or part of the building or structures now or hereafter
located upon the Premises should be destroyed partially or totally by fire or
other casualty, this Lease shall continue thereafter in full force and effect
except as hereinafter provided, and the Lessor may cause the reconstruction of
said building within 60 days following such destruction days, pending the
availability of labor and construction services, to substantially the same
condition in which it did exist at the time immediately preceding such
destruction. The Lessee's obligation to pay rental to the Lessor hereunder
shall abate from the date of such destruction until completing of such
reconstruction, and the terms hereof shall be automatically extended for a
period of time equivalent to that during which rent is abated as aforesaid. In
the event the Lessor does not commence reconstruction, repair or Replacement of
the improvements within 15 days after loss or damage, this Lease shall be deemed
terminated and of no further force or effect.
Section 9.02. ABATEMENT OF RENT; LESSEE'S REMEDIES. Except for abatement
of rent, if any, Lessee shall have no claim against Lessor for any damage
suffered by reason of any such damage, destruction, repair or restoration.
ARTICLE X
REAL PROPERTY TAXES
Section 10.01. PAYMENT OF TAX. Lessor shall pay all real property taxes
applicable to the Premises; provided, however, Lessee shall pay, as Additional
Rent, its proportionate share of any increase in such taxes and assessments
levied upon the real property for which the Premises are a part during the Lease
Term thereof over the fiscal tax year 1996. Such payment shall be made by
Lessee within 30 days after receipt of Lessor's written statement setting forth
10.16-6
<PAGE>
the payment due and the reasonable computation thereof. If the Lease Term shall
not expire concurrently with the expiration of the tax fiscal year, Lessee's
liability for taxes for the last partial Lease Year shall be prorated on an
annual basis. For purposes of this Section 10.01 and otherwise in this Lease,
"Taxes" means real estate taxes, assessments (whether general or special), sewer
rents, rates and charges, transit taxes, taxes based on the receipt of rent, and
any other federal, state or local government charge, general special, ordinary
or extraordinary, that may now or hereafter be levied or assessed against the
Building(s) of which the Premises are a part, or the land on which the
Building(s) stands.
Section 10.02. LESSEE'S "PROPORTIONAL SHARE" OF REAL PROPERTY TAX.
Lessee's "Pro Rata Share" shall mean a fraction, the numerator of which shall be
the total number of square feet in the Premises and the denominator of which
shall be the total number of square feet of real property in the entire complex
of which the Premises are a part.
Section 10.03. PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Premises or elsewhere. When
possible, Lessee shall cause said trade fixtures, furnishings, equipment
and all other personal property to be assessed and billed separately from
the real property of Lessor.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to
Lessee within 10 days after receipt of a written statement setting forth
the taxes applicable to Lessee's property.
ARTICLE XI
BUILDING OPERATING EXPENSES
In addition to the rental herein provided to be paid by Lessee to Lessor,
Lessee shall pay to the Lessor, on or before the first day of each month, as
Additional Rent, the amount, if any, by which Lessee's proportionate share (as
hereinafter defined) of Building Operating Expenses has increased over the Base
Year 1996. Lessee's proportionate share of Building Operating Expenses is based
upon a fraction, the numerator of which shall be the total number of square feet
of real property in the entire complex of which the Premises are a part.
This figure shall be adjusted annually based upon Lessor's best estimate of
costs of the then-current year. Within 90 days after the end of each calendar
year, Lessee shall receive an accounting statement showing the adjustment, the
actual Annual Operating Costs for the prior year and the amount actually paid by
Lessee. If the amount paid by Lessee exceeds Lessee's share of actual costs,
the excess shall be credited against Lessee's next payment(s) of Operating
Costs. If the amount paid by Lessee is less than Lessee's proportionate share
of actual costs, Lessee shall pay the deficit within 10 days of Lessee's receipt
of this statement.
10.16-7
<PAGE>
For purposes of this Article XI, Building Operating Expenses, which is
inclusive of common areas, shall mean the sum of all expenses incurred by Lessor
in connection with the operation, management, repair and maintenance of the
building(s) and common areas including, but not limited to, rubbish and snow
removal, window cleaning, utilities, janitorial service, maintenance of all
parking lots, driveways, landscaping, streets and perimeter bears, including any
governmental surcharge, fee or assessment imposed with respect to the parking
facilities to the extent paid by Lessor and not passed on to users of said
parking facilities and all fire and extended supplies, salaries, wages and other
expenses incurred with respect to maintenance, gardening, landscaping, repaving,
repainting, cleaning, security and fire protection and an amount equal to 10% of
all such expenses to cover Lessor's administrative and overhead expenses.
Lessor may, in addition to any other remedy, impose a reasonable charge for
excess usage of Building(s) facilities and services, which express usage is
occasioned by greater than normal usage or by use of the Premises. Executive
salaries, general overhead and depreciation of improvements shall not be
included in the foregoing expenses.
ARTICLE XII
UTILITIES
Lessee shall pay telephone services and all other utilities metered to the
demised Premises supplied to the Premises, together with any taxes thereon.
ARTICLE XIII
ASSIGNMENT AND SUBLETTING
Section 13.01. LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily,
or by operation of law, assign, transfer, mortgage, sublet or otherwise transfer
or encumber all or any part of Lessee's interest in this Lease or in the
Premises without Lessor's prior written consent, which Lessor shall not
unreasonably withhold. Any attempted assignment, transfer, mortgage,
encumbrance or subletting without such consent shall be void and shall
constitute a breach of this Lease. Lessor may condition its consent to any
subletting upon entering into a lease directly with the proposed subtenant, in
which case the portion of the Premises so leased shall be released from this
Lease and Lessee shall have no other obligations with respect to the released
space.
Section 13.02. NO RELEASE OF LESSEE. Except where Lessor requires a new
Lease directly with the proposed subtenant, as set forth above, no subletting or
assignment shall release Lessee of Lessee's obligation or alter the primary
liability of Lessee to pay the rent and to perform all other obligations to be
performed by Lessee hereunder. The acceptance of rent by Lessor from any other
person shall not be deemed to be a waiver by Lessor of any provision hereof.
Consent to one assignment or subletting shall not be deemed consent to any
subsequent assignment or subletting.
10.16-8
<PAGE>
ARTICLE XIV
DEFAULTS; REMEDIES
Section 14.01. DEFAULTS. The occurrence of any one or more of the
following events shall constitute a default and breach of this Lease by Lessee:
(a) the vacating or abandonment of the Premises by Lessee;
(b) the failure by Lessee to make any payment of rent or other payment
required to be made by Lessee hereunder, as and when due;
(c) the failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by
Lessee, other than described in paragraph (b) above, where such failure
shall continue for a period of 30 days after written notice hereof from
Lessor to Lessee; provided, however, that if the nature of Lessee's default
is such that more than 30 days are reasonably required for its cure, then
Lessee shall not be deemed to be in default if Lessee commenced such cure
to completion; and
(d) (i) the making by Lessee of any general assignment or general
arrangement for the benefit of creditors; (ii) the filing by or against
Lessee of a petition to have Lessee adjudged a bankrupt or a petition for
reorganization or arrangement under any law relating to bankruptcy unless,
in the case of a petition filed against Lessee, the same is dismissed
within 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 30 days; or (iv) the attachment, execution or other judicial
seizures 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 30 days.
Section 14.02. REMEDIES. In the event of any such default or breach by
Lessee, Lessor may, at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such default or breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event,
Lessor shall be entitled to recover from Lessee all damages incurred by
Lessor by reason of Lessee's default including, but not limited to, the
cost of recovering possession of the Premises, expenses of reletting,
including necessary renovation and alteration of the Premises, reasonable
attorneys' fees, and any real estate commission actually paid: the worth at
the time or award by the court having jurisdiction thereof of the amount by
which the unpaid rent for the balance of the term after the time of such
award exceeds the amount of such rental loss for the same
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<PAGE>
period that Lessee provides could be reasonably avoided and that portion of
the leasing commission paid by Lessor applicable to the unexpired term of
this Lease. In the event Lessee shall have abandoned the Premises, Lessor
shall have the option of (i) retaking possession of the Premises and
recovering from Lessee the amount specified in this Section 14.02(a) or
(ii) proceeding under Section 15.02(b).
(b) Maintain Lessee's right to possession, in which case this Lease
shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event, Lessor shall be entitled to enforce all of
Lessor's rights and remedies under this Lease, including the right to
recover the rent as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the State in which the property is
located.
Section 14.03. DEFAULT BY LESSOR. Lessor shall not be in default unless
Lessor fails to perform obligations required of Lessor within a reasonable time,
but in no event later than thirty (30) days after written notice by Lessee to
Lessor; provided, however, that if the nature of Lessor's obligation is such
that more than thirty (30) days are required for performance, then Lessor shall
not be in default if Lessor commences performance within such 30-day period and
thereafter diligently prosecutes the same to completion.
Section 14.04. LATE CHARGES. Notwithstanding anything contained in this
Lease to the contrary, Lessee hereby acknowledges that late payment by Lessee to
Lessor of rent and other sums due hereunder will cause Lessor to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges and late charges, which may be imposed on Lessor by the
terms of any mortgage or trust deed covering the Premises. Accordingly, if any
installment of rent or any other sum due from Lessee shall not be received by
Lessor or Lessor's designee within ten (10) days after such amount shall be due,
Lessee shall pay to Lessor a late charge equal to ten percent (10%) of such
overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Lessor will incur by reason of late
payment by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's default, with respect to such overdue amount nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder.
ARTICLE XV
CONDEMNATION
If the Premises, or any portion thereof, are taken under the power of
eminent domain or sold under the threat of the exercise of said power (all of
which are herein called "condemnation"), this Lease shall terminate as to the
part so taken as of the date the condemning authority takes title or possession,
whichever first occurs. If more than 10% of the floor area of the Premises is
taken by condemnation, Lessee may, at Lessee's option to be exercised in
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<PAGE>
writing only 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 rent shall be reduced in the proportion that the floor area
taken bears to the total floor area of the Premises. Any award for the taking
of all or any part of the Premises under the power of eminent domain or any
payment made under threat of the exercise of such power shall be the property of
Lessor, whether such award shall be made as compensation for diminution in value
of the leasehold or for the taking of the fee or as severance damages; provided,
however, that Lessee shall be entitled to any award for loss of damage to
Lessee's trade fixtures and removable personal property. In the event that this
Lease is not terminated by reason of such condemnation, Lessor shall, to the
extent of severance damages received by Lessor in connection with such
condemnation, repair any damage to the Premises caused by such condemnation,
except to the extent that Lessee has been reimbursed thereof by the condemning
authority. Lessee shall pay any amount in excess of such severance damages
required to complete such repair.
ARTICLE XVI
GENERAL PROVISIONS
Section 16.01. ESTOPPEL CERTIFICATE.
(a) Lessee shall, at any time upon not less than ten (10) days prior
written notice from Lessor, execute, acknowledge and deliver to Lessor a
statement in writing: (i) certifying that this Lease is unmodified and in
full force and effect or, if modified, stating the nature o such
modification and certifying that this Lease, as so modified, is in full
force and effect and the date to which the rent and other charges are paid
in advance, if any; and (ii) acknowledging that there are not, to Lessee's
knowledge, any uncured defaults on the part of Lessor hereunder, or
specifying such defaults if any are claimed. Any such statement may be
conclusively relied upon by any prospective purchaser or encumbrances of
the Premises.
(b) Lessee's failure to deliver such statement within such time shall
be conclusive upon Lessee (i) that this Lease is in full force and effect,
without modification except as may be represented by Lessor, (ii) that
there are no uncured defaults in Lessor's performance, and (iii) that not
more than one month's rent has been paid in advance.
(c) If Lessor desires to finance or refinance the Premises, or any
part thereof, Lessee hereby agrees to deliver to any lender designated by
Lessor such financial statement of Lessee as may be reasonably required by
such lender. Such statements shall include the past three years' financial
statements of Lessee. All such financial statements
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<PAGE>
shall be received by Lessor in confidence and shall be used only for the
purposes herein set forth.
Section 16.02. LESSOR'S LIABILITY. The term "Lessor" as used herein shall
mean only the Owner or Owners at the time in question of the fee title or a
Lessee's interest in a ground lease of the Premises. In the event of any
transfer of such title or interest, Lessor herein named (and in case of any
subsequent transfers the then-Grantor) shall be relieved from after the date of
such transfer of all liability for Lessor's obligations thereafter to be
performed, provided that any funds in the hands of Lessor or the then-Grantor at
the time of such transfer in which Lessee has an interest shall be delivered to
the Grantee. The obligations contained in this Lease to be performed by Lessor
shall, subject as aforesaid, be binding on Lessor's successors and assigns only
during their respective periods of Ownership.
Section 16.03. SEVERABILITY. The invalidity of any provision of this
Lease, as determined by a court of competent jurisdiction, shall in no way
effect the validity of any other provision hereof.
Section 16.04. TIME OF ESSENCE. Time is of the essence.
Section 16.05. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease
contains all agreements of the parties with respect to any matter mentioned
herein. No prior agreement or understanding pertaining to any such matter shall
be effective. This Lease may be modified in writing only, signed by the parties
in interest at the time of the modification.
Section 16.06. NOTICES. Any notice required or permitted to be given
hereunder shall be in writing and may be served personally or by regular mail,
addressed to Lessor and Lessee, respectively, at the addresses set forth after
their signatures at the end of this Lease.
Section 16.07. WAIVERS. No waiver by Lessor of any provision hereof shall
be deemed a waiver of any other provision hereof or of any subsequent breach by
Lessee of the same or any other provision. 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 act by Lessee. The acceptance of rent
hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of
any provision hereof other than the failure of Lessee to pay the particular rent
so accepted regardless of Lessor's knowledge of such preceding breach at the
time of acceptance of such rent.
Section 16.08. RECORDING. Lessee shall not record this Lease without
Lessor's prior written consent and such recordation shall, at the option of
Lessor, constitute a noncurable default of Lessee hereunder. Either party
shall, upon request of the other, execute, acknowledge and deliver to the other
a "short form" memorandum of this Lease for recording purposes.
Section 16.09. HOLDING OVER. If Lessee remains in possession of the
Premises or any part thereof after the expiration of the term hereof without the
express written consent of Lessor,
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such occupancy shall be a tenancy from month to month at a rental in the amount
of double the last monthly rental plus all other charges payable hereunder and
upon all the terms hereof applicable to a month-to-month tenancy.
Section 16.10. 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.
Section 16.11. COVENANTS AND CONDITIONS. Each provision of this Lease to
be performed by Lessee shall be deemed both a covenant and a condition.
Section 16.12. BINDING EFFECT. Subject to any provision hereof
restricting assignment or subletting by Lessee and subject to the provisions of
Section 17.02, this Lease shall bind the parties, their personal
representatives, successors and assigns.
Section 16.13. SUBORDINATION.
(a) This Lease, at Lessor's option, shall be subordinate to any ground
lease, mortgage, deed of trust or any other hypothecation for security now
or hereafter placed upon the property of which the Premises are a part and
to any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of
the Premises shall not be disturbed if Lessee is not in default and so long
as Lessee shall pay the rent and observe and perform all of the provisions
of this Lease, unless this Lease is otherwise terminated pursuant to its
terms. If any mortgagee, trustee or ground Lessor shall elect to have this
Lease prior to the lien of its mortgage, deed of trust or ground lease and
shall give written notice thereof to Lessee, this Lease shall be deemed
prior to such mortgage, deed of trust or ground lease whether this Lease is
dated prior or subsequent to the date of said mortgage, deed of trust or
ground lease as of the date of recording thereof.
(b) Lessee agrees to execute any documents required to effectuate such
subordination or to make this Lease prior to the lien of any mortgage, deed
of trust or ground lease, as the case may be, and failing to do so within
ten (10) days after written demand does hereby make, constitute and
irrevocably appoint Lessor as Lessee's attorney in fact and in Lessee's
name, place and stead, to do so.
Section 16.14. ATTORNEY'S FEES. If either party brings an action to
enforce the terms hereof or declare rights hereunder, the prevailing party, in
any such action, on trial or appeal, shall be entitled to reasonable attorneys'
fees to be paid by the losing party as fixed by the court.
Section 16.15. LESSOR'S ACCESS. Lessor and Lessor's Agents shall have the
right to enter the Premises at reasonable times between 8 a.m. and 5 p.m.
weekdays for the purpose of inspecting the same, showing the same to prospective
purchasers or lenders and making such alterations, repairs, improvements or
additions to the Premises or to the building of which they
10.16-13
<PAGE>
are a part as Lessor may deem necessary or desirable. Lessor may at any time
place on or about the Premises any "For Sale" and "For Lease" signs.
Section 16.16. SIGNS AND AUCTIONS. Lessee shall not place any sign upon
the Premises or conduct any auction thereon without Lessor's prior written
consent; provided, however, Lessee shall place letter and maintain the standard
project sign can with the name of Lessee business.
Section 16.17. MERGER. The voluntary or other surrender of this Lease by
Lessee, or a mutual cancellation thereof, shall not work a merger and shall, at
the option of Lessor, terminate all or any existing subtenancies.
Section 16.18. CORPORATION AUTHORITY. If Lessee is a corporation, each
individual executing this Lease on behalf of said corporation represents and
warrants that he or she is duly authorized to execute and deliver this Lease on
behalf of said corporation in accordance with a duly adopted resolution of the
Board of Directors of said corporation or in accordance with the Bylaws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms. If Lessee is a corporation, Lessee shall, within thirty (30)
days after execution of this Lease, deliver to Lessor a certified copy of a
resolution of the Board of Directors of said corporation authorizing or
ratifying the execution of this Lease.
Section 16.19. RIGHT TO MOVE. Lessor shall have the right, at any time
during the term of this Lease upon giving Lessee sixty (60) days' notice in
writing, to provide and furnish Lessee with space elsewhere in the industrial
park of the approximate same size and areas as the herein Premises and to remove
and place Lessee in such new space at Lessor's sole cost and expense, including
the installation in the new space by Lessor at Lessor's sole cost and expense of
all electrical, plumbing, construction, venting and other similar improvements
made by Lessee in the original space, with all terms, covenants and provisions
contained herein remaining in full force and effect. If Lessee declines to
accept such substituted Premises, this Lease Agreement shall terminate all the
expiration of such sixty (60) day notice period or at such earlier date as
agreed upon by Lessor and Lessee.
Section 16.20. PARKING AND COMMON AREAS. The Lessee, its Agents,
employees and invitees shall be entitled to part in common with either tenant of
Lessor providing that it agrees not to overburden the parking facilities and
agrees to cooperate with the Lessor and other occupants of the property in the
use of the parking facilities. The Lessor specifically reserves the right in
this absolute discretion to determine whether parking facilities are becoming
overburdened and in such event to allocate the parking spaces among the Lessee
and other occupants, their Agent, employees and business invitees using the
parking facilities; provided, however, that Lessee shall be entitled to not less
than ten (10) parking spaces. All loading operating for receipt of shipment of
goods, wares and merchandise by the Lessee shall be done in the rear of the
Premises or in such area therein which is specifically designated in writing by
the Lessor.
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Section 16.21. SAFETY. Lessee will maintain on the Premises at all times
during the term hereof adequate number, size and type of fire extinguishers as
is appropriate to Lessee's business. Lessee will at all times adhere to good
safety practices or as may be required by safety inspectors.
ARTICLE XVII
ENVIRONMENTAL REGULATIONS
The Lessee agrees to abide by all local, state and federal environmental
legislation that may now exist or become law during the term of this lease.
Lessee further agrees to indemnify the Lessor from any environmental issues that
may arise during the term of the lease that are caused by Lessee is use of the
property. This condition shall survive the lease expiration.
ARTICLE XVIII
BUILDING OPERATION EXPENSE CAP
The Lessee and Landlord agree to a maximum 10% annual cap on the building
operating expenses and property taxes during the lease term. The expenses for
1996 base year are attached as Exhibit A.
ARTICLE XIX
BROKER COMPENSATION
The Lessor shall compensate The Home Brokers, who is acting as Lessee's
agent, in the amount of 3.5% of the gross lease value.
The parties hereto have executed this Lease on the date set forth herein
above.
LANDLORD: TENANT:
SPRINGS INDUSTRIAL GROUP, LLC MICROLINK TECHNOLOGIES CORP.
By /s/ Charles Flint, Manager By /s/ Herbert J. Neuhaus, President
--------------------------- -----------------------------------
Date: October 15, 1997 Date: October 15, 1997
------------------------- ---------------------------------
10.16-15
<PAGE>
Lease Guarantor:
INTERCELL CORPORATION
The Undersigned Officer on behalf of Intercell Corporation hereby
guarantees the obligations created under this lease by Microlink Technologies
Corporation including payment of all rental sums due under the lease. Intercell
Corporation shall submit with execution of the lease a current audited balance
sheet and a profit and loss statement for the year ending 1996 or the last
fiscal year of operations.
INTERCELL CORPORATION
By /s/ Paul H. Metzinger
----------------------------------------
Paul H. Metzinger, President & Chief
Executive Officer
Date: October 15, 1997
10.16-16
<PAGE>
EXHIBIT A
October 13, 1997
Mr. Charley Conrad
Olive Real Estate Group, Inc.
102 North Cascade Avenue, Suite 250
Pueblo, Colorado 81003
Dear Mr. Conrad:
Pursuant to your request, we have completed a summary of 1996 expenses for
the building located at 2291 Waynoka Road, Colorado Springs, Colorado. These
expenses are summarized below:
<TABLE>
<CAPTION>
1996 EXPENSE SUMMARY CHART
Expense Cost
------- ----
<S> <C>
Real Estate Taxes $ 9,747.46
Insurance 1,853.00
Repairs/Maintenance 4,284.25
Utilities, Grounds, Miscellaneous 4,075.33
----------
Total $19,960.04
</TABLE>
Based on the total building area of approximately 20,212 square feet, the
above expenses equal approximately $0.99 per square foot.
If we can be of further assistance in this matter, please do not hesitate
to contact us, as it is a privilege to be of service to your firm.
Sincerely,
SPRINGS INDUSTRIAL GROUP, LLC
By /s/ Thomas E. Buczek
----------------------------------
Thomas E. Buczek
A-1
<PAGE>
EXHIBIT 10.17
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
(Do not use this form for Multi-Tenant Property)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
January 2, 1996, is made by and between The J. David Gladstone Institutes, a
charitable trust organized and existing under the laws of California ("LESSOR")
and BMI Acquisition Group, Inc., a California corporation ("LESSEE"),
(collectively the "PARTIES," or individually a "PARTY").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 6610 Nancy Ridge Drive, located in the County of
San Diego, State of California, and generally described as (describe briefly the
nature of the property) approximately 33,938 square feet of improved space
("PREMISES"). (See Paragraph 2 for further provisions.)
1.3 TERM: Five (5) years and Zero (0) months ("ORIGINAL TERM") commencing
as provided in Section 1 of the Addendum and ending on the date which is five
(5) years after the Commencement Date ("EXPIRATION DATE"). (See Paragraph 3 for
further provisions.)
1.4 EARLY POSSESSION: Not applicable. (See Paragraphs 3.2 and 3.3 for
further provisions).
1.5 BASE RENT: $16,969.00 per month ("BASE RENT"), payable on the first
day of each month commencing on the Commencement Date and increasing to the
following amounts on the annual anniversaries of the Commencement Date: first
anniversary $17,647.76, second anniversary $18,353.67, third anniversary
$19,087.82, and fourth anniversary $19,851.33 (See Paragraph 4 for further
provisions.)
[_] 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: $16,969.00 as Base Rent for the period
of the first full calendar month of the Term.
1.7 SECURITY DEPOSIT: $16,969.00 ("SECURITY DEPOSIT"). (See Paragraph 5
for further provisions.)
1.8 PERMITTED USE: General office, assembly and distribution of computer
related products (See Paragraph 6 for further provisions.)
1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise stated
herein. (See Paragraph 8 for further provisions.)
1.10 REAL ESTATE BROKERS: The following real estate brokers (collectively,
the "BROKERS") and brokerage relationships exist in this transaction and are
consented to by the Parties (check applicable boxes):
Colliers Iliff Thorn represents
- -----------------------------------
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[_] Lessor exclusively ("LESSOR'S BROKER"); [X] both Lessor and Lessee, and
_______________________________________________________________ represents
[_] Lessee exclusively ("LESSEE'S BROKER"); [_] both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
1.11 GUARANTOR. The obligations of the Lessee under the Lease are to be
guaranteed by N/A ("GUARANTOR"). (See Paragraph 37 for further provisions.)
1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 1 through 9 and Exhibits A all of which constitute a part of this
Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental, is an approximation which Lessor and
Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, hearing, and
loading doors, if any, in the Premises, other than those constructed by Lessee,
shall be in good operating condition on the Commencement Date. If a non-
compliance with this warranty within six (6) months after the Commencement Date,
correction of that non-compliance shall be the obligation of Lessee at Lessee's
sole cost and expense. See Addendum. Section 10.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility installation (as defined in Paragraph 7.3(a)) made or to
be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within six (6)
months following the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Brokers to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefore as the same relate to Lessee's occupancy of the Premises and/or the
term of this Lease, and (c) that neither
PAGE 2
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Lessor, nor any of Lessor's agents, has made any oral or written representations
or warranties with respect to the said matters other than as set forth in this
Lease.
2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any non-
compliance of the Premises with said warranties.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3. The Original Term shall be subject to
termination as provided in Section 6 of the Addendum and to extension as
provided in Section 7 of the Addendum.
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, however,
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall be in effect during such
period. Any such early possession shall not affect nor advance the Expiration
Date of the Original Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is
specified, by the Commencement Date. Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease, or
the obligations of Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not, except as otherwise provided herein, be obligated to pay
rent or perform any other obligation of Lessee under the terms of this Lease
until Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days thereafter, cancel this Lease, in which event the Parties
shall be discharged from all obligations hereunder; provided, however, that if
such written notice by Lessee is not received by Lessor within said ten (10) day
period, Lessee's right to cancel this Lease shall terminate and be of no further
force or effect. Except as may be otherwise provided, and regardless of when the
term actually commences, if possession is not tendered to Lessee when required
by this Lease and Lessee does not terminate this Lease, as aforesaid, the period
free of the obligation to pay Base Rent, if any, that Lessee would otherwise
have enjoyed shall run from the date of delivery of possession and continue for
a period equal to what Lessee would otherwise have enjoyed under the terms
hereof, but minus any days of delay caused by the acts, changes or missions of
Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due under the terms of this Lease. Base Rent and all
other rent and charges for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual
PAGE 3
10.17-3
<PAGE>
number of days of the calendar month involved. Payment of Bass Rent and other
charges shall be made to Lessor at its address stated herein or to such other
persons or at such other addressees as Lessor may from time to time designate in
writing to Lessee. See Addendum, Section 2.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, coal expense,
loss or damage (Including attorneys' fees) which Lessor my 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 moneys with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Bass Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional moneys with Lessor sufficient to maintain the same ratio between the
Security Deposit and the Bass Rent as those amounts are specified in the Basic
Provisions. Lessor Shall not be required to keep all or any pad of the Security
Deposit separate from its general accounts. Lessor shall, at the expiration or
earlier termination of the term hereof and after Lessee has vacated the
Premises, return to Lessee (or, at Lessor's option, to the last assignee, if
any, of Lessee's interest herein), that portion of the Security Deposit not used
or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no
part of the Security Deposit shall be considered to be held in trust, to bear
interest or other increment for its use, or to be prepayment for any moneys to
be paid by Lessee, as under this Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost
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and expense) with all Applicable Law (as defined in Paragraph 6.3). "REPORTABLE
USE" shall mean (i) the installation or use of any above or below ground storage
tank, (ii) the generation, possession, storage, use, transportation, or disposal
of a Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with, any
governmental authority Reportable Use shall also include Lessee's being
responsible for the presence in, on or about the Premises of a Hazardous
Substance with respect to which any Applicable Law requires that a notice be
given to persons entering or occupying the Premises or neighboring properties.
Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but
in compliance with all Applicable Law, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of Lessee's
business permitted on the Premises, so long as such use is not a Reportable Use
and does not expose the Premises or neighboring properties to any meaningful
risk of contamination or damage or expose Lessor to any liability therefor. In
addition, Lessor may (but without any obligation to do so) condition its consent
to the use or presence of any Hazardous Substance, activity or storage tank by
Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its
reasonable discretion, deems necessary to protect itself, the public, the
Premises and the environment against damage, contamination or injury and/or
liability therefrom or therefor, including, but not limited to, the installation
(and removal on or before Lease expiration or earlier termination) of reasonably
necessary protective modifications to the Premises (such as concrete
encasements) and/or the deposit of an additional Security Deposit under
Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance, or a condition involving or resulting
from same, has come to be located in, on, under or about the Premises, other
than as previously consented to by Lessor, Lessee shall immediately give written
notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy
of any statement, report, notice, registration, application, permit, business
plan, license, claim, action or proceeding given to, or received from, any
governmental authority or private party, or persons entering or occupying the
Premises, concerning the presence, spill, release, discharge of, or exposure to,
any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to all such documents as may be involved in any
Reportable Uses involving the Premises.
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but
not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultant's and attorney's fees and testing), removal,
remediation, restoration and/or abatement thereof, or of any contamination
therein involved, and shall survive the expiration or earlier termination of
this Lease. No termination, cancellation or release agreement entered into by
Lessor and Lessee shall release Lessee from its obligations under this Lease
with reaped to Hazardous Substances or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement.
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6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
tn a timely manner, comply with all "APPLICABLE LAW," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy. Lessee shall,
within five (5) days after receipt of Lessor's written request, provide Lessor
with copies of all documents and information, including, but not limited to,
permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately upon receipt notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable Law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the
case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage lank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as
to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.),
7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14
(condemnation), Lessee shall, at Lessee's sole cost and expense and at all
times, keep the Premises and every pad thereof in good order, condition and
repair, structural and non-structural (whether or not such portion of the
Premises requiring repair, or the means of repairing the same, are reasonably or
readily accessible to Lessee, and whether or not the need for such repairs
occurs as a result of Lessee's use, any prior use, the elements or the age of
such portion of the Premises), including, without limiting the generality of the
foregoing, all equipment or facilities serving the Premises, such
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as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or
standpipe and hose or other automatic fire extinguishing system, including fire
alarm and/or smoke detection systems and equipment, fire hydrants, fixtures,
walls (interior 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, about, or
adjacent to the Premises Lessee shall not cause or permit any Hazardous
Substance to be spilled or released in, on, under or about the Premises
(including through the plumbing or sanitary sewer system) and shall promptly, at
Lessee's expense, take all investigatory and/or remedial action reasonably
recommended, whether or not formally ordered or required, for the cleanup of any
contamination of, and for the maintenance, security and/or monitoring of, the
Premises, the elements surrounding same, or neighboring properties, that was
caused or materially contributed to by Lessee, or pertaining to or involving any
Hazardous Substance and/or storage tank brought onto the Premises by or for
Lessee or under its control. Lessee, in keeping the Premises In good order,
condition and repair, shall exercise and perform good maintenance practices.
Lessee's obligations shall include restorations, replacements or renewals when
necessary to keep the Premises and all improvements thereon or a part thereof in
good order, condition and state of repair. If Lessee occupies the Premises for
seven (7) years or more, Lessor may require Lessee to repaint the exterior of
the buildings on the Premises as reasonably required, but not more frequently
than once every seven (7) years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including tire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance.
7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of
Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3
(relating to compliance with covenants, restrictions and building code), 9
(relating to destruction of the Premises) and 14 (relating to condemnation of
the Premises), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, the
improvements located thereon, or the equipment therein, whether structural or
non structural, all of which obligations are Intended to be that of the Lessee
under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of
this Lease govern the respective obligations of the Parties as to maintenance
and repair of the Premises. Lessee and Lessor expressly waive the benefit of any
statute now or hereafter in effect to the extent it is inconsistent with the
terms of this Lease with respect to, or which affords Lessee the right to make
repairs at the expense of Lessor or to terminate this Lease by reason of, any
needed repairs.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS"
is used in this Lease to refer to all carpeting, window coverings, air lines,
power panels, electrical distribution, security, fire protection systems,
communication systems, lighting fixtures, heating,
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<PAGE>
ventilating, and air conditioning equipment, plumbing, and fencing in, on or
about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and
equipment that can be removed without doing material damage to the Premises. The
term "ALTERATIONS" shall mean any modification of the Improvements on the
Premises from that which are provided by Lessor under the terms of this Lease,
other than Utility Installations or Trade Fixtures, whether by addition or
deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations
or Utility Installations in, on, under or about the Premises without Lessor's
prior written Consent. Lessee may, however, make non-structural Utility
Installations to the interior of the Premises (excluding the roof), as long as
they are not visible from the outside, do not involve puncturing, relocating or
removing the roof or any existing walls, and the cumulative cost thereof during
the term of this Lease as extended does not exceed $25,000.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to LeSsor in written form with proposed detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent shall be deemed conditioned upon: (i) Lessee's acquiring all applicable
permits required by governmental authorities, (ii) the furnishing of copies of
such permits together with a copy of the plans and specifications for the
Alteration or Utility Installation to Lessor prior to commencement of the work
thereon, and (iii) the compliance by Lessee with all conditions of said permits
in a prompt and expeditious manner. Any Alterations or Utility Installations by
Lessee during the term of this Lease shall be done in a good and workmanlike
manner, with good and sufficient materials, and in compliance with all
Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor
with as-built plans and specifications therefor. Lessor may (but without
obligation to do so) condition its consent to any requested Alteration or
Utility Installation that costs $10,000 or more upon Lessee's providing Lessor
with a lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation and/or upon Lessee's
posting an additional Security DeposIt with Lessor under Paragraph 36 hereof.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at Its sole expense defend and protect itself, Lessor
and the Premises against the same and shall pay and satisfy any such adverse
judgment that may be rendered thereon before the enforcement thereof against the
Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor in an amount equal to one and one-hail
times the amount of such contested lien claim or demand, Indemnifying Lessor
against liability for the lame, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorney's fees and costs in participating in
such action if Lessor shall decide it is to Its best interest to do so.
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7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal or
become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises Lessor
may, at any time and at its option, elect in writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alterations, and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee Owned Alterations or Utility Installations be removed by
the expiration of earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. Lessor may require the
removal at an time of all or and of an Lessee Owned Alterations or Utility
Installations made without the required consent of Lessor. See Addendum, Section
9.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date, with all
of the improvements, parts and surfaces thereof clean and free of debris and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration
that would have been prevented by good maintenance practice or by Lessee
performing all of its obligations under this Lease. Except as otherwise agreed
or specified in writing by Lessor, the Premises, as surrendered, shall include
the Utility Installations. The obligation of Lessee shall include the repair of
any damage occasioned by the installation, maintenance or removal of Lessee's
Trade Fixtures, furnishings, equipment and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good practice. Lessee's Trade Fixtures shall remain the properly of
Lessee and shall be removed by Lessee subject to its obligation to repair and
restore the Premises per this Lease. See Addendum, Section 4.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is
the Insuring Party, Lessee shall pay for all Insurance required under this
Paragraph 8 except to the extent of the cost attributable to liability insurance
carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy
periods commencing prior to or extending beyond the Lease term shall be prorated
to correspond to the Lease term. Payment shall be made by Lessee to Lessor
within ten (10) days following receipt of an invoice for any amount due.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General liability policy of insurance
protecting Lessee and Lessor (as an additional insured) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an occurrence basis
PAGE 9
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providing single limit coverage in an amount not less than $1,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises"
Endorsement and contain the "Amendment of the Pollution Exclusion" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not Contain
any intra-insured exclusions as between insured persons or organizations, but
shall include coverage for liability assumed under this Lease as an "insured
contract" for the performance of Lessee's indemnity obligations under this
Lease. The limits of said insurance required by this Lease or as carried by
Lessee shall not however, limit the liability of Lessee nor relieve Lessee of
any obligation hereunder. All insurance to be Carried by Lessee shall be primary
to and not contributory with any similar insurance carried by Lessor, whose
insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party,
Lessor shall also maintain liability insurance described in Paragraph 8.2(a),
above. In addition to, and not in lieu of, the insurance required to be
maintained by Lessee. Lessee shall not be named is an additional insured
therein.
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds
of trust or ground leases on the Premises ("LENDER(S)"), insuring loss or damage
to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders, but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the improvements involved, such latter amount is less than full
replacement cost. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations shall be insured by Lessee under Paragraph
8.4 rather than by Lessor. If the coverage is available and commercially
appropriate, such policy or policies shall insure against all risks of direct
physical loss or damage (except the perils of flood and/or earthquake unless
required by a Lender), including coverage for any additional costs resulting
from debris removal and reasonable amounts of coverage for the enforcement of
any ordinance or law regulating the reconstruction or replacement of any
undamaged sections of the Premises required to be demolished or removed by
reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause of lose. Said policy or policies shall also
contain an agreed valuation provision in lieu of any coinsurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located. If such insurance coverage has a
deductible clause, the deductible amount shall not exceed $1,000 per occurrence,
and Lessee shall be liable for such deductible amount in the event of an Insured
Loss, as defined in Paragraph 9.1(c).
(b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full
rental and other charges payable by Lessee to Lessor under this Lease for one
(1) year (including all real estate taxes, insurance costs, and any scheduled
rental increases). Said Insurance shall provide that in the event the Lease is
PAGE 10
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terminated by reason of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such lose. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be liable
for any deductible amount in the event of such lose.
(c) ADJACENT PREMISES. If the Premises are part of a larger building,
or if the Premises are part of a group of buildings owned by Lessor which are
adjacent to the Premises, the Lessee shall pay for any increase in the premiums
for the property insurance of such building or buildings if said increase is
caused by Lessee's acts, omissions, use or occupancy of the Premises.
(d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease. If Lessee Is the Insuring Party, the policy
carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations
and Utility Installations.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property. Lessee Owned Alterations and Utility
Installations in, on, or about the Premises similar in coverage to that carried
by the Insuring Party under Paragraph 8.3. 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 or the restoration of Lessee Owned Alterations
and Utility Installations. Lessee shall be the Insuring Party with respect to
the insurance required by this Paragraph 8.4 and shall provide Lessor with
written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least B+, V, or such other rating as may be required by a Lender having a lien
on the Premises, as set forth in the most current issue of "Best's Insurance
Guide." Lessee shall not do or permit to be done anything which shall invalidate
the insurance policies referred to in this Paragraph 8. If Lessee is the
Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of
policies of such insurance or certificates evidencing the existence and amounts
of such insurance with the insureds and loss payable clauses as required by this
Lease. No such policy shall be cancellable or subject to modification except
after thirty (30) days prior written notice to Lessor. Lessee shall at least
thirty (30) days prior to the expiration of such policies, furnish Lessor with
evidence of renewals or "insurance binders" evidencing renewal thereof, or
Lessor may order such insurance and charge the cost thereof to Lessee, which
amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party
shall fail to procure and maintain the insurance required to be
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carried by the Insuring Party under this Paragraph 8, the other Party may, but
shall not be required to, procure and maintain the same, but at Lessee's
expense.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies,
Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve the other,
and waive their entire right to recover damages (whether in contract or in tort)
against the other, for loss of or damage to the Waiving Party's property arising
out of or incident to the perils required to be insured against under Paragraph
8. The effect of such releases and waivers of the right to recover damages shall
not be limited by the amount of insurance carried or required, or by any
deductibles applicable thereto.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expanses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well rounded or not. In case any action or proceeding be brought against
Lessor by reason of any of the foregoing matters. Lessee upon notice from Lessor
shall defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
parson in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said injury or damage results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of Income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is less than 50%
of the then Replacement Cost
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of the Premises immediately prior to such damage or destruction, excluding from
such calculation the value of the land and Lessee Owned Alterations and Utility
Installations.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations the
repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "INSURED LOSS" shall mean damage or destruction to improvements
on the Premises, other than Lessee Owned Alterations and Utility Installations,
which was caused by an event required to be covered by the insurance described
in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits
involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition Involving the presence of, or a contamination by, in
Hazardous Substance is 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 Lose occurs, then Lessor shall, at Lessor's expense, repair such damage
(but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the insurance
proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required Insurance was not in force or the
insurance proceeds are not sufficient to effect such repair, the insuring Party
shall promptly contribute the shortage in proceeds (except as to the deductible
which is Lessee's responsibility) as and when required to complete said repairs.
In the event, however, the shortage in proceeds was due to the fact that, by
reason of the unique nature of the improvements, full replacement cost insurance
coverage was not commercially reasonable and available. Lessor shall have no
obligation to pay for the shortage in insurance proceeds or to fully restore the
unique aspects of the Premises unless Lessee provides Lessor with the funds to
cover same, or adequate assurance thereof, within ten (10) days following
receipt of written notice of such shortage and request therefor. If Lessor
receives said funds or adequate assurance thereof within said ten (10) day
period, the party responsible for making the repairs shall complete them is soon
as reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds. In which case this Lease shall remain in full
force and effect. If in such case Lessor does not so elect, then this Lease
shall terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial
PAGE 13
10.17-13
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Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than
Paragraph 9.2, notwithstanding that there may be some insurance coverage, but
the net proceeds of any such insurance shall be made available for the repairs
if made by either Party.
9.3 PARTIAL DAMAGE-UNINSURED LOSS. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an insured Loss or was caused by a negligent or willful act of
Lessee. In the event however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months
of the term of this Lease there is damage for which the cost to repair exceeds
one (1) month's Base Rent whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the Occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option during
said Exercise Period and provides Lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's
expense repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect, it Lessee fails to exercise such option and
provide such funds or assurance during said Exercise Period, then Lessor may at
PAGE 14
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<PAGE>
Lessor's option terminate this Lease as of the expiration of said sixty (60) day
period following the occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within ten (10) days after the expiration
of the Exercise Period, notwithstanding any term or provision in the grant of
option to the contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage-Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired. Except for abatement of Base Rent, Real Property Taxes, insurance
premiums, and other charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such repair or
restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after receipt of such notice, this Lease shall
continue in full force and effect. "COMMENCE" as used in this Paragraph shall
mean either the unconditional authorization of the preparation of the required
plans, or the beginning of the actual work on the Premises, whichever first
occurs.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate
and remediate such Hazardous Substance Condition, if required, as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to investigate
and remediate such condition exceeds twelve (12) times the then monthly Base
Rent or $100,000, whichever is greater, give written notice to Lessee within
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 giving of such notice. In the event
Lessor elects to give such notice of Lessor's intention to terminate this Lease,
Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
investigation and remediation of such Hazardous Substance Condition totally at
Lessee's expense and without reimbursement from Lessor except to the extent of
an amount equal to twelve (12)
PAGE 15
10.17-15
<PAGE>
times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall
provide Lessor with the funds required of Lessee or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such investigation and remediation as soon as reasonably
possible and the required funds are available. If Lessee does not give such
notice and provide the required funds or assurance thereof within the times
specified above, this Lease shall terminate as of the date specified in Lessor's
notice of termination. If a Hazardous Substance Condition Occurs for which
Lessee is not legally responsible, there shall be abatement of Lessee's
obligations under this Lease to the same extent as provided in Paragraph 9.6(a)
for a period of not to exceed twelve months.
9.8 TERMINATION-ADVANCE PAYMENT. Upon termination of this Lease pursuant
to this Paragraph 9, an equitable adjustment shall be made concerning advance
Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall,
in addition, return to Lessee so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises during the term of this
Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least
ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid, if any such taxes to be paid by Lessee shall cover any period of
time prior to or after the expiration or earlier termination of the term hereof,
Lessee's share of such taxes shall be equitably prorated to cover only the
period of time within the tax fiscal year this Lease is in effect, and Lessor
shall reimburse Lessee for any overpayment after such proration. If Lessee shall
bill to pay any Real Property Taxes required by this Lease to be paid by Lessee,
Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor
therefor upon demand.
(b) ADVANCE PAYMENT. In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right, at
Lessor's option, to estimate the Current Real Property Taxes applicable to the
Premises, and to require such current year's Real Property Taxes to be paid in
advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the
installment due, at least twenty (20) days prior to the applicable delinquency
date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor
elects to require payment monthly in advance, the monthly payment shall be that
equal monthly amount which, over the number of months remaining before the month
in which the applicable tax installment would become delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated installment of taxes to be paid. When the actual
amount of the applicable tax bill is known, the amount of such actual monthly
advance payment shall be adjusted as required to provide the fund needed to pay
the applicable taxes before
PAGE 16
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<PAGE>
delinquency. If the amounts paid to Lessor by Lessee under the provisions of
this Paragraph are insufficient to discharge the obligations of Lessee to pay
such Real Property Taxes as the same become due, Lessee shall pay to Lessor,
upon Lessor's demand, such additional sums as are necessary to pay such
obligations. All moneys paid to Lessor under this paragraph may be intermingled
with other moneys of Lessor and shall not bear interest. In the event of a
Breach by Lessee in the performance of the obligations of Lessee under this
Lease, then any balance of funds paid to Lessor under the provisions of this
Paragraph may, subject to proration as provided in Paragraph 10.1(a), at the
option of Lessor, be belted as an additional Security Deposit under Paragraph 5.
10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a pert, Lessor's right to rent or other income therefrom, and/or Lessor's
business of teasing the Premises. The term "REAL PROPERLY TAXES" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
the Lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real properly of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b).
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 in reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
PAGE 17
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<PAGE>
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five
percent (25%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of the execution
by Lessor of this Lease or at the time of the most recent assignment to which
Lessor has consented, or as it exists immediately prior to said transaction or
transactions constituting such reduction, at whichever time said Net Worth of
Lessee was or is greater, shall be considered an assignment of this Lease by
Lessee to which Lessor may reasonably withhold its consent. "NET WORTH OF
LESSEE" for purposes of this Lease shall be the net worth of Lessee (excluding
any guarantors) established under generally accepted accounting principles
consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1(c), or a noncurable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a noncurable Breach, Lessor
shall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to
fair market rental value or one hundred ten percent (110%) of the Base Rent then
in effect, whichever is greater. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and market value
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
(without the Lease being considered an encumbrance or any deduction for
depreciation or obsolescence, and considering the Premises at its highest and
best use and in good condition), or one hundred ten percent (110%) of the price
previously in effect, whichever is greater, (ii) any index-oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to require
that the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Base Rent in effect immediately prior to the market
value adjustment.
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<PAGE>
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent any assignment or subletting shall
not: (i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, or (iii) alter the primary liability of Lessee for
the payment of Base Rent and other sums due Lessor hereunder or for the
performance of any other obligations to be performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other then Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent subletting and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the current monthly Base Rent,
whichever is greater, as reasonable consideration for Lessor's considering and
processing the request for consent. Lessee agrees to provide Lessor with such
other or additional information and/or documentation as may be reasonably
requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurence of a transaction described in Paragraph 12.1(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased to an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the dual receipt by Lessor of the amount
required to establish such Security Deposit a condition to Lessor's consent to
such transaction.
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<PAGE>
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment structure of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment structure for property similar to the Premises as then constituted.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and condition shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor, nor by reason of the collection of
the rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
subleases, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or right to
inquire as to whether such Breach exists and notwithstanding any notice from or
claim from Lessee to the contrary. Lessee shall have no right or claim against
said sublessee, or, until the Breach has been cured, against Lessor, for any
such rents and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, un which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior Defaults
or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under
a sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified tn such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
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<PAGE>
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lease Default or Breach (as hereinafter
defined), $350.00 is a reasonable minimum sum per such occurrence for legal
services and costs in the preparation and service of a notice of Default and
that Lessor may include the cost of such services and costs in said notice as
rent due and payable to cure said Default. A "DEFAULT" is defined as a failure
by the Lessee to observe, comply with or perform any of the terms, covenants,
conditions or rules applicable to Lessee under this Lease. A "BREACH" is defined
as the occurrence of any one or more of the following Defaults, and, where a
grace period for cure after notice is specified herein, the failure by Lessee to
cure such Default prior to the expiration of the applicable grace period, and
shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 end/or
13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure
by Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with Applicable Law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any Such failure continues for a period of ten (10) days
following Mitten notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rule adopted under Paragraph 40 hereof, that
are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The making by
Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. (S)101 or any
successor statute thereto (unless, in the use of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment
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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 by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) If the performance of Lessee's obligations' under this Lease is
guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a
guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurance or security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the guarantors that existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals the costs and
expenses of any such performance by Lessor shall be due and payable by Lessee or
Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not
be honored by the bank upon which it is drawn, Lessor, at its option, may
require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor, in such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of 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
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limited to the cost of recovering possession of the Premises, expenses of
reletting, including necessary renovation and alteration of the Premises,
reasonable attorneys' fees, and that portion of the leasing commission paid by
Lessor applicable to the unexpired term of this Lease. The worth at the time of
award of the amount referred to in provision (iii) of the prior sentence shall
be computed by discounting such amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one percent. Efforts by
Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease
shall not waive Lessor's right to recover damages under this Paragraph. If
termination of this Lease is obtained through the provisional remedy of unlawful
detainer, Lessor shall have the right to recover in such proceeding the unpaid
rent and damages as are recoverable therein, or Lessor may reserve therein the
right to recover all or any part thereof in a separate suit for such rent and/or
damages. If a notice and grace period required under subparagraphs 13.1(b), (c)
or (d) was not previously given, a notice to pay rent or quit, or to perform or
quit, as the case may be, given to Lessee under any statute authorizing the
forfeiture of leases for unlawful detainer shall also constitute the applicable
notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d).
In such case, the applicable grace period under subparagraphs 131(b), (c) or (d)
and under the unlawful detainer statute shall run concurrently after the one
such statutory notice, and the failure of Lessee to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful detainer
and a Breach of this Lease entitling Lessor to the remedies provided for in this
Lease end/or by said statue.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any Indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for
free or spared rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended upon the occurrence of
a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under each an
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Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph 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
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within five (5) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder in the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Bass Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable Quarterly
in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed tn breach of this Lease
unless fair falls within a reasonable time to perform an obligation required to
be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time
shall in no event be less than thirty (30) days after receipt by Lessor, and by
the holders of any ground lease, mortgage or deed of trust covering the Premises
whose name and address shall have been furnished Leases 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 then thirty (30) days after such notice is reasonably required
for its performance, then Lessor shall not be in breach of this Lease if
performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof ere taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "CONDEMNATION"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the land area
not occupied by any building, is taken by condemnation, Lessee may, Lessor shall
have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion
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as the rentable floor area of the Premises taken bears to the total rentable
floor area of the building located on the Premises. No reduction of Base Rent
shall occur if the only portion of the Premises taken is land on which there is
no building. Any award for the taking of all or any part of the Premises under
the power of eminent domain or any payment made under threat of the exercise of
such power shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold or for the taking of the
fee, or as severance damages: provided, however, that Lessee shall be entitled
to any compensation separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of its net
severance damages received, over and above the legal and other expenses incurred
by Lessor in the condemnation matter, repair any damage to the Premises caused
by such condemnation, except to the extent that Lessee has been reimbursed
therefor by the condemning authority. Lessee shall be responsible for the
payment of any amount in excess of such net severance damages required to
complete such repair.
15. BROKER'S FEE.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this
Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said
Brokers Jointly, or in such separate shams as they may mutually designate in
writing, a fee as set forth in a separate written agreement between Lessor and
said Brokers for brokerage services rendered by said Brokers to Lessor in this
transaction.
15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor
further agrees that: (a) if Lessee exercises any Option (as defined in Paragraph
39.1) or any Option subsequently granted which is substantially similar to an
Option granted to Lessee in this Lease, or (b) if Lessee acquires any rights to
the Premises or other premises described in this Lease which are substantially
similar to what Lessee would have acquired had an Option herein granted to
Lessee been exercised, or (c) if Lessee remains in possession of the Premises,
with the consent of Lessor, after the expiration of the term Of this Lease slier
having failed to exercise an Option, or (d) if said Brokers are the procuring
cause of any other lease or sale entered into between the Parties pertaining to
the Premises and/or any adjacent property In which Lessor has an Interest, or
(e) if Base Rent Is Increased, whether by agreement or operation of In
escalation clause herein, then as to any of said transactions, Lessor shall pay
said Brokers a fee in accordance with the schedule of said Brokers In effect at
the time of the execution of this Lease.
15.4 Any buyer or transferee of Lessor's interest In this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessors obligation under this Paragraph 15. Each Broker shall be a third
party beneficiary of the provisions of this Paragraph 15 to the extent of its
interest tn any commission arising from this Lease and may enforce that right
directly against Lessor and its successors.
15.5 Lessee and Lessor each represent and warrant to the other that it has
had no dealings with any person, firm, broker or finder (other than the Broken,
If any named in Paragraph 1.10) in connection with the negotiation of this Lease
and/or the consummation of the transaction contemplated hereby, and thai no
broker or other person, firm or entity other than said named Brokers is entitled
to any commission or finder's fee in connection with said transaction. Lessee
and Lessor do each hereby agree to indemnify, protect, defend and hold the
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<PAGE>
other harmless from and against liability for compensation or charges which may
be claimed by any such unnamed broker, finder or other similar party by reason
of any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. TENANCY STATEMENT.
16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after
written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "TENANCY STATEMENT" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any pad
thereof, or the building of which the Premises are a pad, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or in this Lease. Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15, upon such transfer or assignment and
delivery of the Security deposit as aforesaid, the prior Lessor shall be
relieved of all liability with reaped 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.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way effect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day alter it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
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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 reaped to any default or breach
hereof by either Party.
23. NOTICES.
23.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier or may be
sent by regular, certified or registered mail or U.S. Postal Service Express
Mail, with postage prepaid, or by facsimile transmission, and shall be deemed
sufficiently given if served in a manner specified in this Paragraph 23. The
addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes except that notices
to Lessor shall be sent to the address specified in Section 5 of the Addendum.
Either Party may by written notice to the other specify a different address for
notice purposes, except that upon Lessee's taking possession of the Premises,
the Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A Copy of all notices required or permitted to be
given to Lessor hereunder shall be concurrently transmitted to such party or
parties at such addresses aa Lessor may from time to time hereafter designate by
written notice to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or it no delivery date is shown, the postmark thereon. If sent by regular
mall the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received on
a Sunday or legal holiday, it shell 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 regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any preceding Default or Breach by
Lessee of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted. Any payment given Lessor by Lessee may be accepted
by Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such
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statements and/or conditions shall be of no force or effect whatsoever unless
specifically agreed to in writing by Lessor at or before the time of deposit of
such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the Obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the
Lender that Lessee's possession and this
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<PAGE>
Lease, including any options to extend the term hereof, will not be disturbed so
long as Lessee is not in Breach hereof and efforts to the record owner of the
Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) or Broker in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorney's fees. Such fees may be awarded in the
same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY"
shall include, without limitation, a Party or Broker who substantially obtains
or defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorney's fee award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices of
Default and consultations in connection therewith, whether or not a legal action
is subsequently commenced in connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred twenty (120) days of the term
hereof place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.
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<PAGE>
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to an
act by or for the other Party, such consent shall not be unreasonably withheld
or delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a
condition to considering any such request by Lessee, require that Lessee deposit
with Lessor in amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will
incur in considering and responding to Lessee's request. Except as otherwise
provided, any unused portion of said deposit shall be refunded to Lessee without
Interest. Lessor's consent to any act, assignment of this Lease or subletting of
the Premises by Lessee shall not constitute an acknowledgment that no Default or
Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver
of any then existing Default or Breach, except as may be otherwise specifically
stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. GUARANTOR. This Paragraph 37 intentionally omitted.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease
PAGE 30
10.17-30
<PAGE>
other property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises, or
the right to purchase other property of Lessor, or the right of first refusal to
purchase other property of Lessor, or the right of first offer to purchase other
property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to
extend or renew this Lease, a later option cannot be exercised unless the prior
Options to extend of renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee, or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of Default under Paragraph 13.1, 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) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three or more notices of Default under Paragraph 13.1 during any twelve
month period, whether or not the Defaults are cured, or (iii) if Lessee commits
a Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as wall as lot the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor
PAGE 31
10.17-31
<PAGE>
shall have no obligation whatsoever to provide same. Lessee assumes all
responsibility for the protection of the Premises, Lessee, its agents and
invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves to itself the right from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to Institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the pad of said Party to pay such sum or
any pad thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
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 Lessor or Lessor's agent and submission
of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is
not intended to be binding until executed by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by In institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a pad.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
PAGE 32
10.17-32
<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR
SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL FURTHER, EXERTS
SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS
TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS
SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE
BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR
THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY
SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND
TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS
LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE
STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at______________________ Executed at___________________________
on_______________________________ on____________________________________
by LESSOR: by LESSEE:
See attached See attached
- --------------------------------- --------------------------------------
_________________________________ ______________________________________
By_______________________________ By____________________________________
Name Printed:____________________ Name Printed:_________________________
Title:___________________________ Title:________________________________
By_______________________________ By____________________________________
Name Printed:____________________ Name Printed:_________________________
PAGE 33
10.17-33
<PAGE>
Title:___________________________ Title:________________________________
Address:_________________________ Address:______________________________
_________________________________ ______________________________________
Tel.No. ( ) Fax No. ( ) Tel.No. ( ) Fax No. ( )
--------- -------- --------- -------------
NOTICE: These forms are often modified to meet changing requirements of law
and industry needs. Always write or call to make sure you are
utilizing the most current form: American Industrial Real Estate
Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA
90071, (213) 667-8777, Fax No. (213) 687-8616.
(C) Copyright 1990-By American Industrial Real Estate
Association. All rights reserved. No part of these works may be
reproduced in any form without permission in writing.
FORM 244N-3/90
PAGE 34
10.17-34
<PAGE>
ATTACHMENT TO
-------------
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
------------------------------------------------------
Executed at____________________________
on_____________________________________
by LESSOR:
THE J. DAVID GLADSTONE INSTITUTES,
a charitable trust organized and existing under
the laws of the State of California
By: /s/ Richard Hille
-------------------------------------
Richard Hille, Director of Investments
Address: 43 Corporate Park, Suite 102
Irvine, California 92714
Telephone No.: (714) 660-8955
Fax No.: (714) 660-9031
Executed at San Diego, California
-----------------------------
on January 3, 1996
--------------------------------------
by LESSEE:
BMI ACQUISITION GROUP, INC.,
a California corporation
By: /s/ Buford B. Wiley
--------------------------------------
Print Name: Buford B. Wiley
------------------------------
Title: C.E.O.
------------------------------
10.17-35
<PAGE>
By: /s/ Robert J. Macri
--------------------------------------
Print Name: Robert J. Macri
------------------------------
Title: Chief Financial Officer
------------------------------
Address: 7100 Convoy Court
-------------------------------
San Diego, CA 92111
-----------------------------
Telephone No.: (619) 569-3474
--------------------------
Fax No.: (619) 569-3477
--------------------------
10.17-36
<PAGE>
ADDENDUM TO LEASE
-----------------
This Addendum to Lease is entered into by and between The J. David
Gladstone Institutes, a charitable trust organized and existing under the laws
of the State of California ("LESSOR") and BMI Acquisition Group, Inc., a
California corporation ("LESSEE") concurrently with the Standard
Industrial/Commercial Single-Tenant Lease -- Net between Lessor and Lessee (the
"LEASE") to which this Addendum is attached. The promises, covenants, agreements
and declarations made and set forth in this Addendum are intended to and shall
have the same force and effect if set forth at length in the Lease. To the
extent that the provisions of this Addendum are inconsistent with the terms and
conditions of the Lease, the terms and conditions of this Addendum shall
control. All capitalized terms used herein shall have the same meaning as
specified in the Lease.
1. Commencement Date. The Original Term shall commence upon the date
-----------------
(the "COMMENCEMENT DATE") that the Renovated Improvements to be constructed by
Lessor pursuant to the Lessee Work Letter attached hereto as Exhibit "A" and
made a part hereof are substantially completed (i.e., completed other than minor
"punchlist" items); provided, however, that the Commencement Date shall not
occur earlier than March 31, 1996.
2. Triple Net Lease. Lessor and Lessee acknowledge and agree that
----------------
Lessor will contract directly for property insurance and for rental value
insurance and will bill the costs of maintaining these insurance policies to
Lessee on a monthly basis, which payments shall be due and payable as provided
in Section 8.1 of the Lease. In addition, Lessee shall, in accordance with
Section 11 of the Lease, be responsible for the cost of utilities and services
supplied to the Premises including, without limitation, janitorial service. No
property management fee shall be charged by Lessor. Furthermore, Lessor reserves
the right to review all service contracts and in the event the Premises is not
consistently maintained by Lessee to a level reasonably acceptable to Lessor, in
a manner consistent with local industry practices, Lessor, upon reasonable
notice to Lessee, shall be entitled to contract directly with vendors for any
such services and subsequently bill Lessee for the cost of such services on a
monthly basis, which amounts shall be due and payable, as additional rent,
within ten (10) days after Lessee's receipt of invoice.
3. Limitation on Liability. The liability of Lessor with respect to
-----------------------
the Lease shall be limited solely and exclusively to Lessor's interest in the
Premises and any insurance proceeds received by Lessor. Lessee shall look to no
other assets of Lessor for the satisfaction of any liability of Lessor with
respect to the Lease. Notwithstanding any contrary provision herein or in the
Lease, Lessor shall not be liable under any circumstances for injury or damage
to, or interference with, Lessee's business including, but not limited to, loss
of profits, loss of rents or other revenues, loss of business opportunity, loss
of goodwill or loss of use, however occurring, except that, subject to the first
sentence of this Section 3 above, Lessor shall be liable to the extent such
injury, damage or loss (i) results from the gross negligence of willful
misconduct of Lessor or its employees, agents or contractors and (ii) is not
covered by insurance required to be carried by Lessee under the Lease or
actually carried by Lessee.
10.17-37
<PAGE>
4. Holding Over. If Lessee fails to surrender the Premises upon the
------------
expiration or earlier termination of the Lease without the express written
consent of Lessor, Lessee shall become a tenant at sufferance only at a rental
rate equal to twice the monthly Base Rent payable by Lessee for the month
immediately preceding such expiration or earlier termination and Lessee shall
remain responsible for the payment of all other monetary obligations due and
payable by Lessee under the Lease. Acceptance by Lessor of Base Rent after such
expiration or earlier termination of the Term shall not result in any renewal of
the Term. The foregoing provisions are in addition to, and do not affect
Lessee's right of reentry or any other right or remedies under the Lease or as
otherwise provided at law or in equity or both. If Lessee fails to surrender the
Premises upon the expiration or earlier termination of the Term despite Lessor's
demand to do so, Lessee shall indemnify and hold Lessor harmless from and
against any and all losses, costs, damages and liabilities (including actual
attorneys' fees and costs and court costs) which Lessor may suffer as a result
of Lessee's failure to timely surrender the Premises.
5. Notices. All notices to Lessor and any payments by Lessee to
-------
Lessor under the Lease shall be sent to The J. David Gladstone Institutes, 43
Corporate Park, Suite 102, Irvine, California 92714, Attention: Mr. Richard
Hille, Director of Investments, Telephone (714) 660-8955, Fax (714) 660-9031.
6. Termination Option. Notwithstanding anything to the contrary
------------------
contained in the Lease, Lessee shall have the option ("TERMINATION OPTION") to
terminate and cancel the Lease effective as of the last day of the thirty-sixth
(36th) full calendar month of the Original Term by delivering to Lessor, on or
before the first day of the thirtieth (30th) full calendar month of the Original
Term (i) written notice of Lessee's exercise of the Termination Option and (ii)
the "Termination Fee." The "TERMINATION FEE" shall mean the unamortized balance,
as of the Termination Date, of the sum of leasing commissions paid by Lessor in
connection with the Lease plus any amounts expended by Lessor for design and
construction of improvements in the Premises pursuant to the Lessee Work Letter
attached hereto as Exhibit "A," with such amortization to be calculated on a
straight-line basis over a sixty (60) month amortization period commencing as of
the Commencement Date. Upon request from Lessee, Lessor shall promptly provide
Lessee with a determination of the amount of the Termination Fee together with
supporting documentation used by Lessor in calculating said amount. If Lessee
properly and timely exercises the Termination Option, the Lease shall expire at
midnight on the last day of the thirty-sixth (36th) full calendar month of the
Original Term.
7. Option to Extend. Lessor hereby grants to the Lessee originally-
----------------
named in the Lease ("ORIGINAL LESSEE") one (1) option to extend the Original
Term for a period of five (5) years (the "OPTION TERM"), which option shall be
exercisable only by written notice ("OPTION NOTICE") delivered by Lessee to
Lessor as provided in Section 7.2 below, provided that, as of the date of
delivery of such notice and, at Lessor's option, as of the last day of the
Original Term, Lessee is not in default under the Lease after expiration of
applicable cure periods. The right contained in this Section 7 shall be personal
to the Original Lessee and may only be exercised by the Original Lessee (and not
any assignee, sublessee or other transferee of
10.17-38
<PAGE>
the Original Lessee's interest in this Lease) if the Original Lessee occupies
the entire Premises as of the date of the Option Notice.
7.1 The Base Rent payable by Lessee during the Option Term (the
"OPTION RENT") shall be equal to the then prevailing fair market rent for
the Premises as of the commencement date of the Option Term, but not below
the Base Rent payable by Lessee immediately prior to the Option Term. The
then prevailing fair market rent shall be the rental rate at which tenants,
as of the commencement of the Option Term, are leasing non-sublease space
comparable in size, location and quality to the Premises for a term of five
(5) years, which comparable space is located in the immediate area of the
Premises, taking into consideration the following concessions: (a) rental
abatement concessions, if any, being granted such tenants in connection
with such comparable space and (b) tenant improvements or allowances
provided or to be provided for such comparable space, taking into account,
and deducting the value of, the existing improvements in the Premises, with
such value to be based upon the age, quality and layout of the improvements
and the extent to which the same could be utilized by Lessee based upon the
fact that the precise tenant improvements existing in the Premises are
specifically suitable to Lessee.
7.2 The option contained in this Section 7 shall be exercised by
Lessee, if at all, only in the following manner: (i) Lessee shall deliver
written notice ("LNTEREST NOTICE") to Lessor on or before the date which is
ten (10) months prior to the expiration of the Original Term, stating that
Lessee is interested in exercising its option; (ii) Lessor, after receipt
of Lessee's notice, shall deliver notice (the "OPTION RENT NOTICE") to
Lessee not less than seven (7) months prior to the expiration of the
Original Term, setting forth the Option Rent; and (iii) if Lessee wishes to
exercise such option, Lessee shall, on or before the earlier of (a) the
date occurring six (6) months prior to the expiration of the Original Term,
and (b) the date occurring thirty (30) days after Lessee's receipt of the
Option Rent Notice, exercise the option by delivering the Option Notice to
Lessor. Failure of Lessee to deliver the Interest Notice to Lessor on or
before the date specified in (i) above or to deliver the Option Notice to
Lessor on or before the date specified in (iii) above shall be deemed to
constitute Lessee's failure to exercise its option to extend. If extended
for the Option Term upon all of the terms and conditions set forth in the
Lease, except that the Base Rent shall be as indicated in the Option Rent
Notice.
8. Purchase Option.
---------------
(a) Purchase Option Notice. Lessor hereby grants to Lessee the
----------------------
right and option to purchase the Premises (the "PURCHASE OPTION") on the
terms set forth in this Section 8 by delivering written notice to Lessor of
such exercise (the "PURCHASE OPTION NOTICE") on or prior to the last day of
the tenth (10th) full calendar month of the Original Term.
10.17-39
<PAGE>
(b) Conditions Precedent to Effectiveness of Purchase Option.
--------------------------------------------------------
Notwithstanding anything to the contrary contained in this Section 8,
Lessee's exercise of the Purchase Option shall be effective only if all of
the conditions precedent set forth hereinbelow are true and correct during
the period commencing upon the date Lessee delivers the Purchase Option
Notice and continuing until the Closing Date (as that term is defined
below), unless Lessor, in Lessor's sole discretion, elects to waive any
such condition precedent in writing:
(i) Lessee shall not then be in default under the Lease;
and
(ii) Lessee shall not have assigned its interest in the
Lease or in the Purchase Option to an unrelated entity. An unrelated
entity shall be defined as any entity which is not a related entity. A
related entity shall be defined as (a) any entity which is controlled
by, controls, or is under common control with Lessee, (b) any
corporation in which Lessee or any shareholder of Lessee owns voting
stock sufficient to elect a majority of the Board of Directors of said
corporation, (c) any principal stockholder of Lessee, or (d) any
corporation a majority of the directors of which are officers,
directors and/or employees of Lessee. For purposes of the foregoing,
the terms "control," "under common control" and "controlled by" shall
mean ownership of fifty percent (50%) or more of the beneficial
interest in such related entity.
(c) Actions of Parties. Within ten (10) business days following
------------------
Lessor's receipt of the Purchase Option Notice, the parties shall proceed
to open an escrow for the purchase and sale of the Premises ("ESCROW") with
an escrow company reasonably acceptable to both Lessor and Lessee ("ESCROW
HOLDER") by delivering a fully executed copy of a definitive Purchase and
Sale Agreement and Joint Escrow Instructions (the "PURCHASE AGREEMENT") to
Escrow Holder. In addition, concurrently with delivery of the Purchase
Agreement to Escrow Holder, Lessee shall deliver to Escrow Holder a good
faith deposit in the amount of Twenty Thousand Dollars ($20,000.00), which
deposit shall be nonrefundable to Lessee except in the event of Lessor's
default under the Purchase Agreement. The Purchase Agreement shall specify
that said deposit shall be delivered to Lessor by Escrow Holder as
liquidated damages in the event of Lessee's default under the Purchase
Agreement. The Purchase Agreement shall incorporate the terms and
provisions set forth in this Section 8 and any other provisions approved by
the parties.
(d) Closing Date. The close of Escrow shall occur on or before
------------
the date (the "CLOSING DATE") which is ninety (90) days after Lessee
delivers the Purchase Option Notice to Lessor.
(e) No Contingencies to Lessee's Obligations. After Lessee's
----------------------------------------
delivery of the Purchase Option Notice, there shall be no contingencies or
conditions precedent to Lessee's obligations to close Escrow except for (i)
Lessor's delivery to Escrow Holder
10.17-40
<PAGE>
on or before the Closing Date of a duly executed and acknowledged grant
deed conveying full title to the Premises to Lessee and (ii) the agreement
by a title company reasonably acceptable to Lessee to deliver to Lessee,
after the Closing Date, the Title Policy described in Section 8(g) below.
Notwithstanding the foregoing, throughout the Term of the Lease, Lessor
agrees to Cooperate, at Lessee's expense, with Lessee's reasonable requests
regarding title information, soil testing, survey matters, property tax
statements, building plans, "as built" drawings, permits of all kinds and
other inspections concerning the Premises so that prior to Lessee's
delivery of the Purchase Option Notice, Lessee may satisfy itself regarding
the Premises and Lessee's desire to complete the purchase of the Premises,
(f) Purchase Price. The purchase price for the Premises shall be
--------------
Two Million Dollars ($2,000,000.00), all cash at the close of Escrow.
(g) Title. Title to the Premises shall be evidenced by either a
-----
standard CLTA or ALTA Owner's Form Policy of Title Insurance issued by a
title company reasonably acceptable to Lessee ("TITLE POLICY") in the
amount of the purchase price showing title to the Premises vested in
Lessee. Lessee shall have the option to obtain an ALTA Title Policy by
providing written notice to Lessor of Lessee's agreement to pay for the
cost of the survey and the additional cost of an ALTA Title Policy in
accordance with Section 8(h) below.
(h) Costs and Prorations. Lessor shall pay for all premiums for
--------------------
a CLTA Title Policy, all documentary transfer and other taxes imposed in
connection with the sale of the Premises, one-half (1/2) of all Escrow fees
and costs, and any document recording charges and taxes imposed in
connection with the sale of the Premises. Lessee shall pay one-half(l/2) of
all Escrow fees and costs, the additional premium imposed in the event
Lessee elects to obtain an ALTA Title Policy over the premium for a CLTA
Title Policy and any costs (including survey costs) associated with an ALTA
Title Policy and the costs associated with any title endorsements. All
other costs and expenses shall be apportioned between Lessor and Lessee in
accordance with the customary practice for comparable real estate
transactions in San Diego County.
(i) Representations. Lessee acknowledges that the Purchase
---------------
Option has been granted by Lessor to Lessee based on the understanding that
exercise of the Purchase Option is entirely voluntary by Lessee, and that
the conveyance of the Premises by Lessor to Lessee is and shall be on an
"AS IS" basis, with absolutely no representations or warranties, express or
implied, regarding the condition or nature of the Premises and any
improvements thereon except for the following representations:
(i) Lessor and Lessee each represent to each other that
they have the legal power, right and authority to enter into the Lease
(and this Addendum) and the instruments referenced in this Section 8.
10.17-41
<PAGE>
(ii) Lessor and Lessee represent to each other that
neither the execution of the Lease (and this Addendum) and the
instruments referenced herein, nor the incurrence of the obligations
set forth herein, nor the consummation of the transaction herein
contemplated conflict with or result in the material breach of any
terms, conditions or provisions of, or constitute a default under any
agreement or instrument to which Lessor or Lessee, as applicable, is a
party; and the Lease.
(iii) Any representations and warranties specifically set
forth in the Lease.
The parties agree to indemnify the other, and to hold the other
harmless from all losses, damages, costs and expenses incurred relating to
the Premises which arise form a breach of the representations made above.
Such representations shall survive, and shall not merge into, the close of
Escrow and the recordation of the grant deed for the Premises.
(j) Deliveries to Lessee Upon Closing Date. Lessor shall deliver
--------------------------------------
to Lessee upon the Closing Date, to the extent the same are in Lessor's
possession, originals or copies of all correspondence and files pertaining
to the Premises, including "as built" drawings, blue prints,
specifications, any other documents pertaining to the construction of
improvements, permits and certificates of occupancy and completion, and
other authorizations and documents relating to the Premises.
9. Air Conditioning Units. Without limitation as to Lessor's rights
----------------------
under Section 7.4(b) of the Lease, Lessor may, at Lessor's sole discretion,
require Lessee, upon the expiration or earlier termination of the Term, to
remove the air conditioning units on the slab at the rear of the building on the
Premises and to repair any damage to such slab resulting from such removal, all
at Lessee's sole cost. If Lessee fails to remove such units and repair such
damage despite Lessor's request to do so, Lessor may, upon written notice to
Lessee, cause such work to be performed and Lessee shall then reimburse Lessor
for costs incurred by Lessor in causing such work to be performed within ten
(10) days after Lessee's receipt of invoice therefor. This Section 9 shall
survive the expiration or earlier termination of the Term.
10. Condition of Ground Floor. Notwithstanding anything contained in
-------------------------
Section 2.2 of the Lease, Lessor shall cause the concrete ground floor of the
Premises to be free from defects throughout the initial five (5) year Original
Term of the Lease. However, this warranty shall not apply at any time after
Lessee has notified Lessor of its exercise of the Termination Option pursuant to
Section 6 of this Addendum above nor any time after Lessee's delivery of the
Purchase Option Notice pursuant to Section 8(a) above. Upon Lessor's receipt of
written notice from Lessee setting forth with specificity the nature and extent
of any defect in the concrete ground floor, Lessor shall cause the same to be
rectified promptly, at Lessor's expense.
10.17-42
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have executed this Addendum
concurrently with the Lease.
LESSOR
------
THE J. DAVID GLADSTONE INSTITUTES, a charitable
trust organized and existing under the laws of the
State of California
Date: January 5, 1995 By: /s/ Richard Hille
----------------------------------------------
Richard Hille, Director of Investments
LESSEE
------
BMI ACQUISITION GROUP, INC., a California
corporation
Date: January 3, 1996 By: /s/ Buford B. Wiley
---------------------------------------------
Print Name: Buford B. Wiley
-------------------------------------
Its: C.E.O.
-------------------------------------
Date: January 3, 1996 By: /s/ Robert J. Macri
---------------------------------------------
Print Name: Robert J. Macri
-------------------------------------
Its: Chief Financial Officer
--------------------------------------
10.17-43
<PAGE>
EXHIBIT A
---------
LESSEE WORK LETTER
------------------
This Lessee Work Letter shall set forth the terms and conditions relating
to the renovation of the existing improvements in the Premises. This Lessee Work
Letter is essentially organized chronologically and addresses the issues of
renovation of the Premises, in sequence, as such issues will arise.
SECTION 1
---------
LESSOR'S INITIAL CONSTRUCTION IN THE PREMISES
---------------------------------------------
Lessor has constructed, at its sole cost and expense, the improvements
currently existing in the Premises. Except as provided in Section 2 of the
Lease, Lessee has inspected and hereby approves the condition of the existing
improvements, and agrees that the existing improvements shall be delivered to
Lessee (subject to renovation as provided in this Lessee Work Letter) in their
current "as-is" condition. The renovations to the existing improvements in the
Premises shall be designed and constructed pursuant to this Lessee Work Letter.
Any costs of design and construction of renovations to the existing improvements
to the Premises shall be an "Improvement Allowance Item," as that term is
defined in Section 2.2 of this Lessee Work Letter.
SECTION 2
---------
LESSEE IMPROVEMENTS
-------------------
2.1 Improvement Allowance. Lessee shall be entitled to a one-time
---------------------
improvement allowance (the "IMPROVEMENT ALLOWANCE") in the amount of One Hundred
Seventy Five Thousand Dollars ($175,000.00) for the costs relating to the design
and construction of Lessee's renovations to the improvements which are
permanently affixed to the Premises (the "RENOVATED IMPROVEMENTS"). In no event
shall Lessor be obligated to make disbursements pursuant to this Lessee Work
Letter in a total amount which exceeds the Improvement Allowance. All Renovated
Improvements for which the Improvement Allowance has been made available shall
be deemed Lessor's property under the terms of Section 7.4 of the Lease. Lessee
shall not be entitled to any payment or credit for any unused portion of the
Improvement Allowance.
2.2 Disbursement of the Improvement Allowance. Except as otherwise set
-----------------------------------------
forth in this Lessee Work Letter, the Improvement Allowance shall be disbursed
by Lessor (each of which disbursements shall be made pursuant to Lessor's
disbursement process) for costs related to the construction of the Renovated
Improvements and for the following items and costs (collectively, the
"IMPROVEMENT ALLOWANCE ITEMS"): (i) payment of the fees of the "Architect" and
the "Engineers," as those terms are defined in Section 3.1 of this Lessee Work
Letter, and payment of the fees incurred by, and the cost of documents and
materials (if any) supplied by, Lessor and
10.17-44
<PAGE>
Lessor's consultants in connection with the preparation and review of the
"Construction Drawings," as that term is defined in Section 3.1 of this Lessee
Work Letter; (ii) the cost of any changes in the existing improvements required
by the Construction Drawings; (iii) the cost of any changes to the Construction
Drawings or Renovated Improvements required by applicable building codes (the
"CODE"); and (iv) the "Lessor Supervision Fee," as that term is defined in
Section 4.3.2 of this Lessee Work Letter.
SECTION 3
---------
CONSTRUCTION DRAWINGS
---------------------
3.1 Selection of Architect/Construction Drawings. Lessor shall retain an
--------------------------------------------
architect/space planner (the "ARCHITECT") to prepare the "Construction
Drawings," as that term is defined in this Section 3.1. If necessary, Lessor
shall also retain engineering consultants designated by Lessor (the "ENGINEERS")
to prepare all plans and engineering working drawings relating to the
structural, mechanical, electrical, plumbing, HVAC and lifesafety work of the
Renovated Improvements. The plans and drawings to be prepared by Architect and
the Engineers hereunder shall be known collectively as the "CONSTRUCTION
DRAWINGS."
3.2 Final Space Plan. As soon as reasonably possible after the date of
----------------
full execution and delivery of the Lease, Lessor shall cause the Architect to
prepare the final space plan for Renovated Improvements in the Premises
(collectively, the "FINAL SPACE PLAN"), which Final Space Plan shall include a
layout and designation of all offices, rooms and other partitioning, their
intended use, and equipment to be contained therein, and shall deliver the Final
Space Plan to Lessee for Lessee's approval. Lessee shall approve or reasonably
disapprove any draft of the Final Space Plan within two (2) business days after
Lessee's receipt thereof. Any failure of Lessee to disapprove any draft of the
Final Space Plan by written notice to Lessor within said two (2) business day
period shall be deemed to constitute Lessee's approval thereof. If Lessee
disapproves of any draft of the Final Space Plan, Lessee's notice of disapproval
shall contain a detailed explanation of the reasons for Lessee's disapproval, in
which case Lessor shall cause the Architect to revise the Final Space Plan and
to resubmit the Final Space Plan to Lessee for Lessee's approval.
3.3 Final Working Drawings. Upon Lessee's approval of the Final Space
----------------------
Plan, Lessor shall cause the Architect and the Engineers (if applicable) to
complete the architectural and engineering drawings for the Premises, and the
final architectural working drawings in a form which is complete to allow
subcontractors to bid on the work and to obtain all applicable permits
(collectively, the "FINAL WORKING DRAWINGS") and shall submit the same to Lessee
for LeSsee's approval. Lessee shall approve or reasonably disapprove any draft
of the Final Working Drawings within two (2) business days after Lessee's
receipt thereof. Any failure of Lessee to disapprove any draft of the Final
Working Drawings by written notice to Lessor within said two (2) business day
period shall be deemed to constitute Lessee's approval thereof. If Lessee
disapproves of any draft of the Final Working Drawings, Lessee's notice of
disapproval shall contain a detailed explanation of the reasons for Lessee's
disapproval, in which case Lessor shall
10.17-45
<PAGE>
cause the Architect to revise the Final Working Drawings and to resubmit the
Final Working Drawings to Lessee for Lessee's approval.
3.4 Permits. The Final Working Drawings approved by Lessor and Lessee may
-------
be referred to herein as the "Approved Working Drawings." Lessor shall submit
the Approved Working Drawings to the appropriate municipal authorities for all
applicable building permits necessary to allow "Contractor," as that term is
defined in Section 4.1, below, to commence and fully complete the construction
of the Renovated Improvements (the "PERMITS"). No changes, modifications or
alterations in the Approved Working Drawings may be made without the prior
written consent of Lessor.
SECTION 4
---------
CONSTRUCTION OF THE RENOVATED IMPROVEMENTS
------------------------------------------
4.1 Contractor. A contractor designated by Lessor ("CONTRACTOR") shall
----------
construct the Renovated Improvements.
4.2 Cost Proposal. After the Approved Working Drawings are approved by
-------------
Lessor and Lessee, Lessor shall provide Lessee with a cost proposal in
accordance with the Approved Working Drawings, which cost proposal shall
include, as nearly as possible, the cost of all Improvement Allowance Items to
be incurred by Lessee in connection with the construction of the Renovated
Improvements (the "COST PROPOSAL"). Lessee shall approve and deliver the Cost
Proposal to Lessor within two (2) business days of the receipt of the same, and
upon receipt of the same by Lessor, Lessor shall be released by Lessee to
purchase the items set forth in the Cost Proposal and to commence the
construction relating to such items. The date by which Lessee must approve and
deliver the Cost Proposal to Lessor shall be known hereafter as the "COST
PROPOSAL DELIVERY DATE."
4.3 Construction of Renovated Improvements by Contractor under the
--------------------------------------------------------------
Supervision of Lessor.
- ---------------------
4.3.1 Over-Allowance Amount. On the Cost Proposal Delivery Date,
---------------------
Lessee shall deliver to Lessor cash in an amount (the "OVER-ALLOWANCE AMOUNT")
equal to the difference (if any) between (i) the amount of the Cost Proposal and
(ii) the amount of the Improvement Allowance (less any portion thereof already
disbursed by Lessor, or in the process of being disbursed by Lessor, on or
before the Cost Proposal Delivery Date). The Over-Allowance Amount shall be
disbursed by Lessor prior to the disbursement of any then remaining portion of
the Improvement Allowance, and such disbursement shall be pursuant to the same
procedure as the Improvement Allowance. In the event that, after the Cost
Proposal Date, any revisions, changes, or substitutions shall be made to the
Construction Drawings or the Renovated Improvements, any additional costs which
arise in connection with such revisions, changes or substitutions or any other
additional costs shall be paid by Lessee to Lessor immediately upon Lessor's
request as an addition to the Over-Allowance Amount.
10.17-46
<PAGE>
4.3.2 Lessor's Retention of Contractor. Lessor shall independently
--------------------------------
retain Contractor, on behalf of Lessee, to construct the Renovated Improvements
in accordance with the Approved Working Drawings and the Cost Proposal and
Lessor shall supervise the construction by Contractor, and the Improvement
Allowance shall be charged a construction supervision and management fee (the
"LESSOR SUPERVISION FEE") in an amount equal to the product of (i) five percent
(5%) and (ii) an amount equal to the Improvement Allowance plus the Over-
Allowance Amount (as such Over-Allowance Amount may increase pursuant to the
terms of this Lessee Work Letter).
4.3.3 Contractor's Warranties and Guaranties. Lessor hereby assigns
--------------------------------------
to Lessee all warranties and guaranties by Contractor relating to the Renovated
Improvements, and Lessee hereby waives all claims against Lessor relating to, or
arising out of the construction of, the Renovated Improvements.
SECTION 5
---------
COMPLETION OF THE RENOVATED IMPROVEMENTS;
-----------------------------------------
COMMENCEMENT DATE
-----------------
5.1 Substantial Completion. For purposes of Section 1 of the Addendum, the
----------------------
Renovated Improvements shall be deemed substantially completed upon the
completion of construction of the Renovated Improvements in the Premises
pursuant to the Approved Working Drawings, with the exception of any punch list
items and any equipment to be installed by Lessee.
5.2 Delay of the Substantial Completion. Except as provided in this
-----------------------------------
Section 5, the Commencement Date shall occur as set forth in Section 1 of the
Addendum. However, if there shall be a delay or there are delays in the
substantial completion of the Renovated Improvements, as a direct, indirect,
partial, or total result of the following (collectively, "LESSEE DELAYS"):
5.2.1 Lessee's failure to meet any of the time periods set forth in
this Lessee Work Letter;
5.2.2 Lessee's failure to timely approve any matter requiring
Lessee's approval;
5.2.3 A breach by Lessee of the terms of this Lessee Work Letter or
the Lease;
5.2.4 Changes in any of the Construction Drawings after disapproval
of the same by Lessor or because the same do not comply with Code or other
applicable laws;
5.2.5 Lessee's request for changes in the Approved Working Drawings;
10.17-47
<PAGE>
5.2.6 Lessee's requirement for materials, components, finishes or
improvements which are not available in a commercially reasonable time given the
anticipated date of substantial completion of the Renovated Improvements; or
5.2.7 Any other acts or omissions of Lessee, or its agents, or
employees;
then, notwithstanding anything to the contrary set forth in the Lease or this
Lessee Work Letter and regardless of the actual date of the substantial
completion of the Renovated Improvements, the Commencement Date shall be deemed
to be the date the Commencement Date would have occurred if no Lessee Delay or
Delays, as set forth above, had occurred.
SECTION 6
---------
MISCELLANEOUS
-------------
6.1 Lessee's Entry Into the Premises Prior to Substantial Completion.
----------------------------------------------------------------
Provided that Lessee and its agents do not interfere with Contractor's work in
the Building and the Premises, Contractor shall allow Lessee access to the
Premises prior to the substantial completion of the Renovated Improvements for
the purpose of Lessee installing equipment or trade fixtures (including Lessee's
data and telephone equipment) in the Premises. Prior to Lessee's entry into the
Premises as permitted by the terms of this Section 6.1, Lessee shall submit a
schedule to Lessor and Contractor, for their approval, which schedule shall
detail the timing and purpose of Lessee's entry. Lessee shall hold Lessor
harmless from and indemnify, protect and defend Lessor against any loss or
damage to the Building or Premises and against injury to any persons caused by
Lessee's actions pursuant to this Section 6.1.
6.2 Time of the Essence in This Lessee Work Letter. Unless otherwise
----------------------------------------------
indicated, all references herein to a "number of days" shall mean and refer to
calendar days. In all instances where Lessee is required to approve or deliver
an item, if no written notice of approval is given or the item is not delivered
within the stated time period, at Lessor's sole option, at the end of such
period the item shall automatically be deemed approved or delivered by Lessee
and the next succeeding time period shall commence.
10.17-48
<PAGE>
SECOND AMENDMENT TO STANDARD
----------------------------
INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE NET
---------------------------------------------
This Second Amendment to Standard Industrial/Commercial Single-Tenant Lease
Net is made and effective this 10th day of September, 1997, by and between THE
J. DAVID GLADSTONE INSTITUTES, a charitable trust organized and existing under
the laws of California (hereinafter "Landlord"), and BMI ACQUISITION GROUP,
INC., a California corporation (hereinafter "Tenant"), and is based on the
following facts:
A. On or about January 2, 1996, Tenant executed a Standard
Industrial/Commercial Single-Tenant Lease Net, with Addendum (hereinafter
"Lease") for the premises located at 6610 Nancy Ridge Drive, San Diego,
California (hereinafter the "Premises"). Thereafter, Landlord accepted said
Lease.
B. On or about May 19, 1997, Tenant executed a First Amendment to
Standard Industrial/Commercial Single-Tenant Lease Net (hereinafter "First
Amendment") for the Premises. Thereafter, Landlord accepted said First
Amendment.
C. As of August 1997, Lessee was in arrears in the payment of rent and
late charges under the Lease in the collective sum of $18,706.62 (the
"Arrearages").
D. Because of Lessee's Arrearages, a Notice to Pay Rent or Surrender
Possession was served on Lessee on August 26, 1997.
E. Lessee wishes to reinstate its Lease with Lessor. Lessee has agreed to
pay the delinquent sums stated in Paragraph C above, together with the
additional sum of $17,647.76 (which sum includes rent through the period ending
with the September Base Rent.) Lessor has agreed to extend the expiration date
of the Notice to Pay Rent or Surrender Possession stated in Paragraph D above,
to September 17, 1997. As consideration for said extension, Lessee has agreed to
immediately delete the Termination Option set forth in the Lease, as amended.
F. The parties now intend to amend the Lease as hereinafter set forth.
NOW THEREFORE, for good and valuable consideration, each to the other, it
is hereby agreed as follows:
1. Termination Option. The Termination Option set forth in Paragraph 6 of
------------------
the Addendum To Lease is deleted in its entirety and hereby deemed null and void
and of no further force or effect.
2. Same Meaning. The terms used herein shall be accorded the same
------------
meaning as set forth in the Lease, as amended.
10.17-49
<PAGE>
3. Amendment Controls. Except as herein modified, the terms of the Lease,
------------------
as amended, shall remain in full force and effect. In the event that a dispute
arises between the terms of this Amendment and the terms of the Lease, as
amended, the terms of the Amendment shall control.
IN WITNESS WHEREOF, the undersigned have subscribed their names as of the
day and year first above written.
LESSOR
------
THE J. DAVID GLADSTONE INSTITUTES, a charitable
trust organized and existing under the laws of the
State of California
Date: September 17, 1997 By: /s/ Richard Hille
----------------------------------------------
Richard Hille, Director of Investments
LESSEE
------
BMI ACQUISITION GROUP, INC., a California
corporation
Date: September 10, 1997 By: /s/ Paul H. Metzinger
----------------------------------------------
Print Name: Paul H. Metzinger
--------------------------------------
Its: Executive Vice President
--------------------------------------
10.17-50
<PAGE>
FIRST AMENDMENT TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-
TENANT LEASE-NET
This FIRST AMENDMENT is made and is effective this 2nd day of May, 1997, by
and between THE J. DAVID GLADSTONE INSTITUTES, a charitable trust organized and
existing under the laws of California (hereinafter "Lessor"), and BMI
ACQUISITION GROUP, INC., a California corporation (hereinafter "Lessee"), and is
based on the following facts:
A. On or about January 2, 1996, Lessor and Lessee executed a Standard
Industrial/Commercial Single-Tenant Lease-Net (with Addendum) (the "Lease") for
the premises located at 6610 Nancy Ridge Drive, San Diego, California (the
"Premises").
B. As of March 1997, Lessee was in arrears in its payment of rent,
property taxes, and other rent-related charges under the Lease in the collective
sum of $27,506.73 (the "Arrearages").
C. Because of Lessee's Arrearages, a Complaint for Recovery of Rent and
Recovery of Possession (Unlawful Detainer) was filed on March 19, 1997, in the
Superior Court of California, County of San Diego, bearing Case No. 00709022.
D. Lessee wishes to reinstate its Lease with Lessor. Lessee has agreed to
pay the delinquent sums stated in Paragraph B above, together with additional
sums that have accrued since the Complaint was filed in the additional aggregate
sum of $72,798.07 (which sum includes base rent, property taxes, insurance,
landscaping, late charges, attorney fees and costs through the period ending
with the May Base Rent.)
E. The parties now intend to amend the Lease as hereinafter set forth.
NOW THEREFORE, for good and valuable consideration, each to the other, it
is hereby agreed as follows:
1. Payment Of Delinquent Sum. The unpaid rents and related charges
-------------------------
described in Paragraphs B and D above, i.e. the sum of One Hundred Thousand
Three Hundred Four Dollars and Eighty Cents ($100,304.80) (hereinafter
"Delinquent Sum") shall be paid by Lessee to Lessor by wire transfer to Lessor's
bank account at Bank of America, 11501 Santa Monica Boulevard, Los Angeles,
California, on or before May 5, 1997: In the event that Lessee fails to wire
transfer the Delinquent Sum, or any part thereof, by said date, then this First
Amendment shall be null and void and of no further force or effect.
2. Reinstatement of Lease. Upon the full and timely payment of the
----------------------
Delinquent Sum described in Paragraph 1 above, the Lease will be reinstated.
3. Purchase Option. The Purchase Option set forth in Paragraph 8 of the
---------------
Addendum To Lease is hereby deemed null and void and of no further force or
effect.
10.17-51
<PAGE>
4. Purchase of Premises. Lessee may purchase the Premises before
--------------------
September 30, 1997, for the purchase price ("Purchase Price") of Two Million
Three Hundred Fifty Thousand Dollars ($2,350,000.00) pursuant to a definitive
Purchase and Sale Agreement and Joint Escrow Instructions ("Purchase
Agreement"), as mutually agreed to and executed by the parties, which Purchase
Agreement shall include the following terms and conditions:
4.1 The Purchase Agreement must be executed by the parties and an
escrow opened prior to May 15, 1997, by placing Two Hundred Thirty-Five Thousand
Dollars ($235,000.00) in escrow as a good faith deposit.
4.2 Any default or delinquency under the terms of this Lease by
Lessee shall result in the immediate cancellation of the escrow and forfeiture
by Lessee to Lessor of One Hundred Seventeen Thousand Five Hundred Dollar
($117,500.00) plus accrued interest. Lessee shall remain solely liable for any
escrow or cancellation costs and fees. The balance of the good faith deposit
will be returned to Lessee.
4.3 There will be no conditions to the purchase, except that Lessor
will warrant title to the Premises. Lessee acknowledges that the conveyance of
the Premises by Lessor to Lessee shall be on an "AS IS" basis, with absolutely
no representations or warranties, express or implied, regarding the condition or
nature of the Premises and any improvements thereon.
4.4 Lessor will promptly convey title upon payment in full of the
Purchase Price received and cleared in escrow on or before September 30, 1997.
4.5 No financing, credits or discounts shall be considered by Lessor.
4.6 The parties will share costs of sale as is customary in San Diego
County.
4.7 If for any reason Lessee fails to close escrow prior to September
30, 1997, Lessor shall retain One Hundred Seventeen Thousand Five Hundred
Dollars ($117,500.00) plus accrued interest. Lessee shall be responsible for any
escrow or cancellation costs and fees. The balance of the good faith deposit
will be returned to Lessee.
4.8 Lessee shall not have the authority to assign its interest in
this purchase.
5. Dismissal of Complaint. Upon Lessee's payment of the Delinquent Sum in
----------------------
full as described in Paragraph 1 above, Lessor will cause to be filed a
dismissal of the Complaint described in Paragraph C above.
6. Recitals. The recitals described in Paragraphs A through D above are
--------
incorporated herein by reference as though set forth in full.
10.17-52
<PAGE>
7. Terms. All capitalized terms used herein shall have the same meaning
-----
as specified in the Lease.
Except as herein expressly amended, the Lease is hereby ratified and
confirmed. To the extent that the provisions of the Lease conflict with the
provisions of this First Amendment, the provisions of this First Amendment shall
control.
IN WITNESS WHEREOF, the parties have executed this First Amendment as of
the date and year written below, intending this First Amendment to be a part of
the Lease and effective the date and year first above written
LESSOR:
------
THE J. DAVID GLADSTONE INSTITUTES, a charitable
trust organized and existing under the laws of the
State of California
Date:____________________ By: /s/ Richard Hille
----------------------------------------------
Richard Hille, Director of Investments
LESSEE:
------
BMI ACQUISITION GROUP, INC., a California
corporation
Date:____________________ By: /s/ Jim Farooville
----------------------------------------------
Print Name: Jim Farooville
--------------------------------------
Its: Chairman
----------------------------------------
Date:____________________ By:_______________________________________________
Print Name:_______________________________________
Its:_________________________________________
10.17-53
<PAGE>
EXHIBIT 10.18
Lease
(Build to Suit)
City of Watsonville (Landlord)
California Tube Labs (Tenant)
June, 1995
10.18-1
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
1.1. Parties........................................................ 10.18-6
1.2. Premises....................................................... 10.18-6
1.3. Term........................................................... 10.18-6
1.3.1. Initial term................................................. 10.18-6
1.3.1.1. Duration........................................ 10.18-6
1.3.1.2. Commencement Date............................... 10.18-6
1.3.1.3. Surrender of Premises........................... 10.18-7
1.3.2. Option(s) to renew on same terms............................. 10.18-7
1.3.2.1. Option rent to be set by appraisal.............. 10.18-7
1.3.2.2. Exclusivity..................................... 10.18-9
1.4. Rent........................................................... 10.18-9
1.4.1. Base rent.................................................... 10.18-9
1.4.1.1. Annual Cost of Living Adjustment................ 10.18-9
1.4.1.2. Manner of payment............................... 10.18-10
1.4.1.3. Where paid...................................... 10.18-10
1.4.1.4. Late payment penalty............................ 10.18-10
1.4.1.5. Interest on late rent installments.............. 10.18-11
1.4.2. Taxes........................................................ 10.18-11
1.4.2.1. Tax obligation(s)............................... 10.18-11
1.4.2.2. Proration of Tenant's Tax Liability............. 10.18-12
1.4.3. Utilities.................................................... 10.18-12
1.4.4. Insurance.................................................... 10.18-12
1.4.4.1. Policies to be maintained....................... 10.18-12
1.4.4.1.1. Comprehensive General Liability Insurance. 10.18-12
1.4.4.1.2. Fire and Property Damage Insurance........ 10.18-13
1.4.4.2. Quality of insurance companies.................. 10.18-14
1.4.4.3. Adjustment of insurance limits.................. 10.18-15
1.4.4.4. Evidence of Insurance........................... 10.18-15
1.4.4.5. Waiver of subrogation........................... 10.18-15
1.4.4.6. Notice of Changes in Policy..................... 10.18-15
1.4.4.7. Assignment of Policies.......................... 10.18-15
</TABLE>
10.18-2
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
<TABLE>
<S> <C>
1.4.5. Janitorial and Landscaping Services........................... 10.18-16
1.4.6. Security...................................................... 10.18-16
1.4.7. Other Expenses................................................ 10.18-16
1.5. Restrictions on Use............................................. 10.18-16
1.5.2. Prohibited uses............................................... 10.18-16
1.5.3. Compliance with rules, regulations and laws........ 10.18-17
1.5.4. Landlord's right to grant easements........................... 10.18-17
1.5.5. Signs......................................................... 10.18-18
1.5.6. Height restriction............................................ 10.18-18
1.5.7. Parking restrictions.......................................... 10.18-18
1.5.8. Closure of Airport in an Emergency............................ 10.18-18
1.5.9. Right of Landlord to Enter for Inspection..................... 10.18-19
1.5.10. Discrimination............................................... 10.18-19
1.5.10.1. Discrimination prohibited....................... 10.18-20
1.5.10.2. Enforcement of Nondiscrimination Clause......... 10.18-20
1.5.11. Nondiscrimination............................................ 10.18-20
1.5.11.1. Remedy for Discrimination....................... 10.18-21
1.5.12. Reservation of Right to operate Airport...................... 10.18-21
1.5.13. Airport Development.......................................... 10.18-22
1.5.14. Special Events............................................... 10.18-22
1.5.15. Subordination to Future FAA Agreements....................... 10.18-22
1.5.16. Notice to Federal Aviation Administration.................... 10.18-22
1.5.17. Non-Exclusive Right.......................................... 10.18-23
1.6. Improvements to Leasehold..................................... 10.18-23
1.6.1. Construction.................................................. 10.18-23
1.6.2. Permitted Construction........................................ 10.18-23
1.6.3. Conditions precedent to major construction.................... 10.18-23
1.6.4. New Construction Completion Date.............................. 10.18-24
1.6.5. Protection of Landlord against Cost or Claims
associated with Tenant's improvements........................ 10.18.24
1.6.6. Notice of Completion on Tenant's improvements................. 10.18-25
1.6.7. Ownership of Improvements..................................... 10.18-25
1.6.8. Alterations and Additions..................................... 10.18-25
1.6.9. Repairs....................................................... 10.18-26
</TABLE>
10.18-3
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
<TABLE>
<S> <C>
1.7. Maintenance..................................................... 10.18-26
1.7.1. Landlord's obligations........................................ 10.18-26
1.7.2. Tenant's obligations.......................................... 10.18-27
1.8. No Subordination................................................ 10.18-28
1.9. Assignment and Subletting....................................... 10.18-28
1.10. Waiver of Damages and Indemnification.......................... 10.18-29
1.11. Hazardous Materials............................................ 10.18-29
1.11.1. Soil Conditions.............................................. 10.18-29
1.11.1.1. Hazardous Substances............................ 10.18-30
1.11.1.2. Indemnification by City......................... 10.18-30
1.11.1.3. Indemnification by Tenant....................... 10.18-31
1.11.1.4. Indemnification Survives Lease.................. 10.18-31
1.11.1.5. No Warranty of Current Condition................ 10.18-31
1.12. Breach......................................................... 10.18-32
1.12.1. Remedies..................................................... 10.18-32
1.12.2. Holding Over................................................. 10.18-33
1.12.3. Abandonment.................................................. 10.18-33
1.12.4. Dispute resolution........................................... 10.18-33
1.12.4.1. Mediation....................................... 10.18-33
1.12.4.2. Arbitration..................................... 10.18-33
1.12.4.3. Attorneys' and arbitrator's fees; costs......... 10.18-35
1.12.4.4. Choice of Venue................................. 10.18-35
1.13. Quiet Enjoyment................................................ 10.18-35
1.13.1. Landlord representations..................................... 10.18-35
1.13.1.1. Acceptance of aircraft operations............... 10.18-35
1.13.1.2. Hold harmless................................... 10.18-36
1.14. Notices........................................................ 10.18-36
1.15. Recordation.................................................... 10.18-36
</TABLE>
10.18-4
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
<TABLE>
<S> <C>
1.16. Condemnation................................................... 10.18-37
1.17. Affirmative Action............................................. 10.18-37
1.18. Subordination to Future Agreements............................. 10.18-37
1.19. Notice to Federal Aviation Administration...................... 10.18-37
1.20. Non-exclusive Right............................................ 10.18-38
1.21. First Source Hiring Agreement.................................. 10.18-38
1.22. General Provisions............................................. 10.18-38
1.22.1. Waiver....................................................... 10.18-38
1.22.2. Interpretation of covenants and conditions................... 10.18-38
1.22.3. Law of California controls................................... 10.18-39
1.22.4. Heirs, devisees, successors & assigns........................ 10.18-39
1.22.5. Time of the Essence.......................................... 10.18-39
1.22.6. Approval and consent......................................... 10.18-39
1.22.7. Evidence of Corporation's assent............................. 10.18-39
1.22.8. Real Estate Brokers and Finders.............................. 10.18-39
1.22.9. Exhibits incorporated by reference........................... 10.18-40
1.22.10. Integrated agreement........................................ 10.18-40
1.22.11. Negation of Partnership..................................... 10.18-40
1.22.12. No third party beneficiaries................................ 10.18-40
2. Signatures........................................................ 10.18-41
</TABLE>
10.18-5
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
1.1. PARTIES.
THIS LEASE made and entered into this 14th day of June, between the City of
Watsonville, a municipal corporation, hereafter called "Landlord," and
California Tube Laboratory, Inc., a corporation, hereafter called "Tenant."
1.2. PREMISES.
Landlord hereby leases to Tenant and Tenant hereby hires from Landlord all that
certain real property described on Exhibit "A" and depicted on Exhibit "B"
attached hereto, situated at 125 Aviation Way, Watsonville Municipal Airport,
City of Watsonville, and the improvements to be constructed in accordance with
Exhibit "C," upon the terms and subject to conditions hereinafter set forth.
The real property and improvements described on Exhibits A, B and C are
hereafter referred to as "Premises."
1.3. TERM.
1.3.1. INITIAL TERM.
1.3.1.1. DURATION.
The term of this Lease shall be fifteen (15) years, which term shall commence on
the Commencement Date as defined in this next succeeding section of this lease,
and expire on the fifteenth anniversary thereof, unless sooner terminated
pursuant to this Lease.
1.3.1.2. COMMENCEMENT DATE.
Tenant's obligation to pay rent shall begin on the Commencement Date. The
Commencement Date is the date the improvements described in Exhibit B of this
lease are completed. Completed means achieving a point in construction of the
improvements described in Exhibit B so that such Landlord improvements are
functional and the only work necessary to be completed by Landlord consists of
"punch list" items. Tenant's taking possession of the Premises on the
Commencement Date shall constitute Tenant's acknowledgment that the premises are
in good and acceptable condition except for the punch list items If the
Commencement Date or Ending Date of the Lease are other than the first day of
the month, the rent shall be prorated for that month.
10.18-6
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
Immediately after Tenant takes possession of the premises on the
Commencement Date, Tenant shall at its cost install Tenant's improvements in the
Premises which are those items listed in Exhibit "C."
1.3.1.3. SURRENDER OF PREMISES.
Tenant agrees to surrender the Premises at the termination of the tenancy herein
created in the same condition as the Premises were in at the beginning of the
tenancy, reasonable use and wear thereof and damage by act of God or the
elements excepted. The voluntary or other surrender of this Lease by Tenant or
a mutual cancellation thereof shall not work a merger, and shall, at the option
of Landlord, terminate all or any existing subleases or subtenancies, or may, at
the option of Landlord, operate as an assignment to Landlord of any or all such
sublease or subtenancies.
1.3.2. OPTION(S) TO RENEW ON SAME TERMS.
Tenant shall have the option to renew this Lease, under the same terms and
conditions for three (3) additional successive five (5) year terms on the
condition that (i) Tenant provide Landlord with written notice of its intent to
exercise the option (the "Option Notice") no sooner than eighteen and no later
than twelve months before expiration of the previous term and (ii) that the
Option may not be exercised while Tenant is in breach of any term or condition
of this Lease.
1.3.2.1. OPTION RENT TO BE SET BY APPRAISAL.
The Landlord and Tenant shall have 90 days after Landlord receives the Option
Notice in which to agree on minimum monthly rent during the first year of each
term for which the Option is properly and validly exercised. If the parties
agree on the monthly rent for the extended term during that period, they shall
immediately execute an amendment to this lease stating the minimum monthly rent
during the first year of the succeeding term for which the Option was exercised.
Rent during each of the succeeding four years of any extended term thereafter be
adjusted as provided in this Lease.
If the parties are unable to agree on the minimum monthly rent for the extended
term within that period, then within 10 days after the expiration of that period
each party, at its cost and by giving notice to the other party, shall appoint a
real estate appraiser with at least 5 years' full-time commercial appraisal
experience in the area in which the premises are located to appraise and set the
minimum monthly rent for the extended term. If a party does not appoint
10.18-7
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
an appraiser within 10 days after the other party has given notice of the name
of its appraiser, the single appraiser appointed shall be the sole appraiser and
shall set the minimum monthly rent for the extended term. If the two appraisers
are appointed by the parties as stated in this paragraph, they shall meet
promptly and attempt to set the minimum monthly rent for the extended term. If
they are unable to agree within 30 days after the second appraiser has been
appointed, they shall attempt to elect a third appraiser meeting the
qualifications stated in this paragraph within 10 days after the last day the
two appraisers are given to set the minimum monthly rent. If they are unable to
agree on the third appraiser, either of the parties to this lease by giving 10
days' notice to the other party can file a petition with the American
Arbitration Association solely for the purpose of selecting a third appraiser
who meets the qualifications stated in this paragraph. Each party shall bear
half the cost of the American Arbitration Association appointing the third
appraiser and of paying the third appraiser's fee. The third appraiser, however
selected, shall be a person who has not previously acted in any capacity for
either party.
Within 30 days after the selection of the third appraiser, a majority of the
appraisers shall set the minimum monthly rent for the extended term. If a
majority of the appraisers are unable to set the minimum monthly rent within the
stipulated period of time, the three appraisals shall be added together and
their total divided by three; the resulting quotient shall be the base monthly
rent for the premises during the first year of the extended term.
In setting the base monthly rent for the first year of the extended term, the
appraiser or appraisers shall consider the highest and best use for the premises
without regard to the restriction on use of the premises contained in this
lease.
If, however, the low appraisal and/or the high appraisal is more than 10% lower
and/or higher than the middle appraisal, the low appraisal and/or the high
appraisal shall be disregarded. If only one appraisal is disregarded, the
remaining two appraisals shall be added together and their total divided by two;
the resulting quotient shall be the minimum monthly rent for the premises during
the extended term. If both the low appraisal and the high appraisal are
disregarded as stated in this paragraph, the middle appraisal shall be the base
monthly rent for the premises during the first year of the extended term.
After the base monthly rent for the first year of the extended term has been
set, the appraisers shall immediately notify the parties. If Tenant objects to
the base monthly rent that has been set, Tenant shall have the right to have
this lease expire at the end of the term, provided that Tenant pays all the
costs of the Landlord and Tenant in connection with the appraisal procedure
10.18-8
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
that set the base monthly rent. Tenant's election to allow this Lease to expire
at the end of the term must be exercised within 10 days after receipt of notice
from the appraisers of the minimum monthly rent for the extended term. If
Tenant does not exercise its election within the 10-day period, the term of this
lease shall be extended as provided in this section.
1.3.2.2. EXCLUSIVITY.
Tenant shall have no right to extend the term of the lease other than as set
forth herein.
1.4. RENT.
1.4.1. BASE RENT.
Tenant shall pay to Landlord as a base minimum rent without deduction, setoff,
prior notice or demand, but subject to annual adjustment as provided herein, the
sum of sixty-eight cents ($.68) per square foot per month.
The building to be built for tenant is expected to have an area of approximately
twenty-one thousand six hundred square feet; however, the actual area will be
determined by the architect at the commencement of construction. If the area is
21,600 square feet, then the base rent for the initial month of the initial term
will be fourteen thousand six hundred and eighty-eight dollars ($14,688) per
month ($.68 x 21,600 SF).
1.4.1.1. ANNUAL COST OF LIVING ADJUSTMENT.
The base rent shall be subject to adjustment at the commencement of the first
(1st) year anniversary date of the Lease term, and every year thereafter on the
anniversary date of the Lease term ("the adjustment date"), as follows:
The base for computing the adjustment is the United States Department of Labor,
Bureau of Labor Statistics, Consumer Price Index, "San Francisco - Oakland - San
Jose," which is computed from April to April each year and published in May of
each year. If the index published nearest the adjustment date ("Extension
Index") has increased over the "Beginning Index," the monthly rent for the
following year shall be set by multiplying the monthly rent by a fraction, the
numerator of which is the Extension Index and the denominator of which is the
Beginning Index. The "Beginning Index" is defined as the base rent as set forth
in this Lease until the first adjustment is made after one (1) year, and as
thereafter defined as the new monthly
10.18-9
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
rent thereafter established, after each adjustment date for each year of the
remaining Lease term. On adjustment of the monthly rent for each year period,
the parties shall immediately execute an amendment to the Lease stating the new
monthly rent.
If on any rental adjustment date there shall not exist a Consumer Price Index in
the same format as recited herein, the parties shall substitute the Consumer
Price Index for all Urban Consumers provided such index has been so revised or
changed in such a way as to affect the direct comparability of such revised or
changed index published by the Bureau of Labor Statistics or similar or
successor governmental agency as may then be in existence and most nearly
equivalent thereto (i.e., the Wholesale Price Index). If the parties are unable
to agree on a successor index, then the parties shall refer the choice of the
successor index to arbitration in accordance with rules of the American
Arbitration Association.
Notwithstanding the provisions for adjustment contained in this subsection of
the lease, the annual rent adjustment shall under no circumstances increase less
than three percent (3%) or more than four and one-half percent (4.5%) in any one
year.
1.4.1.2. MANNER OF PAYMENT.
All rental payments shall be paid monthly, in advance, on the first day of each
month, free from all claims and demands against Landlord of any kind or nature
or description whatsoever and without deduction or offset, commencing on the
date the Lease term commences, and continuing during the term.
1.4.1.3. WHERE PAID.
All rent shall be paid to Landlord at the address to which notices to the
Landlord are given.
1.4.1.4. LATE PAYMENT PENALTY.
Each rental installment is due and payable in advance on the first day of the
month and delinquent if not received by the Landlord by the fifth day of the
month. A late payment penalty of ten percent (10%) of the rental installment
due shall be paid by Tenant on each installment which is delinquent.
10.18-10
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
1.4.1.5. INTEREST ON LATE RENT INSTALLMENTS.
Interest shall accrue on any installment of rent and/or late payment penalties
not paid when due after thirty days. The rate of interest shall be the highest
legal rate. Such interest shall be compounded monthly.
1.4.2. TAXES.
1.4.2.1. TAX OBLIGATION(S).
Tenant shall pay as additional rent all taxes, assessments and licenses levied,
imposed or required by any governmental subdivision, body or authority on or in
respect to:
(a) Any improvements or property placed on the Premises by Landlord or Tenant
or any person with Tenant's permission except that if curbs, gutters or
sidewalks are constructed on Aviation Way by or at the direction of the
City of Watsonville, Landlord, not Tenant, shall be responsible for the
costs of such construction;
(b) The use, occupancy or possessory rights in the Premises. Landlord,
pursuant to Section 107.6 of the State Revenue and Taxation Code, hereby
gives notice that the interest of Tenant in this Lease may be subject to
property taxation as a possessory interest. By signing this Lease, Tenant
acknowledges that it is aware of such tax and agrees to pay same when due.
(c) Any business, activity or transaction conducted thereon by Tenant.
(d) City license(s).
(e) Any taxes, fees, assessments, license fees, and other charges that are
levied and/or assessed against Tenant's personal property installed or
located in or on the Premises, whether or not same that become payable
during the term of this Lease or while Tenant continues in possession of
the Premises. On demand by Landlord, Tenant shall furnish landlord with
satisfactory evidence of these payments.
(f) If any general or special assessment is levied and assessed against the
building, other improvements, or land of which the Premises are a part,
Tenant or Landlord can elect to either pay the assessment in full or allow
the assessment to go to bond. If Landlord
10.18-11
<PAGE>
pays the assessment in full, Tenant shall pay to Landlord each time a
payment of possessory use taxes is made a sum equal to that which would
have been payable (as both principal and interest) had Landlord allowed the
assessment to go to bond. If the assessment goes to bond, the bond shall
be paid by Tenant according to a time schedule required by the Santa Cruz
County Tax Collector.
1.4.2.2. PRORATION OF TENANT'S TAX LIABILITY.
Tenant's liability to pay taxes shall be prorated, if necessary, on the basis of
a 365-day year to account for any fractional portion of a fiscal tax year
included in the term at its commencement and/or expiration.
1.4.3. UTILITIES.
Tenant shall make arrangements for and pay all water, gas, heat, light, power,
telephone service, garbage, cable, information and/or any other services
supplied to the Premises, including installation and connection charges
associated with such services from the main source thereof to the extent such
charges are required by someone other than Landlord.
1.4.4. INSURANCE.
1.4.4.1. POLICIES TO BE MAINTAINED.
1.4.4.1.1. Comprehensive General Liability Insurance.
During the rental term, Tenant, at Tenant's sole expense, shall secure and
maintain in full force such policies of insurance as will protect it from claims
for damages or injury resulting from bodily injury, including death, and for the
loss or damage to property of others which may arise from operations of this
Lease. Such insurance shall provide to Landlord's satisfaction that:
(a) The Landlord is an Additional Named Insured affording Landlord with
coverage insuring all risks associated with ownership of the building and
in an amount and form reasonably satisfactory to Landlord;
(b) The insurance afforded by these policies applies severally as to each
insured, except that the inclusion of more than one insured shall not
operate to increase the limit of the company's liability, and the inclusion
hereunder of any person or organization as an
10.18-12
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
insured shall not affect any right which such person or organization would
have as a claimant if not so included;
(c) The insurance shall be primary insurance over any other insurance carried
by Landlord, which other insurance shall be considered excess only:
(d) The policies specifically include coverage for the contractual
indemnification obligations contained in the contractual indemnity clause
in this Lease.
(e) The policies may not be canceled, nor the coverage reduced until thirty
(30) days after a written notice of such cancellation or reduction in
coverage is delivered to Landlord at the address contained herein. Such
notice shall not, however, be construed as permission for tenant to reduce
the coverages provided for under this Lease without the express written
consent of Landlord;
(f) Such liability insurance shall be written with limits of no less than
$1,000,000.00, combined single limits.
(g) The form(s) of endorsements are satisfactory to Landlord.
1.4.4.1.2. FIRE AND PROPERTY DAMAGE INSURANCE.
Tenant shall procure and keep in full force and effect, fire and extended
coverage insurance upon all structural improvements on the Premises in an amount
not less than eighty percent (80%) of the replacement value thereof, and shall
furnish Landlord with evidence that such coverage has been procured and is being
maintained in full force and effect. Landlord shall have the right, at
Landlord's election and without notice to Tenant, but without any obligation to
do so, to procure and maintain such coverage if Tenant has not furnished
evidence of coverage as required by this Lease. Tenant shall reimburse Landlord
on demand for any premiums Landlord so pays in connection with such procurement.
Failure to reimburse Landlord shall constitute a breach of this Lease.
If the Premises are either partially or totally destroyed during the Lease term
or extension thereof because of the occurrence of a risk insured under any
policy of insurance covering the Premises, Tenant shall forthwith repair the
same. Such destruction shall in no way annual or void this Lease. Tenant shall
not be entitled to any proportionate reduction of rent while such repairs are
being made. Tenant need not make repairs if:
10.18-13
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
(a) The damage was not caused by a risk covered by insurance unless the damage
or injury was caused by Tenant; or
(b) Such repairs would be prohibited by the then existing codes and ordinances
of the governing bodies asserting jurisdiction. In such case, insurance
proceeds from insurance described in this Lease shall be released to
Landlord.
(c) This lease shall end upon such determination as set forth in subparagraphs
(a) or (b) above.
Throughout the Lease term, or any extension hereunder, Tenant, at Tenant's cost,
shall cause all improvements on the Premises to be insured against the perils of
Fire and Extended Coverage. Such insurance shall insure on a blanket basis the
value of the Premises and all improvements installed therein either by Landlord
or Tenant. Such insurance shall be written on a full replacement cost basis.
If Landlord requests, Tenant shall immediately include the holder of any
mortgage or deed of trust on the fee as a loss payee to the extent of such
holder's security interest. Such insurance policy shall state that:
(a) the Landlord is an additional named insured;
(b) the insurance shall be primary insurance over any other insurance carried
by Landlord, which other insurance shall be considered excess only;
(c) the policies may not be canceled nor the coverage reduced until thirty (30)
days after a written notice of such cancellation or reduction in coverages
is delivered to Landlord at the address contained herein. Such notice
shall not, however, be construed as permission for tenant to reduce the
coverages provided for under this Lease without the express prior written
consent of Landlord;
Landlord, at Tenant's cost, shall cooperate fully with Tenant to maximize any
recovery following an insured casualty. All policies of fire and extended
coverage or other casualty insurance required by this Lease shall provide that
proceeds thereunder shall be paid to Landlord and Tenant as their interests may
appear.
1.4.4.2. QUALITY OF INSURANCE COMPANIES.
10.18-14
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
All policies required to be maintained by Tenant pursuant to the terms of this
Lease shall be issued by companies authorized to do business in the State of
California with a financial rating of at least A + 3A status as rated in the
most recent edition of Best Insurance Reports. Tenant shall pay premiums
therefor and shall deliver annually to Landlord Certificates of Insurance or
Endorsements that such policies are in effect. If Tenant fails or refuses to
procure or maintain the insurance coverage required hereunder, or fails or
refuses to furnish Landlord with proof that coverage has been procured and is in
full force and paid for, Landlord shall have the right, at Landlord's election
and without notice to Tenant, but without any obligation to do so, to procure
and maintain such coverage. Tenant shall reimburse Landlord on demand for any
premiums Landlord so pays in connection with such procurement.
1.4.4.3. ADJUSTMENT OF INSURANCE LIMITS.
The limit of liability insurance coverage shall be adjusted commensurate with
inflation and other liability factors from time to time upon the reasonable
request of the Landlord.
1.4.4.4. EVIDENCE OF INSURANCE.
Copies of the Policies of Insurance together with endorsements evidencing the
above obligations shall be delivered to Landlord prior to occupation of the
premises. Such documentation as may be required by Landlord shall thereafter be
provided to Landlord annually.
1.4.4.5. WAIVER OF SUBROGATION.
The policies of insurance described in this Lease shall provide that or permit
the waiver of any and all rights of subrogation against Landlord.
1.4.4.6. NOTICE OF CHANGES IN POLICY.
Each policy shall contain an endorsement requiring thirty (30) days' written
notice from the insurance company to Landlord before any termination, change in
the coverage, scope, or amount of insurance required by this Lease shall be
effective.
1.4.4.7. ASSIGNMENT OF POLICIES.
In case this Lease is terminated, the insurance policy and all rights under it
or the insurance proceeds shall be assigned to Landlord at Landlord's election.
10.18-15
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
1.4.5. JANITORIAL AND LANDSCAPING SERVICES.
Tenant shall at its sole cost and expense provide all interior and exterior
janitorial and Landscaping services appropriate to the premises.
1.4.6. SECURITY.
Tenant shall be responsible for its own security monitoring and alarms.
1.4.7. OTHER EXPENSES.
Tenant shall assume, pay and be obligated for any and all costs and expenses
toward the operation, protection, maintenance of the Premises, known or unknown,
expressed or unexpressed, it being the intention of the parties for this to be a
"triple net" lease to Landlord.
1.5. RESTRICTIONS ON USE.
1.5.1 PERMITTED USES. Tenant shall conduct its business at the
premises under the name of California Tube Laboratory or such other
name as Tenant may adopt after thirty days' written notice to
Landlord. Tenant shall establish, maintain and efficiently operate an
electronic tube manufacturing, assembly, maintenance and repair
company together with administrative offices, and loading dock
appropriate to such operations.
1.5.2. PROHIBITED USES.
Tenant is prohibited from engaging in the following:
(a) The sale of food to or the consumption thereof by the general public;
(b) The sale or consumption of alcoholic and non-alcoholic beverages, provided
that non-alcoholic beverages such as coffee and soft drinks may be sold
from mechanical dispensers for Tenant's customers, contractors and
employees;
(c) Sales of aviation, automobile or other fuels. All fuel sales shall be the
exclusive right of the Landlord.
10.18-16
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
(d) Public tie down and hangar services; Tenant shall not rent tie down or
hangar services but shall refer customers therefor to the Landlord;
provided further, that no aircraft shall be stored awaiting parts or for
any other reason.
(e) The manufacture or servicing of aircraft;
(f) Unicom radio communication with aircraft is a function of the Airport
Administration and shall not be co-operated by any other business on the
Airport.
(g) Maintenance on anything other than aircraft, such as automobiles, boats, or
other items, except that Tenant may maintain the premises, tenant
improvements and equipment used by Tenant in its business.
(h) Tenant shall not use the premises for residential uses or sleeping.
(i) Tenant shall not permit the preparation, manufacture or mixing of anything
that emits any objectionable odors, noises or lights.
(j) Tenant shall not do, bring, or keep anything on the premises that will
cause a cancellation of any insurance covering the premises.
(k) Tenant shall not permit a nuisance to occur on the Premises.
1.5.3. COMPLIANCE WITH RULES, REGULATIONS AND LAWS.
In the use and occupancy of the Premises and in the conduct of all business,
activities and transactions thereon, Tenant will comply with all applicable
laws, ordinances, rules, regulations and orders of the City of Watsonville or
any governmental subdivision, body or authority, including all federal, state
and municipal laws or ordinances and all rules and regulations of the Federal
Aviation Agency and the City of Watsonville rules and regulations concerning the
operations of the Watsonville Municipal Airport and environs.
1.5.4. LANDLORD'S RIGHT TO GRANT EASEMENTS.
Upon receiving all necessary permits and approvals for the new work of
improvement, City shall grant to public entities or public service corporations,
for the purpose of serving only the Premises, rights of way or easements on or
over the Premises for poles or conduits or both for
10.18-17
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
telephone, electricity or water, sanitary or storm sewers or both, and for other
utilities or municipal services.
1.5.5. SIGNS.
No advertising signs, posters or similar devices shall be erected, displayed or
maintained in, on, about or above the Premises or the structures thereon which
is visible to someone outside the building without a sign permit, compliance
with applicable laws, and the written approval of the City Manager.
1.5.6. HEIGHT RESTRICTION.
No towers or buildings erected on the Premises shall exceed the height limit
fixed by any City zoning ordinance or regulation of the Airport or Federal
Aviation Authority. Tenant in its operations shall not unreasonably interfere
with the property, interests, operations or activities of the Landlord or of
other tenants of the Landlord.
1.5.7. PARKING RESTRICTIONS.
Landlord shall not permit its employees, visitors, customers, invitees to park
other than on the premises in the parking spaces so provided, marked and
striped.
1.5.8. CLOSURE OF AIRPORT IN AN EMERGENCY.
During any period when the Airport shall be closed or civil aircraft grounded by
any lawful authority restricting the use of the Airport or civil aircraft in
such a manner as to interfere substantially with the use of the Premises by
Tenant, "the rent payable under this Lease shall abate, and the period of such
closure at the option of Tenant shall be added to the term of this Lease.
During the time of war or national emergency, Landlord shall have the right to
lease or lend the landing area of the Airport or any part thereof, to the United
States Government or State government for military or naval use, and if such
lease or lending is executed and the use thereunder interferes substantially
with the use of the Premises by Tenant, the rent shall abate, and this Lease
shall be suspended or terminated.
10.18-18
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
1.5.9. RIGHT OF LANDLORD TO ENTER FOR INSPECTION.
Landlord and its authorized representatives shall have the right to enter the
premises at all reasonable times for any of the following purposes:
(a) To determine whether the Premises are in good condition and whether tenant
is complying with its obligations under the Lease.
(b) To do any necessary maintenance and to make any restoration of the premises
provided that Landlord shall coordinate with Tenant to minimize disruption
of Tenant's use of the Premises.
(c) To serve, post, or keep posted any notices required or allowed under the
provisions of this Lease.
(d) To post and maintain "For Lease" signs during the last twelve months of
tenant's occupancy.
(e) To show the Premises to prospective brokers, agents, tenants, or persons
interested in leasing the property during the last twelve months of the
term provided that Landlord shall coordinate with Tenant to minimize
disruption of Tenant's use of the Premises.
(f) To erect scaffolding and protective barricades around and about the
premises, but not so as to prevent entry to the premises, and to do any
other act or thing necessary for the safety or preservation of the premises
provided that Landlord shall coordinate with Tenant to minimize disruption
of Tenant's use of the Premises.
(g) At reasonable times to make any other inspection it may deem expedient to
the proper enforcement of this Lease.
1.5.10. DISCRIMINATION.
Nothing in the following subsections is intended to prevent the exercise of
discretion and/or discrimination for lawful purposes.
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Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
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1.5.10.1. DISCRIMINATION PROHIBITED.
Tenant hereby covenants that Tenant in its use of the Premises and any and all
structures, buildings, and improvements located hereto shall conduct the fixed
base operation or any other activity hereafter authorized by the Landlord on the
Premises on a nonexclusive and nondiscriminatory basis in all respects with
regard to any person, firm or group of persons. Tenant shall not act in any
manner prohibited by Part 15 of the Federal Aviation Regulations and further
agrees to be nondiscriminatory also with respect to price or cost of services or
goods and in every other fashion as required by applicable law.
1.5.10.2. ENFORCEMENT OF NONDISCRIMINATION CLAUSE.
Landlord shall have the right to take such action against the Tenant as the
United States Government may direct or request to enforce the terms of the
preceding section on behalf of the United States Government or on behalf of any
of its citizens or the Landlord itself.
1.5.11. NONDISCRIMINATION.
The Tenant, for itself, its heirs, personal representatives, successors in
interest, and assigns, as a part of the consideration for this Lease, does
hereby covenant and agree as a covenant running with the land that in the event
facilities are constructed, maintained, or otherwise operated on the Premises
for a purpose for which a Department of Transportation (DOT) program or activity
is extended or for another purpose involving the provision of similar services
or benefits, the Tenant shall maintain and operate such facilities and services
in compliance with all other requirements imposed pursuant to Title 49, Code of
Federal Regulations, DOT, Subtitle A, Office of the Secretary, Part 21,
Nondiscrimination in Federally-Assisted Programs of the Department of
Transportation-Effectuation of Title VI of the Civil Rights Act of 1964, and as
such Regulations may be amended.
The Tenant for itself, its personal representatives, successors in interest, and
assigns, as a part of the consideration hereof, does hereby further covenant and
agree as a covenant running with the land that:
(1) no person on the grounds of race, color or national origin shall be
excluded from participation in, denied the benefits of, or be
otherwise subjected to discrimination in the use of facilities;
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City of Watsonville - California Tube Labs
Friday, June 09, 1995
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(2) that in the construction of any improvements on, over, or under such
land and the furnishing of services thereon, no person on the grounds
of race, color, or national origin shall be excluded from
participation in, denied the benefits of, or otherwise be subject to
discrimination;
(3) that the Tenant shall use the Premises in compliance with all other
requirements imposed by or pursuant to Title 49, Code of Federal
Regulations, Department of Transportation, Subtitle A, Office of the
Secretary, Part 21, Nondiscrimination in Federally-Assisted Programs
of the Department of Transportation-Effectuation of Title VI of the
Civil Rights Act of 1964, and as such Regulations may be amended.
Tenant shall furnish its accommodations and/or services on a fair, equal and not
unjustly discriminatory basis to all users thereof and it shall charge fair,
reasonable and not unjustly discriminatory prices for each unit or service as
required by law; PROVIDED, THAT the Tenant may be allowed to make reasonable and
nondiscriminatory discounts, rebates or other similar type of price reductions
to volume purchasers.
Tenant shall insert the provisions of this section in any lease agreement or
contract by which Tenant grants a right of privilege to any person, firm or
corporation to render accommodations and/or services to the public on the
Premises.
1.5.11.1. REMEDY FOR DISCRIMINATION.
In the event of breach of any of the nondiscrimination covenants identified in
the previous section, Landlord shall have the right to terminate this Lease and
to reenter and repossess the Premises and the facilities thereon, and hold the
same as if this Lease had never been made or issued. The provision does not
become effective until the procedures of 49 CFR Part 21 are followed and
completed including expiration of appeal rights, including a finding that
termination is the appropriate remedy.
1.5.12. RESERVATION OF RIGHT TO OPERATE AIRPORT.
Landlord reserves the right, but shall not be obligated to Tenant to
maintain and keep in repair the landing area of the Airport and all publicly
owned facilities of the Airport.
10.18-21
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City of Watsonville - California Tube Labs
Friday, June 09, 1995
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1.5.13. AIRPORT DEVELOPMENT.
City reserves the right to further develop or improve the Airport as it
sees fit, in accordance with applicable local, state and federal standards,
regardless of the desires or view of the Tenant and without interference,
hindrance or liability.
1.5.14. SPECIAL EVENTS.
The City reserves the right to assign temporary aircraft parking spaces for
all aircraft and direct those aircraft to be moved to their assigned location by
the Airport Manager for purposes of conducting the annual Watsonville Antique
Aircraft Fly-In and Air Show and similar events not to exceed a total of four
per year. City shall provide a minimum of two (2) weeks' notification of the
dates of the Air Show event usually held over the Memorial Day holiday weekend.
Tenant is not prevented from conducting business where safety and the Airport
operation is not jeopardized. Landlord shall take reasonable steps to provide
Tenant access to the Premises during such events.
Tenant agrees to reasonably cooperate with special events organizations at no
cost or expense to Tenant, including making non-essential parking available on
the Premises to special events organizations. Such cooperation may include, but
not be limited to, provision of insurance satisfactory to Tenant. Landlord
shall impose limitations on such special events so as to not unreasonably
disrupt Tenant's business.
1.5.15. SUBORDINATION TO FUTURE FAA AGREEMENTS.
This lease shall be subordinate to the provisions and requirements of any
existing or future agreement between the City and the United States, relative to
the development, operation or maintenance of the Airport.
1.5.16. NOTICE TO FEDERAL AVIATION ADMINISTRATION.
Tenant shall comply with the notification and review requirements covered
in Part 77 of the Federal Aviation Regulations in the event of future
construction of a building planned for the premises, or in the event of any
planned modification or alteration of any present or future building or
structure situated on the premises.
10.18-22
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Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
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1.5.17. NON-EXCLUSIVE RIGHT.
It is understood and agreed that nothing herein contained shall be
construed to grant or authorize the granting of an exclusive right within the
meaning of Section 308 of the Federal Aviation Act.
1.6. IMPROVEMENTS TO LEASEHOLD.
1.6.1. CONSTRUCTION.
The commencement and completion of new construction is a substantial element and
consideration of this Lease, and the commencement and continuance of the Lease
term is expressly conditioned upon successful completion of such construction.
1.6.2. PERMITTED CONSTRUCTION.
The structure shall he built in precise conformity with the Plans, Drawings and
specifications to be prepared by Robert Corbett and approved promptly by
Landlord and Tenant.
In addition, Tenant acknowledges that Tenant has received and shall comply with
the provisions of the "Minimum Improvements Standards for the Construction of
any Improvements on the Watsonville Municipal Airports" as adopted by the City
Council.
1.6.3. CONDITIONS PRECEDENT TO MAJOR CONSTRUCTION.
Tenant shall comply with all the following conditions or procure Landlord's
written waiver of the condition or conditions specified in the waiver:
(a) Deliver to Landlord for Landlord's approval two (2) sets of preliminary
construction plans and specifications, and four (4) copies of the site
plan. Landlord shall not unreasonably withhold its approval of preliminary
plans and specifications.
(b) With respect to Tenant's improvements, Tenant shall comply with all
applicable codes, ordinances, or regulations, and requirements for permits
and approvals, including, but not limited to or restricted to a grading
permit, building permit, zoning and planning requirements, and approvals
from various governmental agencies and bodies having jurisdiction.
10.18-23
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City of Watsonville - California Tube Labs
Friday, June 09, 1995
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(c) Tenant shall require from any contractor:
(1) certificates of insurance evidencing coverage for "Builder's risk,"
(2) evidence of Worker's Compensation Insurance covering all persons
employed in connection with the work and with respect to whom death or
bodily injury claims could be asserted against Landlord or the
Premises, and
(3) evidence that contractor has paid or caused to be paid all premiums
for the coverage described in this subparagraph and premiums
sufficient to assure maintenance of all insurance during the
anticipated course of work.
1.6.4. NEW CONSTRUCTION COMPLETION DATE.
Once work is begun, Landlord shall with reasonable diligence prosecute all
construction of improvements for completion and ready for use; provided however,
that the time for completion shall be extended for as long as Landlord shall be
prevented from completing the construction by delays beyond Landlord's control.
1.6.5. PROTECTION OF LANDLORD AGAINST COST OR CLAIMS ASSOCIATED WITH
TENANT'S IMPROVEMENTS.
Tenant shall pay or cause to be paid the total cost and expense of all works of
Tenant improvements, as that phrase is defined in the mechanic's lien law in
effect at the place of construction when the work begins. No such payment shall
be construed as rent. Tenant shall not suffer or permit to be enforced against
the Premises or any part of it any mechanic's, materialman's, contractor's, or
subcontractor's lien arising from any work of improvements, however it may
arise.
Tenant shall not create or permit to be created or to remain, and covenants to
remove and discharge promptly, at its cost and expense, all liens, claims, stop
notices, encumbrances and charges upon the Premises, or Tenant's leasehold
interest therein which arise out of the use or occupancy of the Premises by
Tenant or anyone using or occupying the Premises with the consent or sufferance
of Tenant, or by reason of labor or materials furnished or claimed to have been
furnished to Tenant for any construction, alteration, addition or repair of any
part of the Premises. Tenant shall give Landlord fifteen (15) days' notice
prior to commencing any work
10.18-24
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City of Watsonville - California Tube Labs
Friday, June 09, 1995
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on the Premises, so that Landlord shall have a reasonable time within which to
post notices of nonresponsibility.
However, Tenant may in good faith and at Tenant's own expense contest the
validity of any such asserted lien, claim, or demand, provided Tenant has
furnished the bond required in California Civil Code (S) 3143. Tenant shall
defend and indemnify Landlord against all liability and loss of any type arising
out of work performed on the Premises by, at the request of or with the
permission of Tenant, together with reasonable attorney's fees and all costs and
expenses incurred by Landlord in negotiating, settling, defending, or otherwise
protecting against such claims.
1.6.6. NOTICE OF COMPLETION ON TENANT'S IMPROVEMENTS.
On completion of the Tenant's improvements, Tenant shall record or cause to be
recorded a Notice Of Completion. Tenant hereby appoints Landlord as Tenant's
attorney in fact to record The Notice Of Completion on Tenant's failure to do so
after Tenant's work of improvement has been substantially completed.
1.6.7. OWNERSHIP OF IMPROVEMENTS.
All improvements on the Premises shall become Landlord's property free of all
claims to or against them by Tenant or any third person, and Tenant shall defend
and indemnify Landlord against all liability and loss arising from such claims
or from Landlord's exercise of the rights conferred by this paragraph.
1.6.8. ALTERATIONS AND ADDITIONS.
Tenant shall not make any structural or cosmetic alterations or improvements to
or erect any additional structures on the Premises without prior written consent
of Landlord. Any alterations or additions approved by Landlord shall be
constructed at the sole expense of Tenant. Any alterations made shall remain on
and be surrendered with the premises on expiration or termination of the term,
except that Landlord can elect within thirty (30) days before or ten (10) days
after expiration of the term, to require tenant to remove any alterations that
tenant has made to the Premises. If Landlord so elects, Tenant at its cost
shall restore the Premises to the condition designated by Landlord in its
election as set forth in this subsection as if the alterations had not been
made, before the last day of the term, or within ten (10) days after notice of
election is given, whichever is later.
10.18-25
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City of Watsonville - California Tube Labs
Friday, June 09, 1995
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If tenant makes any alterations to the Premises as provided in this section, the
alterations shall not be commenced until two (2) days after Landlord receives
notice from tenant stating the date the installation of the alterations is to
commence so that Landlord can post and record an appropriate Notice of
Nonresponsibility.
1.6.9. REPAIRS.
Tenant shall at its own cost and expense keep the Premises and the improvements
thereon and appurtenances thereto and every part thereof including, but without
limitation, glazing, heating, air conditioning equipment, parking areas,
driveways, plumbing, landscaping, roofs, walls, doors and hardware, in as good
order, condition and repair as they shall be upon the commencement of the term
of this Lease, ordinary wear and tear excepted.
If Tenant fails to make or commence any repairs required to be made by it under
the provisions of this Lease within thirty (30) days after notice from Landlord
to do so, then Landlord may, at its option (but this provision shall not be
deemed to create any obligation on Landlord to do so, nor in any manner affect
the obligation of Tenant), enter upon the Premises and repair the same, and the
costs and expenses of such repairs, with interest, shall be included in the
amount of rental payment on the next succeeding rental date.
Tenant is informed and acknowledges it understands its rights under (S)(S) 1941
and 1942 of the Civil Code of the State of California, or by any other similar
statute or regulation now or hereinafter in effect. Tenant represents to
Landlord that it waives and gives up all rights under said (S)(S) 1941 and 1942.
By entry onto the Premises, Tenant shall be deemed to have acknowledged that the
Premises are in good order and repair and suitable for the uses anticipated.
Landlord shall not be liable for any structural defect in the building or for
any defect in material or workmanship however, to the extent required by Tenant,
Landlord shall be required to assign its rights under the construction contract
or any subcontracts or otherwise, to the extent necessary or appropriate to
allow Tenant to assert such claims for structural defects or defects in material
and workmanship against the general or subcontractors. Landlord also agrees to
cooperate with Tenant, at no expense to City, in prosecuting such claims.
1.7. MAINTENANCE.
1.7.1. LANDLORD'S OBLIGATIONS.
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Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
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Except as provided in the next section, Landlord shall maintain, in good and
serviceable condition, the following:
(a) The structural parts of the building, which structural parts include only
the foundations, bearing and exterior walls, (excluding glass and doors)
subflooring, and roof (excluding skylights if any).
(b) The unexposed (rough) electrical, plumbing, and sewage systems, and only
then to the extent such systems were actually constructed or installed by
Landlord or at Landlord's direction as a part of original construction as
described in Exhibit B.
(c) Window frames, gutters, and downspouts on the building.
(d) Landlord shall resurface and restripe the parking area on the Premises when
necessary, except that Landlord shall not be obligated to restripe the
parking area more than once every five years during the term.
1.7.2. TENANT'S OBLIGATIONS.
Except as provided in the previous paragraph, Tenant shall, at its sole cost,
maintain the Premises in good and serviceable condition. In particular, and
without limitation, it shall be Tenant's obligation to maintain, repair and
replace:
(1) all finish plumbing and plumbing fixtures including but not limited to
toilets and drains.
(2) all electrical outlets, switches and fixtures and light bulbs.
(3) all wall and ceiling surfaces and surface coatings.
(4) all floor surfaces, coverings (including but not limited to carpet and
tile) and coatings.
(5) all plate glass, screens, doors, hinges and weather stripping.
(6) The heating, ventilating, and air conditioning system servicing the
premises.
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City of Watsonville - California Tube Labs
Friday, June 09, 1995
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(7) To the extent present in the structure, the skylights, skylight
framing, and weatherstripping.
Tenant shall also be responsible to comply with and pay for compliance with all
fire codes.
1.8. NO SUBORDINATION.
Landlord shall not be required to subordinate the fee title to the Premises to
any security transaction to enable Tenant to obtain financing. The Premises are
now and shall remain free and clear of any liens, encumbrances or other Tenant
obligations to third persons.
1.9. ASSIGNMENT AND SUBLETTING.
Tenant shall not assign this Lease, or any interest therein, and shall not Lease
or sublet the Premises, or any part thereof, or any privilege appurtenant
thereto, without the prior written consent of Landlord first had and obtained.
A consent to one assignment or subletting shall not be construed as a consent to
any subsequent assignment or subletting. Landlord shall not unreasonably
withhold consent, but Landlord may nevertheless condition consent upon such
factors as the identity, reputation, financial worth and stability, operating
ability type of business, compatibility with other uses in operation at the
airport, of any proposed assignee or subtenant. If Tenant at any time or from
time to time requests Landlord's consent to an assignment of the entire balance
of Tenant's leasehold hereunder, Tenant shall first fully inform Landlord in
writing of all the terms of the proposed assignment.
If Tenant at any time or from time to time requests Landlord's consent to a
subletting hereunder, Landlord will require, as a condition of such consent,
that Tenant fully inform Landlord in writing of all the terms of the proposed
sublease and provide Landlord a copy of same.
Unless prior written consent of Landlord shall have been obtained, any transfer,
or attempted assignment or transfer of this Lease or of any interest therein, or
any subletting, either by voluntary or involuntary act of Tenant or by operation
of law or otherwise, shall at the option of the Landlord terminate this Lease,
and any such purported assignment, transfer or subletting without such consent
shall be null and void.
Notwithstanding the previous paragraph, Tenant shall have the right to sublet,
but not assign, up to fifty percent (50%) of the Premises during the first five
years of the lease, for a term that shall not extend past the fifth anniversary
of the Commencement of this Lease, without the prior
10.18-28
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Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
written consent of Landlord, provided however that the Tenant shall be jointly
and severally be obligated to Landlord to perform Tenant's obligations under
this Lease.
1.10. WAIVER OF DAMAGES AND INDEMNIFICATION.
Tenant agrees to hold Landlord harmless from, and to defend Landlord against,
any and all claims or liability for any death of or injury to any person or
damage to any property, whatsoever, occurring in, on or about the Premises or
any part thereof, or occurring in, on or about any other areas of facilities of
the building, including without limiting the generality of the foregoing,
walkway(s), driveway(s), parking area(s), stairways, or passageways if such
death, injury or damage shall be caused in part or in whole, directly or
indirectly, by the act, negligence or fault of, or omission of any duty, with
respect to the same or by Tenant, its tenants, subtenants, agents, servants,
employees or invitees.
Landlord shall similarly hold Tenant harmless in connection with Landlord's
conduct or that of its employees, contractors or agents in, on or about the
Premises.
1.11. HAZARDOUS MATERIALS.
1.11.1. SOIL CONDITIONS.
Tenant shall not commit, or suffer to be committed, any waste upon the Leased
premises, or any nuisance or other act or thing which may disturb the quiet
enjoyment of the use of Landlord or Watsonville Airport or surrounding property.
Tenant shall ensure that no untreated waste from any type of operation,
including but not limited to tube manufacturing will enter the Airport drainage
system or sanitary system or be discharged or placed onto City property or in
violation of law. Tenant shall at all times comply with all applicable laws,
rules and regulations of federal, state or local governmental agencies,
including, but not limited to, the City of Watsonville, Santa Cruz County, and
responsible Regional Air and Water Quality Control Boards. Tenant shall not
permit any activity which directly or indirectly produces objectionable or
unlawful amounts or levels of air pollution (gases, particulate matter, odors,
fumes, smoke, or dust), water pollution, noise, glare, heat emissions,
electronic or radio interference with navigational and communication facilities
for the operation of the Airport and for its use by aircraft, trash or refuse
accumulation, vibration, prop-wash, or jet blast, or which is hazardous or
dangerous by reason or risk of explosion, fire or harmful emission. Any waste
oil storage tanks shall be in approved containers and in accordance with all
environmental and fire protection regulations.
10.18-29
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Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
1.11.1.1. HAZARDOUS SUBSTANCES.
The term "Hazardous Materials" shall mean any toxic substance, hazardous
substance, hazardous material, or hazardous waste, pollutant or contaminant
which is or during the term of this Lease becomes regulated by any local
governmental authority, the State of California, or the United States
government, including, but not limited to any, material or substance which is
defined as a "hazardous waste," "extremely hazardous waste" or "restricted
hazardous waste" under local, State, or federal law and as determined by the
Fire Department.
Except in strict compliance with all government approvals, applicable laws and
regulations pertaining to Hazardous Materials, and in accordance with the
provisions of this Lease, Tenant shall not cause or permit the presence, use,
handling, generation, emission, release, discharge, storage, or disposal of any
Hazardous Materials on, under, in or about the premises, excepting the presence
of any Hazardous Materials on, under, in or about the premises as of the date of
this Lease or the migration to or seepage of Hazardous Materials from
surrounding or adjacent property; and shall not cause or permit the
transportation of any Hazardous Materials to or from the premises.
Tenant shall at all times notify City of any Hazardous Materials present, used,
generated, handled, emitted, released, discharged, stored or disposed of on or
from the premises.
Tenant shall also institute operating procedures designed to handle Hazardous
Materials consistent with prudent industry practice, including evidence of a
licensed agent removal service. City shall have the right to inspect the
premises on 24-hours' prior notice for compliance with the provisions of this
Section.
1.11.1.2. INDEMNIFICATION BY CITY.
City shall indemnify, protect, defend, and hold harmless Tenant and Tenant's
successors and assigns, officers, directors, employees, agents, subtenants and
assignees, from and against all liability, and foreseeable consequential
damages, penalties, expenses and costs of any required or necessary remediation,
repair, removal, clean up or detoxification, of the Premises and surrounding
properties, and from and against the preparation of any clean up, remediation,
closure or other required plans, whether such action is required or necessary
during or following the term of this Lease, to the full extent that the same is
attributable to the use, handling, generation, emission, release, storage,
discharge or disposal of hazardous material by City, its agents, employees, and
contractors or by anyone else, up to the date of this Lease.
10.18-30
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Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
1.11.1.3. INDEMNIFICATION BY TENANT.
Tenant shall indemnify, protect, defend, and hold harmless City and City's
successors and assigns, officers, directors, employees, agents, subtenants and
assignees, from and against all liability, and foreseeable consequential
damages, penalties, expenses and costs of any required or necessary remediation,
repair, removal, clean up or detoxification, of the premises and surrounding
properties, and from and against the preparation of any clean up, remediation,
closure or other required plans, whether such action is required or necessary
during or following the term of this Lease, to the full extent that the same is
attributable to the use, handling, generation, emission, release, storage,
discharge or disposal of hazardous material by Tenant, its agents, employees,
and contractors.
1.11.1.4. INDEMNIFICATION SURVIVES LEASE.
The indemnification provisions of the foregoing sections shall survive the
termination of this Lease.
1.11.1.5. NO WARRANTY OF CURRENT CONDITION.
City makes no representation or warranty, express or implied, as to the physical
condition of the premises, including, but not limited to the condition of the
air, soil, surface water or groundwater, the geology, the presence of known and
unknown faults, the presence of any Hazardous Materials or other kinds of
contamination or pollutants of any kind in the air, soil, groundwater or surface
water, or the suitability of the premises for the construction and use of the
improvements thereon. Except as stated in this Lease, premises are conveyed in
"as is" condition. Notwithstanding the above, Landlord and not Tenant shall be
responsible for the soils remediation work described in the Sampson Engineers
reports identified below. Landlord and Tenant also agree that Tenant is
executing this Lease on the representation of Landlord that the groundwater
remediation described in the Acton - Mickelson - van Dam, Inc. report(s)
identified below shall be completed so as to meet all government mandated
standards (but not necessarily to non-detect levels) in accordance with the
Acton - Mickelson - van Dam, Inc. report(s) identified below, at no expense to
Tenant. Tenant shall not be liable in any respect for (including but not
limited to attorney's fees, costs, costs, fines and expenses), and shall not be
required to remediate (but shall cooperate with any remediation of), any
contamination of the premises which occurred before the effective date of this
Lease, and Landlord shall hold tenant harmless and indemnify Tenant from any
such liability or remediation arising from contamination from causes other than
Tenant.
10.18-31
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Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
Notwithstanding the foregoing, Tenant acknowledges that it has received and read
the following reports:
(1) Sampson Engineers and dated March 8, 1995.
(2) Sampson Engineers and dated April 21, 1995.
(3) Sampson Engineers and dated May 2, 1995.
(4) Those reports related to 100 Aviation Way and identified on Exhibit D,
attached hereto and incorporated by this reference.
(5) Those reports related to 120 Aviation Way and identified on Exhibit E,
attached hereto and incorporated by this reference.
1.12. BREACH.
1.12.1. REMEDIES.
After service of ten (10) days' written notice thereof by Landlord on Tenant any
one of the following shall constitute a breach of this Lease by Tenant:
(a) The appointment of a Receiver to take possession or control of all or
substantially all of the assets of Tenant, or
(b) A general assignment by Tenant for the benefit of creditors, or
(c) Any action taken or suffered by Tenant under any insolvency or bankruptcy,
or
(d) A default in the payment of the rent herein reserved, or any part thereof,
for a period of twenty (20) days, or
(e) A default in the performance of any other covenant or condition of this
Lease on the part of Tenant to be performed for a period of twenty (20)
days after receipt of notice of the default, provided however that Tenant
shall not be in default under this subparagraph as a matter which cannot be
remedied within twenty days so long as Tenant has taken material steps to
cure the default as soon as commercially practicable.
10.18-32
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Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
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1.12.2. HOLDING OVER.
If Tenant shall hold possession of the Premises after the term of this Lease,
Tenant may at Landlord's option become a Tenant from month to month at the
rental and upon the terms herein specified and shall continue to be such tenant
until the tenancy shall be terminated by Landlord on thirty (30) days' notice.
If Landlord exercises its option, the provisions of this Lease, so far as
applicable, shall govern such tenancy, except that the monthly rent for such
tenancy shall be the same as the last full month's rental rate.
1.12.3. ABANDONMENT.
Tenant shall not vacate or abandon the Premises at any time during the term
thereof. If Tenant shall abandon, vacate or surrender the Premises or be
dispossessed by process of law, or otherwise, any personal property belonging to
Tenant and left on the Premises shall be deemed to be abandoned and at the
option of Landlord shall become Landlord's property free from all claims of
Tenant.
1.12.4. DISPUTE RESOLUTION.
1.12.4.1. MEDIATION.
Any dispute between the parties relating to the interpretation and enforcement
of their rights and obligations under this Lease except nonpayment of rent shall
be resolved solely by arbitration in accordance with the provisions of this
lease.
With respect to any dispute between the parties that is to be resolved by
arbitration as provided in this Lease, the parties shall attempt in good faith
first to mediate such dispute and use their best efforts to reach agreement on
the matters in dispute. Within 10 days of the request of any party, the
requesting party shall attempt to employ the services of a third person mutually
acceptable to the parties to conduct such mediation within 10 days of his
appointment. If the parties are unable to agree on such third person, or, if on
completion of such mediation, the parties are unable to agree and settle the
dispute, then the dispute shall be referred to arbitration in accordance with
this Lease.
1.12.4.2. ARBITRATION.
10.18-33
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
Any dispute between the parties that is to be resolved by arbitration as
provided in this Lease shall be decided by arbitration conducted by the American
Arbitration Association in accordance with the Commercial Arbitration Rules of
the American Arbitration Association, as then in effect, except as provided
below. Any such arbitration shall be held and conducted in Watsonville, Santa
Cruz County, CA before one arbitrator who maintains his or her primary business
offices in Santa Cruz County, CA and who shall be selected by mutual agreement
of the parties. If agreement is not reached on the selection of an arbitrator
within 10 days, then such arbitrator shall be appointed by the presiding judge
of the Superior Court of Santa Cruz County.
The provisions of the Commercial Arbitration Rules of the American Arbitration
Association shall apply and govern such arbitration, subject, however, to the
following:
(a) Any demand for arbitration shall be in writing and must be made promptly
after the claim, dispute or other matter in question has arisen. In no
event shall the demand for arbitration be made after the date that
institution of legal or equitable proceedings based on such claim, dispute,
or other matter would be barred by the applicable statute of limitations.
(b) The arbitrator appointed must be a former or retired judge or "attorney"
with at least 10 years' experience in real property and commercial matters,
or nonattorney with like experience in the area of dispute.
(c) All proceedings involving the parties upon request by either party, shall
be reported by a certified shorthand court reporter and written transcripts
of the proceedings shall be prepared and made available to the parties.
(d) The arbitrator shall prepare in writing and provide to the parties factual
findings and the reasons on which the decision of the arbitrator is based.
(e) Final decision by the arbitrator must be made within 90 days from the date
the arbitration proceedings are initiated.
(f) The award or decision of the arbitrator, which may include equitable
relief, shall be final and judgment may be entered on it in accordance with
applicable law in any court having jurisdiction over the matter.
10.18-34
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
1.12.4.3. ATTORNEYS' AND ARBITRATOR'S FEES; COSTS.
The prevailing party shall be awarded reasonable attorneys' fees, expert and
nonexpert witness costs and expenses, and other costs and expenses incurred in
connection with arbitration, unless the arbitrator for good cause determines
otherwise. Costs and fees of the arbitrator shall be borne by the nonprevailing
party, unless the arbitrator for good cause determines otherwise.
If either party shall bring an action, otherwise arising out of this Lease, the
prevailing party in such suit shall be entitled to its costs of suit and
reasonable attorney fees, which shall be payable whether or not such action is
prosecuted to judgment. "Prevailing Party shall include without limitation a
party who brings an action against the other after the other's breach or
default, if such action is dismissed upon the other's breach or default, if such
action is dismissed upon the other's payment of the sums allegedly due or
performance of the covenants allegedly breached, or if the plaintiff/claimant
obtains substantially the relief sought by it in the action.
1.12.4.4. CHOICE OF VENUE.
Any action or arbitration related to this Lease shall occur in Santa Cruz
County, CA.
1.13. QUIET ENJOYMENT.
1.13.1. LANDLORD REPRESENTATIONS.
Landlord covenants and warrants that upon Tenant's paying the rent and observing
and performing all of the terms, covenants, and conditions on Tenant's part to
be observed and performed hereunder, Tenant shall and may peaceably and quietly
enjoy the Premises hereby demised, subject nevertheless to the terms and
conditions of this Lease.
1.13.1.1. ACCEPTANCE OF AIRCRAFT OPERATIONS.
Tenant acknowledges that the leased premises are located at the Watsonville
Municipal Airport. Except as may otherwise be provided in this Lease, Tenant,
for itself, its employees and agents, waives all claims for interference with
its operations arising out of the normal operation of aircraft or aircraft-
related activities at the airport.
10.18-35
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
1.13.1.2. HOLD HARMLESS.
Tenant acknowledges that the leased premises are located at Watsonville
Municipal Airport which is operated without a tower. Tenant and its agents and
employees agree to hold the Landlord harmless from all claims for personal
injury and property damage arising out of aircraft operations on the premises.
1.14. NOTICES.
All notices, consents, waivers or other communications which this Lease requires
or permits either party to give to the other shall be in writing and shall be
served personally and forwarded by registered or certified mail, return receipt
requested, or expedited courier service, made upon or addressed to the
respective parties as follows:
Landlord Tenant
----------------------------- ------------------------------------
City Manager President
City of Watsonville California Tube Laboratory, Inc.
250 Union Street (Upstairs) 1305 7th Avenue
Post Office Box 50000 Santa Cruz, California 95062-3020
Watsonville, CA 95077-5000
or such other address as may be contained in a notice from either party to the
other given pursuant to this paragraph.
Notice of registered or certified mail shall be deemed to be given forty-eight
(48) hours from the time of postmarking if mailed or dispatched by expedited
courier service within the United States (excluding Alaska). Rental payments
required by this Lease shall be delivered to Landlord at Landlord's address
provided in this paragraph.
1.15. RECORDATION.
Tenant shall not cause or permit the original or any copy of this Lease or any
memorandum thereof to be recorded, filed or published in any public place.
10.18-36
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
1.16. CONDEMNATION.
If the whole or any substantial part of the Premises shall be taken by any
paramount public authority under the power of eminent domain, then the terms of
this Lease shall cease as to the part so taken from the date the possession of
that part shall be taken for any public purpose, and from that day Tenant shall
have the right either to cancel this Lease or to continue in the possession of
the remainder of the Premises under the term herein provided, except that the
square foot rental shall be reduced in proportion to the amount of the Premises
taken.
Damages awarded for such taking shall be apportioned between the Landlord and
Tenant in a ratio relating to the number of years expired and remaining in the
lease term between Landlord and Tenant respectively; provided, however, that
Landlord shall not be entitled to any portion of the award made for loss of
business installation or improvements belonging to Tenant.
1.17. AFFIRMATIVE ACTION.
Tenant assures that it will undertake an affirmative action program as required
by 14 CFR Part 152, Subpart E, to insure that no person shall be, on the grounds
of race, creed, color, national origin, or sex be excluded from participating in
any employment activities covered in 14 CFR, Subpart E. Tenant assures that no
person shall be excluded on these grounds from participating in or receiving the
services or benefits of any program or activity covered by such subpart. Tenant
assures that it will require that it's covered by such subpart. Tenant assures
that it will require that its covered suborganizations provide assurances to the
Tenant that they similarly will undertake affirmative action programs and that
they will require assurances from their suborganizations, as provided by 14 CFR
Part 152, Subpart 2, to the same effect.
1.18. SUBORDINATION TO FUTURE AGREEMENTS.
This Lease shall be subordinate to the provisions and requirements of any
existing or future agreement between the Landlord and the United States,
relative to the development, operation or maintenance of the airport.
1.19. NOTICE TO FEDERAL AVIATION ADMINISTRATION.
Tenant shall comply with the notification and review requirements covered in
Part 77 of the Federal Aviation Regulations in the event of future construction
of a building planned for the
10.18-37
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
Premises, or in the event of any planned modification or alteration of any
present or future building or structure situated on the Premises.
1.20. NON-EXCLUSIVE RIGHT.
It is understood and agreed that nothing herein contained shall be construed to
grant or authorize the granting of an exclusive right within the meaning of
Section 308 of the Federal Aviation Act.
1.21. FIRST SOURCE HIRING AGREEMENT.
A condition precedent to Landlord's obligation to perform its obligations under
this Lease is the execution of a First Source Hiring Agreement between the City
of Watsonville and Tenant in a form reasonably acceptable to Landlord and
Tenant.
Together with any other condition(s) set forth in this Lease or by operation of
law, a condition precedent to any permissible assignment of this Lease or
sublease of a portion of the Premises is that any assignee or subtenant execute
the same or a First Source Hiring Agreement with the City of Watsonville in form
acceptable to City.
1.22. GENERAL PROVISIONS.
1.22.1. WAIVER.
Any delay or omission in the exercise of any right or remedy of Landlord on any
default by Tenant shall impair such a right remedy or be construed a waiver.
Any waiver, expressed or implied by either party of any breach by the other
party of any agreement, term or condition of this Lease shall not be, or be
construed to be, a waiver of any subsequent breach of a like or other agreement
term of condition hereof; and the acceptance of rent hereunder shall not be, or
be construed to be, a waiver of any breach of any agreement, term or condition
of this Lease, except as to the payment of rent so accepted. The rights and
remedies of either party under this Lease shall be cumulative and in addition to
any and all other rights and remedies which either party has or may have.
1.22.2. INTERPRETATION OF COVENANTS AND CONDITIONS.
10.18-38
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
All the provisions of this Lease shall be deemed and construed to be "covenants"
as though the words imported such covenants were used in each separate paragraph
hereof, except when expressed as conditions.
1.22.3. LAW OF CALIFORNIA CONTROLS.
This Lease shall be construed and enforced in accordance with the laws of the
State of California.
1.22.4. HEIRS, DEVISEES, SUCCESSORS & ASSIGNS.
This Lease and the covenants and agreements herein contained shall bind and
inure to the benefit of the parties hereof, their heirs, successors, executors,
administrators, and when permitted assigns.
1.22.5. TIME OF THE ESSENCE.
Time is of the essence of this Lease.
1.22.6. APPROVAL AND CONSENT.
Whenever consent or approval of either party is required, that party should not
unreasonably withhold such consent or approval. The parties hereto agree to
cooperate and promptly execute all documents reasonably appropriate to
effectuate the conclusion of this Lease.
1.22.7. EVIDENCE OF CORPORATION'S ASSENT.
Tenant shall deliver to the Landlord on execution of this Lease, a certified
copy of a resolution of its governing body authorizing the execution of this
Lease and naming the officers that are authorized to execute this Lease on
behalf of the corporation.
1.22.8. REAL ESTATE BROKERS AND FINDERS.
Each party represents that it has not had dealings with any real estate broker,
finder, or other party, with respect to this Lease in any manner except for Roy
Lundstedt or Blickman Turkus Real Estate. Each party shall hold the other party
harmless from all damages resulting from any
10.18-39
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
claims that may be asserted against the other party by any other broker, finder,
or other person, with whom the other party has or purportedly has dealt.
1.22.9. EXHIBITS INCORPORATED BY REFERENCE.
Exhibits A, B, C, D and E referred to herein are attached to this Lease and
incorporated by this reference.
1.22.10. INTEGRATED AGREEMENT.
This Lease contains all the agreements of the parties and cannot be amended or
modified except by a written agreement signed by both Parties.
1.22.11. NEGATION OF PARTNERSHIP.
Landlord shall not become or be deemed a partner or joint venturer with Tenant
by reason of the provisions of this Lease.
1.22.12. NO THIRD PARTY BENEFICIARIES.
This lease is not intended to benefit any third person, except as to those
persons who may be identified by specific reference in this Lease.
10.18-40
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
2. SIGNATURES.
IN WITNESS WHEREOF, the parties hereto have executed this Lease the day and
year first above written.
________________________________________________________________________________
Landlord Tenant
City of Watsonville, California Tube Laboratory, Inc.
a municipal corporation a corporation
/s/ Steven M. Salomon /s/ Gordon J. Sales
- ---------------------------- -----------------------------------
by Steven M. Salomon, by Gordon J. Sales
its City Manager its President
/s/ James Martin
-----------------------------------
by James Martin
its Vice-President
Dated: June 21, 1995
ATTEST:
/s/ Lorraine Washington
- ----------------------------
City Clerk
APPROVED AS TO FORM:
/s/ 6-19-95
- ----------------------------
City Attorney
10.18-41
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
RESOLUTION NO. 171-95 (CM)
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF WATSONVILLE
APPROVING LEASE AGREEMENT BETWEEN THE CITY OF WATSONVILLE AND
CALIFORNIA TUBE LABORATORY, INC. FOR A 21,600 SQ. FT. BUILD TO
SUIT MANUFACTURING FACILITY LOCATED AT 125 AVIATION WAY,
WATSONVILLE, AND DIRECTING THE CITY MANAGER TO EXECUTE SAME.
BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF WATSONVILLE, CALIFORNIA,
AS FOLLOWS:
That the Lease Agreement between the City of Watsonville and California
Tube Laboratory, Inc. for a 21,600 sq. ft. build to suit manufacturing facility
located at 125 Aviation Way, Watsonville, a copy of which is attached hereto and
incorporated herein by this reference, is fair and equitable and is hereby
ratified and approved.
That the City Manager be and is hereby authorized and directed to execute
Lease Agreement for and on behalf of the City of Watsonville.
10.18-42
<PAGE>
Lease
City of Watsonville - California Tube Labs
Friday, June 09, 1995
________________________________________________________________________________
The foregoing resolution was introduced at a regular meeting of the Council
of the City of Watsonville, held on the 13th day of June, 1995, by Council
Member Rios, who moved its adoption, which motion being duly seconded by Council
Member Hurst, was upon roll call carried and the resolution adopted by the
following vote:
AYES: COUNCIL MEMBERS: Hurst, McFarren, Osmer, Rios, Bobeda, Campos
NOES: COUNCIL MEMBERS: None
ABSENT: COUNCIL MEMBERS: Alcala
/s/ Tony Campos
---------------------------------------------
Tony Campos, Mayor
ATTEST:
/s/ Lorraine Washington
- ----------------------------
City Clerk
APPROVED AS TO FORM:
/s/
- ----------------------------
City Attorney
10.18-43
<PAGE>
RESOLUTION NO. 55-96 (CM)
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF WATSONVILLE
APPROVING FIRST AMENDMENT TO THE JUNE 13, 1995, LEASE AGREEMENT
BETWEEN THE CITY OF WATSONVILLE AND CALIFORNIA TUBE LABORATORY,
INC. FOR A 21,600 SQ. FT. BUILD-TO-SUIT MANUFACTURING FACILITY
LOCATED AT 125 AVIATION WAY, WATSONVILLE, AND DIRECTING THE CITY
MANAGER TO EXECUTE SAME.
[Amends Resolution No. 171-95 (CM)]
BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF WATSONVILLE, CALIFORNIA,
AS FOLLOWS:
That the First Amendment to the June 13, 1995, Lease Agreement between the
City of Watsonville and California Tube Laboratory, Inc. for a 21,600 sq. ft.
build-to-suit manufacturing facility located at 125 Aviation Way, Watsonville, a
copy of which is attached hereto and incorporated herein by this reference, is
fair and equitable and is hereby ratified and approved.
That the City Manager be and is hereby authorized and directed to execute
First Amendment to Lease Agreement for and on behalf of the City of Watsonville.
10.18-44
<PAGE>
The foregoing resolution was introduced at a regular meeting of the Council
of the City of Watsonville, held on the 27th day of February, 1996, by Council
Member Campos, who moved its adoption, which motion being duly seconded by
Council Member Alcala, was upon roll call carried and the resolution adopted by
the following vote:
AYES: COUNCIL MEMBERS: Campos, Hurst, McFarren, Osmer, Rios, Alcala,
Bobeda
NOES: COUNCIL MEMBERS: None
ABSENT: COUNCIL MEMBERS: None
/s/ Betty Bobeda
--------------------------------------------
Betty Bobeda, Mayor
ATTEST:
/s/ Lorraine Washington
- ----------------------------
City Clerk
APPROVED AS TO FORM:
/s/
- ----------------------------
City Attorney
10.18-45
<PAGE>
FIRST AMENDMENT TO LEASE AGREEMENT
BETWEEN THE CITY OF WATSONVILLE
AND CALIFORNIA TUBE LABORATORY, INC.
THIS FIRST AMENDMENT TO LEASE AGREEMENT (Build-to-Suit) is entered into by
and between the CITY OF WATSONVILLE ("Landlord") and CALIFORNIA TUBE LABORATORY,
INC. ("Tenant") this 28th day of February, 1996. The Tenant and Landlord agree
as follows:
RECITALS
WHEREAS, Landlord and Tenant have previously executed a Lease Agreement for
a 21,600 sq. ft. build-to-suit manufacturing facility located at 125 Aviation
Way, Watsonville, dated June 13, 1995;
WHEREAS, the First Amendment to the Lease Agreement for a 21,600 sq. ft.
build-to-suit manufacturing facility is in the best interest of the Landlord and
Tenant.
NOW, THEREFORE, the Landlord and the Tenant agree that the Agreement shall
be amended as follows:
1. SECTION 1.2. PREMISES. EXHIBIT "B" IS REPLACED BY AMENDED EXHIBIT "B"
ATTACHED HERETO AND INCORPORATED HEREIN.
2. Section 1.4.1. (Base Rent) of the June 14, 1995, Lease is deleted in its
entirety and replaced with the following language:
"SECTION 1.4.1. BASE RENT.
TENANT SHALL PAY TO LANDLORD AS A BASE MINIMUM RENT WITHOUT DEDUCTION,
SETOFF, PRIOR NOTICE OR DEMAND, BUT SUBJECT TO ANNUAL ADJUSTMENTS AS
PROVIDED HEREIN THE FOLLOWING SUMS:
THE BASE RENT FOR THE FIRST TWO YEARS OF THE INITIAL TERM WILL BE
FOURTEEN THOUSAND SIX HUNDRED AND EIGHTY-EIGHT DOLLARS ($14,688) PER
MONTH.
BEGINNING ON THE SECOND ANNIVERSARY OF THE COMMENCEMENT DATE, THE BASE
RENT WILL INCREASE TO FIFTEEN THOUSAND FIVE HUNDRED AND FIFTY-TWO
DOLLARS ($15,552) PER MONTH.
10.18-46
<PAGE>
IF ANY TIME DURING THE INITIAL TERM, ANY PORTION OF THE "MEZZANINE
AREA," AS DEPICTED ON EXHIBIT "B," IS USED FOR ANY PURPOSE OTHER THAN
STORAGE OF EQUIPMENT, MATERIAL OR SUPPLIES THEN THE BASE RENT FOR ANY
SUCH AREA OR PORTION OF SHALL BE THE BASE RENT (AS ADJUSTED PURSUANT
TO SECTION 1.4.1.1.), DIVIDED BY 21,600."
3. All other terms and conditions of the Lease Agreement dated June 13, 1995,
shall remain in full force and effect.
10.18-47
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
to Lease Agreement the day and year first hereinabove written.
LANDLORD TENANT
City of Watsonville, California Tube Laboratory, Inc.
a municipal corporation a corporation
/s/ Steven M. Salomon /s/ Gordon J. Sales
- ---------------------- ------------------------
by Steven M. Salomon, by Gordon J. Sales
its City Manager its President
/s/ James Martin
-------------------------
by James Martin
its Vice President
Dated: 3/13/96 Dated: 3/5/96
-------- -------
ATTEST:
/s/ Lorraine Washington
- ------------------------
City Clerk
APPROVED AS TO FORM:
/s/
- ------------------------
10.18-48
<PAGE>
EXHIBIT A
CALTUBE LAB LEASE
SITUATE in Rancho de los Corralitos, City of Watsonville, County of Santa
Cruz, State of California
BEING a portion of lands of the City of Watsonville recorded in Book 666,
at Page 505, Official Records of Santa Cruz County
BEGINNING at the most northwesterly corner of Parcel A, Watsonville Minor
Land Division No. 5-87, Parcel Map of Airways Industrial Park, filed in Volume
48 of Parcel Maps, at Page 14, from which point the northwest corner of that
certain twelve foot (12') strip of land deeded to the City of Watsonville bears
S.88 degrees 03'W., 13.07' distant; thence from the Point of Beginning
1. Northeasterly curving to the right from a tangent bearing of N.21
degrees 40'40"E. Thru a central angle of 23 degrees 43'40" with a
radius of 400 feet and an arc length of 16567' along the easterly
sideline of Aviation Way, a city street of varying width; thence along
said easterly sideline.
2. N. 45'24'29" E., 65.56' feet; thence curving to the right along the
easterly and southerly sideline of said Aviation Way.
3. Northeasterly thru a central angle of 42 degrees 38'31" with a radius
of 150.00' and an arc length of 111.64'; thence along said southerly
sideline of said Aviation Way
4. N. 88 degrees 03'E., 240.65'; thence leaving said sideline of Aviation
Way
5. S. 1 degrees 57'E., 218.00' to a point on said northerly line of
parcel I as shown on that certain parcel map of lands of Airways
Industrial Park, Watsonville Minor Land Division No. 25-77 filed in
Volume 26 of Parcel Maps at page 41; thence westerly along the
northerly line of parcels 1.2 and 3 of said Airways Industrial Park.
6. S. 88 degrees 03'W., 486.00' to the Point of Beginning
CONTAINING 88,226.6 square feet, more or less
PORTION OF ASSESSOR'S PARCEL NO. 15-151-05
/s/ /s/
--------------------------- ----------------------
Approved as to Description Approved as to Form
10.18-A-1
<PAGE>
EXHIBIT B
GRAPHIC SHOWING SITE PLAN OF AVIATION WAY
WITH SITE AREA, BUILDING AREAS AND TOTAL PARKING
10.18-B-1
<PAGE>
EXHIBIT B
GRAPHIC SHOWING SCHEMATIC FLOOR PLAN - FIRST FLOOR
10.18-B-2
<PAGE>
EXHIBIT B
GRAPHIC SHOWING FLOOR PLAN-SECOND FLOOR
10.18-B-3
<PAGE>
EXHIBIT B
GRAPHIC SHOWING SCHEMATIC WALL SECTION
AND EXTERIOR ELEVATIONS
10.18-B-4
<PAGE>
EXHIBIT C
June 8, 1995
Mr. Ned Madonia
Director of Housing & Economic Development
City of Watsonville
231 Union Street
Watsonville, CA 95076
Reference: Architectural Engineering Fee Proposal
- ---------
California Tube Laboratory, Inc.
New Facility (Shell), Aviation Way, Watsonville
Dear Mr. Madonia,
We very much appreciate the opportunity of providing the City of Watsonville
with a proposal for complete Architectural and Engineering services for the
above-referenced project.
This proposal covers the preparation of all Schematic and Design Development
Drawings as well as final Construction Documents (including Drawings,
Specifications, Bid Documents and appropriate modifications to the City's
standard Construction Contract Agreement). Construction Phase services to be
performed by this office have not yet been fully defined, however, the proposal
does include an allowance for normal Construction Phase work. Should the
requirements for Construction Phase services substantially change, the Agreement
could be amended (up or down) to cover the actual services to be performed.
The Shell facilities are generally defined as follows:
Building (General): 21,528 sf building (footprint) with 5,616 sf 2nd
Floor/Mezzanine. Building height will be approximately 27 feet.
Construction shall be precast (tilt-up) concrete exterior walls with wood
roof and second floor structure.
Building (Specific Improvements):
Approximately 3,100 sf of fully improved office/employee areas (on
first and second floors). Improvements include interior partitioning,
doors, windows, suspended acoustical ceilings, finish flooring,
painting, complete HVAC system, electrical power and lighting (30
2'x4' fixtures) and prewiring for telephone and data lines.
936 sf 2-position dock-height shipping/receiving dock.
Approximately 23,108 sf of unimproved manufacturing and warehouse
areas.
10.18-C-1
<PAGE>
Insulated ceilings/roofs as appropriate.
4 large grade-level overhead doors.
Aluminum/glass storefront entry and window systems as shown on
preliminary drawings.
2 toilet rooms (fully improved).
Stubbed utilities for 3 additional toilet rooms.
Complete automatic fire sprinkler system.
Elevator.
Building electrical service: (Service to and including main
distribution panels only, except includes improved office areas and
general building lighting.)
1) 1,000 amps: 240 volt, 3-phase.
2) 1,000 amps: 480 volt, 3-phase.
Building lighting: 80 foot candles at all manufacturing/warehouse
areas.
Domestic water and natural was stubbed to designated main distribution
locations in building and including distribution to building areas
improved as part of the building shell construction.
Separate gas and electric metering for Tenant and up to three
subtenants.
Site Improvements: Complete site development including:
Grading and earthwork.
Storm drainage.
Site utilities.
Paving, parking, loading and paved yard areas.
Truck pit and ramp.
Landscaping and irrigation.
Fencing and site security.
Site lighting.
Miscellaneous site structures (retaining walls, trash enclosure,
hydrogen enclosure, curbs, railings).
Note: As directed by the City, offsite improvements not included in
this proposal.
We have reviewed the project with both City Staff and the Tenant
(California Tube Laboratory), and have toured the existing Tube Lab
facility in Santa Cruz with our
10.18-C-2
<PAGE>
consulting Mechanical and Electrical Engineers. We understand the scope of
work for building Shell facilities which the City is responsible to
provide, as well as the scope of the Tenant Improvement package which will
be the sole responsibility of the Tenant.
10.18-C-3
<PAGE>
================================================================================
EXHIBIT D
100 AVIATION WAY
ENVIRONMENTAL REMEDIATION REPORTS
AS OF JUNE 1, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Date Subject From
- --------------------------------------------------------------------------------
<S> <C> <C>
04/27/95 Letter to provide environmental Terra Tech
services subsurface investigation at the
100 Aviation Way.
- --------------------------------------------------------------------------------
11/04/94 Excavation soil sampling results - Sampson Engineering Inc.
Aviation Gas/Jet Fuel Underground
Tanks and Pipeline Area - SEI No.
94074
- --------------------------------------------------------------------------------
11/04/94 Excavation soil sampling results - Sampson Engineering Inc.
Aviation Gas/Jet Fuel Underground
Tanks and Pipeline Area - SEI No.
94074
- --------------------------------------------------------------------------------
11/03/94 Test results for the Airport Fuel Farm ToxScan
(no. T-11381)
- --------------------------------------------------------------------------------
11/01/94 Draft Excavation soil sampling results Sampson Engineering Inc.
- Aviation Gas/Jet Fuel Underground
Tanks and Pipeline Area - SEI No.
94074
- --------------------------------------------------------------------------------
10/06/94 Letter re ground water contamination California Regional Water
and attachments. Quality Control Board
Central Coast Region
- --------------------------------------------------------------------------------
09/30/94 Letter to County of Santa Cruz Board Jim Norwood, Fire
of Supervisors re leak in underground Department
piping. Underground Storage Tank
Unauthorized Release/Contamination
Site Report.
- --------------------------------------------------------------------------------
07/20/94 Letter re subsurface investigation California Regional Water
Quality Control Board
Central Coast Region
- --------------------------------------------------------------------------------
07/01/94 Letter to Roger W. Briggs re Ground Edward B. Mondragon
Water Investigation
- --------------------------------------------------------------------------------
</TABLE>
10.18-D-1
<PAGE>
================================================================================
EXHIBIT D
100 AVIATION WAY
ENVIRONMENTAL REMEDIATION REPORTS
AS OF JUNE 1, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Date Subject From
- --------------------------------------------------------------------------------
<S> <C> <C>
11/16/92 Letter to City of Watsonville, 100 Jim Norwood, Fire
Aviation Way, Notice of Annual Department
Underground Tank Test
- --------------------------------------------------------------------------------
10/15/92 Letter to Jim Norwood re Monitoring California Regional Water
well MW11 Quality Control Board
Central Coast Region
- --------------------------------------------------------------------------------
10/07/92 Letter to Harvey Packard Jim Norwood, Fire
Department
- --------------------------------------------------------------------------------
10/06/92 Monitoring well samples from well Weber & Assoc.
MW11
- --------------------------------------------------------------------------------
08/20/92 Letter to Jim Norwood re California Regional Water
Underground tank program; ground Quality Control Board
water monitoring Central Coast Region
- --------------------------------------------------------------------------------
04/03/92 Memo to Kim Wirht re monitoring David Williams
airport fuel tanks.
- --------------------------------------------------------------------------------
12/31/91 Permit granting operation of two Fire Department
12,000-gallon underground tanks
- --------------------------------------------------------------------------------
12/09/91 Memo to Jim Norwood re Sharon Reed
containment tank
- --------------------------------------------------------------------------------
07/07/91 Letter to Watsonville Airport re Jim Norwood, Fire
underground tank records Department
- --------------------------------------------------------------------------------
04/27/91 Letter to Jim Norwood re The Don Chapin Co.
contaminated soil removal
- --------------------------------------------------------------------------------
04/22/91 Invoices and purchase orders from Various agents
6/30/88 to 4/22/91
- --------------------------------------------------------------------------------
04/08/91 Memo to Chuck Comstock re Dave Williams
pesticide cleanup
- --------------------------------------------------------------------------------
04/02/91 Uniform Hazardous Waste Manifest
- --------------------------------------------------------------------------------
03/27/91 Letter to Jim Norwood re The Don Chapin Co.
Contaminated Soil Removal
- --------------------------------------------------------------------------------
</TABLE>
10.18-D-2
<PAGE>
================================================================================
EXHIBIT D
100 AVIATION WAY
ENVIRONMENTAL REMEDIATION REPORTS
AS OF JUNE 1, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Date Subject From
- --------------------------------------------------------------------------------
<S> <C> <C>
03/20/91 Letter to Jim Norwood re Pesticide California Regional Water
Remediation and Soil Sampling Report Quality Control Board
- --------------------------------------------------------------------------------
02/25/91 Report of Laboratory Analysis Pace Inc.
- --------------------------------------------------------------------------------
02/15/91 Letter to Jim Norwood re Pesticide California Regional Water
Cleanup Quality Control Board
Central Coast Region
- --------------------------------------------------------------------------------
02/05/91 Letter and agreement to Joe Hayes Chemical Waste
Management, Inc.
- --------------------------------------------------------------------------------
01/01/91 Pesticide remediation and soil G.E. Weber & Assoc.
sampling report for Watsonville
Municipal Airport
- --------------------------------------------------------------------------------
12/27/90 Chemical Waste Management Reports Chemical Waste
Management
- --------------------------------------------------------------------------------
12/21/90 Generator's Certification of Chemical Waste
Representative Sample Management, Inc.
- --------------------------------------------------------------------------------
12/05/90 Letter to Vern Jones, California Jim Norwood
Regional Water, re pesticide cleanup
- --------------------------------------------------------------------------------
11/28/90 Memo to Chuck Comstock re Dave Williams
Pesticide Contamination
- --------------------------------------------------------------------------------
11/20/90 Letter to Dave Williams re The Don Chapin Co.
contaminated soil removal
- --------------------------------------------------------------------------------
10/01/90 Fee Schedule Kettleman Hills Disposal
Facility
- --------------------------------------------------------------------------------
09/04/90 Letter to Dave Williams re Pesticide California Regional Water
Contamination Quality Control Board
Central Coast Region
- --------------------------------------------------------------------------------
08/13/90 Memo to Don French re ground water Robert Ketley
contamination
- --------------------------------------------------------------------------------
</TABLE>
10.18-D-3
<PAGE>
<TABLE>
<CAPTION>
================================================================================
EXHIBIT D
100 AVIATION WAY
ENVIRONMENTAL REMEDIATION REPORTS
AS OF JUNE 1, 1995
- --------------------------------------------------------------------------------
Date Subject From
- --------------------------------------------------------------------------------
<C> <S> <C>
08/10/90 Letter to California Regional Water The Southland Corp.
Quality Control Board re Sampling
report
- --------------------------------------------------------------------------------
07/13/90 Letter to Vern Jones, California, Dave Williams
Regional Water Quality Control Board
re Investigation Report
- --------------------------------------------------------------------------------
07/12/90 Letter to D. Williams re Phase II soil Weber and Associates
sampling for pesticide
- --------------------------------------------------------------------------------
07/03/90 Letters to D. Williams re Investigative California Regional Water
Report (04/20/90) Quality Control Board
Central Coast Region
- --------------------------------------------------------------------------------
02/15/90 Inspection Notice
- --------------------------------------------------------------------------------
01/01/90 Underground tank inspection from Fire Department
September 1986 to January 1990
- --------------------------------------------------------------------------------
12/12/89 Letter to Chuck Comstock re soil Weber and Associates
sampling for pesticides
- --------------------------------------------------------------------------------
12/01/89 Certified Analytical Results Chain of ToxScan Inc.
Custody Forms from 11/10/89 to
12/01/89
- --------------------------------------------------------------------------------
09/15/89 Letter to David Williams re soil California Regional Water
contaminate with pesticide residues Quality Control Board
Central Coast Region
- --------------------------------------------------------------------------------
09/15/89 Letter D. Williams re Soil California Regional Water
contaminated with pesticide residues Quality Control Board
Central Coast Region
- --------------------------------------------------------------------------------
07/31/88 Field Report
================================================================================
</TABLE>
10.18-D-4
<PAGE>
<TABLE>
<CAPTION>
================================================================================
EXHIBIT E
120 AVIATION WAY
ENVIRONMENTAL REMEDIATION REPORTS
AS OF JUNE 1, 1995
- --------------------------------------------------------------------------------
Date Subject From
- --------------------------------------------------------------------------------
<C> <S> <C>
05/17/95 Letter Proposed Remedial Strategy, Acton, Mickelson
Monitoring Well Destruction & Environmental, Inc.
Ground Water Monitoring
- --------------------------------------------------------------------------------
04/21/95 Quarterly Monitoring Report First Acton, Mickelson,
Quarter __________ Dam, Inc.
- --------------------------------------------------------------------------------
04/13/95 Letter to Exxon Co. re Subsurface California Regional Water
Investigation Quality Control Board-
Central Coast Region
- --------------------------------------------------------------------------------
05/18/94 Letter to Kevin Badgett, Exxon Co., California Regional Water
FAS #7-7159; Ground Water Quality Control Board
Remediation Central Coast Region
- --------------------------------------------------------------------------------
04/20/94 Letter to Kevin Badgett, Exxon Co., California Regional Water
United Flight Service Ground Water Quality Control Board
Monitoring Central Coast Region
- --------------------------------------------------------------------------------
02/08/94 Letter to Kevin Badgett, Exxon Co. California Regional Water
FAS #7-5046; failure to submit Quality Control Board
Central Coast Region
- --------------------------------------------------------------------------------
06/11/93 Letters of 6/11/93, 3/8/93, 2/3/93, to California Regional Water
Marla Guensler, Exxon Co., Exxon 7- Quality Control Board
5046; Ground Water Contamination Central Coast Region
- --------------------------------------------------------------------------------
12/04/92 Letter to McDougall, Santa Cruz California Regional Water
Consolidated Emergency Quality Control Board
Communication Center Central Coast Region
- --------------------------------------------------------------------------------
10/15/92 Letter to Jim Norwood Monitoring California Regional Water
Well MW-11 Quality Control Board
Central Coast Region
- --------------------------------------------------------------------------------
09/10/92 Letter to Delta Environmental Pace Inc.
Consultants re laboratory analyses for
samples received 9/4/92 Exxon 7-5046
- --------------------------------------------------------------------------------
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
================================================================================
EXHIBIT E
120 AVIATION WAY
ENVIRONMENTAL REMEDIATION REPORTS
AS OF JUNE 1, 1995
- --------------------------------------------------------------------------------
Date Subject From
- --------------------------------------------------------------------------------
<C> <S> <C>
09/03/92 Letter to Marla D. Guensler, Exxon California Regional Water
Co., Exxon FA #7-5046; Ground Quality Control Board
Water Monitoring Central Coast Region
- --------------------------------------------------------------------------------
07/13/92 Letter to CRWQCB-CCR re Work Exxon Co.
Plan for Well Construction
- --------------------------------------------------------------------------------
06/02/92 Letter to CRWQCB-CCR re Quarterly Exxon Co.
Monitoring Report, First Quarter of
1992
- --------------------------------------------------------------------------------
04/20/92 Letter to Marla Guensler, Exxon Co., California Regional Water
Request to install additional Quality Control Board
monitoring well Central Coast Region
- --------------------------------------------------------------------------------
10/10/91 Letter to CRWQCB-CCR re 1991 Exxon Co.
Quarterly Monitoring
- --------------------------------------------------------------------------------
03/15/91 Letter to John Goni, CRWQCB-CCR Delta Environmental
re Quarterly Monitoring Report, First Consultants, Inc.
Quarter of 1991
- --------------------------------------------------------------------------------
03/15/91 Letter to Whom It May Concern re Jim Norwood
underground tank
- --------------------------------------------------------------------------------
03/07/91 Letter to Hugh J. Miles re result of Jim Norwood
the composite samples
- --------------------------------------------------------------------------------
02/27/91 Letter to Jim Norwood re Disposal of Delta Environmental
Excavated Soil Consultants, Inc.
- --------------------------------------------------------------------------------
10/29/90 Letter to CRWQCB-CCR re quarterly Exxon Co.
report of ground water analyses
- --------------------------------------------------------------------------------
09/19/90 Letter to Exxon Co. re Waste California Regional Water
Discharge Requirements Quality Control Board
Central Coast Region
- --------------------------------------------------------------------------------
09/14/90 Memo re Waste Discharge CRWQCB-CCR
Requirements for Exxon Co.
- --------------------------------------------------------------------------------
</TABLE>
E-2
<PAGE>
================================================================================
EXHIBIT E
120 AVIATION WAY
ENVIRONMENTAL REMEDIATION REPORTS
AS OF JUNE 1, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Date Subject From
- --------------------------------------------------------------------------------
<S> <C>
08/01/90 Letter to Jim Norwood re monitoring Exxon
report for United Flight Services
- --------------------------------------------------------------------------------
06/01/90 Letter to Jim Norwood re hazardous Exxon Co.
material management plan
- --------------------------------------------------------------------------------
06/01/90 Letter to Calif. Regional Water Exxon Co.
Quality Control Board-Central Coast
Region (CRWQCB-CCR) re
remediation project
- --------------------------------------------------------------------------------
05/08/90 Underground Tank Inspection Airport
- --------------------------------------------------------------------------------
05/03/90 Underground Hazardous Material Fire Department
Storage Facility Report
- --------------------------------------------------------------------------------
02/05/90 United Flight Services (Former Exxon California Regional
5046) Water
Quality Control Board
Central Coast Region
- --------------------------------------------------------------------------------
01/23/90 Correspondence from and to Jaffe
Trutanich, Scatena, & Blum and from
and to Jim Norwood re United Flight
Services
- --------------------------------------------------------------------------------
12/12/89 Memo to City Attorney re D. Williams
Underground Storage Hazardous
Materials
- --------------------------------------------------------------------------------
12/06/89 Letter to United Flight re Inspection Fire Department
Notice
- --------------------------------------------------------------------------------
10/17/89 Correspondence between Exxon Co.
and CRWQCB-CCR re environmental
investigation from 06/15/89 to
10/17/89
- --------------------------------------------------------------------------------
03/28/88 Letter to James Kerr, Exxon Co. Fire Department
- --------------------------------------------------------------------------------
03/14/88 Letter to CRWQCB-CCR re letter to Bronson, Bronson, &
James Kerr McKinnon
- --------------------------------------------------------------------------------
</TABLE>
E-3
<PAGE>
================================================================================
EXHIBIT E
120 AVIATION WAY
ENVIRONMENTAL REMEDIATION REPORTS
AS OF JUNE 1, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Date Subject From
- --------------------------------------------------------------------------------
<S> <C> <C>
12/07/87 Underground Tank Inspection Fire Department
- --------------------------------------------------------------------------------
12/07/87 Underground tank inspection reports Fire Department
- --------------------------------------------------------------------------------
11/17/87 Correspondence between E. A.
Engineering, Science and Technology,
Inc. and CRWQCB-CCR re Exxon
- --------------------------------------------------------------------------------
10/30/87 Hazardous materials waste treatment
and/or disposal method on site or off
site from
- --------------------------------------------------------------------------------
09/04/87 Letter to E. A. Engineering re Well City Watsonville
#18 Log & Well Production profile
- --------------------------------------------------------------------------------
08/14/87 Underground Tank Inspection for Fire Department
February, April, May, July & August
1987
- --------------------------------------------------------------------------------
07/22/87 Letter to United Flight Services re Fire Dept.
Assembly bill 2185 & 2187
- --------------------------------------------------------------------------------
06/03/87 Letter to CRWQCB-CCR re United Bronson, Bronson &
Services Property McKinnon
- --------------------------------------------------------------------------------
06/01/87 Letter to E. A. Engineering re Well City of Watsonville
logs
- --------------------------------------------------------------------------------
06/01/87 Letter to Building Dept. Closure Plan Paradiso _________ Co.
- --------------------------------------------------------------------------------
04/14/87 Correspondence between United
Flight Services and CRWQCB-CCR
from 3/4/87 to 4/14/87
- --------------------------------------------------------------------------------
02/09/87 Letter to United Flight Services re test Jim Norwood
results of soil samples
- --------------------------------------------------------------------------------
02/03/87 Letter to Fire Dept. re soil sampling Terratech
results report for United Flight
- --------------------------------------------------------------------------------
12/23/86 Letter to Terratech re soil samples ToxScan Inc.
received 12/10/86
- --------------------------------------------------------------------------------
</TABLE>
E-4
<PAGE>
================================================================================
EXHIBIT E
120 AVIATION WAY
ENVIRONMENTAL REMEDIATION REPORTS
AS OF JUNE 1, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Date Subject From
- --------------------------------------------------------------------------------
<S> <C> <C>
11/05/86 Correspondence between United
Flight Services and Watsonville Fire
Department from 08/21/86 to 11/5/86
- --------------------------------------------------------------------------------
06/27/86 Underground Tank Inspection Reports Fire Dept.
- --------------------------------------------------------------------------------
04/13/86 Agreement between United Flight and
City of Watsonville re Hazardous
Material
- --------------------------------------------------------------------------------
02/25/86 Applications to use, install, conduct, United Flight
process or carry on operation
involving or creating conditions
deemed hazardous to life or property
from 2/25/86 to 4/13/86
- --------------------------------------------------------------------------------
06/29/84 Hazardous Substance Storage Calfornia Resources Co
Statement
- --------------------------------------------------------------------------------
06/29/84 Application for permit to operate United Flight
underground storage tank
- --------------------------------------------------------------------------------
04/11/77 Letter to United Flight Services re D. Williams
fueling of aircrafts
- --------------------------------------------------------------------------------
05/03/68 Aircraft Fueling Instructions
- --------------------------------------------------------------------------------
01/19/67 Fire Department Permit
- --------------------------------------------------------------------------------
09/26/66 Letter to Humble Oil & Refinery Co. Fire Department
re Aviation Fuel facilities
- --------------------------------------------------------------------------------
03/08/65 Memo to Building Official re Aviation Fire Chief
fuel facilities
================================================================================
</TABLE>
E-5
<PAGE>
EXHIBIT 11
INTERCELL CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended Eleven-Month Period
September 30, Ended September 30,
---------------------------- -------------------
1997 1996 1995
------------ ----------- -------------------
<S> <C> <C> <C>
Statement of operations data:
Net loss $(16,481,000) $(5,283,000) $ (1,321,000)
Deemed preferred stock dividend relating
to in-the-money conversion terms 1,072,000 1,625,000 --
Accretion on preferred stock 460,000 -- --
------------ ----------- -------------------
Net loss applicable to common stockholders (18,013,000) (6,908,000) (1,321,000)
Weighted-average number of
shares or common stock outstanding 18,114,038 13,072,683 7,391,275
Average common and equivalent shares
outstanding/(1)/ -- -- --
------------ ----------- -------------------
18,114,038 13,072,683 7,391,275
============ =========== ===================
Net (loss) per common shares $ (0.99) $ (0.54) $ (0.18)
============ =========== ===================
</TABLE>
- -----------------
/(1)/ The difference between primary and fully diluted earnings per share is
not material.
11-1
<PAGE>
EXHIBIT 23
----------
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Intercell Corporation:
We consent to incorporation by reference in the restriction statement (No.
333-604) on Form S-8 of Intercell Corporation of our report dated January 16,
1998, relating to the consolidated balance sheets of Intercell Corporation and
subsidiaries as of September 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended and for the eleven month period ended September 30, 1995, and the
related schedule, which report appears in the September 30, 1997, annual report
on Form 10-K of Intercell Corporation.
/s/ KPMG Peat Marwick LLP
San Jose, California
February 3, 1998
23.1-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERCELL
CORPORATION'S FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1997 AND FOR THE FISCAL
YEAR ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 107,000
<SECURITIES> 0
<RECEIVABLES> 996,000
<ALLOWANCES> 262,000
<INVENTORY> 982,000
<CURRENT-ASSETS> 3,541,000
<PP&E> 2,783,000
<DEPRECIATION> 419,000
<TOTAL-ASSETS> 7,055,000
<CURRENT-LIABILITIES> 3,655,000
<BONDS> 16,000
3,658,000
0
<COMMON> 21,285,000
<OTHER-SE> (21,559,000)
<TOTAL-LIABILITY-AND-EQUITY> 7,055,000
<SALES> 7,729,000
<TOTAL-REVENUES> 7,987,000
<CGS> 8,029,000
<TOTAL-COSTS> 17,106,000
<OTHER-EXPENSES> 7,276,000
<LOSS-PROVISION> 262,000
<INTEREST-EXPENSE> 179,000
<INCOME-PRETAX> (16,481,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,481,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,481,000)
<EPS-PRIMARY> .99
<EPS-DILUTED> .99
</TABLE>
