<PAGE> 1
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 June 28, 1997
or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from _______ to ______
Commission file number: 0-24170
SIGMA CIRCUITS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0107167
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identifiction Number)
393 Mathew Street
Santa Clara, California 95050
(408) 727-9169
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
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
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. X
The approximate aggregate value of the common stock held by non-
affiliates of the Registrant, based upon the last sale price of the
common stock reported on the Nasdaq National Market was $25,659,368 as
of September 12, 1997.
The number of shares outstanding of the Registrant's common stock,
$.001 par value, was 4,142,640 at September 12, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in
this Report on Form 10-K:
Definitive Proxy Statement in connection with 1997 Annual Meeting
of Stockholders to be filed with the Commission pursuant to
Regulation 14A is incorporated by reference in Part III.
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PART I
Item 1. Business
The Company
The following discussion of the Company's business contains forward-
looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those discussed
herein under "Risk Factors." Factors that could cause or contribute
to such differences include, but are not limited to, those discussed
herein, as well as those discussed in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section in
Part II.
Sigma Circuits, Inc. ("Sigma" or the "Company") is a leading time-
sensitive manufacturer of specialized electronic interconnect
products, including multilayer rigid printed circuit boards ("PCBs"),
backplane assemblies and subassemblies and flexible circuits. The
Company's quick-turn manufacturing capabilities are designed to meet
the time-to-market and time-to-volume requirements of electronic
original equipment manufacturers ("OEMs") and contract manufacturers
whose markets and products are characterized by high growth rates and
short product development cycles. The Company's customers include
electronic OEMs such as The Hewlett-Packard Company, Northern
Telecommunications Limited, Iomega Corporation, Qualcomm Incorporated,
Proxima Corporation, Tekelec Incorporated, Ericsson Corporation, and
Bay Networks Incorporated and contract manufacturers such as Quadrus
Manufacturing Incorporated, Computrol Incorporated, and Solectron
Corporation. Customer relationships established by providing quick-
turn services during the prototype stage of the product life cycle
give the Company an advantage in securing subsequent higher volume pre-
production and production orders. Management believes that the
Company is one of a limited number of companies that can produce a
broad range of electronic interconnect products on both a quick-turn
and production basis.
The Company offers a wide array of sophisticated manufacturing,
engineering and systems integration services to meet its customers'
electronic interconnect needs. The Company has established a
reputation in the quick-turn market for consistently providing high
quality, on-time services using advanced process technologies. As
product life cycles and lead times continue to shorten, the Company is
well positioned to leverage its core competency in quick-turn
manufacturing to serve its customers through a product's entire life
cycle. The Company accomplishes this "one stop shopping" approach
through a focused manufacturing strategy for each facility. The
Company's Santa Clara PCB division in northern California focuses on
quick-turn opportunities for multilayer PCBs while the Stockton PCB
division in central California utilizes its lower cost base to
manufacture higher production volumes on a time critical basis. The
Company has also established divisions dedicated to the manufacture of
backplane assemblies and flexible circuits products in Santa Clara,
California.
The Company has benefited from industry trends such as the increased
demand for complex electronic products, shorter product life cycles,
the increasing complexity and miniaturization of electronic products,
increased reliance of customers on a narrower supplier base and
industry consolidation. The Company intends to enhance its reputation
as a reliable, high quality quick-turn manufacturer of electronic
interconnects and leverage that reputation to serve its fast growing
customers across the spectrum of interconnect solutions and throughout
the volume requirements of the product life cycle. The Company's
strategy also includes improving its profitability through an
increasingly focused manufacturing approach that should improve the
product mix between the Santa Clara quick-turn PCB division and the
Stockton volume PCB division and increase capacity utilization in the
Company's Systems Integration (including backplane assemblies) and
Flexible Circuits divisions.
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Item 1. Business (Continued)
Industry Overview and Trends
Electronic interconnects such as PCBs, backplane assemblies and
flexible circuits are used in a wide variety of industries, including
telecommunications, networking, computers, peripherals, industrial
instrumentation and medical and semiconductor equipment. Electronic
interconnect products are sold to both OEMs and contract manufacturers
in volumes that range from several units for prototypes, small
quantities for pre-production to large quantities for production
volumes. The lead times for PCBs generally fall into two categories,
"quick-turn" and "standard." Quick-turn lead times range from as
little as one day to 15 days for prototype and pre-production
quantities. Standard lead times typically run from six to twelve
weeks and are generally associated with larger volumes.
According to the Institute for Interconnecting and Packaging
Electronic Circuits ("IPC"), the U.S. market for electronics
manufacturing services ("EMS") was estimated at approximately $36
billion in 1996, an increase of 25% from 1995. The available EMS
market includes passive components ($15 billion), actual assembly ($13
billion), PCBs ($7.2 billion), and flexible circuits ($0.7 billion).
Printed Circuit Boards PCBs are the basic platform used in
virtually all advanced electronic equipment to direct, sequence and
control electronic signals between semiconductor devices (such as
microprocessors, memory and logic devices) and passive components
(such as resistors and capacitors). PCBs consist of one or more
layers of circuitry laminated to rigid insulating material composed of
fiberglass epoxy. Multilayer PCBs provide a three-dimensional system
with electronic signals traveling along horizontal planes of multiple
layers of copper circuitry patterns as well as along the vertical
plane through plated holes or vias.
According to the IPC, the U.S. market for PCBs was estimated at
approximately $7.2 billion in 1996, an increase of 10% from 1995.
According to the IPC, multilayer PCBs, the fastest growing segment
(14% growth from 1995 to 1996), accounted for approximately 74% of all
PCBs shipped in 1996. Despite its large size, the PCB market is
fragmented. In 1996, only eight of the approximately 700 independent
PCB manufacturers had annual sales in excess of $100 million which, in
the aggregate, represented only 25% of the PCB market. With the move
to outsourcing nearly complete in the PCB industry, suppliers to the
U.S. PCB market consist almost entirely of independent manufacturers
such as the Company with only a small number of manufacturing
facilities owned by OEMs.
Backplane Assemblies Backplane assemblies are configurations of
stamped and plated pins, plastic housings and other components mounted
on large, complex, multilayer PCBs. Backplane assemblies are used to
connect and supply power to other PCBs. Backplane assemblies are used
in data communications and telecommunications infrastructures, network
hubs, bridges, routers, semiconductor testing equipment and computer
peripheral devices such as servers and RAID Systems. Backplane
assembly is estimated to account for approximately five percent of the
EMS market.
Flexible Circuits Flexible circuits provide electrical connections
between components in electronic systems and are fabricated with a
thin, flexible polyimid or polyester laminate system. Flexible
circuits can conform to difficult packaging requirements and can bend
repeatedly without damage, which are important characteristics in both
portable and miniature electronic interconnect applications. Flexible
circuits are used in a variety of products including disk drives,
medical equipment and high-end consumer products such as cellular
telephones, CD players, camcorders, notebook computers, pagers,
printers, scanners and personal digital assistants.
According to the IPC, the U.S. market for flexible circuits was
estimated at approximately $715 million in 1996, an increase of 19%
from 1995. Unlike the PCB market, the U.S. market for flexible
circuits is more highly concentrated with nine of the approximately 60
independent producers accounting for 60% of the U.S. market in 1996.
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Item 1. Business (Continued)
The Company believes it is well positioned to capitalize on the
following trends in the electronic interconnect product market:
Increased Demand for Complex Electronic Products The market for
electronic products is growing rapidly as a result of new product
introductions, constant technological change, demands for a wider
variety of electronic product features and increasingly powerful and
less expensive electronic components. New markets have emerged in
data communications, telecommunications, computing and multimedia
while existing industries have significantly expanded applications in
areas such as digital and mobile communications, computer networking
and peripherals, instrumentation and industrial controls. The
proliferation of electronic products has resulted in a greater
emphasis on electronic product development and increased demand for
electronic interconnects in the prototype and pre-production
development stage.
Shorter Product Life Cycles for Electronic Products Rapid changes
in technology have significantly shortened the life cycle of complex
electronic products and have placed increased pressure on OEMs to
develop products as rapidly as possible. The time-to-market
considerations of OEMs have increased emphasis on the engineering and
quick-turn production of small unit volumes of electronic
interconnects in the prototype stage of product development. At the
next stage of the product life cycle, interconnect customers require
larger quantities of electronic products on a timely basis to satisfy
the time-to-volume needs of its customers. OEMs and contract
manufacturers also seek the services of quick-turn suppliers when
undelivered orders from volume suppliers threaten to create
unacceptable production delays. These time-to-market and time-to-
volume trends have highlighted the importance of front-end engineering
of electronic products, flexible manufacturing and the collaboration
among OEM designers and electronic interconnect manufacturers.
Increasing Complexity and Miniaturization of Electronic Products
Electronic component manufacturers have introduced successive
generations of higher performance devices in smaller configurations
enabling electronic OEMs to design more compact and portable products.
These high performance products have created a rapidly expanding
market for sophisticated electronic interconnects such as multilayer
PCBs and flexible circuits. The complexity of these products demands
higher sophistication in PCB manufacturing including narrower line
widths and spacing, smaller vias to connect the internal circuitry and
the precise positioning of traces and pads to accommodate a greater
density of surface mount components. The trend toward increasingly
sophisticated products requires considerable engineering support,
technological process investment and manufacturing expertise from
suppliers to produce sufficient high-quality electronic interconnects
in a timely fashion at acceptable costs.
Increased Demand for Providers of Multiple Electronic Interconnect
Solutions In order to avoid delays and costs during the product
life cycle, OEM's are increasingly turning to suppliers capable of
producing electronic interconnect products through all stages of
product development from design to volume production. Time-to-market
and time-to-volume considerations of OEMs have resulted in an increase
in the level of collaboration with suppliers. To meet their rapidly
changing electronic interconnect needs, many OEMs have moved to limit
their vendor base to technically qualified suppliers capable of
reliable, on-time delivery of a wide variety of electronic
interconnects and services including engineering, production, assembly
and testing for PCBs, backplane assemblies and flexible circuits.
Industry Consolidation According to the IPC, the number of PCB
manufacturers has decreased from approximately 1,800 companies in the
late 1970s to approximately 700 in the mid 1990s. The Company
believes this ongoing consolidation is primarily due to the
substantial capital investment and additional engineering and
manufacturing expertise required to make increasingly sophisticated
electronic interconnect products. As a result, many PCB manufacturers
cannot compete in these attractive market segments and have recognized
the need to merge or acquire to reach acceptable critical mass. OEMs
and contract manufacturers have also moved
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Item 1. Business (Continued)
to narrow their supplier base and form strategic relationships with
suppliers capable of providing a broad range of products and services.
These increasing relationships between OEMs and suppliers have
resulted in faster growth for the larger public electronic
interconnect companies in the industry.
Products and Services
The Company provides electronic interconnects such as multilayer PCBs,
backplane assemblies and subassemblies and flexible circuits on a time
critical basis at three levels of production: prototype, pre-
production and volume production. The Company's strategy is to assist
customers in meeting their increasingly important time-to-market and
time-to-volume requirements by translating its quick-turn expertise
into larger production volumes across multiple electronic interconnect
solutions.
Prototypes typically require short lead times of 24 hours to 15 days.
The Company provides prototype services to the product development
groups of rapidly growing companies that require small test quantities
(less than 50 pieces). Because these prototypes are critical to
product development, the customer is generally more concerned with on-
time delivery and high quality than with price.
Pre-production requirements involve the manufacture of limited
quantities of electronic interconnects (ranging from 50 to 5,000
pieces) during the transition period from prototype and testing to
volume production. Pre-production generally requires quick-turn
delivery to accommodate overall time-to-volume pressures or as a
temporary solution in the event of production delays. Although price
is a factor in selecting a pre-production manufacturer, the Company
believes that quality and on-time delivery are the critical factors
for OEMs and contract manufacturers.
Much of the Company's volume production represents subsequent
production for part numbers previously supplied in prototype or pre-
production volumes to the customer. The Company's volume production
is characterized by longer lead times than the prototype and pre-
production volumes but considerably less than the six to twelve week
standard lead times for volume production in the industry. With the
increased emphasis on lower cost as the product moves to full-scale
production, the Company believes that cost, quality and process
capability are the primary competitive factors. As product life
cycles continue to shorten, on-time delivery becomes an increasingly
important consideration.
Rigid Printed Circuit Boards The Company's Santa Clara PCB division
manufactures prototype and pre-production quantities on a quick-turn
basis and its Stockton PCB division manufactures volume production
quantities. This focused manufacturing strategy enables the Company
to accommodate large quick-turn orders to support customers' line
shortage or line start-up requirements. The Company believes this
focused approach differs from that of most of its competition and
allows it to respond quickly to customers' specific product
requirements.
The Company's current capabilities include the manufacture of
sophisticated PCBs of up to 22 layers with trace widths and spaces as
narrow as four mils (.004 inches). The Company's customers often
require complex multilayer PCBs requiring strict adherence to
electrical operating characteristics. Compliance with very tight
tolerances becomes more critical as the layer count increases beyond
eight layers. The Company has advanced technological process
capabilities such as ball grid array ("BGA"), chip on board ("COB"),
tape automated bonding ("TAB") and flip chip which enable production
of integrated circuit packages with higher lead counts, finer lead
pitch and alternative packaging systems.
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Item 1. Business (Continued)
Systems Integration The Company's Systems Integration division
follows a similar time-sensitive manufacturing strategy as used in its
PCB divisions. Integrated systems include PCB assemblies, backplane
assemblies and subassemblies and card cages fabricated from steel or
aluminum. Backplane complexity has increased significantly as
semiconductor speeds have increased and design requirements have
become more stringent. As backplanes become more complex, they
require the use of large multilayer PCBs of six or more layers. The
Company manufactures sophisticated backplanes of up to 22 layers and
.250 inches of thickness. The Company has added a fine pitch surface
mount assembly line to support the increasingly sophisticated
backplane assembly requirements. The Company's backplane assembly
operations include press-fit, pin-through-hole and surface mount
technology. Materials procurement and management services are critical
to the timely delivery of the Company's systems integration products
and services. The Company has invested heavily in the planning,
purchasing and the warehousing systems for electronic components and
card cages. The Company also manages a substantial consignment
inventory supplied by certain customers, primarily for use on their
quick-turn backplane assemblies and subassemblies.
Flexible Circuits The Company's Flexible Circuits division follows
a similar time-sensitive manufacturing strategy as used in its PCB
divisions. Flexible circuits are thin, lightweight circuits used to
interconnect other circuit boards and electronic devices within
electronic equipment. Flexible circuits are used in high speed
computers and other electronic equipment as replacements for cables
and other interconnect devices to improve product reliability and
performance. The Company produces high density, mechanically complex
flexible circuits that offer the advantages of improved signal speeds
and circuit densities, reduced part size, reduced weight, and
flexibility.
Manufacturing and Engineering Services The manufacture of today's
high technology electronic interconnects requires that the Company
provide sophisticated, computer integrated manufacturing services,
consisting of production tooling, manufacturing and electrical test
capabilities for its customers' products. The Company provides design
and engineering services in the early stages of product development.
These services assure that both mechanical and electrical
considerations are integrated to produce a high quality, cost
effective and manufacturable product. In addition, the Company also
performs comprehensive design for manufacturability and assembly
analysis and recommends appropriate changes to reduce production lead
times and manufacturing costs, and to improve manufacturing yields and
quality of PCBs or integrated systems.
Materials and Supplies
The Company orders certain materials and supplies based on purchase
orders received and accepted and seeks to minimize its inventory of
other materials that are not identified for use in filling specific
orders. In addition, the Company works closely with certain suppliers
to improve the materials and supplies used in its operations. Although
the Company uses a select group of suppliers, the materials and
supplies used in manufacturing and assembling its products are
generally readily available in the open market. The Company has also
established strategic alliances and stocking arrangements with key
vendors to increase protection against shortages. However, shortages
of certain materials and supplies have occurred in the past, and there
can be no assurance that future shortages, price increases that cannot
be passed through to customers or delays in obtaining materials will
not have a material adverse effect on the Company's business,
financial condition, cash flows and results of operations.
Patents
The Company holds no patents, and believes that patents and trademarks
are not important competitive factors in its industry.
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Item 1. Business (Continued)
Sales and Marketing
As part of its sales and marketing strategy, the Company targets
electronic OEMs who require a broad range of high-value added
services. The Company markets its manufacturing services through a
direct sales force of 26 salespersons and managers, supplemented by
six manufacturers' representative firms, and an in-house staff of 24
customer service representatives and applications engineers. Direct
sales personnel are located in California, Colorado, Massachusetts,
Minnesota, Texas, and Virginia. The Company uses its direct sales and
customer service personnel to promote the Company's value added
systems integration, flexible circuits and PCB products and services.
Customers
The Company's quick-turn manufacturing capabilities are designed to
meet the time-to-market and time-to-volume requirements of electronic
OEMs and contract manufacturers who are characterized by high growth
rates and short product development cycles. The Company's diversified
customer base is primarily composed of OEMs and contract manufacturers
in the telecommunications, networking, computers, peripherals,
industrial instrumentation and medical and semiconductor equipment
segments of the electronics industry.
The Company seeks to serve a sufficiently diversified group of
customers to avoid dependence on any one major customer or market
segment. In fiscal year 1997, the Hewlett-Packard Company accounted
for approximately 10% of net sales. In fiscal years 1996 and 1995,
none of the Company's customers accounted for more than 10% of net
sales. In addition, the Company's ten largest customers in the
aggregate accounted for approximately 30 to 40% of its net sales
during such periods.
Competition
The electronics industry is characterized by intense competition. The
Company faces significant competition in its quick-turn PCB and
flexible circuits product lines primarily from a number of regional
privately-held manufacturers. As the Company increasingly expands its
volume production of PCBs, backplane assemblies and flexible circuits
products, it will continue to face much larger competitors. Many of
these competitors have significantly greater financial, technical and
marketing resources, greater name recognition and a larger installed
customer base than the Company. These competitors include Altron
Incorporated, Hadco Corporation, Elexsys International Incorporated,
Pragetzer Industries Incorporated and Sanmina Corporation. In
addition, these competitors may have the ability to respond more
quickly to new or emerging technologies and may adapt more quickly to
changes in customer requirements and may devote greater resources to
the development, promotion and sale of their products than the
Company.
The Company competes on the basis of a number of factors including
quality, time-sensitive delivery and high-technology manufacturing
processes. These factors vary in importance depending on the product
or service being offered by the Company. The Company believes that
when it competes in the standard lead-time volume production of its
PCBs, backplane assemblies and flexible circuits products, it will
encounter greater price sensitivity from potential customers.
Consolidation of smaller competitors may also result in increased
competition, which could result in price reductions, reduced margins
or loss of market share, any of which could materially and adversely
affect the Company's business, financial condition, cash flows and
results of operations.
Furthermore, from time to time the Company operates in the lower
technology, higher volume segments of the PCB market, where it may be
at a competitive disadvantage when competing with manufacturers with
lower cost structures, particularly those with offshore facilities
where labor and other costs are generally lower. During
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Item 1. Business (Continued)
periods of recession or economic slowdown in the electronics industry,
the Company's competitive advantages in the areas of quick-turn
manufacturing and responsive customer service may be of reduced
importance to the Company's customers, who may become more price
sensitive. Although capital barriers to entry are relatively high
for manufacturing technologically complex interconnect products, the
basic interconnect technology is generally not protected by patents or
copyrights, and companies with significant resources or international
operations may enter the market. Increased competition could result
in price reductions, reduced margins or loss of market share, any of
which could have a material adverse effect on the Company's business,
financial condition, cash flows and results of operations.
Backlog
Because of the rapid delivery times associated with the quick-turn
market segment for electronic interconnects, the Company generally
ships products within 30 days of receipt of a customer order and the
Company historically has not had a material backlog of orders. As
orders for certain quantities or products such as volume production of
PCBs and backplane assemblies increase, backlogs in the Stockton PCB
division and the Systems Integration division may grow based on the
longer lead times typical of those products. Currently, the Company
does consider backlog to be meaningful to its Systems Integration
division and to a lesser extent, its Stockton PCB division.
Environmental Matters
The Company utilizes many raw materials in the manufacturing process
which require compliance with various federal, state and local
regulations. The Company is also subject to environmental laws
relating to the storage, use and disposal of chemicals, solid waste
and other hazardous materials, as well as air quality regulations.
Proper disposal of waste including metals and chemicals used in the
manufacturing process is a major consideration for electronic
interconnect product manufacturers. Although the Company believes
that its facilities are currently in material compliance with
applicable environmental laws, and although it monitors its operations
to avoid violations arising from human error or equipment failures,
there can be no assurance that violations will not occur. In the
event of a violation of environmental laws, the Company could be held
liable for damages and for the costs of remedial actions and could
also be subject to revocation of permits necessary to conduct its
business. Any such revocations could require the Company to cease or
limit production at one or more of its facilities, which could have a
material adverse effect on the Company's business, financial
condition, cash flows and results of operations.
Environmental laws could become more stringent over time, imposing
greater compliance costs and increasing risks and penalties associated
with a violation. The Company operates in an environmentally
sensitive geographic location and is subject to potentially
conflicting and changing regulatory agenda of political, business and
environmental groups. Changes or restriction on discharge limits,
emissions levels, or material storage or handling might require a high
level of unplanned capital investment and/or subsequent relocation to
another geographical location.
Employees
As of June 30, 1997, the Company had approximately 785 full-time
employees, of which approximately 89% were engaged in manufacturing
and engineering, 6% in sales and marketing and 5% in administration
and finance. The Company is not subject to any collective bargaining
agreements and none of its employees are represented by a labor union.
The Company has never experienced a disruption of operations due to a
labor related work stoppage or dispute. The Company considers
relations with its employees to be good.
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Item 1. Business (Continued)
Acquisitions
The Company acquired substantially all of the assets and certain
liabilities of three related manufacturers of electronic interconnect
products, Citation Circuits, Inc., Citation Enterprises, Inc. and
Citron Inc. (collectively, "Citation Companies" or "Citation") on
September 30, 1995 (the "Citation Acquisition"), which are now being
operated as the Company's Stockton PCB division. As a result of the
Citation Acquisition, the Company acquired approximately 79,000 square
feet of manufacturing space and hired approximately 340 former
Citation employees. The Stockton PCB division has required, and will
continue to require, the integration and coordination of
manufacturing, administration, accounting and sales and marketing
efforts. In particular, the Company continues to implement certain
Company-wide administrative, accounting and operational procedures at
this division. In February 1996, as part of the Company's strategic
plan, the Stockton, California backplane assembly operation (formerly
Citron, Inc.) was consolidated into the Systems Integration division
located in Santa Clara, California.
The Company may from time to time pursue the acquisition of other
companies, assets or product lines that would complement or expand its
existing business. These acquisitions may involve business in which
the Company lacks experience. Acquisitions involve a number of risks
that could adversely affect the Company's operating results, including
the diversion of management's attention, the assimilation of the
operations, products and personnel of the acquired companies, the
amortization of acquired intangible assets and the potential loss of
key employees of the acquired companies. There can be no assurance
that the Company will be able to manage one or more acquisitions
successfully, or that the Company will be able to integrate the
operations, products or personnel gained through such acquisition
without a material adverse effect on the Company's business, financial
condition, cash flows and results of operations.
Plant Closure
On May 22, 1996, the Company announced the closure of its Costa Mesa
PCB division, which occupied approximately 43,000 square feet in Costa
Mesa, California, and the consolidation of certain resources into the
Santa Clara PCB and Stockton PCB divisions. The Company believed that
the duplicity that existed between the Santa Clara and Costa Mesa
quick-turn PCB operations was not an efficient utilization of the
Company's resources. With the acquisition of the Stockton PCB division
and the related available capacity for volume work historically placed
in the higher cost quick-turn facilities, management believed that
closure of the Costa Mesa PCB division would give the Company an
opportunity to improve job loading and margins without a loss of
capacity following the consolidation and redeployment of resources.
The Company's consolidation plan resulted in facility closing costs
and a write-off of goodwill associated with the division's operations
of approximately $3.0 million and $800,000, respectively, during the
fourth quarter of the fiscal year ended June 30, 1996. On July 25,
1997, the Company successfully sold the building on behalf of the
owner (and landlord), therefore, eliminating any future lease and
operating obligations.
Risk Factors
In addition to the other information in this Report on Form 10-K, the
following risk factors should be considered carefully in evaluating
the Company and its business.
Dependence on Electronics Industry The Company's principal
customers are OEMs and contract manufacturers in the
telecommunications, networking, computers, peripherals, industrial
instrumentation, and medical and semiconductor equipment industries.
These industry segments, and the electronics industry as a
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Item 1. Business (Continued)
whole, are characterized by intense competition, relatively short
product-life cycles and significant fluctuations in product demand. In
addition, the electronics industry is generally subject to rapid
technological change and product obsolescence. Discontinuance or
modifications of products containing components manufactured by the
Company could adversely affect the Company's business, financial
condition and results of operations. In addition, the electronics
industry has in the past, and is likely in the future, to experience
recessionary periods. A recession or any other event leading to
excess capacity in the electronics industry would likely result in
intensified price competition and a decrease in unit volume, both of
which would have a material adverse effect on the Company's business,
financial condition and results of operations.
Fluctuations in Quarterly Operating Results The Company's quarterly
operating results have varied and may continue to fluctuate
significantly. At times in the past, the Company's net sales and net
income have decreased from the prior quarter. Operating results are
affected by a number of factors, including the timing and volume of
orders from and shipments to customers relative to the Company's
manufacturing capacity, level of product and price competition,
product mix, the number of working days in a particular quarter and
general economic factors. In recent years, the Company's gross margins
have varied primarily as a result of capacity utilization, closing
costs related to the closure of the Costa Mesa facility, product mix,
start-up costs in its two newer divisions, lead times, volume levels
and complexity of customer orders. The timing and volume of orders
placed by the Company's OEM customers vary due to customer attempts to
manage inventory, changes in the OEM's manufacturing strategy and
variation in demand for customer products. An interruption in
manufacturing resulting from shortages of parts or equipment, fire,
natural disaster, equipment failure or otherwise would have a material
adverse effect on the Company's business, financial condition, cash
flows and results of operations. Results of operations in any period
should not be considered indicative of the results to be expected for
any future period. Due to all of the foregoing factors, it is likely
that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In
such event, the price of the Company's common stock would likely be
materially adversely affected.
Customer Concentration Since its inception, the Company's net sales
to a small number of its customers have accounted for a high
percentage of the Company's annual net sales. During fiscal years
1995, 1996 and 1997, the Company's ten largest customers together
accounted for approximately 30 to 40% of net sales. The Hewlett-
Packard Company accounted for approximately 10% of the Company's net
sales in fiscal year 1997; however, no single customer accounted for
more than 10% of the Company's net sales in fiscal years 1996 and
1995. The concentration on certain customers is more evident in the
Company's Systems Integration and Flexible Circuits divisions where
the 15 largest customers typically account for over 89% and 58% of net
sales in those divisions, respectively. Given the Company's
manufacturing strategy, concentration, and therefore, dependence on a
number of its most significant customers may increase.
The Company's past growth has resulted, in part, from its ability to
identify and attract customers in rapidly growing segments of the
electronics industry. The Company has manufactured products for some
of these customers for a relatively short period of time. There can
be no assurance that the Company will continue to be able to identify,
attract and retain customers with high growth rates or that the
customers that it does attract and retain will continue to grow at
their historical rates or at all. Although there can be no assurance
that the Company's principal customers will continue to purchase
products and services from the Company at current levels, if at all,
the Company expects to continue to depend upon its principal customers
for a significant portion of its net sales. The loss of or decrease in
orders from one or more major customers could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Variability of Orders The Company does not obtain long term
purchase commitments from its customers and a substantial portion of
net sales in a given quarter depends on obtaining orders for products
to be manufactured
</PAGE>
<PAGE> 11
Item 1. Business (Continued)
and shipped in the same quarter in which those orders are received.
Customers may cancel orders and change or delay delivery schedules at
any time. The timely replacement of canceled, delayed or reduced
orders with new orders cannot be assured. Significant or numerous
cancellations, reductions or delays in orders by a customer or group
of customers could adversely affect the Company's business, financial
condition and results of operations. Because the Company has
historically operated with virtually no backlog, net sales for any
quarter are substantially dependent on orders booked in that quarter
and revenues for any future quarter are not predictable with any
significant degree of certainty. The Company's expense levels are
relatively fixed and are based, in part, on expectations of future
revenues. Consequently, if revenue levels are below expectations, the
Company's business, financial condition, cash flows and results of
operations are likely to be adversely affected.
Limited Operating History in New Divisions In fiscal year 1994, the
Company formed the Systems Integration and Flexible Circuits
divisions. The costs associated with the start-up and integration of
these divisions have adversely affected recent operating results and
could adversely affect future operating results. For example, net
income in fiscal years 1995, 1996 and 1997 was significantly affected
by costs associated with the creation and operation of these divisions
and the time required for these divisions to achieve volume
production. There can be no assurance that these divisions will
experience net sales growth or will be profitable on a quarterly or
annual basis, or that the costs of operating and managing these
divisions will not continue to have a material adverse effect on the
Company's business, financial condition and results of operations in
the future. Any inability to adjust spending quickly enough to
compensate for any revenue shortfall may magnify the adverse impact of
such shortfall on the Company's results of operations and result in a
material adverse effect on the Company's business, financial
condition, cash flows and results of operations.
Technological Change and Process Development The market for the
Company's manufacturing products and services is characterized by
rapidly changing technology and continuing process development. The
future success of the Company's business will depend in large part
upon its ability to maintain and enhance its technological
capabilities, develop and market manufacturing products and services
that meet changing customer needs and successfully anticipate or
respond to technological changes in manufacturing processes,on a cost-
effective and timely basis. In addition, the electronics industry
could in the future encounter competition from new technologies that
render existing electronic interconnect technology less competitive or
obsolete, including technologies that may reduce the number of PCBs
required in electronic components. Increasingly, the Company faces
technological pressure from sophisticated design, verification and
simulation capabilities in the electronics design automation industry.
These advances may reduce the demand for services such as those
provided by the Company, particularly the number of prototypes
required before a product is ready for market. Reductions in the
volume of products produced in prototype form could have a material
adverse effect on the Company's business, financial condition and
results of operations. Although management believes the Company's
operations utilize the assembly and testing technologies and equipment
currently required by the Company's customers, there can be no
assurance that the Company will effectively respond to the
technological requirements of the changing market. To the extent the
Company determines that new assembly and testing technologies and
equipment are required to remain competitive, the acquisition and
implementation of such technologies and equipment are likely to
continue to require significant capital investment by the Company.
There can be no assurance that this capital will be available in the
future or that investments in new technologies, such as the Company's
investment in its backplane assembly and flexible circuits operations,
will be utilized to the extent necessary to make such investments
profitable.
Management of Growth Over the past several years the Company has
experienced a period of rapid growth that has placed, and is expected
to continue to place,a significant strain on the Company's management,
operational and financial resources. This situation was compounded
by the Citation Acquisition. The Company's growth is expected to
require the addition of new management personnel and the development
of additional expertise by existing management personnel. The
Company's ability to manage growth effectively, particularly given the
</PAGE>
<PAGE> 12
Item 1. Business (Continued)
increasing scope of its operations, will require it to continue to
implement and improve its operational, financial and management
information systems as well as to develop the management skills of its
managers and supervisors and to train, motivate and manage its
employees. The Company's failure to effectively manage growth could
have a material adverse effect on the Company's business, financial
condition and results of operations. Competition for personnel is
intense and there can be no assurance that the Company will be able to
attract, assimilate or retain additional highly qualified employees in
the future. The failure to hire and retain such personnel could have
a material adverse effect on the Company's business, financial
condition, cash flows and results of operations.
Dependence on Key Personnel The Company's future success depends to
a large extent upon the continued services of key managerial and
technical employees, none of whom is bound by an employment agreement.
The loss of the services of the Company's key employees could have a
material adverse effect on the Company. The Company believes that its
future success depends on its continuing ability to attract and retain
highly qualified technical, managerial and marketing personnel.
Competition for such personnel is intense, and there can be no
assurance that the Company will be able to attract, assimilate or
retain such personnel. If the Company is unable to hire and retain
new personnel, the Company's business, financial condition, cash flows
and results of operations may be materially adversely affected.
Availability of Raw Materials and Components and Dependence on Key
Suppliers While the Company has not entered into any supply
agreements and does not have any guaranteed sources of raw materials
or components, it routinely purchases raw materials and components
from several key material suppliers. Although alternative material
suppliers are available, a significant unplanned event at a major
supplier could have an adverse impact on the Company's operations.
Shortages of certain types of raw materials have occurred in the past
and may occur in the future. To date, raw material shortages have not
materially affected the Company's business. Future shortages or price
fluctuations in raw materials could have an adverse impact on the
Company's manufacturing operations, thereby adversely affecting the
Company's results of operations. Electronic components used by the
Company in producing backplane assemblies and subassemblies are
purchased by the Company and, in certain circumstances, the Company
may be required to bear the risk of component price fluctuations.
Shortages of certain types of electronic components have occurred in
the past and may occur in the future. Component shortages or price
fluctuations could have an adverse effect on the Company's backplane
assembly operations, thereby adversely affecting the Company's growth
plans. To date, component price fluctuations or shortages have not
materially affected the Company. To the extent that the Company's
backplane assembly operations expands as a percentage of the Company's
net sales, component shortages and price fluctuations could, to a
greater extent, materially adversely affect the Company's business,
financial condition, cash flows and results of operations.
Executive Officers of the Registrant
The executive officers of the Company who are elected by and serve at
the discretion of the Board of Directors, and their ages as of June
30, 1997, are as follows:
<TABLE>
<S> <C> <C>
Name Age Position
B. Kevin Kelly 43 President, Chief Executive
Officer and Director
Philip S. Bushnell 46 Senior Vice President, Finance
and Administration, Chief Financial Officer,
Secretary and Director
W. Kent Hardwick 39 Vice President, Sales and Marketing
</TABLE>
Mr. Kelly has served as President and Chief Executive Officer and a
Director of the Company since October 1992. Prior to joining Sigma,
Mr. Kelly held the position of Vice President of Operations at Lundahl
</PAGE>
<PAGE> 13
Item 1. Business (Continued)
Astro Circuits, Inc., a high volume manufacturer of printed circuit
boards, from December 1991 to October 1992. Prior to that time, from
December 1990 to December 1991, Mr. Kelly was a founder and President
of Vitesse Engineering, a supplier of electrical test fixtures for the
printed circuit board industry. From March 1988 to December 1990,
Mr. Kelly was Vice President of Sales and Operations at West Coast
Circuits, Inc., a quick-turn manufacturer of printed circuit boards.
Mr. Bushnell has served as Senior Vice President, Finance and
Administration of the Company since January 1994. From August 1992
until January 1994, Mr. Bushnell served as Vice President, Finance. He
was elected Secretary and Chief Financial Officer in October 1992 and
has been a Director since June 1993. From July 1987 to August 1992,
Mr. Bushnell was employed in various finance positions with the
Company. Prior to joining Sigma, Mr. Bushnell held various finance
positions at Varian Associates, a diversified electronics company from
1978 until 1986.
Mr. Hardwick has served as Vice President, Sales and Marketing of the
Company since March 1997. From March 1996 to March 1997, Mr. Hardwick
served as Vice President of Business Development. From August 1995 to
March 1996, Mr. Hardwick served as Director of Business Development.
From 1983 to 1995, Mr. Hardwick was employed in various sales and
marketing positions with the Company.
Item 2. Properties
The Company maintains all of its manufacturing facilities and most of
its offices in California. The Company also maintains a sales office
in Massachusetts.
The Company's headquarters and Santa Clara PCB manufacturing division
occupy approximately 45,000 square feet in Santa Clara, California.
Approximately 10,000 square feet is allocated to office space, while
the remaining 35,000 square feet is used for manufacturing and
warehousing. The Company's headquarters and manufacturing operations
are comprised of four buildings owned and one building leased by the
Company. The monthly lease payments are approximately $6,700 under an
agreement that will expire in May 2002.
The Company's Stockton PCB manufacturing division occupies
approximately 79,000 square feet in Stockton, California. The
manufacturing operations are comprised of one building owned and two
buildings leased by the Company. The monthly lease payments are
$3,650, per building, and are leased under separate agreements that
will expire in October 2003. Additionally, the Company leases one
building for warehousing. The monthly lease payments are
approximately $1,800 under an agreement that will expire in November
1997.
The Company's Systems Integration division leases approximately 21,000
square feet in Santa Clara, California. The monthly lease payments are
approximately $16,500 under an agreement that will expire in June
1999.
The Company's Flexible Circuits division leases approximately 18,000
square feet in Santa Clara, California. The monthly lease payments are
approximately $14,600 under an agreement that will expire in May 1998.
The Company leases office space in Franklin, Massachusetts and Newport
Beach, California for its regional sales staffs.
Item 3. Legal Proceedings
In connection with the acquisition of the Citation Companies on
September 30, 1995, the Company assumed certain environmental
contingent liabilities pertaining to operations prior to that date. As
of the acquisition date, the Citation Companies had accrued $303,000
for the two known claims.
</PAGE>
<PAGE> 14
Item 3. Legal Proceedings (Continued)
The first contingent liability relates to allegations by the City of
Stockton of violations of its City Code regarding discharge of waste
water into the City's sewer system in excess of allowed limits during
several months in 1992. As of June 30, 1997, no further action has
taken place between the City of Stockton and the Company. The Company
has established a reserve for this contingency and in the opinion of
its management, any settlement would not likely result in a loss that
would have a material adverse effect on the Company's business,
financial condition, cash flows and results of operations.
The second contingent liability relates to the United States
Environmental Protection Agency ("EPA") issuance of an administrative
civil complaint regarding the timely submission of required federal
forms under the Emergency Planning and Community Right-to-Know Act of
1986 ("EPCRA"). On April 15, 1996, the Company entered into a
tentative "Consent Agreement and Consent Order" ("CACO") with the EPA
pertaining to its complaint. In the CACO, the Company has certified
that it has completed and submitted all required federal forms to the
EPA under the EPCRA, and that it has complied with all other EPCRA
requirements at all of its facilities. In addition, the Company will
also purchase and test certain equipment to aid in its environmental
regulatory requirements within twelve months of the effective date of
the CACO. The minimum aggregate cost associated with the purchase,
installation and testing of this equipment is $220,250 and if the
actual aggregate cost is lower, the difference between the actual cost
and such minimum threshold, will be remitted to the EPA. As of June
30, 1997, the Company had incurred approximately $288,000 of costs
associated with the minimum threshold. In relation to the testing of
the equipment, the Company is subject to additional filing
requirements with the EPA pertaining to the functionality of the
equipment. Further, the Company paid a civil penalty of $65,000 upon
execution of and as required by the CACO in July 1996. Terms of the
CACO constitute a full and final settlement of the complaint.
On March 13, 1997, the Company filed a lawsuit against one of its
customers. The suit asserts a breach of contract by the customer
relating to custom-made assembled circuit boards and other services
provided by the Company under purchase orders received by the Company
from the customer. The suit was filed in the Superior Court of the
State of California, Santa Clara County, with the Company seeking
damages in excess of approximately $1,000,000, the customer's
outstanding accounts receivable balance, plus additional damages, late
charges and related interest. Additionally, the Company is seeking
payment or reimbursement of costs of the suit, as well as attorneys'
fees, and any other appropriate relief. The customer filed a cross
complaint, on April 10, 1997, relating to breach of contract,
intentional and negligent misrepresentation, intentional and negligent
interference with contractual relationships, and intentional and
negligent interference with prospective economic advantage. The
customer is seeking damages in excess of $10,000,000, an unspecified
amount of punitive damages, as well as payment or reimbursement of
costs of the suit, attorneys' fees, and any other appropriate relief.
The Company filed an application for a writ of attachment on March 13,
1997, which was subsequently denied. Although no assurances can be
given, the Company believes the customer's claims are without merit
and will defend itself vigorously, therefore, no provision for any
liability has been made in the financial statements. As the extent of
recovery is unknown at this time, the Company wrote off the customer's
receivable amount, as well as purchased inventory in support of this
customer relating to the manufacture of its product and accrued other
costs associated with the suit. The Company has not established a
reserve for this contingency and in the opinion of its management, any
settlement would not likely results in a loss that would have a
material adverse effect on the Company's business, financial
condition, cash flows and results from operations.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year ended June 30, 1997,
there were no matters submitted to a vote of security holders.
</PAGE>
<PAGE> 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock is traded on the Nasdaq National Market
under the trading symbol "SIGA."
The price range for the Company's common stock from July 1, 1995
through June 30, 1997 (adjusted to reflect a two-for-one stock split
effected as a 100% stock dividend in February 1996) was:
<TABLE>
Quarters Ended
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sep.30, Dec.31, Mar.31, Jun.30, Sep.30, Dec.31, Mar.31 Jun.30,
1995 1995 1996 1996 1996 1996 1997 1997
High $7.00 $10.13 $14.38 $11.88 $7.06 $7.38 $6.75 $4.88
Low $2.94 $ 5.13 $ 9.25 $ 5.88 $4.63 $4.75 $4.81 $2.38
</TABLE>
The reported last sale price of the Company's common stock on the
Nasdaq National Market on September 12, 1997 was $7.00. As of
September 12, 1997, there were 147 holders of record of the Company's
common stock.
The Company has never declared or paid a cash dividend on its common
stock. The Company presently intends to retain its earnings to fund
the development and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.
Additionally, a financing agreement between the Company and a
particular lender contains a covenant prohibiting the payment of cash
dividends without prior lender approval.
Item 6. Selected Financial Data
Statement of Operations Data:
<TABLE>
(In thousands, except per share amounts)
Year Ended June 30,
<S> <C> <C> <C> <C> <C>
1997 1996(1) 1995 1994 1993
Net Sales $79,980 $87,705 $48,246 $38,906 $36,429
Cost of Sales 67,525 71,471 39,317 30,783 28,947
Gross Profit 12,455 16,234 8,929 8,123 7,482
Selling, General and
Administrative Expenses 11,680 11,490 7,759 6,394 6,143
Amortization of Goodwill 501 482 200 200 200
Facility Closing Costs (250) 3,775 -- -- --
Operating Income 524 487 970 1,529 1,139
Interest and Other Expense,
Net 1,990 2,125 350 364 492
Income (Loss) Before
Income Taxes (1,466) (1,638) 620 1,165 647
Provision (Benefit) for
Income Taxes (234) (562) 394 558 295
Net Income (Loss) $(1,232) $(1,076) $ 226 $ 607 $ 352
Net Income (Loss) Applicable
to Common Stock $(1,232) $(1,076) $ 226 $ 557 $ 234
Net Income (Loss) Per Share $ (.30) $ (.28) $ .06 $ .37 $ .29
Number of Shares Used In
Computing Per Share
Information 4,044 3,797 3,640 1,514 814
</TABLE>
<F1>
(1) Includes the operations of the Citation Companies acquired on
September 30, 1995.
</PAGE>
<PAGE> 16
Item 6. Selected Financial Data (Continued)
<TABLE>
Balance Sheet Data:
June 30,
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
Working Capital (Deficiency) $10,035 $ 2,764 $ 5,121 $ 2,537 $ (317)
Total Assets $42,647 $46,960 $24,400 $19,078 $ 17,152
Long-Term Debt, Less Current
Portion $18,902 $14,345 $ 5,774 $ 1,425 $ 3,134
Redeemable Preferred Stock $ -- $ -- $ -- $ -- $ 2,588
Stockholders' Equity $12,314 $12,918 $10,987 $10,612 $ 2,981
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
This discussion contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or
contribute to such differences, include, but are not limited to, those
discussed herein, as well as those discussed under "Risk Factors" in
the "Business" section in Part I. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any
revision to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
Beginning in fiscal year 1994, the Company adopted a strategy to
service more of the electronic interconnect needs of its strategic
customers by broadening its product offerings and increasing its
capacity. The Company believed that its reputation as a high quality,
reliable quick-turn supplier of PCBs would generate demand among its
customers for additional product offerings. The Company also believed
that the customer relationships established by providing quick-turn
services during the prototype stage of the product life cycle would
give it an advantage in securing the larger volume pre-production and
production orders of such products. Assisted by the proceeds of a
private equity financing and its initial public offering, the Company
established its Systems Integration and Flexible Circuits divisions
during the latter part of fiscal year 1994 in order to broaden its
product offerings. During fiscal year 1995, the Company's gross margin
and operating expenses were negatively affected by the
underutilization and start-up costs of the Systems Integration and
Flexible Circuits divisions.
The Company completed the Citation Acquisition during the first
quarter of fiscal year 1996 in order to obtain the manufacturing
capacity required to service its customers' higher volume production
jobs in a lower cost operating environment. During the first half of
fiscal year 1996, net sales and gross profit increased significantly
as a result of the additional capacity obtained in the Citation
Acquisition and the products offered by its two new divisions. During
the second half of fiscal year 1996, the electronic interconnect
industry experienced a softening period which adversely impacted the
Company. The Company, along with many of its competitors, experienced
a decline in the demand for its products and services during calendar
year 1996. As a result, the Company announced on May 22, 1996, the
closure of its Costa Mesa PCB division and the consolidation of
certain capital and selected personnel into its Santa Clara PCB and
Stockton PCB divisions. During June 1996, the Company recorded a one-
time charge of approximately $3.8 million for facility closing costs.
The Company's operating results have been and are expected to continue
to be affected by a number of factors, including the timing and volume
of orders from and shipments to customers relative to the Company's
manufacturing capacity,level of product and price competition, product
mix, the number of working days in a particular quarter, economic
conditions in the electronic interconnect industry and general
economic factors. The lead times, volume levels and complexity
of customer orders have also affected overall gross margins.
</PAGE>
<PAGE> 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Results of Operations
The following table sets forth, for the periods indicated, certain
statements of operations data expressed as a percentage of net sales.
The table and the discussion below should be read in conjunction with
the financial statements and the notes thereto, that appear elsewhere
in this report.
<TABLE>
Years Ended June 30,
<S> <C> <C> <C>
1997 1996 1995
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 84.4 81.5 81.5
Gross Margin 15.6 18.5 18.5
Selling, General and Administrative Expenses 14.6 13.1 16.0
Amortization of Goodwill 0.6 0.5 0.5
Facility Closing Costs (0.3) 4.3 --
Operating Income 0.7 0.6 2.0
Interest and Other Expense, Net 2.5 2.4 0.7
Income (Loss) Before Income Taxes (1.8) (1.8) 1.3
Provision (Benefit) for Income Taxes (0.3) (0.6) 0.8
Net Income (Loss) (1.5)% (1.2)% 0.5%
</TABLE>
Net Sales
Net sales for the fiscal year ended June 30, 1997 were $80.0 million,
a decrease of $7.7 million or 8.8% from the prior fiscal year. This
decrease was primarily the result of a 12.2% decrease in net sales of
PCBs the result of the Costa Mesa, California PCB division closure
during the summer of 1996 and the reallocation of resources to the
Santa Clara and Stockton PCB divisions. It has taken the Company
approximately a year to recover from the effects of the industry
slowdown in calendar year 1996 and its consolidation efforts of its
PCB operations. This is evidenced by the fourth quarter of fiscal
year 1997 when PCB sales from the two remaining PCB divisions were
approximately 11% higher than PCB sales during the fourth quarter of
fiscal year 1996. For the fiscal year 1997, the combined sales of the
Systems Integration and Flexible Circuits divisions increased
approximately 17.4% as compared to fiscal year 1996 and contributed
approximately 26.3% of the Company's net sales in fiscal year 1997.
Net sales for the fiscal year ended June 30, 1996 were $87.7 million,
an increase of $39.5 million or 81.8% from the prior fiscal year.
Approximately 61.5% of the increase in net sales was the result of the
Citation Acquisition with the balance principally from net sales
growth in the Systems Integration and Flexible Circuits divisions.
Gross Profit
Gross profit for the fiscal year ended June 30, 1997 was $12.5
million, a decrease of $3.8 million or 23.3% from the prior fiscal
year. The decrease in gross profit was due to lower total net sales
volume and a charge of $1.9 million relating to excess and obsolete
inventory and equipment, as well as an unfavorable sales tax ruling.
Gross margin for fiscal years 1997 and 1996 was 15.6% and 18.5%
respectively. Negatively impacting gross margin was the aforementioned
charges as well as a continuation of the under-utilization of capacity
at the Systems Integration and Flexible Circuits divisions.
</PAGE>
<PAGE> 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Gross profit for the fiscal year ended June 30, 1996 was $16.2
million, an increase of $7.3 million or 81.8% from the prior fiscal
year. The increase in gross profit was primarily due to the increase
in net sales. Gross margin for fiscal years 1996 and 1995 was 18.5%.
Gross margin for fiscal year 1996 was adversely impacted by
manufacturing costs at the Systems Integration and Flexible Circuits
divisions. Although these two newer operations combined contributed
to gross profit in fiscal year 1996, as compared to fiscal year 1995,
net sales volume remained lower than that of many of the Company's
major competitors. Additionally, decreased demand for PCBs together
with the closure of the Costa Mesa PCB division had a negative impact
on gross profit and margins for the PCB operations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the fiscal year ended
June 30, 1997 were $11.7 million, an increase of $0.2 million or 1.7%
from the prior fiscal year. During the current fiscal year, selling,
general and administrative expenses were negatively effected by a
charge of approximately $1.2 million primarily attributable to bad
debt and related expenses associated with a lawsuit filed against a
seriously delinquent paying customer. Because of this charge,
selling, general and administrative expenses as a percentage of sales
was 14.6% for fiscal year 1997 as compared to 13.1% for fiscal year
1996. Without this charge, selling, general and administrative
expenses as a percentage of net sales would have been approximately
the same for fiscal years 1997 and 1996.
Selling, general and administrative expenses for the fiscal year ended
June 30, 1996 were $11.5 million, an increase of $3.7 million or 48.2%
from the prior fiscal year. In the aggregate, these expenses increased
primarily as a result of the Citation Acquisition and to support the
growth in the Systems Integration and Flexible Circuits divisions.
Selling, general and administrative expenses as a percentage of net
sales decreased from 16.0% to 13.1% due to the relatively fixed nature
of certain selling, general and administrative expenses.
Net Interest and Other Expenses
Net interest expense for the fiscal year ended June 30, 1997 was $2.0
million, an increase of $301,000 from the prior fiscal year. The
increase is primarily attributable to debt incurred by the Company, in
the prior fiscal year, in connection with the Citation Acquisition.
Additionally, the Company maintained a debt service level, at
substantially the same rates, that was significantly higher during
fiscal year 1997 as compared to fiscal year 1996.
Net interest expense for the fiscal year ended June 30, 1996 was $1.7
million, an increase of $1.3 million from the prior fiscal year. The
increase is primarily attributable to debt incurred by the Company in
financing the Citation Acquisition during the first quarter of fiscal
year 1996. The Company obtained $10.0 million in variable rate bank
term loans bearing interest rates of approximately 9.5% for the nine
months ended June 30, 1996. Additionally, in connection with the
Citation Acquisition, the Company issued approximately $4.1 million in
two 12.0% subordinated notes to the seller of the Citation Companies.
During the fourth quarter of fiscal year 1996, the Company recorded a
one time charge of approximately $436,000 for expenses incurred in
connection with a withdrawn public offering of the Company's common
stock.
Provision (Benefit) for Income Taxes
The Company's combined federal and state effective income tax (benefit)
rates were (16.1)%, (34.3)% and 63.6% for the fiscal years ended 1997,
1996 and 1995, respectively. The effective income tax (benefit) rates
</PAGE>
<PAGE> 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
differ from the federal statutory income tax (benefit) rates primarily
due to state taxes, net of federal benefit, amortization and write-off
of goodwill and deferred stock compensation which are not deductible
in determining taxable income or loss. Additionally, the amount of
pre-tax income can have a material effect on the Company's effective
income tax (benefit) rate. Impacting the fiscal year 1997 effective
benefit rate was a valuation allowance of $325,000 recorded by the
Company. Impacting the fiscal year 1996 state effective benefit rate
was the State of California's Machinery and Equipment tax credit.
Financial Condition
The Company has historically financed its operations primarily through
bank borrowings, issuances of debt and equity securities and cash
generated from operations.
Liquidity
The Company generated cash from operating activities of approximately
$5.4 million and $3.6 million in fiscal years 1997 and 1996,
respectively, and used cash in operating activities of $0.1 million in
fiscal year 1995. Cash generated from operations in fiscal years 1997
and 1996 was primarily attributable to net income of $4.9 million and
$5.3 million, respectively, as adjusted for non-cash expenses,
primarily depreciation, amortization and write-off of goodwill. Cash
used for operations in fiscal year 1995 was primarily the result of
start-up costs for the new Systems Integration and Flexible Circuits
divisions.
The Company used cash in investing activities of approximately $2.5
million, $14.5 million and $4.7 million in fiscal years 1997, 1996 and
1995, respectively. Cash used in investing activities in fiscal year
1997 was primarily attributable to capital expenditures of
approximately $2.5 million. Cash used in investing activities in
fiscal year 1996 was primarily attributable to approximately $9.1
million in expenditures for the purchase of the Citation Companies and
approximately $5.4 million used for the purchase of property and
equipment. Cash used in investing activities in fiscal year 1995 was
primarily for purchases of capital equipment.
The Company used cash in financing activities of approximately $1.3
million in fiscal year 1997 and generated cash from financing
activities of approximately $10.8 million and $4.6 million in fiscal
years 1997 and 1996, respectively. Cash used in investing activities
in fiscal year 1997 was primarily attributable to net debt repayments
of approximately $1.5 million. Cash generated from financing
activities in fiscal year 1996 was primarily attributable to $10.6
million in long-term borrowings of which $10.0 million was used to
finance the Citation Acquisition. Cash generated from financing
activities in fiscal year 1995 was primarily attributable to
approximately $800,000 in long-term borrowings, net of debt
repayments, and approximately $3.8 million in increased borrowings
under the revolving line of credit.
On May 21, 1997, the Company entered into a $25.0 million credit
facility agreement with the CIT Group/Business Credit, Inc. (the "CIT
Group"), an asset-based lender. The proceeds of this new facility
were used to repay substantially all of the Company's existing debt
and capital lease obligations. As of June 30, 1997 the Company had
long-term debt outstanding of approximately $20.5 million, consisting
primarily of $8.3 million outstanding under the Company's revolving
line of credit, a $9.8 million term loan, a $1.8 million convertible
subordinated note and $0.6 million of real estate obligations.
</PAGE>
<PAGE> 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
As part of its new credit facility, the Company has a $13.7 million
revolving line of credit, a $9.8 million term loan and a $1.5 million
capital expenditure ("CAPEX") term loan. The revolving line of credit
is limited to a maximum amount of $13.7 million or the sum of 90.0%
and 50.0% of the Company's eligible trade accounts receivable and raw
materials inventory, respectively, as contractually defined. The
revolving line of credit expires on May 21, 2001 and currently bears
interest at 9.0%. The $9.8 million term expires on May 21, 2002 and
currently bears interest at 9.75%. Principal payments of
approximately $0.2 are due monthly in equal installments with the
first installment due on September 1, 1997. The CAPEX term loan has a
maximum amount of $1.5 million in which the Company's financing
agreement limits borrowings to this maximum or the amount determined
as the sum of $500,000 plus 50.0% of cumulative earnings before
interest, taxes, depreciation and amortization for a contractually
defined period of time. The $1.5 million CAPEX term loan expires on
May 1, 2001 and as of June 30, 1997, there were no outstanding
borrowings under this loan. Additionally, the Company has a $1.8
million convertible subordinated note with the seller of the Citation
Companies. This note expires on May 21, 2001 and currently bears
interest at 10.0%. The note is convertible into a maximum of 400,000
shares of common stock at the option of the holder based upon certain
defined criteria. Further, the Company has a real estate note of
approximately $0.6 million that was assumed in the Citation
Acquisition. The real estate note is due, as a balloon payment, on
December 31, 2005 and currently bears interest at 8.5%. As of June 30,
1997, the Company was in compliance with the convenants of the
financing agreement with the CIT Group.
The Company believes that its existing funds, borrowings available
under its revolving line of credit and CAPEX term loan and funds
expected to be generated from operations will be sufficient to meet
its working capital needs for the next twelve months. There can be no
assurance, however, that events in the future will not require the
Company to seek additional capital sooner or, if so required, that it
will be available on terms acceptable to the Company. To the extent
that cash generated from operations is not sufficient to meet the
Company's projected capital expenditures or future working capital
needs, the Company's business, financial condition, cash flows and
results of operations may be materially and adversely affected.
Capital Resources
During fiscal year 1997, the Company purchased approximately $2.5
million of property and equipment which was funded through long-term
borrowings. The Company's financing agreement allows for capital
expenditures up to a maximum amount of $1.0 million per quarter with
an aggregate amount of $4.0 million per year. Any expenditures
exceeding this maximum quarterly and annual amounts would require
prior approval. Therefore, excluding the financial impact of any
acquisition or establishment of new facilities, the Company expects to
incur capital expenditures of $4.0 million, in the aggregate, in
fiscal year 1998.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
Certain information required by this item is included on pages 24 to
44 in Item 14 of Part IV of this Report on Form 10-K and is
incorporated into this part by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
Not applicable.
</PAGE>
<PAGE> 20
PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning the Company's directors required by this
item is included under the caption "Election of Directors" in the
Company's 1997 Definitive Proxy Statement to be filed with the
Commission pursuant to Regulation 14A and incorporated herein by
reference.
The information concerning the Company's executive officers required
by this item is included in Part I under the caption "Executive
Officers of the Registrant."
Item 11. Executive Compensation
The information required by this item is included under the caption
"Executive Compensation" and "Stock Option Grants and Exercises" in
the Company's 1997 Definitive Proxy Statement to be filed with the
Commission pursuant to Regulation 14A and incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is included under the caption
"Security Ownership of Certain Beneficial Owners and Management" in
the Company's 1997 Definitive Proxy Statement to be filed with the
Commission pursuant to Regulation 14A and incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is included under the caption
"Certain Transactions" in the Company's 1997 Definitive Proxy
Statement to be filed with the Commission pursuant to Regulation 14A
and incorporated herein by reference.
</PAGE>
<PAGE> 22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report on Form 10-K:
Page
1. Financial Statements. The following financial statements
of the Company and the Report of Deloitte & Touche LLP,
Independent Auditors are included in Part IV of this
Report on Form 10-K on the pages indicated:
Independent Auditors' Report 23
Balance Sheets as of June 30, 1997 and 1996 24
Statements of Operations for the Years ended June 30,
1997, 1996 and 1995 25
Statements of Stockholders' Equity for the Years
ended June 30, 1997, 1996 and 1995 26
Statements of Cash Flows for the Years ended June 30,
1997, 1996 and 1995 27
Notes to Financial Statements 29
2. Financial Statement Schedules. The following financial
statement schedule of the Company for the years ended
June 30, 1997, 1996 and 1995 is filed as part of this
Report on Form 10-K and should be read in conjunction
with the financial statements.
Schedule Title
II Valuation and Qualifying Accounts 44
Schedules not listed above have been omitted because
they are not applicable, not required, or the
information required to be set forth therein is
included in the financial statements or notes thereto.
3. Exhibits. See Exhibit Index on page 46 hereof for a
list of exhibits filed or incorporated by reference
as a part of this Report on Form 10-K.
(b) Reports on Form 8-K. No reports on Form 8-K were filed
by the Company in the fourth quarter of the fiscal year
ended June 30, 1997.
(c) Exhibits. The exhibits required by this item are listed
under Item 14(a)(3) above.
(d) Financial Statement Schedules. The financial statement
schedule required by this item is listed under Item
14(a)(2) above.
</PAGE>
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Sigma Circuits, Inc.:
We have audited the accompanying balance sheets of Sigma Circuits,
Inc. as of June 30, 1997 and 1996, and the related statements of
operations, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1997. Our audits also included the
financial statement schedules listed at the Index at Item 14(a)(2).
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Sigma Circuits, Inc. as
of June 30, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended June 30,
1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedules, when
considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set
forth therein.
DELOITTE & TOUCHE LLP
July 30, 1997
San Jose, California
</PAGE>
<PAGE> 24
<TABLE>
SIGMA CIRCUITS, INC.
BALANCE SHEETS
(In thousands, except per share data)
June 30,
<S> <C> <C>
1997 1996
ASSETS
Current Assets:
Cash and Equivalents $ 1,633 $ --
Accounts Receivable (Net of Allowances
of $630 and $598, Respectively) 12,432 11,987
Income Taxes Receivable 1,476 1,393
Inventories 2,797 4,753
Prepaid Expenses and Other Assets 330 314
Deferred Income Taxes 1,510 2,660
Total Current Assets 20,178 21,107
Property and Equipment, Net 15,874 18,899
Goodwill (Net of Accumulated Amortization
of $2,823 and $2,322, Respectively) 6,114 6,615
Deposits and Other Assets 481 339
Total $42,647 $46,960
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Cash Overdraft $ -- $ 297
Current Portion of Long-Term Debt 1,633 7,681
Accounts Payable 4,518 4,418
Accrued Liabilities 3,992 5,947
Total Current Liabilities 10,143 18,343
Long-Term Debt 18,902 14,345
Deferred Income Taxes 1,259 1,354
Other Long-Term Liabilities 39 --
Commitments (Note 12) -- --
Stockholders' Equity:
Preferred Stock, $0.001 Par Value:
Shares Authorized: 5,000
Share Outstanding: None -- --
Common Stock, $0.001 Par Value:
Shares Authorized: 20,000
Shares Outstanding: 4,138 and
3,998, Respectively 11,152 10,604
Deferred Stock Compensation (110) (180)
Retained Earnings 1,262 2,494
Total Stockholders' Equity 12,304 12,918
Total $42,647 $46,960
See notes to financial statements.
</TABLE>
</PAGE>
<PAGE> 25
<TABLE>
SIGMA CIRCUITS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended June 30,
<S> <C> <C> <C>
1997 1996 1995
Net Sales $79,980 $87,705 $48,246
Cost of Sales 67,525 71,471 39,317
Gross Profit 12,455 16,234 8,929
Selling, General and Administrative
Expenses 11,680 11,490 7,759
Amortization of Goodwill 501 482 200
Facility Closing Costs (250) 3,775 --
Operating Income 524 487 970
Interest Expense, Net 1,990 1,689 350
Withdrawn Public Offering Costs -- 436 --
Income (Loss) Before Income Taxes (1,466) (1,638) 620
Provision (Benefit) for Income Taxes (234) (562) 394
Net Income (Loss) $(1,232) $(1,076) $ 226
Net Income (Loss) Per Share $ (.30) $ (.28) $ .06
Number of Shares Used in Computing
Per Share Information 4,044 3,797 3,640
</TABLE>
See notes to financial statements.
</PAGE>
<PAGE> 26
<TABLE>
SIGMA CIRCUITS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<S> <C> <C> <C> <C> <C>
Deferred
Common Stock Stock Retained
Shares Amount Compensation Earning Total
Balances at June 30, 1994 3,404 $ 7,702 $(434) $ 3,344 $10,612
Exercise of Common Stock
Options 20 16 16
Issuance of Common Stock
Under Employee Stock
Purchase Plan 14 25 25
Amortization of Deferred
Stock Compensation 108 108
Net Income 226 226
Balances at June 30, 1995 3,438 7,743 (326) 3,570 10,987
Exercise of Common Stock
Options 83 96 96
Issuance of Common Stock
Under Employee Stock
Purchase Plan 98 324 324
Issuance of Common Stock in
Connection with Citation
Companies Acquisition 379 2,500 2,500
Amortization of Deferred
Stock Compensation 87 87
Forfeitures of Common Stock
Options (59) 59 --
Net Loss (1,076) (1,076)
Balances at June 30, 1996 3,998 10,604 (180) 2,494 12,918
Exercise of Common Stock
Options 45 67 67
Issuance of Common Stock
Under Employee Stock
Purchase Plan 95 394 394
Tax Benefit of Employee
Stock Transactions 87 87
Amortization of Deferred
Stock Compensation 70 70
Net Loss (1,232) (1,232)
Balances at June 30, 1997 4,138 $11,152 $(110) $1,262 $12,304
</TABLE>
See notes to financial statements.
</PAGE>
<PAGE> 27
<TABLE>
SIGMA CIRCUITS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended June 30,
<S> <C> <C> <C>
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (1,232) $ (1,076) $ 226
Reconciliation to Cash Provided by (Used
for) Operating Activities:
Depreciation and Amortization of
Property and Equipment 4,728 4,555 2,681
Amortization and Write-Off of Goodwill 501 1,282 200
Amortization of Deferred Stock Compensation 70 87 108
Amortization of Non-Compete Agreement 150 -- --
Loss on Disposal of Assets 11 292 208
Deferred Income Taxes 1,055 (2,425) (711)
Facility Closing Costs (250) 2,559 --
Changes in Assets and Liabilities:
Accounts Receivable (445) 826 (2,516)
Inventories 1,956 (738) (633)
Prepaid Expenses and Other Assets 16 452 (571)
Accounts Payable 100 (720) 257
Accrued Liabilities (1,183) 121 199
Income Taxes Payable / Refundable (83) (1,599) 432
Other Long-Term Liabilities 39 -- --
Cash Provided by (Used for)
Operating Activities 5,433 3,616 (120)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (2,501) (5,415) (4,550)
Proceeds from Sale of Property and Equipment 320 63 4
Deposits and Other Assets (292) (50) (178)
Purchase of Citation Companies, Net of Cash
Acquired -- (9,092) --
Cash Used for Investing Activities (2,473) (14,494) (4,724)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of Credit 2,621 1,957 3,750
Proceeds from Long-Term Debt 11,600 10,638 1,074
Repayment of Long-Term Debt (15,712) (2,540) (280)
Increase/(Decrease) in Cash Overdraft (297) 297 --
Proceeds from Issuance of Common Stock 461 420 41
Cash Provided by (Used for)
Financing Activities (1,327) 10,772 4,585
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,633 (106) (259)
CASH AND EQUIVALENTS:
Beginning of Year -- 106 365
End of Year $ 1,633 $ -- $ 106
</TABLE>
</PAGE>
<PAGE> 28
<TABLE>
SIGMA CIRCUITS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Year Ended June 30,
<S> <C> <C> <C>
1997 1996 1995
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash Paid for Interest $ 2,289 $ 1,403 $405
Cash (Received) Paid for Income Taxes $(1,293) $ 3,050 $672
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Tax Benefit from Employee Stock Transactions $ 87 $ -- $ --
Equipment Acquired Under Capital Lease
Obligations $ -- $ 648 $ --
PURCHASE OF THE CITATION COMPANIES:
Cash Paid, Net of Cash Acquired $ 9,092
Stock Issued to Seller 2,500
Debt Issued to Seller 4,092
Liabilities Assumed 5,190
Assets Acquired (including Goodwill
of $5,744) $20,874
</TABLE>
See notes to financial statements.
</PAGE>
<PAGE> 29
SIGMA CIRCUITS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended June 30, 1997, 1996 and 1995
Note 1. Organization of the Company
Sigma Circuits, Inc. (the "Company") was incorporated in the
State of California in April 1986 under the name Sigma Circuits
Holding Company to acquire its predecessor company
("Predecessor") which had been in the rigid printed circuit
board business since 1974. The acquisition ("Sigma
Acquisition") of the Predecessor was completed in April 1986
via a purchase for approximately $11,500,000 and gave rise to
approximately $4,000,000 in goodwill. The Company
reincorporated in the State of Delaware in December 1987 under
the name Sigma Circuits, Inc.
Note 2. Summary of Significant Accounting Policies
Fiscal Year The Company uses a 52-53 week fiscal year ending
on the Saturday nearest the end of the month of June. The
fiscal years ended June 28, 1997, June 29, 1996, and July 1,
1995 each consisted of 52 weeks. In addition, the Company's
fiscal quarters end on the Saturday nearest the end of the
months of September, December, March and June. For reporting
purposes, the Company presents its fiscal year end as June 30
and its quarter ends as September 30, December 31, March 31 and
June 30.
Use of Estimates The Company's management has made certain
estimates and assumptions relating to the reporting of assets
and liabilities, as well as the disclosure of contingent assets
and liabilities to prepare its financial statements in
conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
Reclassifications Certain reclassifications have been made
to the prior years' financial statements to conform with the
current year's presentation. The reclassification of these
amounts had no effect on the results of operations or retained
earnings.
Cash and Equivalents Cash and equivalents include demand
deposits and money market accounts since they represent highly
liquid investments with maturities of three months or less when
purchased. The carrying amount of these investments
approximated fair value as of June 30, 1997 and 1996.
Concentrations of Credit Risk Financial instruments that
potentially subject the Company to concentrations of credit
risk consist principally of trade accounts receivable. The
risk is limited due to the fact that the Company's trade
accounts receivable are derived from sales in various
geographic areas to numerous companies varying in size within
the electronics industry. The Company has developed and
maintained credit policies and procedures to reflect the
electronics industry's growth, as well as its inherent risk.
Additionally, the Company performs ongoing credit evaluations
of its customers' financial condition and generally does not
require collateral, such as letters of credit or security
agreements. Credit losses consistently have been within
management's expectations.
Inventories Inventories are stated at the lower of cost
(first-in, first-out basis) or market. Cost includes material,
labor and manufacturing overhead.
Property and Equipment Property and equipment are stated at
cost less accumulated depreciation and amortization. Buildings
and equipment are depreciated over the estimated useful life of
the underlying assets and generally range from fifteen to
twenty five years for buildings and three to ten years for
equipment. Improvements are amortized over the shorter of the
estimated useful lives of the underlying property or the
contractual lives of the applicable leases. Depreciation is
computed on the
</PAGE>
<PAGE> 30
SIGMA CIRCUITS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 2. Summary of Significant Accounting Policies (Continued)
straight-line method for financial reporting purposes and
the various accelerated methods, as required by law, for
income tax purposes. On July 1, 1995, the Company adopted the
provisions of Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." There was
no cumulative effect in the adoption of this standard. Based
upon its evaluation, the Company believes that no material
impairment of property and equipment existed as of June 30,
1997 and 1996.
Goodwill Goodwill resulted from the Sigma and Citation
Acquisitions (Note 3 and 10, respectively) and represents the
excess of the aggregate purchase price over the fair value of
net assets acquired. The goodwill is being amortized over 20
and 15 years, respectively, using the straight-line method. The
Company annually evaluates the realizability of goodwill based
upon projections of its undiscounted net cash flows. Based upon
its evaluations, the Company believes that no material
impairment of goodwill existed as of June 30, 1997 and 1996.
Environmental Compliance and Remediation Environmental
compliance costs include ongoing maintenance, monitoring and
similar costs and relate to current operations or conditions
caused by past operations. These costs are expensed as
incurred. Environmental remediation costs are accrued, except
to the extent costs can be capitalized, when environmental
assessments and/or remedial efforts are probable, and the costs
can be reasonably estimated. These liabilities are determined
on a site by site basis and are not discounted. Environmental
costs which improve the condition or extend the life of related
property or prevent future environmental contamination are
capitalized.
Income Taxes Income taxes are accounted for under SFAS No.
109, "Accounting for Income Taxes", an approach that requires
the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been
recognized in the Company's financial and tax reporting. In
estimating future tax consequences, management generally
considers all expected future events other than enactments of
changes in the tax laws or rates. Under the provisions of SFAS
No. 109, a valuation allowance should be provided when it is
more likely than not that some portion or all of the deferred
tax assets recorded will not be recognized.
Stock-Based Compensation Stock-based compensation is
recognized under Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations, using the intrinsic value method. Therefore,
the Company measures compensation cost for stock options as the
difference, if any, between the quoted market price of the
Company's stock, at the date of grant, and the price the
employee must pay to acquire the stock under it stock option
plans. In October 1995, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 123 "Accounting for Stock-Based
Compensation." This standard establishes financial accounting
and reporting standards for stock-based compensation plans.
The new accounting standards prescribed are optional, although
certain pro forma disclosures are required, and allows for a
company to account for stock-based compensation cost under
existing accounting rules. Therefore, the Company will
continue to account for its compensation costs under APB No. 25.
Revenue Recognition Revenue is recognized by the Company at
the time its products are shipped.
</PAGE>
<PAGE> 31
SIGMA CIRCUITS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 2. Summary of Significant Accounting Policies (Continued)
Per Share Information Net income per share is based on the
weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares include
common stock options and warrants (using the treasury stock
method) and are excluded in loss periods as they are anti-
dilutive for computing per share information.
Recent Accounting Standards In February 1997, the Financial
Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share".
The Company is required to adopt this standard in the second
quarter of fiscal year 1998 and will restate at that time
earnings per share ("EPS") data for prior periods to conform
with the standard. Earlier application is not permitted. This
new standard replaces current EPS reporting requirements and
requires a dual presentation of basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing net income by
the weighted average amount of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. As with
current EPS reporting requirements, the standard requires
common equivalent shares to be excluded in loss periods as they
are anti-dilutive.
If SFAS No. 128 had been in effect during the current and prior
fiscal years, basic and fully diluted EPS would not have been
significantly different than the EPS currently reported for the
periods.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130 "Reporting Comprehensive Income," which requires
that an entity report, by major components and as a single
total, the change in its net assets during the period from non-
shareholder sources; and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information," which
establishes annual and interim reporting standards for an
entity's business segments and related disclosures about its
products, services, geographic areas, and major customers.
Adoption of these statements will not impact the Company's
financial position, results of operations or cash flows. Both
statements are effective for fiscal years beginning after
December 15, 1997, with earlier application permitted.
Note 3. Inventories
<TABLE>
Inventories consist of (in thousands):
June 30,
<S> <C> <C>
1997 1996
Raw Materials $ 877 $2,641
Work in Process 1,416 1,880
Finished Goods 504 232
Inventories $2,797 $4,753
</TABLE>
</PAGE>
<PAGE> 31
SIGMA CIRCUITS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 4. Property and Equipment
<TABLE>
Property and equipment consist of (in thousands):
June 30,
<S> <C> <C>
1997 1996
Land $ 1,057 $ 1,057
Buildings and Improvements 6,835 7,902
Machinery and Equipment 24,060 25,549
Total Property and Equipment 31,952 34,508
Accumulated Depreciation and Amortization (16,078) (15,609)
Property and Equipment, Net $ 15,874 $ 18,899
</TABLE>
Note 5. Accrued Liabilities
<TABLE>
Accrued liabilities consist of (in thousands):
June 30,
<S> <C> <C>
1997 1996
Accrued Compensation and Related Liabilities $1,978 $2,277
Accrued Facility Closing Costs 347 2,559
Accrued Interest Expense 180 436
Accrued Sales Tax Audit Expense 512 90
Other Accrued Expenses 975 585
Accrued Liabilities $3,992 $5,947
</TABLE>
Note 6. Long-Term Debt
<TABLE>
Long-term debt consists of (in thousands):
June 30,
1997 1996
<S> <C> <C>
Revolving Line of Credit $ 8,328 $ 5,707
Term Loan(s) 9,800 8,163
Real Estate Term Note(s) 607 1,804
Convertible Subordinated Note 1,800 1,500
Subordinated Note -- 2,592
Other Equipment Debt and Capital Leases -- 2,260
Total Debt 20,535 22,026
Current Portion of Long-Term Debt (1,633) (7,681)
Long-Term Debt $18,902 $14,345
</TABLE>
During May 1997, the Company entered into a $25,000,000 credit
facility agreement with the CIT Group/Business Credit, Inc., an
asset-based lender (the "Lender"). The proceeds of this new
facility were used to repay substantially all of the Company's
existing debt and capital lease obligations. The financing
agreement was entered into on May 21, 1997 with proceeds being
disbursed to the Company's existing creditors on May 30, 1997
in the aggregate amount of approximately $17,500,000.
</PAGE>
<PAGE> 33
SIGMA CIRCUITS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 6. Long-Term Debt (Continued)
The credit facility includes a revolving line or credit, a term
loan, and a capital expenditures ("CAPEX") term loan. The
credit facility is collateralized by a lien on substantially
all of the Company's assets and do not require any compensating
balances. Additionally, the credit facility's financing
agreement prohibits the payment of any cash dividends. The
agreement also requires the Company to meet certain financial
covenants, as contractually defined, on a quarterly basis
including minimum net worth and fixed charge coverage amounts.
Additionally, the agreement contains certain affirmative and
negative covenants customary for this type of agreement. As of
June 30, 1997, the Company was in compliance with the
convenants of the financing agreement with the Lender.
Revolving Line of Credit
The revolving line of credit with the Lender limits borrowings
to a maximum amount of $13,700,000 or the sum of 90.0% and
50.0% of the Company's eligible trade accounts receivable and
raw materials inventory, respectively, as contractually
defined. A sub-limit maximum amount of $1,000,000 was
established for eligible raw materials inventory. The
revolving line of credit expires on May 21, 2001 and bears
interest, at the Company's option, based upon either the Chase
Manhattan Bank's prime rate ("Prime") or the London Interbank
Offered Rate ("Libor"). Under the Prime option, the borrowing
margins range from .25% to .50% in addition to the applicable
rate. Under the Libor option, the borrowing margins range from
2.75% to 3.00% in addition to the applicable rate. Regardless
of either option, the borrowing margins are determined based
upon the Company's profitability during its fiscal quarters.
Interest is paid monthly in arrears. As of June 30, 1997, the
revolving line of credit's interest rate was 9.0% equaling
Prime plus .5%.
Term Loan
The term loan with the Lender provided a principal amount of
$9,800,000. The term loan expires on August 1, 2002 and bears
interest, at the Company's option, based upon either the
aforementioned Prime or Libor rates. Under the Prime option,
the borrowing margins range from .75% to 1.25% in addition to
the applicable rate. Under the Libor option, the borrowing
margins range from 3.0% to 3.5% in addition to the applicable
rate. Regardless of either option, the borrowing margins are
determined based upon the Company's profitability during its
fiscal quarters. The first principal payment of $163,333 under
this loan is due September 1, 1997 with future principal
payments of the same amount due on the first of each subsequent
month. Interest is paid monthly in arrears. As of June 30,
1997, the revolving line of credit's interest rate was 9.75%
equaling Prime plus 1.25%.
CAPEX Term Loan
The revolving line of credit with the Lender limits borrowings
to a maximum amount of $1,500,000 or $500,000 plus 50.0% of
cumulative earnings before interest, taxes, depreciation and
amortization for a contractually defined period of time. The
CAPEX term loan expires on May 21, 2001 and bears interest, at
the Company's option, based upon either the aforementioned
Prime or Libor rates. Under the Prime option, the borrowing
margins range from .75% to 1.25% in addition to the applicable
rate. Under the Libor option, the borrowing margins range from
3.0% to 3.5% in addition to the applicable rate. Regardless of
either option, the borrowing margins are determined based upon
the Company's profitability during its fiscal quarters.
Interest is paid monthly in arrears. As of June 30, 1997,
there were no outstanding amounts under the CAPEX term loan.
</PAGE>
<PAGE> 34
SIGMA CIRCUITS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 6. Long-Term Debt (Continued)
Convertible Subordinated Note
The convertible subordinated note was issued to the seller of
the Citation Companies for a principal amount of $1,800,000
which is convertible into a maximum of 400,000 shares of common
stock at the option of the holder based upon certain defined
criteria. The maximum shares that may be converted are 200,000
in each two year period of the note's contractual term. The
conversion price is $4.50 for each conversion period. The
convertible subordinated note is due on May 21, 2001 and bears
interest at a fixed rate of 10.00%. Interest is paid monthly
in arrears.
Real Estate Note
The real estate note was assumed in the Citation Acquisition
for a principal amount of approximately $607,000. The note is
collateralized by the underlying building. The real estate
note is due on December 31, 2005 and bears interest at a fixed
rate of 8.5%. Interest is paid annually in arrears in
December.
Future debt payments for all outstanding debt obligations is as
follows (in thousands):
<TABLE>
Fiscal year ending June 30:
<S> <C>
1998 $ 1,633
1999 1,960
2000 1,960
2001 12,088
2002 1,960
Thereafter 934
Total $20,535
</TABLE>
Note 7. Income Taxes
The provision (benefit) for income taxes consists of (in
thousands):
<TABLE>
Year Ended June 30,
<S> <C> <C> <C>
1997 1996 1995
Current:
Federal $(1,155) $1,100 $ 862
State (134) 12 243
Total Current Income Taxes (1,289) 1,112 1,105
Deferred:
Federal 810 (1,078) (530)
State (80) (596) (181)
Total Deferred Income Taxes 730 (1,674) (711)
Valuation Allowance 325 -- --
Provision (Benefit) for Income
Taxes $ (234) $ (562) $ 394
</TABLE>
</PAGE>
<PAGE> 35
SIGMA CIRCUITS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 7. Income Taxes (Continued)
<TABLE>
Deferred income tax assets (liabilities) are comprised of (in
thousands):
Year Ended June 30,
<C> <C> <C>
<S> 1997 1996 1995
Gross Deferred Income Tax Assets,
Principally Accruals Deductible in
in Different Periods $ 1,835 $ 2,660 $ 460
Gross Deferred Income Tax Liabilities,
Principally Depreciation and
Amortization (1,259) (1,354) (1,579)
Valuation Allowance (325) -- --
Total Net Deferred Income Tax $ 251 $ 1,306 $(1,119)
Assets (Liabilities)
</TABLE>
The Company's effective income tax (benefit) rate differs from
the federal statutory income tax (benefit) rate as follows:
<TABLE>
Year Ended June 30,
<C> <C> <C>
<S> 1997 1996 1995
Federal Statutory Income Tax
(Benefit) Rate (35.0)% (35.0)% 35.0%
State Taxes, Net of Federal Benefit (2.6) (1.7) 9.8
Amortization and Write-Off of Goodwill 2.8 21.3 11.3
Amortization of Deferred Stock
Compensation 1.7 1.9 6.1
State Tax Credits (7.1) (22.6) --
Valuation Allowance 22.2 -- --
Other 1.9 1.8 1.4
Effective Income Tax (Benefit) Rate (16.1)% (34.3)% 63.6%
</TABLE>
The Company recorded a valuation allowance of approximately
$325,000 as of June 30, 1997. There was no valuation allowance
recorded as of June 30, 1996.
As of June 30, 1997, the Company had approximately $1,300,000
in net operating losses ("NOL") available for carryforward or
carryback. The Company will carryback this amount to recover
income taxes previously paid to both federal and state taxing
authorities. The carryback is available for three prior fiscal
years, through fiscal year 1994, starting with the earliest
year first. As the Company generated enough taxable income,
during the carryback period, to fully recover the NOL , the
amount has been recorded as a receivable as of June 30, 1997.
Additionally, the Company had approximately $930,000 in state
tax credits expiring at various times through fiscal year 2015.
</PAGE>
<PAGE> 35
SIGMA CIRCUITS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 8. Stockholders' Equity
Preferred Stock
The Company's Certificate of Incorporation authorized the
issuance of 5,000,000 shares of preferred stock at $.001 par
value, which may be designated as to powers, preferences,
rights, limitations or restrictions. As of June 30, 1997 and
1996, no shares of preferred stock have been issued.
Common Stock
The Company's Certificate of Incorporation authorized the
issuance of 20,000,000 shares of common stock at $.001 par
value, which may be designated as to powers, preferences,
rights, limitations or restrictions.
On January 30, 1996, the Board of Directors authorized a two-
for-one common stock split, in the form of a common stock
dividend, distributed on February 26, 1996 to stockholders of
record at the close of business on February 12, 1996. The per
share amounts and numbers of shares have been restated to
reflect the common stock split for all periods presented.
The number of shares of common stock reserved for future
issuances as of June 30, 1997 was as follows:
<TABLE>
<S> <C>
Employee Stock Options Outstanding 952,720
Reserved for Future Grants Under the
1988 Stock Option Plan 199,483
Director Stock Options Outstanding 56,454
Reserved for Future Grants Under 1994 Non-Employee 43,546
Directors' Stock Option Plan
Reserved for Issuance Under the 1994 Employee Stock
Purchase Plan 83,348
Reserved for Issuance Pertaining to Underwriter's 200,000
Warrant
Reserved for Conversion of Convertible Subordinated
Note 400,000
Total Reserved for Future Issuance 1,935,551
</TABLE>
Warrant
In connection with its initial public offering in June 1994,
the Company granted the underwriter a warrant to purchase
200,000 shares of common stock at $3.30 per share. This
warrant expires in June 1998.
Note 9. Stock Plans
1988 Stock Option Plan
In May 1988, the Company adopted the 1988 Stock Option Plan
(the "Plan") to provide for approved grants of incentive or
nonstatutory options to purchase common stock to key employees,
directors or consultants of the Company. The Plan is
administered by the Board of Directors, unless the Board of
Directors delegates administration to a committee of
disinterested directors. The maximum number of shares of common
stock that may be issued pursuant to options granted under
the Plan is 1,300,000. Incentive stock options must be granted
at not less than fair market value, and nonstatutory stock
</PAGE>
<PAGE> 37
SIGMA CIRCUITS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 9. Stock Plans (Continued)
options must be granted at not less than 85% of fair market
value at the date of grant as determined by the Board of
Directors. Options generally become exercisable over a
five-year period and generally expire ten years after the date
of grant.
1994 Non-Employee Directors' Stock Option Plan
In March 1994, the Company adopted the 1994 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan") to provide
for automatic grants of options to purchase shares of common
stock to non-employee directors of the Company. The Directors'
Plan is administered by the Board of Directors, unless the
Board of Directors delegates administration to a committee of
disinterested directors. The maximum number of shares of
common stock that may be issued pursuant to options granted
under the Directors' Plan is 100,000. Pursuant to the terms of
the Directors' Plan, each non-employee director of the Company
was granted an option to purchase 4,362 shares of common stock
upon the closing of the public offering. Any person elected as
a director of the Company who is not otherwise employed by the
Company was automatically granted an option to purchase 4,362
shares of common stock at the fair market value on the date of
grant. Each non-employee director thereafter was automatically
granted an option to purchase 1,454 shares of common stock at
the fair market value, on December 31 of each year that such
person was a non-employee director of the Company. In
September 1995, the Board of Directors authorized, and the
stockholders subsequently approved an amendment to increase the
level of grants to 10,000 (for new directors) and 3,000 (for
existing directors) from 4,362 and 1,454, respectively.
A summary of option activity under the Company's plans is as
follows:
<TABLE>
Number Weighted Average
of Shares Exercise Price
<S> <C> <C>
Outstanding at June 30, 1994 393,564 $ .63
Granted 504,150 $2.35
Exercised (18,760) $ .54
Canceled/Expired (61,233) $1.47
Outstanding at June 30, 1995 817,721 $1.65
Granted (weighted average fair
value of $2.68) 635,426 $6.97
Exercised (83,847) $1.15
Canceled/Expired (286,737) $3.88
Outstanding at June 30, 1996 1,082,563 $4.22
Granted (weighted average fair
value of $2.28) 257,000 $5.29
Exercised (44,618) $1.50
Canceled/Expired (285,771) $5.91
Outstanding at June 30, 1997 1,009,174 $4.14
</TABLE>
</PAGE>
<PAGE> 38
SIGMA CIRCUITS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 9. Stock Plans (Continued)
Additional information regarding options outstanding as of June
30, 1997 is as follows:
<TABLE>
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise of Contractual Exercise of Exercise
Price Shares Life (years) Price Shares Price
<C> <C> <C> <C> <C> <C>
$ .54- .54 208,657 6.2 $ .54 138,846 $ .54
$1.88- 2.75 217,065 7.4 $2.24 95,510 $2.30
$3.63- 5.13 110,018 9.4 $4.55 10,237 $5.04
$5.25-10.13 473,434 8.4 $6.50 111,940 $6.94
1,009,174 7.8 $4.14 356,533 $3.15
</TABLE>
Options to purchase 181,716 and 108,000 shares at weighted
average prices of $1.87 and $1.00 were exercisable as of June
30, 1996 and 1995, respectively.
1994 Employee Stock Purchase Plan
In March 1994, the Company adopted the Employee Stock Purchase
Plan (the "Purchase Plan") which provides for the issuance of
up to 290,908 shares of common stock. The Purchase Plan is
intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Internal Revenue Code. The
Purchase Plan will terminate in December 2004. The Board of
Directors has the authority to amend, suspend or terminate the
Purchase Plan, subject to the limitation that no such action
may adversely affect any outstanding rights to purchase common
stock. Under the Purchase Plan, the Board of Directors may
authorize participation by eligible employees, including
officers, in periodic offerings following the commencement of
the Purchase Plan. Common stock issued under the Purchase Plan
in fiscal years 1997 and 1996 totaled 95,087 shares at a
weighted average price of $4.14 and 98,217 shares at a weighted
average price of $3.30, respectively.
The weighted average fair value of purchase rights granted was
$1.86 and $2.11 in fiscal years 1997 and 1996, respectively.
The Company's calculations were made using the Black-Scholes
option pricing model with the following weighted average
assumptions in fiscal year 1997 and 1996, respectively:
expected term of six months after grant for both years; risk-
free interest rates of 5.1% and 5.6%; stock volatility of 75.0%
for both years; and, no dividends during the expected terms.
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123 "Accounting for
Stock-Based Compensation." This standard defines a fair value
method of accounting for stock options and other equity
instruments, such as stock purchase plans. Under this method,
compensation cost is measured based on the fair value of the
stock award when granted and is recognized as an expense over
the service period, which is usually the vesting period. The
standard permits a company to continue to account for its
compensation cost under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro
forma net income and earnings per share as if the Company had
applied the new method of accounting. The Company has adopted
the disclosure-only provisions of this new standard and will
recognize compensation costs under existing accounting rules.
</PAGE>
<PAGE> 39
SIGMA CIRCUITS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 9. Stock Plans (Continued)
Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing
models which were developed to estimate the fair value of
freely tradeable, fully transferable options without vesting
restrictions. Such options differ significantly from the
Company's stock-based awards. These models also require
subjective assumptions including future stock price volatility
and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using
the Black-Scholes option pricing model with the following
weighted average assumptions for fiscal years 1997 and 1996,
respectively: expected term of six months after vesting for
both years; expected turnover of 20.0% for employees for both
years; expected turnover of 0.0% and 10.0% for executives; risk-
free interest rates of 6.2% and 5.7%; stock volatility of 75.0%
for both years; and, no dividends during the expected terms.
The Company's calculations are based on a multiple option
valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the fiscal year 1997 and
1996 awards had been amortized to expense over the vesting
period of the awards, pro forma net loss would have been
$2,137,000 or $.53 per share in fiscal year 1997 and $1,745,000
or $.46 per share in fiscal year 1996. The impact of
outstanding non-vested stock options granted prior to fiscal
year 1996 has been excluded from the pro forma calculations in
accordance with SFAS No. 123. Therefore, the fiscal year 1997
and 1996 pro forma adjustments are not indicative of pro forma
adjustments for future periods, when the calculation will apply
to all applicable stock options.
Deferred Stock Compensation
In March 1994, the Company recorded deferred stock compensation
expense for the difference between the grant price and deemed
fair value of the Company's common stock for options granted
subsequent to December 31, 1992 through June 30, 1994. Such
deferred stock compensation expense is being amortized, on the
straight-line method, over the five-year vesting period of the
underlying options.
Note 10. Acquisition of Citation Companies
On September 30, 1995, the Company acquired substantially all
of the assets and assumed certain liabilities of Citation
Circuits, Inc., Citation Enterprises, Inc. and Citron Inc.
(collectively, the "Citation Companies"), all of which were
owned by a common shareholder and engaged in the manufacture
and sale of printed circuit boards and backplane assemblies
(the "Citation Acquisition"). The purchase price of
$16,544,000 was paid in cash of $9,952,000 (financed through
$10,000,000 of variable rate installment notes), 378,786 shares
of common stock with a fair market value of $2,500,000 and two
12.0% subordinated notes payable to the seller due in June 1997
totaling approximately $4,092,000, of which $1,500,000 was
convertible into 200,000 shares of common stock at the option
of the seller.The total purchase price of the Citation Companies
was approximately $17,278,000 (including approximately $734,000
of acquisition expenses). Of the excess of the purchase price
over the estimated fair value of the tangible net assets
acquired, approximately $300,000 has been allocated to a two
year non-compete agreement with the seller and approximately
$5,744,000 has been allocated to goodwill which is being
amortized over 15 years.
</PAGE>
<PAGE> 40
SIGMA CIRCUITS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 10. Acquisition of Citation Companies (Continued)
The reported results of operations of the Company for the
fiscal year ended June 30, 1996 includes nine months of the
operating results of what was formerly known as the Citation
Companies as the acquisition occurred on September 30, 1995.
Unaudited pro forma results of operations as if the acquisition
had occurred at the beginning of fiscal year 1995 are as
follows (in thousands, except per share data):
<TABLE>
Year Ended June 30,
<S> <C> <C>
1996 1995
Net Sales $95,366 $73,253
Gross Profit 17,553 12,328
Net Loss (922) (386)
Net Loss Per Share $ (.23) $ (.10)
Number of Shares Used in Computing
Per Share Information 3,987 3,802
</TABLE>
The unaudited pro forma financial information does not give
effect to any potential benefits that might have been realized
through the combination of operations and are not necessarily
indicative of the consolidated results which would have been
reported if the acquisition of the Citation Companies had
actually occurred at the beginning of the fiscal year 1995.
Note 11. Facility Closing Costs
During the fourth quarter of fiscal year 1996, the Company
recorded facility closing costs of $3,775,000 ($2,585,000 after
tax or $.68 per share) due to the closure of its Costa Mesa
facility. The charge included approximately $488,000 related
to the write down of long-lived assets to their expected net
realizable values, $800,000 for the portion of goodwill from
the Sigma Acquisition related to the Costa Mesa quick-turn PCB
operations, as well as amounts for severance and related
benefits, real and personal property lease terminations and
other items. As of June 30, 1997, approximately $347,000 of
the liability had not been paid.
In July 1997, the Company successfully sold the building on
behalf of the owner (and landlord). The Company expended
approximately $217,000, subsequent to fiscal year end, and the
sale of the building eliminates any future lease and operating
obligations.
Note 12. Commitments and Contingencies
The Company leases certain of its operational facilities,
offices and machinery and equipment under noncancelable
operating leases with terms expiring through fiscal year 2004.
The Company is responsible for utilities, maintenance,
insurance and property taxes under most of its leases.
</PAGE>
<PAGE> 41
SIGMA CIRCUITS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 12. Commitments and Contingencies (Continued)
Future minimum lease payments for all operating leases are as
follows (in thousands):
<TABLE>
Fiscal year ending June 30:
<S> <C>
1998 $ 636
1999 424
2000 226
2001 226
2002 172
Thereafter 117
Total $1,801
</TABLE>
Rent expense under all operating leases was approximately
$755,000, $1,215,000, and $1,114,000 in fiscal years 1997, 1996
and 1995, respectively.
In connection with the acquisition of the Citation Companies on
September 30, 1995, the Company assumed certain environmental
contingent liabilities pertaining to operations prior to that
date. As of the acquisition date, the Citation Companies had
accrued $303,000 for the two known claims.
The first contingent liability relates to allegations by the
City of Stockton of violations of its City Code regarding
discharge of waste water into the City's sewer system in excess
of allowed limits during several months in 1992. As of June 30,
1997, no further action has taken place between the City of
Stockton and the Company. The Company has established a
reserve for this contingency and in the opinion of its
management, any settlement would not likely result in a loss
that would have a material adverse effect on the Company's
business, financial condition, cash flows and results of
operations.
The second contingent liability relates to the United States
Environmental Protection Agency ("EPA") issuance of an
administrative civil complaint regarding the timely submission
of required federal forms under the Emergency Planning and
Community Right-to-Know Act of 1986 ("EPCRA"). On April 15,
1996, the Company entered into a tentative "Consent Agreement
and Consent Order" ("CACO") with the EPA pertaining to its
complaint. In the CACO, the Company has certified that it has
completed and submitted all required federal forms to the EPA
under the EPCRA, and that it has complied with all other EPCRA
requirements at all of its facilities. In addition, the
Company will also purchase and test certain equipment to aid in
its environmental regulatory requirements within twelve months
of the effective date of the CACO. The minimum aggregate cost
associated with the purchase, installation and testing of this
equipment is $220,250 and if the actual aggregate cost is
lower, the difference between the actual cost and such minimum
threshold, will be remitted to the EPA. As of June 30, 1997,
the Company had incurred approximately $288,000 of costs
associated with the minimum threshold. In relation to the
testing of the equipment, the Company is subject to additional
filing requirements with the EPA pertaining to the
functionality of the equipment. Further, the Company paid a
civil penalty of $65,000 upon execution of and as required by
the CACO in July 1996. Terms of the CACO constitute a full and
final settlement of the complaint.
</PAGE>
<PAGE> 42
SIGMA CIRCUITS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 12. Commitments and Contingencies (Continued)
On March 13, 1997, the Company filed a lawsuit against one of
its customers. The suit asserts a breach of contract by the
customer relating to custom-made assembled circuit boards and
other services provided by the Company under purchase orders
received by the Company from the customer. The suit was filed
in the Superior Court of the State of California, Santa Clara
County, with the Company seeking damages in excess of
approximately $1,000,000, the customer's outstanding accounts
receivable balance, plus additional damages, late charges and
related interest. Additionally, the Company is seeking payment
or reimbursement of costs of the suit, as well as attorneys'
fees, and any other appropriate relief. The customer filed a
cross complaint, on April 10, 1997, relating to breach of
contract, intentional and negligent misrepresentation,
intentional and negligent interference with contractual
relationships, and intentional and negligent interference with
prospective economic advantage. The customer is seeking
damages in excess of $10,000,000, an unspecified amount of
punitive damages, as well as payment or reimbursement of costs
of the suit, attorneys' fees, and any other appropriate relief.
The Company filed an application for a writ of attachment on
March 13, 1997, which was subsequently denied. Although no
assurances can be given, the Company believes the customer's
claims are without merit and will defend itself vigorously,
therefore, no provision for any liability has been made in the
financial statements. As the extent of recovery is unknown at
this time, the Company wrote off the customer's receivable
amount, as well as purchased inventory in support of this
customer relating to the manufacture of its product and accrued
other costs associated with the suit. The Company has not
established a reserve for this contingency and in the opinion
of its management, any settlement would not likely result in a
loss that would have a material adverse effect on the Company's
business, financial condition, cash flows and results from
operations.
Note 13. Employee Benefit Plan
The Company provides an employee savings and retirement plan
that is designed to qualify under Section 401(k) of the
Internal Revenue Code. Under the plan, eligible employees may
contribute up to 15% of their pre-tax earnings, not to exceed
the Internal Revenue Service annual contribution limit.
Further, the plan allows the Company to make discretionary
contributions. No contributions were made by the Company in
the fiscal years ended June 30, 1997, 1996 or 1995.
Note 14. Segment Information and Significant Customers
The Company operates in one business segment which is the
manufacture of electronic interconnect products including rigid
printed circuit boards, backplane assemblies and subassemblies
and flexible circuits products. The Company sells its
customized interconnect products to original equipment
manufacturers and contract manufacturers in the electronics
industry.
The Hewlett-Packard Company accounted for approximately 10.4%
of net sales for fiscal year 1997. No single customer accounted
for over 10.0% of net sales in the fiscal years ended June 30,
1996 and 1995.
</PAGE>
<PAGE> 43
SIGMA CIRCUITS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 15. Quarterly Results (Unaudited)
The following summarized unaudited results of operations for
the quarters in the fiscal years ended June 30, 1997 and 1996
have been accounted for using generally accepted accounting
principles for interim reporting purposes and reflect
adjustments (consisting of normal recurring adjustments) which
the Company considers necessary for the fair presentation of
results of operations for these interim periods.
<TABLE>
(In thousands, except per share amounts)
Quarters Ended
Sep. Dec. Mar. Jun. Sep. Dec. Mar. Jun.
30, 31, 31, 30, 30, 31, 31, 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 1995 1996 1996 1996 1996 1997 1997
Net Sales $16,076 $26,711 $24,330 $20,588 $18,802 $19,916 $20,425 $20,837
Gross Profit $ 3,563 $ 5,882 $ 4,936 $ 1,853 $ 2,318 $ 3,536 $ 2,514 $ 4,087
Operating
Income (Loss)$ 1,133 $ 2,445 $ 2,163 $(5,255) $ 227 $ 1,017 $(1,797) $ 1,077
Net Income
(Loss) $ 566 $ 1,148 $ 1,120 $(3,911) $ (183) $ 273 $(1,735) $ 413
Net Income
(Loss) Per
Share $ .14 $ .24 $ .23 $ (.99) $ (.05) $ .06 $ (.43) $ .09
Number of
Shares Used
in Computing
Per Share
Information 4,150 4,766 4,845 3,936 4,001 4,506 4,074 4,389
</TABLE>
</PAGE>
<PAGE> 44
Schedule II
Sigma Circuits, Inc.
<TABLE>
Valuation And Qualifying Accounts (In Thousands)
Balance at Charged Balance
Beginning Costs and Deductions/ at End
of Period Expenses Write-Off Other of Period
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended
June 30, 1995:
Accounts Receivable
Allowance $200 $ 139 $ 29 $ -- $310
Fiscal Year Ended
June 30, 1996:
Accounts Receivable
Allowance $310 $ 385 $ 244 $147(1) $598
Fiscal Year Ended
June 30, 1997:
Accounts Receivable
Allowance $598 $1,162 $1,130 $ -- $630
</TABLE>
<F1>
(1) Represents the cumulative balance of the Citation Companies' accounts
receivable allowance for doubtful accounts as of September 30, 1995.
</PAGE>
<PAGE> 45
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, in
the City of Santa Clara, County of Santa Clara, State of California,
on the 25th day of September, 1997.
Sigma Circuits, Inc.
By /s/ B. Kevin Kelly
B. Kevin Kelly
President, Chief Executive
Officer and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints B. Kevin Kelly and Philip S.
Bushnell, or any of them, his attorney-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any
amendments to this Report, and to file the same, with exhibits thereto
and other documents in connections therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of
said attorney-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
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 in the capacities and on the dates indicated.
Signature Title Date
President, Chief Executive
/s/ B. Kevin Kelly Officer and Director
B. Kevin Kelly (Principal Executive Officer) September 25, 1997
Senior Vice President,
Finance and Administration,
Chief Financial Officer,
Secretary and Director
/s/ Philip S. Bushnell (Principal Financial and
Philip S. Bushnell Accounting Officer) September 25, 1997
/s/ Robert P. Cummins
Robert P. Cummins Chairman of the Board September 25, 1997
/s/ Thomas J. Bernard
Thomas J. Bernard Director September 25, 1997
/s/ William W. Boyle
William W. Boyle Director September 25, 1997
/s/ Carl H. R. Brockl
Carl H. R. Brockl Director September 25, 1997
</PAGE>
<PAGE> 46
<TABLE>
Exhibit
Number Description
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant.(1)
3.2 Bylaws of the Registrant.(1)
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Registration Agreement among the Registrant and certain other
parties named therein, dated April 15, 1986.(1)
4.3 Series C Registration Rights Agreement among the Registrant and
certain other parties named therein, dated September 30, 1993.(1)
4.5 Specimen stock certificate.(1)
10.1 Form of Indemnity Agreement entered into between the Registrant
and its directors and officers, with related schedule.(1)
10.2 Registrant's 1988 Stock Option Plan, as amended to date.(1)
10.3 Form of Incentive Stock Option under the 1988 Stock Option Plan.(1)
10.4 Form of Nonstatutory Stock Option under the 1988 Stock Option Plan.(1)
10.5 Form of Notice of Exercise under the 1988 Stock Option Plan.(1)
10.6 Registrant's 1994 Non-Employee Directors' Stock Option Plan, as
amended to date.(1)
10.7 Registrant's 1994 Employee Stock Purchase Plan, as amended to date.(1)
10.9 Form of Stock Warrant granted to Cruttenden & Company.(1)
10.21 Lease Agreement between the Registrant and The Kontrabecki Group,
dated May 3, 1994, and attachments thereto.(1)
10.22 Lease Agreement between the Registrant and The Kontrabecki Group,
dated June 9, 1995, and attachments thereto.(2)
10.24 Lease Agreement Extension and Modification dated September 30, 1995,
between the Registrant and Anthony and Cydelle Drago to Lease
Agreement dated December 30, 1986, as amended.(2)
10.25 Consulting Agreement between the Registrant and Robert P. Cummins,
dated July 1, 1997.(4)
10.26 Change-in-Control Severance Agreement between the Registrant and
B. Kevin Kelly, dated October 26, 1995.(4)
10.27 Change-in-Control Severance Agreement between the Registrant and
Philip S. Bushnell, dated October 26, 1995.(4)
10.31 Convertible Subordinated Promissory Note granted to Citation
Enterprise, Inc., dated May 21, 1997.
10.33 Asset Purchase Agreement between the Registrant, Citation Circuits,
Inc., Citation Enterprises, Inc., Citron Inc. and Carl Brockl,
dated September 8, 1995.(3)
</TABLE>
</PAGE>
<PAGE> 46
<TABLE>
Exhibit
Number Description
<C> <S>
10.34 Financing Agreement between the Registrant and the CIT Group/Business
Credit, Inc., dated May 21, 1997 and exhibits thereto.
10.35 Lease Agreement between the Registrant and G.B.G., dated April 23, 1997,
as amended.
11.1 Statements Regarding Calculation of Net Income (Loss) Per Share.
23.1 Consent of Deloitte & Touche LLP.1
24.1 Power of Attorney. Reference is made to the signatures page.
</TABLE>
____________________________________
<F1>
(1) Incorporated by reference to the corresponding
Exhibit previously filed as an Exhibit to the Company's
Registration Statement on Form S-1, as amended, filed
May 26, 1994 (File No. 33-76606).
<F2>
(2) Incorporated by reference to the corresponding
Exhibit previously filed as an Exhibit to the Company's
Form 10-K, as amended, filed September 28, 1995 (File
No. 0-24170).
<F3>
(3) Incorporated by reference to the corresponding
Exhibit previously filed as an Exhibit to the Company's
Form 8-K, as amended, filed October 11, 1995 (File No.
0-24170).
<F4>
(4) Incorporated by reference to the corresponding
Exhibit previously filed as an Exhibit to the Company's
Registration Statement on Form S-1, as amended, filed
February 16, 1996 (File No. 333-1262).
</PAGE>
<PAGE> 48
EXHIBIT 11.1
<TABLE>
SIGMA CIRCUITS, INC.
STATEMENTS REGARDING CALCULATION
OF NET INCOME (LOSS) PER SHARE
(In thousands, except per share amounts)
Year Ended June 30,
<S> <C> <C> <C>
1997 1996 1995
Net Income (Loss) $(1,232) $(1,076) $ 226
Weighted Average Common Stock Outstanding
Common Stock Equivalents: 4,044 3,797 3,424
Dilutive Effect of Stock Options -- -- 216
Dilutive Effect of Underwriter's
Warrant -- -- --
Number of Shares Used in Computing Per
Share Information 4,044 3,797 3,640
Net Income (Loss) Per Share $ (.30) $ (.28) $ .06
</TABLE>
</PAGE>
<PAGE> 49
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statements (No. 33-76606 and No. 333-29041) of Sigma Circuits, Inc. on
Form S-8 of our report dated July 30, 1997 appearing in this Annual
Report on Form 10-K of Sigma Circuits, Inc. for the year ended June
30, 1997.
DELOITTE & TOUCHE LLP
San Jose, California
September 25, 1997
</PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet and Statement of Operations filed as part of the Report
on Form 10-K and is qualifed in its entirety by reference to such Report
on Form 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,633
<SECURITIES> 0
<RECEIVABLES> 13,062
<ALLOWANCES> 630
<INVENTORY> 2,797
<CURRENT-ASSETS> 20,098
<PP&E> 31,952
<DEPRECIATION> 16,078
<TOTAL-ASSETS> 42,567
<CURRENT-LIABILITIES> 10,143
<BONDS> 0
0
0
<COMMON> 11,152
<OTHER-SE> 1,152
<TOTAL-LIABILITY-AND-EQUITY> 42,567
<SALES> 79,980
<TOTAL-REVENUES> 79,980
<CGS> 67,525
<TOTAL-COSTS> 67,525
<OTHER-EXPENSES> 11,931
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,689
<INCOME-PRETAX> (1,466)
<INCOME-TAX> (234)
<INCOME-CONTINUING> (1,232)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,232)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
Sigma Circuits, Inc.
CONSULTING AGREEMENT
This Agreement ("Agreement") is by and between Robert P.
Cummins, an independent contractor and consultant ("Consultant")
and Sigma Circuits, Inc. ("Company") and is effective as of July
1, 1997 ("Effective Date").
In consideration of the mutual promises stated in the
paragraphs that follow, the Company and Consultant agree as
follows:
1. Engagement of Services. Consultant is hereby retained
by the Company to complete the services described in Exhibit A
(the "Services"). The manner and means by which Consultant
chooses to complete the Projects are in Consultant's sole
discretion and control. Consultant agrees to exercise the highest
degree of professionalism, and utilize its expertise and creative
talents in performing such Services. In performing the Services,
Consultant agrees to provide his own equipment, tools and other
materials at his own expense. The Company will make its
facilities and equipment available to Consultant when necessary.
Consultant shall be responsible for all expenses incurred in
performing services under this Agreement, except for reasonable
preapproved travel expenses, which shall be reimbursed by the
Company. Consultant shall perform the services necessary to
satisfy his obligations under this Agreement in a timely and
professional manner consistent with industry standards at a
location, place and time which the Consultant deems appropriate.
Nothing in this Agreement shall restrict the ability of
Consultant to serve as a member of the Company's Board of
Directors and to receive such compensation and benefits as the
Company determines to provide to the members of its Board of
Directors who are not employees of the Company.
2. Fees and Taxes. Consultant shall be paid fees for work
performed for Services at the rate of $2500 dollars per month.
Consultant shall be entitled to no additional compensation,
except for the reimbursement of expenses described above, for
services performed under the terms of this Agreement. Consultant
agrees to submit invoices to the Company on a monthly basis. The
Company accepts no responsibilities for the expenditure by
Consultant of more dollars than this Agreement authorizes. As an
independent contractor, the Company will not withhold or make
payments for state or federal income tax or social security; make
unemployment insurance or disability insurance contributions; or
obtain workers' compensation insurance on Consultant's behalf.
The Company will issue Consultant a 1099 form with respect to
Consultant's fees. Consultant agrees to accept exclusive
liability for complying with all applicable state and federal
laws governing self-employed individuals, including obligations
such as payment of quarterly taxes, social security, disability
and other contributions based on the fees paid to Consultant, its
agents or employees under this Agreement. Consultant hereby
indemnifies and defends the Company against any and all such
taxes or contributions.
3. Consultant not an Employee. Consultant agrees that it
is the express intention of both Consultant and the Company that
Consultant is an independent contractor and not an employee,
agent, joint venturer or partner of the Company. Consultant
agrees not to hold itself out as, or give any person or entity
any reason to believe, that Consultant is an employee, agent,
joint venturer or partner of the Company. Consultant agrees not
to bind the Company, unless expressly authorized by the Company
in writing. Consultant will not receive any employee benefits
such as paid holidays, vacations, sick leave or other such paid
time off, or participate in Company-sponsored health insurance or
other employee benefit plans.
4. Proprietary Information and Noncompetition. As a
condition of this Agreement, Consultant hereby agrees to abide by
the Company's Proprietary Information and Inventions Agreement,
which he has previously signed, attached hereto as Exhibit B.
Consultant retains the right to engage in work activities for
entities other than the Company. However, Consultant agrees
that, throughout the independent contractor relationship,
Consultant will not, without obtaining the Company's prior
written approval, directly or indirectly engage or prepare to
engage in any activity in competition with the Company, accept
employment or provide services to, or establish a business
relationship with a business or individual engaged in or
preparing to engage in competition with the Company.
5. Workforce. Consultant may maintain a qualified
workforce which may perform services under this Agreement. The
Company will not control, direct or supervise Consultant's
workforce. Consultant agrees that all of its employees or agents
who perform any work for the Company under this Agreement will
sign the Company's Proprietary Information and Inventions
Agreement. Consultant further agrees that it will provide the
Company with the original signed copy of such agreements prior to
such individuals' commencement of work for the Company.
Consultant assumes full and sole responsibility for the payment
of all compensation, tax withholding, social security
contributions, workers' compensation payments, disability
insurance contributions, unemployment insurance contributions and
expenses of its workforce. Consultant hereby indemnifies the
Company from any and all claims or liabilities arising out of any
of Consultant's obligations to its workforce, including but not
limited to injury, disability or death of Consultant's employees
or agents.
6. Termination. This Agreement shall be effective on the
Effective Date and shall continue in effect until June 30, 1998,
unless terminated earlier as set forth in this paragraph. Either
the Company or Consultant may terminate this Agreement at any
time by giving the other party fifteen (15) days written notice.
In the event Consultant materially breaches any of the covenants
in this Agreement, the Company may terminate this Agreement
immediately upon written notice, provided that if the reason for
termination is failure to timely perform the Services set forth
in Exhibit A, the Company shall provide Consultant with fifteen
(15) days advance written notice and an opportunity to cure the
breach during the notice period.
7. General. This Agreement shall bind the heirs, personal
representatives, successors, assigns, executors and
administrators of both Consultant and the Company, and inure to
the benefit of both Consultant and the Company, their heirs,
successors and assigns. This Agreement, including Exhibits A and
B, constitutes the complete, final and exclusive embodiment of
the entire agreement between Consultant and the Company with
respect to the terms and conditions of the subject matter hereof.
This Agreement is entered into without relying upon any promise,
warranty or representation, written or oral, other than those
expressly contained in this Agreement, and it supersedes any
other such promises, warranties, representations or agreements.
This Agreement may not be amended or modified except by a written
instrument signed by both Consultant and a duly authorized
officer of the Company. This Agreement shall be construed and
interpreted in accordance with the laws of the State of
California. If any provision of this Agreement is determined to
be invalid or unenforceable, in whole or in part, this
determination will not affect any other provision of this
Agreement. A failure of either Consultant or the Company to
enforce at any time or for any period of time the provisions of
this Agreement shall not be construed to be a waiver of such
provisions or of the right of Consultant or the Company to
enforce each and every such provision.
In Witness Whereof, the parties hereto have executed this
Agreement as of the date first written above.
Sigma Circuits, Inc. Consultant
By: /s/ B. Kevin Kelly By: /s/ Robert P. Cummins
Date: June 9, 1997 Date: June 9, 1997
Taxpayer I.D. #: ###-##-####
THIS CONVERTIBLE SUBORDINATED PROMISSORY NOTE HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE
OR DISPOSITION MAY BE EFFECTED EXCEPT IN COMPLIANCE WITH RULE 144
UNDER SAID ACT OR AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER, SATISFACTORY TO
THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT
OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE
COMMISSION.
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
$1,800,000 May 21, 1997
Palo Alto, California
For value received SIGMA CIRCUITS, INC., a Delaware
corporation ("Payor") promises to pay to CITATION ENTERPRISES,
INC., a California corporation, or its assigns ("Holder") the
principal sum of One Million Eight Hundred Thousand Dollars
($1,800,000), with interest on the outstanding principal amount
at the rate of ten percent (10.0%) per annum, or the highest rate
permissible by law, whichever is less. Interest shall commence
with the date hereof and shall continue on the outstanding
principal balance until paid in full.
1. All payments of interest and principal shall be in
lawful money of the United States of America. All payments shall
be applied first to accrued interest, and thereafter to
principal. Payor may prepay the Note in whole or in part at any
time, upon ten (10) days notice to Holder during which time
Holder may elect to convert all or a portion of this Note
pursuant to Section 4 below, without penalty or additional fees.
2. Interest on the outstanding principal balance hereof
shall be payable monthly in arrears on the first day of each
month, commencing June 1, 1997. The entire outstanding principal
balance and all unpaid accrued interest shall become fully due
and payable on May 31, 2001. If any payment of interest or
principal is not made within fifteen (15) days of the date due,
Payor shall pay to Holder, upon demand, a late fee in respect of
such late payment in the amount of Seven Hundred Fifty Dollars
($750).
3. In consideration for Holder's agreement to accept this
Note, Payor shall pay to Holder on the date hereof a loan fee in
the amount of Eighteen Thousand Dollars ($18,000).
4. Conversion.
(a) The Holder may, at its option, convert the
principal amount of this Note into shares of Payor's Common
Stock, upon three (3) days written notice to Payor, at any time,
provided however, that prior to May 21, 1999, no more than Nine
Hundred Thousand Dollars ($900,000) of the outstanding principal
may be converted. In the event of any such conversion, each
dollar of principal of this Note shall convert into shares of
such Common Stock of equal value thereto at the rate of Four
Dollars and Fifty Cents ($4.50) per share (subject to
proportional adjustment in the event of stock splits,
recapitalizations or similar events).
(b) In the event that, prior to the maturity of this
Note, the Payor conducts a merger, sale of substantially all
assets or similar transaction that results in the shareholders of
Payor immediately prior to the transaction holding less than
fifty percent (50%) of the company surviving such transaction
(referred to for convenience as a "Merger"), the Payor shall,
upon demand of the Holder pay the outstanding principal balance
of this Note plus all accrued but unpaid interest, or, if no such
demand is made, this Note shall automatically be converted into
shares of Common Stock at the rate specified in paragraph (a)
above upon such Merger.
(c) No fractional shares of Common Stock shall be
issued upon conversion of this Note. In lieu of any fractional
shares to which the Holder would otherwise be entitled, the Payor
shall pay the cash value of that fractional share, calculated on
the basis of the price of a share of such Common Stock. Upon the
conversion of this Note pursuant to Section 4(a) or (b) above,
the Holder shall surrender this Note, duly endorsed, at the
principal offices of the Payor. The Payor shall, as soon as
practicable thereafter, issue and deliver to the Holder at such
principal office a certificate or certificates for the number of
shares of such Common Stock to which such Holder shall be
entitled upon such conversion (bearing such legends as may be
required by the Payor's bylaws and applicable state and federal
securities laws in the opinion of counsel to the Payor), together
with any other securities and property to which the Holder is
entitled upon such conversion under the terms of this Note,
including a check payable to the Holder for any cash amounts
payable as described above. In the event of any conversion of
this Note pursuant to Section 4(b) above, such conversion shall
be deemed to have been made immediately prior to the closing of
the Merger and on and after such date the Holder entitled to
receive the shares of such Common Stock issuable upon such
conversion shall be treated for all purpose as the record holder
of such shares. Upon conversion of this Note, the Payor shall be
forever released from all its obligations and liabilities under
this Note, except that the Payor shall be obligated to pay the
Holder, within ten (10) days after the date of such conversion,
any interest accrued and unpaid or unconverted to and including
the date of such conversion, and no more.
5. The principal of and interest on the indebtedness
evidenced by this Note are hereby expressly subordinated, in
right of payment, to the prior payment in full of all of the
Payor's indebtedness under that certain Financing Agreement dated
as of May 21, 1997, by and between The CIT Group/Business Credit,
Inc. and the Payor (the "Senior Debt"), whether outstanding on
the date hereof or hereafter created or incurred, and any
deferrals, renewals or extensions of any such indebtedness or any
notes or other evidence of indebtedness issued in exchange for
such indebtedness. Payor shall not make, and Holder shall not
ask for, demand or receive, any payments of principal or interest
while any portion of such Senior Debt is outstanding, provided,
however, that (i) Holder may convert the principal amount of this
Note into Common Stock pursuant to Section 4 above at any time,
and (ii) so long as no event of default under the Senior Debt
exists, Payor may make regularly scheduled payments of interest
and principal hereunder.
6. Payor hereby waives demand, notice, presentment,
protest and notice of dishonor.
7. The terms of this Note shall be construed in accordance
with the laws of the State of California, as applied to contracts
entered into by California residents within the State of
California, which contracts are to be performed entirely within
the State of California.
8. Any term of this Note may be amended or waived with the
written consent of each of Payor and Holder.
SIGMA CIRCUITS, INC.
By: /s/ B. Kevin Kelly
B. Kevin Kelly
President and Chief Executive Officer
FINANCING AGREEMENT
The CIT Group/Business Credit, Inc.
(as Agent and as Lender)
And
Sigma Circuits, Inc.
(as Borrower)
Dated: as of May 21, 1997
TABLE OF CONTENTS
Page
SECTION 1. Definitions 1
SECTION 2. Conditions Precedent 13
SECTION 3. Revolving Loans 15
SECTION 4. Letters of Credit 17
SECTION 4A. CAPEX Term Loans 19
SECTION 4B. Term Loans 20
SECTION 5. Collateral 21
SECTION 6. Representations, Warranties and Covenants 24
SECTION 7. Interest, Fees and Expenses 30
SECTION 8. Powers 32
SECTION 9. Events of Default and Remedies 32
SECTION 10. Termination 35
SECTION 11. Agency 36
SECTION 12. Agreements between the Lenders 38
SECTION 13. Miscellaneous 40
EXHIBITS
Exhibit A Form of Capex Term Loan Promissory Note
Exhibit B Form of Term Loan Promissory Note
THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation
(hereinafter "CITBC"), with offices located at 300 South Grand Avenue,
Third Floor, Los Angeles, CA 90071, and the other lenders that may,
subsequent to the date hereof, purchase from CITBC a portion of CITBC's
rights and obligations under this Financing Agreement (CITBC and such other
lenders each individually sometimes referred to as a "Lender" and
collectively as the "Lenders") and CITBC as agent for the Lenders
(hereinafter the "Agent") are pleased to confirm the terms and conditions
under which the Lenders shall make revolving loans, advances and other
financial accommodations to Sigma Circuits, Inc. (herein the "Company"), a
Delaware corporation with its principal place of business at 393 Mathew
Street, Santa Clara, CA 95050.
SECTION 1. Definitions
Accounts shall mean all of the Company's now existing and future: (a)
accounts receivable, (whether or not specifically listed on schedules
furnished to CITBC), and any and all instruments, documents, contract
rights, chattel paper, general intangibles, including, without limitation,
all accounts created by or arising from all of the Company's sales of goods
or rendition of services to its customers, and all accounts arising from
sales or rendition of services made under any of the Company's trade names
or styles, or through any of the Company's divisions; (b) unpaid seller's
rights (including rescission, replevin, reclamation and stoppage in
transit) relating to the foregoing or arising therefrom; (c) rights to any
goods represented by any of the foregoing, including rights to returned or
repossessed goods; (d) reserves and credit balances arising hereunder; (e)
guarantees or collateral for any of the foregoing; (f) insurance policies
or rights relating to any of the foregoing; (g) cash and non-cash proceeds
of any and all the foregoing; and (h) deposits.
Aggregate Line of Credit means $25,000,000.00, and includes the Line of
Credit, the Term Loan, and the CAPEX Term Loan Line of Credit.
Agreement shall mean this Financing Agreement as it may from time to time
be amended, modified, supplemented, renewed, extended, or restated.
Anniversary Date shall mean the date occurring one (1) year from the date
hereof and the same date in every year thereafter.
Availability shall mean at any time the excess of the sum of a) Eligible
Accounts Receivable multiplied by the percentage provided for in clause (a)
of paragraph 1 of Section 3 of this Agreement and b) Eligible Raw Materials
multiplied by the percentage provided for in clause (b) of paragraph 1 of
Section 3 of this Agreement but not to exceed the Inventory Sub-Limit in
effect from time to time, less the sum of x) the outstanding aggregate
amount of all Obligations (exclusive of the then outstanding amount of all
Letters of Credit and exclusive of any Obligations relating to the Term
Loans and the CAPEX Term Loans) of the Company and y) the Availability
Reserve.
Availability Reserve shall mean, at any time of determination y) the then
outstanding amount of all Letters of Credit, plus z) in the reasonable
discretion of the Agent, any reserve that the Agent may require.
Broker shall mean Sierra Financial Associates.
Business Day shall mean any day on which the Agent and The Chase Manhattan
Bank are open for business.
CAPEX Libor Margin shall mean the percentages set forth below determined
with respect to the Net Income of the Company for its most recent fiscal
quarter, with any change to occur on the first day of the month following
each filing of a 10Q or 10K report by the Company with the SEC, and the
Agent's receipt and review of a copy thereof. Should the Company fail
timely to file and provide to the Agent a copy of the aforementioned
reports (without giving effect to any extension of time), then interest
will be computed based on the highest margin set forth below during such
period of delinquency until the Agent's receipt and review of the Company's
next 10Q or 10K report:
If Net Income is: Margin is:
Less than or Equal to 0 3.50%
Greater than 0 3.00%
CAPEX Non-Libor Margin shall mean the percentages set forth below
determined with respect to the Net Income of the Company for its most
recent fiscal quarter, with any change to occur on the first day of the
month following each filing of a 10Q or 10K report by the Company with the
SEC, and the Agent's receipt and review of a copy thereof. Should the
Company fail timely to file and provide to the Agent a copy of the
aforementioned reports (without giving effect to any extension of time),
then interest will be computed based on the highest margin set forth below
during such period of delinquency until the Agent's receipt and review of
the Company's next 10Q or 10K report:
If Net Income is: Margin is:
Less than or Equal to 0 1.25%
Greater than 0 0.75%
CAPEX Term Loan Availability shall mean, as of any date of determination
thereof, the greater of: (a) Zero Dollars ($0.00); and (b) the then
applicable CAPEX Term Loan Maximum Amount minus the aggregate principal
amount of all CAPEX Term Loans funded by the Lenders to the Company on or
before such date of determination.
CAPEX Term Loans shall mean the term loans made and to be made to the
Company by the Lenders in the aggregate principal amount of up to the CAPEX
Term Loan Maximum Amount as more fully described in Section 4A of this
Agreement.
CAPEX Term Loan Line of Credit shall mean the commitment of the Lenders to
make CAPEX Term Loans to the Company pursuant to Section 4A of this
Agreement in the aggregate amount of the CAPEX Term Loan Maximum Amount.
CAPEX Term Loan Maximum Amount shall mean, as of any date of determination
thereof, including, without limitation, the proposed date of funding of any
CAPEX Term Loan, for purposes of determining whether availability exists
under the CAPEX Term Loan Line of Credit to make such CAPEX Term Loan, the
lesser of: (a) $1,500,000.00; and (b) the sum of (i) $500,000.00, plus
(ii) commencing with the delivery to the Agent of the Company's monthly
financial statements for the Company's fiscal June, 1997, fifty percent
(50%) of the Company's cumulative EBITDA for the Relevant Measuring Period.
CAPEX Term Loan Promissory Notes shall mean the promissory notes each in
the form of Exhibit A hereto executed and delivered by the Company to the
Lenders to evidence a CAPEX Term Loan extended pursuant to and repayable in
accordance with, the provisions of Section 4A hereof.
Capital Expenditures for any period shall mean the aggregate of all
expenditures of the Company during such period that in conformity with GAAP
are required to be included in or reflected by the property, plant or
equipment or similar fixed asset account reflected in the balance sheet of
the Company.
Capital Improvements shall mean operating Equipment acquired or installed
for use in the Company's domestic United States business operations.
Capital Lease shall mean any lease of property (whether real, personal or
mixed) which, in conformity with GAAP, is accounted for as a capital lease
or a Capital Expenditure on the balance sheet of the Company.
Chase Manhattan Bank Rate shall mean the rate of interest per annum
announced by The Chase Manhattan Bank from time to time as its prime rate
in effect at its principal office in the City of New York. (The prime rate
is not intended to be the lowest rate of interest charged by The Chase
Manhattan Bank to its borrowers).
Citation shall mean Citation Circuits, Inc.
Citation Subordinated Debt shall mean $1,800,000.00 of new or restructured
subordinated principal Indebtedness of the Company to Citation, which shall
be unsecured and subordinate to the Obligations, and the terms of which
subordinated Indebtedness (including principal amortization and the
applicable subordination provisions relating thereto) shall be satisfactory
to the Agent.
Collateral shall mean (a) all present and future Accounts, Equipment,
Documents of Title, Inventory, Investment Property, Deposit Accounts,
General Intangibles, and Other Collateral of the Company, (b) the Santa
Clara Fee Real Property, and (c) at the option of the Agent, all other
present and future Real Estate of the Company other than (i) leasehold
estates in Real Estate of the Company that exist on the date hereof, (ii)
leasehold estates in Real Estate of the Company arising after the date
hereof that are not deemed by the Agent to be of material value as
Collateral, and (iii) the Stockton Fee Real Property.
Collateral Management Fee shall mean the sum of $50,000.00 which shall be
paid to the Agent in accordance with paragraph 8 of Section 7 hereof to
offset the expenses and costs of the Agent in connection with record
keeping, periodic examinations, analyzing and evaluating the Collateral.
Consolidated Balance Sheet shall mean a consolidated balance sheet for the
Company and its consolidated subsidiaries, if any, eliminating all
inter-company transactions and prepared in accordance with GAAP.
Consolidating Balance Sheet shall mean a Consolidated Balance Sheet plus
individual balance sheets for the Company and its subsidiaries, if any,
showing all eliminations of inter-company transactions and prepared in
accordance with GAAP and including a balance sheet for the Company
exclusively. With respect to any period during which the Company has no
subsidiaries, delivery hereunder of Consolidating Balance Sheets shall not
be required.
Customarily Permitted Liens shall mean
(a) liens of local or state authorities for franchise or other like
taxes provided the aggregate amounts of such liens shall not exceed
$100,000.00 in the aggregate at any one time;
(b) statutory liens of landlords and vendors and liens of carriers,
warehousemen, mechanics, materialmen and other like liens imposed by law,
created in the ordinary course of business and for amounts not yet due (or
which are being contested in good faith by appropriate proceedings or other
appropriate actions which are sufficient to prevent imminent foreclosure of
such liens) and with respect to which adequate reserves or other
appropriate provisions are being maintained in accordance with GAAP;
(c) deposits made (and the liens thereon) in the ordinary course of
business (including, without limitation, security deposits for leases,
surety bonds and appeal bonds) in connection with workers' compensation,
unemployment insurance and other types of social security benefits or to
secure the performance of tenders, bid contracts (other than for the
repayment or guarantee of borrowed money or purchase money obligations),
foreign currency exchange contracts, statutory obligations and other
similar obligations arising as a result of progress payments under
government contracts;
(d) easements (including, without limitation, reciprocal easement
agreements and utility agreements), encroachments, minor defects or
irregularities in title, variation and other restrictions, charges or
encumbrances (whether or not recorded) affecting the Real Estate and which
do not interfere in any material respect with the use or enjoyment of such
Real Estate in the ordinary course of the Company's business;
(e) liens that are not prior to the liens of the Agent or the Lenders
that constitute rights of setoff of a customary nature or bankers' liens
with respect to amounts on deposit, whether arising by operation of law or
by contract, in connection with arrangements (other than the borrowing of
money) entered into with banks in the ordinary course of business; and
(f) leases or subleases and non-exclusive licenses and sublicenses
granted to others in the ordinary course of business not interfering in any
material respect with the business of the Company, and any interest or
title of a lessor or licensor under any lease or license.
Deed of Trust shall mean a "Deed of Trust, Security Agreement, Fixture
Filing, and Assignment of Rents" dated as of even date herewith, made by
the Company as trustor, in favor of Chicago Title Company, as trustee, for
the benefit of the Agent, as beneficiary, encumbering the Santa Clara Fee
Real Property, in form and substance satisfactory to the Agent.
Default shall mean any event specified in Section 9 hereof, whether or not
any requirement for the giving of notice, the lapse of time, or both, or
any other condition, event or act specified therein, has been satisfied.
Default Rate of Interest shall mean a rate of interest per annum equal to
the sum of: a) two and one-half (2.50%) and b) the Chase Manhattan Bank
Rate, which the Agent shall be entitled to charge the Company on all
Obligations due the Lenders by the Company to the extent provided in
paragraph 2 of Section 9 of this Agreement.
Deposit Accounts shall have the meaning set forth in the Uniform Commercial
Code as in effect in the State of California.
Depository Accounts shall mean those accounts owned by, and in the name of,
the Agent and designated by the Agent for the deposit of proceeds of
Collateral.
Documentary Letter of Credit shall mean a Letter of Credit that is a
commercial or documentary letter of credit, as such term is commonly
understood by letter of credit issuers, and that is not a standby letter of
credit, as such term is commonly understood by letter of credit issuers.
Documents of Title shall mean all present and future warehouse receipts,
bills of lading, shipping documents, chattel paper, instrument and similar
documents, all whether negotiable or not and all goods and inventory
relating thereto and all cash and non-cash proceeds of the foregoing.
Early Termination Date shall mean the date on which the Company terminates
this Agreement, the Line of Credit, the CAPEX Term Loan Line of Credit,
and/or the Aggregate Line of Credit, which date is before the second
Anniversary Date.
Early Termination Fee shall: i) mean the fee the Lenders are entitled to
charge the Company in the event the Company terminates this Agreement, the
Line of Credit, the CAPEX Term Loan Line of Credit, and/or the Aggregate
Line of Credit on a date before the second Anniversary Date; and ii) be
determined by multiplying the Aggregate Line of Credit by one half of one
percent (0.50%) per annum for the number of days from the Early Termination
Date to the fourth Anniversary Date.
EBITDA shall mean, in any period, all consolidated earnings of the Company
before all interest and tax obligations of the Company for said period, and
before depreciation and amortization for such period, determined in
accordance with GAAP.
Effective Date shall mean the date on which the initial loans and advances
are available hereunder.
Environmental Indemnity shall mean an "Environmental Indemnity," dated as
of even date herewith, made by the Company, in favor of the Agent and the
Lenders, in form and substance satisfactory to the Agent.
Event(s) of Default shall have the meaning provided for in Section 9 of
this Agreement.
Eligible Accounts Receivable shall mean the gross amount of the Company's
accounts receivable, payable in United States currency, due from customers
residing in the United States of America and Canada that conform to the
warranties contained herein and at all times continue to be acceptable to
the Agent in the exercise of its reasonable business judgment, less,
without duplication, the sum of a) any returns, discounts, claims, credits
and allowances of any nature (whether issued, owing, granted or
outstanding), and b) reserves for: i) sales to the United States of
America or to any agency, department or division thereof; ii) accounts that
remain unpaid more than ninety (90) days from invoice date; iii) contras;
iv) sales to any subsidiary or to any company affiliated with the Company
in any way; v) bill and hold (deferred shipment) or consignment sales; vi)
sales to any customer which is a) insolvent, b) the debtor in any
bankruptcy, insolvency, arrangement, reorganization, receivership or
similar proceedings under any federal or state law, c) negotiating, or has
called a meeting of its creditors for purposes of negotiating, a compromise
of its debts or d) in the Agent's reasonable business judgment, financially
unacceptable to the Agent or has a credit rating unacceptable to the Agent;
vii) all sales to any customer if fifty percent (50%) or more of either x)
all outstanding invoices or y) the aggregate dollar amount of all
outstanding invoices, are unpaid ninety (90) days from invoice date; viii)
all deposits due customers; ix) the amount by which the then outstanding
amount of all otherwise Eligible Accounts Receivable due from customers
residing in Canada exceeds twenty-five percent (25%) of the total
outstanding amount of all otherwise Eligible Accounts Receivable due from
customers residing in the United States of America or Canada; x) any other
reasons deemed necessary by the Agent in its reasonable business judgment
and which are customary either in the commercial finance industry or in the
lending practices of the Lenders; and xi) in the Agent's reasonable
business judgment, an amount representing, historically, one hundred
percent (100%) of returns, discounts, claims, credits and allowances.
Eligible Raw Materials shall mean the gross cost of the Company's raw
materials Inventory that conforms to the warranties herein less any i)
supplies, ii) Inventory not present in the United States of America, iii)
Inventory returned or rejected by the Company's customers other than
Inventory that is undamaged and resalable in the normal course of business,
iv) Inventory to be returned to the Company's suppliers, v) Inventory in
transit to third parties, vi) shrinkage, and vii) reserves required by the
Agent in accordance with the standard set forth below and without
duplication but only for the following: (a) Inventory specially ordered
for specific customers which Inventory is uniquely different in size,
shape, quality or color and which uniquely different Inventory is not
customarily used or sold by the Company; (b) market value declines, to the
extent the Inventory's value is below its cost; (c) bill and hold (deferred
shipment or consignment sales); (d) markdowns, to the extent the
Inventory's value is below its cost; (e) Inventory which is not located at
the Company's domestic United States locations or warehouses (other than
Inventory in transit between the Company's facilities); (f) demonstration
items, to the extent the Inventory's value is below its cost; (g) damaged
or defective Inventory; (h) obsolete Inventory (but not including undamaged
Inventory which is solely out-of-season); (i) Inventory held for lease; and
(j) Inventory imported under letters of credit issued without the
assistance of the Letter of Credit Guaranty and then only until the bank
issuing such letters of credit has been reimbursed by the Company for any
drafts under such letters of credit. The amount of such reserves shall be
determined solely by the Agent in its reasonable discretion and in the
exercise of its reasonable business judgment using standards customarily
applied by the Agent to transactions involving clients engaged in
comparable businesses and taking into account the nature of the Company's
business, consistently applied by the Agent. Such standards shall take
into consideration amounts representing, historically, the Company's
reserves, discounts, returns, claims, credits and allowances.
Equipment shall mean all present and hereafter acquired machinery,
equipment, furnishings and fixtures, and all additions, substitutions and
replacements thereof, wherever located, together with all attachments,
components, parts, equipment and accessories installed thereon or affixed
thereto and all proceeds of whatever sort.
ERISA shall mean the Employee Retirement Income Security Act or 1974, as
amended from time to time and the rules and regulations promulgated
thereunder from time to time.
Excess Availability shall mean the amount by which Availability on any date
of determination exceeds all past due or then due debts, obligations and
payables of the Company.
Existing Stockton Lien shall mean the lien on the Stockton Fee Real
Property that exists as of the date hereof, or by any extension or
refinancing of such lien that does not increase the outstanding principal
secured thereby, materially increase the interest rate thereon or fees
payable with respect thereto, or foreshorten the maturity thereof.
Fixed Charge Coverage Ratio shall mean, with respect to any period, a
fraction, the numerator of which is the Company's consolidated EBITDA for
such period, and the denominator of which is the sum of interest expense,
principal amortization, taxes paid or payable in cash, and non-financed
capital expenditures of the Company on a consolidated basis, determined in
accordance with GAAP.
GAAP shall mean generally accepted accounting principles in the United
States of America as in effect on the date hereof.
General Intangibles shall have the meaning set forth in the Uniform
Commercial Code as in effect in the State of California and shall include,
without limitation, all present and future right, title and interest in and
to all tradenames, trademarks (together with the goodwill associated
therewith), patents, patent applications, patent registrations, licenses,
copyrights, copyright registrations, copyright recordings, copyright
applications, copyright licenses, customer lists, distribution agreements,
service agreements, supply agreements, and tax refunds, together with all
monies and claims for monies now or hereafter due and payable in connection
with any of the foregoing or otherwise, and all cash and non-cash proceeds
thereof.
Indebtedness shall mean, without duplication, all liabilities, which are
any of the following: (a) obligations in respect of money (borrowed or
otherwise) or for the deferred purchase price of property, services or
assets, other than Inventory, or (b) lease obligations which, in accordance
with GAAP, have been, or which should be capitalized.
Inventory shall mean all of the Company's present and hereafter acquired
merchandise, inventory and goods, and all additions, substitutions and
replacements thereof, wherever located, together with all goods and
materials used or usable in manufacturing, processing, packaging or
shipping same; in all stages of production- from raw materials through
work-in-process to finished goods - and all proceeds thereof of whatever
sort.
Inventory Sub-Limit shall mean $1,000,000.00.
Investment Property shall have the meaning set forth in the Uniform
Commercial Code as in effect in the State of California.
Issuing Bank shall mean the bank issuing Letters of Credit for the Company.
Letters of Credit shall mean all letters of credit issued with the
assistance of the Lenders by the Issuing Bank for or on behalf of the
Company. A Letter of Credit shall be either a Documentary Letter of Credit
or a Standby Letter of Credit.
Letter of Credit Guaranty shall mean the guaranty delivered by the Agent on
behalf of the Lenders to the Issuing Bank of the Company's reimbursement
obligation under the Issuing Bank's Reimbursement Agreement, Application
for Letter of Credit or other like document.
Letter of Credit Guaranty Fee shall mean the fee the Lenders may charge the
Company under paragraph 6 of Section 7 of this Agreement for: i) issuing
the Letter of Credit Guaranty or ii) otherwise aiding the Company in
obtaining Letters of Credit, or iii) indemnifying, as of the date hereof,
any bank that had previously issued letters of credit for the Company.
Libor shall mean, at any time of determination, and subject to
availability, the London Interbank Offered Rate paid in London by The Chase
Manhattan Bank on one month, two month, three month or six month dollar
deposits and if such rates are not otherwise available, then those rates as
published, under "Money Rates", in the New York City edition of the Wall
Street Journal or if there is no such publication or statement therein as
to Libor, then in any publication used in the New York City financial
community.
Libor Loan shall mean the loans for which the Company has elected to use
Libor for interest rate computations.
Libor Period shall mean the Libor for one month, two month, three month or
six month dollar deposits, as selected by the Company.
Line of Credit shall mean the commitment of the Lenders to make loans and
advances pursuant to Section 3 of this Agreement, to the Company in the
amount equal to $13,700,000.00.
Line of Credit Fee shall: i) mean the fee due the Lenders at the end of
each month for making available during such month the unused portion of the
Line of Credit and the CAPEX Term Loan Line of Credit, and ii) be
determined by multiplying the sum of (A) the average daily Unused Line of
Credit for such month plus the average daily CAPEX Term Loan Availability
for such month, times one-half of one percent (1/2 of 1%) per annum times
the number of days in said month.
Loan Facility Fee shall mean the non-refundable fee payable to the Lenders
in accordance with, and pursuant to, the provisions of paragraph 4 of
Section 7 of this Agreement.
Net Income shall mean, with respect to any fiscal period of the Company,
its consolidated net income for such period determined in accordance with
GAAP.
Net Worth shall mean assets in excess of liabilities, determined in
accordance with GAAP, on a consistent basis with the latest annual audited
statement.
Obligations shall mean all loans and advances made or to be made by the
Lenders or by the Agent on behalf of the Lenders to the Company or to
others for the Company's account; any and all indebtedness and obligations
which may at any time be owing by the Company to the Lenders howsoever
arising, whether now in existence or incurred by the Company from time to
time hereafter; whether secured by pledge, lien upon or security interest
in any of the Company's assets or property or the assets or property of any
other person, firm, entity or corporation; whether such indebtedness is
absolute or contingent, joint or several, matured or unmatured, direct or
indirect and whether the Company is liable to the Lenders for such
indebtedness as principal, surety, endorser, guarantor or otherwise.
Obligations shall also include indebtedness owing to the Lenders by the
Company under this Agreement or under any other agreement or arrangement
now or hereafter entered into between the Company and the Lenders;
indebtedness or obligations incurred by, or imposed on, the Lenders and/or
the Agent as a result of environmental claims (other than as a result of
actions of the Lenders and/or the Agent) arising out of the Company's
operation, premises or waste disposal practices or sites; the Company's
liability to the Lenders as maker or endorser on any promissory note or
other instrument for the payment of money; the Company's liability to the
Lenders and/or the Agent under any instrument of guaranty or indemnity, or
arising under any guaranty, endorsement or undertaking which the Lenders
and/or the Agent may make or issue to others for the Company's account,
including any accommodation extended with respect to applications for
letters of credit, the Lenders' and/or the Agent's acceptance of drafts or
the Lenders and/or the Agent's endorsement of notes or other instruments
for the Company's account and benefit. Without limiting the generality of
the foregoing, the term "Obligations" as used in this Agreement shall also
include, without limitation, all indebtedness, obligations and liabilities
of the Company to the Agent or the Lenders pursuant to (i) the CAPEX Term
Loans and/or arising under the CAPEX Term Loan Line of Credit, (ii) the
Term Loans, (iii) the Deed of Trust, and (iv) the Environmental Indemnity
(except that the Obligations of the Company under the Environmental
Indemnity shall not be secured by the lien of the Deed of Trust on the
Santa Clara Fee Real Property).
Operating Leases shall mean all leases of property (whether real, personal
or mixed) other than Capital Leases.
Other Collateral shall mean all now owned or hereafter acquired: cash and
other monies and property in the possession or control of the Agent and/or
the Lenders at any time; all books, records, ledger cards, disks and
related data processing software at any time evidencing or containing
information relating to any of the Collateral or otherwise necessary or
helpful in the collection thereof or realization thereon; all letters of
credit and proceeds of letters of credit; and all cash and non-cash
proceeds of any of the foregoing.
Out-of-Pocket Expenses shall mean all of the Agent's and/or, after an Event
of Default, Lenders' present and future expenses incurred relative to this
Agreement, whether incurred heretofore or hereafter, which expenses shall
include, without being limited to, the cost of record searches, all costs
and expenses incurred by the Agent in opening bank accounts, depositing
checks, receiving and transferring funds, and any charges imposed on the
Agent due to "insufficient funds" of deposited checks and the Agent's
standard fee relating thereto, any amounts paid by the Agent, incurred by
or charged to the Agent by the Issuing Bank under the Letter of Credit
Guaranty or the Company's Reimbursement Agreement, Application for Letter
of Credit or other like document which pertain either directly or
indirectly to such Letters of Credit, and the Agent's standard fees
relating to the Letters of Credit and any drafts thereunder, outside
counsel fees, title insurance premiums, environmental due diligence costs,
real estate survey costs (if applicable), fees and taxes relative to the
filing of financing statements, costs of preparing and recording the Deed
of Trust against the Santa Clara Fee Real Property, and all expenses, costs
and fees set forth in Section 9 of this Agreement.
Permitted Encumbrances shall mean: i) liens expressly permitted, or
consented to, by the Agent; ii) Purchase Money Liens; iii) Customarily
Permitted Liens; iv) liens granted the Agent for the benefit of the Lenders
by the Company; v) liens of judgment creditors provided such liens do not
exceed, in the aggregate, at any time, $100,000.00 (other than liens bonded
or insured to the reasonable satisfaction of the Agent); vi) the Existing
Stockton Lien; vii) liens for taxes or assessments not yet due and payable;
and viii) liens for taxes or assessments which are being diligently
contested in good faith by the Company by appropriate proceedings and which
liens are not x) senior to the liens of the Agent (except for real property
taxes or assessments) or y) for taxes due the United States of America or
z) for amounts in excess of $100,000.00.
Permitted Indebtedness shall mean: i) current indebtedness maturing in
less than one year and incurred in the ordinary course of business for raw
materials, supplies, equipment, services, utilities, taxes or labor; ii)
the indebtedness secured by the Purchase Money Liens; iii) the Subordinated
Debt and the Subordinated Replacement Debt; iv) indebtedness arising under
this Agreement; v) deferred taxes and other expenses incurred in the
ordinary course of business; and vi) other indebtedness existing on the
date of execution of this Agreement and listed in the most recent financial
statement delivered to the Lenders or otherwise disclosed to the Lenders in
writing on or before the date of execution of this Agreement.
Purchase Money Indebtedness shall mean the Indebtedness incurred by the
Company either concurrent with the acquisition by the Company of Equipment
or not more than ninety (90) days after the acquisition by the Company of
Equipment and secured solely by the Equipment acquired x) concurrent with
the incurrence of the Indebtedness or y) within ninety (90) days of the
incurrence of the Indebtedness provided i) the Indebtedness so incurred is
to facilitate the Company's acquisition of Equipment or to reimburse the
Company for the cash purchase price paid by the Company for the purchase of
Equipment, ii) the Company shall deliver to the Agent a description of the
Equipment so pledged, iii) the Indebtedness in each transaction is not less
than fifty percent (50%) of the then book value of the Equipment pledged to
secure such Indebtedness, iv) such Equipment is not Collateral financed in
whole or in part by CAPEX Term Loans, and v) the Indebtedness incurred
shall not exceed, in the aggregate, $1,500,000.00 in any fiscal year.
Purchase Money Liens shall mean the lien granted by the Company to secure
the Purchase Money Indebtedness.
Real Estate shall mean the Company's fee and/or leasehold estates or
interests in real property, including, without limitation, the Santa Clara
Fee Real Property and the Stockton Fee Real Property.
Relevant Measuring Period shall mean (a) with respect to any date prior to
the date that the Agent has received the Company's financial statements for
the Company's fiscal May, 1998, the period commencing on the first day of
the Company's fiscal June, 1997, and continuing through and including the
last day of the most recent fiscal month of the Company ended prior to the
Company's fiscal May, 1998, for which the Agent has received the Company's
financial statements, and (b) with respect to any date on or after the date
that the Agent has received the Company's financial statements for the
Company's fiscal May, 1998, the twelve (12) consecutive fiscal months of
the Company most recently ended with respect to which the Agent has
received the Company's financial statements.
Required Lenders shall mean Lenders holding not less than seventy percent
(70%) of the Obligations.
Revolver Libor Margin shall mean the percentages set forth below determined
with respect to the Net Income of the Company for its most recent fiscal
quarter, with any change to occur on the first day of the month following
each filing of a 10Q or 10K report by the Company with the SEC, and the
Agent's receipt and review of a copy thereof. Should the Company fail
timely to file and provide to the Agent a copy of the aforementioned
reports (without giving effect to any extension of time), then interest
will be computed based on the highest margin set forth below during such
period of delinquency until the Agent's receipt and review of the Company's
next 10Q or 10K report:
If Net Income is: Margin is:
Less than or Equal to 0 3.00%
Greater than 0 2.75%
Revolver Non-Libor Margin shall mean the percentages set forth below
determined with respect to the Net Income of the Company for its most
recent fiscal quarter, with any change to occur on the first day of the
month following each filing of a 10Q or 10K report by the Company with the
SEC, and the Agent's receipt and review of a copy thereof. Should the
Company fail timely to file and provide to the Agent a copy of the
aforementioned reports (without giving effect to any extension of time),
then interest will be computed based on the highest margin set forth below
during such period of delinquency until the Agent's receipt and review of
the Company's next 10Q or 10K report:
If Net Income is: Margin is:
Less than or Equal to 0 0.50%
Greater than 0 0.25%
Revolving Loans shall mean the loans and advances made, from time to time,
to or for the account of the Company by the Agent on behalf of the Lenders
pursuant to Section 3 of this Agreement.
Santa Clara Fee Real Property shall mean the four parcels of Real Estate
owned in fee simple by the Company and located at 353 Mathew Street, 359
Mathew Street, 377 Mathew Street, and 393 Mathew Street, each in Santa
Clara, California, including all related buildings, structures,
improvements, easements, appurtenances, hereditaments, rights, interests,
and estates, but not including personal property.
Settlement Date shall mean the date, weekly, and more frequently, at the
discretion of the Agent, upon the occurrence of an Event of Default or a
continuing decline or increase of the Revolving Loans that the Agent and
the Lenders shall settle amongst themselves so that x) the Agent shall not
have, as Agent, any money at risk and y) on such Settlement Date the
Lenders shall have a pro rata amount of all outstanding Revolving Loans,
CAPEX Term Loans, and Term Loans.
Significant Assets shall mean, with respect to any person or entity, assets
of such person or entity with an aggregate value in excess of $25,000.00.
Standby Letter of Credit shall mean a Letter of Credit that is a standby
letter of credit as such term is commonly understood by letter of credit
issuers.
Stockton Fee Real Property means the Real Estate located in Stockton,
California, owned in fee on the date hereof by the Company, so long as it
is encumbered by the Existing Stockton Lien.
Subordinated Debt shall mean the Citation Subordinated Debt and the debt
due a Subordinating Creditor (and any note evidencing such debt) which has
been subordinated, by a Subordination Agreement, to the prior payment and
satisfaction of the Obligations of the Company to the Agent and/or the
Lenders (in form and substance satisfactory to the Agent).
Subordinated Replacement Debt shall mean any debt incurred by the Company
to repay, in whole or in part, the Subordinated Debt provided the
Subordinated Replacement Debt is on terms and conditions substantially
similar to the Subordinated Debt, and is not greater in principal amount
than the Subordinated Debt being repaid.
Subordinating Creditor shall mean any holder of any Citation Subordinated
Debt and any other party hereafter executing a Subordination Agreement.
Subordination Agreement shall mean the agreement among the Company, a
Subordinating Creditor, and the Agent, pursuant to which Subordinated Debt
is subordinated to the prior payment and satisfaction of the Company's
Obligations to the Agent and the Lenders (in form and substance
satisfactory to the Agent).
Term Loan Libor Margin shall mean the percentages set forth below
determined with respect to the Net Income of the Company for its most
recent fiscal quarter, with any change to occur on the first day of the
month following each filing of a 10Q or 10K report by the Company with the
SEC, and the Agent's receipt and review of a copy thereof. Should the
Company fail timely to file and provide to the Agent a copy of the
aforementioned reports (without giving effect to any extension of time),
then interest will be computed based on the highest margin set forth below
during such period of delinquency until the Agent's receipt and review of
the Company's next 10Q or 10K report:
If Net Income is: Margin is:
Less than or Equal to 0 3.50%
Greater than 0 3.00%
Term Loan Non-Libor Margin shall mean the percentages set forth below
determined with respect to the Net Income of the Company for its most
recent fiscal quarter, with any change to occur on the first day of the
month following each filing of a 10Q or 10K report by the Company with the
SEC, and the Agent's receipt and review of a copy thereof. Should the
Company fail timely to file and provide to the Agent a copy of the
aforementioned reports (without giving effect to any extension of time),
then interest will be computed based on the highest margin set forth below
during such period of delinquency until the Agent's receipt and review of
the Company's next 10Q or 10K report:
If Net Income is: Margin is:
Less than or Equal to 0 1.25%
Greater than 0 0.75%
Term Loan Promissory Notes shall mean the promissory notes in the form of
Exhibit B hereto executed by the Company to evidence the Term Loans
extended pursuant to and repayable in accordance with the provisions of
Section 4B hereof.
Term Loans shall mean the term loans in the aggregate principal amount of
$9,800,000.00 made by the Lenders pursuant to, and repayable in accordance
with, the provisions of Section 4B of this Financing Agreement.
Title Insurance Commitment means a firm written commitment of Chicago
Title Company, in form and substance satisfactory to the Agent, pursuant to
which Chicago Title Company commits to issue $2,820,000.00 of title
insurance to the Agent insuring the first priority of the lien of the Deed
of Trust, pursuant to an ALTA lender's policy containing such endorsements
(including, without limitation, a revolving credit endorsement), and only
such exceptions, as have been approved by the Agent.
Trade Accounts Payable shall mean the trade accounts payable for Inventory
sold to the Company, all as determined in accordance with GAAP.
Trade Accounts Receivable shall mean the trade accounts receivable due the
Company as a result of a sale of Inventory by the Company, all as
determined in accordance with GAAP.
Unused Line of Credit shall mean, as of any date of determination thereof,
the amount of the Line of Credit, minus the sum of outstanding Revolving
Loans and Letters of Credit.
SECTION 2. Conditions Precedent
The obligation of the Lenders to make loans hereunder and to assist in
the issuance of Letters of Credit is subject to the satisfaction of, or
waiver of, immediately prior to or concurrently with the making of such
loans, the following conditions precedent:
a) Lien Searches - The Agent shall have received tax, judgment,
Uniform Commercial Code and lien searches, satisfactory to the Agent for
all locations presently occupied or used by the Company.
b) Casualty Insurance - The Company shall have delivered to the Agent
evidence satisfactory to the Agent that casualty insurance policies listing
the Agent as loss payee or mortgagee, as the case may be, are in full force
and effect, all as set forth in Section 6, paragraph 5 of this Agreement.
c) Personal Property Liens - Any documents (including, without
limitation, financing statements and notices to depositary institutions)
required to be filed in order to create, in favor of the Agent on behalf of
the Lenders, a first and exclusive perfected security interest, subject
only to the Permitted Encumbrances, in the Collateral with respect to which
a security interest may be perfected by a filing under the Uniform
Commercial Code or other applicable law (state or federal) shall have been
properly filed in each office in each jurisdiction required in order to
create in favor of the Agent a perfected lien on the Collateral. The Agent
shall have received acknowledgement copies of all such filings (or, in lieu
thereof, the Agent shall have received other evidence satisfactory to the
Agent that all such filings have been made); and the Agent shall have
received evidence that all necessary filing fees and all taxes or other
expenses related to such filings have been paid in full.
d) Examination & Verification- The Agent shall have completed to the
satisfaction of the Lenders an examination and verification of the
Accounts, Inventory, books and records of the Company.
e) Additional Documents - The Company shall have executed and
delivered to the Agent all loan documents necessary to consummate the
lending arrangement contemplated between the Company and the Lenders and to
convey and perfect liens to the Agent on all, or substantially all, of the
assets of the Company, other than Real Estate excluded from the definition
of Collateral.
f) Board Resolution - The Lenders shall have received a copy of the
resolutions of the Board of Directors of the Company authorizing the
execution, delivery and performance of (i) this Agreement, and (ii) any
related agreements, in each case certified by the Secretary or Assistant
Secretary of the Company as of the date hereof, together with a certificate
of the Secretary or Assistant Secretary of the Company as to the incumbency
and signature of the officers of the Company executing this Agreement and
any certificate or other documents to be delivered by it pursuant hereto,
together with evidence of the incumbency of such Secretary or Assistant
Secretary.
g) Corporate Organization - The Lenders shall have received (i) a
copy of the Certificate of Incorporation of the Company certified by the
Secretary of State of its incorporation, and (ii) a copy of the By-Laws (as
amended through the date hereof) of the Company and certified by the
Secretary or Assistant Secretary of the Company.
h) Officer's Certificate - The Agent shall have received an executed
Officer's Certificate of the Company, satisfactory in form and substance to
the Agent, certifying that (i) the representations and warranties contained
herein are true and correct in all material respects on and as of the date
hereof; (ii) the Company is in compliance with all of the terms and
provisions set forth herein; and (iii) no Default, or any event which, with
the giving of notice or the passage of time or both would constitute an
Event of Default, has occurred.
i) Absence of Default - No Default, Event of Default or material
adverse change in the financial condition, business, prospects, profits,
operations or assets of the Company shall have occurred.
j) Excess Availability - On the date of the initial disbursement of
Revolving Loans, the Company must have, after giving effect to all
Revolving Loans and disbursements, an Excess Availability of $1,000,000.00
- - this requirement contemplates that all debts, obligations and payables
of the Company are current.
k) Real Property Liens, Title Insurance Commitment, Environmental
Indemnity, and Survey (if Applicable) - The Agent shall have received the
original, executed, acknowledged Deed of Trust, suitable for recordation in
the official records of Santa Clara County, California, the original,
executed Environmental Indemnity, and the original executed Title Insurance
Commitment. In addition, the Agent shall have received evidence that all
premiums in respect of the Title Insurance Commitment and the title
insurance policy to be issued pursuant to the Title Insurance Commitment
have been paid, and that all charges for recording fees shall have been
paid (or, alternatively, arrangements for payment of same directly to
Chicago Title Company by the Company with no liability on the part of the
Agent and the Lenders, and no conditions to the effectiveness of the Title
Insurance Commitment, shall have been made to the satisfaction of the
Agent). In addition, if and only if required by, and to the extent
required by, Chicago Title Company to issue the Title Insurance Commitment,
the Agent and Chicago Title Company shall have received maps or plats of a
perimeter or boundary of the site of each of the properties covered by the
Deed of Trust, dated a date satisfactory to the Agent and Chicago Title
Company prepared by an independent professional licensed land surveyor
satisfactory to the Agent and Chicago Title Company, which maps or plats
and the surveys on which they are based shall be made in accordance with
the Minimum Standard Detail Requirements for Land Title Surveys jointly
established and adopted by the American Land Title Association and the
American Congress on Surveying and Mapping; and, without limiting the
generality of the foregoing, there shall be surveyed and shown on the maps
or plats or surveys the following: (i) the locations on such sites of all
the buildings, structures and other improvements and the established
building setback lines insofar as the foregoing affect the perimeter or
boundary of such property; (ii) the lines of streets abutting the sites and
width thereof; (iii) all access and other easements appurtenant to the
sites or necessary or desirable to use the sites; (iv) all roadways, paths,
driveways, easements, encroachments and overhanging projections and similar
encumbrances affecting the sites, whether recorded, apparent from a
physical inspection of the sites or otherwise known to the surveyor; (v)
any encroachments on any adjoining property by the building structures and
improvements on the sites; and (vi) if the site is designated as being on a
filed map, a legend relating the survey to said map. Further, the survey
shall x) be certified to the Agent and Chicago Title Company and y) contain
a legend reciting as to whether or not the site is located in a flood zone.
l) Commitment Letter - The Company shall have fully complied, to the
satisfaction of CITBC, with all of the terms and conditions of the
commitment letter, dated May 7, 1997, issued by CITBC to, and accepted by,
the Company.
m) Third Party Agreements/Consents - The Company shall have provided
to the Agent, and the Agent and its counsel shall have reviewed, with
results satisfactory to the Agent, all material agreements of the Company
or its subsidiaries with third parties requested by the Agent; and, to the
extent requested by the Agent in the reasonable exercise of its sole
discretion, third party consents or agreements shall have been obtained
from such third parties to facilitate the ability of Agent to hold an
enforceable, perfected, first-priority security interest in the Collateral.
n) Legal Restraints/Litigation - At the date of execution of this
Agreement, there shall be no x) litigation, investigation or proceeding
(judicial or administrative) pending or, to the Company's knowledge,
threatened against the Company or its assets, by any agency, division or
department of any county, city, state, federal or foreign government
arising out of this Agreement, y) injunction, writ or restraining order
restraining or prohibiting the consummation of the financing arrangements
contemplated under this Agreement or z) suit, action, investigation or
proceeding (judicial or administrative) pending or threatened against the
Company or its assets, which, in the opinion of the Agent, if adversely
determined could have a material adverse effect on the business, operation,
assets, financial condition or Collateral of the Company.
o) Disbursement Authorization - The Company shall have delivered to
the Agent all information necessary for the Agent on behalf of the Lenders
to issue wire transfer instructions on behalf of the Company for the
initial and subsequent loans and/or advances to be made under this
Agreement including, but not limited to, disbursement authorizations in
form acceptable to the Agent.
p) Opinions - Counsel for the Company shall have delivered to the
Agent opinions satisfactory to CITBC.
q) Depository Accounts - The Company, the Agent and the applicable
banks have executed all documents, and taken all necessary action, to set
up the Depository Accounts.
r) Landlord Consents and Waivers - The landlords of the Company shall
have executed and delivered to the Agent landlord consents and waivers in
form and substance satisfactory to the Agent.
s) Existing Credit Agreement - (x) The Company's existing credit
agreement with Comerica Bank shall be terminated, (y) all loans and
obligations of the Company and/or any subsidiary of the Company thereunder
shall be paid or satisfied in full utilizing cash on hand of the Company
and/or the proceeds of the initial Loans to be made under this Agreement,
and (z) all liens upon or security interests in favor of Comerica Bank in
connection therewith shall be terminated and/or released upon such payment.
t) Existing Equipment Leases - The Company's Indebtedness pursuant to
its existing Equipment leases shall have been repaid to the satisfaction of
the Agent and all liens upon the Collateral in favor of such lessors shall
have been terminated.
u) Certain Existing Subordinated Indebtedness - The Company's
Indebtedness to Citation or its affiliates, other than the Citation
Subordinated Debt that is to remain outstanding after the Effective Date,
shall have been repaid to the satisfaction of the Agent.
v) Broker Letter Agreement - Broker shall have executed and delivered
to the Agent a letter agreement, in form and substance satisfactory to the
Agent, regarding payment in full at closing of any and all brokers' or
finders' fees payable in connection with the transactions contemplated
hereby.
Upon the execution of this Agreement and the initial disbursement of loans
hereunder, all of the above Conditions Precedent shall have been deemed
satisfied except as the Company and the Agent shall otherwise agree herein
or in a separate writing.
SECTION 3. Revolving Loans
1. The Lenders severally agree, subject to the terms and conditions
of this Agreement from time to time, and within x) the Availability and y)
the Line of Credit, but subject to the Lenders' right to make
"overadvances", to make loans and advances to the Company on a revolving
basis (i.e. subject to the limitations set forth herein, the Company may
borrow, repay and re-borrow Revolving Loans). Such loans and advances
shall be in amounts up to: a) ninety percent (90%) of the outstanding
Eligible Accounts Receivable of the Company, and b) fifty percent (50%) of
Eligible Raw Materials, at lower of cost or market, but not to exceed the
Inventory Sub-Limit from time to time in effect. All requests for loans
and advances (other than Libor Loans) must by received by an officer of the
Agent no later than 1:00 p.m., New York time, of the day on which such
loans and advances are required. Should the Agent for any reason honor
requests for advances in excess of the limitations set forth herein, such
advances shall be considered "overadvances" and shall be made in the
Agent's sole discretion, subject to any additional terms the Agent or the
Lenders deems necessary. The Company may elect to use Libor as to any new
or then outstanding Revolving Loans provided x) there is then no unwaived
Default or Event of Default, and y) the Company has so advised the Agent of
its election to use Libor and the Libor Period selected no later than three
(3) Business Days prior to the proposed borrowing or, in the case of a
Libor election with respect to a then outstanding Revolving Loan, three (3)
Business Days prior to the conversion of any then outstanding Revolving
Loans to Libor Loans and z) the election and Libor shall be effective,
provided, there is then no unwaived Default or Event of Default, on the
fourth Business Day following said notice. The Libor elections must be for
$100,000.00 or whole multiples thereof. No more than three (3) Libor
elections in the aggregate may be in effect at any one time (including
elections relating to Revolving Loans, elections relating to CAPEX Term
Loans, and elections relating to Term Loans) unless the Agent agrees
otherwise.
2. In furtherance of the continuing assignment and security interest
in the Company's Accounts, the Company will, upon the creation of Accounts,
execute and deliver to the Agent for the benefit of the Lenders in such
form and manner as the Agent may reasonably require, solely for the Agent's
convenience in maintaining records of collateral, such confirmatory
schedules of Accounts as the Agent may reasonably request, and such other
appropriate reports designating, identifying and describing the Accounts as
the Agent may reasonably require. In addition, upon the Agent's request
the Company shall provide the Agent with copies of agreements with, or
purchase orders from, the Company's customers, and copies of invoices to
customers, proof of shipment or delivery and such other documentation and
information relating to said Accounts and other collateral as the Agent may
reasonably require. Failure to provide the Agent with any of the foregoing
shall in no way affect, diminish, modify or otherwise limit the security
interests granted herein. The Company hereby authorizes the Agent to
regard the Company's printed name or rubber stamp signature on assignment
schedules or invoices as the equivalent of a manual signature by one of the
Company's authorized officers or agents.
3. The Company hereby represents and warrants that: each Account is
based on an actual and bona fide lease or sale and delivery of goods or
rendition of services to customers, made by the Company in the ordinary
course of its business; the goods and inventory being sold and the Accounts
created are the exclusive property of the Company and are not and shall not
be subject to any lien, consignment arrangement, encumbrance, security
interest or financing statement whatsoever, other than the Permitted
Encumbrances; the invoices evidencing such Accounts are in the name of the
Company; and the customers of the Company have accepted the goods or
services, owe and are obligated to pay the full amounts stated in the
invoices according to their terms, without dispute, offset, defense,
counterclaim or contra, except for de minimis error, disputes and other
matters arising in the ordinary course of business of which the Company has
advised the Agent pursuant to paragraph 5 of this Section 3. The Company
confirms to the Lenders that any and all taxes or fees relating to its
business, its sales, the Accounts or goods relating thereto, are its sole
responsibility and that same will be paid by the Company when due and that
none of said taxes or fees represent a lien on or claim against the
Accounts. The Company also warrants and represents that it is a duly and
validly existing corporation and is qualified in all states and foreign
countries where the failure to so qualify would have a material adverse
effect on the business of the Company or the ability of the Company to
enforce collection of Accounts due from customers residing in that state or
foreign country. The Company agrees to maintain such books and records
regarding Accounts as the Agent may reasonably require and agrees that the
books and records of the Company will reflect the Lenders' interest in the
Accounts.
4. Until the Agent has advised the Company to the contrary after the
occurrence of an Event of Default, the Company may and will enforce,
collect and receive all amounts owing on the Accounts for the Lenders'
benefit and on the Lenders' behalf, but at the Company's expense; such
privilege shall terminate automatically upon the institution by or against
the Company of any proceeding under any bankruptcy or insolvency law or, at
the election of the Agent, upon the occurrence of any other Event of
Default and until such Event of Default is waived or ceases to exist. Any
checks, cash, notes or other instruments or property received by the
Company with respect to any Accounts shall be held by the Company in trust
for the Lenders, separate from the Company's own property and funds, and
immediately turned over to the Agent with proper assignments or
endorsements by deposit to the Depository Accounts. All amounts received
by the Agent in payment of Accounts will be credited to the Company's
account upon the Agent's receipt of "collected funds" in United States
currency at the Agent's bank account in New York, New York on the Business
Day of receipt if received no later than 1:00 pm or on the next succeeding
Business Day if received after 1:00 pm. No checks, drafts or other
instrument received by the Agent shall constitute final payment to the
Agent unless and until such instruments have actually been collected.
5. The Company agrees to notify the Agent: a) promptly of any matters
materially affecting the value, enforceability or collectibility of any
Account in excess of $75,000.00 and of all material customer disputes,
offsets, defenses, counterclaims, returns, rejections and reclaimed or
repossessed merchandise or goods and b) periodically, but no less
frequently than monthly, of all matters affecting the value, enforceability
or collectibility of any Account and of all customer disputes, offsets,
defenses, counterclaims, returns, rejections and reclaimed or repossessed
goods. The Company agrees to issue credit memoranda promptly (with
duplicates to the Agent upon request after the occurrence of an Event of
Default) upon accepting returns or granting allowances, and may continue to
do so until the Agent has notified the Company that an Event of Default has
occurred and that all future credits or allowances are to be made only
after the Agent's prior written approval. Upon the occurrence of an Event
of Default and until such time as such Event of Default is waived or ceases
to exist and on notice from the Agent, the Company agrees that all
returned, reclaimed or repossessed merchandise or goods shall be set aside
by the Company, marked with the Agent's name and held by the Company for
the Agent's account.
6. The Agent shall maintain a separate account on its books in the
Company's name in which the Company will be charged with loans and advances
made by the Agent to the Company or for its account, and with any other
Obligations, including any and all costs, expenses and reasonable
attorney's fees which the Agent or any Lender reasonably may incur in
connection with the exercise by or for the Agent or the Lenders of any of
the rights or powers herein conferred upon the Agent or the Lenders, or in
the prosecution or defense of any action or proceeding to enforce or
protect any rights of the Agent and the Lenders in connection with this
Agreement or the Collateral assigned hereunder, or any Obligations owing to
the Lenders by the Company. The Company will be credited with all amounts
received by the Agent from the Company or from others for the Company's
account, including, as above set forth, all amounts received by the Agent
in payment of assigned Accounts and such amounts will be applied to payment
of the Obligations. In no event shall prior recourse to any Accounts or
other security granted to or by the Company be a prerequisite to the
Agent's right to demand payment of any Obligation. Further, it is
understood that the Agent and the Lenders shall have no obligation
whatsoever to perform in any respect any of the Company's contracts or
obligations relating to the Accounts.
7. After the end of each fiscal month of the Company, the Agent shall
promptly send the Company a statement showing the accounting for the
charges, loans, advances and other transactions occurring between the Agent
and the Lenders and the Company during that month. The monthly statements
shall be deemed correct and binding upon the Company and shall constitute
an account stated between the Company, the Agent and the Lenders unless the
Agent receives a written statement of the exceptions within thirty (30)
days of the date of the monthly statement.
SECTION 4. Letters of Credit
In order to assist the Company in establishing or opening Documentary
Letters of Credit or Standby Letters of Credit with an Issuing Bank to
cover the purchase and importation of Inventory, Equipment or otherwise,
the Company has requested the Lenders to join in the applications for such
Letters of Credit, and/or guarantee payment or performance of such Letters
of Credit and any drafts or acceptances thereunder through the issuance of
the Letter of Credit Guaranty, thereby lending the Lenders' credit to the
Company and the Lenders have agreed to do so. These arrangements shall be
handled by the Agent subject to the terms and conditions set forth below.
1. The amount and extent of the Letters of Credit and changes or
modifications thereof by the Company and/or the Issuing Bank of the terms
and conditions thereof shall in all respects be subject to the prior
approval of the Agent in the exercise of its reasonable discretion provided
however, that: a) in no event may the aggregate amount of all such
outstanding Letters of Credit exceed, in the aggregate, at any one time
$500,000.00 and b) the Letters of Credit and all documentation in
connection therewith shall be in form and substance satisfactory to the
Company, the Agent and the Issuing Bank.
2. The Agent shall have the right, without notice to the Company, to
charge the Company's account on the Agent's books with the amount of any
and all indebtedness, liability or obligation of any kind outstanding under
the Letter of Credits at the earlier of a) payment by the Agent under the
Letter of Credit Guaranty, or b) the occurrence of an Event of Default
which is not waived and which has not ceased to exist. Any amount charged
to Company's loan account shall be deemed a Revolving Loan hereunder and
shall incur interest at the rate provided in Section 7, paragraph 1 of this
Agreement.
3. The Company unconditionally indemnifies the Agent and the Lenders
and holds them harmless from any and all loss, claim or liability incurred
by them arising from any transactions or occurrences relating to Letters of
Credit established or opened for the Company's account, the collateral
relating thereto and any drafts or acceptances thereunder, and all
obligations thereunder, including any such loss or claim due to any action
taken by any Issuing Bank, other than for any such loss, claim or liability
arising out of the gross negligence or willful misconduct by the Agent.
The Company agrees that any action taken by any Issuing Bank, under or in
connection with the Letters of Credit, the guarantees, the drafts or
acceptances, or the Collateral, shall be binding on the Company and shall
not put the Agent and the Lenders in any resulting liability to the
Company. The Company further agrees to hold the Agent and the Lenders
harmless from any errors or omission, negligence or misconduct by the
Issuing Bank. The Company's unconditional obligation to the Agent and the
Lenders hereunder shall not be modified or diminished for any reason or in
any manner whatsoever, other than as a result of Agent's gross negligence
or willful misconduct. The Company agrees that any charges incurred for
the Company's account by the Issuing Bank shall be conclusive on the Agent
and may be charged to the Company's account.
4. The Agent and the Lenders shall not be responsible for: the
existence, character, quality, quantity, condition, packing, value or
delivery of the goods purporting to be represented by any documents; any
difference or variation in the character, quality, quantity, condition,
packing, value or delivery of the goods from that expressed in the
documents; the validity, sufficiency or genuineness of any documents or of
any endorsements thereon, even if such documents should in fact prove to be
in any or all respects invalid, insufficient, fraudulent or forged; the
time, place, manner or order in which shipment is made; partial or
incomplete shipment, or failure or omission to ship any or all of the goods
referred to in the Letters of Credit or documents; any deviation from
instructions; delay, default, or fraud by the shipper and/or anyone else in
connection with the Collateral or the shipping thereof; or any breach of
contract between the beneficiary and the Company.
5. Upon the occurrence of an Event of Default which has not been
waived and which has not ceased to exist, the Agent shall have the full
right and authority to clear and resolve any questions of non-compliance of
documents; to give any instructions as to acceptance or rejection of any
documents or goods; to execute any and all steamship or airways guaranties
(and applications therefor), indemnities or delivery orders; to grant any
extensions of the maturity of, time of payment for, or time of presentation
of, any drafts, acceptances, or documents; and to agree to any amendments,
renewals, extensions, modifications, changes or cancellations of any of the
terms or conditions of any of the applications, Letters of Credit, drafts
or acceptances; all in the Agent's sole name, and the Issuing Bank shall be
entitled to comply with and honor any and all such documents or instruments
executed by or received solely from the Agent, all without any notice to or
any consent from the Company.
6. Without the Agent's express consent and endorsement in writing,
the Company agrees: a) not to execute any and all applications for
steamship or airway guaranties, indemnities or delivery orders; to grant
any extensions of the maturity of, time of payment for, or time of
presentation of, any drafts, acceptances or documents; or to agree to any
amendments, renewals, extensions, modifications, changes or cancellations
of any of the terms or conditions of any of the applications, Letters of
Credit, drafts or acceptances; and b) after the occurrence of an Event of
Default which is not waived and which has not ceased to exist, not to i)
clear and resolve any questions of non-compliance of documents, or ii) give
any instructions as to acceptances or rejection of any documents or goods.
7. The Company agrees that any necessary import, export or other
licenses or certificates for the import or handling of the Collateral will
have been promptly procured; all foreign and domestic governmental laws and
regulations in regard to the shipment and importation of the Collateral, or
the financing thereof will have been promptly and fully complied with; and
any certificates in that regard that the Agent may at any time request will
be promptly furnished. In this connection, the Company warrants and
represents that, to the best of its knowledge, all shipments made under any
such Letters of Credit are in accordance with the laws and regulations of
the countries in which the shipments originate and terminate, and are not
prohibited by any such laws and regulations. The Company assumes all risk,
liability and responsibility for, and agrees to pay and discharge, all
present and future local, state, federal or foreign taxes, duties, or
levies. Any embargo, restriction, laws, customs or regulations of any
country, state, city, or other political subdivision, where the Collateral
is or may be located, or wherein payments are to be made, or wherein drafts
may be drawn, negotiated, accepted, or paid, shall be solely the Company's
risk, liability and responsibility.
8. Upon any payments made to the Issuing Bank under the Letter of
Credit Guaranty, the Agent and the Lenders shall acquire, by subrogation,
any rights, remedies, duties or obligations granted or undertaken by the
Company to the Issuing Bank in any application for Letters of Credit, any
standing agreement relating to Letters of Credit or otherwise, all of which
shall be deemed to have been granted to the Agent and the Lenders and apply
in all respects to the Agent and the Lenders and shall be in addition to
any rights, remedies, duties or obligations contained herein.
SECTION 4A. CAPEX Term Loans
1. Within the available and unused CAPEX Term Loan Line of Credit and
upon receipt of CAPEX Term Loan Promissory Notes, in the form of Exhibit A
attached hereto, from the Company aggregating the amount of the requested
CAPEX Term Loans, the Lenders severally will extend to the Company CAPEX
Term Loans aggregating such requested amount, provided: a) no Default or
Event of Default has occurred or would occur after giving effect to such
CAPEX Term Loan, b) all of the conditions listed below are fulfilled to the
sole but reasonable satisfaction of the Agent.
2. CAPEX Term Loan proceeds: x) are to be used exclusively to pay
for, or reimburse the Company for, the acquisition by the Company of newly
acquired Capital Improvements which are not subject to Purchase Money
Liens; and y) will be disbursed upon completion of, or within three (3)
months after, the delivery, assembly and installation of the Capital
Improvement.
3. The Company must give the Agent thirty (30) days prior written
notice of its intention to enter into a CAPEX Term Loan and draw down the
CAPEX Term Loans no later than the close of business on the date occurring
two (2) years from the date hereof, or such later date agreed to by the
Required Lenders in their discretion.
4. No CAPEX Term Loan may exceed eighty percent (80%) of the total
acquisition costs of the Capital Improvements, exclusive of assembly costs,
software costs, installation expenses, maintenance, shipping costs, taxes
and import or custom charges for which the CAPEX Term Loan is sought.
5. The CAPEX Term Loans must be in increments of $250,000.00 or more.
6. Each CAPEX Term Loan will be repaid to the Lenders by the Company
in forty-eight (48) equal monthly installments of principal commencing on
the first Business Day of the next calendar month after initial funding
thereof. To the extent repaid, CAPEX Term Loans may not be reborrowed
under this Section 4A of this Agreement and the CAPEX Term Loan Line of
Credit shall be permanently reduced by the amount of any such repayment(s).
7. In the event this Agreement or the Line of Credit is terminated by
the Agent, the Required Lenders acting through the Agent, or the Company
for any reason whatsoever, the CAPEX Term Loan Line of Credit shall be
terminated and the CAPEX Term Loans shall become due and payable on the
effective date of such termination notwithstanding any provision to the
contrary in the CAPEX Term Loan Promissory Notes or this Agreement.
8. The Company may prepay (without fee or penalty except to the
extent, if any, that any Early Termination Fee may be applicable) at any
time, at its option, in whole or in part, the CAPEX Term Loans, provided
that on each such prepayment, the Company shall pay accrued interest on the
principal so prepaid to the date of such prepayment.
9. Each prepayment shall be applied to the then last maturing
installments of principal of the CAPEX Term Loans.
10. The Company hereby authorizes the Agent to charge its Revolving
Loan Account with the amount of all amounts due under this Section 4A as
such amounts become due. The Company confirms that any charges which the
Agent may so make to its account as herein provided will be made as an
accommodation to the Company and solely at the Agent's discretion.
SECTION 4B. Term Loans
1. The Company hereby agrees to execute and deliver to the Agent, for
the benefit of the Lenders, Term Loan Promissory Notes, in the form of
Exhibit B attached hereto, aggregating $9,800,000.00 in principal, to
evidence Term Loans to be extended by the Lenders.
2. Upon receipt of such Term Loan Promissory Notes by the Agent for
the benefit of the Lenders, the Lenders hereby severally agree to extend to
the Company Term Loans in the aggregate principal amount of $9,800,000.00.
3. The principal amount of the Term Loans shall be repaid to the
Agent for the benefit of the Lenders by the Company by: i) fifty-nine (59)
equal monthly principal installments of $163,333.33 each, followed by ii)
one (1) installment of $163,333.53, whereof the first installment shall be
due and payable on the first Business Day of September, 1997 and the
subsequent installments shall be due and payable on the first Business Day
of each month thereafter until paid in full.
4 . In the event this Financing Agreement or the Line of Credit is
terminated by the Agent, the Required Lenders acting through the Agent, or
the Company for any reason whatsoever, the Term Loans shall become due and
payable on the effective date of such termination notwithstanding any
provision to the contrary in the Term Loan Promissory Notes or this
Financing Agreement.
5. The Company may prepay (without fee or penalty except to the
extent, if any, that any Early Termination Fee may be applicable) at any
time, at its option, in whole or in part, the Term Loans, provided that on
each such prepayment, the Company shall pay accrued interest on the
principal so prepaid to the date of such prepayment.
6. Each prepayment shall be applied to the then last maturing
installments of principal of the Term Loans.
7. The Company hereby authorizes the Agent to charge its Revolving
Loan Account with the amount of all amounts due under this Section 4B as
such amounts become due. The Company confirms that any charges which the
Agent may so make to its account as herein provided will be made as an
accommodation to the Company and solely at the Agent's discretion.
SECTION 5. Collateral
1. As security for the prompt payment in full of all loans and
advances made and to be made to the Company from time to time by the Agent
on behalf of the Lenders, pursuant hereto, as well as to secure the payment
in full of the other Obligations, the Company hereby pledges and grants to
the Agent for the benefit of the Lenders a continuing general lien upon and
security interest in all of its:
(a) present and hereafter acquired Inventory;
(b) present and hereafter acquired Equipment;
(c) present and future Accounts;
(d) present and future General Intangibles;
(e) present and future Documents of Title;
(f) present and future Investment Property;
(g) present and future Other Collateral; and
(h) present and future Deposit Accounts.
In addition, pursuant to the Deed of Trust, the Company is granting to the
Agent, for the benefit of the Agent and the Lenders, a lien on the Santa
Clara Fee Real Property, to secure all Obligations of the Company other
than those arising under the Environmental Indemnity.
2. The security interests granted hereunder shall extend and attach
to:
(a) All Collateral which is presently in existence and which is owned
by the Company or in which the Company has any interest, whether held by
the Company or others for its account, and, if any Collateral is Equipment,
whether the Company's interest in such Equipment is as owner or lessee
under a capitalized lease or conditional vendee, except, with respect to
any Equipment subject to a lease as to which the Company is the lessee, or
subject to a conditional purchase agreement as to which the Company is the
purchaser, to the extent and only for so long as such grant of security
interest expressly is prohibited by the terms of any enforceable provision
of any applicable lease or conditional purchase agreement;
(b) All Equipment whether the same constitutes personal property or
fixtures, including, but without limiting the generality of the foregoing,
all dies, jigs, tools, benches, tables, accretions, component parts thereof
and additions thereto, as well as all accessories, motors, engines and
auxiliary parts used in connection with or attached to the Equipment; and
(c) All Inventory and any portion thereof which may be returned,
rejected, reclaimed or repossessed by either the Agent or the Company from
the Company's customers, as well as to all supplies, goods, incidentals,
packaging materials, labels and any other items which contribute to the
finished goods or products manufactured or processed by the Company, or to
the sale, promotion or shipment thereof.
3. The Company agrees to safeguard, protect and hold all Inventory
for the Lenders' account and make no disposition thereof except in the
regular course of the business of the Company as herein provided.
Inventory may be sold and shipped by the Company to its customers in the
ordinary course of the Company's business, for cash or on open account and
on terms currently being extended by the Company to its customers, provided
that all proceeds of all sales (including cash, accounts receivable,
checks, notes, instruments for the payment of money and similar proceeds)
are forthwith transferred, endorsed, and turned over and delivered to the
Agent in accordance with paragraph 4 of Section 3 of this Agreement. Sales
of Inventory in which a lien upon, or security interest in, Inventory is
retained by the Company shall be made by the Company only with the approval
of the Agent, and the proceeds of such sales or sales of inventory for cash
shall not be commingled with the Company's other property, but shall be
segregated, held by the Company in trust for the Lenders as the Lenders'
exclusive property, and shall be delivered immediately by the Company to
the Agent in the identical form received by the Company by deposit to the
Depository Accounts. Upon the sale, exchange, or other disposition of
Inventory, as herein provided, the security interest in the Company's
Inventory provided for herein shall, without break in continuity and
without further formality or act, continue in, and attach to, all proceeds,
including any instruments for the payment of money, accounts receivable,
contract rights, documents of title, shipping documents, chattel paper and
all other cash and non-cash proceeds of such sale, exchange or disposition.
As to any such sale, exchange or other disposition, the Agent shall have
all of the rights of an unpaid seller, including stoppage in transit,
replevin, rescission and reclamation.
4. The Company agrees at its own cost and expense to keep the
Equipment in as good and substantial repair and condition as the same is
now or at the time the lien and security interest granted herein shall
attach thereto, reasonable wear and tear excepted, making any and all
repairs and replacements when and where necessary, provided, however, that
the Company need not maintain Equipment which, in the Company's business
judgment is obsolete or no longer needed in the Company's operations. The
Company also agrees to safeguard, protect and hold all Equipment for the
Lenders' account and make no disposition thereof unless the Company first
obtains the prior written approval of the Agent. Any sale, exchange or
other disposition of any Equipment shall only be made by the Company with
the prior written approval of the Agent, and the proceeds of any such sales
shall not be commingled with the Company's other property, but shall be
segregated, held by the Company in trust for the Lenders as the Lenders'
exclusive property, and shall be delivered immediately by the Company to
the Agent in the identical form received by the Company by deposit to the
Depository Accounts. Upon the sale, exchange, or other disposition of the
Equipment, as herein provided, the security interest provided for herein
shall, without break in continuity and without further formality or act,
continue in, and attach to, all proceeds, including any instruments for the
payment of money, accounts receivable, contract rights, documents of title,
shipping documents, chattel paper and all other cash and non-cash proceeds
of such sales, exchange or disposition. As to any such sale, exchange or
other disposition, the Agent shall have all of the rights of an unpaid
seller, including stoppage in transit, replevin, rescission and
reclamation. Notwithstanding anything hereinabove contained to the
contrary, the Company may sell, exchange or otherwise dispose of (provided
that, for purposes of this paragraph, a writedown or writeoff of Equipment
on the books and records of the Company for accounting purposes, where the
Company retains its ownership rights or interest in such Equipment and has
not abandoned or physically relinquished possession thereof, shall not be
considered a disposition, nor shall the disassembly of obsolete or
unnecessary Equipment for reconfiguration or re-use by the Company be
considered a disposition thereof) obsolete Equipment or Equipment no longer
needed in the Company's operations, other than Equipment financed with
CAPEX Term Loans, provided, however, that (a) the then book value of the
Equipment so disposed of does not exceed $150,000.00 in the aggregate in
any fiscal year and (b) the proceeds of such sales or dispositions are
delivered to the Agent in accordance with the foregoing provisions of this
paragraph, except that the Company may retain and use such proceeds to
purchase forthwith replacement Equipment which the Company determines in
its reasonable business judgment to have a collateral value at least equal
to the Equipment so disposed of or sold, provided, however, that the
aforesaid right shall automatically cease upon the occurrence of an Event
of Default which is not waived and which has not ceased to exist.
5. The rights and security interests granted to the Agent for the
benefit of the Lenders hereunder are to continue in full force and effect,
notwithstanding the termination of this Agreement or the fact that the
account maintained in the Company's name on the books of the Agent may from
time to time be temporarily in a credit position, until the final payment
in full to the Agent and the Lenders of all Obligations and the termination
of this Agreement. Any delay, or omission by the Agent to exercise any
right hereunder, shall not be deemed a waiver thereof, or be deemed a
waiver of any other right, unless such waiver be in writing and signed by
the Agent. A waiver on any one occasion shall not be construed as a bar to
or waiver of any right or remedy on any future occasion.
6. To the extent that the Obligations are now or hereafter secured by
any assets or property other than the Collateral or by the guarantee,
endorsement, assets or property of any other person, then the Agent shall
have the right in its sole discretion to determine which rights, security,
liens, security interests or remedies the Agent shall at any time pursue,
foreclose upon, relinquish, subordinate, modify or take any other action
with respect to, without in any way modifying or affecting any of them, or
any of the Agent's rights hereunder.
7. Any reserves or balances to the credit of the Company and any
other property or assets of the Company in the possession of the Agent or
any Lender may be held by such holder as security for the Obligations and
applied in whole or partial satisfaction of such Obligations when due. The
liens and security interests granted herein and any other lien or security
interest the Agent or any Lender may have in any other assets of the
Company, shall secure payment and performance of all now existing and
future Obligations. The Agent may in its discretion charge any or all of
the Obligations to the account of the Company when due.
8. The Company shall give or shall cause the appropriate party to
give, to the Agent, for the benefit of the Lenders, from time to time such
mortgage, pledge or security agreements with respect to the General
Intangibles, Investment Property, and Deposit Accounts of the Company and
the capital stock of any and all present or future subsidiaries of the
Company as the Agent shall require to obtain valid first liens thereon.
9. The Company shall not sell Accounts and shall not permit any
subsidiary of the Company to sell Accounts.
SECTION 6. Representations, Warranties and Covenants
1. The Company hereby warrants and represents and/or covenants that:
i) the fair value of the Company's assets exceeds the book value of the
Company's liabilities; ii) the Company is generally able to pay its debts
as they become due and payable; and iii) the Company does not have
unreasonably small capital to carry on its business as it is currently
conducted absent extraordinary and unforeseen circumstances. The Company
further warrants and represents that except for the Permitted Encumbrances,
the security interests granted herein constitute and shall at all times
constitute the first and only liens on the Collateral; that, except for the
Permitted Encumbrances, the Company is or will be at the time additional
Collateral is acquired by it, the absolute owner of the Collateral with
full right to pledge, sell, consign, transfer and create a security
interest therein, free and clear of any and all claims or liens in favor of
others; that the Company will at its expense forever warrant and, at the
Agent's request, defend the same from any and all claims and demands of any
other person other than the Permitted Encumbrances; that the Company will
not grant, create or permit to exist, any lien upon or security interest in
the Collateral, or any proceeds thereof, in favor of any other person other
than the holders of the Permitted Encumbrances; and that the Equipment does
not comprise a part of the Inventory of the Company and that the Equipment
is and will only be used by the Company in its business and will not be
held for sale or lease, or removed from its premises, or otherwise disposed
of by the Company without the prior written approval of the Agent except as
otherwise permitted in paragraph 4 of Section 5 of this Agreement.
2. The Company agrees to maintain books and records pertaining to the
Collateral in such detail, form and scope as the Agent shall reasonably
require. The Company agrees that the Agent or any Lender may enter upon
the Company's premises at any time upon prior notice (provided, however,
that notice need not be given if there is then an Event of Default which
has not been waived and which has not ceased to exist) during normal
business hours, and from time to time, for the purpose of inspecting the
Collateral, any and all records pertaining thereto and the books and
records of the Company. The Company agrees to afford the Agent prior
written notice of any change in the location of any Collateral, other than
to locations, that as of the date hereof, are known to the Agent and at
which the Agent has filed financing statements and otherwise fully
perfected liens thereon. The Company is also to advise the Agent promptly,
in sufficient detail, of any material adverse change relating to the type,
quantity or quality of the Collateral or on the security interests granted
therein. The Company represents and warrants that its chief executive
office is located at the address set forth in Section 13, paragraph 6C of
this Agreement and that its federal taxpayer identification number is 77-
0107167.
3. The Company agrees to: execute and deliver to the Agent, from
time to time, solely for the Agent's convenience in maintaining a record of
the Collateral, such written statements and schedules as the Agent may
reasonably require, designating, identifying or describing the Collateral
pledged hereunder. The Company's failure, however, to promptly give the
Agent such statements or schedules shall not affect, diminish, modify or
otherwise limit the Agent's security interests in the Collateral.
4. The Company agrees, upon request, to comply with the requirements
of all foreign, state and federal laws in order to grant to the Agent for
the benefit of the Lenders valid and perfected first security interests in
the Collateral, subject only to the Permitted Encumbrances. The Company
agrees to do whatever the Agent may reasonably request, from time to time,
by way of: filing notices of liens, financing statements, amendments,
renewals and continuations thereof; cooperating with the Agent's employees;
keeping Inventory records; transferring proceeds of Collateral to the
Agent's possession; and performing such further acts as the Agent or the
Lenders may reasonably require in order to effect the purposes of this
Agreement.
5. The Company agrees to maintain insurance on the Real Estate,
Equipment and Inventory under such policies of insurance, with such
insurance companies, in such reasonable amounts and covering such insurable
risks as are at all times reasonably satisfactory to the Agent. All
policies covering the Equipment and Inventory are, subject to the rights of
any holders of Permitted Encumbrances holding claims senior to the Lenders,
to be made payable to the Agent for the account of the Lenders, in case of
loss, under a standard non-contributory "mortgagee", "lender" or "secured
party" clause and are to contain such other provisions as the Agent may
require to fully protect the Agent's and Lenders' interest in the Inventory
and Equipment and to any payments to be made under such policies. In the
event of any loss or damage by fire or other casualty, insurance proceeds
relating to Collateral shall reduce at the Agent's discretion the Company's
Revolving Loans, CAPEX Term Loans, and/or Term Loans. True copies of the
insurance policies or original certificates of insurance are to be
delivered to the Agent, with all premiums current, with the loss payable
endorsement in the Agent's favor, and shall provide for not less than
thirty (30) days prior written notice to the Agent of the exercise of any
right of cancellation. At the Company's request, or if the Company fails
to maintain such insurance, the Agent may arrange for such insurance, but
at the Company's expense and without any responsibility on the Agent's part
for: obtaining the insurance, the solvency of the insurance companies, the
adequacy of the coverage, or the collection of claims. Upon the occurrence
of an Event of Default which is not waived and which has not ceased to
exist, the Agent shall, subject to the rights of any holders of Permitted
Encumbrances holding claims senior to the Agent's, have the sole right, in
the name of the Agent and the Lenders' or the Company, to file claims under
any insurance policies, to receive, receipt and give acquittance for any
payments that may be payable thereunder, and to execute any and all
endorsements, receipts, releases, assignments, reassignments or other
documents that may be necessary to effect the collection, compromise or
settlement of any claims under any such insurance policies. All proceeds
of insurance received by the Agent shall be promptly deposited by the Agent
and applied as herein above provided.
6. The Company agrees to pay, when due, all taxes, assessments,
claims and other charges (herein "taxes") lawfully levied or assessed upon
the Company or the Collateral or collected by the Company and if such taxes
remain unpaid after the date fixed for the payment thereof (unless such
taxes are being diligently contested in good faith by the Company by
appropriate proceedings) or if any lien shall be claimed thereunder x) for
taxes due the United States of America or y) which is senior to the lien of
the Agent or z) for an amount in excess of $100,000.00, the Agent may, on
the Company's behalf, pay such taxes, and the amount thereof shall be an
Obligation secured hereby and due the Agent on demand.
7. The Company: (a) agrees to comply with all acts, rules,
regulations and orders of any legislative, administrative or judicial body
or official, which the failure to comply with would have a material and
adverse impact on the Collateral, or any material part thereof, or on the
operation of the Company's business; provided that the Company may contest
any acts, rules, regulations, orders and directions of such bodies or
officials in any reasonable manner which will not, in the Agent's
reasonable opinion, materially and adversely effect the Agent's and
Lenders' rights or priority in the Collateral; (b) agrees to comply with
all environmental statutes, acts, rules, regulations or orders as presently
existing or as adopted or amended in the future, applicable to the
ownership and/or use of its real property and operation of its business,
which the failure to comply with would have a material and adverse impact
on the Collateral, or any material part thereof, or on the operation of the
business of the Company; and (c) shall not be deemed to have breached any
provision of this paragraph 7 if (i) the failure to comply with the
foregoing requirements of this paragraph 7 resulted from good faith error
or innocent omission, (ii) the Company promptly commences and diligently
pursues a cure of such breach and (iii) such failure to comply with the
foregoing requirements of this paragraph 7 is cured within thirty (30)
business days following the Company's receipt of notice of such failure to
comply with the foregoing requirements of this paragraph 7. The Company
hereby indemnifies the Agent and the Lenders and agrees to defend and hold
the Agent and the Lenders harmless from and against any and all loss,
damage, claim, liability, injury or expense which the Agent and the Lenders
may sustain or incur (other than as a result of actions of the Agent and
the Lenders) in connection with: any claim or expense asserted against the
Agent and the Lenders as a result of any environmental pollution of the
Company's Real Property, or any hazardous material or hazardous substance
on the Company's Real Property; or any claim or expense which results from
the Company's environmental activities (including, but not limited to, the
Company's off-site disposal practices) and the Company further agrees that
this indemnification shall survive termination of this Agreement as well as
the payment of all Obligations or amounts payable hereunder.
8. Until termination of this Agreement and payment and satisfaction
of all Obligations due hereunder, the Company agrees that, unless the Agent
shall have otherwise consented in writing, the Company will furnish to the
Agent and each Lender, (x) within ninety (90) days after the end of each
fiscal year of the Company, an audited Consolidated Balance Sheet and a
Consolidating Balance Sheet as at the close of such year, statements of
profit and loss, and cash flow of the Company and its subsidiaries for such
year, audited by Deloitte & Touche LLP or other independent public
accountants selected by the Company and satisfactory to the Agent; y)
within thirty (30) days after the end of each fiscal month end (other than
a fiscal month end that is also a fiscal quarter end), a Consolidated
Balance Sheet and a Consolidating Balance Sheet as at the end of such
period and statements of profit and loss of the Company and all
subsidiaries for such period, certified by an authorized financial or
accounting officer of the Company; and (z) within forty-five (45) days
after the end of each fiscal month end that is also a fiscal quarter end, a
Consolidated Balance Sheet and a Consolidating Balance Sheet as at the end
of such period and statements of profit and loss and cash flow of the
Company and all subsidiaries for such period (or, in the case of the cash
flow statement, for the fiscal quarter then ended), certified by an
authorized financial or accounting officer of the Company; and from time to
time, such further information regarding the business affairs and financial
condition of the Company as the Agent may reasonably request, including,
without limitation, annual cash flow projections in form satisfactory to
the Agent. Each financial statement which the Company is required to
submit hereunder must be accompanied by an officer's certificate, signed by
the President, Vice President, Controller, or Treasurer, pursuant to which
any one such officer must certify that: (i) the financial statement(s)
fairly and accurately represent(s) the Company's financial condition at the
end of the particular accounting period, as well as the Company's operating
results during such accounting period, subject to year-end audit
adjustments; (ii) during the particular accounting period: (x) there has
been no event or condition which would constitute a Default or Event of
Default under this Agreement, provided, however, that if any such officer
has knowledge that any such Default or Event of Default, has occurred
during such period, the existence of and a detailed description of same
shall be set forth in such officer's certificate; and (y) the Company has
not received any notice of cancellation with respect to its property
insurance policies; and (iii) as to the quarterly statements, the exhibits
attached to such financial statement(s) constitute detailed calculations
showing compliance with all financial covenants contained in this
Agreement. With respect to any period during which the Company has no
subsidiaries, delivery hereunder of Consolidating Balance Sheets shall not
be required.
9. The Company shall have on the last day of each fiscal quarter set
forth below a Net Worth of not less than:
Fiscal Quarter Ended Net Worth
a) 6/30/97 $11,500,000.00
b) 9/30/97 $12,000,000.00
c) 12/31/97 $12,700,000.00
d) 3/31/98 $13,300,000.00
e) 6/30/98 $14,200,000.00
f) 9/30/98 $14,800,000.00
g) 12/31/98 $15,400,000.00
h) 3/31/99 $16,000,000.00
i) 6/30/99 $16,600,000.00
j) 9/30/99 $7,200,000.00
k) 12/31/99 and at the end of each $17,800,000.00
fiscal quarter thereafter
10. Until termination of this Agreement and payment and satisfaction
of all Obligations due hereunder, the Company agrees that, without the
prior written consent of the Agent, except as otherwise herein provided,
the Company will not, and will not permit any future direct or indirect
subsidiary of the Company to:
A. Mortgage, assign, pledge, transfer or otherwise permit any lien,
charge, security interest, encumbrance or judgment, (whether as a
result of a purchase money or title retention transaction, or other
security interest, or otherwise) to exist on any of the Company's
assets or goods, whether real, personal or mixed, whether now owned or
hereafter acquired, except for the Permitted Encumbrances;
B. Incur or create any Indebtedness other than the Permitted
Indebtedness;
C. Borrow any money on the security of the Company's Collateral;
D. Sell, lease, assign, transfer or otherwise dispose of i)
Collateral, except as otherwise specifically permitted by this
Agreement, or ii) either all or substantially all of the Company's
assets, which do not constitute Collateral;
E. Merge, consolidate or otherwise alter or modify its corporate
name, its federal taxpayer identification number, principal place of
business, corporate organization or state of incorporation or enter
into or engage in any operation or activity materially different from
that presently being conducted by the Company, provided, however, that
the Company may change its name, without the consent of the Agent if
the Company has given the Agent thirty (30) days prior written notice
of such change;
F. Assume, guarantee, endorse, or otherwise become liable upon the
obligations of any person, firm, entity or corporation, except by the
endorsement of negotiable instruments for deposit or collection or
similar transactions in the ordinary course of business;
G. Declare or pay any dividend of any kind on (other than dividends
payable solely in ordinary common stock of the Company, which are
permitted), or purchase, acquire, redeem or retire, any of the capital
stock or equity interest, of any class whatsoever, whether now or
hereafter outstanding, except that the Company may redeem its capital
stock owned by its retired, deceased or terminated officers, directors
or shareholders which the Company is contractually obligated to
redeem, provided that (i) no Default or Event of Default then exists
or will exist after giving effect to such redemptions and (ii) in no
event shall the aggregate amount of such redemptions exceed
$250,000.00 in the aggregate in any fiscal year;
H. Make any advance or loan to, or any investment in or acquisition
of, any firm, entity, person or corporation, provided, however, that
the Company may, without the consent of the Agent but consistent with
Company's business practices in existence on the date hereof (and with
prior approval of the board of directors of the Company in the case of
clauses ii), iii), and/or iv) below): i) advance business and travel
expenses to its officers and employees; ii) provide relocation loans
to its officers and employees provided such loans are evidenced by a
promissory note; iii) issue restricted stock to officers of the
Company in exchange for deferred promises to pay the purchase price
thereof secured by such stock; and iv) make miscellaneous loans and
advances not to exceed $50,000.00 in the aggregate at any one time
outstanding, which loans and advances either shall be on open book
account and not evidenced by an instrument, or, if evidenced by an
instrument, such original instrument promptly upon issuance shall be
endorsed to and delivered in pledge to the Agent for the benefit of
the Lenders.
11. Without the prior written consent of the Agent, the Company will
not: a) enter into any Operating Lease if after giving effect thereto the
aggregate obligations with respect to Operating Leases of the Company
during any fiscal year would exceed $1,000,000.00, or b) contract for,
purchase, make expenditures for, lease pursuant to a Capital Lease or
otherwise incur obligations with respect to Capital Expenditures (whether
subject to a security interest or otherwise) during any fiscal year in the
aggregate amount in excess of $4,000,000.00; provided, however, that
Capital Expenditures during any fiscal quarter may not exceed $1,000,000.00
in the aggregate.
12. The Company shall have for each fiscal quarter during the
applicable periods below a Fixed Charge Coverage Ratio of not less than:
Period Fixed Charge Coverage Ratio
a) On June 30, 1997, for the
fiscal quarter then ended 0.75:1.0
b) On September 30, 1997, for the
fiscal quarter then ended 0.90:1.0
c) On December 31, 1997, for the
fiscal quarter then ended 0.98:1.0
d) On March 31, 1998, and on the last day of
each fiscal quarter thereafter, in each case 1.00:1.0
{Balance of page intentionally omitted -- please go to next page}
13. The Company agrees to advise the Agent in writing of: a) all
expenditures (actual or anticipated) in excess of $150,000.00 with respect
to any occurrence or related series of occurrences for x) environmental
clean-up, y) environmental compliance or z) environmental testing and the
impact of said expenses on the Company's working capital; and b) any
written notices the Company receives from any local, state, federal or
foreign authority advising the Company of any environmental liability (real
or potential) stemming from the Company's operations, its premises, its
waste disposal practices, or waste disposal sites used by the Company and
to provide the Agent with copies of all such notices if so required.
14. The Company agrees that: a) all present and future Accounts
are, and will be, payable in United States currency, b) the Company shall
assume any and all risks associated with Accounts paid in a currency other
than the currency of the United States and c) sales to foreign customers
and payments on account thereof, are not subject to any currency or
exchequer restrictions prohibiting, restricting or limiting the amount of
currency that such foreign customers may remit from such jurisdictions or
countries in payment of the Accounts for which such foreign customers are
obligated.
15. Without the prior written consent of the Lenders, the Company
agrees that it will not enter into any transaction, including, without
limitation, any purchase, sale, lease, loan or exchange of property with
any subsidiary or affiliate of the Company unless such is conducted on an
arms-length basis and on terms no less beneficial to the Company than the
Company would have obtained from any entity that was not related in any
fashion with the Company.
16. To the extent that any charge, withholding or tax is imposed on
the Lenders or on any interest or fees earned or paid to the Lenders by any
country or governmental authority, all as a result of this Agreement (other
than domestic taxes payable by the Agent or the Lenders with respect to
their income or revenues), the Company shall indemnify the Agent and the
Lenders and hold them harmless from any such tax, charge or withholding.
17. The Company owns or possesses any trademarks, permits, service
marks, tradenames and licenses necessary for its business, free from any
interest, lien, restriction or encumbrance, other than the Permitted
Encumbrances, and none of the foregoing is subject to any outstanding
order, decree, judgment or stipulation. To the extent that proceedings are
now, or in the future, instituted or pending or, to the best knowledge of
the Company, threatened charging that any of the foregoing was
misappropriated or infringes on the rights of any third party, the Company
shall x) promptly notify the Agent, y) take all action necessary to defend
its interest in the foregoing and z) provide the Agent with such
information as the Agent may reasonably request so as to assess the impact
of such proceedings or claims on the Company.
18. The Company shall remit any and all sales taxes when due to the
appropriate sales tax authorities when any such remittances are due,
provided, however, that such remittances need not be made on or before such
due date if: i) such sales taxes are being diligently contested by the
Company in good faith and by appropriate proceedings; ii) the Company
establishes such reserves as may be required by GAAP; and iii) the failure
to remit such sales taxes does not create a lien in favor of such sales tax
authorities or impose upon the Lenders and/or the Agent any obligation to
segregate proceeds.
19. The Company has no subsidiaries as of the Effective Date. After
the Effective Date, the Company shall not, without the prior written
consent of the Agent, have any subsidiary that holds or owns any
Significant Assets. Without limiting the foregoing, the Company shall
immediately notify the Agent if, after the Effective Date, the Company
acquires or owns any subsidiary with Significant Assets.
SECTION 7. Interest, Fees and Expenses
1. (a) Interest on the Revolving Loans (other than Libor Loans) shall
be payable monthly as of the end of each month and shall be an amount equal
to the sum of the applicable Revolver Non-Libor Margin plus the Chase
Manhattan Bank Rate per annum, on the average of the net balances (other
than Libor Loans) owing by the Company to the Lenders in the Company's
account at the close of each day during such month. Any change in said
Chase Manhattan Bank Rate shall be effective as of the first of the month
following any change. The rates hereunder shall be calculated on a per
annum basis and will be based on a 360-day year. The Agent shall be
entitled to charge the Company's account at the rate provided for herein
when due until all Obligations have been paid in full. Interest on the
Revolving Loans which are Libor Loans shall be payable monthly as of the
end of each month and shall be an amount equal to the sum of the applicable
Revolver Libor Margin and the applicable Libor on each then outstanding
Revolving Loan which is a Libor Loan, on a per annum basis, on the average
of the net balance owing by the Company on such Libor Loan at the close of
each day during such month. The Company may elect to use Libor as to any
new or then outstanding Revolving Loans provided x) there is then no
unwaived Default or Event of Default, and y) the Company has so advised the
Agent of its election to use Libor and the Libor Period selected no later
than three (3) Business Days prior to the proposed borrowing or, in the
case of a Libor election with respect to a then outstanding Revolving Loan,
three (3) Business Days prior to the conversion of any then outstanding
Revolving Loans to Libor Loans and z) the election and Libor shall be
effective, provided, there is then no unwaived Default or Event of Default,
on the fourth Business Day following said notice. The Libor elections must
be for $100,000.00 or whole multiples thereof. No more than three (3)
Libor elections in the aggregate may be in effect at any one time
(including elections relating to Revolving Loans, elections relating to
CAPEX Term Loans, and elections relating to Term Loans) unless the Agent
agrees otherwise. If no such election is timely made or can be made, then
the Agent shall use the Chase Manhattan Bank Rate to compute interest. In
the event of any change in said Chase Manhattan Bank Rate, the rate
hereunder shall change correspondingly, as of the first of the month
following any change. The rates hereunder shall be calculated based on a
360-day year. The Agent shall be entitled to charge the Company's account
at the rate provided for herein when due until all Obligations have been
paid in full.
(b) Interest on the CAPEX Term Loans shall be payable monthly as of
the end of each month on the unpaid balance or on payment in full prior to
maturity in an amount equal to (a) the applicable CAPEX Non-Libor Margin
plus the Chase Manhattan Bank Rate per annum on balances other than Libor
Loans and (b) the applicable CAPEX Libor Margin plus the applicable Libor
on any Libor Loan, on a per annum basis, on the average of the net balance
of the CAPEX Term Loans owing by the Company to the Lenders at the close of
each day during such month. In the event of any change in said Chase
Manhattan Bank Rate, the rate under clause (a) of this sub-paragraph (b)
shall change correspondingly, as of the first of the month following any
change. The rates hereunder shall be calculated based on a 360-day year.
The Agent shall be entitled to charge the Company's Revolving Loan Account
at the rate provided for herein when due until all Obligations have been
paid in full. The Company may make Libor elections with respect to CAPEX
Term Loans on the same basis, in the same manner, and subject to the same
notice requirements and limitations, as set forth above with respect to
Revolving Loans that are Libor Loans. No more than three (3) Libor
elections in the aggregate may be in effect at any one time (including
elections relating to Revolving Loans, elections relating to CAPEX Term
Loans, and elections relating to Term Loans) unless the Agent agrees
otherwise.
(c) Interest on the Term Loans shall be payable monthly as of the end
of each month on the unpaid balance or on payment in full prior to maturity
in an amount equal to (a) the applicable Term Loan Non-Libor Margin plus
the Chase Manhattan Bank Rate per annum on balances other than Libor Loans
and (b) the applicable Term Loan Libor Margin plus the applicable Libor on
any Libor Loan, on a per annum basis, on the average of the net balance of
the Term Loans owing by the Company to the Lenders at the close of each day
during such month. In the event of any change in said Chase Manhattan Bank
Rate, the rate under clause (a) of this sub-paragraph (b) shall change
correspondingly, as of the first of the month following any change. The
rates hereunder shall be calculated based on a 360-day year. The Agent
shall be entitled to charge the Company's Revolving Loan Account at the
rate provided for herein when due until all Obligations have been paid in
full. The Company may make Libor elections with respect to Term Loans on
the same basis, in the same manner, and subject to the same notice
requirements and limitations, as set forth above with respect to Revolving
Loans that are Libor Loans. No more than three (3) Libor elections in the
aggregate may be in effect at any one time (including elections relating to
Revolving Loans, elections relating to CAPEX Term Loans, and elections
relating to Term Loans) unless the Agent agrees otherwise.
2. The Company shall reimburse or pay the Agent for all Out-of-Pocket
Expenses of the Agent and, after the occurrence of any unwaived Event of
Default which has not ceased to exist, the Lenders.
3. Upon the last business day of each month, commencing with May 31,
1997, the Company shall pay the Agent for the account of the Lenders the
Line of Credit Fee.
4. To induce the Lenders to enter into this Agreement and to extend
to the Company the Revolving Loan, the Company shall pay to the Agent for
the account of the Lenders a Loan Facility Fee in the amount of $250,000.00
payable on the Effective Date, of which one-half thereof shall be paid over
upon receipt by the Agent to the Broker in full satisfaction of any
finder's fees, broker's fees, or related claims of the Broker in connection
with the transactions contemplated by this Agreement. The Commitment Fee
of $100,000.00 referred to in the Commitment Letter (less any portion
thereof applied to Out-of-Pocket Expenses) will, on the Effective Date, be
credited to the Company's account.
5. The Company shall pay the Agent's standard charges for the Agent's
personnel used by the Agent for reviewing the books and records of the
Company and for verifying, testing protecting, safeguarding, preserving or
disposing of all or any part of the Collateral provided, however, that the
foregoing shall not be payable until the occurrence of an Event of Default
if the Company is paying a Collateral Management Fee.
6. In consideration of the Letter of Credit Guaranty, the Company
shall pay the Agent for the account of the Lenders the Letter of Credit
Guaranty Fee which shall be an amount equal to (a) two percent (2%) per
annum, payable monthly, on the face amount of each Standby Letter of Credit
less the amount of any and all amounts previously drawn under such Standby
Letter of Credit; and b) one and one half percent (1.5%) per annum, payable
monthly, on the face amount of each Documentary Letter of Credit less the
amount of any and all amounts previously drawn under such Documentary
Letter of Credit.
7. Any charges, fees, commissions, costs and expenses charged to the
Agent for the Company's account by any Issuing Bank in connection with or
arising out of Letters of Credit issued pursuant to this Agreement or out
of transactions relating thereto will be charged to the Company's account
in full when charged to or paid by the Agent and when made by any such
Issuing Bank shall be conclusive on the Agent.
8. On the Effective Date and on each Anniversary Date, the Company
shall pay to the Agent for the Agent's account the Collateral Management
Fee.
9. The Company shall pay to the Agent for the account of the Lenders
such amount or amounts as shall compensate the Agent, the Lenders or their
Participants (as defined below), if any, for any loss, costs or expenses
incurred by the Agent, the Lenders or their Participants if any, (as
reasonably determined by the Agent, the Lenders or their Participants if
any) as a result of: (i) any payment or prepayment on a date other than
the last day of a Libor Period for such Libor Loan, or (ii) any failure of
the Company to borrow a Libor Loan on the date for such borrowing specified
in the relevant notice; such compensation to include, without limitation,
an amount equal to any loss or expense suffered by the Agent, the Lenders
or their Participants if any, during the period from the date of receipt of
such payment or prepayment or the date of such failure to borrow to the
last day of such Libor Period if the rate of interest obtained by the
Agent, the Lenders or their Participants if any, upon the reemployment of
an amount of funds equal to the amount of such payment, prepayment or
failure to borrow is less than the rate of interest applicable to such
Libor Loan for such Libor Period. The determination by the Agent, the
Lenders or their Participants, if any, of the amount of any such loss or
expense, when set forth in a written notice to the Company, containing the
calculations thereof in reasonable detail, shall constitute prima facie
evidence thereof.
10. The Company hereby authorizes the Agent to charge the Company's
accounts with the Agent with the amount of all payments due hereunder as
such payments become due. The Company confirms that any charges which the
Agent may so make to the Company's account as herein provided will be made
as an accommodation to the Company and solely at the Agent's discretion.
SECTION 8. Powers
The Company hereby constitutes the Agent or any person or agent the
Agent may designate as its attorney-in-fact, at the Company's cost and
expense, to exercise all of the following powers, which being coupled with
an interest, shall be irrevocable until all of the Company's Obligations
have been paid in full:
(a) To receive, take, endorse, sign, assign and deliver, all in the
name of the Agent, the Lenders or the Company, any and all checks, notes,
drafts, and other documents or instruments relating to the Collateral;
(b) To receive, open and dispose of all mail addressed to the Company
and to notify postal authorities to change the address for delivery thereof
to such address as the Agent may designate;
(c) To request from customers indebted on Accounts at any time, in
the name of the Agent or the Company or that of the Agent's designee,
information concerning the amounts owing on the Accounts;
(d) To transmit to customers indebted on Accounts notice of the
Agent's and Lenders' interest therein and to notify customers indebted on
Accounts to make payment directly to the Agent for the Company's account;
and
(e) To take or bring, in the name of the Agent, the Lenders or the
Company, all steps, actions, suits or proceedings deemed by the Agent
necessary or desirable to enforce or effect collection of the Accounts.
Notwithstanding anything herein above contained to the contrary, the
powers set forth in (b), (d) and (e) above may only be exercised after the
occurrence of an Event of Default which has not been waived and which has
not ceased to exist, and until such time as such Event of Default is waived
or has ceased to exist.
SECTION 9. Events of Default and Remedies
1. Notwithstanding anything herein above to the contrary, the Agent
may terminate this Agreement immediately upon the occurrence of any of the
following (herein "Events of Default"):
a) cessation of the business of the Company or any of its
subsidiaries or the calling of a meeting by the Company of its
creditors for purposes of compromising the debts and obligations of the
Company or any of its subsidiaries;
b) the failure of the Company or any of its subsidiaries to generally
meet debts as they mature;
c) the commencement by the Company or any of its subsidiaries of any
bankruptcy, insolvency, arrangement, reorganization, receivership or
similar proceedings under any foreign, federal or state law;
d) the commencement against the Company or any of its subsidiaries of
any bankruptcy, insolvency, arrangement, reorganization, receivership
or similar proceedings under any foreign, federal or state, provided,
however, that such Default shall not be deemed an Event of Default if
such is dismissed within sixty (60) days from the date of commencement;
e) breach by the Company or any of its subsidiaries of any
warranty, representation or covenant contained herein (other than
those referred to in sub-paragraph f below) or in any other written
agreement between the Company or any subsidiary of the Company and
the Lenders, provided that such Default by the Company or any of
its subsidiaries of any of the warranties, representations or
covenants referred in this clause e shall not be deemed to be an
Event of Default unless and until such Default shall remain
unremedied to the Agent's reasonable satisfaction for a period of
ten (10) days from the date of such breach;
f) breach by the Company or any of its subsidiaries of any warranty,
representation or covenant of Section 3, Paragraphs 3 (other than the
third sentence of paragraph 3) and 4 (other than the third and fourth
sentences of paragraph 4); Section 5, Paragraphs 3 and 4 (other than
the first sentence of paragraph 4); Section 6, Paragraphs 1, 5, 6, 9
through 13, and 15;
g) failure of the Company to pay any of the Obligations within
five (5) business days of the due date thereof, provided that
nothing contained herein shall prohibit the Agent from charging
such amounts to the Company's account on the due date thereof;
h) the occurrence of any default or event of default which is not
cured within any applicable grace period or waived under any instrument
or agreement evidencing Subordinated Debt, the Subordinated Replacement
Debt or any other Indebtedness having a principal amount in excess of
$500,000.00;
i) the Company or any of its subsidiaries shall i) engage in any
"prohibited transaction" as defined in ERISA, ii) have any "accumulated
funding deficiency" as defined in ERISA, iii) have any Reportable Event
as defined in ERISA, iv) terminate any Plan, as defined in ERISA or v)
be engaged in any proceeding in which the Pension Benefit Guaranty
Corporation shall seek appointment, or is appointed, as trustee or
administrator of any Plan, as defined in ERISA, and with respect to
this sub-paragraph i such event or condition x) remains uncured for a
period of thirty (30) days from date of notice of occurrence and y)
could, in the reasonable opinion of the Lenders, subject the Company or
any of its subsidiaries to any tax, penalty or other liability material
to the business, operations or financial condition of the Company and
its subsidiaries; or
j) without the prior written consent of the Agent, the Company shall
x) amend or modify the Subordinated Debt or Subordinated Replacement
Debt or y) make any pre-payment, or payment of principal, on account of
the Subordinated Debt or the Subordinated Replacement Debt, or redeem
or repurchase any of same (except that, after the first Anniversary
Date, so long as no Default or Event of Default has occurred and is
continuing, and if, after giving effect to each such payment,
redemption or repurchase there exists Excess Availability of not less
than $2,500,000.00, the Company may pay, redeem or repurchase, in whole
or in part, the Citation Subordinated Debt), provided, however, that
the Company may prepay the Subordinated Debt with the proceeds of any
Subordinated Replacement Debt or an equity offering of the Company, and
provided, further, that the Company may at any time convert the
Citation Subordinated Debt to equity of the Company.
The Company shall not have any grace period or right of cure with respect
to any Event of Default except as specifically set forth herein or in any
ancillary loan document. To the extent that the Company has any such grace
period or right of cure, and if the Company cures an Event of Default in
accordance therewith, such Event of Default immediately upon being cured
shall cease to exist prospectively for all purposes of this Agreement and
any ancillary loan documents.
2. Upon the occurrence of a Default and/or an Event of Default, at
the option of the Agent (subject to the instructions of the Required
Lenders), all loans and advances provided for in paragraph 1 of Section 3,
all CAPEX Term Loans, all Term Loans, and the obligation of the Agent under
this Agreement to assist the Company in opening Letters of Credit shall be
thereafter in the Agent's sole discretion and the obligation of the Lenders
to make revolving loans, CAPEX Term Loans, Term Loans, and to assist the
Company in opening Letters of Credit shall cease unless such Default is
cured or Event of Default is waived, and at the option of the Agent or
pursuant to instructions from the Required Lenders upon the occurrence of
an Event of Default: i) all Obligations shall become immediately due and
payable; ii) the Agent may charge the Company the Default Rate of Interest
on all then outstanding or thereafter incurred Obligations in lieu of the
interest provided for in paragraph 1 of Section 7 of this Agreement
provided a) the Agent has given the Company written notice of the Event of
Default, provided, however, that no notice is required if the Event of
Default is the event listed in paragraph 1(c) or 1(d) of this Section 9 and
b) the Company has failed to cure the Event of Default within ten (10) days
after x) the Agent deposited such notice in the United States mail or y)
the occurrence of the Event of Default listed in paragraph 1(c) or 1(d) of
this Section 9; and iii) the Agent may immediately terminate this Agreement
upon notice to the Company, provided, however, that no notice of
termination is required if the Event of Default is the event listed in
paragraph 1(c) or 1(d) of this Section 9. The exercise of any option is
not exclusive of any other option which may be exercised at any time by the
Agent and/or the Lenders.
3. Immediately upon the occurrence of any Event of Default and while
any Event of Default is continuing, the Agent may to the extent permitted
by law (whether foreign, federal or state): (a) remove from any premises
where same may be located any and all documents, instruments, files and
records, and any receptacles or cabinets containing same, relating to the
Accounts, or the Agent may use, at the Company's expense, such of the
Company's personnel, supplies or space at the Company's places of business
or otherwise, as may be necessary to properly administer and control the
Accounts or the handling of collections and realizations thereon; (b) bring
suit, in the name of the Company or the Agent or the Lenders, and generally
shall have all other rights respecting said Accounts, including, without
limitation, the right to: accelerate or extend the time of payment,
settle, compromise, release in whole or in part any amounts owing on any
Accounts and issue credits in the name of the Company or the Agent; (c)
exercise (directly or through an assignee or nominee) all of the rights,
remedies and powers of the Company under or with respect to the Accounts,
the General Intangibles, the Investment Property, the Other Collateral, or
the Deposit Accounts, (d) sell, assign and deliver the Collateral and any
returned, reclaimed or repossessed merchandise, with or without
advertisement, at public or private sale, for cash, on credit or otherwise,
at the Agent's sole option and discretion, and the Agent, the Lenders or a
Lender may bid or become a purchaser at any such sale, free from any right
of redemption, which right is hereby expressly waived by the Company; (e)
foreclose the security interests and liens created herein or in the Deed of
Trust by any available judicial or non-judicial procedure, or to take
possession of any or all of the Inventory, Equipment, and/or Other
Collateral without judicial process, and to enter any premises where any
Inventory, Equipment, and/or Other Collateral may be located for the
purpose of taking possession of or removing the same; (f) demand by written
notice to the Company that the Company cease or limit, to the extent
specified in such demand, sales of Accounts; and (g) exercise any other
rights and remedies provided in law (whether foreign, federal or state), in
equity, by contract or otherwise, including, without limitation, all rights
and remedies in respect of the Santa Clara Fee Real Property, the Deed of
Trust, and/or the Environmental Indemnity. The Agent shall have the right,
without notice or advertisement, to sell, lease, or otherwise dispose of
all or any part of the Collateral whether in its then condition or after
further preparation or processing, in the name of the Company or the Agent,
the Lenders or a Lender, or in the name of such other party as the Agent or
the Lenders may designate, either at public or private sale or at any
broker's board, in lots or in bulk, for cash or for credit, with or without
warranties or representations, and upon such other terms and conditions as
the Agent or the Lenders in its or their sole discretion may deem
advisable, and the Agent, the Lenders or a Lenders shall have the right to
purchase at any such sale. If any Inventory and Equipment shall require
rebuilding, repairing, maintenance or preparation, the Agent shall have the
right, at its option, to do such of the aforesaid as is necessary, for the
purpose of putting the Inventory and Equipment in such saleable form as the
Agent shall deem appropriate. The Company agrees, at the request of the
Agent, to assemble the Inventory and Equipment and to make it available to
the Agent at premises of the Company or elsewhere and to make available to
the Agent the premises and facilities of the Company for the purpose of the
Agent's taking possession of, removing or putting the Inventory and
Equipment in saleable form. However, if notice of intended disposition of
any Collateral is required by law (whether foreign, federal or state), it
is agreed that ten (10) days notice shall constitute reasonable
notification and full compliance with the law. The net cash proceeds
resulting from the Agent's exercise of any of the foregoing rights, (after
deducting all charges, costs and expenses, including reasonable attorneys'
fees) shall be applied by the Agent to the payment of the Obligations,
including any then outstanding Letters of Credit, whether due or to become
due, in such order as the Agent may elect, and the Company shall remain
liable to the Agent and the Lenders for any deficiencies, and the Agent and
the Lenders in turn agree to remit to the Company or its successors or
assigns, any surplus resulting therefrom. The enumeration of the foregoing
rights is not intended to be exhaustive and the exercise of any right shall
not preclude the exercise of any other rights, all of which shall be
cumulative.
4. Any person dealing with the Agent or with a Company's attorney-in-
fact appointed under Section 8 above shall not be concerned to enquire
whether any event has happened upon which any of the powers, authorities
and discretion conferred by or pursuant to this Agreement are or may be
exercisable by the Agent, attorney-in-fact or otherwise as to the propriety
or regularity of any exercise thereof or of any act purporting or intended
to be an exercise thereof or whether any money remains owing under this
Agreement and the title and position of such person shall not be
impeachable by reference to any of those matters.
SECTION 10. Termination
Except as otherwise permitted herein, the Lenders may terminate this
Agreement and the Line of Credit only as of the fourth or any subsequent
Anniversary Date and then only by giving the Company at least sixty (60)
days prior written notice of termination. Notwithstanding the foregoing
the Agent may terminate this Agreement immediately upon the occurrence of
an Event of Default, provided, however, that if the Event of Default is an
event listed in paragraph 1(c) or 1(d) of Section 9 of this Agreement, the
Agent may regard this Agreement as terminated and notice to that effect is
not required. This Agreement, unless terminated as herein provided, shall
automatically continue from Anniversary Date to Anniversary Date. The
Company may terminate this Agreement, the Line of Credit, and the CAPEX
Term Loan Line of Credit at any time upon sixty (60) days prior written
notice to the Agent. If such termination is before the second Anniversary
Date, the Company shall pay to the Agent for the account of the Lenders the
Early Termination Fee. All Obligations shall become due and payable as of
any termination hereunder or under Section 9 hereof and, pending a final
accounting, the Agent may withhold any balances in the Company's account
(unless supplied with an indemnity satisfactory to the Agent) to cover all
of the Company's Obligations, whether absolute or contingent, including any
then outstanding Letters of Credit. All of the Agent's and Lenders'
rights, liens and security interests shall continue after any termination
until all Obligations have been paid and satisfied in full.
SECTION 11. Agency
1. Each Lender hereby irrevocably designates and appoints CITBC as
the Agent for the Lenders under this Agreement and any ancillary loan
documents and irrevocably authorizes CITBC as Agent for such Lender, to
take such action on its behalf under the provisions of this Agreement and
all ancillary documents and to exercise such powers and perform such duties
as are expressly delegated to the Agent by the terms of this Agreement and
all ancillary documents together with such other powers as are reasonably
incidental thereto. Notwithstanding any provision to the contrary
elsewhere in this Agreement, the Agent shall not have any duties or
responsibilities, except those expressly set forth herein, or any fiduciary
relationship with any Lender and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into
this Agreement and the ancillary documents or otherwise exist against the
Agent.
2. The Agent may execute any of its duties under this Agreement and
all ancillary documents by or through agents or attorneys-in-fact and shall
be entitled to the advice of counsel concerning all matters pertaining to
such duties.
3. Neither the Agent nor any of its officers, directors, employees,
agents, or attorneys-in-fact shall be (i) liable to any Lender for any
action lawfully taken or omitted to be taken by it or such person under or
in connection with this Agreement and all ancillary documents (except for
its or such person's own gross negligence or willful misconduct), or (ii)
responsible in any manner to any of the Lenders for any recitals,
statements, representations or warranties made by the Company or any
officer thereof contained in this Agreement and all ancillary documents or
in any certificate, report, statement or other document referred to or
provided for in, or received by the Agent under or in connection with, this
Agreement and all ancillary documents or for the value, validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement
and all ancillary documents or for any failure of the Company to perform
its obligations thereunder. The Agent shall not be under any obligation to
any Lender to ascertain or to inquire as to the observance or performance
of any of the agreements contained in, or conditions of, this Agreement and
all ancillary documents or to inspect the properties, books or records of
the Company.
4. The Agent shall be entitled to rely, and shall be fully protected
in relying, upon any note, writing, resolution, notice, consent,
certificate, affidavit, letter, cablegram, telegram, telecopy, facsimile,
message, statement, order or other document or conversation believed by it
to be genuine and correct and to have been signed, sent or made by the
proper person or persons and upon advice and statements of legal counsel
(including, without limitation, counsel to the Company), independent
accountants and other experts selected by the Agent. The Agent shall be
fully justified in failing or refusing to take any action under this
Agreement and all ancillary documents unless it shall first receive such
advice or concurrence of the Required Lenders, as it deems appropriate or
it shall first be indemnified to its satisfaction by the Lenders against
any and all liability and expense which may be incurred by it by reason of
taking or continuing to take any such action. The Agent shall in all cases
be fully protected in acting, or in refraining from acting, under this
Agreement and all ancillary documents in accordance with a request of the
Required Lenders, and such request and any action taken or failure to act
pursuant thereto shall be binding upon all the Lenders.
5. The Agent shall not be deemed to have knowledge or notice of the
occurrence of any Default or Event of Default hereunder unless the Agent
has received notice from a Lender or the Company describing such Default or
Event of Default. In the event that the Agent receives such a notice, the
Agent shall promptly give notice thereof to the Lenders. The Agent shall
take such action with respect to such Default or Event of Default as shall
be reasonably directed by the Required Lenders; provided that unless and
until the Agent shall have received such direction, the Agent may in the
interim (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Default or Event of Default as it
shall deem advisable and in the best interests of the Lenders.
6. Each Lender expressly acknowledges that neither the Agent nor any
of its officers, directors, employees, agents or attorneys-in-fact has made
any representations or warranties to it and that no act by the Agent
hereinafter taken, including any review of the affairs of the Company shall
be deemed to constitute any representation or warranty by the Agent to any
Lender. Each Lender represents to the Agent that it has, independently and
without reliance upon the Agent or any other Lender and based on such
documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, operations, property,
financial and other condition and creditworthiness of the Company and made
its own decision to enter into this Agreement. Each Lender also represents
that it will, independently and without reliance upon the Agent or any
other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit analysis,
appraisals and decisions in taking or not taking action under this
Agreement and to make such investigation as it deems necessary to inform
itself as to the business, operations, property, financial and other
condition or creditworthiness of the Company. The Agent, however, shall
provide the Lenders with copies of all financial statements, projections
and business plans which come into the possession of the Agent or any of
its officers, employees, agents or attorneys-in-fact.
7. The Lenders agree to indemnify the Agent in its capacity as such
(to the extent not reimbursed by the Company and without limiting the joint
and several obligation of the Company to do so), from and against any and
all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind whatsoever
which may at any time be imposed on, incurred by or asserted against the
Agent in any way relating to or arising out of this Agreement on any
ancillary documents or any documents contemplated by or referred to herein
or the transactions contemplated hereby or any action taken or omitted by
the Agent under or in connection with any of the foregoing; provided that
no Lender shall be liable for the payment of any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements resulting solely from the Agent's
gross negligence or willful misconduct. The agreements in this paragraph
shall survive the payment of the Obligations.
8. The Agent may make loans to, and generally engage in any kind of
business with the Company as though the Agent were not the Agent hereunder.
With respect to its loans made or renewed by it or loan obligations
hereunder as Lender, the Agent shall have the same rights and powers,
duties and liabilities under this Agreement as any Lender and may exercise
the same as though it were not the Agent and the terms "Lender" and
"Lenders" shall include the Agent in its individual capacity.
9. The Agent may resign as Agent upon 30 days' notice to the Lenders
and such resignation shall be effective upon the appointment of a successor
Agent. If the Agent shall resign as Agent, then the Lenders shall appoint
a successor agent for the Lenders whereupon such successor agent shall
succeed to the rights, powers and duties of the Agent and the term "Agent"
shall mean such successor agent effective upon its appointment, and the
former Agent's rights, powers and duties as Agent shall be terminated,
without any other or further act or deed on the part of such former Agent
or any of the parties to this Agreement, provided, however, that the
Lenders shall: a) notify the Company of the successor Agent and b) request
the consent of the Company to such successor Agent, which consent shall not
be unreasonably withheld. The Company shall be deemed to have consented to
the successor Agent if the Lenders do not receive from the Company, within
ten (10) days of the Lenders' notice to the Company, a written statement of
the Company's objection to the successor Agent. Should the Company not
consent and no acceptable successor Agent is agreed upon within thirty (30)
days of the date the Company advised the Lenders of its objection to the
successor Agent, then the Lenders may appoint (without the Company's
consent) another successor Agent. After any retiring Agent's resignation
hereunder as Agent the provisions of this Section 11 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was
Agent.
10. Notwithstanding anything contained in this Agreement to the
contrary, the Agent will not, without the prior written consent of all of
the Lenders: a) amend this Agreement to t) change the terms of the CAPEX
Term Loan Line of Credit, the CAPEX Term Loans, or the Term Loans, u)
change the advance rates provided for with respect to the Revolving Loans,
v) increase the Line of Credit w) reduce the interest rate x) reduce or
waive i) any fees payable to the Lenders (as opposed to the Agent) or ii)
the repayment of any Obligations due the Lenders; y) alter or amend 1) this
paragraph 10 or 2) the definition of Eligible Accounts Receivable or
Eligible Raw Materials and the Agent's criteria for determining compliance
therewith; or b) release collateral in bulk without a corresponding
reduction in the Obligations to the Lenders. Except as otherwise herein
above provided, the Agent will not, without the prior written consent of
the Required Lenders: a) execute an amendment of the terms of this
Agreement; or b) waive any Event of Default under this Agreement. In all
other respects the Agent is authorized to take such actions or fail to take
such actions if the Agent, in its reasonable discretion, deems such to be
advisable and in the best interest of the Lenders, including, but not
limited to, the making of an over advance of up to 10% of the Line of
Credit, or the termination of this Agreement upon the occurrence of an
Event of Default, unless it is specifically instructed to the contrary by
the Required Lenders.
SECTION 12. Agreement between the Lenders
1. a) The Agent, for the account of the Lenders, shall disburse all
loans and advances to the Company and shall handle all collections of
Collateral and repayment of Obligations. It is understood that for
purposes of advances to the Company and for purposes of this Section 12 the
Agent is using the funds of CITBC.
b) Unless the Agent shall have been notified in writing by any
Lender prior to any advance to the Company that such Lender will not make
the amount which would constitute its share of the borrowing on such date
available to the Agent, the Agent may assume that such Lender shall make
such amount available to the Agent on a Settlement Date, and the Agent may,
in reliance upon such assumption, make available to the Company a
corresponding amount. A certificate of the Agent submitted to any Lender
with respect to any amount owing under this subsection shall be conclusive,
absent manifest error. If such Lender's share of such borrowing is not in
fact made available to the Agent by such Lender on the Settlement Date, the
Agent shall be entitled to recover such amount with interest thereon at the
rate per annum applicable to Revolving Loans hereunder, on demand, from the
Company without prejudice to any rights which the Agent may have against
such Lender hereunder. Nothing contained in this subsection shall relieve
any Lender which has failed to make available its ratable portion of any
borrowing hereunder from its obligation to do so in accordance with the
terms hereof. Nothing contained herein shall be deemed to obligate the
Agent to make available to the Company the full amount of a requested
advance when the Agent has any notice (written or otherwise) that any of
the Lenders will not advance its ratable portion thereof.
2. On the Settlement Date, the Agent and the Lenders shall each remit
to the other, in immediately available funds, all amounts necessary so as
to ensure that, as of the Settlement Date, the Lenders shall have their
proportionate share portion of all outstanding Obligations.
3. The Agent shall forward to each Lender, at the end of each month,
a copy of the account statement rendered by the Agent to the Company.
4. The Agent shall, after receipt of any interest and fees earned
under this Agreement, remit to the Lenders interest and fees as computed at
the rate and as provided for in the assignment and assumption letter
entered into between CITBC and such Lender.
5. (a) The Company acknowledges that the Lenders may sell
participations in the loans and extensions of credit made and to be made to
the Company hereunder. The Company further acknowledges that in doing so,
the Lenders may grant to such participants certain rights which would
require the participant's consent to certain waivers, amendments and other
actions with respect to the provisions of this Agreement.
(b) The Company authorizes each Lender to disclose to any
participant or purchasing lender (each, a "Transferee") and any prospective
Transferee any and all financial information in such Lender's possession
concerning the Company and their affiliates which has been delivered to
such Lender by or on behalf of the Company pursuant to this Agreement or
which has been delivered to such Lender by or on behalf of the Company in
connection with such Lender's credit evaluation of any Company and its
affiliates prior to entering into this Agreement. The Company has made and
will, from time to time, make available to the Agent and the Lenders
certain financial and other business information (the "Confidential
Information") relating to its business. The Agent and the Lenders agree to
maintain the confidentiality of all Confidential Information, and to
disclose such information only (a) to officers, directors or employees or
to legal or financial advisors, in each case to the extent necessary to
carry out this Agreement and the other loan documents; b) to The CIT Group
Holdings, Inc., The CIT Group, Inc., The Chase Manhattan Bank, its holding
company, Dai-Ichi Kanygo Bank, or such other Lenders' parent companies as
is reasonably necessary or required for internal reporting purposes; (c) to
any other recipient to the extent the disclosure of such information to
such recipient is required in connection with the examination of such
Lender's or Transferee's records by appropriate authorities, pursuant to
court order, subpoena or other legal process or otherwise as required by
law or regulation; and (d) to a Transferee. In each instance, the
applicable Lender shall advise the recipient or Transferee to maintain the
confidentiality of the Confidential Information and with respect to a
Transferee, provided such Transferee signs a confidentiality agreement
substantially similar to the provisions of this paragraph 5 (b). No
Lender, Transferee or recipient shall be required to maintain the
confidentiality of any portion of the Confidential Information which (a)
becomes generally available to the public other than by such Lender's,
Transferee's or recipient's unauthorized disclosure, (b) is known by such
recipient, Lender or Transferee or its agents, advisors or representatives
prior to disclosure by the Company or (c) becomes available from a source
other than the Company, provided that the disclosure of Confidential
Information to such recipient, Lender or Transferee by such source does not
violate a confidentiality agreement or duty imposed on such source of which
such recipient, Lender or Transferee has actual knowledge.
6. The Company hereby agrees that each Lender is solely responsible
for its portion of the Aggregate Line of Credit and that neither the Agent
nor any Lender shall be responsible for, nor assume any obligations for the
failure of any Lender to make available its portion of the Aggregate Line
of Credit. Further, should any Lender refuse to make available its portion
of the Aggregate Line of Credit, then the other Lender may, but without
obligation to do so, increase, unilaterally, its portion of the Aggregate
Line of Credit in which event the Company is so obligated to that other
Lender.
7. In the event that the Agent, the Lenders or any one of them is
sued or threatened with suit by the Company or any one of them, or by any
receiver, trustee, creditor or any committee of creditors on account of any
preference, voidable transfer or lender liability issue, alleged to have
occurred or been received as a result of, or during the transactions
contemplated under this Agreement, then in such event any money paid in
satisfaction or compromise of such suit, action, claim or demand and any
expenses, costs and attorneys' paid or incurred in connection therewith,
whether by the Agent, the Lenders or any one of them, shall be shared
proportionately by the Lenders. In addition, any costs, expenses, fees or
disbursements incurred by outside agencies or attorneys retained by the
Agent to effect collection or enforcement of any rights in the Collateral,
including enforcing, preserving or maintaining rights under this Agreement
shall be shared proportionately between the Lenders to the extent not
reimbursed by the Company or from the proceeds of Collateral. The
provisions of this paragraph shall not apply to any suits, actions,
proceedings or claims that x) predate the date of this Agreement or y) are
based on transactions, actions or omissions that predate the date of this
Agreement.
8. The Lenders each agree with each other that any money or assets of
any Company held or received by either Lender, no matter how or when
received, shall be applied to the reduction of the Obligations after x) the
occurrence of an Event of Default and y) the election by the Required
Lenders to accelerate the Obligations. In addition, the Company
authorizes, and the Lenders shall have the right, without notice, upon any
amount becoming due and payable hereunder, to set-off and apply any and all
property held by, or in the possession of the Lenders against the
Obligations due the Lenders, provided that no Lender will effect any set-
off without the prior consent of the Agent.
9. Except as otherwise set forth below in this paragraph, any Lender,
with the prior approval of the Agent, shall have the right at any time to
assign to one or more commercial banks, commercial finance lenders or other
financial institutions all or a portion of its rights and obligations under
this Agreement (including, without limitation, its obligations under the
Line of Credit, the Revolving Loans, the CAPEX Term Loan Line of Credit,
the CAPEX Term Loans, the Term Loans, and its rights and obligations with
respect to Letters of Credit). Upon such assignment with the approval of
the Agent, and provided such assignee assumes its portion of the assigning
Lender's obligations hereunder and pays to the Agent a non-refundable
assignment fee of $5,000.00, (i) the assignee thereunder shall be a party
hereto and, to the extent that rights and obligations hereunder have been
assigned to it pursuant to such assignment, have the rights and obligations
of a Lender hereunder and (ii) the assigning Lender, with the approval of
the Agent, shall, to the extent that rights and obligations hereunder have
been assigned by it pursuant to such assignment, relinquish its rights and
be released from its obligations under this Agreement. The Company shall,
if necessary, execute any documents reasonably required to effectuate the
assignments. The foregoing notwithstanding: (A) CITBC, as a Lender, or any
affiliate of or successor to CITBC that is an assignee of CITBC as a
Lender, (y) at all times shall retain for its own account an aggregate
portion of the combined Line of Credit, CAPEX Term Loan Line of Credit, and
outstanding Term Loans of not less than the lower of (A) $5,000,000.00, and
(B) fifty percent (50%) of the combined Line of Credit, CAPEX Term Loan
Line of Credit, and outstanding Term Loans, and (z) at no time shall hold
for its own account less, in the aggregate, of the Line of Credit, the
CAPEX Term Loan Line of Credit, and the outstanding Term Loans, than any
other Lender; and (B) no Lender shall, without the prior written consent of
the Company and the Agent, assign to any other person or entity less than
$5,000,000.00 of its aggregate position with respect to the Line of Credit,
the CAPEX Term Loan Line of Credit, and the outstanding Term Loans, unless
such Lender's entire position aggregates less than $5,000,000.00 and such
Lender is assigning its entire position.
SECTION 13. Miscellaneous
1. The Company hereby waives diligence, demand, presentment and
protest and any notices thereof as well as notice of nonpayment. No delay
or omission of the Agent or the Lenders or the Company to exercise any
right or remedy hereunder, whether before or after the happening of any
Event of Default, shall impair any such right or shall operate as a waiver
thereof or as a waiver of any such Event of Default. No single or partial
exercise by the Agent or the Lenders of any right or remedy precludes any
other or further exercise thereof, or precludes any other right or remedy.
2. This Agreement and the documents executed and delivered in
connection therewith constitute the entire agreement between the Company
and the Agent and the Lenders; supersede any prior agreements; subject to
the provisions of paragraph 10 of Section 11 of this Agreement, can be
changed only by a writing signed by all of the Company, the Agent and the
Required Lenders; and shall bind and benefit the Company and the Agent and
the Lenders and their respective successors and assigns.
3. In no event shall the Company, upon demand by the Agent for
payment of any indebtedness relating hereto, by acceleration of the
maturity thereof, or otherwise, be obligated to pay interest and fees in
excess of the amount permitted by law. Regardless of any provision herein
or in any agreement made in connection herewith, the Lenders shall never be
entitled to receive, charge or apply, as interest on any indebtedness
relating hereto, any amount in excess of the maximum amount of interest
permissible under applicable law. If the Agent or the Lenders ever
receives, collects or applies any such excess, it shall be deemed a partial
repayment of principal and treated as such; and if principal is paid in
full, any remaining excess shall be refunded to the Company. This
paragraph shall control every other provision hereof and of any other
agreement made in connection herewith.
4. If any provision hereof or of any other agreement made in
connection herewith is held to be illegal or unenforceable, such provision
shall be fully severable, and the remaining provisions of the applicable
agreement shall remain in full force and effect and shall not be affected
by such provision's severance. Furthermore, in lieu of any such provision,
there shall be added automatically as a part of the applicable agreement a
legal and enforceable provision as similar in terms to the severed
provision as may be possible.
5. THE COMPANY, THE AGENT AND EACH LENDER EACH HEREBY WAIVE ANY RIGHT
TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS
AGREEMENT. THE COMPANY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF
PROCESS AND CONSENTS TO SERVICE OF PROCESS BY CERTIFIED OR REGISTERED
MAIL, RETURN RECEIPT REQUESTED.
6. Except as otherwise herein provided, any notice or other
communication required hereunder shall be in writing, and shall be deemed
to have been validly served, given or delivered when hand delivered or sent
by telegram or facsimile, upon delivery when delivered by reputable
overnight courier, or three days after deposit in the United State mails,
with proper first class postage prepaid and addressed to the party to be
notified as follows:
(A) if to CITBC or the Agent, at:
The CIT Group/Business Credit, Inc.
300 South Grand Avenue
Los Angeles, CA 90071
Fax No. (213) 613-2588
Attn: Regional Manager
(B) if to the Lenders (other than CITBC) at such addresses as the
Agent or such Lenders may give the Company:
(C) if to the Company at:
Sigma Circuits, Inc.
393 Mathew Street
Santa Clara, CA 95050
Fax No. (408) 727-0319
Attn: Chief Financial Officer
with copy to:
Cooley Godward LLP
3000 El Camino Real
5 Palo Alto Square
Palo Alto, CA 94306
Fax No. (415) 857-0663
Attn: Pamela J. Martinson, Esq.
or to such other address as any party may designate for itself by like
notice, provided, however, that the failure to send any notice to Cooley
Godward LLP shall not invalidate any notice given to the Company and shall
not give the Company any rights or causes of action against CITBC.
7. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT
SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.
8. Any legal proceedings with respect to this Agreement against the
Company or any of its assets may be brought in the courts of California or
in the courts of the United States located in California. The Company
hereby irrevocably and unconditionally accepts for itself and in respect of
its assets, the nonexclusive jurisdiction of the aforesaid courts and
waives any objection it may have to the laying of venue of any such
proceedings in any of the said courts and any claim it may have that any
such proceedings have been brought in any inconvenient forum or are being
brought before another court.
9. This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered by their proper and duly authorized officers as
of the date set forth above. This Agreement shall take effect as of the
date set forth above after being accepted below.
Very truly yours,
THE CIT GROUP/BUSINESS CREDIT, INC. (AGENT)
By /s/ Robert Castine
Assistant Vice President
THE CIT GROUP/BUSINESS CREDIT, INC. (LENDER)
By /s/ Robert Castine
Assistant Vice President
Read and Agreed to:
SIGMA CIRCUITS, INC.
By /s/ B. Kevin Kelly /s/ Philip S. Bushnell (Seal)
Name: B. Kevin Kelly Name: Philip S. Bushnell
Title: President Title: Secretary
Executed and Accepted at
Palo Alto, California
THE CIT GROUP/BUSINESS CREDIT, INC. (AGENT)
By /s/ Robert Castine
Assistant Vice President
THE CIT GROUP/BUSINESS CREDIT, INC. (LENDER)
By /s/ Robert Castine
Assistant Vice President
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. Basic Provisions. ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for
reference purposes only, April 23, 1997, is made by and between
G.B.G. ("Lessor") and Sigma Circuits Incorporated, "A California
Corporation" ("Lessee"), (collectively the "Parties," or
individually a "Party").
1.2 Premises: That certain real property, including
all improvements therein or to be provided by Lessor under the
terms of this Lease, and commonly known as 345 - 347 Mathew
Street, located in the County of Santa Clara, State of
California, and generally described as (describe briefly the
nature of the property and, if applicable, the "Project", if the
property is located within a Project) a approximately 10,000
square foot two (2) unit industrial building ("Premises"). (See
also Paragraph 2)
1.3 Term: five (5) years and 0 months ("Original
Term") commencing June 1, 1997 ("Commencement Date") and ending
May 31, 2002 ("Expiration Date"). (See also Paragraph 3)
1.4 Early Possession: N/A ("Early Possession Date").
(See also Paragraphs 3.2 and 3.3)
1.5 Base Rent: $2,817.00 per month ("Base Rent"),
payable on the first (1st) day of each month commencing June 1,
1997 (See also Paragraph 4)
If this box is checked, there are provisions in this
Lease for the Base Rent to be adjusted.
1.6 Base Rent Paid Upon Execution: $2,817.00 as Base
Rent for the period June 1, 1997 - June 30, 1997.
1.7 Security Deposit: $6,650.00 ("Security Deposit").
(See also Paragraph 5)
1.8 Agreed Use: General office, storage distribution,
manufacturing of electronic interconnect products and all related
legal uses. (See also Paragraph 6)
1.9 Insuring Party. Lessor is the "Insuring Party"
unless otherwise stated herein. (See also Paragraph 8)
1.10 Real Estate Brokers. (See also Paragraph 15)
(a) Representation. The following real estate
brokers (collectively, the "Brokers") and brokerage relationships
exist in this transaction (check applicable boxes).
N/A represents Lessor exclusively ("Lessor's Broker");
YES BT Commercial represents Lessee exclusively ("Lessee's
Broker"); or
N/A represents both Lessor and Lessee ("Dual Agency").
(b) Payment to Brokers. Upon execution and
delivery of this Lease by both Parties, Lessor shall pay to the
Broker the fee of $5,000.
1.11 Guarantor. The obligations of the Lessee under
this Lease are to be guaranteed by N/A ("Guarantor"). (See
also Paragraph 37)
1.12 Addenda and Exhibits. Attached hereto is an
Addendum or Addenda consisting of Paragraphs 50 through 60 and
Exhibits A, all of which constitute a part of this Lease.
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and
Lessee hereby leases from Lessor, the Premises, for the term, at
the rental, and upon all of the terms, covenants and conditions
set forth in this Lease. Unless otherwise provided herein, any
statement of size set forth in this Lease, or that may have been
used in calculating rental, is an approximation which the Parties
agree is reasonable and the rental based thereon is not subject
to revision whether or not the actual size is more or less.
2.2 Condition. Lessor shall deliver the Premises to
Lessee broom clean and free of debris on the Commencement Date or
the Early Possession Date, whichever first occurs ("Start Date"),
and, so long as the required service contracts described in
Paragraph 7.1(b) below are obtained by Lessee within thirty (30)
days following the Start Date, warrants that the existing
electrical, plumbing, fire sprinkler, lighting, heating,
ventilating and air conditioning systems ("HVAC"), loading doors,
if any, and all other such elements in the Premises, other than
those constructed by Lessee, shall be in good operating condition
on said date and that the structural elements of the roof,
bearing walls and foundation of any buildings on the Premises
(the "Building") shall be free of material defects. If a non-
compliance with said warranty exists as of the Start Date, Lessor
shall, as Lessor's sole obligation with respect to such matter,
except as otherwise provided in this Lease, promptly after
receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify
same at Lessor's expense. If, after the Start Date, Lessee does
not give Lessor written notice of any non-compliance with this
warranty within. (i) one year as to the surface of the roof and
the structural portions of the roof, foundations and bearing
walls, (ii) six (6) months as to the HVAC systems, (iii) thirty
(30) days as to the remaining systems and other elements of the
building, correction of such non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance. Lessor warrants that the improvements
on the Premises comply with all applicable laws, covenants or
restrictions of record, building codes, regulations and
ordinances ("Applicable Requirements") in effect on the Start
Date. Said warranty does not apply to the use to which Lessee
will put the Premises or to any Alterations or Utility
Installations (as defined in Paragraph 7.3(a)) made or to be made
by Lessee. NOTE. Lessee is responsible for determining whether
or not the zoning is appropriate for Lessee's intended use, and
acknowledges that past uses of the Premises may no longer be
allowed. If the Premises do not comply with said warranty,
Lessor shall, except as otherwise provided, promptly after
receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify
the same at Lessor's expense. If Lessee does not give Lessor
written notice of a non-compliance with this warranty within six
(6) months following the Start Date, correction of that non-
compliance shall be the obligation of Lessee at Lessee's sole
cost and expense. If the Applicable Requirements are hereafter
changed (as opposed to being in existence at the Start Date,
which is addressed in Paragraph 6.2(e) below) so as to require
during the term of this Lease the construction of an addition to
or an alteration of the Building, the remediation of any
Hazardous Substance, or the reinforcement or other physical
modification of the Building ("Capital Expenditure"), Lessor and
Lessee shall allocate the cost of such work as follows.
(a) Subject to Paragraph 2.3(c) below, if such
Capital Expenditures are required as a result of the specific and
unique use of the Premises by Lessee as compared with uses by
tenants in general, Lessee shall be fully responsible for the
cost thereof, provided, however that if such Capital Expenditure
is required during the last two (2) years of this Lease and the
cost thereof exceeds six (6) months' Base Rent, Lessee may
instead terminate this Lease unless Lessor notifies Lessee, in
writing, within ten (10) days after receipt of Lessee's
termination notice that Lessor has elected to pay the difference
between the actual cost thereof and the amount equal to six (6)
months' Base Rent. If Lessee elects termination, Lessee shall
immediately cease the use of the Premises which requires such
Capital Expenditure and deliver to Lessor written notice
specifying a termination date at least ninety (90) days
thereafter. Such termination date shall, however, in no event be
earlier than the last day that Lessee could legally utilize the
Premises without commencing such Capital Expenditure.
(b) If such Capital Expenditure is not the result
of the specific and unique use of the Premises by Lessee (such
as, governmentally mandated seismic modifications), then Lessor
and Lessee shall allocate the obligation to pay for such costs
pursuant to the provisions of Paragraph 7.1(c); provided,
however, that if such Capital Expenditure is required during the
last two years of this Lease or if Lessor reasonably determines
that it is not economically feasible to pay its share thereof,
Lessor shall have the option to terminate this Lease upon ninety
(90) days prior written notice to Lessee unless Lessee notifies
Lessor, in writing, within ten (10) days after receipt of
Lessor's termination notice that Lessee will pay for such Capital
Expenditure. If Lessor does not elect to terminate, and fails to
tender its share of any such Capital Expenditure, Lessee may
advance such funds and deduct same, with Interest, from Rent
until Lessor's share of such costs have been fully paid. If
Lessee is unable to finance Lessor's share, or if the balance of
the Rent due and payable for the remainder of this Lease is not
sufficient to fully reimburse Lessee on an offset basis, Lessee
shall have the right to terminate this Lease upon thirty (30)
days written notice to Lessor.
(c) Notwithstanding the above, the provisions
concerning Capital Expenditures are intended to apply only to non-
voluntary, unexpected, and new Applicable Requirements. If the
Capital Expenditures are instead triggered by Lessee as a result
of an actual or proposed change in use, change in intensity of
use, or modification to the Premises then, and in that event,
Lessee shall be fully responsible for the cost thereof, and
Lessee shall not have any right to terminate this Lease.
2.4 Acknowledgments. Lessee acknowledges that.
(a) it has been advised by Lessor and/or Brokers to satisfy
itself with respect to the condition of the Premises (including
but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with
Applicable Requirements), and their suitability for Lessee's
intended use, (b) Lessee has made such investigation as it deems
necessary with reference to such matters and assumes all
responsibility therefor as the same relate to its occupancy of
the Premises, and (c) neither Lessor, Lessor's agents, nor any
Broker has made any oral or written representations or warranties
with respect to said matters other than as set forth in this
Lease. In addition, Lessor acknowledges that. (a) Broker has
made no representations, promises or warranties concerning
Lessee's ability to honor the Lease or suitability to occupy the
Premises, and (b) it is Lessor's sole responsibility to
investigate the financial capability and/or suitability of all
proposed tenants.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and
Original Term of this Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If Lessee totally or partially
occupies the Premises prior to the Commencement Date, the
obligation to pay Base Rent shall be abated for the period of
such early possession. All other terms of this Lease (including
but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall, however,
be in effect during such period. Any such early possession shall
not affect the Expiration Date.
3.3 Delay In Possession. Lessor agrees to use its
best commercially reasonable efforts to deliver possession of the
Premises to Lessee by the Commencement Date. If, despite said
efforts, Lessor is unable to deliver possession as agreed, Lessor
shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease. Lessee shall not,
however, be obligated to pay Rent or perform its other
obligations until it receives possession of the Premises. If
possession is not delivered within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in
writing within ten (10) days after the end of such sixty (60) day
period, cancel this Lease, in which event the Parties shall be
discharged from all obligations hereunder. If such written
notice is not received by Lessor within said ten (10) day period,
Lessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Lessee when required
and Lessee does not terminate this Lease, as aforesaid, any
period of rent abatement that Lessee would otherwise have enjoyed
shall run from the date of delivery of possession and continue
for a period equal to what Lessee would otherwise have enjoyed
under the terms hereof, but minus any days of delay caused by the
acts or omissions of Lessee. If possession of the Premises is
not delivered within four (4) months after the Commencement Date,
this Lease shall terminate unless other agreements are reached
between Lessor and Lessee, in writing.
3.4 Lessee Compliance. Lessor shall not be required
to tender possession of the Premises to Lessee until Lessee
complies with its obligation to provide evidence of insurance
(Paragraph 8.5). Pending delivery of such evidence, Lessee shall
be required to perform all of its obligations under this Lease
from and after the Start Date, including the payment of Rent,
notwithstanding Lessor's election to withhold possession pending
receipt of such evidence of insurance. Further, if Lessee is
required to perform any other conditions prior to or concurrent
with the Start Date, the Start Date shall occur but Lessor may
elect to withhold possession until such conditions are satisfied.
4. Rent.
4.1. Rent Defined. All monetary obligations of Lessee
to Lessor under the terms of this Lease (except for the Security
Deposit) are deemed to be rent ("Rent").
4.2 Payment. Lessee shall cause payment of Rent to be
received by Lessor in lawful money of the United States, without
offset or deduction, on or before the day on which it is due.
Rent for any period during the term hereof which is for less than
one (1) full calendar month shall be prorated based upon the
actual number of days of said month. Payment of Rent shall be
made to Lessor at its address stated herein or to such other
persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount
then due shall not be a waiver of Lessor's rights to the balance
of such Rent, regardless of Lessor's endorsement of any check so
stating.
5. Security Deposit. Lessee shall deposit with Lessor
upon execution hereof the Security Deposit as security for
Lessee's faithful performance of its obligations under this
Lease. If Lessee fails to pay Rent, or otherwise Defaults under
this Lease, Lessor may use, apply or retain all or any portion of
said Security Deposit for the payment of any amount due Lessor or
to reimburse or compensate Lessor for any liability, expense,
loss or damage which Lessor may suffer or incur by reason
thereof. If Lessor uses or applies all or any portion of said
Security Deposit, Lessee shall within ten (10) days after written
request therefor deposit monies with Lessor sufficient to restore
said Security Deposit to the full amount required by this Lease.
If the Base Rent increases during the term of this Lease, Lessee
shall, upon written request from Lessor, deposit additional
moneys with Lessor so that the total amount of the Security
Deposit shall at all times bear the same proportion to the
increased Base Rent as the initial Security Deposit bore to the
initial Base Rent. Should the Agreed Use be amended to
accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right
to increase the Security Deposit to the extent necessary, in
Lessor's reasonable judgment, to account for any increased wear
and tear that the Premises may suffer as a result thereof. If a
change in control of Lessee occurs during this Lease and
following such change the financial condition of Lessee is, in
Lessor's reasonable judgment, significantly reduced, Lessee shall
deposit such additional monies with Lessor as shall be sufficient
to cause the Security Deposit to be at a commercially reasonable
level based on said change in financial condition. Lessor shall
not be required to keep the Security Deposit separate from its
general accounts. Within fourteen (14) days after the expiration
or termination of this Lease, if Lessor elects to apply the
Security Deposit only to unpaid Rent, and otherwise within thirty
(30) days after the Premises have been vacated pursuant to
Paragraph 7.4(c) below, Lessor shall return that portion of the
Security Deposit not used or applied by Lessor. No part of the
Security Deposit shall be considered to be held in trust, to bear
interest or to be prepayment for any monies to be paid by Lessee
under this Lease.
6. Use.
6.1 Use. Lessee shall use and occupy the Premises
only for the Agreed Use, or any other legal use which is
reasonably comparable thereto, and for no other purpose. Lessee
shall not use or permit the use of the Premises in a manner that
is unlawful, creates damage, waste or a nuisance, or that
disturbs owners and/or occupants of, or causes damage to
neighboring properties. Lessor shall not unreasonably withhold
or delay its consent to any written request for a modification of
the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the
mechanical or electrical systems therein, is not significantly
more burdensome to the Premises. If Lessor elects to withhold
consent, Lessor shall within five (5) business days after such
request give written notification of same, which notice shall
include an explanation of Lessor's objections to the change in
use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term
"Hazardous Substance" as used in this Lease shall mean any
product, substance, or waste whose presence, use, manufacture,
disposal, transportation, or release, either by itself or in
combination with other materials expected to be on the Premises,
is either. (i) potentially injurious to the public health,
safety or welfare, the environment or the Premises,
(ii) regulated or monitored by any governmental authority, or
(iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute
or common law theory. Hazardous Substances shall include, but
not be limited to, hydrocarbons, petroleum, gasoline, and/or
crude oil or any products, by-products or fractions thereof.
Lessee shall not engage in any activity in or on the Premises
which constitutes a Reportable Use of Hazardous Substances
without the express prior written consent of Lessor and timely
compliance (at Lessee's expense) with all Applicable
Requirements. "Reportable Use" shall mean (i) the installation
or use of any above or below ground storage tank, (ii) the
generation, possession, storage, use, transportation, or disposal
of a Hazardous Substance that requires a permit from, or with
respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with
respect to which any Applicable Requirements requires that a
notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee
may use any ordinary and customary materials reasonably required
to be used in the normal course of the Agreed Use, so long as
such use is in compliance with all Applicable Requirements, is
not a Reportable Use, and does not expose the Premises or
neighboring property to any meaningful risk of contamination or
damage or expose Lessor to any liability therefor. In addition,
Lessor may condition its consent to any Reportable Use upon
receiving such additional assurances as Lessor reasonably deems
necessary to protect itself, the public, the Premises and/or the
environment against damage, contamination, injury and/or
liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of
protective modifications (such as concrete encasements).
(b) Duty to Inform Lessor. If Lessee knows, or
has reasonable cause to believe, that a Hazardous Substance has
come to be located in, on, under or about the Premises, other
than as previously consented to by Lessor, Lessee shall
immediately give written notice of such fact to Lessor, and
provide Lessor with a copy of any report, notice, claim or other
documentation which it has concerning the presence of such
Hazardous Substance.
(c) Lessee Remediation. Lessee shall not cause
or permit any Hazardous Substance to be spilled or released in,
on, under, or about the Premises (including through the plumbing
or sanitary sewer system) and shall promptly, at Lessee's
expense, take all investigatory and/or remedial action reasonably
recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance,
security and/or monitoring of the Premises or neighboring
properties, that was caused or materially contributed to by
Lessee, or pertaining to or involving any Hazardous Substance
brought onto the Premises during the term of this Lease, by or
for Lessee, or any third party.
(d) Lessee Indemnification. Lessee shall
indemnify, defend and hold Lessor, its agents, employees,
lenders and ground lessor, if any, harmless from and against any
and all loss of rents and/or damages, liabilities, judgments,
claims, expenses, penalties, and attorneys' and consultants' fees
arising out of or involving any Hazardous Substance brought onto
the Premises by or for Lessee, or any third party (provided,
however, that Lessee shall have no liability under this Lease
with respect to underground migration of any Hazardous Substance
under the Premises from adjacent properties). Lessee's
obligations shall include, but not be limited to, the effects of
any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of
investigation, removal, remediation, restoration and/or
abatement, and shall survive the expiration or termination of
this Lease. No termination, cancellation or release agreement
entered into by Lessor and Lessee shall release Lessee from its
obligations under this Lease with respect to Hazardous
Substances, unless specifically so agreed by Lessor in writing at
the time of such agreement.
(e) Lessor Indemnification. Lessor and its
successors and assigns shall indemnify, defend, reimburse and
hold Lessee, its employees and lenders, harmless from and against
any and all environmental damages which existed as a result of
Hazardous Substances on the Premises prior to the Start Date or
which are caused by the gross negligence, or intentional acts of
Lessor, its agents or employees. Lessor's obligations, as and
when required by the Applicable Requirements, shall include, but
not be limited to, the cost of investigation, removal,
remediation, restoration and/or abatement, and shall survive the
expiration or termination of this Lease.
(f) Investigations and Remediations. Lessor
shall retain the responsibility and pay for any investigations or
remediation measures required by governmental entities having
jurisdiction with respect to the existence of Hazardous
Substances on the Premises prior to the Start Date. Lessee shall
cooperate fully in any such activities at the request of Lessor,
including allowing Lessor and Lessor's agents to have reasonable
access to the Premises at reasonable times in order to carry out
Lessor's investigative and remedial responsibilities.
(g) Landlord Termination Option. If a Hazardous
Substance Condition occurs during the term of this lease, unless
Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by
the Applicable Requirements and this Lease shall continue in full
force and effect, but subject to Lessor's rights under Paragraph
6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either
(i) investigate and remediate such Hazardous Substance Condition,
if required, as soon as reasonably possible at Lessor's expense,
in which event this Lease shall continue in full force and
effect, or (ii) if the estimated cost to remediate such condition
exceeds twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater, give written notice to Lessee, within
thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such Hazardous Substance Condition, of Lessor's
desire to terminate this Lease as of the date sixty (60) days
following the date of such notice. In the event Lessor elects to
give a termination notice, Lessee may, within ten (10) days
thereafter, give written notice to Lessor of Lessee's commitment
to pay the amount by which the cost of the remediation of such
Hazardous Substance Condition exceeds an amount equal to twelve
(12) times the then monthly Base Rent or $100,000, whichever is
greater. Lessee shall provide Lessor with said funds or
satisfactory assurance thereof within thirty (30) days following
such commitment. In such event, this Lease shall continue in
full force and effect, and Lessor shall proceed to make such
remediation as soon as reasonably possible after the required
funds are available. If Lessee does not give such notice and
provide the required funds or assurance thereof within the time
provided, this Lease shall terminate as of the date specified in
Lessor's notice of termination.
6.3 Lessee's Compliance with Applicable Requirements.
Except as otherwise provided in this Lease, Lessee, shall, at
Lessee's sole expense, fully, diligently and in a timely manner,
materially comply with all Applicable Requirements, the
requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers
and/or consultants which relate in any manner to the Premises,
without regard to whether said requirements are now in effect or
become effective after the Start Date. Lessee shall, within ten
(10) days after receipt of Lessor's written request, provide
Lessor with copies of all permits and other documents, and other
information evidencing Lessee's compliance with any Applicable
Requirements specified by Lessor, and shall immediately upon
receipt, notify Lessor in writing (with copies of any documents
involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving the
failure of Lessee or the Premises to comply with any Applicable
Requirements.
6.4 Inspection; Compliance. Lessor and Lessor's
Lender and consultants shall have the right to enter into
Premises at any time, in the case of an emergency, and otherwise
at reasonable times, for the purpose of inspecting the condition
of the Premises and for verifying compliance by Lessee with this
Lease. The cost of any such inspections shall be paid by Lessor,
unless a violation of Applicable Requirements, or a contamination
is found to exist or be imminent, or the inspection is requested
or ordered by a governmental authority. In such case, Lessee
shall upon request reimburse Lessor for the cost of such
inspections, so long as such inspection is reasonably related to
the violation or contamination.
7. Maintenance; Repairs, Utility Installations; Trade
Fixtures and Alterations.
7.1 Lessee's Obligations.
(a) In General. Subject to the provisions of
Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's
Compliance with Applicable Requirements), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation),
Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition
and repair (whether or not the portion of the Premises requiring
repairs, or the means of repairing the same, are reasonably or
readily accessible to Lessee, and whether or not the need for
such repairs occurs as a result of Lessee's use, any prior use,
the elements or the age of such portion of the Premises),
including, but not limited to, all equipment or facilities, such
as plumbing, HVAC, electrical, lighting facilities, boilers,
pressure vessels, fire protection system, fixtures, walls
(interior and exterior), foundations, ceilings, roofs, floors,
windows, doors, plate glass, skylights, landscaping, driveways,
parking lots, fences, retaining walls, signs, sidewalks and
parkways located in, on, or adjacent to the Premises. Lessee, in
keeping the Premises in good order, condition and repair, shall
exercise and perform good maintenance practices, specifically
including the procurement and maintenance of the service
contracts required by Paragraph 7.1(b) below. Lessee's
obligations shall include restorations, replacements or renewals
when necessary to keep the Premises and all improvements thereon
or a part thereof in good order, condition and state of repair.
Lessee shall, during the term of this Lease, keep the exterior
appearance of the Building in a first-class condition consistent
with the exterior appearance of other similar facilities of
comparable age and size in the vicinity, including, when
necessary, the exterior repainting of the Building.
(b) Service Contracts. Lessee shall, at Lessee's
sole expense, procure and maintain contracts, with copies to
Lessor, in customary form and substance for, and with contractors
specializing and experienced in the maintenance of the following
equipment and improvements, ("Basic Elements"), if any, as and
when installed on the Premises. (i) HVAC equipment, (ii) boiler,
and pressure vessels, (iii) fire protection systems,
(iv) landscaping and irrigation systems, (v) roof covering and
drains, and (vi) asphalt and parking lots, (vii) clarifiers and
(viii) any other equipment, if reasonably required by Lessor.
(c) Replacement. Subject to Lessee's
indemnification of Lessor as set forth in Paragraph 8.7 below,
and without relieving Lessee of liability resulting from Lessee's
failure to exercise and perform good maintenance practices, if
the Basic Elements described in Paragraph 7.1(b) cannot be
repaired other than at a cost which is in excess of 50% of the
cost of replacing such Basic Elements, then such Basic Elements
shall be replaced by Lessor, and the cost thereof shall be
prorated between the Parties and Lessee shall only be obligated
to pay, each month during the remainder of the term of this
Lease, on the date on which Base Rent is due, an amount equal to
the product of multiplying the cost of such replacement by a
fraction, the numerator of which is one, and the denominator of
which is the number of months of the useful life of such
replacement as such useful life is specified pursuant to Federal
income tax regulations or guidelines for depreciation thereof
(including interest on the unamortized balance as is then
commercially reasonable in the judgment of Lessor's accountants),
with Lessee reserving the right to prepay its obligation at any
time.
7.2 Lessor's Obligations. Subject to the provisions
of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or
Destruction) and 14 (Condemnation), it is intended by the Parties
hereto that Lessor have no obligation, in any manner whatsoever,
to repair and maintain the Premises, or the equipment therein,
all of which obligations are intended to be that of the Lessee.
It is the intention of the Parties that the terms of this Lease
govern the respective obligations of the Parties as to
maintenance and repair of the Premises, and they expressly waive
the benefit of any statute now or hereafter in effect to the
extent it is inconsistent with the terms of this Lease.
7.3 Utility Installations; Trade Fixtures;
Alterations.
(a) Definitions; Consent Required. The term
"Utility Installations" refers to all floor and window coverings,
air lines, power panels, electrical distribution, security and
fire protection systems, communication systems, lighting
fixtures, HVAC equipment, plumbing, and fencing in or on the
Premises. The term "Trade Fixtures" shall mean Lessee's
machinery and equipment that can be removed without doing
material damage to the Premises. The term "Alterations" shall
mean any modification of the improvements, other than Utility
Installations or Trade Fixtures, whether by addition or deletion.
"Lessee Owned Alterations and/or Utility Installations" are
defined as Alterations and/or Utility Installations made by
Lessee that are not yet owned by Lessor pursuant to Paragraph
7.4(a). Lessee shall not make any Alterations or Utility
Installations to the Premises without Lessor's prior written
consent. Lessee may, however, make non-structural Utility
Installations to the interior of the Premises (excluding the
roof) without such consent but upon notice to Lessor, as long as
they are not visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, and the
cumulative cost thereof during this Lease as extended does not
exceed $50,000 in the aggregate or $10,000 in any one year.
(b) Consent. Any Alterations or Utility
Installations that Lessee shall desire to make and which require
the consent of the Lessor shall be presented to Lessor in written
form with detailed plans. Consent shall be deemed conditioned
upon Lessee's. (i) acquiring all applicable governmental
permits, (ii) furnishing Lessor with copies of both the permits
and the plans and specifications prior to commencement of the
work, and (iii) compliance with all conditions of said permits
and other Applicable Requirements in a prompt and expeditious
manner. Any Alterations or Utility Installations shall be
performed in a workmanlike manner with good and sufficient
materials. Lessee shall promptly upon completion furnish Lessor
with as-built plans and specifications. For work which costs an
amount equal to the greater of one month's base rent, or $10,000,
Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation and/or
upon Lessee's posting an additional Security Deposit with Lessor.
(c) Indemnification. Lessee shall pay, when due,
all claims for labor or materials furnished or alleged to have
been furnished to or for Lessee at or for use on the Premises,
which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice
prior to the commencement of any work in, on or about the
Premises, and Lessor shall have the right to post notices of non-
responsibility. If Lessee shall contest the validity of any such
lien, claim or demand, then Lessee shall, at its sole expense
defend and protect itself, Lessor and the Premises against the
same and shall pay and satisfy any such adverse judgment that may
be rendered thereon before the enforcement thereof. If Lessor
shall require, Lessee shall furnish a surety bond in an amount
equal to one and one-half times the amount of such contested
lien, claim or demand, indemnifying Lessor against liability for
the same. If Lessor elects to participate in any such action,
Lessee shall pay Lessor's reasonable attorneys' fees and costs.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to
require removal or elect ownership as hereinafter provided, all
Alterations and Utility Installations made by Lessee shall be the
property of Lessee, but considered a part of the Premises.
Lessor may, at any time, elect in writing to be the owner of all
or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per paragraph 7.4(b)
hereof, all Lessee Owned Alterations and Utility Installations
shall, at the expiration or termination of this Lease, become the
property of Lessor and be surrendered by Lessee with the
Premises.
(b) Removal. By delivery to Lessee of written
notice from Lessor not later than ninety (90) days prior to the
end of the term of this Lease, Lessor may require that any or all
Lessee Owned Alterations or Utility Installations be removed by
the expiration or termination of this Lease. Lessor may require
the removal at any time of all or any part of any Lessee Owned
Alterations or Utility Installations made without the required
consent.
(c) Surrender/Restoration. Lessee shall
surrender the Premises by the Expiration Date or any earlier
termination date, with all of the improvements, parts and
surfaces thereof broom clean and free of debris, and in good
operating order, condition and state of repair, ordinary wear and
tear excepted. "Ordinary wear and tear" shall not include any
damage or deterioration that would have been prevented by good
maintenance practice. Lessee shall repair any damage occasioned
by the installation, maintenance or removal of Trade Fixtures,
furnishings, and equipment as well as the removal of any storage
tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or groundwater contaminated by
Lessee. Trade Fixtures shall remain the property of Lessee and
shall be removed by Lessee. The failure by Lessee to timely
vacate the Premises pursuant to this Paragraph 7.4(c) without the
express written consent of Lessor shall constitute a holdover
under the provisions of Paragraph 26 below.
8. Insurance; Indemnity.
8.1 Payment For Insurance. Lessee shall pay for all
insurance required under Paragraph 8 except to the extent of the
cost attributable to liability insurance carried by Lessor under
Paragraph 8.2(b) in excess of $2,000,000 per occurrence.
Premiums for policy periods commencing prior to or extending
beyond the Lease term shall be prorated to correspond to the
Lease term. Payment shall be made by Lessee to Lessor within ten
(10) days following receipt of an invoice.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and
keep in force a Commercial General Liability policy of insurance
protecting Lessee and Lessor against claims for bodily injury,
personal injury and property damage based upon or arising out of
the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an
occurrence basis providing single limit coverage in an amount not
less than $2,000,000 per occurrence with an "Additional Insured-
Managers or Lessors of Premises Endorsement" and contain the
"Amendment of the Pollution Exclusion endorsement" for damage
caused by heat, smoke or fumes from a hostile fire. The policy
shall not contain any intra-insured exclusions as between insured
persons or organizations, but shall include coverage for
liability assumed under this Lease as an "insured contract" for
the performance of Lessee's indemnity obligations under this
Lease. The limits of said insurance shall not, however, limit
the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance carried by Lessee shall be primary to
and not contributory with any similar insurance carried by
Lessor, whose insurance shall be considered excess insurance
only.
(b) Carried by Lessor. Lessor shall maintain
liability insurance as described in Paragraph 8.2(a), in addition
to, and not in lieu of, the insurance required to be maintained
by Lessee. Lessee shall not be named as an additional insured
therein.
8.3 Property Insurance/Building, Improvements and
Rental Value.
(a) Building and Improvements. The Insuring
Party shall obtain and keep in force a policy or policies in the
name of Lessor, with loss payable to Lessor and to any Lender
insuring loss or damage to the Premises. The amount of such
insurance shall be equal to the full replacement cost of the
Premises, as the same shall exist from time to time, or the
amount required by any Lenders, but in no event more than the
commercially reasonable and available insurable value thereof.
If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations, Trade Fixtures, and
Lessee's personal property shall be insured by Lessee under
Paragraph 8.4 rather than by Lessor. If the coverage is
available and commercially appropriate, such policy or policies
shall insure against all risks of direct physical loss or damage
(except the perils of flood and/or earthquake unless required by
a Lender), including coverage for debris removal and the
enforcement of any Applicable Requirements requiring the
upgrading, demolition, reconstruction or replacement of any
portion of the Premises as the result of a covered loss. Said
policy or policies shall also contain an agreed valuation
provision in lieu of any coinsurance clause, waiver of
subrogation, and inflation guard protection causing an increase
in the annual property insurance coverage amount by a factor of
not less than the adjusted U.S. Department of Labor Consumer
Price Index for All Urban Consumers for the city nearest to where
the Premises are located. If such insurance coverage has a
deductible clause, the deductible amount shall not exceed $1,000
per occurrence, and Lessee shall be liable for such deductible
amount in the event of an Insured Loss.
(b) Rental Value. The Insuring Party shall
obtain and keep in force a policy or policies in the name of
Lessor with loss payable to Lessor and any Lender, insuring the
loss of the full Rent for one (1) year. Said insurance shall
provide that in the event the Lease is terminated by reason of an
insured loss, the period of indemnity for such coverage shall be
extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss
of Rent from the date of any such loss. Said insurance shall
contain an agreed valuation provision in lieu of any coinsurance
clause, and the amount of coverage shall be adjusted annually to
reflect the projected Rent otherwise payable by Lessee, for the
next twelve (12) month period. Lessee shall be liable for any
deductible amount in the event of such loss.
(c) Adjacent Premises. If the Premises are part
of a larger building, or of a group of buildings owned by Lessor
which are adjacent to the Premises, the Lessee shall pay for any
increase in the premiums for the property insurance of such
building or buildings if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
8.4 Lessee's Property/Business Interruption Insurance.
(a) Property Damage. Lessee shall obtain and
maintain insurance coverage on all of Lessee's personal property,
Trade Fixtures, and Lessee Owned Alterations and Utility
Installations. Such insurance shall be full replacement cost
coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used
by Lessee for the replacement of personal property, Trade
Fixtures and Lessee Owned Alterations and Utility Installations.
Lessee shall provide Lessor with written evidence that such
insurance is in force.
(b) Business Interruption. If reasonably
available, and if Lessor requests Lessee to do so in writing,
Lessee shall obtain and maintain loss of income and extra expense
insurance in amounts as will reimburse Lessee for direct or
indirect loss of earnings attributable to all perils commonly
insured against by prudent lessees in the business of Lessee or
attributable to prevention of access to the Premises as a result
of such perils.
(c) No Representation of Adequate Coverage.
Lessor makes no representation that the limits or forms of
coverage of insurance specified herein are adequate to cover
Lessee's property, business operations or obligations under this
Lease.
8.5 Insurance Policies. Insurance required herein
shall be by companies duly licensed or admitted to transact
business in the state where the Premises are located, and
maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, as set forth in the most current issue
of "Best's Insurance Guide", or such other rating as may be
required by a Lender. Lessee shall not do or permit to be done
anything which invalidates the required insurance policies.
Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates
evidencing the existence and amounts of the required insurance.
No such policy shall be cancelable or subject to modification
except after thirty (30) days prior written notice to Lessor.
Lessee shall, at least thirty (30) days prior to the expiration
of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may
order such insurance and charge the cost thereof to Lessee, which
amount shall be payable by Lessee to Lessor upon demand. Such
policies shall be for a term of at least one year, or the length
of the remaining term of this Lease, whichever is less. If
either Party shall fail to procure and maintain the insurance
required to be carried by it, the other Party may, but shall not
be required to, procure and maintain the same.
8.6 Waiver of Subrogation. Without affecting any
other rights or remedies, Lessee and Lessor each hereby release
and relieve the other, and waive their entire right to recover
damages against the other, for loss of or damage to its property
arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not
limited by the amount of insurance carried or required, or by any
deductibles applicable hereto. The Parties agree to have their
respective property damage insurance carriers waive any right to
subrogation that such companies may have against Lessor or
Lessee, as the case may be, so long as the insurance is not
invalidated thereby.
8.7 Indemnity. Except for Lessor's sole negligence,
Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground
lessor, partners and Lenders, from and against any and all
claims, loss of rents and/or damages, liens, judgments,
penalties, attorneys' and consultants' fees, expenses and/or
liabilities arising out of, involving, or in connection with, the
use and/or occupancy of the Premises by Lessee. If any action or
proceeding is brought against Lessor by reason of any of the
foregoing matters, Lessee shall upon notice defend the same at
Lessee's expense by counsel reasonably satisfactory to Lessor and
Lessor shall cooperate with Lessee in such defense. Lessor need
not have first paid any such claim in order to be defended or
indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall
not be liable for injury or damage to the person or goods, wares,
merchandise or other property of Lessee, Lessee's employees,
contractors, invitees, customers, or any other person in or about
the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or
from the breakage, leakage, obstruction or other defects of
pipes, fire sprinklers, wires, appliances, plumbing, HVAC or
lighting fixtures, or from any other cause, whether the said
injury or damage results from conditions arising upon the
Premises or upon other portions of the building of which the
Premises are a part, or from other sources or places. Lessor
shall not be liable for any damages arising from any act or
neglect of any other tenant of Lessor. Notwithstanding Lessor's
negligence or breach of this Lease, Lessor shall under no
circumstances be liable for injury to Lessee's business or for
any loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage
or destruction to the improvements on the Premises, other than
Lessee Owned Alterations and Utility Installations, which can
reasonably be repaired in six (6) months or less from the date of
the damage or destruction. Lessor shall notify Lessee in writing
within thirty (30) days from the date of the damage or
destruction as to whether or not the damage is Partial or Total.
(b) "Premises Total Destruction" shall mean
damage or destruction to the Premises, other than Lessee Owned
Alterations and Utility Installations, which cannot reasonably be
repaired in six (6) months or less from the date of the damage or
destruction. Lessor shall notify Lessee in writing within thirty
(30) days from the date of the damage or destruction as to
whether or not the damage is Partial or Total.
(c) "Insured Loss" shall mean damage or
destruction to improvements on the Premises, other than Lessee
Owned Alterations and Utility Installations and Trade Fixtures,
which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to
repair or rebuild the improvements owned by Lessor at the time of
the occurrence to their condition existing immediately prior
thereto, including demolition, debris removal and upgrading
required by the operation of Applicable Requirements, and without
deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean
the occurrence or discovery of a condition involving the presence
of, or a contamination by, a Hazardous Substance as defined in
Paragraph 6.2(a), in, on, or under the Premises.
9.2 Partial Damage - Insured Loss. If a Premises
Partial Damage that is an Insured Loss occurs, then Lessor shall,
at Lessor's expense, repair such damage (but not Lessee's Trade
Fixtures or Lessee Owned Alterations and Utility Installations)
as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at
Lessor's election, make the repair of any damage or destruction
the total cost to repair of which is $10,000 or less, and, in
such event, Lessor shall make any applicable insurance proceeds
available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not
in force or the insurance proceeds are not sufficient to effect
such repair, the Insuring Party shall promptly contribute the
shortage in proceeds (except as to the deductible which is
Lessee's responsibility) as and when required to complete said
repairs. In the event, however, such shortage was due to the
fact that, by reason of the unique nature of the improvements,
full replacement cost insurance coverage was not commercially
reasonable and available, Lessor shall have no obligation to pay
for the shortage in insurance proceeds or to fully restore the
unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within
ten (10) days following receipt of written notice of such
shortage and request therefor. If Lessor receives said funds or
adequate assurance thereof within said ten (10) day period, the
party responsible for making the repairs shall complete them as
soon as reasonably possible and this Lease shall remain in full
force and effect. If such funds or assurance are not received,
Lessor may nevertheless elect by written notice to Lessee within
ten (10) days thereafter to. (i) make such restoration and
repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in
full force and effect, or have this Lease terminate thirty (30)
days thereafter. Lessee shall not be entitled to reimbursement
of any funds contributed by Lessee to repair any such damage or
destruction. Premises Partial Damage due to flood or earthquake
shall be subject to Paragraph 9.3, notwithstanding that there may
be some insurance coverage, but the net proceeds of any such
insurance shall be made available for the repairs if made by
either Party.
9.3 Partial Damage - Uninsured Loss. If a Premises
Partial Damage that is not an Insured Loss occurs, unless caused
by a negligent or willful act of Lessee (in which event Lessee
shall make the repairs at Lessee's expense), Lessor may either.
(i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force
and effect, or (ii) terminate this Lease by giving written notice
to Lessee within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such damage. Such termination
shall be effective sixty (60) days following the date of such
notice. In the event Lessor elects to terminate this Lease,
Lessee shall have the right within ten (10) days after receipt of
the termination notice to give written notice to Lessor of
Lessee's commitment to pay for the repair of such damage without
reimbursement from Lessor. Lessee shall provide Lessor with said
funds or satisfactory assurance thereof within thirty (30) days
after making such commitment. In such event this Lease shall
continue in full force and effect, and Lessor shall proceed to
make such repairs as soon as reasonably possible after the
required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date
specified in the termination notice.
9.4 Total Destruction. Notwithstanding any other
provision hereof, if a Premises Total Destruction occurs, this
Lease shall terminate sixty (60) days following such Destruction.
If the damage or destruction was caused by the gross negligence
or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee except as provided in
Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during
the last six (6) months of this Lease there is damage for which
the cost to repair exceeds one (1) month's Base Rent, whether or
not an Insured Loss, Lessor may terminate this Lease effective
sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty
(30) days after the date of occurrence of such damage.
Notwithstanding the foregoing, if Lessee at that time has an
exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising
such option and (b) providing Lessor with any shortage in
insurance proceeds (or adequate assurance thereof) needed to make
the repairs on or before the earlier of (i) the date which is ten
days after Lessee's receipt of Lessor's written notice purporting
to terminate this Lease, or (ii) the day prior to the date upon
which such option expires. If Lessee duly exercises such option
during such period and provides Lessor with funds (or adequate
assurance thereof) to cover any shortage in insurance proceeds,
Lessor shall, at Lessor's commercially reasonable expense, repair
such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during such
period, then this Lease shall terminate on the date specified in
the termination notice and Lessee's option shall be extinguished.
9.6 Abatement of Rent; Lessee's Remedies.
(a) Abatement. In the event of Premises Partial
Damage or Premises Total Destruction or a Hazardous Substance
Condition for which Lessee is not responsible under this Lease,
the Rent payable by Lessee for the period required for the
repair, remediation or restoration of such damage shall be abated
in proportion to the degree to which Lessee's use of the Premises
is impaired, but not to exceed the proceeds received from the
Rental Value insurance. All other obligations of Lessee
hereunder shall be performed by Lessee, and Lessor shall have no
liability for any such damage, destruction, remediation, repair
or restoration except as provided herein.
(b) Remedies. If Lessor shall be obligated to
repair or restore the Premises and does not commence, in a
substantial and meaningful way, such repair or restoration within
ninety (90) days after such obligation shall accrue, Lessee may,
at any time prior to the commencement of such repair or
restoration, give written notice to Lessor and to any Lenders of
which Lessee has actual notice, of Lessee's election to terminate
this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice and such
repair or restoration is not commenced within thirty (30) days
thereafter, this Lease shall terminate as of the date specified
in said notice. If the repair or restoration is commenced within
said thirty (30) days, this Lease shall continue in full force
and effect. "Commence" shall mean either the unconditional
authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first
occurs.
9.7 Termination-Advance Payments. Upon termination of
this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an
equitable adjustment shall be made concerning advance Base Rent
and any other advance payments made by Lessee to Lessor. Lessor
shall, in addition, return to Lessee so much of Lessee's Security
Deposit as has not been, or is not then required to be, used by
Lessor.
9.8 Waive Statutes. Lessor and Lessee agree that the
terms of this Lease shall govern the effect of any damage to or
destruction of the Premises with respect to the termination of
this Lease and hereby waive the provisions of any present or
future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 Definition of "Real Property Taxes". As used
herein, the term "Real Property Taxes" shall include any form of
assessment; real estate, general, special, ordinary or
extraordinary, or rental levy or tax (other than inheritance,
personal income or estate taxes); improvement bond; and/or
license fee imposed upon or levied against any legal or equitable
interest of Lessor in the Premises, Lessor's right to other
income therefrom, and/or Lessor's business of leasing, by any
authority having the direct or indirect power to tax and where
the funds are generated with reference to the Building address
and where the proceeds so generated are to be applied by the
city, county or other local taxing authority of a jurisdiction
within which the Premises are located. The term "Real Property
Taxes" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events
occurring during the term of this Lease, including but not
limited to, a change in the ownership of the Premises.
10.2
(a) Payment of Taxes. Lessee shall pay the Real
Property Taxes applicable to the Premises during the term of this
Lease. Subject to Paragraph 10.2(b), all such payments shall be
made at least ten (10) days prior to any delinquency date.
Lessee shall promptly furnish Lessor with satisfactory evidence
that such taxes have been paid. If any such taxes shall cover
any period of time prior to or after the expiration or
termination of this Lease, Lessee's share of such taxes shall be
prorated to cover only that portion of the tax bill applicable to
the period that this Lease is in effect, and Lessor shall
reimburse Lessee for any overpayment. If Lessee shall fail to
pay any required Real Property Taxes, Lessor shall have the right
to pay the same, and Lessee shall reimburse Lessor therefor upon
demand.
(b) Advance Payment. In the event Lessee incurs
a late charge on any Rent payment, Lessor may, at Lessor's
option, estimate the current Real Property Taxes, and require
that such taxes be paid in advance to Lessor by Lessee, either.
(i) in a lump sum amount equal to the installment due, at least
twenty (20) days prior to the applicable delinquency date, or
(ii) monthly in advance with the payment of the Base Rent. If
Lessor elects to require payment monthly in advance, the monthly
payment shall be an amount equal to the amount of the estimated
installment of taxes divided by the number of months remaining
before the month in which said installment becomes delinquent.
When the actual amount of the applicable tax bill is known, the
amount of such equal monthly advance payments shall be adjusted
as required to provide the funds needed to pay the applicable
taxes. If the amount collected by Lessor is insufficient to pay
such Real Property Taxes when due, Lessee shall pay Lessor, upon
demand, such additional sums as are necessary to pay such
obligations. All moneys paid to Lessor under this Paragraph may
be intermingled with other moneys of Lessor and shall not bear
interest. In the event of a Breach by Lessee in the performance
of its obligations under this Lease, then any balance of funds
paid to Lessor under the provisions of this Paragraph may at the
option of Lessor, be treated as an additional Security Deposit.
10.3 Joint Assessment. If the Premises are not
separately assessed, Lessee's liability shall be an equitable
proportion of the Real Property Taxes for all of the land and
improvements included within the tax parcel assessed, such
proportion to be conclusively determined by Lessor from the
respective valuations assigned in the assessor's work sheets or
such other information as may be reasonably available.
10.4 Personal Property Taxes. Lessee shall pay, prior
to delinquency, all taxes assessed against and levied upon Lessee
Owned Alterations, Utility Installations, Trade Fixtures,
furnishings, equipment and all personal property of Lessee. When
possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's
real property, Lessee shall pay Lessor the taxes attributable to
Lessee's property within ten (10) days after receipt of a written
statement.
11. Utilities. Lessee shall pay for all water, gas, heat,
light, power, telephone, trash disposal and other utilities and
services supplied to the Premises, together with any taxes
thereon. If any such services are not separately metered to
Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation
of law assign, transfer, mortgage or encumber (collectively,
"assign" or "assignment") or sublet all or any part of Lessee's
interest in this Lease or in the Premises without Lessor's prior
written consent.
(b) A change in the control of Lessee shall
constitute an assignment requiring consent. The transfer, on a
cumulative basis, of 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, transfer, leveraged buy-out or
otherwise), whether or not a formal assignment or hypothecation
of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee by an amount
greater than twenty-five percent (25%) of such Net Worth as it
was represented at the time of the execution of this Lease or at
the time of the most recent assignment to which Lessor has
consented, or as it exists immediately prior to said transaction
or transactions constituting such reduction, whichever was or is
greater, shall be considered an assignment of this Lease to which
Lessor may withhold its consent. "Net Worth of Lessee" shall
mean the net worth of Lessee (excluding any guarantors)
established under generally accepted accounting principles.
(d) An assignment or subletting without consent
shall, at Lessor's option, be a Default curable after notice per
Paragraph 13.1(c), or a noncurable Breach without the necessity
of any notice and grace period. If Lessor elects to treat such
unapproved assignment or subletting as a noncurable Breach,
Lessor may either. (i) terminate this Lease, or (ii) upon thirty
(30) days written notice, increase the monthly Base Rent to one
hundred ten percent (110%) of the Base Rent then in effect.
Further, in the event of such Breach and rental adjustment,
(i) the purchase price of any option to purchase the Premises
held by Lessee shall be subject to similar adjustment to one
hundred ten percent (110%) of the price previously in effect, and
(ii) all fixed and non-fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased to One Hundred
Ten Percent (110%) of the scheduled adjusted rent.
(e) Lessee's remedy for any breach of Paragraph
12.1 by Lessor shall be limited to compensatory damages and/or
injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and
Subletting.
(a) Regardless of Lessor's consent, any
assignment or subletting shall not. (i) be effective without the
express written assumption by such assignee or sublessee of the
obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, or (iii) alter the primary liability
of Lessee for the payment of Rent or for the performance of any
other obligations to be performed by Lessee.
(b) Lessor may accept Rent or performance of
Lessee's obligations from any person other than Lessee pending
approval or disapproval of an assignment. Neither a delay in the
approval or disapproval of such assignment nor the acceptance of
Rent or performance shall constitute a waiver or estoppel of
Lessor's right to exercise its remedies for Lessee's Default or
Breach.
(c) Lessor's consent to any assignment or
subletting shall not constitute a consent to any subsequent
assignment or subletting.
(d) In the event of any Default or Breach by
Lessee, Lessor may proceed directly against Lessee, any
Guarantors or anyone else responsible for the performance of
Lessee's obligations under this Lease, including any assignee or
sublessee, without first exhausting Lessor's remedies against any
other person or entity responsible therefore to Lessor, or any
security held by Lessor.
(e) Each request for consent to an assignment or
subletting shall be in writing, accompanied by information
relevant to Lessor's determination as to the financial and
operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended
use and/or required modification of the Premises, if any,
together with a fee of $500.00 as consideration for Lessor's
considering and processing said request. Lessee agrees to
provide Lessor with such other or additional information and/or
documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this
Lease shall, by reason of accepting such assignment or entering
into such sublease, be deemed to have assumed and agreed to
conform and comply with each and every term, covenant, condition
and obligation herein to be observed or performed by Lessee
during the term of said assignment 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 to in writing.
12.3 Additional Terms and Conditions Applicable to
Subletting. The following terms and conditions shall apply to
any subletting by Lessee of all or any part of the Premises and
shall be deemed included in all subleases under this Lease
whether or not expressly incorporated therein.
(a) Lessee hereby assigns and transfers to Lessor
all of Lessee's interest in all Rent payable on any sublease, and
Lessor may collect such Rent and apply same toward Lessee's
obligations under this Lease; provided, however, that until a
Breach shall occur in the performance of Lessee's obligations,
Lessee may collect said Rent. Lessor shall not, by reason of the
foregoing or any assignment of such sublease, nor by reason of
the collection of Rent, be deemed liable to the sublessee for any
failure of Lessee to perform and comply with any of Lessee's
obligations to such sublessee. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a
written notice from Lessor stating that a Breach exists in the
performance of Lessee's obligations under this Lease, to pay to
Lessor all Rent due and to become due under the sublease.
Sublessee shall rely upon any such notice from Lessor and shall
pay all Rents to Lessor without any obligation or right to
inquire as to whether such Breach exists, notwithstanding any
claim from Lessee to the contrary.
(b) In the event of a Breach by Lessee, Lessor
may, at its option, require sublessee to attorn to Lessor, in
which event Lessor shall undertake the obligations of the
sublessor under such sublease from the time of the exercise of
said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or
security deposit paid by such sublessee to such sublessor or for
any prior Defaults or Breaches of such sublessor.
(c) Any matter requiring the consent of the
sublessor under a sublease shall also require the consent of
Lessor.
(d) No sublessee shall further assign or sublet
all or any part of the Premises without Lessor's prior written
consent.
(e) Lessor shall deliver a copy of any notice of
Default or Breach by Lessee to the sublessee, who shall have the
right to cure the Default of Lessee within the grace period, if
any, specified in such notice. The sublessee shall have a right
of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. A "Default" is defined as a
failure by the Lessee to comply with or perform any of the terms,
covenants, conditions or rules under this Lease. A "Breach" is
defined as the occurrence of one or more of the following
Defaults, and the failure of Lessee to cure such Default within
any applicable grace period.
(a) The abandonment of the Premises; or the
vacating of the Premises without providing a commercially
reasonable level of security, or where the coverage of the
property insurance described in Paragraph 8.3 is jeopardized as a
result thereof, or without providing reasonable assurances to
minimize potential vandalism.
(b) The failure of Lessee to make any payment of
Rent or any other monetary payment required to be made by Lessee
hereunder, whether to Lessor or to a third party, when due, to
provide reasonable evidence of insurance or surety bond, or to
fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a
period of three (3) business days following written notice to
Lessee.
(c) The failure by Lessee to provide
(i) reasonable written evidence of compliance with Applicable
Requirements, (ii) the service contracts, (iii) the rescission of
an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence
concerning any guaranty and/or Guarantor, (vii) any document
requested under Paragraph 42 (easements), or (viii) any other
documentation or information which Lessor may reasonably require
of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice
to Lessee.
(d) A Default by Lessee as to the terms,
covenants, conditions or provisions of this Lease, or of the
rules adopted under Paragraph 40 hereof, other than those
described in subparagraphs 13.1(a), (b) or (c), above, where such
Default continues for a period of thirty (30) days after written
notice; provided, however, that if the nature of Lessee's Default
is such that more than thirty (30) days are reasonably required
for its cure, then it shall not be deemed to be a Breach if
Lessee commences such cure within said thirty (30) day period and
thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following
events. (i) the making of any general arrangement or assignment
for the benefit of creditors; (ii) becoming a "debtor" as defined
in 11 U.S.C. 101 or any successor statute thereto (unless, in
the case of a petition filed against Lessee, the same is
dismissed within sixty (60) days); (iii) the appointment of a
trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest
in this Lease, where possession is not restored to Lessee within
thirty (30) days; or (iv) the attachment, execution or other
judicial seizure of substantially all of Lessee's assets located
at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided,
however, in the event that any provision of this subparagraph
(e) is contrary to any applicable law, such provision shall be of
no force or effect, and not affect the validity of the remaining
provisions.
(f) The discovery that any financial statement of
Lessee or of any Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations
under this Lease is guaranteed. (i) the death of a Guarantor,
(ii) the termination of a Guarantor's liability with respect to
this Lease other than in accordance with the terms of such
guaranty, (iii) a Guarantor's becoming insolvent or the subject
of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation
on an anticipatory basis, and Lessee's failure, within sixty (60)
days following written notice of any such event, to provide
written alternative assurance or security, which, when coupled
with the then existing resources of Lessee, equals or exceeds the
combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any of its
affirmative duties or obligations, within ten (10) days after
written notice (or in case of an emergency, without notice),
Lessor may, at its option, perform such duty or obligation on
Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental
licenses, permits or approvals. The costs and expenses of any
such performance by Lessor shall be due and payable by Lessee
upon receipt of invoice therefor. If any check given to Lessor
by Lessee shall not be honored by the bank upon which it is
drawn, Lessor, at its option, may require all future payments to
be made by Lessee to be by cashier's check. In the event of a
Breach, Lessor may, with or without further notice or demand, and
without limiting Lessor in the exercise of any right or remedy
which Lessor may have by reason of such Breach.
(a) Terminate Lessee's right to possession of the
Premises by any lawful means, in which case this Lease shall
terminate and Lessee shall immediately surrender possession to
Lessor. In such event Lessor shall be entitled to recover from
Lessee. (i) the unpaid Rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after
termination until the time of award exceeds the amount of such
rental loss that the Lessee proves could have been reasonably
avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time
of award exceeds the amount of such rental loss that the Lessee
proves could be reasonably avoided; and (iv) any other amount
necessary to compensate Lessor for all the detriment proximately
caused by the Lessee's failure to perform its obligations under
this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost
of recovering possession of the Premises, expenses of reletting,
including necessary renovation and alteration of the Premises,
reasonable attorneys' fees, and that portion of any leasing
commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the
time of award of the amount referred to in provision (iii) of the
immediately preceding sentence shall be computed by discounting
such amount at the discount rate of the Federal Reserve Bank of
the District within which the Premises are located at the time of
award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Breach of this Lease shall not waive
Lessor's right to recover damages under Paragraph 12. If
termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to
recover in such proceeding any unpaid Rent and damages as are
recoverable therein, or Lessor may reserve the right to recover
all or any part thereof in a separate suit. If a notice and
grace period required under Paragraph 13.1 was not previously
given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also
constitute the notice required by Paragraph 13.1. In such case,
the applicable grace period required by Paragraph 13.1 and the
unlawful detainer statute shall run concurrently, and the failure
of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a
Breach of this Lease entitling Lessor to the remedies provided
for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to
possession and recover the Rent as it becomes due, in which event
Lessee may sublet or assign, subject only to reasonable
limitations. Acts of maintenance, efforts to relet, and/or the
appointment of a receiver to protect the Lessor's interests,
shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter
available under the laws or judicial decisions of the state
wherein the Premises are located. The expiration or termination
of this Lease and/or the termination of Lessee's right to
possession shall not relieve Lessee from liability under any
indemnity provisions of this Lease as to matters occurring or
accruing during the term hereof or by reason of Lessee's
occupancy of the Premises.
13.3 Inducement Recapture. Any agreement for free or
abated rent or other charges, or for the giving or paying by
Lessor to or for Lessee of any cash or other bonus, inducement or
consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement
Provisions," shall be deemed conditioned upon Lessee's full and
faithful performance of all of the terms, covenants and
conditions of this Lease. Upon Breach of this Lease by Lessee,
any such Inducement Provision shall automatically be deemed
deleted from this Lease and of no further force or effect, and
any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an
inducement Provision shall be immediately due and payable by
Lessee to Lessor, notwithstanding any subsequent cure of said
Breach by Lessee. The acceptance by Lessor of rent or the cure
of the Breach which initiated the operation of this paragraph
shall not be deemed a waiver by Lessor of the provisions of this
paragraph unless specifically so stated in writing by Lessor at
the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that
late payment by Lessee of Rent will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are
not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender.
Accordingly, if any Rent shall not be received by Lessor within
five (5) days after such amount shall be due, then, without any
requirement for notice to Lessee, Lessee shall pay to Lessor a
one-time late charge equal to ten percent (10%) of each such
overdue amount. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor
will incur by reason of such late payment. Acceptance of such
late charge by Lessor shall in no event constitute a waiver of
Lessee's Default or Breach with respect to such overdue amount,
nor prevent the exercise of any of the other rights and remedies
granted hereunder. In the event that a late charge is payable
hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding any provision of
this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 Interest. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor when
due, as to scheduled payments (such as Base Rent), or within
thirty (30) days following the date on which it was due, for non-
scheduled payments, shall bear interest from the date when due as
to scheduled payments, or the thirty-first (31st) day after it
was due, as to non-scheduled payments. The interest ("Interest")
charged shall be equal to the prime rate charged by the largest
state chartered bank in the state in which the Premises are
located plus 4%, but shall not exceed the maximum rate allowed by
law. Interest is payable in addition to the potential late
charge provided for in Paragraph 13.4.
13.6 Breach by Lessor.
(a) Notice of Breach. Lessor shall not be deemed
in breach of this Lease unless Lessor fails within a reasonable
time to perform an obligation required to be performed by Lessor.
For purposes of this Paragraph, a reasonable time shall in no
event be less than thirty (30) days after receipt by Lessor, and
any Lender whose name and address shall have been furnished
Lessee in writing for such purpose, of written notice specifying
wherein such obligation of Lessor has not been performed;
provided, however, that if the nature of Lessor's obligation is
such that more than thirty (30) days are reasonably required for
its performance, then Lessor shall not be in breach if
performance is commenced within such thirty (30) day period and
thereafter diligently pursued to completion.
(b) Performance by Lessee on Behalf of Lessor.
In the event that neither Lessor nor Lender cures said breach
within thirty (30) days after receipt of said notice, or if
having commenced said cure they do not diligently pursue it to
completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to the greater of
one month's Base Rent or the Security Deposit, and to pay an
excess of such expense under protest, reserving Lessee's right to
reimbursement from Lessor. Lessee shall document the cost of
said cure and supply said documentation to Lessor.
14. Condemnation. If the Premises or any portion thereof
are taken under the power of eminent domain or sold under the
threat of the exercise of said power (collectively
"Condemnation"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent
(10%) of any building, or more than twenty-five percent (25%) of
the land area not occupied by any building, is taken by
Condemnation, Lessee may, at Lessee's option, to be exercised in
writing within ten (10) days after Lessor shall have given Lessee
written notice of such taking (or in the absence of such notice,
within ten (10) days after the condemning authority shall have
taken possession) terminate this Lease as of the date the
condemning authority takes such possession. If Lessee does not
terminate this Lease in accordance with the foregoing, this Lease
shall remain in full force and effect as to the portion of the
Premises remaining, except that the Base Rent shall be reduced in
proportion to the reduction in utility of the Premises caused by
such Condemnation. Condemnation awards and/or payments shall be
the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold, the value
of the part taken, or for severance damages; provided, however,
that Lessee shall be entitled to any compensation for Lessee's
relocation expenses, loss of business goodwill and/or Trade
Fixtures, without regard to whether or not this Lease is
terminated pursuant to the provisions of this Paragraph. All
Alterations and Utility Installations made to the Premises by
Lessee, for purposes of Condemnation only, shall be considered
the property of the Lessee and Lessee shall be entitled to any
and all compensation which is payable therefor. In the event
that this Lease is not terminated by reason of the Condemnation,
Lessor shall repair any damage to the Premises caused by such
Condemnation.
15. Brokers' Fee.
15.1 Additional Commission. In addition to the
payments owed pursuant to Paragraph 1.10 above, and unless lessor
and the Brokers otherwise agree in writing, Lessor agrees that.
(a) if Lessee exercises any Option, (b) if Lessee acquires any
rights to the Premises or other premises owned by Lessor and
located within the same Project, if any, within which the
Premises is located, (c) if Lessee remains in possession of the
Premises, with the consent of Lessor, after the expiration of
this Lease, or (d) if Base Rent is increased, whether by
agreement or operation of an escalation clause herein, then,
Lessor shall pay Brokers a fee in accordance with the schedule of
said Brokers in effect at the time of the execution of this
Lease.
15.2 Assumption of Obligations. Any buyer or
transferee of Lessor's interest in this Lease shall be deemed to
have assumed Lessor's obligation hereunder. Each Broker shall be
a third party beneficiary of the provisions of Paragraphs 1.10,
15, 22 and 31. If Lessor fails to pay to a Broker any amounts
due as and for commissions pertaining to this Lease when due,
then such amounts shall accrue Interest. In addition, if Lessor
fails to pay any amounts to Lessee's Broker when due, Lessee's
Broker may send written notice to Lessor and Lessee of such
failure and if Lessor fails to pay such amounts within ten (10)
days after said notice, Lessee shall pay said monies to its
Broker and offset such amounts against Rent. In addition,
Lessee's Broker shall be deemed to be a third party beneficiary
of any commission agreement entered into by and/or between Lessor
and Lessor's Broker.
15.3 Representations and Indemnities of Broker
Relationships. Lessee and Lessor each represent and warrant to
the other that it has had no dealings with any person, firm,
broker or finder (other than the Brokers, if any) in connection
with this Lease, and that no one other than said named Brokers is
entitled to any commission or finder's fee in connection
herewith. Lessee and Lessor do each hereby agree to indemnify,
protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any
such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect
thereto.
16. Tenancy Statement/Estoppel Certificate.
16.1 Each Party (as "Responding Party") shall within
ten (10) days after written notice from the other Party (the
"Requesting Party") execute, acknowledge and deliver to the
Requesting Party an estoppel certificate in writing, in form
similar to the then most current "Tenancy Statement" form
published by the American Industrial Real Estate Association,
plus such additional information, confirmation and/or statements
as may be reasonably requested by the Requesting Party.
16.2 If Lessor desires to finance, refinance, or sell
the Premises, or any part thereof, Lessee and all Guarantors
shall deliver to any potential lender or purchaser designated by
Lessor such financial statements as may be reasonably required by
such lender or purchaser, including but not limited to Lessee's
financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender
or purchaser in confidence and shall be used only for the
purposes herein set forth.
17. Definition of Lessor. The term "Lessor" as used herein
shall mean the owner or owners at the time in question of the fee
title to the Premises, or, if this is a sublease, of the Lessee's
interest in the prior lease. In the event of a transfer of
Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by
credit) any unused Security Deposit held by Lessor. Except as
provided in Paragraph 15, upon such transfer or assignment and
delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the
obligations and/or covenants under this Lease thereafter to be
performed by the Lessor. Subject to the foregoing, the
obligations and/or covenants in this Lease to be performed by the
Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, the original Lessor under
this Lease, and all subsequent holders of the Lessor's interest
in this Lease shall remain liable and responsible with regard to
the potential duties and liabilities of Lessor pertaining to
Hazardous Substances as outlined in Paragraph 6 above.
18. Severability. The invalidity of any provision of this
Lease, as determined by a court of competent jurisdiction, shall
in no way affect the validity of any other provision hereof.
19. Days. Unless otherwise specifically indicated to the
contrary, the word "days" as used in this Lease shall mean and
refer to calendar days.
20. Limitation on Liability. The obligations of Lessor
under this Lease shall not constitute personal obligations of
Lessor, the individual partners of Lessor or its or their
individual partners, directors, officers or shareholders, and
Lessee shall look to the Premises, and to no other assets of
Lessor, for the satisfaction of any liability of Lessor with
respect to this Lease, and shall not seek recourse against the
individual partners of Lessor, or its or their individual
partners, directors, officers or shareholders, or any of their
personal assets for such satisfaction.
21. Time of Essence. Time is of the essence with respect
to the performance of all obligations to be performed or observed
by the Parties under this Lease.
22. No Prior or Other Agreements; Broker Disclaimer. This
Lease contains all agreements between the Parties with respect to
any matter mentioned herein, and no other prior or
contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers
that it has made, and is relying solely upon, its own
investigation as to the nature, quality, character and financial
responsibility of the other Party to this Lease and as to the
nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any
default or breach hereof by either Party. The liability
(including court costs and Attorneys' fees), of any Broker with
respect to negotiation, execution, delivery or performance by
either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee
received by such Broker pursuant to this Lease; provided,
however, that the foregoing limitation on each Broker's liability
shall not be applicable to any gross negligence or willful
misconduct of such Broker.
23. Notices.
23.1 Notice Requirements. All notices required or
permitted by this Lease shall be in writing and may be delivered
in person (by hand or by courier) or may be sent by regular,
certified or registered mail or U.S. Postal Service Express
Mail, with postage prepaid, or by facsimile transmission, and
shall be deemed sufficiently given if served in a manner
specified in this Paragraph 23. The addresses noted adjacent to
a Party's signature on this Lease shall be that Party's address
for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice,
except that upon Lessee's taking possession of the Premises, the
Premises shall constitute Lessee's address for notice. A copy of
all notices to Lessor shall be concurrently transmitted to such
party or parties at such addresses as Lessor may from time to
time hereafter designate in writing.
23.2 Date of Notice. Any notice sent by registered or
certified mail, return receipt requested, shall be deemed given
on the date of delivery shown on the receipt card, or if no
delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours
after the same is addressed as required herein and mailed with
postage prepaid. Notices delivered by United States Express Mail
or overnight courier that guarantee next day delivery shall be
deemed given twenty-four (24) hours after delivery of the same to
the Postal Service or courier. Notices transmitted by facsimile
transmission or similar means shall be deemed delivered upon
telephone confirmation of receipt, provided a copy is also
delivered via delivery or mail. If notice is received on a
Saturday, Sunday or legal holiday, it shall be deemed received on
the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach
of any term, covenant or condition hereof by Lessee, shall be
deemed a waiver of any other term, covenant or condition hereof,
or of any subsequent Default or Breach by Lessee of the same or
of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of,
any subsequent or similar act by Lessee, or be construed as the
basis of an estoppel to enforce the provision or provisions of
this Lease requiring such consent. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee.
Any payment by Lessee may be accepted by Lessor on account of
moneys or damages due Lessor, notwithstanding any qualifying
statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or
effect whatsoever unless specifically agreed to in writing by
Lessor at or before the time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request
of the other, execute, acknowledge and deliver to the other a
short form memorandum of this Lease for recording purposes. The
Party requesting recordation shall be responsible for payment of
any fees applicable thereto.
26. No Right To Holdover. Lessee has no right to retain
possession of the Premises or any part thereof beyond the
expiration or termination of this Lease. In the event that
Lessee holds over, then the Base Rent shall be increased to one
hundred fifty percent (150%) of the Base Rent applicable during
the month immediately preceding the expiration or termination.
Nothing contained herein shall be construed as consent by Lessor
to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder
shall be deemed exclusive but shall, wherever possible, be
cumulative with all other remedies at law or in equity.
28. Covenants and Conditions; Construction of Agreement.
All provisions of this Lease to be observed or performed by
Lessee are both covenants and conditions. In construing this
Lease, all headings and titles are for the convenience of the
parties only and shall not be considered a part of this Lease.
Whenever required by the context, the singular shall include the
plural and vice versa. This Lease shall not be construed as if
prepared by one of the parties, but rather according to its fair
meaning as a whole, as if both parties had prepared it.
29. Binding Effect; Choice of Law. This Lease shall be
binding upon the parties, their personal representatives,
successors and assigns and be governed by the laws of the State
in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted
hereby shall be subject and subordinate to any ground lease,
mortgage, deed of trust, or other hypothecation or security
device (collectively, "Security Device"), now or hereafter placed
upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions
thereof. Lessee agrees that the holders of any such Security
Devices shall have no liability or obligation to perform any of
the obligations of Lessor under this Lease. Any Lender may elect
to have this Lease and/or any Option granted hereby superior to
the lien of its Security Device by giving written notice thereof
to Lessee, this Lease and such Options shall be deemed prior to
such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance
provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender
or any other party who acquires ownership of the Premises by
reason of a foreclosure of a Security Device, and that in the
event of such foreclosure, such new owner shall not. (i) be
liable for any act or omission of any prior lessor or with
respect to events occurring prior to acquisition of ownership;
(ii) be subject to any offsets or defenses which Lessee might
have against any prior lessor, or (iii) be bound by prepayment of
more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices
entered into by Lessor after the execution of this Lease,
Lessee's subordination of this Lease shall be subject to
receiving a commercially reasonable non-disturbance agreement (a
"Non-Disturbance Agreement") from the Lender which Non-
Disturbance Agreement provides that Lessee's possession of the
Premises, and this Lease, including any options to extend the
term hereof, will not be disturbed so long as Lessee is not in
Breach hereof and attorns to the record owner of the Premises.
Further, within sixty (60) days after the execution of this
Lease, Lessor shall use its commercially reasonable efforts to
obtain a Non-Disturbance Agreement from the holder of any pre-
existing Security Device which is secured by the Premises. In
the event that Lessor is unable to provide the Non-Disturbance
Agreement within said sixty (60) days, then Lessee may, at
Lessee's option, directly contact Lessor's lender and attempt to
negotiate for the execution and delivery of a Non-Disturbance
Agreement.
30.4 Self-Executing. The agreements contained in this
Paragraph 30 shall be effective without the execution of any
further documents; provided, however, that, upon written request
from Lessor or a Lender in connection with a sale, financing or
refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately
document any subordination, attornment and/or Non-Disturbance
Agreement provided for herein.
31. Attorneys' Fees. If any Party or Broker brings an
action or proceeding to enforce the terms hereof or declare
rights hereunder, the Prevailing Party (as hereafter defined) in
any such proceeding, action, or appeal thereon, shall be entitled
to reasonable attorneys' fees. Such fees may be awarded in the
same suit or recovered in a separate suit, whether or not such
action or proceeding is pursued to decision or judgment. The
term, "Prevailing Party" shall include, without limitation, a
Party or Broker who substantially obtains or defeats the relief
sought, as the case may be, whether by compromise, settlement,
judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorneys' fees award shall not be
computed in accordance with any court fee schedule, but shall be
such as to fully reimburse all attorneys' fees reasonably
incurred. In addition, Lessor shall be entitled to attorneys'
fees, costs and expenses incurred in the preparation and service
of notices of Default and consultations in connection therewith,
whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and
Lessor's agents shall have the right to enter the Premises at any
time, in the case of an emergency, and otherwise at reasonable
times for the purpose of showing the same to prospective
purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises as Lessor may
deem necessary. All such activities shall be without abatement
of rent or liability to Lessee. Lessor may at any time place on
the Premises any ordinary "For Sale" signs and Lessor may during
the last six (6) months of the term hereof place on the Premises
any ordinary "For Lease" signs. Lessee may at any time place on
or about the Premises any ordinary "For Sublease" sign.
33. Auctions. Lessee shall not conduct, nor permit to be
conducted, any auction upon the Premises without Lessor's prior
written consent. Lessor shall not be obligated to exercise any
standard of reasonableness in determining whether to permit an
auction.
34. Signs. Except for ordinary "for sublease" signs,
Lessee shall not place any sign upon the Premises without
Lessor's prior written consent. All signs must comply with all
Applicable Requirements.
35. Termination; Merger. Unless specifically stated
otherwise in writing by Lessor, the voluntary or other surrender
of this Lease by Lessee, the mutual termination or cancellation
hereof, or a termination hereof by Lessor for Breach by Lessee,
shall automatically terminate any sublease or lesser estate in
the Premises; provided, however, that Lessor may elect to
continue any one or all existing subtenancies. Lessor's failure
within ten (10) days following any such event to elect to the
contrary by written notice to the holder of any such lesser
interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. Consents. Except as otherwise provided herein,
wherever in this Lease the consent of a Party is required to an
act by or for the other Party, such consent shall not be
unreasonably withheld or delayed. Lessor's actual reasonable
costs and expenses not to exceed $1,000.00 (including but not
limited to architects', attorneys', engineers' and other
consultants' fees) incurred in the consideration of, or response
to, a request by Lessee for any Lessor consent, including but not
limited to consents to an assignment, a subletting or the
presence or use of a Hazardous Substance, shall be paid by Lessee
upon receipt of an invoice and supporting documentation therefor.
Lessor's consent to any act, assignment or subletting shall not
constitute 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. The failure to specify herein any particular
condition to Lessor's consent shall not preclude the imposition
by Lessor at the time of consent of such further or other
conditions as are then reasonable with reference to the
particular matter for which consent is being given. In the event
that either Party disagrees with any determination made by the
other hereunder and reasonably requests the reasons for such
determination, the determining party shall furnish its reasons in
writing and in reasonable detail within ten (10) business days
following such request.
37. Guarantor.
37.1 Execution. The Guarantors, if any, shall each
execute a guaranty in the form most recently published by the
American Industrial Real Estate Association, and each such
Guarantor shall have the same obligations as Lessee under this
Lease.
37.2 Default. It shall constitute a Default of the
Lessee if any Guarantor fails or refuses, upon request to
provide. (a) evidence of the execution of the guaranty,
including the authority of the party signing on Guarantor's
behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of its board of
directors authorizing the making of such guaranty, (b) current
financial statements, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. Quiet Possession. Subject to payment by Lessee of the
Rent and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under
this Lease, Lessee shall have quiet possession and quiet
enjoyment of the Premises during the term hereof.
39. Options.
39.1 Definition. "Option" shall mean. (a) the right
to extend the term of or renew this Lease or to extend or renew
any lease that Lessee has on other property of Lessor; (b) the
right of first refusal or first offer to lease either the
Premises or other property of Lessor; (c) the right to purchase
or the right of first refusal to purchase the Premises or other
property of Lessor.
39.2 Options Personal To Original Lessee. Each Option
granted to Lessee in this Lease is personal to the original
Lessee, and cannot be assigned or exercised by anyone other than
said original Lessee and only while the original Lessee is in
full possession of the Premises and, if requested by Lessor, with
Lessee certifying that Lessee has no intention of thereafter
assigning or subletting.
39.3 Multiple Options. In the event that Lessee has
any multiple Options to extend or renew this Lease, a later
Option cannot be exercised unless the prior Options have been
validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an
Option. (i) during the period commencing with the giving of any
notice of Default and continuing until said Default is cured,
(ii) during the period of time any Rent is unpaid (without regard
to whether notice thereof is given Lessee), (iii) during the time
Lessee is in Breach of this Lease, or (iv) in the event that
Lessee has been given three (3) or more notices of Default,
whether or not the Defaults are cured, during the twelve (12)
month period immediately preceding the exercise of the Option.
(b) The period of time within which an Option may
be exercised shall not be extended or enlarged by reason of
Lessee's inability to exercise an Option because of the
provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no
further force or effect, notwithstanding Lessee's due and timely
exercise of the Option, if, after such exercise and prior to the
commencement of the extended term, (i) Lessee fails to pay Rent
for a period of thirty (30) days after such Rent becomes due
(without any necessity of Lessor to give notice thereof),
(ii) Lessor gives to Lessee three (3) or more notices of separate
Default during any twelve (12) month period, whether or not the
Defaults are cured, or (iii) if Lessee commits a Breach of this
Lease.
40. Multiple Buildings. If the Premises are a part of a
group of buildings controlled by Lessor, Lessee agrees that it
will observe all reasonable rules and regulations which Lessor
may make from time to time for the management, safety, and care
of said properties, including the care and cleanliness of the
grounds and including the parking, loading and unloading of
vehicles, and that Lessee will pay its fair share of common
expenses incurred in connection therewith.
41. Security Measures. Lessee hereby acknowledges that the
rental payable to Lessor hereunder does not include the cost of
guard service or other security measures, and that Lessor shall
have no obligation whatsoever to provide same. Lessee assumes
all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third
parties.
42. Reservations. Lessor reserves to itself the right,
from time to time, to grant, without the consent or joinder of
Lessee, such easements, rights and dedications that Lessor deems
necessary, and to cause the recordation of parcel maps and
restrictions, so long as such easements, rights, dedications,
maps and restrictions do not unreasonably interfere with the use
of the Premises by Lessee. Lessee agrees to sign any documents
reasonably requested by Lessor to effectuate any such easement
rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute
shall arise as to any amount or sum of money to be paid by one
Party to the other under the provisions hereof, the Party against
whom the obligation to pay the money is asserted shall have the
right to make payment "under protest" and such payment shall not
be regarded as a voluntary payment and there shall survive the
right on the part of said Party to institute suit for recovery of
such sum. If it shall be adjudged that there was no legal
obligation on the part of said Party to pay such sum or any part
thereof, said Party shall be entitled to recover such sum or so
much thereof as it was not legally required to pay.
44. Authority. If either Party hereto is a corporation,
trust, limited liability company, partnership, or similar
entity, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized
to execute and deliver this Lease on its behalf. Each party
shall, within thirty (30) days after request, deliver to the
other party satisfactory evidence of such authority.
45. Conflict. Any conflict between the printed provisions
of this Lease and the typewritten or handwritten provisions shall
be controlled by the typewritten or handwritten provisions.
46. Offer. Preparation of this Lease by either party or
their agent and submission of same to the other Party shall not
be deemed an offer to lease to the other Party. This Lease is
not intended to be binding until executed and delivered by all
Parties hereto.
47. Amendments. This Lease may be modified only in
writing, signed by the Parties in interest at the time of the
modification. As long as they do not materially change Lessee's
obligations hereunder, Lessee agrees to make such reasonable non-
monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal
financing or refinancing of the Premises.
48. Multiple Parties. If more than one person or entity
is named herein as either Lessor or Lessee, such multiple Parties
shall have joint and several responsibility to comply with the
terms of this Lease.
49. Mediation and Arbitration of Disputes. An Addendum
requiring the Mediation and/or the Arbitration of all disputes
between the Parties and/or Brokers arising out of this Lease M
is M is not attached to this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS
LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE
EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT
THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE
IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
ATTENTION. NO REPRESENTATION OR RECOMMENDATION IS MADE BY
THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER
AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF
THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES
ARE URGED TO.
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND
INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION
SHOULD INCLUDE BUT NOT BE LIMITED TO. THE POSSIBLE PRESENCE OF
HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL
INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND
THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING. IF THE PREMISES IS LOCATED IN A STATE OTHER THAN
CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE
REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE
PREMISES IS LOCATED.
The parties hereto have executed this Lease at the place and
on the dates specified above their respective signatures.
Executed at on Executed at on
by LESSOR: G.B.G. by LESSEE: Sigma Circuits, Incorporated
By: /s/ Richard Greco By: /s/ Philip S. Bushnell
Name Printed: Richard Greco Name Printed: Philip S. Bushnell
Title: General Partner, G.B.G. Title: Sr. Vice President
and CFO
50. Rental Rate:
Lessee shall pay rent to Lessor based upon the following rent
schedule:
Monthly
Months Base Rent NNN Square Footage & Address
01-03 $2,817.00 Approximately 4,700 SF (345 Mathew Street)
04-12* $6,650.00 Approximately 10,000 SF (345-347 Mathew Street)
13-24 $6,850.00 Approximately 10,000 SF (345-347 Mathew Street)
25-36 $7,050.00 Approximately 10,000 SF (345-347 Mathew Street)
37-48 $7,250.00 Approximately 10,000 SF (345-347 Mathew Street)
49-60 $7,450.00 Approximately 10,000 SF (345-347 Mathew Street)
* Upon Business Solutions vacating 347 Mathew Street, Lessee
shall have possession of said premises rent free for
ninety (90) days to paint, carpet and construct any tenant
improvements. Lessee shall pay Lessor $2,817.00 per month
plus the NNN expenses for 345 Mathew Street (Approximately
4,700 sq. ft.) until ninety (90) days after Business
Solutions has vacated 347 Mathew Street (Approximately
5,300 square feet) with possession delivered to Lessee.
The full base rental amount of $6,650.00 per month and the
full NNN expense for both units (Approximately 10,000
square feet) shall commence ninety (90) days after
Business Solutions has vacated 347 Mathew Street with
possession delivered to Lessee.
In the event possession of 347 Mathew Street is not
delivered to Lessee by December 1, 1997, this Lease shall
terminate unless other agreements are reached with Lessee,
in writing.
51. Condition of the Premises:
Notwithstanding anything to the contrary contained in the
Lease Agreement, Lessor shall deliver the Premises with all
building systems and components in good working order and
repair including, but not limited to, HVAC, electrical,
lighting, plumbing, ceiling tiles, man doors, utility systems,
office doors, structural integrity, walls, roof, fire
protection system, roll-up doors, parking lot, landscape
irrigation, etc. If required by any governmental agency
having jurisdiction, Lessor shall be responsible for
compliance with the California Tile 24 Disabled Access
Regulation which incorporates the Federal Americans with
Disability Act (ADA).
52. Foundation, Walls and Roof:
Notwithstanding anything to the contrary contained in the
Lease Agreement, Lessor, at Lessor's sole cost and expense,
shall be responsible for the maintenance and replacement of
the foundation, walls, roof structure and roof membrane.
53. Maintenance and Repairs:
Lessor shall perform and construct, at Lessor's sole cost and
expense, and Lessee shall have no obligation to perform or pay
for, any repair, maintenance or improvements (i) necessitated
by the acts or omissions of Lessor, or its agents, employees,
licensees, invitees or contractors, (ii) for which Lessor has
a right of reimbursement from others.
54. NNN Expenses:
The Lessor estimates the current NNN expenses to be $.065 per
square foot per month.
55. Option to Renew:
Lessee shall have one (1) five (5) year option to extend this
Lease by giving notice in writing to the Lessor not less than
one hundred eighty (180) days prior to any expiration date.
All conditions and covenants of this Lease shall remain in
full force and effect during any extension except that the
annual rental payable during the said extended term, shall be
the fair market rental rate of the leased Premises as of the
commencement date of the extended term. Such fair market
rental rate shall be ascertained by comparing the subject
Premises to other like
Premises in like areas in vicinity. In the event that the
parties are unable to agree as to the fair lease value of the
Premises, then the fair lease value shall be determined by
three (3) appraisers, one of whom shall be chosen by the
Lessor, one of whom shall be chosen by the Lessee and one of
whom shall be chosen by the first two appraisers. Each party
shall pay for the cost of the appraisers selected by him and
one-half of the cost of the third appraiser. The average of
the two appraisers which are closer together, shall then be
calculated and the value thus determined shall conclusively be
deemed to be the fair lease value of the leased Premises for
the purposes of this paragraph and shall accrue from the first
day of any extended term hereof.
56. Signage:
Lessee shall be allowed signage per the City of Santa Clara's
sign ordinance.
57. Entry by Lessor:
Lessor and Lessor's agents, except in the case of emergency,
shall provide Lessee with twenty-four (24) hours notice prior
to entry of the Premises. Any such entry by Lessor and
Lessor's agents shall comply with all reasonable security
measures of Lessee and shall not impair Lessee's operations
more than reasonably necessary. During any such entry, Lessor
and Lessor's agents shall at all times be accompanied by a
representative of Lessee.
58. Reasonable Expenditures:
Any expenditure by a party permitted or required under the
Lease, for which such party is entitled to demand and does
demand reimbursement from the other party, shall be limited to
the fair market value of the goods and services involved,
shall be reasonably incurred, and shall be substantiated by
documentary evidence available for inspection and review by
the other party.
59. Lessor's Acknowledgment and Consent:
Notwithstanding anything to the contrary contained in
Paragraphs 6.2 and 7 of the Lease Agreement, Lessor
acknowledges and consents to the following:
1) Lessee's use of the Premises for the storage and use of
hazardous substances in the manufacturing process of interconnect
products.
2) Any modifications/alterations to the Premises required by
any governmental organization having jurisdiction for the storage
and use of hazardous materials in the manufacturing process of
interconnect products.
Lessee shall, at Lessee's sole cost and expense, comply with
any and all rules, regulations, codes, ordinances, statutes,
and other requirements of lawful government authority
respecting hazardous substances in connection with the
manufacturing process of interconnect products.
60. Effect of Addendum:
In the event of any inconsistency between this Addendum and
the Lease, the terms of this Addendum shall prevail. As used
herein, the term "Lease" shall mean the Lease, this Addendum
and all riders, exhibits, rules and regulations, referred to
in the Lease of this Addendum.
READ AND APPROVED:
LESSOR: LESSEE:
G.B.G. Sigma Circuits Incorporated
By: /s/ Richard Greco By: /s/ Philip S. Bushnell
Its: General Partner, G.B.G. Its: Sr. Vice President and CFO
Date: 6/24/97 Date: 4/30/97
EXHIBIT A
Exhibit A is a map (Book 230, Page 47) compiled in conformance
with Section 327 of the Revenue B Taxation Code. Effective Date
- - March 1, 1993. Alfred E. Carlson - Assessor.
Said map shows property location in relation to all other
property located on Mathew Street, Reed Street, Martin Street and
De La Cruz Avenue in Santa Clara, California. Property is
located at 345 Mathew Street, Santa Clara, California.
MODIFICATION TO STANDARD INDUSTRIAL/COMMERCIAL
SINGLE - TENANT LEASE - NET
This is a modification to that certain "STANDARD
INDUSTRIAL/COMMERCIAL SINGLE - TENANT LEASE - NET" ("Tenant
Lease") entered into between G.B.G., a California general
partnership ("Lessor"), and Sigma Circuits Incorporated, a
California corporation ("Lessee"), and executed on the same date
as this "Modification" to the Tenant Lease.
1. Purpose.
The Lessor and Lessee of the Tenant Lease originally
drafted the Tenant Lease for the purpose of memorializing their
agreement. However, after the Tenant Lease was drafted, the
parties negotiated and entered into certain modifications to the
Tenant Lease. This modification to the Tenant Lease will
memorialize the said modifications.
2. Modification to Provision 1.3 of the Tenant Lease:
Provision 1.3 of the Tenant Lease is modified to
provide that the lease term shall begin on July 1, 1997 and end
on June 30, 2002.
3. Modification to Provision 1.5 of the Tenant Lease:
Provision 1.5 of the Tenant Lease is modified to
provide that the Tenant Lease rent is $6,650 commencing on July
1, 1997.
4. Modification to Provision 1.7 of the Tenant Lease:
Provision 1.7 of the Tenant Lease is modified to
provide for a security deposit of $7,450. This provision shall be
further modified to provide that if the Lessee fails to timely
pay the last month's rent the Lessee shall pay the Lessor $10,175
or an amount equal to 150% of the last month's rent, which ever
is the greater, for the last month's rent. The intent of this
modification is that the Lessee has represented to the Lessor
that the prepayment of an amount equal to the last month's rent
will be available to the Lessor as a security deposit to provide
for damages, and not used up by the lessee in the final month of
the lease term.
5. Modification to Provision 1.10(a)&(b) of the Tenant
Lease:
Provisions 1.10(a) and (b) of the Tenant Lease are
modified to provide that BT Commercial represents the interests
of the Lessee and Alexander F. Eagle III, Attorney at Law,
represents the interests of the Lessor. These provisions of the
lease shall also be modified to provide that any commission
payable to BT Commercial shall be paid by the Lessee, and any
attorneys' fees payable to Alexander F. Eagle III shall be paid
by the Lessor.
6. Modification to Provision 1.12 of the Tenant Lease:
Provision 1.12 of the Tenant Lease is modified to
provide that the addendum or addenda consists of paragraph 50
through 61
7. Modification to Provision 15.1 of the Tenant Lease:
Provision 15.1 of the Tenant Lease shall be deleted in
its entirety.
8. Modification to Provision 50 of the Tenant Lease:
The reference to month's 01-03 and 04-12 shall be modified
to provide that the months 01-12 shall be at the rental rate of
$6,650 per month. The intent of this modification is to delete
any reduction in the rent during the first three months of the
Tenant Lease.
Provision 50 of the Tenant Lease shall also be modified to
delete the third full paragraph, in its entirety, which paragraph
begins with the words, "Upon Business Solutions vacating" and
ends with the words "347 Mathew Street with possession delivered
to Lessee."
9. Modification to Provision 51 of the Tenant Lease:
The last sentence of Provision 51 of the Tenant Lease
shall be modified to provide that, "[I]f required by any
governmental agency having jurisdiction, Lessor shall be
responsible for compliance with California Title 24 Disabled
Access Regulation which incorporates the Federal Americans With
Disability Act ("ADA"), except if such a requirement is caused by
any acts of the Lessee, such as alterations, improvements, or
modifications made to any part of the premises by the Lessee,
then the Lessee shall be responsible for all costs of any such
ADA compliance." It is the intent of this modification that the
Lessor shall not be responsible for the cost of any ADA
requirements caused by Lessee's alteration, improvement, or
modification of the premises.
10. Modification to Provision 55 of the Tenant Lease:
The first paragraph of provision 55 of the Tenant Lease
shall be modified with the addition of the following:
"During the period of time that the Lessee and Lessor
may be attempting to settle any dispute regarding the
market rental rate, the Lessee shall continue to be
responsible for a monthly base rent of $7,450, and all
other costs, i.e., triple net costs, that may be
payable under the Tenant Lease.
Every calendar year after June 30, 2002 (the first
increase will be July 1, 2003), the rental rate shall
be increased to reflect the increase, if any, in the
cost of living during the previous calendar year by
adding to the current monthly base rent an amount
obtained by multiplying the monthly base rent by the
percentage by which the level of the Consumer Price
Index for the San Francisco-Oakland Metropolitan Area,
as reported for the last day of that annual period by
the Bureau of Labor Statistics of the United States
Department of Labor, has increased over its level as
of June 30, 2002.
11. Addition of Provision 61 to the Tenant Lease:
A Provision 61 shall be added providing that, "[I]f
the Lessee materially alters, improves or modifies existing
office improvements of the premises, Lessee shall return the
premises to Lessor in the following condition: The premises shall
be divided into two units divided down the middle in the same
manner as each unit is currently divided. Each of the two
separate units shall consist of at least 20% office space with
the office space being located on the street side of the
premises. Each of the units shall have its own bathroom. The
Lessee shall return the premises to the Lessor in said condition
upon expiration of the lease and if Lessee doesn't, the Lessee's
rental shall continue in full until the premises are returned in
such condition. Lessee shall also return the premises to Lessor
with all improvements made by the Lessee during the term of the
lease unless the improvements conflict with the use of the
premises as a two unit building with 20% office. The intent of
this provision arises out of the Lessee's indication that it may
want to turn the premises into a single manufacturing facility.
The Lessor does not want the premises returned to it as a single
unit building because, in the Lessor's opinion, that is not the
highest and best rental use of the premises; and the Lessee's
indication that Lessee may be making substantial improvements to
the premises, i.e. a sprinkler system, updating utilities to
current codes and requirements and ADA requirements. Therefore,
the Lessee has promised to return the premises in the above
condition.
Complete with any useable improvements made during the term of
the Tenant Lease.
11. Reallegation and inconsistencies:
All provisions of the Tenant Lease not inconsistent with
this Modification are restated in this document. If any provision
of the Tenant Lease are inconsistent with this Modification, the
provisions of this Modification shall control.
We, the undersigned, agree to the above modifications and
changes.
(Signature Page Follows)
Lessor: Lessee:
G.B.G. Sigma Circuits Incorporated
By: /s/ Richard Greco By: /s/ Philip S. Bushnell
Its: General Partner, G.B.G. Its: Sr. Vice President and CFO
Date: 6/24/97 Date: 6/23/97
