<PAGE>
CHATCOM, INC
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
Commission file number 0-20462
CHATCOM, INC.
(Exact name of Registrant as specified in its charter)
California 95-3746596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 Topanga Canyon Boulevard, Chatsworth, California 91311
(Address of principal executive offices)
818/709-1778
(Registrant's telephone number)
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
---- ----
As of February 17, 1999, there were 21,245,503 shares of the Registrant's
Common Stock issued and outstanding.
Transitional Small Business Disclosure Format: Yes No X
---- ----
Page 1 of 18
<PAGE>
CHATCOM, INC
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Balance Sheets (in thousands)
- ----------------------------------------------------------------------------------------------------------
(unaudited)
December 31, March 31,
ASSETS Notes 1998 1998
---------- ------------- ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 157 $ 381
Accounts receivable, net of allowances $23,000
(December 31, 1998) and $50,000 (March 31, 1998) 4 125 849
Inventories 2,4,5 1,181 2,636
Prepaid expenses and other current assets 4 59 92
---------- ----------
Total current assets 1,522 3,958
EQUIPMENT AND FIXTURES, Net 3,4 219 388
DEPOSIT 23 22
---------- ----------
TOTAL 4 $ 1,764 $ 4,368
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable 5 $ 2,380 $ 2,904
Accrued expenses 5 826 1,074
Line of credit 4 189
Current portion of notes payable 5 1,280
Current portion of capital lease obligations 15 15
Deferred income - sale of technology 5 4,424
---------- ----------
Total current liabilities 7,834 5,273
---------- ----------
LONG TERM LIABILITIES:
Notes payable - less current portion 5 20
Capital lease obligation - less current portion 6 22
---------- ----------
Total long-term liabilities 6 42
---------- ----------
REDEEMABLE PREFERRED STOCK:
Series E Convertible Redeemable Preferred Stock
$1,100,000 redemption value net of $163,000 of offering
costs, authorized 2,000 shares; issued and outstanding
1,100 shares at March 31, 1998 6 937
---------- ----------
SHAREHOLDERS' DEFICIT:
Preferred Stock, no par value, authorized 1,000,000 shares
Series D Convertible Preferred Stock, $1,000 stated value
per share, authorized 5,000 shares; issued and outstanding
2,496 shares at March 31, 1998 5 1,407
Series E Convertible Preferred Stock, $1,000 stated value
per share, authorized 2,000 shares, issued and outstanding
890 shares at December 31, 1998 6 727
Series F Convertible Preferred Stock, $1,000 stated value
per share, authorized 2,000 shares, issued and outstanding
945 shares at March 31, 1998 5 945
Series G Convertible Preferred Stock, $1,000 stated value
per share, authorized 500 shares, issued and outstanding
400 shares at March 31, 1998 5 400
Common stock, no par value; authorized 25,000,000 shares;
issued and outstanding 14,668,749 shares at
December 31, 1998 and 11,591,215 shares at March 31, 1998 6 11,406 11,025
Additional paid-in capital 2,839 2,839
Accumulated deficit (21,048) (18,500)
---------- ----------
Total shareholders' deficit (6,076) (1,884)
---------- ----------
TOTAL $ 1,764 $ 4,368
========== ==========
</TABLE>
See accompanying notes to financial statements
Page 2 of 18
<PAGE>
CHATCOM, INC
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS (unaudited) (in thousands, except share and per sharedata)
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
December 31 December 31,
1998 1997 1998 1997
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
SALES
Gross sales $ 594 $ 1,781 $ 2,562 $ 8,955
Returns (1) (2,302) (80) (2,895)
------------ ----------- ------------ ----------
Net sales (returns) 593 (521) 2,482 6,060
------------ ----------- ------------ ----------
COST OF GOODS SOLD 575 328 2,229 4,485
------------ ----------- ------------ ----------
GROSS PROFIT (LOSS) 18 (849) 253 1,575
------------ ----------- ------------ ----------
OPERATING EXPENSES:
Selling 193 769 708 2,660
General and administrative 183 372 1,031 1,922
Research and development 271 449 765 1,616
------------ ----------- ------------ ----------
Total operating expenses 647 1,590 2,504 6,198
------------ ----------- ------------ ----------
LOSS FROM OPERATIONS (629) (2,439) (2,251) (4,623)
INTEREST EXPENSE, NET (7) (182) (77) (190)
------------ ----------- ------------ ----------
LOSS BEFORE INCOME TAXES (636) (2,621) (2,328) (4,813)
PROVISION FOR INCOME TAXES (1) (1)
------------ ----------- ------------ ----------
NET LOSS $ (636) $ (2,621) $ (2,329) $ (4,814)
DIVIDENDS ON PREFERRED STOCK (19) (85) (220) (260)
------------ ----------- ------------ ----------
NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $ (655) $ (2,706) $ (2,549) $ (5,074)
============ =========== ============ ==========
BASIC NET LOSS PER COMMON SHARE: $ (0.05) $ (0.27) $ (0.20) $ (0.51)
============ =========== ============ ==========
Weighted average number of Common Shares 13,817,130 9,934,190 12,723,273 9,893,585
============ =========== ============ ==========
</TABLE>
See accompanying notes to financial statements
Page 3 of 18
<PAGE>
CHATCOM, INC
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
- -----------------------------------------------------------------------------------------------------------------
Nine Months Ended
December 31
1998 1997
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,329) $(4,814)
Adjustments to reconcile net cash used in
operating activities:
Depreciation and amortization 169 271
Increase (decrease) in provision for losses on accounts receivable (27) 302
Provision for inventory obsolescence 160 306
Interest on subordinated debt 20
Interest on accounts payable 175
Changes in operating assets and liabilities:
Accounts receivable 751 179
Inventories 755 (754)
Inventories to be returned from customer (1,334)
Prepaid expenses and other current assets 33 6
Deposits (1)
Accounts payable (230) 3,438
Accrued expenses (38) (31)
------------- ------------
Net cash used in operating activities (757) (183)
------------- ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures 0 (183)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases (16) (20)
Proceeds from notes payable 400
Repayment of note payable (40)
Proceeds from line of credit 333
Repayment of line of credit (144)
Proceeds from sale of preferred stock 937
Proceeds from issuance of convertible subordinated debt 890
------------- ------------
Net cash provided by financing activities 533 1,807
------------- ------------
NET DECREASE IN CASH (224) (612)
CASH, BEGINNING OF PERIOD 381 1,169
------------- ------------
CASH, END OF PERIOD $ 157 $ 557
============= ============
</TABLE>
(Continued)
See accompanying notes to financial statements
Page 4 of 18
<PAGE>
CHATCOM, INC
STATEMENTS OF CASH FLOWS (unaudited) (Continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During the nine months ended December 31, 1998 and 1997, the Company paid
interest of $76,000 and $2,000 respectively, and taxes of $0 and $8,000,
respectively.
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended December 31, 1998, the Company accrued
dividends related to the Series D Convertible Preferred Stock of $104,000
and paid previously accrued dividends of $125,000 through the issuance of
242,001 shares of Common Stock, which resulted in an increase in Common
Stock of $125,000 and a decrease in accrued expenses of $125,000.
During the nine months ended December 31, 1998, the Company accrued
dividends related to the Series E Convertible Preferred Stock of $61,000
and paid previously accrued dividends of $45,000 through the issuance of
98,709 shares of Common Stock, which resulted in an increase in Common
Stock of $45,000 and a decrease in accrued expenses of $45,000.
During the nine months ended December 31, 1998, holders of the Series E
Convertible Preferred Stock converted an aggregate total of 210 shares
($210,000 in stated value) and approximately $1,000 in accrued dividends
related thereto into a total of 2,736,824 shares of Common Stock, which
resulted in an increase in Common Stock of $211,000, a decrease of Series E
Convertible Preferred Stock of $210,000, and a decrease in accrued expenses
of $1,000.
During the nine months ended December 31, 1998, the Company accrued
dividends related to the Series F Convertible Preferred Stock and Series G
Convertible Preferred Stock of $38,000 and $16,000, respectively.
During September 1998, the Company entered into a Sale Agreement and
License Agreement whereby the Company sold its recently announced
BrightStar product technology in exchange for the receipt of $200,000 in
cash and the cancellation of certain indebtedness and preferred stock
totaling $4,224,000, which resulted in a decrease in accounts payable of
$20,000, a decrease in accrued expenses of $258,000, a decrease in notes
payable of $1,194,000, a decrease in Series D Convertible Preferred Stock
of $1,407,000, a decrease in Series F Convertible Preferred Stock of
$945,000, a decrease of Series G Convertible Preferred Stock of $400,000
and an increase to Deferred Income - Sale of technology of $4,424,000. In
connection with these transactions, the Company was also permitted to
return approximately $540,000 in inventory which resulted in a decrease to
accounts payable of $274,000, a decrease in notes payable of $266,000 and a
decrease to inventory of $540,000.
During the nine months ended December 31, 1997, the Company accrued
dividends related to the Series D Convertible Preferred Stock of $187,000
and paid previously accrued dividends of $235,000 through the issuance of
154,800 shares of Common Stock, which resulted in an increase in Common
Stock of $235,000 and a decrease in accrued expenses of $235,000.
During the nine months ended December 31, 1997, the Company accrued
dividends related to the Series E Convertible Redeemable Preferred Stock of
$24,000.
During the nine months ended December 31, 1997, the Company entered into
capital lease agreements for equipment totaling $29,000.
See accompanying notes to financial statements
Page 5 of 18
<PAGE>
CHATCOM, INC
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. ACCOUNTING POLICIES
The accompanying unaudited financial statements of ChatCom, Inc. (the
"Company") have been prepared in accordance with instructions to Form 10-
QSB and, in the opinion of management, include all material adjustments
(consisting only of normal recurring accruals) which are necessary for the
fair presentation of results of operations for the interim periods. These
unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-KSB, as amended, for the fiscal year ended March 31,
1998. The results of operations for the nine month period ended December
31, 1998 are not necessarily indicative of the results to be expected for
the full fiscal year ending March 31, 1999.
Certain prior year amounts have been reclassified to conform with current
year classifications.
2. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
---------------- ----------------
<S> <C> <C>
Raw materials 1,133,000 $ 766,000
Work in process 8,000 469,000
Finished goods 1,875,000 3,192,000
---------------- ----------------
Inventory at cost 3,016,000 4,417,000
Less: Reserve for obsolescence (1,835,000) (1,781,000)
---------------- ----------------
$ 1,181,000 $ 2,636,000
================ ================
</TABLE>
3. EQUIPMENT AND FIXTURES, Net
Equipment and fixtures consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
---------------- ----------------
<S> <C> <C>
Equipment $ 694,000 $ 694,000
Software 75,000 75,000
Furniture and fixtures 33,000 33,000
Leasehold improvements 89,000 89,000
---------------- --------------
891,000 891,000
Less: accumulated depreciation (672,000) (503,000)
---------------- --------------
$ 219,000 $ 388,000
================ ==============
</TABLE>
Page 6 of 18
<PAGE>
CHATCOM, INC
4. LINE OF CREDIT
On August 31, 1998, the Company entered into a line of credit agreement
with ALCO Financial Services, Inc. ("ALCO") (the "Credit Facility"). Under
the terms of the Credit Facility, which remains in effect through August
31, 1999, the Company can borrow from ALCO up to $300,000 based on eligible
accounts receivable and inventory, at prime plus seven percent. The Credit
Facility granted ALCO a blanket lien on all assets of the Company and
included certain financial covenants limiting mergers, acquisitions,
recapitalizations, dividends, loans to others, hypothecation of assets or
corporate guarantees. The Credit Facility was conditional upon the
Company's receipt of a cash infusion of $200,000 from High View Capital
(which was received by the Company during September 1998 - See note 5)
prior to effecting the line of credit. Since the inception of the Credit
Facility through December 31, 1998, the Company borrowed a total of
$333,000 and repaid a total of $144,000. As of December 31, 1998,
outstanding borrowings under the Credit Facility totaled $189,000, and the
Company was in compliance with all required covenants.
5. CONVERSION OF UNSECURED DEBT, ADDITIONAL FINANCING AND SALE AGREEMENT
As of February 1, 1998, the Company entered into a Settlement Agreement
with Vermont Research Products, Inc. ("VRPI"), a major supplier of certain
products (which are resold by the Company), for the conversion of a portion
of the amount owed by the Company to VRPI (approximately $2.04 million at
February 1, 1998) into 945 shares of the Company's Series F Convertible
Redeemable Preferred Stock, $1,000 stated value per share, valued at
$945,000 (the "Series F Preferred Stock") and 400 shares of the Company's
Series G Convertible Preferred Stock, $1,000 stated value per share, valued
at $400,000 (the "Series G Preferred Stock"). The Settlement Agreement
also provided for payment terms with respect to the remaining balance owed
to VRPI (approximately $694,000 at February 1, 1998 (the "Remaining
Balance"). As additional consideration, the Company issued to VRPI a five-
year warrant to purchase 285,000 shares of Common Stock at an exercise
price of $.35 per share. Dividends on the Series F Preferred Stock and
Series G Preferred Stock were payable in cash or shares of Common Stock, at
the election of the Company, at the rate of 9.5% per annum. The Series F
Preferred Stock was convertible into shares of Common Stock at any time
through January 31, 2003 at a conversion price equal to the market price at
the time of conversion, but at a conversion price no greater than $.95 per
share and no less then $.35 per share. The Series G Preferred Stock was
convertible into shares of Common Stock at a conversion price of $.35 per
share. The holder of the Series F Preferred Stock and Series G Preferred
Stock was entitled to equal preference with holders of the Company's Series
D and Series E Preferred Stock. As long as any amounts of Series F
Preferred Stock or Series G Preferred Stock remain outstanding, VRPI had
the right to approve any preferred stock offering by the Company which
ranked equal to or senior to those of VRPI's, and approve any debt offering
contemplated by the Company, except for commercial bank lines of credit or
loans secured by the Company's U.S. accounts receivable or inventory. Of
the remaining balance owed to VRPI after the conversion of certain amounts
into the Series F Preferred Stock and the Series G Preferred Stock,
$274,000 represents equipment warehoused by VRPI for the Company and was
payable to VRPI at the time of shipment to any customer of the Company. Of
the remaining balance owed to VRPI (approximately $420,000 together with
interest at 9.5% effective February 1, 1998), $5,000 was payable upon
execution of the Settlement Agreement, $5,000 was payable on March 1, 1998,
$5,000 was payable on April 1, 1998, and $35,000 per month was payable
commencing May 1, 1998. Additionally, the Company was required to remit
25% of its collections of foreign accounts receivable commencing February
1, 1998 as well as 20% of the net proceeds to the Company of any equity
financing (other than commercial bank loan financing or asset based lending
against United States accounts receivable ad finished or assembled good
inventory) effected by the Company subsequent to February 1, 1998 plus the
sum of $50,000 upon consummation of each of the first two such financings.
The Company also agreed to pay VRPI's expenses in connection with this
transaction.
Page 7 of 18
<PAGE>
CHATCOM, INC
Pursuant to the Settlement Agreement, the Company paid VRPI the sum of
$50,000 (of which $5,000 was paid upon the execution of the Settlement
Agreement, $5,000 paid on March 1, 1998 and April 1, 1998 and $35,000 was
paid on May 1, 1998). Due to the Company's liquidity crisis, no further
payments were made to VRPI, including any amounts owed in connection with
the Company's issuance of Common Stock in March 1998 ($110,000) and in
connection with the Company's collection of foreign accounts receivable
(approximately $93,000 as of December 31, 1998).
On June 6, 1998, the Company received written notice from VRPI of VRPI's
decision (which the Company did not agree to) to surrender its Series F & G
Preferred Stock as a result of VRPI's contention that the Company failed to
timely file a registration statement covering the underlying Common Shares.
On June 11, 1998, the Company received a $100,000 loan from VRPI (the "VRPI
Loan"). The VRPI Loan provided for interest at the rate of 15% per annum,
was secured by the Company's foreign accounts receivable and was due on
July 11, 1998. During the 30 day period ending July 11, 1998 (the "Study
Period"), VRPI conducted an examination of the Company's technology and
finances in order to determine if an investment in the Company was
warranted. The VRPI Loan contained certain restrictions, including, among
others, the use of the loan proceeds for only those expenses necessary to
continue the Company's operations during the Study Period and the Company's
agreement not to issue stock or incur debt, except for the Company's
proposed line of credit (described above) with any party other than VRPI
and those persons or entities who choose to participate with VRPI in
connection with any further financing of the Company. VRPI had informed the
Company that it had prepared, but not filed, a lawsuit against the Company
and certain of its officers and directors and agreed not to file the
complaint during the Study Period. On July 7, 1998, VRPI provided an
additional $100,000 of financing to the Company.
In August 1998, the Company entered into and in September 1998 closed, a
Purchase and Sale Agreement (the "Sale Agreement") with VRPI and High View
Capital ("HVC"). HVC (including certain of its affiliates) is the holder of
the Company's Series D Convertible Preferred Stock and the Company's
convertible subordinated debt in the aggregate principal amount of
$890,000. The Sale Agreement provided for the sale by the Company of its
BrightStar product technology (the "New Product") to VRPI and HVC
(collectively, the "Purchasers") in exchange for $400,000 in cash ($200,000
of which was advanced to the Company by VRPI through July 7, 1998 and the
remaining $200,000 was received by the Company on September 2, 1998), the
cancellation of all outstanding loans and convertible notes made to the
Company by the Purchasers or their affiliates including accrued interest
(approximately $966,000 at August 26, 1998), the cancellation of all trade
debt owing by the Company to the Purchasers (approximately $391,000 at
August 26, 1998), the return of certain equipment by the Company to VRPI in
the amount of approximately $289,000, the cancellation of all shares of
preferred stock (and accrued dividends thereon) owned by the Purchasers or
any of their affiliates (approximately $4.0 million in stated value at
August 26, 1998) and the cancellation of all warrants held by the
Purchasers or their affiliates to purchase share of the Company's Common
Stock (835,000 shares). The Sale Agreement included certain other
conditions, which included the Company's receipt of a minimum of $300,000
from ALCO under a line of credit (which was effected on August 31, 1998 -
See Note 4) and the execution of a license agreement under which the
Purchasers would grant the Company an exclusive license to the New Product
(the "License Agreement"). The License Agreement provides for royalty
payments to be made by the Company to the Purchasers in the Amount of 5% of
the sale price of New Products sold by the Company. In the event of any
sale or merger the Company or the licensing by the Company of the New
Product to a third party, the Company may elect to buy-back the New Product
from the Purchasers for $1, provided the sale or merger or licensing
arrangement generates at least $8 million in aggregate proceeds to the
Company. In such an event, the Company would be required to distribute the
proceeds from such a transaction on the following incremental basis: up to
$1 million, 75% to Purchasers, 25% to the Company; $1,000,000 to
$5,999,999, 48.5% to Purchasers, 51.5% to the Company; $6,000,000 to
$7,999,999, 68% to Purchasers, 32% to the Company; $8,000,000 to
$9,999,999, 60% to Purchasers, 40% to the Company; $10,000,000 to
$12,999,999, 21% to Purchasers, 79% to the Company; $13,000,000 to
$16,000,000, 7.5% to Purchasers, 92.5% to the Company; over $16,000,000,
100% to the Company. In the event the Company enters into a sale, merger or
licensing agreement that generates less than $8 million in aggregate
proceeds to the Company, the license granted to the
Page 8 of 18
<PAGE>
CHATCOM, INC
Company under the License Agreement would convert to a non-exclusive
license. The Purchasers have the right to rescind the Sale Agreement and
License Agreement for a period of one year (until August 31, 1999), and the
Company and the Purchaser have agreed to place in escrow the preferred
stock and warrants to be cancelled pursuant to the Sale Agreement pending
expiration of the rescission period.
The accompanying balance sheet of the Company as of December 31, 1998
reflects the result of the Sale Agreement and License Agreement and the
cancellation of certain indebtedness and preferred stock related thereto
(as described above) in the aggregate amount of $4,424,000 and reflects a
liability entitled Deferred Income-Sale of Technology in the amount of
$4,424,000.
6. SERIES E CONVERTIBLE REDEEMABLE PREFERRED STOCK
The Company's Series E Convertible Redeemable Preferred Stock (the "Series
E Preferred Stock") contained a mandatory redemption feature which provided
that if on September 1, 1998 all of the shares of Common Stock issuable
upon conversion of the then outstanding shares of Series E Preferred Stock
were not at that time duly registered, the Company, at the demand of the
any investor, would be obligated to redeem such investor's shares of Series
E Preferred Stock for a total amount equal to the market prices times the
number of shares of Common Stock into which such shares of Series E
Preferred Stock are convertible on the date of such demand, and would be
required to pay accrued dividends on such shares of Series E Preferred
Stock, whether or not declared, to the redemption date. On July 15, 1998,
the Company's Form S-3 (which registered certain shares of Common Stock of
the Company including those Common shares issuable upon conversion of
Series E Preferred Stock) was declared effective (the "Registration"). As
a result of the Registration, the mandatory redemption feature of the
Series E Preferred Stock was eliminated and the Company has reclassified
the Series E Preferred Stock to Shareholders' Deficit in the accompanying
Balance Sheet as of December 31, 1998.
The Series E Preferred Stock Registration Rights Agreement contains a late
registration penalty which requires the Company to pay the investors on
January 24, 1998 and on each successive date which is 30 days after the
previous payment (prorated for partial periods) until such registration
statement is declared effective, payments in the amount of 3% of the
purchase price of the outstanding Series E Preferred Stock ($1,100,000), in
cash or shares of the Company's Common Stock at the election of the
investor. Through the effective date of the Registration, the Company has
incurred approximately $227,000 in late registration penalties. The
investors have notified the Company that payment of the penalty shall be
made by the Company in cash. As of December 31, 1998, the Company's
financial statements reflect the accrual of $227,000 in late registration
penalties. The Company believes that the late registration penalty was a
result of the Company's severe cash flow constraints. Furthermore, the
Company is presently not capable of paying the registration penalty in
cash.
At various dates since the Registration through December 31, 1998, holders
of the Series E Preferred Stock converted an aggregate total of 210 shares
($210,000 in stated value) and approximately $1,000 in accrued dividends
related thereto into a total of 2,736,824 shares of the Company's Common
Stock.
7. RELATED PARTIES
One of the officers of the Company is also a shareholder of a law firm that
provides legal consultation to the Company. At December 31, 1998 and 1997,
the Company owed this law firm $17,000 and $16,000, respectively. During
the nine months ended December 31, 1998 and 1997, fees relating to services
provided by this law firm in the amounts of $12,000 and $34,000,
respectively, were included in general and administrative expenses in the
accompanying statement of operations.
Page 9 of 18
<PAGE>
CHATCOM, INC
8. CREDITORS MORATORIUM
In September of 1998, a meeting of the Company's creditors was held at
Credit Managers Association of California ("CMAC"). As an inducement for
creditors to enter into a moratorium and to discourage present and future
creditors from attempting to execute on the Company's assets, the Company
pledged substantially all of its assets to CMAC in its capacity as agent
for the creditors of the Company. An unofficial committee of creditors has
been formed to monitor the Company's operations and review its business
plan, as described under "Liquidity and Capital Resources". Creditors are
being requested to forbear from seeking payment on all past due obligations
through February 1999, while efforts are undertaken to explore alternative
measures by which the Company can seek to realize moneys or other
consideration for its creditors and stockholders, and the creditors
committee has agreed to a proposed plan to restructure the Company (which
is contingent on the Company securing substantial additional equity capital
for which commitments have not yet been). However, no binding moratorium
agreement is currently in place, and it is possible that one or more
creditors will not honor this forbearance request or agree to the proposed
restructure plan. Absent continuing creditor cooperation, the Company will
be forced to seek relief in the bankruptcy courts.
9. COMMITMENTS
On January 25, 1999 the Company entered into a lease agreement with Pacific
Gulf Properties Inc., for the lease of office and manufacturing space at
9420 Lurline Avenue, Unit D, Chatsworth, California 91311 and which
comprises approximately 8,925 square feet of office and manufacturing
space. This facility was leased for a two (2) year term commencing on March
1, 1999 and expires on February 28, 2001 and includes minimum monthly
payments of $5,622.75 during the term of the lease. The Company anticipates
that it will occupy this facility beginning March 1, 1999. This facility
replaces the Company's present facility on Topanga Canyon Boulevard in
Chatsworth, California (approximately 25,000 square feet), which lease
expires on February 28, 1999.
Page 10 of 18
<PAGE>
CHATCOM, INC
Item 2. Management's Discussion and Analysis.
Safe Harbor Statement under the Private Securities Litigation form Act of 1995
- ------------------------------------------------------------------------------
Except for the historical information contained herein, the matters
discussed in this quarterly report are forward-looking statements, which involve
risks and uncertainties, including but not limited to economics, competitive,
governmental and technological factors affecting the Company's business
operations and financial condition and other factors as described in the
Company's various filings with the Securities and Exchange Commission, including
without limitation the Company's Form 10-KSB for the fiscal year ended March 31,
1998.
Recent Developments
- -------------------
As of December 31, 1998 and March 31, 1998, the Company had negative
working capital of $6.3 million and $1.3 million, respectively. The Company must
obtain additional liquidity to meet its current obligations and maintain its
operations and is actively seeking additional financing to meet its immediate
needs. The Company is currently in discussions with an Investor Group in
negotiating a private placement for proceeds up to $500,000, but does not have
any commitments and there can be no assurance that it will be able to secure any
financing. The Company intends to seek protection under bankruptcy laws in the
immediate future if it is unable to secure sufficient financing to support its
current operations. If additional funds are raised through the issuance of
equity securities to meet the Company's short-term working capital needs, it is
likely that the Company will be required to sell such securities at a
substantial discount to the current market price for the Common Stock, the
percentage ownership of the then current shareholders of the Company will be
reduced, and such equity securities may have rights, preferences or privileges
senior to those of the holders of the Company's Common Stock.
The Company has incurred operating losses in each of its last three fiscal
years and in each of the first three quarters of its current fiscal year and is
continuing to incur operating losses subsequent to December 31, 1998. Although
the Company has been pursuing a sale or merger of the Company as well as seeking
additional capital to support its long-term operations, these efforts have been
unsuccessful to date. The Company is currently attempting to effect a
restructuring in which its creditors would receive convertible preferred stock
or a cash settlement payment for all of the Company's outstanding indebtedness
and the Company's outstanding preferred stock would be exchanged for a new
series of preferred stock. Consummation of this restructure plan would be
contingent upon the Company obtaining significant long-term equity financing.
The Company does not have any commitments for this financing, and there can be
no assurance that it will be able to secure this financing on a timely basis or
at all.
Results of Operations for the Three Months Ended December 31, 1998 Compared to
the Three Months Ended December 31, 1997
Gross sales during the three months ended December 31, 1998 (the "third
quarter of fiscal 1999") decreased $1.2 million or 67% compared to the three
months ended December 31, 1997 (the "third quarter of fiscal 1998"). This
decline resulted primarily from decreased shipments to domestic Value Added
Resellers ("VAR's") ($846,000), which the Company believes is attributable to
the declining demand for remote control type remote access solutions, and a
decrease in selling, advertising and marketing expenditures, including marketing
support for VAR's, which began during fiscal 1998 due to the Company's severe
cash flow constraints.
In December 1997, the Company and its Singapore distributor, Macon
Holding(S) Pte. Ltd. ("Macon") entered into an agreement whereby the Company
agreed to permit Macon to return a majority of the equipment (approximately $2.7
million at sales price, approximately $1.8 million at cost) previously sold to
Macon in the quarterly periods ended June 30, 1997 ($2.8 million) and September
30, 1997 ($.5 million) due to Macon's inability to pay for this equipment.
Macon has attributed its inability to pay for such requirement primarily to the
Asian economic crisis during the later part of 1997 as well as less than
anticipated market acceptance of the equipment. Of the amount returned by
Macon, approximately $505,000 (approximately $328,000 at cost) was received by
the Company during the quarter ended December 31, 1997 (of which $285,000 at
sales price, approximately $185,000 at cost was accrued for as of September 30,
1997) and approximately $2.2 million (approximately $1.4 million at cost) was
received during the quarter ended March 31, 1998 (of which approximately $2.1
million at sales price and approximately $1.3 million at cost was accrued for
during the quarter ended December 31, 1997). The equipment received from Macon
is a type that can be readily sold to other customers in the event the Company
is able to secure additional orders for these products. Through December 31,
1998, approximately $1.2 million (approximately $761,000 at cost) of the
equipment returned from Macon had been resold by the Company to other customers.
The Company believes that sales may fluctuate on a quarterly basis as a
result of a number of factors, including the status of world economic
conditions, fluctuations in foreign currency exchange rates and the timing of
system shipments (the current U.S. list price of the company's most powerful
system, for example, exceeds $300,000; thus the acceleration or delay of a small
number of shipments from one quarter to another can significantly affect the
results of operations for the quarters involved). Orders and shipments during
the first half of the March 31, 1999 fiscal quarter continue to be adversely
impacted as a result of reduced expenditures for advertising and marketing
programs and the postponement of hiring or replacement of certain sales
personnel due to the Company's continuing and deepening cash flow constraints,
and the Company's poor financial condition to the extent that it has caused
certain customers to delay purchases from the Company or order from other
suppliers. Additionally, as a result of the Company's poor financial condition,
the Company may not be able to effect the timely procurement of manufacturing
components and thus may need to extend the time normally required to ship
finished goods and may not be able to meet delivery requirements of certain
customers.
Page 11 of 18
<PAGE>
CHATCOM, INC
Cost of goods sold during the third quarter of fiscal 1999 was $575,000 or
97% of net sales compared to $328,000 during the third quarter of fiscal 1998.
Cost of goods sold during the third quarter of fiscal 1998 was reduced by
approximately $1.5 million as a result of the product returns associated with
Macon. Without the returns from Macon, cost of sales would have been
approximately 1.8 million or 100% of gross sales for the quarter ended December
31, 1997. Although the cost of certain components (i.e., microprocessors and
random access memory components) during the third quarter of fiscal 1999 were
somewhat lower than the comparable prior year quarter, the Company has not been
able to achieve further reductions in component costs due to the lower
quantities purchased during fiscal 1999 as a result of the decrease in sales
described above. Furthermore, as a result of the Company's cash flow
constraints, the Company has incurred and may continue to incur additional costs
from vendors in order to expedite the procurement of components in order to
satisfy delivery requirements of certain customers. The Company's gross margins
are affected by several factors, including, among others, sales mix and
distribution channels and, therefore, may vary in future periods from those
experienced during the third quarter of fiscal 1999.
Selling expenses decreased $576,000 or 75% in the third quarter of fiscal
1999 compared to the third quarter of fiscal 1998, primarily as a result of
decreased salaries and related costs ($238,000) in all departments (selling,
marketing and technical support) as a result of resignations (and the subsequent
postponement of hiring replacement personnel due to cash flow constraints) and
reductions-in-force effected by the Company since November 1997, as well as
decreased advertising expenses ($73,000) and trade show expenses ($85,000) due
to certain costs reductions implemented during the second quarter of fiscal
1998; decreased commissions ($32,000) as a result of significantly lower gross
sales during the third quarter of fiscal 1999 compared to the third quarter of
fiscal 1998; and reduced travel costs ($52,000) associated with selling and
equipment installation due to the lower sales and fewer personnel, as described
above.
General and administrative expenses decreased by $189,000 or 51%, to
$183,000 during the third quarter of fiscal 1999 from $372,000 during the third
quarter of fiscal 1998. The decrease in general and administrative expenses
consisted primarily of lower legal fees ($118,000); decreased salaries and
related costs ($85,000) as a result of fewer personnel; decreased directors fees
($30,000) as a result of fewer directors and the agreement of the Company's
current directors to waive all respective fees and reduced recruiting expense
($40,000) as well as decreases in substantially all other general and
administrative expenses. General and administrative expenses during third
quarter of fiscal 1998 included a credit balance for bad debt expense of
$257,000 which was the result of a $300,000 reduction in bad debt expense due to
the Company's arrangement with Macon to receive back inventory (during the
second fiscal quarter ended September 30, 1997, the Company established a
$500,000 bad debt reserve as a result of Macon's payment delinquency). Bad debt
expense during the third quarter of fiscal 1999 was a credit balance of $46,000
as a result of the Company lowering its allowance for bad debts due to
collection of certain accounts which were previously reserved.
Research and development expenses during the third quarter of fiscal 1999
decreased $178,000 or 40% compared to the third quarter of fiscal 1998. The
decrease in the third quarter of fiscal 1999 was primarily attributable to lower
payroll and related expenses ($100,000) and decreased use of consultants
($72,000) which were due to cost reductions implemented by the Company as a
result of its poor financial condition and cash flow constraints.
Net interest expense of $7,000 during the third quarter of fiscal 1999 was
the result of borrowings in connection with a line of credit which was effected
during September 1998. Net interest expense of $182,000 during the third quarter
of fiscal 1998 was the result of the Company's acceptance for a charge of
interest ($175,000) by Vermont Research Products, Inc. ("Vermont"), a major
supplier of certain products which are resold by the Company, in anticipation of
the Company entering into an agreement with Vermont whereby Vermont would
convert a portion of the balance owed by the Company to preferred stock, as well
as interest associated with $350,000, convertible subordinated notes issued by
the Company during May 1997.
Page 12 of 18
<PAGE>
CHATCOM, INC
Results of Operations for the Nine Months Ended December 31, 1998 Compared to
the Nine Months Ended December 31, 1997
Net sales during the nine months ended December 31, 1998 (the "first nine
months of fiscal 1999") decreased $3.6 million or 59% compared to the nine
months ended December 31, 1997 (the "first nine months of fiscal 1998"). The
decline in net sales during the first nine months of fiscal 1999 compared to the
first nine months of fiscal 1998 resulted primarily from decreased shipments to
both domestic VARs ($2.2 million) as domestic direct customers ($590,000) which
the Company believes is attributable to the declining demand for remote control
type remote access solutions, and a continued decrease in selling, advertising
and marketing expenditures including marketing support for VAR's during fiscal
1999 due to the Company's cash flow constraints, and a decrease in net shipments
to the Company's Singapore distributor ($575,000) as a result of the Asian
economic crisis in the later half of 1997.
Costs of goods sold were $2.2 million of 89% of net sales during the first
nine months of fiscal 1999 compared to $4.5 million or 74% of net sales in the
first nine months of fiscal 1998. The decrease in gross margin in the first
nine months of fiscal 1999 compared to the first nine months of fiscal 1998 (11%
vs 26%, respectively) was primarily the result of continued price discounting
due to competition and continued fixed manufacturing overhead costs which did
not decrease proportionately with the lower sales during the first nine months
of fiscal 1999.
Selling expenses decreased $2.0 million or 73% in the first nine months of
fiscal 1999 compared to the first nine months of fiscal 1998, primarily as a
result of decreased salaries and related costs ($732,000) in all departments
(selling, marketing and technical support) as a result of resignations (and the
subsequent postponement of hiring replacement personnel due to cash flow
constraints) and reductions-in-force effected by the Company since November
1997, as well as decreased advertising expenses ($336,000) and trade show
expenses ($222,000) due to certain costs reductions implemented during the seond
quarter of fiscal 1998; decreased commission ($147,000) as a result of
significantly lower sales during the first nine months of fiscal 1999 compared
to the first nine months of fiscal 1998; and reduced travel costs ($146,000)
associated with selling and equipment installation due to the lower sales and
fewer personnel, as described above.
General and administrative expenses decreased by $891,000 or 46%, to
$1,031,000 during the first nine months of fiscal 1999 from $1.9 million during
the first nine months of fiscal 1998. The decrease in general and
administrative expenses consisted primarily of a decrease in bad debt expense
($332,000) as the result of the establishment of a reserve related to Macon's
balance owed to the Company at December 31, 1997 and the reduction to the
allowance for bad debts during the third quarter of fiscal 1999 as a result of
collection of certain accounts which were previously reserved; decreased
salaries and related costs ($180,000) as a result of fewer personnel; decrease
directors fees ($64,000) as a result of fewer directors during fiscal 1999 and
the agreement of the Company's directors to waive all respective fees and lower
investors relations expenses ($60,000). These decreases were partially offset
by an accrual of a penalty ($121,000 during the first nine months of fiscal
1999) due to the delay in registering shares in connection with the Company's
Series E Preferred Stock (which was primarily due to the Company's liquidity
problems).
Research and development expenses during the first nine months of fiscal
1999 decreased $854,000 or 53% compared to the first nine months of fiscal 1998.
The decrease in the first nine months of fiscal 1999 was primarily attributable
to lower payroll and related expenses ($288,000); decreased use of consultants
($294,000); and decreased expenditures for prototypes ($177,000); all of which
were due to cost reductions implemented by the Company as a result of its poor
financial condition and cash flow constraints.
Page 13 of 18
<PAGE>
CHATCOM, INC
Net interest expense of $77,000 during the first nine months of fiscal 1999
($77,000) was primarily the result of interest in connection with a line of
credit (which was effected during September 1998) and interest associated with
convertible subordinated notes of $350,000 and $540,000 which were issued by the
Company in May 1997 and December 1997, respectively, and canceled during August
1998 pursuant to a Purchase and Sale Agreement. Net interest expense of
$190,000 during the first nine months of fiscal 1998 was primarily the result of
the Company's acceptance for a charge of interest ($175,000) by Vermont Research
Products, Inc. ("Vermont"), a major supplier of certain products which are
resold by the Company, in anticipation of the Company entering into an agreement
with Vermont whereby Vermont would convert a portion of the balance owed by the
Company, and interest associated with convertible subordinated notes of $350,000
and $540,000 issued by the Company in May 1997 and December 1997, respectively.
Liquidity and Capital Resources
- -------------------------------
The Company recorded net losses of $7.8 million and $4.6 million during
fiscal years ended March 31, 1998 and 1997, respectively, and recorded a net
loss of $2.3 million during the first nine months of fiscal 1999. During the
first nine months of fiscal 1999, cash decreased $224,000 primarily due to the
negative cash flow from operations of $757,000. The negative cash flow from
operations during the first nine months of fiscal 1999 was comprised primarily
of the net loss ($2.3 million) and a decrease in accounts payable ($230,000).
These decreases to cash flow were partially offset by a decrease in accounts
receivable ($751,000) as a result of collections; a decrease in inventories
($751,000) due primarily to shipment of components returned from Macon; and by
non cash charges primarily related to depreciation and amortization ($169,000)
and inventory obsolescence ($160,000).
Net cash provided by financing activities during the first nine months of
fiscal 1999 ($533,000) was primarily result of the proceeds from High View
Capital and the VRPI loans in connection with the sale of the Company's
BrightStar technology in September 1998 (see below) and net borrowings under a
line of credit ($189,000).
On June 6, 1998, the Company received written notice from VRPI of VRPI's
decision (which the Company did not agree to) to surrender its Series F & G
Preferred Stock as a result of VRPI's contention that the Company failed to
timely file a registration statement covering the underlying Common Shares. On
June 11, 1998, the Company received a $100,000 loan from VRPI (the "VRPI Loan").
The VRPI Loan provided for interest at the rate of 15% per annum, was secured by
the Company's foreign accounts receivable and was due on July 11, 1998. During
the 30 day period ending July 11, 1998 (the "Study Period"), VRPI conducted an
examination of the Company's technology and finances in order to determine if an
investment in the Company was warranted. The VRPI Loan contained certain
restrictions, including, among others, the use of the loan proceeds for only
those expenses necessary to continue the Company's operations during the Study
Period and the Company's agreement not to issue stock or incur debt, except for
the Company's proposed line of credit (described above) with any party other
than VRPI and those persons or entities who choose to participate with VRPI in
connection with any further financing of the Company. VRPI had informed the
Company that it had prepared, but not filed, a lawsuit against the Company and
certain of its officers and directors and agreed not to file the complaint
during the Study Period. On July 7, 1998, VRPI provided an additional $100,000
of financing to the Company.
Page 14 of 18
<PAGE>
CHATCOM, INC
On August 26, 1998, the Company entered into a Purchase and Sale Agreement
(the "Sale Agreement") with VRPI and High View Capital ("HVC"). HVC (including
certain of its affiliates) is the holder of the Company's Series D Convertible
Preferred Stock and the Company's convertible subordinated debt in the aggregate
principal amount of $890,000. The Sale Agreement provides for the sale by the
Company of its recently announced BrightStar product technology (the "New
Product") to VRPI and HVC (collectively, the "Purchasers") in exchange for
$400,000 in cash ($200,000 of which was advanced to the Company by VRPI through
July 7, 1998 and the remaining $200,000 was received by the Company on September
2, 1998), the cancellation of all outstanding loans and convertible notes made
to the Company by the Purchasers or their affiliates including accrued interest
(approximately $966,000 at August 26, 1998), the cancellation of all trade debt
owing by the Company to the Purchasers (approximately $391,000 at August 26,
1998), the return of certain equipment by the Company to VRPI in the amount of
approximately $289,000, the cancellation of all shares of preferred stock (and
accrued dividends thereon) owned by the Purchasers or any of their affiliates
(approximately $4.0 million in stated value at August 26, 1998) and the
cancellation of all warrants held by the Purchasers or their affiliates to
purchase share of the Company's Common Stock (835,000 shares). The Sale
Agreement included certain other conditions, which included the Company's
receipt of a minimum of $300,000 from ALCO under a line of credit (which was
effected on August 31, 1998) and the execution of a license agreement under
which the Purchasers would grant the Company an exclusive license to the New
Product (the "License Agreement"). The License Agreement provides for royalty
payments to be made by the Company to the Purchasers in the amount of 5% of the
sale price of New Products sold by the Company. In the event of any sale or
merger the Company or the licensing by the Company of the New Product to a third
party, the Company may elect to buy-back the New Product from the Purchasers for
$1, provided the sale or merger or licensing arrangement generates at least $8
million in aggregate proceeds to the Company. In such an event, the Company
would be required to distribute the proceeds from such a transaction on the
following incremental basis: up to $1 million, 75% to Purchasers, 25% to the
Company; $1,000,000 to $5,999,999, 48.5% to Purchasers, 51.5% to the Company;
$6,000,000 to $7,999,999, 68% to Purchasers, 32% to the Company; $8,000,000 to
$9,999,999, 60% to Purchasers, 40% to the Company; $10,000,000 to $12,999,999,
21% to Purchasers, 79% to the Company; $13,000,000 to $16,000,000, 7.5% to
Purchasers, 92.5% to the Company; over $16,000,000, 100% to the Company. In the
event the Company enters into a sale, merger or licensing agreement that
generates less than $8 million in aggregate proceeds to the Company, the license
granted to the Company under the License Agreement would convert to a non-
exclusive license. The Purchasers have the right to rescind the Sale Agreement
and License Agreement for a period of one year (until August 31, 1999).
On August 31, 1998, the Company entered into a line of credit agreement
with ALCO Financial Services, Inc. ("ALCO") (the "Credit Facility"). Under the
terms of the Credit Facility, which remains in effect through August 31, 1999,
the Company can borrow from ALCO up to $300,000 based on eligible accounts
receivable and inventory, at prime plus seven percent. The Credit Facility
granted ALCO a blanket lien on all assets of the Company and includes certain
financial covenants limiting mergers, acquisitions, recapitalizations,
dividends, loans to others, hypothecation of assets or corporate guarantees.
The Credit Facility was conditional upon the Company's receipt of a cash
infusion of $200,000 from High View Capital (which was received by the Company
during September 1998) prior to effecting the line of credit. Since the
inception of the agreement through December 31, 1998, the Company borrowed a
total of $333,000 and repaid a total of $144,000. As of December 31, 1998,
outstanding borrowings under the Credit Facility totaled $189,000, and the
Company was in compliance with all required covenants.
As a result of the Company's continuing liquidity problems, the Company has
been sued for non-payment by several suppliers of products and services.
Several other vendors have forwarded their accounts with the Company to
collection agencies. The Company has settled certain of these complaints
whereby the vendors agreed to accept a substantial discount from the balance
owed of at least 40%, allow the Company a payment moratorium (typically two
months), and to accept payment of the restated debt over an extended period of
time. The Company also entered into agreements with several creditors (who had
not sued the Company) which provided for discounts equal to at least 40% of the
original debt with payments of the restated debt extended over several months.
At present, the Company is in default on most of the agreements described above.
Page 15 of 18
<PAGE>
CHATCOM, INC
In September of 1998, a meeting of the Company's creditors was held at
Credit Managers Association of California ("CMAC"). As an inducement for
creditors to enter into a moratorium and to discourage present and future
creditors from attempting to execute on the Company's assets, the Company
pledged substantially all of its assets to CMAC in its capacity as agent for the
creditors of the Company. An unofficial committee of creditors has been formed
to monitor the Company's operations and review its business plan. Creditors are
being requested to forbear from seeking payment on all past due obligations
through February 1999, while efforts are undertaken to explore alternative
measures by which the Company can seek to realize moneys or other consideration
for its creditors and stockholders, and the creditors committee has agreed to
the Company's proposed restructure plan described above. However, no binding
moratorium agreement is currently in place, and it is possible that one or more
creditors will not honor this forbearance request or agree to the proposed
restructure plan. Absent continuing creditor cooperation, the Company will be
forced to seek relief in the bankruptcy courts.
During August 1998, the Company's Common Stock was delisted from the Nasdaq
SmallCap Market ("Nasdaq") as a result of the Company's inability to sustain the
listing requirements of Nasdaq. As a result of being delisted from Nasdaq, the
Company's Common Stock currently trades on the OTC Bulletin Board. Lack of an
established trading market for the Company's Common Stock such as Nasdaq may
limit the ability of the Company's shareholders to dispose of their shares, and
may negatively affect the prevailing price of the Common Stock, and may
adversely impact the Company's ability to arrange future financing.
On January 25, 1999 the Company entered into a lease agreement with
Pacific Gulf Properties Inc., for the lease of office and manufacturing space at
9420 Lurline Avenue, Unit D, Chatsworth, California, 91311 and which comprises
approximately 8,925 square feet of office and manufacturing space. This facility
was leased for a two (2) year term commencing on March 1, 1999 and expires on
February 28, 2001 and includes minimum monthly payments of $5,622.75 during the
term of the lease. The Company anticipates that it will occupy this facility
beginning March 1, 1999. This facility replaces the Company's present facility
on Topanga Canyon Boulevard in Chatsworth, California (approximately 25,000
square feet), which lease expires on February 28, 1999.
Page 16 of 18
<PAGE>
CHATCOM, INC
Year 2000
- ---------
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculation or system failures. Based on
preliminary information, costs of addressing potential problems are currently
not expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods. The Company's
internal accounting and other information and certain non-information systems
will need to be upgraded. The total hardware and software costs of such upgrade
are not expected to exceed $25,000 and are not expected to entail any
significant technical or timing difficulties. The Company plans to make the
foregoing upgrade during 1999. Should the Company, however, fail to make the
necessary upgrade, it would be forced to replace its current systems with manual
systems in the year 2000. The use of manual systems could result in certain
billing or shipping delays, but the Company does not believe these delays, if
any, would have a material adverse effect on the Company. The Company's server
products incorporate chips of other manufacturers that must be year 2000
compliant. In August 1997 the Company commenced contacting its existing
customers to alert them to the need to replace certain of the chips in the
Companies product that are not year 2000 compliant. The cost to the customer for
upgrading these chips is relatively low and the Company does not anticipate that
its own costs in connection with this upgrade process will be material.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits. The following exhibits are filed with this Form 10-QSB
or are incorporated by reference to the document described:
10.1 Lease Agreement between Chatcom, Inc., and Pacific
Gulf Properties Inc.
27 Financial Data Schedule.
b. Reports on Form 8-K.
None
No other information is required to be filed under Part II of this
Form 10-QSB.
Page 17 of 18
<PAGE>
CHATCOM, INC
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHATCOM, INC.
a California Corporation
Date: February 22, 1999 by: /s/ E. Carey Walters
--------------------
E. Carey Walters, President,
Chief Executive Officer
Date: February 22, 1999 by: /s/ Dianna Saltmarch
--------------------
Dianna Saltmarch, Principal
Accounting Officer
Page 18 of 18
<PAGE>
EXHIBIT 10.1
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO OF AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION]
Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
January 25, 1999, is made by and between Pacific Gulf Properties Inc., a
Maryland Corporation ("Lessor") and Chatcom, Inc., a California Corporation
("Lessee"), (collectively the "Parties," or individually a "Party").
1.2(a) Premises: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 9420 Lurline Avenue, Unit D, located in
the City of Chatsworth, County of Los Angeles, State of California, with zip
code 91311, as outlined on Exhibit A attached hereto ("Premises"). The
"Building" is that certain building containing the Premises and generally
described as (described briefly the nature of the Building) multi tenant
industrial unit consisting of approximately 8,925 sq. ft. of industrial space
within the Lurline Industrial Park, a 124,585 sq. ft. industrial park. In
addition to Lessee's rights to use and occupy the Premises as hereinafter
specified, Lessee shall have non-exclusive rights to the Common Areas (as
defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any
rights to the roof, exterior walls or utility raceways of the Building or to any
other buildings in the Industrial Center. The Premises, the Building, the Common
Areas, the land upon which they are located, along with all other buildings and
improvements thereon, are herein collectively referred to as the "Industrial
Center." (Also see Paragraph 2).
1.2(b) Parking: 16 unreserved vehicle parking spaces ("Unreserved Parking
Spaces"); and 0 reserved vehicle parking spaces ("Reserved Parking Spaces").
Also see Paragraph 2.6.)
1.3 Term: 2 years and 0 months ("Original Term") commencing March 1, 1999
("Commencement Date") and ending February 28, 2001 ("Expiration Date"). Also see
Paragraph 3.)
1.4 Early possession: Upon mutual lease execution, ("Early Possession
Date"). (Also see Paragraphs 3.2 and 3.3.)
1.5 Base Rent: $5.622.75 per month ("Base Rent"), payable on the First day
of each month commencing March 1, 1999. (Also see Paragraph 4.)
[X] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum 62, attached hereto.
1.6(a) Base Rent Paid Upon Execution: $5,622.75 as Base Rent for the period
March 1 - March 31, 1999.
1.6(b) Lessee's Share of Common Area Operating Expenses: 7 & 16/100 percent
(7.16%) ("Lessee's Share") as determined by [X] prorata square footage of the
Premises as compared to the total square footage of the Building or [_] other
criteria as described in addendum Project.
1.7 Security Deposit: $5,622.75 ("Security Deposit"). (Also see Paragraph
5.)
1.8 Permitted Use: General Office, engineering, electronic assembly,
warehouse & distribution, ("Permitted Use") (Also see paragraph 6.)
1.9 Insuring Party. Lessor is the "Insuring Party." (Also see Paragraph 8.)
1.10(a) Real Estate Brokers. The following real estate broker(s)
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[_] ________________________________________ represents Lessor exclusively
("Lessor's Broker");
[_] ________________________________________ represents Lessee exclusively
("Lessee's Broker"); or
[X] Delphi Commercial/DAUM Commercial represents both Lessor and Lessee ("Dual
Agency"). (Also see Paragraph 15.)
1.10(b) Payment to Brokers. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there is no
separate written agreement between Lessor and said Broker(s), the sum of $N/A)
for brokerage services rendered by said Broker(s) in connection with this
transaction.
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by __________________________________________________________________
________________________________________________________________________________
("Guarantor"). (Also see Paragraph 37.)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 64, and Exhibits A through D, all of which
constitute a part of this Lease.
2. Premises, Parking and Common Areas.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental and /or Common Area Operating Expenses, is
an approximation which Lessor and Lessee agree is reasonable and the rental and
Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement Date,
Lessor shall, except as otherwise provided in this Lease, promptly after receipt
of written notice from Lessee setting forth with specificity the nature and
extent of such non-compliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
thirty (30) days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within six (6) months following the
Commencement Date and setting forth with specificity the nature and extent of
such non-compliance, take such action, at Lessor's expense, as may be reasonable
or appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises
Initials: CLM
-----
-----
MULTI-TENANT GROSS
Page 1 of 13
<PAGE>
under Applicable Laws (as defined in Paragraph 2.4).
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has
been advised by the Broker(s) to satisfy itself with respect to the condition of
the Premises (including, but not limited to, the electrical and fire sprinkler
systems, security, environmental aspects, seismic and earthquake requirements,
and compliance with the Americans with Disabilities Act and applicable zoning,
municipal, county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "Applicable Laws") and the
present and future suitability of the Premises for Lessee's intended use; (b)
that Lessee has made such investigation as it deems necessary with reference to
such matters, is satisfied with reference thereto, and assumes all
responsibility therefore as the same relate to Lessee's occupancy of the
Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties with
respect to said matters other than as set forth in this Lease.
2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
2.6 Vehicle Parking. Lessee shall be entitled to use the umber of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than
full-size passenger automobiles or pick-up trucks, herein called "Permitted Size
Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and
loaded or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to or
are controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
contractors or invitees to be loaded, unloaded, or parked in areas other than
those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide the
parking facilities required by Applicable Law.
2.7 Common Areas -- Definition. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center and interior utility raceways within the Premises that
are provided and designated by the Lessor from time to time for the general
non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center
and their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 Common Areas -- Lessee's Rights. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common Areas as they
exist from time to time, subject to any rights, powers, and privileges reserved
Lessor under the terms hereof or under the terms of any rules and regulations or
restrictions governing the use of the Industrial Center. Under no circumstances
shall the right herein granted to use the Common Areas be deemed to include the
right to store any property, temporarily or permanently, in the Common Areas.
Any such storage shall be permitted only by the prior written consent of Lessor
or Lessor's designated agent, which consent may be revoked at any time. In the
event that any unauthorized storage shall occur then Lessor shall have the
right, without notice, in addition to such other rights and remedies that it may
have, to remove the property and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.
2.9 Common Areas -- Rules and Regulations. Lessor or such other person(s)
as Lessor may appoint shall have the exclusive control and management of the
Common Areas and shall have the right, from time to time, to establish, modify,
amend and enforce reasonable Rules and Regulations with respect thereto in
accordance with Paragraph 40. Lessee agrees to abide by and conform to all such
Rules and Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center.
2.10 Common Areas -- Changes. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitations, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the Industrial
Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Industrial Center as Lessor may, in
the exercise of sound business judgment, deem to be appropriate.
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 an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the
Early Possession Date but prior to the Commencement Date, the obligation to pay
Base Rent shall be abated for the period of such early occupancy. All other
terms of this Lease, however, (including, but not limited to, the obligations to
pay Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 Delay in Possession. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by the
Commencement Date, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of said sixty (60) day period, cancel this Lease, in which event the
Parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would have otherwise enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. Rent.
4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as
the same may be adjusted from time to time, to Lessor in lawful money of the
United States, without offset or deduction, on or before the day on which it is
due under the terms of this Lease. Base Rent and all other rent and charges for
any period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated herein
or to such other persons or at such other addresses as Lessor may from time to
time designate in writing to Lessee.
4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinunder defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "Common Area Operating Expenses" are defined, for purposes of this
Lease, as all costs incurred by Lessor relating to the ownership and operation
of the Industrial Center, including, but not limited to, the following:
(i) The operation, repair and maintenance, in neat, clean, good
order and condition, of the following:
(aa) The Common Areas, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area
lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
Initials: CLM
-------
-------
MULTI-TENANT GROSS
Page 2 of 13
<PAGE>
(ii) The cost of water, gas, electricity telephone to service the
Common Areas.
(iii) Trash disposal, property management and security services and
the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair of Common Areas.
(v) Any increases above the Base Real Property Taxes (as defined in
Paragraph 10.2(b)) for the Building and the Common Areas.
(vi) Any "Insurance Cost Increase" (as defined in Paragraph 8.1).
(vii) The cost of insurance carried by Lessor with respect to the
Common Areas.
(viii) Any deductible portion of an insured loss concerning the
Building or the Common Areas.
(ix) Any other services to be provided by Lessor that are stated
elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes that are
specifically attributable to the Building or to any other building in the
Industrial Center or to the operation, repair and maintenance thereof, shall be
allocated entirely to the Building or to such other building. However, any
Common Area Operating Expenses and Real Property Taxes that are specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services set forth in
Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Lessor to
either have said improvements or facilities or to provide those services unless
the Industrial Center already has the same, Lessor already provides the
services, or Lessor has agreed elsewhere in this Lease to provide the same or
some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be payable by
Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time of Lessee's Share of annual
Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12-month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessee shall be credited the amount of such
overpayment against Lessee's Share of Common Area Operating Expenses next
becoming due. If Lessee's payments under this Paragraph 4.2(d) during said
preceding year were less than Lessee's Share as indicated on said statement,
Lessee shall pay to Lessor the amount of the deficiency within ten (10) days
after delivery by Lessor to Lessee of said statement.
5. Security Deposit.
Lessee shall deposit with Lessor upon Lessee's execution hereof the Security
Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance
of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or
other rent or charges due hereunder, or otherwise Defaults under this Lease (as
defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion
or said Security Deposit for the payment of any amount due Lessor or to
reimburse or compensate lessor for any liability, cost, expense, loss or damage
(including attorneys' fees) 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 therefore deposit monies with
Lessor sufficient to restore said Security Deposit to the full amount required
by this Lease. Any time the Base Rent increases during the term of this Lease,
Lessee shall, upon written request from Lessor, deposit additional monies with
Lessor as an addition to the Security Deposit so that the total amount of the
Security Deposit shall at all times bear the same proportion to the then current
Base Rent as the initial Security Deposit bears to the initial Base Rent set
forth in Paragraph 1.5. Lessor shall not be required to keep all or any part of
the Security Deposit separate from its general accounts. Lessor shall, at the
expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein), that portion of the Security
Deposit not used or applied by Lessor. Unless otherwise expressly agreed in
writing by Lessor, no part of the Security Deposit shall be considered to be
held in trust, to bear interest or other increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.
6. Use.
6.1 Permitted Use.
(a) Lessee shall use and occupy the Premises only for the Permitted
Use set forth in Paragraph 1.8 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 waste or a
nuisance, or that disturbs owners and/or occupants of, or causes damage to the
Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants, and
by prospective assignees and subtenants of Lessee, its assignees and subtenants,
for a modification of said Permitted Use, so long as the same will not impair
the structural integrity of the improvements on the Premises or in the Building
or the mechanical or electrical systems therein, does not conflict with uses by
other lessees, is not significantly more burdensome to the Premises or the
Building and the improvements thereon, and is otherwise permissible pursuant to
this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within
five (5) business days after such request give a written notification of same,
which notice shall include an explanation of Lessor's reasonable 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, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (1) 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 Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products or by-products thereof. Lessee
shall not engage in any activity in or about the Premises which constitutes a
Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Requirements (as defined in
Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any
above or below ground storage tank, (ii) the generation, possession, storage,
use, transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority, and (iii) the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable Laws require that a notice be given to persons entering or occupying
the Premises or neighboring properties. Notwithstanding the foregoing, Lessee
may, without Lessor's prior consent, but upon notice to Lessor and in compliance
with all Applicable Requirements, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of the Permitted
Use, so long as such use is not a Reportable Use and does not expose the
Premises, or neighboring properties to any meaningful risk of contamination or
damage or expose Lessor to any liability therefor. In addition, Lessor may (but
without any obligation to do so) condition its consent to any Reportable Use of
any Hazardous Substance by Lessee Upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefor, including, but not limited
to, the installation (and, at Lessor's option, removal on or before Lease
expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements) and/or the deposit
of an additional Security Deposit under a Paragraph 5 hereof.
(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 or the Building, other than as previously consented to by Lessor,
Lessee shall immediately give Lessor written notice thereof, together with a
copy of any statement, report, notice, registration, application, permit,
business plan, license, claim, action, or proceeding given to, or received from,
any governmental authority or private party concerning the presence, spill,
release, discharge of, or exposure to, such Hazardous Substance including, but
not limited to, all such documents as may be involved in any Reportable Use
Involving the Premises. Lessee shall not cause or permit any Hazardous Substance
to be spilled or released in, on, under or about the Premises (including,
without limitation, through the plumbing or sanitary sewer system).
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's
obligations under this Paragraph 6.2(c) shall include, but not be limited to,
the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement.
6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's sole
cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers
Initials: CLM
------
------
MULTI-TENANT GROSS
Page 3 of 13
<PAGE>
and/or consultants, relating in any manner to the Premises (including, but not
limited to, matters pertaining to (i) industrial hygiene, (ii) environmental
conditions on, in, under or about the Premises, including soil and groundwater
conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including,
but not limited to, permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable 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
failure by Lessee or the Premises to comply with any Applicable Requirements.
6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Lenders") shall have the right
to enter the Premises at any time in the case of an emergency, and otherwise at
reasonable times, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable
Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to
employ experts and/or consultants in connection therewith to advise Lessor with
respect to Lessee's activities, including, but not limited to, Lessee's
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance on or from the Premises. The costs and expenses of any such
inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair (whether or not such portion of
the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities specifically serving the Premises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections if
within the Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors plate glass, and skylights, but
excluding any items which are the responsibility of Lessor pursuant to Paragraph
7.2 below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(c) If Lessee falls to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement
pursuant to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) or other automatic fire extinguisher system including fire alarm
and/or smoke detection systems and equipment, fire hydrants, parking lots,
walkways, parkways, driveways, landscaping, fences, signs and utility systems
serving the Common Areas and all parts thereof, as well as providing the
services for which there is a Common Area Operating Expense pursuant to
Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior
surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or
replace windows, doors or plate glass of the Premises. Lessee expressly waives
the benefit of any statute now or hereafter in effect which would otherwise
afford Lessee the right to make repairs at Lessor's expense or to terminate this
Lease because of Lessor's failure to keep the Building, Industrial Center of
Common Areas in good order, condition and repair.
7.3 Utility Installations, Trade Fixtures, Alterations.
(a) Definitions; Consent Required. The term "Utility Installations"
is used in this Lease to refer to all air lines, power panels, electrical
distribution, security, fire protection systems, communications systems,
lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures"
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "Alterations" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "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 nor cause to be
made any Alterations or Utility Installations in, on, under or about the
Premises without Lessor's prior written consent. Lessee may, however, make non-
structural Utility Installations to the interior of the Premises (excluding the
roof) without Lessor's consent but upon notice to Lessor, so long as they are
not visible from the outside of the Premises, do not involve puncturing,
relocating or removing the roof or any existing walls, or changing or
interfering with the fire sprinkler or fire detection systems and the cumulative
cost thereof during the term of this Lease as extended does not exceed
$2,500.00.
(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. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon; (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor with
as-built plans and specifications therefor. Lessor may (but without obligation
to do so) condition its consent to any requested Alteration or Utility
Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a
lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation.
(c) Lien Protection. 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 tenn (10) days' notice prior to the commencement of
any work in, on, or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense, defend and protect itself,
Lessor and the Premises against the same and shall pay and satisfy any such
adverse judgment that may be rendered thereon before the enforcement thereof
against the Lessor or the Premises. If Lessor shall require, Lessee shall
furnish to Lessor a surety bond satisfactory to Lessor, in an amount equal to
one and one-half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for the same, as required by law for the
holding of the Premises free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 Ownership, Removal, Surrender, and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal and
to cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Installations made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Lessor may, at any time and at its option, elect in writing to
Lessee to be the owner of all or any specified part of the Lessee-Owned
Alterations and Utility Installation. Unless otherwise instructed per
Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) Removal. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee-Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding that their
Installation may have been been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
Initials: CLM
---------
---------
MULTI-TENANT GROSS
Page 4 of 13
<PAGE>
(c) Surrender/Restoration. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date, clean and
free of debris and in good operating order, condition and state of repair,
ordinary wear and tear excepted. Ordinary wear and tear shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease. Expect
as otherwise agreed or specified herein, the Premises, as surrendered, shall
include the Alterations and Utility Installations. The obligation of Lessee
shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and
Lessee-Owned Alterations and Utility Installations, as well as the removal of
any storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or ground water contaminated by Lessee, all as
may then be required by Applicable Requirements and/or good practice. Lessee's
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee subject to its obligation to repair and restore the Premises per this
Lease.
8. Insurance; Indemnity.
8.1 Payment of Premium Increases.
(a) As used herein, the term "Insurance Cost Increase" is defined as
any increase in the actual cost of the insurance applicable to the Building and
required to be carried by Lessor pursuant to Paragraphs 8.2(b), 8.3(a) and
8.3(b), ("Required Insurance"), over and above the Base Premium, as hereinafter
defined, calculated on an annual basis. "Insurance Cost Increase" shall
include, but not be limited to, requirements of the holder of a mortgage or deed
of trust covering the Premises, increased valuation of the Premises, and/or a
general premium rate increase. The term "Insurance Cost Increase" shall not,
however, include any premium increases resulting from the nature of the
occupancy of any other lessee of the Building. If the Parties insert a dollar
amount in Paragraph 1.9, such amount shall be considered the "Base Premium." If
a dollar amount has not been inserted in Paragraph 1.9 and if the Building has
been previously occupied during the twelve (12) month period immediately
preceding the Commencement Date, the "Base Premium" shall be the annual premium
applicable to such twelve (12) month period. If the Building was not fully
occupied during such twelve (12) month period, the "Base Premium" shall be the
lowest annual premium reasonably obtainable for the Required Insurance as of the
Commencement Date, assuming the most nominal use possible of the Building. In no
event, however, shall Lessee be responsible for any portion of the premium cost
attributable to liability insurance coverage in excess of $1,000,000 procured
under Paragraph 8.2(b).
(b) Lessee shall pay any Insurance Cost Increase to Lessor pursuant to
Paragraph 4.2. Premiums for policy periods commencing prior to, or extending
beyond, the term of this Lease shall be prorated to coincide with the
corresponding Commencement Date or Expiration Date.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force during
the term of this Lease a Commerical General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
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 required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) Carried by Lessor. Lessor shall also maintain liability insurance
described in Paragraph 8.2(a) above, in addition to and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.
8.3 Property Insurance - Building, Improvements and Rental Value.
(a) Building and Improvements. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and to any Lender(s), insuring against loss or damage to
the Premises. Such insurance shall be for full replacement cost, as the same
shall exist from time to time, or the amount required by any Lender(s), but in
no event more than the commercially reasonable and available insurable value
thereof if, by reason of the unique nature or age of the improvements involved,
such latter amount is less than full replacement cost. Lessee-Owned Alterations
and Utility Installations, Trade Fixtures and Lessee's personal property shall
be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and
commercially appropriate, Lessor's 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 or included in the Base Premium),
including coverage for any additional costs resulting from debris removal and
reasonable amounts of coverage for the enforcement of any ordinance or law
regulating the reconstruction or replacement of any undamaged sections of the
Building required to be demolished or removed by reason of the enforcement of
any building, zoning, safety or land use laws as the result of a covered loss,
but not including plate glass insurance. Said policy or policies shall also
contain an agreed valuation provision in lieu of any co-insurance 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 the where the Premises are located.
(b) Rental Value. Lessor shall also obtain and keep in force during
the term of this Lease a policy or policies in the name of Lessor, with loss
payable to Lessor and any Lender(s), insuring the loss of the full rental and
other charges payable by all lessees of the Building to Lessor for one year
(including all Real Property Taxes, insurance costs, all Common Area Operating
Expenses and any scheduled rental increases). Said insurance may 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 rental revenues from the date of any such loss. Said insurance shall contain
an agreed valuation provision in lieu of any co-insurance clause, and the
amount of coverage shall be adjusted annually to reflect the projected rental
income, Real Property Taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the next 12-month period. Common Area Operating Expenses
shall include any deductible amount in the event of such loss.
(c) Adjacent Premises. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas or
other buildings in the Industrial Center if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
(d) Lessee's Improvements. Since Lessor is the insuring Party, Lessor
shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property. Trade Fixtures and Lessee-Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by Lessor as the insuring Party under Paragraph 8.3(a). Such insurance
shall be full replacement cost coverage with a deductible not to exceed $1,000
per occurrence. The proceeds from any such insurance shall be used by Lessee
for the replacement of personal property and the restoration of Trade Fixtures
and Lessee-Owned Alterations and Utility Installations. Upon request from
Lessor, Lessee shall provide Lessor with written evidence that such insurance is
in force.
8.5 Insurance Policies. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, or such other rating as may be required by a Lender,
as set forth in the most current issue of "Best's Insurance Guide." Lessee
shall not do or permit to be done anything which shall invalidate the insurance
policies referred to in this Paragraph 8. Lessee shall cause to be delivered to
Lessor, within seven (7) days after the earlier of the Early Possession Date, or
the Commencement Date, certified copies of, or certificates evidencing the
existence and amounts of, the insurance required under Paragraph 8.2(a) and 8.4.
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.
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 (whether in contract or in tort) against
the other, for loss or damage to their property arising out of or incident to
the perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance 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 negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, involving, or in connection
with,
Initials: CLM
-------
-------
MULTI-TENANT GROSS
Page 5 of 13
<PAGE>
the occupancy of the Premises by Lessee, the conduct of Lessee's business, any
act, omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit for any claim or any action or proceeding involved therein, and whether
or not in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by reason
of any of the foregoing matters, Lessee, upon notice from Lessor, shall defend
the same at Lessee's expense by counsel reasonably satisfactory to Lessor and
Lessor shall cooperate with Lessee in such defense. Lessor need not have first
paid any such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether 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, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other lessee of Lessor nor from the failure by Lessor to enforce the
provisions of any other lease in the Industrial Center. 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
Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is less than fifty percent (50%) of
the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility installations, the
repair cost of which damage or destruction is fifty percent (50%) or more of the
then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and
Utility Installations and Trade Fixtures) immediately prior to such damage or
destruction. In addition, damage or destruction to the Building, other than
Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any
lessees of the Building, the cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures of any lessees of the
Building) of the Building shall, at the option of Lessor, be deemed to be
Premises Total Destruction.
(c) "Insured Loss" shall mean damage or destruction to 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 building codes, ordinances or
laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on or under the
Premises.
9.2 Premises Partial Damage - Insured Loss. If Premises Partial Damage
that is an insured Loss occurs, the 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. In the event, however, that there is a
shortage of insurance proceeds and such shortage is due to the fact that, by
reason of the unique nature of the improvements in the Premises, 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, Lessor shall complete them as soon as
reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If Lessor does not receive such funds or assurance within such
ten (10) day period, and if Lessor does not so elect to restore and repair, then
this Lease shall terminate sixty (60) days following the occurrence of the
damage or destruction. Unless otherwise agreed, Lessee shall in no event have
any right to reimbursement from Lessor for any funds contributed by Lessee to
repair any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2,
notwithstanding that there may be some insurance coverage, but the net proceeds
of any such insurance shall be made available for the repairs if made by either
Party.
9.3 Partial Damage - Uninsured Loss. If Premises Partial Damage that is
not an insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may, at Lessor's
option, either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor knowledge of the occurrence of such damage 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 such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the repair of such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. 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 give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 Damage Near End of Term. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (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 (10) 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 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 as of the date set forth in the first sentence
of this Paragraph 9.5.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Lessee is not legally responsible, the Base Rent,
Common Area Operating Expenses and other charges, if any, payable by Lessee
hereunder for the period during which such damage or condition, its repair,
remediation or restoration continues, shall be abated in proportion to the
degree to which Lessee's use of the Premises is impaired, but not in excess of
proceeds from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other charges, if
any, as aforesaid, all other obligations of Lessee hereunder shall be performed
by Lessee, and Lessee shall have no claim against Lessor for any damage suffered
by reason of any such damage, destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified
Initials: CLM
-------
-------
MULTI-TENANT GROSS
Page 6 of 13
<PAGE>
in said notice. If Lessor or a Lender commences the repair or restoration of
the Premises within thirty (30) days after the receipt of such notice, this
Lease shall continue in full force and effect. "Commence" as used in this
Paragraph 9.6 shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever occurs first.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but subject
to Lessor's rights under Paragraph 6.2(c) 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 investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000, whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge
of the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the data sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) Investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,00 whichever is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30 Days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 Termination - Advance Payments. Upon termination of this Lease pursuant
to this Paragraph 9, Lessor shall return to Lessee any advance payment made by
Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is
not then required to be, used by Lessor under the terms of this Lease.
9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent it is consistent
herewith.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2(a), applicable to the Industrial Center, and except
as otherwise provided in Paragraph 10.3, any increases in such amounts over the
Base Real Property Taxes shall be included in the calculation of Common Area
Operating Expenses in accordance with the provisions of Paragraph 4.2.
10.2 Real Property Tax Definitions.
(a) As used herein, the term "Real Property Taxes" shall include any
form of real estate tax or assessment, general, special, ordinary or
extraordinary, and any license fee, commercial rental tax, improvement bond or
bonds, levy or tax (other than inheritance, personal income or estate taxes)
imposed upon the Industrial Center by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage, or other improvement
district thereof, levied against any legal or equitable interest or Lessor in
the Industrial Center or any portion thereof, Lessor's right to rent or other
income therefrom, and/or Lessor's business of leasing the Premises. The term
"Real Property Taxes" will also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring, or
changes in Applicable Law taking effect, during the term of this Lease,
including but not limited to a change in the ownership of the Industrial Center
or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Parties.
(b) As used herein, the term "Base Real Property Taxes" shall be the
amount of Real Property Taxes which are assessed against the Premises, Building
or Common Areas in the calendar year during which the Lease is executed. In
calculating Real Property Taxes for any calendar year, the Real Property Taxes
for any real estate tax year shall be included in the calculation of Real
Property Taxes for such calendar year based upon the number of days which
such calendar year and tax year have in common.
10.3 Additional Improvements. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records work sheets
as being caused by additional improvements placed upon the Industrial Center by
other lessees or by Lessor for the exclusive enjoyment of such other lessees.
Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to Lessor at
the time Common Area Operating Expenses are payable under Paragraph 4.2, the
entirety of any increase in Real Property Taxes if assessed solely by reason of
Alterations, Trade Fixtures or Utility Installations placed upon the Premises by
Lessee or at Lessee's request.
10.4 Joint Assessment. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center.
When possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said 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 setting forth the taxes
applicable to Lessee's property.
11. Utilities. Lessee shall pay directly for all utilities and services
supplied to the Premises, including, but not limited to, electricity, telephone,
security, gas and cleaning of the Premises, together with any taxes thereon. If
any such utilities or services are not separately metered to the Premises or
separately billed to the Premises, Lessee shall pay to Lessor a reasonable
proportion to be determined by Lessor of all such charges jointly metered or
billed with other premises in the Building, in the manner and within the time
periods set forth in Paragraph 4.2(d).
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five
percent (25%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of full
execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment
of this Lease by Lessee to which Lessor may reasonably withhold its consent.
"Net Worth of Lessee" for purposes of this Lease shall be the net worth of
Lessee (excluding any Guarantors) established under generally accepted
accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1, or a non-curable Breach without
the necessity of any notice and grace period. If Lessor elects to treat such
unconsented to assignment of subletting as a non-curable Breach, Lessor shall
have the right to either; (i) terminate this Lease, or (ii) upon thirty (30)
days' written notice ("Lessor's Notice"), increase the monthly Base Rent for the
Premises to the greater of the then fair market rental value of the Premises, as
reasonably determined by Lessor, or one hundred ten percent (110%) of the Base
Rent then in effect. Pending determination of the new fair market rental
value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's
Notice, with any overpayment credited against the next installment(s) of Base
Rent coming due, and any underpayment for the period retroactively to the
effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and rental
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
as reasonably determined by Lessor (without the Lease being considered an
encumbrance or any deduction for depreciation or obsolescence, and considering
the Premises at its highest and best use and in good condition) or one hundred
ten percent (110%) of the price previously in effect, (ii) any index-oriented
rental or price adjustment formulas contained in this Lease shall be
Initials: CLM
-------
-------
MULTI-TENANT GROSS
Page 7 of 13
<PAGE>
adjusted to require that the base index be determined with reference to the
index applicable to the time of such adjustment, and (iii) any fixed rental
adjustments scheduled during the remainder of the Lease term shall be increased
in the same ratio as the new rental bears to the Base Rent in effect immediately
prior the adjustment specified in Lessor's Notice.
(e) Lessee's remedy for any breach this 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, nor (iii) alter the primary liability of
Lessee for the payment of Base Rent and other sums due Lessor hereunder or for
the performance of any other obligations to be performed by Lessee under this
Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and
assignments of the sublease or any amendments or modifications thereto without
notifying Lessee or anyone else liable under this Lease or the sublease and
without obtaining their consent, and such action shall not relieve such persons
from liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's obligation
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
anyone else responsible for the performance of the Lessee's obligations under
this Lease, including any 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 non refundable
deposit of $1,000 or ten percent (10%) of the monthly Base Rent applicable to
the portion of the Premises which is the subject of the proposed assignment or
sublease, whichever is greater, as reasonable consideration for Lessor's
considering and processing the request for consent. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may be
reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.2(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment schedule of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment schedule for property similar to the Premises as then constituted, as
determined by Lessor.
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 there:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease: provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect enjoy the
rents accruing under such sublease. Lessor shall not, by reason of the foregoing
provision or any other assignment of such sublease to Lessor, nor by reason of
the collection of the rents from a sublessee, be deemed liable to the sublessee
for any failure of Lessee to perform and comply with any of Lessee's obligations
to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor stating
that a Breach exists in the performance of Lessee's obligations under this
Lease, to pay to Lessor the rents and other charges due and to become due under
the sublease. Sublessee shall rely upon any such statement and request from
Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against such sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by said
sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior defaults
or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under
a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all of any part of the Premises without Lessor's prior
written consent.
(e) Lessor shall deliver a copy of any notice of Default of 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. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "Default" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease.
A "Breach" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies
set forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent, Lessee's Share of Common Area
Operating Expenses, or any other monetary payment required to be made by Lessee
hereunder as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
failure of Lessee to fulfill any obligation under this lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to lessee.
(c) Except as expressly otherwise provided in this Lease, the failure
by Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with Applicable Requirements per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or
subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37.
(v) the subordination or non-subordination of this Lease per Paragraph 30, (vi)
the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii)) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other under this
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 by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that
are to be observed, complied with or performed by Lessee, 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 thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee if
Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making by
Lessee of any general arrangement or assignment for the benefit of
Initials: CLM
------
------
MULTI-TENANT GROSS
Page 8 of 13
<PAGE>
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section
101 or any successor statue 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 discharge within thirty (30) days; provided, however, in the
event that any provision of this Subparagraph 13.1(e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement of Lessee or
of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially
false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurances of security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the Guarantors that existed at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may, at its
option (but without obligation to do so), perform such duty or obligation on
Lessee's behalf, including, but not limited to, the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee to Lessor upon invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its own option, may require all future payments to be made under this
Lease by Lessee to be made only by cashier's check. In the event of a Breach of
this Lease by Lessee (as defined in paragraph 13.1), with or without further
notice or demand, and without limiting Lessor in the exercise of any right or
remedy which Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee: (i) the worth at the
time of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including, but not 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 San Francisco or the Federal Reserve Bank
District in which the Premises are located at the time of award plus one percent
(1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach
of this Lease shall not waive Lessor's right to recover damages under this
Paragraph 13.2. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve the right to recover all or any part thereof in a separate suit for such
rent and/or damages. If a notice and grace period required under Subparagraph
13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or
to perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also constitute
the applicable notice for grace period purposes required by Subparagraph
13.1(b), (c) or (d). In such case, the applicable grace period under the
unlawful detainer statute shall run concurrently after the one such statutory
notice, and the failure of Lessee to cure the Default within the greater of the
two (2) such grace periods shall constitute both an unlawful detainer and a
Breach of this Lease entitling Lessor to the remedies provided for in this Lease
and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
recover the rent as it becomes due, provided Lessee has the right to sublet or
assign, subject only to reasonable limitations. Lessor and Lessee agree that
the limitations on assignment and subletting in this Lease are reasonable. Acts
of maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver to protect the Lessor's interest under this Lease,
shall not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination
of Lessee's right to possession shall not relieve Lessee from liability under
any indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture in Event of Breach. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) 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,
and recoverable by Lessor, as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of
such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or deed of trust covering the Premises.
Accordingly, if any installment of rent or other sum due from Lessee shall not
be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to ten percent (10%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease
unless Lessor falls within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by any Lender(s) whose name and address shall have been furnished to 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 after such
notice are reasonably required for its performance, then Lessor shall not be in
breach of this Lease if performance is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the portion of
the Common Areas designated for Lessee's parking, 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 the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises. No reduction of Base
Rent shall occur if the condemnation does not apply to any portion of the
Premises. Any award for the taking of all or any part of the Premises under the
power of eminent domain or any payment made under threat of the exercise of such
power shall be the property of Lessor, whether such award shall be
Initials: CLM
-------
-------
MULTI-TENANT GROSS
Page 9 of 13
<PAGE>
made as compensation for diminution of value of the leasehold or for the taking
of the fee, or as severance damages; provided, however, that Lessee shall be
entitled to any compensation, separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above Lessee's share of
the legal and other expenses incurred by Lessor in the condemnation matter,
repair any damage to the Premises caused by such condemnation authority. Lessee
shall be responsible for the payment of any amount in excess of such net
severance damages required to complete such repair.
15. Brokers' Fees
15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.4 Representations and Warranties. 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 as named in Paragraph 1.10(a) in connection with the
negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the 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, and/or attorneys' fees
reasonably incurred with respect thereto.
16. Tenancy and Financial Statements.
16.1 Tenancy Statement. Each Party (as "Responding Party") shall within ten
(10) days after written notice from the other Party (the "Requesting Party")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in a 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 Financial Statement. If Lessor desires to finance, refinance, or sell
the Premises or the Building, or any part thereof, Lessee and all Guarantors
shall deliver to any potential lender or purchaser designated by Lessor such
financial statements of Lessee and such Guarantors as may be reasonably required
by such lender or purchaser, including, but not limited to, Lessee's financial
statements for the past three (3) years. All such financial statements shall be
received by Lessor and such lender or purchaser in confidence and shall be used
only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises. In the event
of a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, 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.
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. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10) days
following the date on which it was due, shall bear interest from the date due at
the prime rate charged by the largest state chartered bank in the state in which
the Premises are located plus four percent (4%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential late charge provided
for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
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. Each Broker shall be an intended third party beneficiary
of the provisions of this Paragraph 22.
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 messenger or
courier service) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile transmission
during normal business hours, and shall be deemed sufficiently given if served
in a manner specified in this Paragraph 23. The addresses noted adjacent to a
Party's signature on this Lease shall be that Party's address for delivery or
mailing of notice purposes. Either Party may by written notice to the other
specify a different address for notice purposes, except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for the purpose of mailing or delivering notices to Lessee. A copy of
all notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
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
guarantees next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the United States Postal Service or courier. If any
notice is transmitted by facsimile transmission or similar means, the same shall
be deemed served or delivered upon telephone or facsimile confirmation of
receipt of the transmission thereof, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday or a Sunday or a 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 any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of
any provision hereof. Any payment given Lessor by Lessee may be accepted by
Lessor on account of monies 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 or taxes applicable thereto.
26. No Right to Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to two hundred percent
(200%) of the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be construed
as a 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. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
Initials: CLM
-------
-------
MULTI-TENANT GROSS
Page 10 of 13
<PAGE>
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the state in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default pursuant
to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (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 assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession 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.
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 Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. 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' fee 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. Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in 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. Broker(s) shall be intended
third part beneficiaries of this Paragraph 31.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
Building, as Lessor may reasonably deem necessary. Lessor may at any time place
on or about the Premises or Building any ordinary "For Sale" signs and Lessor
may at any time during the last one hundred eighty (180) days of the term hereof
place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the exterior of the Premises
or the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign
on the Premises by or for Lessee shall be subject to the provisions of Paragraph
7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination of cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate in
the Premises; provided, however, Lessor shall, in the event of any such
surrender, termination or cancellation, have the option to continue any one or
all of any existing subtenancies. Lessor's failure within ten (10) days
following any such event to make a written election to the contrary by written
notice to the holder of any such lesser interest, shall constitute Lessor's
election to have such event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including, but not
limited to, architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including, but not
limited to, consents to an assignment a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgment that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 Form of Guaranty. If there are to be any Guarantors of this Lease
per Paragraph 1.11, the form of the guaranty to be executed by each such
Guarantor shall be 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, including, but not limited to, the
obligation to provide the Tenancy Statement and information required in
Paragraph 16.
37.2 Additional Obligations of Guarantor. It shall constitute a Default
of the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and resolution of its board of directors authorizing the making of
such guaranty, together with a certificate of incumbency showing the signatures
of the persons authorized to sign on its behalf, (b) current financial
statements of Guarantor as may from time to time be requested by Lessor, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
39. Options.
39.1 Definition. As used in this Lease, the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises, or
the right to purchase other property of Lessor, or the right of first refusal to
purchase other property of Lessor, or the right of first offer to purchase other
property of Lessor.
Initials: CLM
-------
-------
MULTI-TENANT GROSS
Page 11 of 13
<PAGE>
39.2 Opinions Personal to Original Lessee. Each Option granted to Lessee
in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof,
and cannot be voluntarily or involuntarily assigned or exercised by any person
or entity other than said original Lessee while the original Lessee is in full
and actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as part of an assignment of this Lease or separately or apart
therefrom, and no Option may be separated from this Lease in any manner, be
reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of separate Defaults under Paragraph 13.1 during the twelve
(12) month period immediately preceding the exercise of the Option, whether or
not the Defaults are cured.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during any twelve (12) months period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. Rules and Regulations. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants
or tenants of the Building and the Industrial Center and their invitees.
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 the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessor. Lessee agrees to sign any
documents reasonable 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 obligations 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
adjusted 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 under the provisions of
this Lease.
44. Authority. If either party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. 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. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other Rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S
REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR
CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES; THE PARTIES SHALL RELY SOLEY UPON THE ADVICE OF THEIR OWN COUNSEL
AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY
IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE
PROPERTY IS LOCATED SHOULD BE CONSULTED.
The Parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Executed at:
------------------------- --------------------------
on: on:
--------------------------------- ----------------------------------
By LESSOR: By LESSEE:
Pacific Gulf Properties Inc. Chatcom, Inc.
- ------------------------------------- --------------------------------------
a Maryland Corporation a California Corporation
- ------------------------------------- --------------------------------------
By: By: /s/ E. Carey Walters
--------------------------------- ----------------------------------
Name Printed: Jonathan Carley Name Printed: E. Carey Walters
----------------------- ------------------------
Title: Regional Manager Title: President and CEO
------------------------------ -------------------------------
Initials: CLM
-------
-------
MULTI-TENANT GROSS
Page 12 of 13
<PAGE>
<TABLE>
<S> <C>
By:______________________________________ By:______________________________________
Name Printed: Donna Montgomery Name Printed:
---------------------------- ----------------------------
Title: Leasing Manager Title:
----------------------------------- -----------------------------------
Address: 9774 Crescent Center Drive, #506 Address:
--------------------------------- ---------------------------------
Rancho Cucamonga, CA 91730
--------------------------------- ---------------------------------
Telephone: (909) 483-1166 Telephone:
------------------------------ ------------------------------
Facsimile: (909) 483-1163 Facsimile:
------------------------------ ------------------------------
BROKER: BROKER:
Executed at:_____________________________ Executed at:_____________________________
on:______________________________________ on:______________________________________
By:______________________________________ By:______________________________________
Name Printed:____________________________ Name Printed:____________________________
Title:___________________________________ Title:___________________________________
Address:_________________________________ Address:_________________________________
_________________________________________ _________________________________________
Telephone: (___) ________________________ Telephone: (___) ________________________
Facsimile: (___) ________________________ Facsimile: (___) ________________________
</TABLE>
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing
the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION,
700 South Flower Street, Suite 600, Los Angeles, California 90017 (213)
687-8777.
Initials: CLM
-----
-----
MULTI-TENANT GROSS
Page 13 of 13
<PAGE>
ADDENDUM to Lease dated January 25, 1999 by and between Pacific Gulf Properties,
Inc., a Maryland Corporation, as "Lessor" and Chatcom, Inc., a California
Corporation, as "Lessee", on the premises known as 9420 Lurline Avenue, Unit D,
Chatsworth, California.
The above referenced Lease is hereby amended as follows:
49. TRASH DISPOSAL: Lessee agrees that all trash and debris are to be
--------------
deposited in receptacles provided by Lessee at Lessee's expense within the
Premises parking lot and all receptacles shall remain inside enclosures. If it
is determined that Lessee is regularly disposing of an unusually large amount of
refuse, Lessee shall, within ten (10) days receipt of written notice from Lessor
and at Lessee's sole expense, provide for an additional trash bin and pickup
service at his or her leased Premises. Lessor reserves the right to stipulate
location of storage for Lessee's additional receptacle. Lessor reserves the
right to stipulate location of storage for Lessee's additional receptacle.
Lessee agrees not to store any items or leave any debris outside the Premises in
any of the common area, including the parking lot and in the event Lessor must
remove items or debris, Lessor shall charge the cost of removing said items or
debris to Lessee, and Lessee shall pay the same upon demand or be in default of
this Lease as defined in Paragraph 13 of this Lease.
50. GOVERNMENTAL AUTHORITY COMPLIANCE: Lessee shall, at Lessee's expense,
---------------------------------
comply promptly with all governmental authorities and all applicable statues,
ordinances, rules, regulations, orders, covenants and restrictions of record,
and requirements in effect during the term or any part of the term hereof,
regulating the use by Lessee of the Premises, including compliance with the
Uniform Fire Code. Lessee shall have the sole responsibility to secure any and
all governmental approvals relating to Lessee's use of the premises, including
but not necessarily limited to an Occupancy Permit issued by the City of Los
Angeles/Chatsworth. Lessee shall secure such approvals promptly and hold Lessor
harmless from any costs and fees incurred in the process, and from any fines or
penalties arising from Lessee's nonconformance with applicable law or
regulations.
51. EFFECT OF DEFAULT ON FREE OR ABATED RENT: In the event of Lessee's
---------------------------------------
default under Paragraph 13 of this Lease, and said default by Lessee is not
cured by Lessee, any previous free rent, abated rent, or early possession free
occupancy, shall due and payable to Lessor immediately.
52. WAIVER OF JURY TRIAL: The parties hereto shall and they hereby do waive
--------------------
trial by jury in any action, proceeding or counterclaim brought by either of
the parties hereto against the other on any matters whatsoever arising out of or
in any way related to this Lease, the relationship of Lessor and Lessee,
Lessee's use or occupancy of the Premises, the Building or the Park, and/or any
claim of injury, loss or damage.
53. COUNTERCLAIMS: In the event Lessor commences any proceedings for
-------------
nonpayment of rent, or any other sums or amounts due hereunder, Lessee shall not
interpose any counterclaim of whatever nature or description in any such
proceedings, provided, however, nothing contained herein shall be deemed or
construed as a waiver of the Lessee's right to assert such claims in any
separate action brought by Lessee or the right to offset the amount of any final
judgment owed by Lessor to Lessee.
54. WARRANTY OF AUTHORITY: Each person executing this agreement on behalf
---------------------
of a party represents and warrants that (1) such person is duly and validly
authorized to do so on behalf of the entity it purports to so bind, and (2) if
such party is partnership, corporation or trustee, that such partnership,
corporation or trustee has full right and authority to enter into this Lease
and perform all its obligations hereunder.
55. LESSOR'S PERSONAL LIABILITY: The liability of Lessor (which, for
---------------------------
purposes of this Lease, shall include Lessor and the owner of the Building if
other than Lessor) to Lessee for any default by Lessor under the terms of this
Lease shall be limited to the actual interest of Lessor and its present or
future partners in the Premises or the Building and Lessee agrees to look solely
to the Premises for satisfaction of any liability and shall not look to other
assets of Lessor nor seek any recourse against the assets of the individual
partners, directors, officers, shareholders, agents or employees of Lessor; it
being intended that Lessor and the individual partners, directors, officers,
shareholders, agents or employees of Lessor shall not be personally liable in
any manner whatsoever for any judgment or deficiency. The liability of Lessor
under this Lease is limited to its actual period of ownership of title to the
Building, and Lessor shall be automatically released from further performance
under this Lease and from all further liabilities and expenses hereunder upon
transfer of Lessor's interest in the Premises or the Building. Lessee agrees to
attorn to any entity purchasing or otherwise acquiring the Premises.
Initials CLM
-------
-------
<PAGE>
EXHIBIT "A"
[SITE PLAN 9400 - 9420 - 9430 - 9440 LURLINE, CHATSWORTH]
Initial CLM
-----
-----
<PAGE>
EXHIBIT "B"
Lessor or Broker makes no representation or guarantee as to the accuracy of this
floor plan. Lessee shall be solely responsible in verifying all specifications
contained herein.
[FLOOR PLAN]
- --------------------------------------------------------------------------------
9420 South Lurline Avenue, Suite D, Chatsworth 8,925 S.F.
- --------------------------------------------------------------------------------
OFFICE SPACE 7,532 S.F. WAREHOUSE SPACE 1,393 S.F. WAREHOUSE CEILING HEIGHT.
(APPROX.) 15'-0'
- --------------------------------------------------------------------------------
LURLINE INDUSTRIAL PARK
For information contact:
PACIFIC GULF PROPERTIES, INC.
9500 7th Street, Suite L, Rancho Cucamonga TEL: (909) 483-1166
- --------------------------------------------------------------------------------
NOTE: All information represented on this drawing is believed to be accurate.
However, tenant should verify all pertinent information prior to committing
to a lease.
Initial CLM
-----
-----
<PAGE>
EXHIBIT "C"
RULES AND REGULATIONS
---------------------
1. No sign, placard, picture, advertisement, name or notice shall be
installed or displayed on any part of the outside of the Building without the
prior written consent of Lessor. Lessor shall have the right to remove, at
Lessee's expense and without notice, any sign installed or displayed in
violation of this rule. All approved signs or lettering on doors and walls
shall be printed, painted, affixed or inscribed at the expense of Lessee by a
person satisfactory to Lessor.
2. If Lessee requires telegraphic, telephonic or burglar alarm systems,
Lessee shall provide Lessor with operating instructions prior to their
installation.
3. Lessor reserves the right, exercisable without notice and without
liability to Lessee, to change the name of the Building/Project.
4. The cost of repairing damage of any kind caused by Lessee, its
employees, guests, agents or invitees whether by negligence, carelessness, or
for any other reason, shall be paid for by Lessee.
5. Lessee shall not install any radio or television antenna, loudspeaker or
other devise on the roof or exterior walls of the Building. Lessee shall not
interfere with radio or television broadcasting or reception from or in the
Building or elsewhere.
6. Without the written consent of Lessor, Lessee shall not use the name of
the Building/project in connection with or in promoting or advertising the
business of Lessee except as Lessee's address.
7. Lessee shall comply with all safety, fire protection and evacuation
procedures and regulations established by Lessor or any governmental agency.
8. Lessor may waive any one or more of these Rules and Regulations for the
benefit of Lessee or any other lessee, but no such waiver by Lessor shall be
construed as a waiver of such Rules and Regulations in favor of Lessee or any
other lessee, nor prevent Lessor form thereafter enforcing any such Rules and
Regulations against any or all of lessees of the Project.
9. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of any Lease of premises in the Project.
Lessor, at its sole discretion, reserves the right to amend or modify this
Exhibit "C" as it deems necessary.
10. Lessor reserves the right to change, rescind or to make such other and
reasonable rules and regulations as in its judgment may from time to time be
needed for safety and security, for care and cleanliness of the Project and
for the preservations of good order therein. Lessee agrees to abide by all such
rules and regulations hereinabove stated and any additional rules and
regulations which are adopted.
11. Lessor shall have no liability or responsibility to any lessee for the
safety or well being of Lessee, his employees, invitees or business clients in
their use pr presence within the premises, or any place within the Project other
than may be construed to be normally assumed as Lessor's liability or
responsibility as defined elsewhere in the Lease.
12. Lessee agrees that all trash and debris is to be deposited in receptacles
provided within the complex and all receptacles shall remain inside enclosures
as provided by Lessor. If it is determined that Lessee is regularly disposing
of an unusually large amount of refuse, Lessee shall within ten (10) days
receipt of written notice from Lessor and at Lessee's sole expense, provide
written notice from Lessor and at Lessee's sole expense, provide for an
additional trash bin and pick up service at this leased premises. Lessor
reserves the right to stipulate location of storage for Lessee's additional
receptacle.
13. The Premises shall not be used for lodging or for any improper, immoral
or objectionable purpose. No cooking shall be done or permitted by Lessee on
the Premises, except that use by Lessee of Underwriters' Laboratory approved
equipment for brewing coffee, tea, hot chocolate and similar beverages shall be
permitted, provided that such equipment and use is in accordance with all
applicable federal, state, county and city laws, codes, ordinances, rules and
regulations. Lessee shall have the right to use microwave ovens and
refrigerators to serve its employees and customers.
14. Lessee assumes any and all responsibility for protecting its Premises
from theft, robbery and pilferage, which includes keeping doors locked and other
means of entry to the Premises closed.
Initials
CLM
--------
--------
<PAGE>
EXHIBIT "D"
HAZARDOUS MATERIALS DISCLOSURE
------------------------------
This Hazardous Materials Disclosure is incorporated by reference into the lease
dated January 25, 1999, by and between Pacific Gulf Properties, Inc., a Maryland
----------------
Corporation, as Lessor, and Chatcom, Inc., A CA Corporation, as Lessee, for the
-------------------------------
premises located at 9420 Lurline Avenue, Unit D, Chatsworth, California.
---------------------------------------------------
I, E. Carey Walters , represent that the following disclosure
----------------------------
accurately reflects the usage or nonusage of hazardous materials on the leased
Premises.
Description of Lessee's usage and business operations:
- --------------------------------------------------------------------------------
Petroleum products, chemicals, container sizes, and amounts to be utilized by
Lessee at any time during tenancy:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Method and storage locations of hazardous materials:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
List any operations discharges in or on Premises:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
I, E. Carey Walters , certify that I will comply fully with all
----------------------------
applicable environmental laws governing hazardous materials and their usage in
our operations.
Lessee:
Chatcom, Inc. a California Corporation,
By: /s/ E. Carey Walters
--------------------------
E. Carey Walters
Its: President & CEO
--------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1999
<PERIOD-START> OCT-01-1998 APR-01-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 157 157
<SECURITIES> 0 0
<RECEIVABLES> 148 148
<ALLOWANCES> (23) (23)
<INVENTORY> 1,181 1,181
<CURRENT-ASSETS> 1,522 1,522
<PP&E> 890 890
<DEPRECIATION> (671) (671)
<TOTAL-ASSETS> 1,764 1,764
<CURRENT-LIABILITIES> 7,834 7,834
<BONDS> 0 0
0 0
727 727
<COMMON> 11,406 11,406
<OTHER-SE> (18,209) (18,209)
<TOTAL-LIABILITY-AND-EQUITY> 1,764 1,764
<SALES> 593 2,482
<TOTAL-REVENUES> 593 2,482
<CGS> 575 2,229
<TOTAL-COSTS> 575 2,229
<OTHER-EXPENSES> 647 2,504
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 7 77
<INCOME-PRETAX> (636) (2,328)
<INCOME-TAX> 0 1
<INCOME-CONTINUING> (636) (2,329)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (636) (2,329)
<EPS-PRIMARY> (0.05) (0.20)
<EPS-DILUTED> (0.05) (0.20)
</TABLE>
