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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________.
Commission file number 0-16055
PHOTOMATRIX, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3267788
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1958 KELLOGG AVE., CARLSBAD, CALIFORNIA 92008
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(Address of principal executive offices) (Zip Code)
(760) 431-4999
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statement incorporated hereby by reference in Part III of this Form 10-KSB or
any amendment to this Form 10-KSB. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of August 14, 1999, based on the average of the highest and
lowest prices of such stock on that date was $1,859,000. The number of shares
of common stock of Photomatrix, Inc. outstanding as of August 14, 1999, was
9,914,000.
The issuer's revenues from continuing operations for the year ended March 31,
1999 totaled $5,009,000
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THESE STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS
RELATING TO THE COMPANY'S PLANS AND OBJECTIVES FOR FUTURE OPERATIONS,
ASSUMPTIONS AND STATEMENTS RELATING TO THE COMPANY'S FUTURE ECONOMIC
PERFORMANCE, MANAGEMENT'S OPINIONS ABOUT THE COMPETITIVE POSITION OF THE
COMPANY'S PRODUCTS, THE ABILITY OF THE COMPANY TO COMPETE SUCCESSFULLY AND
OTHER NON-HISTORICAL INFORMATION. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, WITHOUT LIMITATION, THOSE RISKS
DISCUSSED IN ITEM 7 UNDER THE HEADING "ADDITIONAL RISK FACTORS" AS WELL AS
THOSE DISCUSSED ELSEWHERE IN THIS ANNUAL REPORT.
ITEM 1. BUSINESS
OVERVIEW
Photomatrix, Inc. ("we," the "Company," or "Photomatrix,")
is a value-added contract manufacturing company, specializing in electronics
manufacturing, including enclosed electronic systems. On June 5, 1998, the
shareholders of Photomatrix approved a merger ("Merger") with I-PAC
Manufacturing, Inc. ("I-PAC"). On July 1, 1998, we acquired certain assets of
MGM TechRep and formed PHRX Rep Co. ("Rep Co."), an outside sales
representative firm. On November 27, 1998, we acquired certain assets of
Amcraft, Inc. and formed I-PAC Precision Machining ("Precision Machining"), a
contract precision metal machining business. On December 18, 1998, we
acquired certain assets of Greene International West and formed National
Metal Technologies ("NMT"), a contract metal stamping business. On June 21,
1999, we sold certain assets and product rights of our wholly owned
subsidiary, Photomatrix Imaging, Inc. ("PMX") to Scan-Optics, Inc.
Photomatrix is currently comprised of I-PAC, NMT, Precision Machining and Rep
Co.
I-PAC is a value added contract manufacturer, specializing in the
manufacture of electrical and mechanical assemblies. PMX currently
manufactures high-performance document and aperture-card scanners for
Scan-Optics.
CORPORATE HISTORY
Photomatrix was incorporated in California in 1978 under the name
Xscribe Corporation. On July 31, 1996, the Company sold substantially all the
assets and the business of its wholly owned subsidiary, Xscribe Legal
Systems, Inc. In October 1996, the Company changed its name from Xscribe
Corporation to Photomatrix, Inc. In December 1996, the Board of Directors of
the Company approved a plan to discontinue the operations of another wholly
owned subsidiary, Lexia Systems, Inc. In June 1999, the Company sold
substantially all the assets and the business of its wholly owned subsidiary,
Photomatrix Imaging, Inc. The financial position and results of operations of
Photomatrix Imaging, Inc., Xscribe Legal Systems, Inc. and Lexia Systems,
Inc. have been shown in the consolidated financial statements of the Company
as discontinued operations. In May 1998, we consolidated and relocated our
United States continuing operations to 1958 Kellogg Avenue, Carlsbad,
California. Our phone number is (760) 431-4999.
With the June 21, 1999 sale of certain assets and product rights of
PMX to Scan-Optics, we have re-positioned the Company as a manufacturing
services company whose focus and core competencies are in the electronic
manufacturing services industry. During the year, we have acquired metal
stamping and metal machining capabilities, which we believe will enhance the
services we offer to the electronics market. Although no specific material
acquisition is probable as of the date of this Report, we intend to acquire
additional capabilities, which will further enhance the range of services
that we can offer to our electronic
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customers. As of March 31, 1999, we consider the Company to be in transition
with regard to this re-positioning effort.
DESCRIPTION OF BUSINESS
Our manufacturing services feature two broad capabilities,
electronic assembly ("electronic services") and metal stamping and machining
("metal services"). Our electronic services are primarily performed by I-PAC
and are located at 1958 Kellogg Avenue, Carlsbad, California. Our metal
services are primarily performed by NMT and Precision Machining and are
located at 4040 Calle Platino, Oceanside, California. Rep Co. is located at
1958 Kellogg Avenue, Carlsbad, California.
ELECTRONIC SERVICES
PRINCIPAL PRODUCTS
The Company is primarily a value added custom contract manufacturer
of electrical and mechanical assemblies, including complex, multi-layer
printed circuit board assemblies, wire and cable harnesses, molded cables,
and complete system and subsystem assemblies. Through our wholly-owned
subsidiary, I-PAC, we specialize in providing value-added electronic
manufacturing services in connection with the manufacture of surface mount
and hybrid printed circuit boards used in high value industrial and
commercial products which require an exceptionally high level of quality
control, a critical emphasis on delivery schedules, and intensive customer
support.
All printed circuit boards that we manufacture are designed by our
customers and manufactured to their specifications. Using computer controlled
manufacturing and test machinery and equipment, we provide manufacturing
services employing surface mount technology ("SMT") and pin-through-hole
("PTH") interconnection technologies. We offer a wide range of manufacturing
and management services, either on a turnkey or consignment basis, including
material procurement and control, manufacturing and test engineering support,
and quality assurance. Our strategy is to develop long-term manufacturing
relationships with established and emerging original equipment manufacturers
("OEMs").
CONTRACT ELECTRONICS MANUFACTURING INDUSTRY
OVERVIEW
The contract electronics manufacturing industry provides the program
management, technical and administrative support, and manufacturing expertise
required to take a product from the early design and prototype stages through
volume production and distribution. Over the past two decades electronic
systems have become smaller, lighter and more reliable, while demands for
performance at lower costs have increased. The use of a contract manufacturer
allows an OEM to avoid large capital investments in plant, equipment and
staff and to concentrate instead on the areas of its greatest strength:
innovation, design and marketing.
OEMs use contract manufacturers to:
Reduce Production Costs. Contract manufacturers generally are
able to manufacture specialized products at a lower cost than OEMs
because of efficiencies associated with specialization and higher
production volumes.
Accelerate Time to Market. Rapid technological advances and
shorter product life cycles require OEMs to reduce the time required to
bring a product to market. Delays in bringing a product to market can
result in obsolescence of the product before or shortly after it
becomes available. By providing an established infrastructure and
manufacturing
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expertise, contract manufacturers can help OEMs shorten their
product introduction cycles.
Access Advanced Manufacturing Capabilities. As electronic
products have become smaller and more technologically advanced,
manufacturing processes have become more automated and complex, making
it more difficult for OEMs to maintain the manufacturing expertise
required to remain competitive. Using contract manufacturers affords
OEMs access to advanced manufacturing technology and processes.
Improve Manufacturing Quality. Because of their focus on their
specialized area of expertise, contract manufacturers generally can
provide services of higher quality than OEMs can provide in-house.
Focus Resources. In the rapidly changing, increasingly
competitive electronics industry, most OEMs must focus their attention
and resources properly. The use of contract manufacturers enables OEMs
to focus on their core competencies.
Reduce Investment. As the electronics industry has become more
technologically advanced, manufacturing requirements have resulted in
increased investments in inventory, equipment, labor and
infrastructure. Contract manufacturers enable OEMs to achieve high
technological capabilities at a lower capital investment level than
required for internal manufacturing.
Improve Inventory Management and Purchasing Power. The
experience of contract manufacturers in inventory procurement and
management can reduce OEM production and inventory costs.
INDUSTRY SIZE
The market for electronics manufacturing services in the United
States jumped 25% in 1998, to reach $22.5 billion, according to a survey by
the Institute for Interconnecting and Packaging Electronic Circuits (IPC), a
trade association of board assemblers and contract manufacturers in
Northbrook, IL. The report predicts that manufacturing services' revenue will
reach $44 billion by 2001. A Purchasing Magazine survey conducted in 1998,
found that 47% of an average OEMs electronics manufacturing is outsourced and
that OEMs spend an average $5.2 million per year on contract manufacturers.
PRINTED CIRCUIT BOARDS
PCBs are the basic platform used in virtually all advanced
electronic equipment to direct, sequence and control electronic signals
between semiconductor devices (such as microprocessors, memory chips and
logic devices) and passive components (such as resistors and capacitors).
PCBs consist of one or more layers of circuitry laminated into rigid
insulating material composed of fiberglass epoxy. Multi-layer PCBs provide a
three dimensional system with electronic signals traveling along horizontal
planes of multiple layers of circuitry patterns as well as along the vertical
plane through plated holes or vias.
SMT is an assembly process that allows the placement of a large
number of components in a dense array directly on both sides of a PCB. SMT is
a recent advance over the more mature PTH technology, which permits
electronic components to be attached to only one side of a PCB by inserting
the component into holes drilled through the board. The SMT process allows
OEMs to use advanced circuitry, while at the same time permitting the
placement of a greater number of components on a PCB without having to
increase the size of the board. By allowing increasingly complex circuits to
be packaged with the components in closer proximity to each other, SMT
enhances circuit processing speed and board and system performance.
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Lead times for PCBs generally fall into two categories, "quick turn"
and "standard." Quick turn lead times range from one to 15 days for prototype
and pre-production quantities. Standard lead times typically run from six to
twelve weeks and are generally associated with larger volumes.
As OEMs have increasingly focused on core competencies, outsourcing
of PCBs and electronic interconnects has grown. The 1997 worldwide PCB market
was estimated at $29.7 billion by IPC, of which the U.S. portion was $7.8
billion and was forecast to grow 6.5% annually through 2001.
SYSTEM AND SUBSYSTEM ASSEMBLY
According to Technology Forecasters of Alameda, California, the
worldwide value added contract manufacturing market was approximately $90
billion in 1998 and is growing at a worldwide rate of approximately 25% per
year. We believe that OEMs are increasingly relying upon independent contract
manufacturers for the manufacture of complex electronic interconnect products
rather than on in-house production.
BUSINESS STRATEGY
In response to these industry trends, we have positioned the Company
as a specialist in the manufacture of complex, multi-layer PCBs, wire and
cable harnesses, molded cables, and complete system and subsystem assemblies
including value added electronic manufacturing services. Our strategy is to
emphasize our experience with surface mount and hybrid printed circuit boards
used in high value industrial and commercial products which require an
exceptionally high level of quality, a critical emphasis on delivery
schedules, and intensive customer support. Further, our strategy includes the
following elements:
Establish and Maintain Long-term Relationships. One of our
primary objectives is to pursue opportunities whereby we become an
integral part of an OEM's manufacturing operations. In this regard, the
Company strives to work closely with its customers in all phases of
design and production in an attempt to establish itself as the sole or
primary source for our customers' specialized manufacturing
requirements. We believe that this effort to develop close, reliable,
long-term relationships builds customer loyalty that is difficult for
competitors to overcome. We specifically target turnkey manufacturing
opportunities, including electronic enclosure assemblies, because such
business offers increased profit margin, greater control over all
variables of the manufacturing process and greater reliance upon us by
the OEM associated with the turnkey operation.
Target and Maintain Balance Among Selected OEM Industries and
Customers. The Company markets its services to industries and customers
that have strict quality control standards for their products and that
have service intensive manufacturing requirements. We focus on complex
assemblies in low and medium volumes for commercial and industrial
customers. The Company has not been, and does not intend to become, a
manufacturer of high volume PCB assemblies for personal computers or
other consumer related products, which typically have relatively low
margins. Instead, we have focused on a variety of industries that
produce products that generally have longer life cycles, higher
engineering content, higher customer margins, more stable demand and
less price pressure.
Provide Comprehensive and Reliable Manufacturing Services. We
believe that our ability to attract and retain customers depends on our
ability to offer a broad range of specialized services. We provide our
customers with services ranging from prototype production to the
manufacture of PCB assemblies, material procurement and management,
post-production testing, and final product assembly. We also strive to
provide the highest level of reliability in connection with these
services and have an
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ongoing program of investing in sophisticated machinery and
equipment to enable us to achieve this objective on a continuing
basis. Our ability to provide electrical mechanical assembly, wire
and cable assembly and harnessing, molded cable processing and other
related services allows us to offer a broader range of value added
services to our customers than is typically offered by a PCB
assembly manufacturer.
Pursue Opportunities for Growth. Although we have not
currently identified any candidate for acquisition, we are committed to
pursuing opportunities to increase the scope and capabilities of our
operations through acquisition. Our strategy is to attempt to increase
our contract manufacturing business through growth of our customer
base, as well as vertical and horizontal acquisition of other
manufacturers.
Maintain Flexibility. Many of our customers are leaders in
their respective industries. As such, these customers often require
that their products be routinely reengineered. The Company has
organized its operations so that it can respond rapidly to design
changes and provide value added services where needed.
SERVICES PROVIDED
We manufacture over 200 different electrical assemblies that are
incorporated in over 60 different products. We provide contract manufacturing
services primarily with regard to advanced, industrial and commercial
products in the industrial controls, process control equipment, commercial
broadcast, video and instrumentation markets.
Prototype Manufacture. We offer quick turn, PCB prototype
manufacturing capabilities, incorporating SMT and hybrid technologies.
We support new OEM products in their design phase and then attempt to
migrate these products to our production manufacturing facility when
larger quantities are required.
Product Manufacture. We manufacture electronic products and
assemblies for use in a variety of industries and applications. Our
manufacturing operations include product assembly, testing, and
assembly into final product housings. While we have automated various
aspects of many processes, the assembly of components into electronic
products is a labor-intensive process generally requiring a high degree
of precision and dexterity, together with multiple quality control
steps prior to shipment. In addition to PCB assembly, we manufacture
various interconnect products, including molded cables.
Product Testing. The increasingly complex design and assembly
techniques required for products manufactured by the Company, as well
as the reliability demanded by its customers, has required us to engage
extensive testing of our products. These tests include in-circuit
component measurement testing, manufacturing defect analysis, and
functional tests.
Value Added Services. The Company provides value added
electronic manufacturing services to enhance the quality and reduce the
cost of OEM products. We primarily solicit the manufacturer of high
engineering content OEM products and offer close working relationships
with our customers and flexibility to meet customer-engineering needs.
MANUFACTURING AND SUPPLIES
The principal materials used by the Company in the manufacture of
its products are electronic components such as memory chips, micro-processing
units, integrated circuits, resistors, capacitors, transformers, switches,
connectors, wire and related items purchased as stock items from a variety of
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manufacturers and distributors. While we purchase most of these materials
from outside sources, we are not dependent upon a single source of supply for
any materials essential to our business. The Company has generally been able
to obtain adequate supplies of such materials, and no shortage of such
materials is currently anticipated. However, notwithstanding the foregoing,
there can be no assurance that we will continue to be able to procure such
components in the future without material delay or other restrictions.
MARKETING
Senior management of I-PAC and Rep Co. are currently primarily
responsible for marketing our electronic manufacturing services. Rep Co.
receives variable commissions based on orders received by I-PAC. As part of
its marketing strategy, I-PAC attempts to work closely with our customers in
all phases of design and production in an attempt to establish itself as the
sole or primary source for its customers' specialized manufacturing
requirements. We believe that this effort to develop close, reliable,
long-term relationships builds customer loyalty that is difficult for
competitors to overcome. As a result, we are continually striving to develop
new negotiated business with existing customers.
COMPETITION
The contract manufacturing industry is highly fragmented and is
characterized by intense competition. According to an IPC market study, there
are approximately 15 North American contract manufacturers ("CMs") with sales
in excess of $300 million, 140 companies with annual sales between $5 million
and $300 million and over 1,200 companies with less than $5 million in sales.
The contract manufacturing services provided by the Company are available
from many independent sources as well as the in-house manufacturing
capabilities of current and potential customers of I-PAC. Many of I-PAC's
competitors and potential competitors are significantly larger and have
significantly more capital, direct buying power and management resources than
I-PAC. We believe that the principal competitive factors in our targeted
markets are flexible value added services, product quality and reliability,
flexibility and timeliness in responding to design and schedule changes,
reliability in meeting product delivery schedules, pricing and geographical
location. We believe that we compete favorably with respect to these factors.
However, we also expect that competition in our markets will continue to be
intense, and there can be no assurance that we will compete successfully.
METAL SERVICES
ELECTRONIC ENCLOSURES INDUSTRY
The electronic enclosures industry is a subsector of the Electronic
Manufacturing Services ("EMS") industry. The electronic enclosures industry
is comprised of manufacturers of metal and composite enclosures that house
and protect sensitive electronic controls and components. These manufacturers
need computer numerically controlled ("CNC") machining, metal fabrication,
electronic assembly, mechanical assembly, metal finishing, and kitting
capabilities.
The enclosure market represents about $20 billion in revenue, and is
well positioned for growth as market leaders aggressively consolidate and
their OEM customers analyze their supply base, increasingly relying on
suppliers to provide a broader range of electronic manufacturing capabilities.
ELECTRONIC ENCLOSURE PRODUCTS
Examples of electronic enclosure products are metallic and composite
enclosures and cabinets that house electrical and electronic controls,
instruments, and components. Specifically electronic enclosures include:
cabinets, cases, subracks, microcomputer packaging systems, backplanes, power
supplies, technical workstations, computer room rack mount enclosures,
telephone and data patch panels, fiber-optic
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interconnect boxes and patch panels, power distribution systems, and
enclosure cooling systems. Electronic enclosures can be standard, modified or
custom made products.
Electronic enclosure products are primarily sold to original
equipment manufacturers (OEMs). The business is driven by the desire of many
OEM producers of electronic components to outsource manufacturing, product
development, supply chain management, assembly and testing.
MARKETS FOR ELECTRONIC ENCLOSURES
Industries that require electronic enclosures include:
INDUSTRIAL MARKETS which are comprised of manufacturing
industries in which electrical and electronic controls require
protection from harsh factory floor environments, plant maintenance and
repair, commercial construction and electrical equipment manufacturers.
COMMERCIAL ELECTRONIC MARKETS that are comprised of computer,
test and measurement, industrial control and factory automation,
medical and automated teller machines industries.
OTHER MARKETS including computer networking, data
communication, telecommunication and semiconductor industries.
COMPETITION
The two biggest companies operating in the electronic enclosures
market are Applied Power, Inc. ("Applied Power") and Pentair, Inc.
("Pentair"). Applied Power is a $1.2 billion revenue company. Enclosure
products and systems accounted for $480 million of their revenues in 1998.
Pentair is a diversified international manufacturer with annual sales of
approximately $2 billion. Its electrical and electronic enclosure revenues
totaled $564 million in 1998. Competition in this segment can be very intense
and focuses on price, innovation, service, quality and delivery.
PRINCIPAL PRODUCTS
In order to broaden our EMS capabilities and position the Company as
a participant in electronic enclosures industry, we formed NMT. NMT was
founded in December 1998 by acquiring certain assets and contracts from Green
International West ("GIW"), a metal stamping company located in Oceanside,
California. GIW recently emerged from a Chapter 11 Federal Bankruptcy
proceeding, which was canceled through the infusion of new capital funds from
its major shareholders. As a result, NMT currently is a metal stamping
facility that manufactures and supplies metallic links for munitions
manufacturers and the United States and foreign militaries, voice emitters
for the defense industry, and munitions clips for a number of commercial arms
manufacturers.
METAL STAMPING INDUSTRY
OVERVIEW
Metal stamping is generally broken down into two categories,
automotive stampings (SIC 3465) and metal stampings, not classified elsewhere
(SIC 3469). In 1996, there were an estimated 700 automotive stamping
manufacturers in the U.S., reporting sales of $13.6 billion and employing
approximately 109,000 people. The 3,600 companies in the metal stampings, not
classified elsewhere, category reported 1996 sales of $15.4 billion and
employed approximately 116,000 people.
Stamped metal products are used in the medical, commercial,
aerospace, electrical, automotive and defense industries. Because of the
sophisticated applications in which these products are used, they must be
manufactured under strict quality methods such as Statistical Process Control
(SPC) or similar quality
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management techniques. Highly accurate dies and quick-change punch press
tools are requirements for the expected tolerances within +/-0.001".
The different types of metal stamping processes are:
BLANKING is an initial operation involving a punch and die
combination for cutting an outside part contour from a piece of stock. It's a
single operation on low volume or larger part projects.
PIERCING is the process of creating inside contours and holes in
sheet or plate material. In progressive stamping work, it is usually done
first, with blanking the part as the last step.
COMPOUND DIES stamp both inside and outside contours at the same
time in a single station tool. It is the most accurate method for maintaining
concentricity and flatness of parts.
PROGRESSIVE DIES are designed for handling high volumes of parts
from strip sheet or coil stock. By handling most of the stamping operations
at progressive stations in the tooling, while the material is advanced
through it, maximum efficiency is realized per press stroke and secondary
handling of material is substantially reduced.
DRAWING is the process forming a flat metal blank into a die cavity
without stretching the material.
EMBOSSING uses a male and female die to produce shallow indentations
or raised designs with no change in material thickness.
COINING is a closed-die squeezing operation for medium indentations
or raised designs.
SERVICES PROVIDED BY NMT
NMT specializes in high-speed metal stamping, progressive
die and forming operations. NMT also maintains several secondary metal
processing capabilities, including phosphate coating, chem film and
heat-treat tempering. NMT features metal stampings from miniature, long run
commodity grade parts produced in excess of 1000 parts per minute to large,
close tolerance specific parts produced at 2 parts per minute. Metals that
NMT processes include stainless steel, copper, cold rolled steel, aluminum
and tin. NMT is capable of stamping a wide range of parts to meet commercial,
medical or military requirements.
NMT currently manufactures and supplies metallic links for munitions
manufacturers and the United States and foreign militaries, as well as
firearm magazines for the after-market firearm industry. During the fiscal
year ended March 31, 1999, NMT provided high volume and deep draw metal
stamping, metal assembly services and heat treating services to defense
contractors such as ILC Industries and Alliant Techsystems. In the
after-market firearm magazine market, NMT manufactures components for
companies such as Chip McCormick Corporation ("CMC") and Sturm, Ruger &
Company. The product NMT manufactures for ILC Industries is called a voice
emitter, which is part of a protective gas mask. For Alliant, NMT
manufactures automatic links for munition supplies. NMT currently
manufacturers and assembles four different gun magazine sizes for CMC.
VOICE EMITTERS
Voice emitters are used in protective masks to allow for
face-to-face and telephone communication. These protective masks
provide the required protection in combat situations without the aid of
forced ventilation air.
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MUNITIONS LINKS
Munitions links are used to hold loaded shells or ordnance for
large automatic cannons. These are generally for military operations.
MAGAZINES
Gun magazines or "clips" hold loaded shells for personal hand
held weapons, such as pistols or rifles.
We are actively marketing our electronic enclosures manufacturing
capabilities to our electronic manufacturing customers, as well as using
these expanded capabilities to attract new electronic customers.
MANUFACTURING AND SUPPLIES
The principal materials used by NMT are rolled stainless steel,
gaskets, diaphragms, and springs. While NMT purchases most of these materials
from outside sources, NMT is not dependent upon a single source of supply for
any materials essential to its business. NMT has generally been able to
obtain adequate supplies of such materials, and no shortage of such materials
is currently anticipated. However, notwithstanding the foregoing, there can
be no assurance that NMT will continue to be able to procure such components
in the future without material delay or other restrictions.
MARKETING
Senior management of NMT and Rep Co. are currently primarily
responsible for marketing NMT's services. Rep Co. receives variable
commissions based on orders received by NMT. Currently, the majority of NMT's
orders are the result of a competitive bidding process. The bid process
involves customers and potential customers providing NMT and its competitors
with a request for quotation ("RFQ"). NMT then prepares a detailed cost
estimate and submits a bid. The contract or purchase order is then awarded,
generally to the lowest bidder.
As part of its marketing strategy, NMT attempts to work closely with
its customers in all phases of design and production in an attempt to
establish itself as the sole or primary source for its customers' specialized
manufacturing requirements. We believe that this effort to develop close,
reliable, long-term relationships builds customer loyalty that is difficult
for competitors to overcome. As a result, NMT is continually striving to
develop new negotiated business with existing customers.
COMPETITION
The metal stamping industry is highly fragmented and is
characterized by intense competition. The metal stamping services provided by
NMT are available from many sources, however a higher concentration of
competitors can be found in the mid and eastern sections of the United
States. NMT's direct competitors are Valentec Wells of Costa Mesa, California
and G.G. Greene of Warren, Pennsylvania. Many of NMT's competitors and
potential competitors are significantly larger and have significantly more
capital, direct buying power and management resources than NMT. We believe
that the principal competitive factors in its targeted markets are flexible
value added services, product quality and reliability, flexibility and
timeliness in responding to design and schedule changes, reliability in
meeting product delivery schedules, pricing and geographical location. We
believe that NMT competes favorably with respect to these factors. However,
we also expect that competition in these markets will continue to be intense,
and there can be no assurance that NMT will compete successfully.
PRECISION MACHINING INDUSTRY
OVERVIEW
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In 1996, SIC code 3499, fabricated metal products, not elsewhere
classified, accounted for $4.6 billion in revenues. Approximately 38,700
laborers were employed in this category at 1,200 manufacturers.
Precision machining operations are generally referred to as "machine
shops". To compete in the precision machining industry, the machine shop has
to provide on-time delivery, quality to specifications and competitive
pricing. In general, relationships with vendors will determine a machine
shop's ability to deliver the product to the customer on time, the shop's
quality is based on engineering and machine operator skills, and the level of
productivity and efficiencies realized by the shop will determine pricing.
The different types of Precision Machining operations are CNC
milling, CNC turning, metal sawing, drilling/tapping, centerless grinding
SERVICES PROVIDED BY PRECISION MACHINING
Precision Machining was formed in December 1998. Precision Machining
processes knurled parts as small as 1" in length to large, complex pieces
weighing hundreds of pounds.
Precision Machining provides a full range of machining services
including CNC milling, CNC turning, metal sawing, drilling/tapping, and
centerless grinding. Precision Machining also offers secondary operations
including tumble de-burring, bead blasting, heat treating, plating, broaching
and plasma cutting.
Precision Machining has experience machining covers, skids and
brackets, some of the main components of electronic enclosures, and has the
ability to precision machine these items to tight tolerances.
MANUFACTURING AND SUPPLIES
The principal material used by Precision Machining is
stainless steel. While Precision Machining purchases most of its materials
from outside sources, Precision Machining is not dependent upon a single
source of supply for any materials essential to its business. Precision
Machining has generally been able to obtain adequate supplies of such
materials, and no shortage of such materials is currently anticipated.
However, notwithstanding the foregoing, there can be no assurance that
Precision Machining will continue to be able to procure such components in
the future without material delay or other restrictions.
MARKETING
Senior management of Precision Machining and Rep Co. are
currently primarily responsible for marketing Precision Machining's services.
Rep Co. receives variable commissions based on orders received by Precision
Machining. Currently, Precision Machining's orders are a mix of negotiated
and competitive bidding processes. As part of its marketing strategy,
Precision Machining attempts to work closely with its customers in all phases
of design and production in an attempt to establish itself as the sole or
primary source for its customers' specialized manufacturing requirements. We
believe that this effort to develop close, reliable, long-term relationships
builds customer loyalty that is difficult for competitors to overcome. As a
result, Precision Machining is continually striving to develop new negotiated
business with existing customers.
COMPETITION
The precision machining industry is highly fragmented and
is characterized by intense competition. The precision machining services
provided by Precision Machining are available from many sources, however
customers tend to use local shops. Many of Precision Machining's competitors
and potential competitors are significantly larger and have significantly
more capital, direct buying power and
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management resources than Precision Machining. We believe that the principal
competitive factors in its targeted markets are flexible value added
services, product quality and reliability, flexibility and timeliness in
responding to design and schedule changes, reliability in meeting product
delivery schedules, pricing and geographical location. We believe that
Precision Machining competes favorably with respect to these factors.
However, we also expect that competition in Precision Machining's markets
will continue to be intense, and there can be no assurance that Precision
Machining will compete successfully.
DISCONTINUED OPERATIONS
The following represents a brief history of the discontinued
operations of Photomatrix:
SALE OF ASSETS, LIABILITIES AND PRODUCT RIGHTS OF PHOTOMATRIX
IMAGING CORPORATION. In June 1999, the Company sold certain assets and
liabilities related to its scanner business to Scan-Optics for $2.1 million.
The Company retained certain assets and liabilities. Under the terms of the
Asset Purchase Agreement, Scan-Optics, Inc., paid approximately $2.1 million
in cash to acquire product rights and certain assets, including all
receivables, inventory and certain equipment, as well as assuming
approximately $2 million of current and future liabilities of Photomatrix
Imaging Corporation and Photomatrix, Ltd., located in Great Britain.
Scan-Optics also assumed lease commitments associated with Photomatrix's
engineering facilities located in Chandler, Arizona, as well as its
facilities in Great Britain. In addition, Photomatrix has the right to
receive royalties up to an aggregate of $250,000 over a three year period
dependent upon the release of a new product. The Company has also entered
into a Transition Agreement during which Photomatrix would continue to
manufacture scanners for Scan-Optics at its Carlsbad facility for a
transitional period of time. The Company also entered into a five year
Manufacturing Agreement to serve as a preferred supplier for certain
outsourced manufacturing components as required and ordered by Scan-Optics.
SALE OF ASSETS, LIABILITIES AND PRODUCT RIGHTS OF XSCRIBE LEGAL
SYSTEM, INC. In July 1996, the Company sold certain assets and liabilities
related to its computer-aided transcription business to its primary
competitor for $2.2 million. The Company retained certain liabilities.
LEXIA SYSTEMS, INC. In October 1993, the Company acquired the North
American Sales Division of International Computers Limited, Inc. ("ICL"), a
developer of groupware (office automation) software and manufacturer of
Unix-based hardware, and formed Lexia Systems, Inc. ("Lexia"). Lexia and ICL
entered into a strategic alliance whereby Lexia was to distribute ICL's
groupware products in the United States and support the domestic installed
base of ICL customers. However, the business partnering efforts between the
Company and ICL and its sister company, Fujitsu ICL Computers Ltd.
("Fujitsu") have proved to be ineffective primarily because of a difficult
working relationship between ICL, Fujitsu and Lexia, combined with the fact
that Lexia did not own the applicable software or proprietary rights and was
not able to control the marketing or product management of ICL and Fujitsu
products. Consequently, in December 1996, the Board of Directors of the
Company approved a plan to discontinue Lexia Systems, Inc. The operations of
Lexia were shut down on September 30, 1998. Approximately $250,000 of
reserves for discontinued operating losses was not required, contributing to
income from discontinued operations for the year. Lexia has entered into a
settlement with Fujitsu Computers Ltd. ("Fujitsu") regarding its
disagreements over outstanding claims. Lexia had carried on its books
accounts payable claims by Fujitsu in the amount of $341,000. Lexia has
disputed these liabilities. Lexia agreed to pay Fujitsu $200,000 over an
eight month period as payment in full of all outstanding claims against
Lexia, resulting in an additional $141,000 of income from discontinued
operations for the fiscal year 1999. Lexia also carries on its books accounts
payable and unpaid rent claims by ICL, a sister company of Fujitsu, in the
amount of $457,000. Lexia disputes any liability with respect to ICL in light
of its own offsetting claims and defenses. There is no assurance that Lexia
will be successful in prevailing in its position with regard to the
outstanding claims previously made by ICL.
OTHER INFORMATION REGARDING ALL SUBSIDIARIES
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SEASONALITY
On a consolidated basis, we expect to experience our strongest sales
volume in the first and second quarters of each calendar year, but we do not
consider our business to be seasonal. It is more accurately subject to the
business cycles that impact our customers.
BACKLOG
As of August 14, 1999, our consolidated backlog was approximately
$3,293,000 for continuing operations. We define backlog as hard copy
contracts or purchase orders for which we have firm delivery dates.
EMPLOYEES
As of August 1, 1999, we had approximately 121 full time employees
and 0 part time employees. None of our employees are represented by a labor
union. We believe our relations with our employees are good.
GOVERNMENT REGULATION
The Company's operations are subject to certain federal, state and
local regulatory requirements related to environmental, waste management,
health and safety matters. While there can be no assurance that material
costs and liabilities will not be incurred or that past or future operations
will not result in exposure to claims of injury by employees or the public,
we believe that our business is operated in substantial compliance with such
regulations.
The Company periodically generates and temporarily handles limited
amounts of materials that are considered hazardous wastes under applicable
law. We contract for the off-site disposal of these materials and have
implemented a waste management program to address related regulatory issues.
ITEM 2. PROPERTY
We maintain our executive offices and electronic manufacturing
facilities in a 40,000 square foot, two story concrete building located at
1958 Kellogg Ave., Carlsbad, California. We began leasing these facilities
under a sale and leaseback transaction that was completed on June 3, 1999.
NMT leases an 80,000 square foot facility located at 4040 Calle
Platino Avenue, Oceanside, California. The lease for this facility provides
for annual rent of $300,000 from February 1999 to November 2000, $422,400
from December 2000 to November 2001, and $576,000 from December 2001 to
November 2002. Thereafter, until the lease expires in 2013, annual increases
in rent will be based on the Consumer Price Index ("CPI"), but in no case
shall the increase be greater than 6% or less than 3%.
During the fiscal year ended March 31, 1999, I-PAC Express leased a
5,000 square foot facility located at 1415 East McFadden Avenue, Santa Ana,
California. In April 1999, that lease was terminated.
During the fiscal year ended March 31, 1999, the Company also leased
facilities in Chandler, Arizona and London, England. These facilities housed
the Photomatrix product development and Photomatrix European operations,
respectively. The Chandler facility consists of 5,100 square feet, and the
lease expires in June 2000. The London facility consists of 2,400 square
feet, and the lease expires in May 2013. Effective June 21, 1999, these
leases were either sub-leased or assigned to Scan-Optics as part of the sale
of scanner operations.
Subsequent to March 31, 1998, we relocated our corporate
headquarters from San Diego, California to our current Carlsbad, California
location. We are still party to a lease of a facility located in San Diego,
California, consisting of approximately 23,400 square feet, which previously
housed our
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corporate offices and our manufacturing, sales and administrative functions.
The lease expires in September 2002. We have entered into an assignment of
this lease, effective June 15, 1998.
During the fiscal year ended March 31, 1999, our discontinued
subsidiary Lexia also leased 880 square feet in Herndon, Virginia. This lease
expired in November 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company has indemnified Stenograph Corporation in connection
with a product liability case pending in the Nineteenth Judicial District,
East Baton Rouge Perish, in which Stenograph is a defendant (BROWN V.
STENOGRAPH ET AL). The Company has tendered this claim to its insurance
carrier, St. Paul Fire ("St. Paul"). St. Paul has assumed the Company's
defense. The insurance carriers have prevailed in all similar judgments
rendered to date. It may take several years before this litigation is
ultimately resolved. The Company believes that this case is without merit and
further believes that if any liability results from these claims, the
liability (excluding punitive damages, if any) will be covered by its
insurance policies.
There are no material pending legal proceedings to which the Company
or any of its subsidiaries is a party or of which any of their properties is
the subject. The Company is not aware of any such proceedings known to be
contemplated by governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET PRICES OF PHOTOMATRIX COMMON STOCK
On July 8, 1999 Photomatrix, Inc. was de-listed from the Nasdaq
SmallCap Market and is now traded in the Over-the-Counter Bulletin Board
under the symbol PHRX. On August 14, 1999, there were 9,914,000 shares
outstanding, and there were approximately 2,000 shareholders of record.
Following is information regarding Photomatrix, Inc. common stock market
prices:
<TABLE>
<CAPTION>
FISCAL YEAR 1999 FISCAL YEAR 1998
---------------- ----------------
Quarter Ended Low Bid High Bid Low Bid High Bid
------------- ------- -------- ------- --------
<S> <C> <C> <C> <C>
June 30 - 1st 9/16 1-3/16 5/16 5/8
September 30 - 2nd 5/8 1-1/16 9/32 9/16
December 31 - 3rd 3/8 31/32 1/4 29/32
March 31 - 4th 1/8 9/16 3/8 15/16
</TABLE>
The Company has not paid a cash dividend on its common stock, and it is not
anticipated that the Company will pay any dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Following is a comparative discussion by fiscal year of the results
of continuing operations for the last two fiscal years ended March 31, 1999.
The Company believes that inflation has not had a material effect on its
operations to date.
FISCAL YEAR 1999 ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR 1998 ENDED
MARCH 31, 1998
On June 11, 1998, the Company acquired I-PAC. On July 1, 1998, the
Company acquired PHRX Rep Co. On November 27, 1998, the Company acquired the
assets and business of I-PAC Precision Machining, Inc. ("Amcraft"). On
December 18, 1998, the Company acquired the assets and business of NMT. All
acquisitions were treated as purchases for accounting and financial reporting
purposes. These companies comprise the manufacturing group. Under the
purchase method of accounting, the results of operations of the acquired
companies are combined with those of the Company from the date of
acquisition. In addition, on March 2, 1999, the Company decided to sell the
assets of its scanner operations to Scan-Optics, Inc. Accordingly,
operational results of the scanner operations have been reclassified as
discontinued operations for the respective years presented herein. The
balance sheets of the scanner operations have similarly been reclassified as
net current assets of discontinued operations as of March 31, 1999. As a
result, the current year ended March 31, 1999, represents the first operating
period reflecting the combined operations of I-PAC, PHRX Rep Co., Amcraft and
NMT, with the scanner operations shown as discontinued for all periods shown.
As all of these operations were acquired during the current year, only
partial year results of operations are included in the consolidated statement
of operations of the Company.
CONTINUING OPERATIONS
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Consolidated revenues for the year ended March 31, 1999 totaled
approximately $5,009,000, and was comprised of approximately $3,886,000 of
electronic manufacturing services revenue, $1,062,000 of metal manufacturing
services revenue and $61,000 of other revenue. The electronic manufacturing
services revenue was generated over approximately ten months of operations,
while the metal manufacturing services revenue was generated over
approximately four months and the other revenue was generated over nine
months. During this period, revenues were adversely affected by the Company's
tight cash position. This tight cash condition has continued subsequent to
March 31, 1999.
Consolidated gross margin for the year ended March 31, 1999 was
approximately $740,000 or 14.8% of consolidated revenues. This amount is
comprised of approximately $507,000 of electronic manufacturing services
gross margin, $172,000 of metal manufacturing services gross margin and
$61,000 of other gross margin. The consolidated gross margin represents an
amount considered by management to be significantly less than expected under
normal operating conditions. The poor gross margin performance was primarily
the result of much lower volume and higher material costs related to the
Company's tight cash condition during the last five months of the fiscal year.
Consolidated selling, general and administrative ("SG&A") expenses
for the year ended March 31, 1999 was approximately $3,154,000. This amount
is comprised of approximately $1,704,000 of corporate general and
administrative expenses, $1,101,000 of electronic manufacturing services SG&A
expenses and $349,000 of metal manufacturing services SG&A expenses. No
corporate general and administrative expenses were allocated to discontinued
operations. The Company has been in the process of reducing its consolidated
SG&A expenses during the first quarter of fiscal 2000. Management believes
that these costs may be further reduced as a result of the sale of the
scanner operations and the consolidation of the metal manufacturing services,
although there is no assurance that these additional cost reductions will be
achieved.
Consolidated other expenses for the year ended March 31, 1999
totaled approximately $280,000 and was comprised primarily of interest
expense.
The low gross margins, combined with higher than normal SG&A
expenses and other expenses resulted in a loss from continuing operations of
$2,694,000 ($0.30 per share) for the year ended March 31, 1999.
In June 1999, the Company sold its scanner business. The Company
recorded a loss on the sale of discontinued operations of approximately
$1,036,000 for the year ended March 31, 1999. In addition, the Company
recorded a loss from discontinued operations in the current year of
$1,061,000 related to its scanner operations (which is more fully described
below), offset by approximately $415,000 of income from discontinued
operations related primarily to its previously discontinued subsidiary, Lexia
Systems, which is also more fully described below. This compares with a loss
from discontinued operations in the prior year related to scanner operations
of $1,696,000 , which was offset by $214,000 of income from discontinued
operations primarily related to its previously discontinued subsidiary,
Xscribe Legal Systems. Including the loss on sale of discontinued operations
and the loss from discontinued operations, the net loss for the year ended
March 31, 1999 was $4,376,000 ($0.49 per share) compared to a net loss for
the year ended March 31, 1998 of $1,482,000 ($0.29 per share), an increase of
$2,977,000 (200.1%).
DISCONTINUED OPERATIONS
On March 2, 1999, the Company approved the sale of its scanner
operations to Scan-Optics. The following analysis compares the results of the
scanner and other discontinued operations for the fiscal year 1999 compared
to the fiscal year 1998.
Consolidated revenue for discontinued operations for the year ended
March 31, 1999 decreased by $2,321,000 (27.0%) to $6,274,000 from $8,595,000
for the year ended March 31, 1998. This decrease was due to decreases in
scanner revenue of $1,242,000 (29.6%), COM duplicator revenue of $169,000
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(100.0%) and spare parts revenue of $484,000 (36.0%) and service revenue of
$300,000 (18.4%). The decrease in scanner revenue was primarily attributable
to a decrease in orders of approximately $1,419,000 received from a major OEM
customer.
Consolidated gross margins for discontinued operations for the year
ended March 31, 1999 decreased $878,000 (30.0%) to $1,828,000 from
$2,706,000. This excludes the effect of the $1,016,000 write-off of
capitalized software, as more fully discussed below, and goodwill. Gross
margin, excluding the write-off of intangible assets, as a percent of sales
decreased 1.8% to 29.7% from 31.5% in the year ended March 31, 1998. This
decrease was due to production inefficiencies resulting from reduced volume.
Selling, general and administrative ("SG&A") expenses for
discontinued operations decreased $220,000 to $2,978,000 from $3,198,000 in
the prior year. As a percent of revenue SG&A increased 10.6% to 47.8% from
37.2% in the prior year. The cost reductions are attributable primarily due
to cost reduction efforts in both the sales and marketing and the general and
administrative areas of the Company, which were implemented during the
current fiscal year.
Research and development expenses for discontinued operations
decreased $302,000 (30.4%) to $693,000 from $995,000 in the year ended March
31, 1998. No software development expenditures were capitalized because they
related to non-technologically feasible projects in the current year,
compared to $103,000 in the prior year. Total development spending decreased
$405,000 to $693,000 from $1,098,000 in the prior year primarily because of
decreased scanner development activity.
As a result of the sale to Scan-Optics, fiscal year 1999 includes a
write-off of intangible assets in the amount of $1,016,000. This amount
included $44,000 related to capitalized software, $61,000 related to Filenet
software development and $911,000 related to goodwill. Fiscal year 1998
includes a write-off of capitalized software in the amount of $366,000.
During fiscal 1999, the Company relocated its scanner operations into the
I-PAC facility located in Carlsbad, California. The costs related to this
move approximate $181,000.
Interest expense for discontinued operations increased $1,000 to
$42,000 from $41,000 in the prior year. Other income decreased $188,000 to
$15,000 from $203,000 in 1998. This reduction is the result of a one-time
sale of an unused trademark in the amount of $100,000, together with various
other transactions that were non-recurring in nature during the prior year.
The large decrease in gross margin, including the write-off of
intangible assets, and the reduction in other income, offset slightly by the
decreases in SG&A expenses, interest expense and product development expenses
resulted in a loss from the discontinued scanner operations of $2,694,000
($0.30 per share) for the year ended March 31, 1999. This is an increase of
$998,000 (58.8%) over the loss from the discontinued scanner operations of
$1,696,000 ($0.33 per share) for the year ended March 31, 1998.
During fiscal 1997, the Company sold its court reporting business
(Xscribe Legal Systems, Inc.) and discontinued Lexia Systems, Inc., as more
fully described in Note 4 of the Consolidated Financial Statements contained
elsewhere herein. The Company booked net income from discontinued operations
in fiscal 1999 of $415,000 compared to income of $214,000 in fiscal 1998. The
current year income was comprised of approximately $250,000 of Lexia accruals
for estimated losses to dispose which were not required, an additional
$141,000 of Lexia income related to the settlement of outstanding claims with
Fujitsu and approximately $24,000 of XLS income related to the settlement of
outstanding claims. Prior year income was comprised of $214,000 XLS accruals
for estimated losses that were not required.
FISCAL YEAR 1998 ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR 1997 ENDED
MARCH 31, 1997
The following discussion compares the results of the discontinued
scanner operations for the fiscal year 1998 with fiscal year 1997.
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<PAGE>
Consolidated revenue for discontinued scanner operations for the
year ended March 31, 1998 decreased by $99,000 (1.1%) to $8,595,000 from
$8,694,000 for the year ended March 31, 1997. This decrease was due to
decreases in scanner revenue of $593,000 (10.8%) and COM duplicator revenue
of $185,000 (52.1%) offset by increases in spare parts revenue of $488,000
(51.0%) and service revenue of $191,000 (9.8%).
Consolidated gross margins for discontinued scanner operations for
the year ended March 31, 1998 increased $412,000 (18.0%) to $2,706,000 from
$2,294,000. This excludes the effect of the $366,000 write-off of capitalized
software, as more fully discussed below. Gross margin as a percent of sales
increased 5.1% to 31.5% from 26.4% in the year ended March 31, 1998. This
increase was due to a more favorable product mix, as well as the cost
reductions gained as a result of production efficiencies resulting from
improved production methods, product modularization and the consolidation of
the San Diego, California and Culver City, California operations in March,
1997. These improvements were somewhat offset by the write-off of $165,000 of
inventory and an increase in the Company's reserve for obsolete inventory by
$475,000 as a result of new product introductions, together with a
significant decrease in sales of aperture card scanners.
Selling, general and administrative ("SG&A") expenses for
discontinued scanner operations decreased $113,000 to $3,198,000 from
$3,311,000 in the prior year. As a percent of revenue, SG&A decreased 0.9% to
37.2% from 38.1% in the prior year. These reductions are attributable
primarily due to cost reduction efforts in both the sales and marketing and
the general and administrative areas of the Company, which were implemented
during the 1998 fiscal year.
Research and development expenses for discontinued scanner
operations increased $188,000 (23.3%) to $995,000 from $807,000 in the year
ended March 31, 1997. Software development expenditures that were capitalized
because they related to technologically feasible projects were $103,000 in
the current year compared to $162,000 in the prior year. Total development
spending increased $129,000 to $1,098,000 from $969,000 in the prior year
primarily because of increased scanner development activity, including the
development of new models.
Fiscal year 1998 includes a write-off of capitalized software in the
amount of $366,000. Fiscal year 1997 includes a charge for facility
consolidation and relocation in the amount of $520,000.
Interest expense for discontinued scanner operations decreased
$51,000 to $41,000 from $92,000 in the prior year. This decrease was due to
the elimination of borrowings under the Company's credit facility during
fiscal 1998. Other income decreased $47,000 to $203,000 from $250,000 in
1997. This reduction is the result of a one-time sale of an unused trademark
in the amount of $100,000 in the 1998 fiscal year together with various other
transactions which were non-recurring in nature, compared to a $250,000
non-recurring payment from a major customer under a minimum quantity purchase
contract during the fiscal year 1997.
The Company's provisions for income taxes were $5,000 and $104,000
in the years ended March 31, 1998 and 1997, respectively. These amounts are
substantially different from provisions calculated using the statutory rates
because of the Company's inability to recognize the effect of net operating
losses and related carry-forwards. The fiscal year 1997's provision was
significantly greater than that of the fiscal year 1997, as a result of an
increase in the Company's valuation allowance relating to deferred tax assets.
The increases in gross margin and decreases in SG&A expenses,
interest expense and income tax expense, offset slightly by the increase in
product development expenses and reduction in other income, resulted in a
loss from continuing operations of $1,696,000 ($0.33 per share) for the year
ended March 31, 1998. This was an improvement of $594,000 (25.9%) over the
loss from continuing operations of $2,290,000 ($0.44 per share) for the year
ended March 31, 1997.
During fiscal 1997, the Company sold its court reporting business
(Xscribe Legal Systems, Inc.) and discontinued Lexia Systems, Inc., as more
fully described in Note 4 of the Consolidated Financial
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Statements contained elsewhere herein. The Company booked a net loss from
discontinued operations in fiscal 1997 of $117,000. This loss included
accruals for indemnifications related to the discontinued operations of
Xscribe Legal Systems. During the fiscal year 1998, the indemnification
period lapsed and the Company determined that the remaining accruals were no
longer necessary. The accruals were reversed, resulting in income from
discontinued operations of $214,000 in the fiscal year 1998. Including the
income from discontinued operations, the net loss for the year ended March
31, 1998 was $1,482,000 ($0.29 per share), an improvement of $925,000 (38.4%)
over the net loss for the year ended March 31, 1997 of $2,407,000 ($0.46 per
share)
LIQUIDITY AND CAPITAL RESOURCES
Following is a discussion of Photomatrix's recent and future sources of and
demands on liquidity as well as an analysis of liquidity levels.
RECENT AND FUTURE SOURCES OF AND DEMANDS ON LIQUIDITY AND CAPITAL RESOURCES
In July 1998 the Company entered into a $2,100,000 credit facility
with its bank that included a $1,500,000 line of credit and a $600,000 term
loan. The outstanding balances under these loans, as of March 31, 1999 was
$2,122,000. The line of credit accrued interest on outstanding borrowings at
the bank's prime rate plus 1 % per annum until March 1, 1999, after which
interest accrued at the bank's prime rate plus 6 % per annum. Under the terms
of this agreement, total borrowings under the line of credit were limited to
the lesser of $1,500,000 or 70% of eligible accounts receivable (as defined
under the agreement). The Company had been required to (1) maintain a minimum
tangible net worth of $3,200,000 as of December 31, 1998, and $3,500,000
thereafter (2) maintain a ratio of total liabilities to tangible net worth of
not greater than 2.75 to 1.0, and (3) maintain a minimum debt service
coverage of no less than 1.25 to 1.0. Based on December 31, 1998 financial
data, the Company was not in compliance with these covenants. The bank agreed
to forebear from taking adverse action, subject to the Company fulfilling
certain reporting and other conditions, including entering into discussions
with alternative lenders to replace the bank's credit facilities. Accordingly
the amount due under the term loan portion of this credit facility has been
reclassified as a current liability as of March 31, 1999. The Company paid
all outstanding balances under this credit facility on June 21, 1999.
On June 18, 1999, the Company entered into a $1,500,000 credit
facility with another lender that included a $1,200,000 line of credit and a
$300,000 term loan. The line of credit accrued interest on outstanding
borrowings at the bank's prime rate plus 4 % per annum. Under the terms of
this agreement, total borrowings under the line of credit were limited to the
lesser of $1,200,000 or 80% of eligible accounts receivable (as defined under
the agreement). Outstanding borrowings are collateralized by primarily all of
the Company's assets. The line of credit expires on June 30, 2001.
As of March 31, 1999, the Company had issued two notes in the
aggregate amount of $2,023,000, which are collateralized by the trust deeds
of the Company's real property located in Carlsbad, California. The repayment
of these notes was guaranteed by certain major shareholders of the Company
and the Small Business Administration. These notes were payable in aggregate
monthly installments of approximately $18,000, including interest ranging
from 7.5% to 9.5%. On June 3, 1999, the Company closed escrow on a
sale-and-leaseback transaction, whereby it sold the real property for $2.9
million and entered into a fifteen year lease with the buyer. All underlying
debt was extinguished.
In December 1998, NMT became obligated under a five-year note in the
amount of $350,000, bearing interest at 8%. Future note payments may be made
in a combination of Photomatrix stock and cash at the election of the
parties. In addition, NMT agreed to enter into a capital lease of GIW
equipment, with a bargain purchase option to purchase the equipment for
$490,000 at the end of the one-year period. The first year rental payments
under the equipment lease will be satisfied with the issuance of 25,000
shares of Photomatrix common stock valued at $2.00 per share. Photomatrix
agreed to price protect the shares issued to GIW shareholders at a price of
$2.00 per share, at a point two years from the closing date, for these
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initial shares issued for the first year's payments on the note and the
equipment lease. This debt will bear interest at 8%.
The Company is obligated under a series of notes payable totaling
$294,000 as of March 31, 1999. These notes bear interest at a rate of 8% per
annum and mature in April 2000. Interest and principal payments totaling
$16,000 are due monthly. In October 1998, the Company stopped making payments
on these notes, until June 1999, when payments were resumed. The Company is
attempting to accelerate the monthly payments required under these notes.
The Company also has certain equipment notes in the aggregate amount
of $44,000 with interest rates varying between 8% and 26.6% with final
payments due between 2000 and 2005. These notes are collateralized by
equipment. In addition, the Company also has entered into certain capital
leases in the aggregate amount of $395,000, calling for minimum monthly
payments aggregating approximately $25,000 per month.
During September 1998, The Company's wholly owned subsidiary, Lexia
Systems, settled its outstanding dispute with Fujitsu. As a result, the
Company reduced its previously recorded liability of $340,000 to Fujitsu to
$200,000 and began making payments against this liability in November 1998
with the final payment due to Fujitsu in June 1999. Lexia also has recorded
liabilities reflecting accounts payable and unpaid rent claims of ICL and
related entities in the amount of $457,000 at December 31, 1998. These
liabilities are included in net liabilities of discontinued operations. Lexia
disputes any liability with respect to ICL in light of its own offsetting
claims and defenses. There is no assurance that Lexia will be successful in
prevailing in its position with regard to outstanding claims previously made
by ICL.
The Company's sources of future short-term liquidity are its cash
balance of $42,000 as of March 31, 1999, the proceeds from the sale of assets
of its scanner operations and the unused amount of its new $1.5 million
credit facility, $1.2 million of which is a line of credit, with its lender.
Availability under the line of credit can be further limited based upon the
balance of eligible accounts receivable as described above.
The Company is currently obligated as a guarantor under an
assignment agreement of a lease in the amount of approximately $20,000 per
month through September 2002. As of March 31, 1999, the Company has not been
required to pay any amounts related to this guarantee. The Company is also
obligated to pay approximately $17,000 per month on various other leases.
Aside from these commitments, the Company has not made any material
commitments.
The Company anticipates that its current cash position, revenue from
operations and other (including the sale of assets of its scanner operations
and sale and leaseback of its facilities) and funds from its existing line of
credit will be sufficient to finance working capital and capital requirements
of the combined company for the next twelve months. However, the Company's
capital requirements may vary as a result of competitive and technological
developments and the terms and conditions of any future strategic
transactions. If such requirements change, the Company may need to raise
additional capital. However, there can be no assurance that the Company can
raise additional capital under favorable terms, if at all.
NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Financial Instruments and Hedging Activities" (SFAS 133) issued by
the FASB is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. SFAS 133 provides a comprehensive and consistent standard for
the recognition and measurement of derivatives and hedging activities. The
Company does not expect adoption of SFAS 133 to have a material effect on its
financial position or results of operations.
19
<PAGE>
YEAR 2000
The Company recognizes the need to ensure that its operations will
not be adversely impacted by Year 2000 software and hardware failures. The
Company is in process of reviewing its information technology systems and
non-information technology systems with embedded technology applications,
addressing Year 2000 risks, and believes it will resolve any such risks in a
timely manner. During the quarter ended December 31, 1998, the Company began
a process of contacting its critical business partners to reasonably assure
that they are adequately prepared.
The Company believes that its products are fully Year 2000 compliant.
In connection with the recent merger, it is currently developing
plans to convert much of its in-house software. Year 2000 issues will be
considered in connection with this software conversion project. In addition,
the Company has evaluated every piece of equipment in its facilities. All
equipment was found to be compliant.
The Company plans on developing contingency plans to address Year
2000 issues that do arise. As part of its Year 2000 compliance program, the
Company plans to identify alternate vendor sources for vendors who do not
respond to our questionnaires or who appear to not be in compliance. Although
no assurance can be made, given the nature of its major customers, the
Company does not expect that it will encounter significant problems with
respect to customer compliance with Year 2000 issues.
Currently, the Company does not have an estimate of costs associated
with these efforts, but does not believe them to be significant. However, the
Company could be adversely impacted if its suppliers or customers do not make
the necessary changes to their own systems and products successfully and in a
timely manner, or if regional infrastructure failures occur as a consequence
of Year 2000 problems.
The SEC's recent guidance for Year 2000 disclosure also calls on
companies to describe their most likely worst case Year 2000 scenario. The
Company believes that the most likely worst case scenario is that the Company
will have to add additional staff and/or reassign existing staff and/or
acquire additional equipment or software during the time period leading up to
and immediately following December 31, 1999, in order to address Year 2000
issues that unexpectedly arise.
FUTURE OPERATING RESULTS
Photomatrix's business is subject to the following risks and
uncertainties in addition to those described above.
STATUS AS A GOING CONCERN
The Company's independent public accountants have included an explanatory
paragraph in their audit report with respect to substantial doubt concerning
the Company's ability to continue as a going concern. As noted in Note 4 of
the consolidated financial statements, subsequent to March 31, 1999, the
Company sold the product rights and certain assets of its scanner operations,
entered into a sale and leaseback transaction of its building and land,
retired approximately $4 million of bank debt and entered into a new credit
facility arrangement with a lender. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to
meet its obligations on a timely basis, to comply with the terms of its new
financing agreement, to obtain additional financing as may be required, and
ultimately to attain profitability. The Company is concentrating on
increasing sales. However, there can be no assurance as to the Company's
success in this regard.
ABILITY TO SUCCESSFULLY MARKET MANUFACTURING SERVICES
20
<PAGE>
The Company's growth strategy is dependent upon its ability to
market successfully its contract manufacturing and metal enclosed electronic
systems manufacturing services. During the last six months of fiscal year
1999 and the first three months of fiscal year 2000, our ability to do this
has been significantly hampered by the tight cash position brought about by
the operating losses of our scanner operations. With (1) the completion of
the sale of the product rights and assets of the scanner operations, (2) the
sale and leaseback of our Carlsbad facility and (3) the establishment of a
$1.5 million credit facility with a new lender, we are concentrating our
efforts on the marketing and sales of our electronic contract and metal
enclosure manufacturing services. We have limited prior experience in
marketing and manufacturing metal enclosed electronic systems. There is no
assurance that we will be successful in this effort.
COMPETITIVE ENVIRONMENT
There can be no assurance that Photomatrix will be able to overcome
competitive forces and reactions in order to increase revenue in an amount
necessary to return to profitability. The Company's ability to increase its
revenue is partially dependent upon successfully developing additional OEM
relationships and upon expanding its direct sales. The Company's ability to
improve its sales is in part dependent upon its marketing expenditures. The
Company's liquidity constraints may limit these expenditures.
We operate in a highly competitive industry and face competition
from a number of domestic and foreign electronic and electronic enclosure
manufacturing services companies, many with financial and manufacturing
resources greater than the Company's. We also face competition in the form of
current and prospective customers that have the capabilities to develop and
manufacture products internally. In order to maintain a viable alternative,
we must continue to enhance our total engineering and manufacturing
technologies.
REQUIRED REVENUE INCREASES
We have reduced operating costs over the past eighteen months. In
recent months, the Company has consolidated many of its operations, including
moving I-PAC Express and Rep Co., to the Carlsbad, California facility and
moving the Precision Machining operations into the Oceanside, California
facility. At current revenue levels, these cost reductions will not, in and
of themselves, return the Company to profitability. Therefore, we are
currently focused on increasing our revenue through the pursuit of OEM
opportunities in the electronics industry in order to return the Company to
profitable operations. We believe that the recent acquisitions and sale of
scanner operations enhances the likelihood that the Company will return to
profitability. There is no assurance, however, that the Company will be
profitable.
RETENTION OF KEY EMPLOYEES
The Company is highly dependent upon the principal members of its
management staff and key individuals in all areas of the Company. We have
implemented certain programs we believe will help in retaining these key
employees. There can be no assurance that we will be able to retain all key
personnel or attract new qualified personnel on acceptable terms.
RETAINING AVAILABILITY OF LINE OF CREDIT
The Company has not yet achieved a critical-mass level of revenue
sufficient to reach a financial break-even point. As of December 31, 1998,
Photomatrix, Inc. was in default of all loan covenants under a $2.1 million
credit facility with its bank. On February 10, 1999, the bank agreed to
forebear from taking adverse action, provided that Photomatrix found an
alternative lending source or otherwise paid off all debt prior to May 15,
1999. We immediately began discussions with alternative lenders. Proceeds
from the sale of the scanner operations and the building were used to retire
this credit facility. On June 18, 1999, we also entered into a $1.5 million
credit facility with a lending institution. We believe that the new credit
facility will be adequate to finance the Company's growth in the year ending
March 31, 2000.
21
<PAGE>
Furthermore, as discussed above, if the Company cannot increase revenue
levels sufficiently to return to profitability, we could be in default of our
new debt agreements during the current year and possibly lose our line of
credit.
BIDDING LONG TERM AND GOVERNMENT CONTRACTS
The majority of NMT's customers are currently defense contractors.
The majority of contracts with these customers are awarded based on the
lowest bid over a multiple year period of performance. While we believe that
we are able to accurately estimate costs, including increases in labor and
material costs, over the life of these multiple year defense contracts, there
can be no assurance that costs used to estimate the cost of these contracts
when preparing a bid will approximate actual costs over the life of the
contract.
YEAR 2000 CONTINGENCIES
The Company recognizes the need to ensure that its operations will
not be adversely impacted by Year 2000 software and hardware failures. The
Company is addressing Year 2000 risks and believes it will resolve any such
risks in a timely manner. The currently estimated costs associated with these
changes are not material in any year and are not material to the Company's
financial position. However, the Company could be adversely impacted if its
suppliers and customers do not make the necessary changes to their own
systems and products successfully and in a timely manner.
CUSTOMER CONCENTRATION
Many companies in the electronic manufacturing services industry,
including the Company, have a high percentage of their revenues concentrated
in a small customer base. The greatest risk facing these companies is
possible weakening of a major customer or a slow-down in the industry. It may
take several quarters to replace significant customers.
INTERNAL GROWTH
Start-up costs and the management of labor and equipment
efficiencies for new manufacturing services programs and new customers can
have the effect of reducing the Company's gross margins. Due to these and
other factors, gross margins can be negatively impacted early on in the life
cycle of new programs. In addition, labor efficiency and equipment
utilization rates ultimately achieved and maintained by the Company for new
and current programs impact the Company's gross margins.
ACQUISITION STRATEGY
Geographical expansion and growth by acquisition can have an effect
on the Company's operation. The successful operation of an acquired business
will require communication and cooperation among key managers, along with the
transition of customer relationships. There can be no assurance the Company
will successfully manage the integration of new locations or acquired
operations and may experience certain inefficiencies that could negatively
impact the results of operations. Additionally, no assurance can be given
that any past or future acquisition by the Company will enhance the Company's
business.
LEXIA SYSTEMS, INC.
Relative to the discontinuation of Lexia Systems, Inc. ("Lexia"),
and to the protracted nature of the negotiations and the disagreements with
vendors, ICL and Fujitsu, there is no assurance that Lexia and ICL/Fujitsu
will settle their current disagreements.
During September 1998, The Company's wholly owned subsidiary, Lexia
Systems, settled its outstanding dispute with Fujitsu. As a result, the
Company reduced its previously recorded liability of $341,000 to Fujitsu to
$200,000 and began making payments against this liability in November 1998
with the final payment due to Fujitsu in June 1999. Lexia also has recorded
liabilities reflecting accounts
22
<PAGE>
payable and unpaid rent claims of ICL and related entities in the amount of
$457,000 at March 31, 1999. These liabilities are included in net assets of
discontinued operations. Lexia disputes any liability with respect to ICL in
light of its own offsetting claims and defenses. There is no assurance that
Lexia will be successful in prevailing in its position with regard to
outstanding claims previously made by ICL.
Other factors that could adversely affect forward-looking statements
include (1) the Company's ability to maintain and expand its customer base,
(2) gross margin pressures, (3) the effect of start-up costs related to new
facilities, (4) the overall economic conditions affecting the electronics
industry, and (5) other factors and risks detailed herein and in the
Company's other Securities and Exchange Commission filings.
ITEM 7. FINANCIAL STATEMENTS
The financial statements filed herewith are set forth in "F" pages
and are incorporated herein by reference.
The following consolidated financial statements are filed herewith:
Consolidated Balance Sheet as of March 31, 1999
Consolidated Statements of Operations for the years ended March 31, 1999
and 1998
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended March 31, 1999
and 1998
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 19, 1999, KPMG LLP resigned as principal independent
accountant for Photomatrix, Inc. The reports of KPMG LLP on the Company's
consolidated financial statements for the prior two fiscal years did not
contain an adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope, or accounting principles. In
connection with the audits of the Company's financial statements for each of
the two fiscal years ended March 31, 1998, and in the subsequent interim
period through February 19, 1999, there were no disagreements with KPMG LLP
on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not resolved to the
satisfaction of KPMG LLP would have caused KPMG LLP to make reference to the
matter in their report.
On May 26, 1999, we retained BDO Seidman, LLP as our new independent
principal accountant. During the last two fiscal years and subsequent interim
periods of the Company, the Company did not consult BDO Seidman, LLP
regarding (i) either, the application of accounting principles to a specified
transaction either completed or proposed; or the type of audit opinion that
might be rendered on the Company's financial statements, or (ii) any matter
that was the subject of a disagreement (as defined in Item 304(a)(1)(iv) of
Securities and Exchange Commission Regulation S-K) or was a reportable event
(as defined in Item 304(a)(1)(v) of Securities and Exchange Commission
Regulation S-K).
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Mr. PATRICK W. MOORE assumed the duties of Chief Executive Officer and Vice
Chairman of the Company effective as of June 11, 1998. Mr. Moore has been a
Director of the Company since January 1991. Mr. Moore, who has served as the
President of I-PAC since 1990, has significant business experience in both
the private and public sectors. From 1986 to 1990, Mr. Moore served as
President of
23
<PAGE>
Southwest General Industries, a privately held electronic contract
manufacturing company. From 1981 to 1986, Mr. Moore served as President of
the San Diego Private Industry Council and as Executive Director of the San
Diego Regional Employment and Training Consortium. Mr. Moore has served on
the National Commission on Employment Policy, committees of the National
Academy of Science, and as the national president of various trade
organizations based in Washington, D.C. Mr. Moore is 51 years of age.
Mr. SUREN G. DUTIA has been a Director of the Company and has served as the
President and Chief Executive Officer of the Company from January 1989
through June 11, 1998. He was elected to be the Chairman of the Board of the
Company in September 1990. Effective June 11, 1998, Mr. Dutia resigned as
Chief Executive Officer and Chairman of the Board and retained his position
as President of the Company. Mr. Dutia resigned as President on June 21,
1999. Prior to January 1989, Mr. Dutia was associated from 1981 to December
1988 with Dynatech Corporation, a diversified high-technology company
headquartered in Burlington, Massachusetts. From 1986 to 1988, Mr. Dutia was
a Division Manager and Vice President. Mr. Dutia was responsible for several
subsidiaries, including one operating subsidiary for which he acted as
President. He directed turn-around/divestiture activities for Dynatech and
handled investor relations. Mr. Dutia is 56 years of age.
Mr. IRA H. SHARP has been a Director of the Company since January 1990. Mr.
Sharp has been the owner, Chief Executive Officer and General Counsel of
Alderson Reporting Company, Inc., a court-reporting and litigation-support
services firm in Washington, D.C., since 1984. Mr. Sharp also served in the
same capacities for Alderson from 1977 until 1983. During the period of his
absence from Alderson, Mr. Sharp was a lawyer in private practice. Mr. Sharp
is 56 years of age.
Mr. JOHN F. STALEY has been a Director of the Company since January 1989.
From 1972 to the present, Mr. Staley has been a partner in Staley, Jobson and
Wetherell, a law firm Mr. Staley founded, located in Pleasanton, California.
Mr. Staley was also the founder and a director of Lab Sales of California and
P.M. America, which were corporations involved in the manufacture, sale and
distribution of blood-analyzing machines and which were sold to Dynatech
Corporation in 1982. In 1982, Mr. Staley co-founded the Bank of Livermore,
California. Mr. Staley is 55 years of age.
Mr. JAMES P. HILL became a director of the Company effective as of June 11,
1998. For the last five years Mr. Hill has been, one of the managing
directors and president, specializing in bankruptcy law, commercial law and
civil litigation in the San Diego law firm of Sullivan, Hill, Lewin, Rez &
Engel. Mr. Hill was a Director of the San Diego Bankruptcy Forum from 1991
through 1994 and the Chairman of the Commercial Law Section of the San Diego
County Bar Association from 1985 through 1987. Mr. Hill also serves as a
director on the Board of MGM Techrep, Inc. Mr. Hill is 47 years of age.
Mr. MICHAEL J. GENOVESE became a director of the Company effective as of
February 1999. Mr. Genovese is a partner with the law firm of Grant, Hanley &
Genovese, LLP, specializing in the area of business transactional law,
including general business, real estate acquisition and sale, and taxation
law. Mr. Genovese started his professional career with Ernst & Ernst
(currently Ernst & Young, LLP) in 1971 until 1977 when he commenced the
practice of law. Mr. Genovese is a member of the Orange County Bar
Association, the California State Bar Association (Business Law, Real
Property Law and Taxation Sections), and the American Bar Association
(Business law, Real Property, Probate & Trust Law, and Taxation Sections).
Mr. Genovese is 50 years of age.
EXECUTIVE OFFICERS
Set forth below is information about certain executive officers of
Photomatrix and its subsidiaries effective as of August 14, 1999.
MR. ROY L. GAYHART joined Photomatrix as Chief Financial Officer and
Secretary on April 18, 1997. From 1994 to 1997, Mr. Gayhart was President of
Sutherland-Gayhart, Inc., a private investment company that specialized in
small start-up and bridge financing investments. From 1992 to 1994 he served
as Chief
24
<PAGE>
Financial Officer, and later Vice President of International Operations, for
Lottery Enterprises, Inc. Mr. Gayhart has also served as Chief Financial
Officer and Chief Operating Officer for the Shorebreak Division of South
Carolina Tees, Inc. (from 1991 to 1992), Jack's Incorporated (from 1988 to
1991) and Nu-Ear Electronics, Inc. (from 1984 to 1988). Mr. Gayhart
previously was an audit manager with Arthur Andersen LLP. Mr. Gayhart is 49
years of age.
Set forth below is certain information about significant employees of the
Company as of August 14, 1999.
MR. TIM MULLENNIX has been serving in the position of Vice President of Sales
and Marketing since December 1998. From June 1998 to December 1998, Mr.
Mullennix was the Vice President and General Manager of I-PAC. Mr. Mullennix
served as the Vice President of the Advance Group of Companies from 1997 to
1998. From 1994 to 1997, Mr. Mullennix was the President of MGM TechRep.
MR. LARRY NARITELLI joined Photomatrix in March 1999 as Corporate Controller.
From 1996 to 1999, Mr. Naritelli was employed at Dentsply/New Image in
various positions including Accounting Manager and Controller. From 1994 to
1996, Mr. Naritelli was employed at Compton's New Media as Accounting Manager
and later as Manager of General Ledgers.
MR. STEPHAN JONES is the General Manager of I-PAC Manufacturing, Inc. Mr.
Jones joined Photomatrix in June 1998 as Operations Manager. Mr. Jones was an
Operations Consultant from 1997 to 1998 at Ficom and from 1996 to 1997 at
Northstar. From 1993 to 1996, Mr. Jones was employed at Three Eagle as a
Venture Capital Consultant.
MR. JEFFERY TARDIFF joined Photomatrix in December 1998 as the General
Manager of NMT. Prior to joining Photomatrix, Mr. Tardiff was the Quality
Manager at Green International West for approximately six months. From 1997
to 1998, Mr. Tardiff was a Managing Partner at QC & Associates. From 1996 to
1997, Mr. Tardiff was employed at D3 Technologies as Tool Design Manager.
From 1995 to 1996, Mr. Tardiff served as Quality Control Manager at
Spec-Built Systems. From 1992 to 1995, Mr. Tardiff served as a Project
Manager for the Convair Division of General Dynamics.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows, for the most recent three years, the cash
compensation paid by the Company, as well as all other compensation paid or
accrued for those years, to the Executive Officers of the Company as of March
31, 1999. No other executive officers of the Company earned annual salary and
bonus in excess of $100,000 during the fiscal year 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
---------------------------
Annual Compensation Long Term Compensation Awards
------------------- -----------------------------
NAME AND
PRINCIPAL POSITION YEAR SALARY BONUS OTHER SECURITIES UNDERLYING OPTIONS/SARS(#)
- ------------------ ---- ------ ----- ----- -------------------------------------
<S> <C> <C> <C> <C> <C>
William L. Grivas,
Former Chairman (1) (2) 1999 $125,000 $0 $2,800 (3) 153,941
1998 -- -- -- --
1997 -- -- -- --
Patrick W. Moore,
Chief Executive Officer (2) 1999 $125,000 $0 $2,700 (4) 153,941
1998 -- -- -- --
1997 -- -- -- --
25
<PAGE>
Suren G. Dutia,
Former Chairman, CEO & 1999 $140,000 $50,000 $46,500 (5) --
President (8)
1998 $140,000 $0 $11,200 (5) --
1997 $154,400 $30,000 $15,000 (5) --
Roy L. Gayhart,
Chief Financial Officer (6) 1999 $114,000 $25,000 $7,750 (7) 210,000
1998 $97,000 $0 $5,800(7) 40,000
1997 -- -- -- --
</TABLE>
(1) Mr. Grivas resigned as Chairman of the Photomatrix Board of Directors
on January 18, 1999, at which time he also took a paid leave of
absence. Mr. Grivas' leave of absence, as well as his status as an
employee, terminated as of the expiration of the term of his employment
agreement on June 30, 1999.
(2) Mr. Grivas and Mr. Moore were not Executive Officers of the Company
prior to fiscal year 1999.
(3) Includes Company matching contributions to the Photomatrix Savings and
Investment Plan ($0) and medical premiums ($2,800) for 1999.
(4) Includes Company matching contributions to the Photomatrix Savings and
Investment Plan ($0) and medical premiums ($2,700) for 1999.
(5) Includes accrued severance pay ($32,300 in 1999), company matching
contributions to the Photomatrix Savings and Investment Plan ($2,500,
$4,900 and $4,800,) and supplemental life and medical premiums
($11,700, $7,400 and $10,200) for 1999, 1998 and 1997, respectively.
(6) Mr. Gayhart was not an employee or Executive Officer of the Company
prior to fiscal year 1998.
(7) Includes Company matching contributions to the Photomatrix Savings and
Investment Plan ($2,500 and $800) and medical premiums ($5,250 and
$5,000) for 1999 and 1998, respectively.
(8) Mr. Dutia resigned as Chairman and CEO on June 5, 1998, and as
President on June 21, 1999. He remains a director.
EMPLOYMENT AGREEMENTS. Mr. Moore and Mr. Gayhart are employed under
employment agreements that expire on September 30, 1999. Mr. Grivas and Mr.
Dutia were employed under employment agreements that expired on June 30, 1999
and July 31, 1999, respectively. Mr. Grivas resigned as Chairman on January
18, 1999 and his employment terminated on June 30, 1999. Mr. Dutia resigned
as President on June 21, 1999 and his employment terminated on July 31, 1999.
The Company and Mr. Gayhart have agreed that his employment will terminate on
September 30, 1999. If Mr. Moore's, or Mr. Gayhart's employment is terminated
by the Company without cause prior to the end of its term, then he will be
entitled to receive his base salary, stock option vesting and health
insurance benefits for the remainder of the term.
OFFICERS SEVERANCE POLICY. In 1988, the Company's Board of Directors adopted
an Officers' Severance Policy that was modified in November 1990, February
1997 and in April 1999. Under the policy, Mr. Dutia began receiving twelve
weeks' compensation beginning August 1, 1999 and Mr. Gayhart will begin
receiving eight weeks compensation beginning October 1, 1999. In addition,
Mr. Moore is to receive twelve weeks' compensation upon termination of
employment by the Company, in addition to amounts due him under his
employment contract.
STOCK OPTION GRANTS
26
<PAGE>
The following table shows certain information concerning stock options
granted during fiscal year 1999 to the Company's executive officers:
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
-------------------------------------
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term (1)
----------------- -------------------
Percent of
Number of Total
Securities Options/SARs Exercise
Underlying Granted to Or Base
Options/SARs Employees in Price Expiration 5% 10%
Name Granted (#) Fiscal Year ($/Sh) Date ($) ($)
---- ----------- ----------- ------ ---- --- ---
<S> <C> <C> <C> <C> <C> <C>
Patrick W. Moore 153,941 19.0% $0.4875 June 4, 2008 $19,000 $75,000
William L. Grivas 153,941 19.0% $0.4875 June 4, 2008 $19,000 $75,000
Roy Gayhart 200,000 24.7% $0.625 October 15, 2008 -- $70,000
Roy Gayhart 10,000 1.2% $0.81 April 18, 2008 -- $ 2,000
</TABLE>
(1) The potential realizable value is calculated pursuant to SEC
regulations by assuming the indicated annual rates of stock price
appreciation for the option term. Actual realized value will depend on
the actual annual rate of stock price appreciation for the option term.
This calculation assumes that market price of the stock as of June 12,
1999 of $0.375 would appreciate to $0.6108 and $0.97265, at 5% and 10%
annual rates of price appreciation respectively.
TEN YEAR OPTION RE-PRICING TABLE
In July 1997 the Compensation Committee offered to re-price a
portion of the option shares previously granted to Mr. Dutia which had an
original exercise price in excess of the market value of the Company's common
stock at that time. This offer was made in conjunction with identical offers
to most employees. The following table sets forth the specified information
concerning all options re-priced for all executive officers of the Company
for the period August 1987 (initial public offering) through June 1999.
<TABLE>
<CAPTION>
Length of
Number of Original
Shares Market Price Option Term
Underlying of Stock at Exercise Remaining at
Options Time of Price at Time New Exercise Date of
Name Date Re-priced Re-pricing of Re-pricing Price Re-pricing
---- ---- --------- ---------- ------------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
S. Dutia, CEO November 1990 200,000 $0.18 $3.75 $0.18 8 years
S. Dutia, CEO June 1995 25,000 $1.25 $4.13 $1.69 9 years
S. Dutia, CEO November 1995 166,667 $0.88 $1.31-$2.91 $0.88 6-9 years
S. Dutia, CEO July 1997 166,667 $0.37 $.88 $0.37 4-7 years
27
<PAGE>
B. Myers, Former CFO November 1995 100,000 $0.18 $1.50-$3.48 $0.18 8 years
B. Myers, Former CFO June 1995 16,667 $1.25 $4.13 $1.69 9 years
B. Myers, Former CFO November 1995 116,667 $0.88 $1.31-$2.91 $0.88 6-9 years
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of June 12, 1999, Aundir Trust Company Ltd., James P. Hill,
William L. Grivas and Patrick W. Moore, were the only shareholders known by
the Company to be the beneficial owner of more than five percent of its
outstanding Common Stock.
As of that date, Aundir Trust Company, Ltd. was the beneficial owner
of 1,054,002 shares, representing approximately 10.5 percent of the Company's
outstanding stock. These shares are beneficially owned by Aundir Trust
Company, Ltd. as trustee of the Bulldog Trust and the Pitkin Trust,
irrevocable trusts established by Sam Wyly and Charles J. Wyly, Jr.,
respectively. The record holders are Tensas, Ltd. and Roaring Creek, Ltd.,
which are corporations wholly owned by such trusts. Sam Wyly and Charles J.
Wyly, Jr. disclaim beneficial ownership of these shares. The address of
Aundir Trust Company is Castle Town, Isle of Man, British Isles.
The following table sets forth certain information regarding the
ownership of Photomatrix common stock by Directors and Executive Officers:
<TABLE>
<CAPTION>
Shares of Common Stock Percent of Shares of
Beneficially Owned Common Stock Outstanding
Name of Beneficial Owner or Group as of July 12, 1999 (1) as of July 12, 1999 (1)
- --------------------------------- ----------------------- -----------------------
<S> <C> <C>
Patrick W. Moore, Chief Executive Officer 1,826,501 (2) 18.21%
William L. Grivas, Former Chairman (3) 1,762,998 (4) 17.58%
Suren G. Dutia, Director 374,366 (5) 3.73%
James P. Hill, Director 1,580,176 (6) 15.74%
John F. Staley, Director 140,033 (7) 1.40%
Ira H. Sharp, Director 81,667 (8) *
Michael Genovese, Director -- *
J. Larry Smart, Former Director (9) 10,000 (10) *
Roy L. Gayhart, Chief Financial Officer, Secretary 78,000 (11) *
All directors and executive officers as a group 5,853,741 59.04%
</TABLE>
(1) Includes and reflects the ownership by the named director or officer of
shares of Common Stock subject to options exercisable within 60 days of
July 12, 1999.
(2) Includes options to purchase 227,274 shares.
28
<PAGE>
(3) Mr. Grivas resigned as director and chairman of the Photomatrix Board of
Directors on January 18, 1999.
(4) Includes 1,720,998 shares and options for shares owned directly by William
L. Grivas and 42,000 shares owned by family members.
(5) Includes options to purchase 266,667 shares.
(6) Includes 168,824 shares owned by Loma Services Corporation, of which Mr.
Hill's wife is the sole shareholder, 1,000 shares owned by Loma Services
Money Purchase Pension Plan in which both Mr. Hill and his wife are
holders of beneficial interest and 1,410,352 shares owned by Mr. Hill
as Trustee of the Hill Family Trust.
(7) Includes options to purchase 80,000 shares.
(8) Includes options to purchase 76,667 shares.
(9) Mr. Smart resigned as Director effective December 18, 1998.
(10) Includes options to purchase 10,000 shares.
(11) Includes options to purchase 78,000 shares.
(*) Less than 1%
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, officers and persons who own more than ten percent of the
Company's common stock, to file reports ownership and changes in ownership of
securities with the Securities and Exchange Commission and to furnish to the
Company copies of all Section 16(a) forms they file. During the fiscal year
ended March 31, 1999, certain of the directors and officers of the company
did not file Form 3 and 4 reports specified under Section 16(a) of the
Securities Exchange Act of 1934. On January 21, 1999, Michael J. Genovese was
elected a director of the Company and did not timely file a Form 3. On
December 11, 1998, the Company's Board voted to grant each of directors Hill,
Sharp, and Staley options to purchase 25,000 shares of the Company's Common
Stock as part of their compensation as Directors. The Company has not yet
issued certificates for these options, and these directors did not timely
file a Form 4 reflecting this change in beneficial ownership. On October 16,
1998, Roy L. Gayhart, the Chief Financial Officer of the Company, was granted
options to purchase 200,000 shares of the Company's Common Stock. The
Company has not yet issued a certificate for these options, and Mr. Gayhart
did not timely file a Form 4 reflecting this change in beneficial ownership.
On July 20, 1998, Mr. Larry Smart was elected a director of the Company and
did not timely file a Form 3 reflecting that status. On May 12, 1998, the
pension plan of a company affiliated with Mr. Hill purchased 1,000 shares of
the Company's Common Stock on the open market and Mr. Hill did not timely
file a Form 4 reflecting this change in beneficial ownership. On October 21,
November 1, December 1, and December 11, 1998, Mr. Smart was granted options
to purchase 5,000, 5,000, 5,000 and 25,000 shares of the Company's Common
Stock, respectively. Mr. Smart resigned as a director on December 18, 1998,
and, as a consequence of that resignation, the options granted on December 1,
1998 and December 11, 1998 were canceled. The Company has not yet issued
certificates for the remaining outstanding options, and these changes in
beneficial ownership were not timely reported by Mr. Smart on Form 4.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the acquisition of PMX, Photomatrix restructured
outstanding indebtedness to members and affiliates of the Wyly family into
non-negotiable seven-year term notes bearing interest at the rate of eight
percent per annum. The total principal amount of the notes payable to members
of the Wyly family and their affiliates as of March 31, 1999 was $313,000.
The former shareholders of I-PAC currently own interests in several
entities with which I-PAC has done business. During the year ended March 31,
1999, the Company recorded a write-off of approximately $25,000 of inventory
specifically manufactured for companies which are owned at least in part by
or otherwise associated with the brother of William L. Grivas, who was the
Chairman of Photomatrix through January 18, 1999 and who is a major
shareholder of the Company. In addition, the Company also recorded
approximately $20,000 of additional allowance for doubtful accounts for
uncollectible related party accounts receivable from such companies and from
a company owned by Mr. Grivas, during the quarter ended December 31, 1998.
The inventory and receivables were acquired by the Company as a result of
its acquisition of I-PAC. The Company has therefore recorded the additional
bad debt reserves and inventory write-off as an increase to goodwill related
to the purchase of I-PAC.
During the year ended March 31, 1999, the Company paid approximately
$127,000 to Evergreen Investments ("Evergreen"), a company owned by Mr.
Grivas and Patrick W. Moore, the Chief Executive Officer and a major
shareholder. $50,000 of this amount was intended to cover personal tax
liabilities of the former I-PAC shareholders arising from pre-merger S Corp.
allocations for calendar year 1997, pursuant to
29
<PAGE>
the Plan and Agreement of Merger and Reorganization between the Company and
I-PAC, approximately $34,000 was for pre-merger management fees, and
approximately $43,000 was for pre-acquisition commission payments due MGM
under the acquisition agreement entered in July 1998. In addition,
approximately $31,000 was paid to James P. Hill, a director and major
shareholder, to cover personal tax liabilities of the former I-PAC
shareholders arising from pre-merger S Corp allocations for calendar year
1997, pursuant to the Plan and Agreement of Merger and Reorganization between
the Company and I-PAC. Approximately $27,000 was paid to MGM for earn-out
payments due MGM under the acquisition agreement entered in July 1998. The
Company also recorded sales of approximately $7,000 to MGS Interconnect, a
company owned by Mr. Moore and Mr. Grivas during the current period. This
amount has been fully reserved as uncollectible as of March 31, 1999. In
addition, the Company paid approximately $139,000 to Sullivan, Hill, Lewin,
Rez and Engel ("SHLRE"), a law firm in which Mr. Hill, is a partner. At March
31, 1999, the Company had approximately $3,000 in earn-out payments due to
MGM and approximately $7,000 due from MGS Interconnect. In addition, the
Company owed SHLRE approximately $44,000 at March 31, 1999. The Audit
Committee approved all items in excess of $10,000 disclosed in this paragraph.
As mentioned in Note 7 to the consolidated financial statements,
certain shareholders of the Company have guaranteed approximately $2,023,000
of the Company's debt at March 31, 1999. This debt was retired in June 1999.
Prior to the merger, I-PAC guaranteed approximately $113,000 of debt of the
same shareholders. This guarantee continued after the merger, and remains in
effect.
Claudia Fullerton, who is the wife of Patrick W. Moore, was employed by
the Company as its Director of Administration at an annual salary of $54,000
from June 11, 1998 until April 30, 1999. Ms. Fullerton is receiving severance
pay for the period from May 1, 1999 through August 29, 1999, under terms of a
pre-merger employment agreement.
William L. Grivas, Jr., son of William L. Grivas Sr., was employed by
the Company as a Program Manager at an annual salary of $30,000 from June 11,
1998 through August 20, 1999.
On July 20, 1999, the Company entered into an independent contracting
agreement with William L. Grivas, Sr., a major shareholder, whereby Mr.
Grivas would represent the Company in connection with selling or bartering
certain inventory and negotiating settlements of certain of the Company's
liabilities. The agreement, which expires on or before September 20, 1999,
requires the Company to pay Mr. Grivas $2,884 per week. This agreement was
approved by the Board of Directors.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(27) EXHIBITS
The exhibits listed under Item 13(a) are filed as part of this Annual Report
on Form 10-KSB.
<TABLE>
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation (ix)
3.3 Bylaws (ix)
3.3.1 Amendment to Bylaws dated June 5, 1998 (xii)
10.2 Settlement Agreement dated January 11, 1993 between Photomatrix Corporation (iv)
and Scan-Graphics, Inc.
30
<PAGE>
10.4 Lease Agreement between Photomatrix and EVB Limited Partnership-I dated (iv)
December 17, 1987
10.5 Lease Agreement between Photomatrix Limited and Bermer Limited dated May 31, (iv)
1989
10.6 Promissory Notes dated April 30, 1993 in the aggregate principal (iv)
amount of $776,607 payable to the following members of the Wyly
family and affiliates: Sam Wyly, Charles Wyly, Jr., Evan Wyly,
Donald Miller, First Dallas International, Ltd., and Premier
Partners
10.7 Subcontract dated March 31, 1991 between PRC, Inc. and Photomatrix (iv)
10.8 1992 Xscribe Stock Option Plan and Sample Agreement (iv)
10.11 Executive Employment Agreement between the Company and Suren G. Dutia dated (i)
December 20, 1988
10.11.1 Amendment to Executive Employment Agreement between the Company and Suren G. (xii)
Dutia
10.24 Description of executive bonus arrangements and executive severance plan (iv)
10.25 1994 Xscribe Stock Option Plan and Sample Agreements (vii)
10.30 Security and Loan Agreement between Imperial Bank and Xscribe Corporation (ix)
dated June 17, 1996 and related documents
10.30.1 Amendment No. 1 to Security and Loan Agreement with Imperial Bank (xii)
10.30.2 Amendment No. 2 to Security and Loan Agreement with Imperial Bank (xii)
10.30.3 Amendment No. 3 to Security and Loan Agreement with Imperial Bank (xii)
10.31 OEM Purchase Agreement for Photomatrix Scanners dated February 8, 1996 (ix)
between Bell & Howell Limited and Photomatrix Corporation (Non-public
information has been filed with the Securities and Exchange
Commission)
10.32 OEM Purchase Agreement for Photomatrix Scanners dated June 12, 1996 between (ix)
Bell & Howell Operating Company and Photomatrix Corporation (Non-public
information has been filed with the Securities and Exchange Commission)
10.33 Facilities Lease Agreement between Photomatrix and Manufacturers Life dated (x)
November 7, 1996
10.33.1 Consent by Lessor to Assignment of Facilities Lease Agreement (xii)
10.35 Business Agreement with Bell & Howell dated December 29, 1997 (xii)
10.35.1 Addendum to Business Agreement with Bell & Howell dated January 5, 1998 (xii)
10.35.2 Amendment to Business Agreement with Bell & Howell dated June 30, 1998 (xiii)
10.35.3 Settlement Agreement with Bell & Howell dated March 24, 1999
31
<PAGE>
10.36 Agreement and Plan of Reorganization and Merger, dated as of March 16, (xi)
1998, by and among Photomatrix, Inc., Photomatrix Acquisition Corp., and
I-PAC Manufacturing, Inc.
10.37 Executive Employment Agreement, dated as of June 5, 1998, between the Company (xii)
and Patrick W. Moore
10.38 Executive Employment Agreement dated as of June 5, 1998, between the Company (xii)
and William L. Grivas
10.39 1998 Photomatrix, Inc. Stock Option Plan and Sample Agreements (xi)
10.40 Lease Assignment and Assumption Agreement between Photomatrix Imaging Corp. (xiii)
and Cryogen, Inc.
10.41 Management services Agreement with Dr. John Faessel (xiii)
10.42 Promissory Note with Imperial Bank (xiii)
10.43 Credit Agreement with Imperial Bank (xiii)
10.44 Stock Option Agreement-Patrick W. Moore (xiv)
10.45 Stock Option Agreement-William L. Grivas, Sr. (xiv)
10.46 Employee Stock Purchase Plan (xiv)
10.47 MGM TechRep Asset Transfer Agreement (xiv)
10.48 Asset Purchase Agreement-National Metal Technologies (xv)
10.49 Asset Purchase Agreement-Amcraft (xv)
10.50 John Deere equipment lease (xv)
10.51 Agreement between Photomatrix and all affiliates and William L. Grivas, Sr. (xv)
10.52 KPMG letter to SEC regarding resignation (xvi)
10.53 Purchase Agreement with Cabot Industrial Properties, L.P.
10.54 Lease Agreement with Cabot Industrial Properties, L.P.
10.55 Asset Purchase Agreement with Scan-Optics, Inc.
10.56 Transition Agreement with Scan-Optics, Inc.
10.57 Loan and Security Agreement with Celtic Capital
21.1 Subsidiaries of the registrant as of March 31, 1999:
32
<PAGE>
Photomatrix Imaging, Inc., Nevada
I-PAC Manufacturing, Inc., California
National Metal Technologies, Inc., California
I-PAC Precision Machining, California
Photomatrix Acquisition Inc., California
PHRX Rep Co., California
I-PAC Express Assembly, Inc.
Lexia Systems, Inc., California
Xscribe Imaging, Inc., California
Xscribe Legal Systems, Inc. California
23.1 Independent Auditors' Consent from BDO Seidman LLP
23.2 Independent Auditors' Consent from KPMG LLP
24.1 Power of Attorney (see signature pages)
(d) Schedule
27.1 Financial Data Schedule
</TABLE>
(i) Incorporated by reference to exhibits filed with the
Company's Combined Annual Report to Shareholders and Annual Report on Form
10-K for the fiscal year ended March 31, 1991, filed with the Securities and
Exchange Commission on June 26, 1991.
(ii) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1992, filed with the Securities and Exchange Commission on June 26, 1992.
(iii) Incorporated by reference to exhibits filed with the
Company's Post Effective Amendment No. 2 to its Registration Statement on
Form S-2 (No. 33-43036) filed with the Securities and Exchange Commission on
June 14, 1993.
(iv) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1993, filed with the Securities and Exchange Commission on June 29, 1993.
(v) Incorporated by reference to exhibits filed with the
Company's Current Report on Form 8-K dated October 25, 1993, filed with the
Securities and Exchange Commission on November 5, 1993.
(vi) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1994, filed with the Securities and Exchange Commission on June 29, 1994.
(vii) Incorporated by reference to exhibits filed with Company's
Registration Statement on Form S-8 with the Securities and Exchange
Commission on August 18, 1995.
(viii) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1995, filed with the Securities and Exchange Commission on June 29, 1995.
(ix) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1996, filed with the Securities and Exchange Commission on June 25, 1996.
33
<PAGE>
(x) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31,
1997, filed with the Securities and Exchange Commission on June 30, 1997.
(xi) Incorporated by reference to exhibits to definitive proxy
materials filed on Schedule 14A on May 13, 1998.
(xii) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31,
1998, filed with the Securities and Exchange Commission on June 29, 1998.
(xiii) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1998, filed with the Securities and Exchange Commission on August 14, 1998.
(xiv) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-QSB for the quarter ended September 30,
1998, filed with the Securities and Exchange Commission on November 9, 1998.
(xv) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-QSB for the quarter ended December 31,
1998, filed with the Securities and Exchange Commission on February 16, 1999.
(xvi) Incorporated by reference to exhibits filed with the
Company's Report on Form 8-K filed with the Securities and Exchange
Commission on February 26, 1999.
b. REPORTS ON FORM 8-K.
The Company filed a report on Form 8-K dated February 26, 1999 regarding the
resignation of its principal independent accountant, KPMG LLP.
The Company also filed a report on Form 8-K dated June 2, 1999 regarding the
appointment of BDO Seidman, LLP as its principal independent accountant.
34
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Photomatrix, Inc.
We have audited the accompanying consolidated balance sheet of Photomatrix,
Inc. and subsidiaries as of March 31, 1999, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Photomatrix, Inc. and subsidiaries as of March 31, 1999, and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company has suffered
recurring losses from operations and has a working capital deficiency, the
effects of which raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
Costa Mesa, California
July 16, 1999
F-1
<PAGE>
INDEPENDENT AUDITORS REPORT
The Board of Directors and
Shareholders of Photomatrix, Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of Photomatrix, Inc. and subsidiaries
for the year ended March 31, 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
As more fully described in Note 4 to the consolidated financial statements,
in March 1999, the Company approved a plan to sell its document scanner
operations. Operations and cash flows for the year ended March 31, 1998 have
been reclassified to discontinued operations in the accompanying consolidated
financial statements.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Photomatrix, Inc. and subsidiaries for the year ended March 31,
1998, in conformity with generally accepted accounting principles.
KPMG LLP
San Diego, California
May 29, 1998, except as to Note 4 to the consolidated financial statements,
as to which the date is September 3, 1999.
F-2
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
<TABLE>
<CAPTION>
ASSETS 1999
--------------
<S> <C>
Current assets:
Cash $42,000
Accounts receivable, net of allowance
of $292,000 1,448,000
Inventories 725,000
Land and building held for sale (Note 11) 2,674,000
Net assets of discontinued operations 386,000
Prepaid expenses and other 8,000
--------------
Total current assets 5,283,000
--------------
Property and equipment, at cost 2,141,000
Less accumulated depreciation and amortization (223,000)
--------------
Net property and equipment 1,918,000
--------------
Goodwill, net of accumulated amortization of
$96,000 (Notes 1, 3 and 4) 2,088,000
Other assets 65,000
--------------
$9,354,000
--------------
--------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,724,000
Accrued liabilities 745,000
Credit facility (Note 8) 2,122,000
Mortgage on land and building held for sale 2,023,000
Current maturities of long-term debt (Note 8) 158,000
--------------
Total current liabilities 6,772,000
--------------
Long-term debt 1,009,000
Commitments and contingencies (Note 11)
Shareholders' equity (Note 6):
Preferred stock, no par value; 3,173,000 shares authorized,
no shares issued and outstanding -
Common stock, no par value; 30 million shares
authorized, 9,914,000 shares issued and outstanding 21,376,000
Additional paid in capital 53,000
Accumulated deficit (19,856,000)
--------------
Total shareholders' equity 1,573,000
--------------
$9,354,000
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------------- -------------
<S> <C> <C>
Revenues $ 5,009,000 $ -
Cost of revenues 4,269,000 -
--------------- -------------
Gross profit 740,000 -
Selling, general and administrative expenses 3,154,000 -
--------------- -------------
Operating loss (2,414,000) -
Other income (expense), net:
Interest expense (292,000) -
Other, net 12,000 -
--------------- -------------
Net other income (expense) (280,000) -
--------------- -------------
Loss from continuing operations before income taxes (2,694,000) -
Provision for income taxes (Note 9) - -
--------------- -------------
Loss from continuing operations (2,694,000) -
Loss from discontinued operations, net of income
taxes (Note 4) (646,000) (1,482,000)
Loss on disposal of discontinued operation,
including provision (1,036,000) for
phase-out period of $ 270,000, net of income
taxes (Note 4) (1,036,000) -
--------------- -------------
Net loss $ (4,376,000) $ (1,482,000)
--------------- -------------
Other comprehensive income:
Foreign currency translation adjustment - 7,000
Total comprehensive loss $ (4,376,000) $ (1,475,000)
--------------- -------------
--------------- -------------
Basic and diluted net loss per share:
Continuing operations $ (0.30) $ (0.00)
Discontinued operations $ (0.19) $ ( 0.29)
--------------- -------------
Net loss $ (0.49) $ (0.29)
--------------- -------------
--------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999AND 1998
<TABLE>
<CAPTION>
Common Accumulated
Stock Additional other
--------------------------- Paid in Accumulated comprehensive
Shares Amount Capital Deficit income Total
------------- ------------- --------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1997 5,083,000 $19,351,000 $ -- $ (13,998,000) $ 146,000 $ 5,499,000
Change in foreign
translation -- -- -- -- 7,000 7,000
Net loss -- -- -- (1,482,000) -- (1,482,000)
------------- ------------- --------------- --------------- ---------------- -------------
Balance, March 31, 1998 5,083,000 $19,351,000 -- $ (15,480,000) $ 153,000 $4,024,000
Issuance of shares
(Note 3) -
I-PAC acquisition 4,848,000 1,939,000 -- -- -- 1,939,000
NMT asset acquisition 100,000 200,000 -- -- -- 200,000
Repurchase of shares
(Notes 6 & 10) (117,000) (114,000) -- -- -- (114,000)
Compensation expense -- -- 53,000 -- -- 53,000
Elimination of foreign
currency translation in
connection with
discontinued operations -- -- -- (153,000) (153,000)
Net loss -- -- -- (4,376,000) -- (4,376,000)
------------- ------------- --------------- --------------- ---------------- -------------
Balance, March 31, 1999 9,914,000 $21,376,000 $ 53,000 $ (19,856,000) -- $ 1,573,000
------------- ------------- --------------- --------------- ---------------- -------------
------------- ------------- --------------- --------------- ---------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net Loss: $ (4,376,000) $ (1,482,000)
Net loss from discontinued operations (1,682,000) (1,482,000)
-------------- --------------
Net loss from continuing operations (2,694,000) --
Adjustments:
Depreciation and amortization 281,000 --
Amortization of goodwill 96,000 --
Provision for doubtful accounts 292,000 --
Provision for inventory 686,000 --
Options issued for compensation 53,000 --
Changes in assets and liabilities, net of assets
acquired:
Accounts receivable (949,000) --
Inventories (1,198,000) --
Prepaid expenses and current assets 74,000 --
Other assets (31,000) --
Accounts payable 787,000 --
Accrued liabilities 191,000 --
-------------- --------------
Cash used in continuing operations (2,412,000) --
Cash provided by discontinued operations 676,000 414,000
-------------- --------------
Cash provided by (used in) operations (1,736,000) 414,000
-------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (456,000) --
Cash paid for acquisition of treasury stock (114,000) --
Costs of acquisitions (150,000) --
Cash provided by discontinued investing activities -- 275,000
-------------- --------------
Cash provided by (used in) investing activities (720,000) 275,000
-------------- --------------
Cash flows from financing activities:
Borrowings under credit facility and long-term debt 2,158,000 --
Payments of credit facility and long-term debt (977,000) --
Payments of mortgage on land and building held for
sale (25,000) --
Cash used by discontinued financing activities -- (166,000)
-------------- --------------
Cash provided by financing activities 1,156,000 (166,000)
-------------- --------------
Effects of exchange rate of discontinued operation on
cash -- 7,000
Increase (decrease) in cash $ (1,300,000) $ 530,000
Cash at beginning of year 1,342,000 812,000
-------------- --------------
Cash at end of year $ 42,000 $ 1,342,000
-------------- --------------
-------------- --------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 292,000 $ --
Cash paid for income taxes -- --
Supplemental disclosure of non-cash investing and financing
activities:
Fair value of assets acquired $ 7,861,000 $ --
Cash paid for acquisition $ 150,000 $ --
Liabilities assumed $ 5,572,000 $ --
Common stock issued $ 2,139,000 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
PHOTOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Photomatrix, Inc. and its wholly owned subsidiaries (the consolidated entity
referred to as the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
BUSINESS
The Company is a value-added engineering, design and manufacturing company,
specializing in the manufacture of enclosed electronic systems and assemblies.
GOODWILL
Goodwill represents the excess of purchase price over the fair value of the
net assets acquired through business combinations accounted for as purchases
and is amortized on a straight-line basis over its estimated useful life of
twenty years. During 1999, the Company wrote-down the value of goodwill by
approximately $911,000 (see Note 4).
FOREIGN CURRENCY TRANSLATION
The accounts of the Company's discontinued foreign subsidiary are measured
using local currency as the functional currency; assets and liabilities are
translated into U.S. dollars at period-end exchange rates, and income and
expense accounts are translated at average monthly exchange rates. Net gains
or losses resulting from such translation are excluded from operations and
accumulated in a separate component of shareholders' equity ("accumulated
other comprehensive income") through the date of the Company's decision to
dispose of Photomatrix, Ltd. (see Note 4). The balance in the accumulated
other comprehensive income account as of the disposal date has been written
off and included in loss on disposal of discontinued operations in the
accompanying statement of operations for the year ended March 31, 1999.
INVENTORIES
Inventories include material, labor and overhead valued at the lower of cost
(first-in, first-out) or market, and consist of the following as of March 31,
1999:
<TABLE>
<S> <C>
Raw materials $ 379,000
Work in process 240,000
Finished goods 106,000
------------
$ 725,000
------------
------------
</TABLE>
REVENUE RECOGNITION
Revenues are recorded at the time of shipment of products or performance of
services.
PROPERTY AND EQUIPMENT
F-7
<PAGE>
Substantially all property and equipment is manufacturing equipment and
personal computers used in the Company's assembly, product development, sales
and administrative activities. These items are stated at cost. Depreciation
is provided over the estimated useful lives, typically three-to-ten years,
using the straight-line method.
LONG-LIVED ASSETS
The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
effective April 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax basis and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are computed using enacted tax rates expected to apply to taxable
income in the years in which temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities from
a change in tax rates is recognized in income in the period that includes the
enactment date. The Company provides a valuation allowance for certain
deferred tax assets, if it is more likely than not that the Company will not
realize tax assets through future operations.
BASIC AND DILUTED LOSS PER SHARE
In December 1997, the Company adopted the provisions of SFAS No. 128,
"Earnings per Share." SFAS No. 128 supersedes APB No. 15 and replaces
"primary" and "fully diluted" earnings per share ("EPS") under Accounting
Principles Board ("APB") Opinion No. 15 with "basic" and "diluted" EPS.
Unlike primary EPS, basic EPS excludes the dilutive effects of options,
warrants and other convertible securities. The weighted average number of
common shares outstanding used in computing basic EPS was 8,963,000, and
5,083,000 in fiscal years 1999 and 1998, respectively. Diluted EPS reflects
the potential dilution of securities that could share in the earnings of the
Company, similar to fully diluted EPS. Options and warrants representing
approximately 1,564,000 and 886,000 shares were excluded from the
computations of net loss per common share for the years ended March 31, 1999
and 1998, respectively, as their effect is antidilutive.
STOCK OPTIONS
Prior to April 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price. On April 1, 1996,
the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
which permits entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant. Alternatively,
SFAS No. 123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net loss and pro forma loss per share
disclosures for employee stock option grants made in fiscal 1996 and future
years as if the fair-value based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123.
F-8
<PAGE>
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable.
Receivables are primarily from large manufacturers for whom the Company
performs manufacturing services. The Company performs ongoing credit
evaluations of its customers' financial conditions. Four customers accounted
for 18.8%, 14.2%, 13.8% and 11.3%, respectively, of the Company's total
revenue for fiscal year 1999. No other customer accounted for more than 10%
of the Company's total revenue or accounts receivable during the years
presented.
PRODUCT WARRANTY COSTS
The Company provides product warranties covering products it manufactures for
its customers as part of its standard sales agreement. The warranties cover
the repair costs associated with hardware defects and range in term from 90
days to one year from date of sale. The Company accrues for warranty costs at
the time of sale.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires that the fair values be disclosed
for the Company's financial instruments. The carrying amount of cash,
accounts receivable, accounts payable, accrued liabilities, and customer
deposits approximate their fair values because of the short-term nature of
these instruments. The carrying amounts reported for notes payable and other
non-current liabilities approximate fair value because the underlying
instruments bear interest at rates that are comparable to rates available to
the Company for similar debt instruments.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
COMPREHENSIVE INCOME (LOSS)
Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130).
SFAS 130 established new rules for the reporting and display of comprehensive
income (loss) and its components in a full set of general-purpose financial
statements. All prior period data presented has been restated to conform to
the provisions of SFAS 130.
REPORTABLE SEGMENTS
Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information" (SFAS 131). SFAS 131 requires public business
enterprises to report certain information about operating segments in
complete sets of financial statements and in condensed financial statements
of interim periods issued to shareholders. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. All prior period data presented has been restated to conform to
the provisions of SFAS 131. The Company has determined that it operates two
reportable segments: electronic services and metal services.
F-9
<PAGE>
NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Financial Instruments and Hedging Activities" (SFAS 133) issued by
the FASB is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. SFAS 133 provides a comprehensive and consistent standard for
the recognition and measurement of derivatives and hedging activities. The
Company does not expect adoption of SFAS 133 to have a material effect on its
financial position or results of operations.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. This contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. As shown in the consolidated financial statements, the
Company has suffered recurring losses from operations and has a working
capital deficiency, the effects of which, raise substantial doubt about the
Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating
to the recoverability of assets and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern. As
described in Note 8, as of March 31, 1999, the Company was not in compliance
with its covenants under a $2.1 million credit facility. The bank agreed to
forebear from taking adverse action, subject to the Company fulfilling
certain reporting and other conditions, including entering into discussions
with alternative lenders to replace the bank's credit facilities. Accordingly
the amount due under the term loan portion of this credit facility has been
reclassified to a current liability as of March 31, 1999. In June 1999, the
Company retired all outstanding debt with its bank and entered into a new
$1,500,000 credit facility with another financial institution. The new line
of credit accrues interest on outstanding borrowings at the bank's prime rate
plus 4 % per annum and carries a minimum monthly payment of $6,000.
As described in Note 11, in June 1999, the Company entered into a
sale-and-leaseback transaction of its Carlsbad facility for $2,925,000. Under
the terms of the Purchase and Sale Agreement between Cabot Industrial
Properties, L. P. ("Cabot") and the Company, Cabot acquired all buildings,
building improvements and land located at 1958 Kellogg Avenue, Carlsbad,
California. The proceeds from the sale were used to retire mortgage debt and
pay down a portion of the outstanding balance under the Company's line of
credit. In a separate lease agreement, the Company agreed to lease the
Carlsbad facility under a fifteen-year lease with Cabot, starting out at a
monthly rental of approximately $25,000.
As described in Note 4, in June 1999, the Company completed a transaction
whereby it sold product rights and certain assets of its document scanner
operations. Under the terms of the Agreement, ScanOptics paid the Company
approximately $1,890,000 in cash and agreed to pay an additional $210,000 to
acquire all receivables, inventory and certain equipment, as well as assume
nearly $2 million of current and future liabilities of the scanner
operations, which in management's opinion, has been the source of its
recurring operating losses over the past several years. Proceeds from this
sale were used to reduce short-term debt and provide working capital to the
Company.
The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely basis,
to comply with the terms of its new financing agreement, to obtain additional
financing as may be required, and ultimately to attain profitability. The
Company is concentrating on increasing sales. However, there can be no
assurance as to the Company's success in this regard.
3. ACQUISITIONS
F-10
<PAGE>
I-PAC MANUFACTURING, INC.
On March 16, 1998, the Company entered into an Agreement and Plan of Merger
and Reorganization ("Agreement" or "Merger") with I-PAC Manufacturing, Inc.
("I-PAC"). The Agreement was approved by the shareholders of the Company on
June 5, 1998, and the transaction closed on June 11, 1998. As a result of the
Merger, all of the 8,500 outstanding shares of I-PAC common stock were
exchanged for 4,848,000 shares of the Company's common stock and possibly an
additional 4,652,000 shares of the Company's common stock in the event that
I-PAC achieved certain performance milestones during a twelve month period
commencing on July 1, 1998 or outstanding options to purchase the Company's
common stock are exercised.
If any performance milestones are met, the issuance of additional shares
awarded to I-PAC shareholders under the earn-out formula and/or in connection
with the exercise of Photomatrix outstanding options and warrants will be
treated as additional costs of the acquired enterprise and amortized
accordingly over the benefit period. The Merger was accounted for as a
purchase of I-PAC by the Company for accounting and financial reporting
purposes. Under the purchase method of accounting, upon closing of the
Merger, I-PAC's future results of operations were combined with those of the
Company, and I-PAC's assets and liabilities were recorded on the Company's
books at their respective fair values. The purchase price, amounting to
$2,191,000, was comprised of the value of the stock plus acquisition costs
and was allocated among the assets acquired and the liabilities assumed. The
$2,200,000 excess of the purchase price over the fair value of I-PAC's net
assets is being amortized over twenty years. As of July 16, 1999, the Company
has not made a determination as to whether any performance milestones have
been achieved.
If the I-PAC transaction had been consummated at the beginning of fiscal year
1998, the Company's consolidated revenues, income (loss) and income (loss)
per share from continuing operations for the year ended March 31, 1999 and
1998 would have been:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues $ 5,508,000 $5,442,000
Income (Loss) $(4,786,000) $ 436,000
Basic EPS $ (0.53) $ 0.05
</TABLE>
These pro forma results may not be indicative of the results of operations
that would have been reported if the transaction had occurred as of these
dates, or which may be reported in the future.
NATIONAL METAL TECHNOLOGIES, INC.
On December 18, 1998, the Company entered into an Agreement to acquire
certain assets and the business operations of Greene International West, Inc.
("GIW"), a metal stamping company located in Oceanside, California. GIW
recently emerged from a Chapter 11 Federal Bankruptcy proceeding, which was
canceled through the infusion of new capital funds from its major
shareholders. The new operation has been incorporated as National Metal
Technologies, Inc. ("NMT").
Under the terms of the agreement, NMT will pay a total of $500,000, comprised
of a down payment of $150,000 satisfied by the issuance of 75,000 shares of
Photomatrix common stock and a five year note in the amount of $350,000, for
the purchase of GIW's customer list, supplier registrations, contract
backlog, proprietary trade data, rights to hire employees and general
intangibles of GIW. Future note payments may be made in a combination of
Photomatrix stock and cash at the election of the parties. In addition, NMT
agreed to enter into a capital lease of GIW equipment, with an option to
purchase the equipment for $490,000 at the end of the one-year period. The
first year rental payments under the equipment lease will be satisfied with
the issuance of 25,000 shares of Photomatrix common stock. As the capital
lease was a condition of the acquisition, the Company has recorded the assets
held under the capital lease at their estimated fair value of $943,000 and
the related bargain purchase obligation of $490,000 as part of the net assets
acquired.
F-11
<PAGE>
Photomatrix agreed to price protect the shares issued to GIW shareholders at
a price of $2.00 per share, at a point two years from the closing date, for
the 100,000 initial shares issued. This stock price guaranty would total an
additional amount of approximately $150,000 as of March 31, 1999, based on
the Company's current stock price.
National Metal Technologies also entered into a fifteen year lease of the
80,000 square foot facility housing the metal stamping operation, under terms
that provide rent abatements for the first three years of the facility lease.
NMT also agreed to purchase GIW's accounts receivable and usable inventory,
and pay certain royalties (1.75% of sales to existing customers) over a
three-year period. All royalties are payable in common stock or cash, at the
Company's election. The $ 8,000 excess of the purchase price over the fair
value of NMT's net assets acquired is being amortized over twenty years.
I-PAC PRECISION MACHINING
On November 27, 1998, the Company entered into an agreement to acquire
certain assets and the business operations of Amcraft, Inc., a precision
metal machining company located in Carlsbad, California. The new operation
has been incorporated as I-PAC Precision Machining, Inc. ("Precision
Machining")
The Company acquired the business assets of Amcraft out of an assignment for
the benefit of creditors proceeding. Under the terms of the purchase, the
Company paid a total of $20,000 for the purchase of work-in-process
inventory, miscellaneous equipment, customer list and backlog, rights to hire
employees and the business name of Amcraft. The Company also entered into
leases of approximately $450,000 primarily of CNC precision machining
equipment, which had previously been used by Amcraft. In addition, the
Company leased the 10,000 square foot facility previously occupied by the
Amcraft operations through April of 1999, at which time the precision metal
machining operation was relocated to the newly acquired NMT facility located
in Oceanside, California.
PHRX REP CO
On July 1, 1998, the Company acquired the assets and business of MGM Techrep,
Inc. ("MGM") and formed PHRX Rep Co. MGM, a private entity that is primarily
owned by the officers and former owners of I-PAC, is a manufacturer's sales
representative firm headquartered in Santa Ana, California. Established in
1994, MGM has been the primary sales rep firm in the Southern California area
for I-PAC. MGM also represents approximately 15 other companies engaged in
the manufacture and distribution of a wide range of industrial products used
in the manufacture and sale of electronic and related products.
The acquisition included all contracts with MGM's principals, its customer
list, all physical assets, and the MGM trade name. MGM retained existing
liabilities and released its sales personnel to the Company, and MGM's
shareholders executed non-compete agreements with respect to the sales rep
business. The purchase price of the transaction will be determined primarily
on an earn-out basis by a declining percentage (75% in the first year, 50% in
the second year and 35% in the final year following the closing date) of the
commissions earned over a three-year period by MGM on sales involving its
existing principals and customers as of the time of the acquisition. During
the year ended March 31, 1999, the Company recorded approximately $113,000 as
excess of the purchase price over the fair value of the acquired net assets
related to these earn-out accruals. No payments will be due to MGM for
principals or customer accounts added after the closing date. In addition,
the Company forgave approximately $18,000 of amounts due from MGM as of the
closing date.
Consistent with the provisions of the Photomatrix/I-PAC merger agreement,
this related party transaction was reviewed and approved by the outside
directors on the Audit Committee of the Company's Board of Directors.
4. DIVESTITURE AND DISCONTINUATION
F-12
<PAGE>
PHOTOMATRIX IMAGING, INC. AND PHOTOMATRIX, LTD.
On March 2, 1999, the Company approved a plan to sell certain product rights,
assets and liabilities of Photomatrix Imaging, Inc. ("Imaging") and its
wholly owned subsidiary, Photomatrix, Ltd. ("Ltd."). On June 21, 1999, the
Company completed the transaction whereby it sold product rights and certain
assets of its document scanner operations to Scan-Optics, Inc. Under the
terms of the agreement, ScanOptics paid the Company approximately $1,890,000
in cash and agreed to pay an additional $210,000 to acquire all receivables,
inventory and certain equipment, as well as assume nearly $2 million of
current and future liabilities of Imaging and Ltd.,. Scan-Optics also assumed
lease commitments associated with the Company's engineering facilities
located in Chandler, Arizona, as well as its facilities in Great Britain. In
addition, ScanOptics agreed to pay certain royalties, not to exceed $250,000
over a three-year period and also enter into a transition agreement and a
five-year manufacturing agreement, under which the Company would continue to
manufacture document scanners and document scanner parts for Scan-Optics.
Proceeds from this sale were used to reduce short-term debt and provide
working capital to the Company. The purchase price is subject to adjustment
based upon certain additional due diligence to be completed by Scan-Optics
within ninety days.
Current and prior period balances have been reclassified to present Imaging
and Ltd. as a discontinued operation. Revenues related to discontinued
operations totaled $6,274,000 and $8,595,000 for the years ended March 31,
1999 and 1998, respectively. During the year ended March 31, 1999, the
Company recorded a write-off of intangible assets related to its scanner
operations in the approximate amount of $1,016,000, comprised of $44,000
related to capitalized software, $61,000 related to software development and
$911,000 related to goodwill. This write-off has been included in the loss on
disposal of discontinued operation in the accompanying consolidated statement
of operations for the year ended March 31, 1999.
XSCRIBE LEGAL SYSTEMS, INC.
On July 31, 1996, the Company sold substantially all of the assets and the
business of its wholly-owned subsidiary, Xscribe Legal Systems, Inc. ("Legal
Systems"), to Stenograph Corporation ("Stenograph") in exchange for $2
million cash paid at closing, a $180,000 note delivered at closing, and the
assumption by Stenograph of substantially all of the current liabilities
($844,000) of Legal Systems (excluding certain contingent liabilities). The
contingent liabilities retained by the Company consist primarily of all
income, property, sales and employment tax contingencies of Legal Systems, if
any, and all products liability contingencies of Legal Systems for product
sold prior to July 31, 1996.
The Company recognized a gain on the sale of Legal Systems of $134,000 and
also recorded a net loss from discontinued operations in fiscal 1997 of
$117,000. This loss included accruals for indemnifications related to the
discontinued operations of Legal Systems. During fiscal 1998, the
indemnification period lapsed and the Company determined that the remaining
accruals were no longer necessary. The accruals were reversed, resulting in
income from discontinued operations of $214,000 in fiscal year 1998.
LEXIA SYSTEMS, INC.
In December 1996, the Board of Directors of the Company approved a plan to
discontinue the operations of Lexia Systems, Inc. ("Lexia"). The operations
of Lexia were shut down on September 30, 1998. Approximately $250,000 of
reserves for discontinued operating losses was not required, resulting in
income from discontinued operations in fiscal year 1998. Lexia has entered
into a settlement with a vendor, Fujitsu Computers Ltd. ("Fujitsu") regarding
its disagreements over outstanding claims. Lexia had carried on its books
accounts payable claims by Fujitsu in the amount of $341,000. Lexia has
disputed these liabilities. Lexia agreed to pay Fujitsu $200,000 over an
eight month period as payment in full of all outstanding claims against
Lexia, resulting in an additional $141,000 of income from discontinued
operations for the fiscal year 1999. Lexia also carries on its books accounts
payable and unpaid rent claims by ICL, a sister company of Fujitsu, in the
amount of $457,000. Lexia disputes any liability with respect to ICL in light
of its own offsetting claims and defenses. There is no assurance that Lexia
will be successful in prevailing in its position with regard to the
outstanding claims previously made by ICL.
F-13
<PAGE>
5. SEGMENT INFORMATION
The Company's operations are classified into two reportable business
segments: Electronic Services and Metal Services. Electronic Services
manufactures and sells electronic products, including electronic enclosed
systems, utilized in technology intensive products and business environments.
This segment is primarily comprised of I-PAC. Metal Services manufactures and
sells stamped and machined metal products and services, including phosphate
and heat treat services, utilized in military, government and commercial
weaponry products. This segment is comprised of NMT and Precision Machining.
Other includes corporate expenses, charges that do not relate to current
operations, divested operations and inter-company eliminations.
In evaluating financial performance, management focuses on operating income
as a measure of profit or loss. Operating income is before interest expense,
interest income and income tax expense. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies (Note 1). The following table summarizes financial
information by business segment from continuing operations.
<TABLE>
<CAPTION>
(000's omitted) 1999
<S> <C>
REVENUE:
Electronic Services $3,886
Metal Services 1,062
Other 61
-----------
Total $5,009
-----------
-----------
SEGMENT OPERATING PROFIT (LOSS):
Electronic Services $(1,339)
Metal Services (380)
Other (695)
-----------
Total $(2,414)
-----------
-----------
DEPRECIATION AND AMORTIZATION:
Electronic Services $ 172
Metal Services 49
Other 2
-----------
Total $ 223
-----------
-----------
CAPITAL EXPENDITURES:
Electronic Services $3,603
Metal Services 1,210
Other 2
-----------
Total $4,815
-----------
-----------
ASSETS:
Electronic Services $5,295
Metal Services 2,187
Other 1,872
-----------
Total $9,354
-----------
-----------
</TABLE>
6. SHAREHOLDERS' EQUITY
The Company has three existing common stock option plans under which an
aggregate of 2,202,500 shares of the Company's common stock may be issued to
officers, directors and employees of the Company and its subsidiaries through
qualified incentive stock options or non-qualified stock options. The Company
has a fourth plan, which expired in fiscal 1994 with approximately 100,000
options still outstanding. Under the terms of the existing plans, incentive
stock options are granted at an exercise price which is not less than the
F-14
<PAGE>
fair market value of the Company's common stock at the date of grant;
non-qualified options are granted at not less than 85% of the fair value at
the date of grant. Options are exercisable within the period and in the
increments as determined by the Company's Board of Directors or Compensation
Committee appointed by the Board of Directors.
At March 31, 1999, there were 1,067,171 additional shares available for grant
under the Plans. The per share weighted-average fair value of stock options
granted during 1999 and 1998 was $0.36 and $0.33, respectively, on the date
of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1999 - expected dividend yield 0.0%, volatility
of 84.3%, risk-free interest rate of 6.0%, and an expected life of 7 years;
1998 - expected dividend yield 0.0%, volatility of 88.2%, risk-free interest
rate of 6.0%, and an expected life of 10 years.
The Company applied APB Opinion No. 25 in accounting for its Plans and,
accordingly, no employee compensation cost has been recognized for its stock
options in the consolidated financial statements. During 1999, the Company
recognized approximately $53,000 of compensation expense for options issued
to non-employees. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net loss, as reported $(4,376,000) $(1,482,000)
Pro forma net loss $(4,441,000) $(1,566,000)
Loss per share, as reported $(0.49) $(0.29)
Pro forma loss per share $(0.50) $(0.31)
</TABLE>
Pro forma net loss reflects only options granted in 1997 and thereafter.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts
presented above because compensation cost is reflected over the options'
vesting period of 2-3 years and compensation cost for options granted prior
to April 1, 1996 is not considered.
Additional information with respect to the options under the plans follows:
<TABLE>
<CAPTION>
Shares Range of Exercise Price
------ -----------------------
<S> <C> <C>
Options outstanding March 31, 1997 747,332 $0.18 - $1.25
Options granted 683,331 $0.35 - $0.38
Options canceled (652,330) $0.44 - $1.25
---------- -------------
Options outstanding, March 31, 1998 778,333 $0.18 - $0.47
Options granted 501,966 $0.31 - $1.03
Options canceled (45,000) $0.38 - $0.75
---------- -------------
Options outstanding, March 31, 1999 1,235,329 $0.18 - $1.03
---------- -------------
Options exercisable, March 31, 1999 441,666 $0.18 - $0.75
---------- -------------
----------
</TABLE>
In addition, the Company granted options for an additional 307,882 shares to
two officers in 1999. These options, which were not covered under any of the
Company's stock option plans, vested upon grant and carried an exercise price
of $0.49. As of March 31, 1999, the Company has 1,564,475 options outstanding
with a weighted average exercise price of $0.48 per share and a weighted
average remaining contractual life of 9 years.
In July 1997, the Company canceled stock options to acquire 579,331 shares at
exercise prices ranging from $0.44 to $1.25 per share and granted new
replacement options to acquire 579,331 shares at an exercise price of $0.38
per share, its then fair market value.
In addition to the options described above, the Company had outstanding
warrants and other options to acquire common shares as of March 31, 1999 as
follows:
F-15
<PAGE>
<TABLE>
<CAPTION>
Shares Exercise Price Expiration
------ -------------- ----------
<S> <C> <C>
33,333 $0.42 December, 2003
75,000 $0.44 April, 2002
87,500 $0.75 April, 2001
</TABLE>
The Company is authorized to issue 3,173,000 shares of its preferred stock.
No preferred shares were outstanding as of March 31, 1999.
As discussed in Note 10, during the year ended March 31, 1999, the Company
purchased approximately 117,000 shares of the its common stock on the open
market on behalf of the Photomatrix Employee Stock Purchase Plan and has
recorded approximately $114,000 as a repurchase of common stock.
On July 8, 1999, the Company received written notification from NASDAQ that
its securities would be delisted from the NASDAQ SmallCap Market effective
the end of trading on July 8, 1999. Its common stock will be quoted and
traded on the Over-the-Counter Bulletin Board under the symbol "PHRX"
effective July 9, 1999. NASDAQ had advised Photomatrix on November 10, 1998,
that it was not in compliance with the minimum bid price requirement and that
the Company was being afforded a ninety day grace period, until February 10,
1999, to remedy this deficiency or be de-listed from the NASDAQ SmallCap
Stock Market. The Company was unable to comply with the bid price requirement
within the grace period. At a formal hearing with NASDAQ on April 16, 1999,
the Company requested an extension period, during which time it could comply
with the minimum bid requirement. As of July 8, 1999, the Company remained in
non-compliance with the minimum bid price requirement. NASDAQ denied the
Company's request for such an extension.
7. RELATED PARTY TRANSACTIONS
The former shareholders of I-PAC currently own interests in several entities
with which I-PAC does business. During the year ended March 31, 1999, the
Company recorded a write-off of approximately $25,000 of inventory
specifically manufactured for companies which are owned at least in part by
or otherwise associated with the brother of William L. Grivas, who was the
Chairman of Photomatrix through January 18, 1999 and who is a major
shareholder of the Company. In addition, the Company also recorded
approximately $20,000 of additional allowance for doubtful accounts for
uncollectible related party accounts receivable from such companies and from
a company owned by Mr. Grivas, during the quarter ended December 31, 1998.
The inventory and receivables were acquired by the Company as a result of its
acquisition of I-PAC. The Company has therefore recorded the additional bad
debt reserves and inventory write-off as an increase to goodwill related to
the purchase of I-PAC.
During the year ended March 31, 1999, the Company paid approximately $127,000
to Evergreen Investments ("Evergreen"), a company owned by Mr. Grivas and
Patrick W. Moore, the Chief Executive Officer and a major shareholder.
Pursuant to the Plan and Agreement of Merger and Reorganization between the
Company and I-PAC, $50,000 of this amount was intended to cover personal tax
liabilities of the former I-PAC shareholders arising from pre-merger S Corp.
allocations for calendar year 1997, approximately $34,000 was for pre-merger
management fees, and approximately $43,000 was for pre-acquisition commission
payments due MGM under the acquisition agreement entered in July 1998. In
addition, approximately $31,000 was paid to James P. Hill, a director and
major shareholder, to cover personal tax liabilities of the former I-PAC
shareholders arising from pre-merger S Corp allocations for calendar year
1997, pursuant to the Plan and Agreement of Merger and Reorganization between
the Company and I-PAC. Approximately $27,000 was paid to MGM for earn-out
payments due MGM under the acquisition agreement entered in July 1998. The
Company also recorded sales of approximately $7,000 to MGS Interconnect, a
company owned by Mr. Moore and Mr. Grivas during the current period. In
addition, the Company paid approximately $139,000 to Sullivan, Hill, Lewin,
Rez and Engel ("SHLRE"), a law firm in which Mr. Hill, is a partner. At March
31, 1999, the Company had approximately $3,000 in earn-out payments due to
MGM and approximately $7,000 due from MGS Interconnect. In addition, the
Company owed SHLRE approximately $44,000 at March 31, 1999.
F-16
<PAGE>
As discussed in Note 8, certain shareholders of the Company have guaranteed
approximately $2,023,000 of the Company's debt at March 31, 1999. This debt
was repaid in June 1999. In addition, the Company has guaranteed
approximately $113,000 of debt of the same shareholders.
In connection with the acquisition of Photomatrix in the year ended March 31,
1994, $777,000 of amounts due to affiliates of Photomatrix's then-majority
shareholders (presently shareholders of the Company) was converted into
seven-year notes payable which mature in April 2000. These notes bear
interest at a rate of 8% per annum. Interest-only payments were due monthly
during the first two years. Interest and principal are due in equal monthly
installments (beginning in May 1995) for years three-through-seven. Interest
expense related to these notes was approximately $24,000 and $37,000 in the
years ended March 31, 1999 and 1998, respectively. As of March 31, 1999,
approximately $313,000 was outstanding under these notes.
8. CREDIT FACILITY AND DEBT
In July 1998 the Company entered into a $2,100,000 credit facility with its
bank that included a $1,500,000 line of credit and a $600,000 term loan. The
line of credit accrued interest on outstanding borrowings at the bank's prime
rate plus 1 % per annum. As of March 31, 1999, the aggregate outstanding
balance under these loans was $2,122,000.
Under the terms of the agreement, total borrowings under the line of credit
were limited to the lesser of $1,500,000 or 70% of eligible accounts
receivable (as defined under the agreement). The Company was required to (1)
maintain a minimum tangible net worth at various dates (2) maintain a ratio
of total liabilities to tangible net worth of not greater than 2.75 to 1.0,
and (3) maintain a minimum debt service coverage of no less than 1.25 to 1.0.
Based on December 31, 1998 financial data, the Company was not in compliance
with these covenants. The bank agreed to forebear from taking adverse action,
subject to the Company fulfilling certain reporting and other conditions,
including entering into discussions with alternative lenders to replace the
bank's credit facilities. Accordingly the amount due under the term loan
portion of this credit facility has been reclassified as a current liability
as of March 31, 1999. In June, 1999, the Company retired all outstanding debt
with its bank and entered into a new $1,500,000 credit facility with a
financial institution. The new line of credit accrues interest on outstanding
borrowings at the bank's prime rate plus 4 % per annum and carries a minimum
monthly payment of $6,000.
The Company has issued two notes in the aggregate amount of $2,023,000, which
are collateralized by trust deeds on the Company's real property located in
Carlsbad, California. The repayment of these notes was guaranteed by certain
major shareholders of the Company and the Small Business Administration.
These notes were payable in aggregate monthly installments of approximately
$18,000, including interest ranging from 7.5% to 9.5%. In June, 1999, the
Company retired this debt (Note 11).
Long-term debt includes the following:
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------
<S> <C>
8% note, collateralized by equipment $ 350,000
Capitalized leases 773,000
Other notes 44,000
------------
1,167,000
Less current portion 158,000
------------
Long-term portion $ 1,009,000
------------
------------
</TABLE>
In December 1998, the NMT became obligated under five-year note in the amount
of $350,000, bearing interest at 8%. Future note payments may be made in a
combination of Photomatrix stock and cash at the election of the parties. In
addition, as discussed in Note 3, NMT agreed to enter into a capital lease of
GIW equipment, with a bargain purchase option to purchase the equipment for
$490,000 at the end of the one-year period. The first year rental payments
under the equipment lease will be satisfied with the issuance of
F-17
<PAGE>
25,000 shares of Photomatrix common stock valued at $2.00 per share.
Photomatrix agreed to price protect the shares issued to GIW shareholders at
a price of $2.00 per share, at a point two years from the closing date, for
these initial shares issued for the first year's payments on the note and the
equipment lease. This debt will bear interest at 8%.
The Company also has certain equipment notes in the aggregate amount of
$44,000 with interest rates varying between 8% and 26.6% with final payments
due between 2000 and 2006. These notes are collateralized by equipment. In
addition, the Company also has entered into certain capital leases in the
aggregate amount of $395,000, calling for minimum monthly payments
aggregating approximately $25,000 per month.
During the year ended March 31, 1999, the Company recorded the cancellation
of a $227,000 long-term liability due a lender/customer. This long-term
liability was previously assumed by the Company in connection with the
acquisition of I-PAC. Under terms of the agreement, the liability was only to
be repaid if sales were to be made to the lender prior to September 5, 1998
at a rate of 40% of the non-material component of any such sales. As of
September 5, 1998, the $227,000 liability expired and all underlying security
interest was released under terms of the agreement. The Company has recorded
the expiration of the note as a reduction to goodwill related to the purchase
of I-PAC.
The aggregate maturities for long-term debt of continuing operations at March
31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
Year Ending March 31,
---------------------
<S> <C>
2000 $ 158,000
2001 321,000
2002 268,000
2003 210,000
2004 210,000
-----------
$ 1,167,000
-----------
-----------
</TABLE>
The Company is also obligated under a series of notes payable totaling
$294,000 as of March 31, 1999. These notes, which are included in net assets
of discontinued operations, bear interest at a rate of 8% per annum and
mature in April 2000. Interest and principal payments totaling $16,000 are
due monthly. In October 1998, the Company stopped making payments on these
notes, until June 1999, when payments were resumed at the rate of
approximately $31,000 per month.
9. INCOME TAXES
The components of loss before income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
LOSS BEFORE INCOME TAXES
U.S. continuing operations $ (2,694,000) $ -
U.S. discontinued operations (1,696,000) (1,196,000)
Foreign discontinued operations 14,000 (281,000)
------------- -------------
$ (4,376,000) $ (1,477,000)
------------- -------------
------------- -------------
</TABLE>
RECONCILIATION STATUTORY TO EFFECTIVE RATES
A reconciliation from the federal income tax provision computed at the
statutory rate to the actual provision for taxes on loss from continuing
operations for fiscal year 1999 and 1998 is as follows:
<TABLE>
1999 1998
---- ----
F-18
<PAGE>
<S> <C> <C>
Tax at statutory federal tax rate $ (1,521,000) $ --
State income taxes (net of federal benefit) 9,000 --
Federal impact on continuing operations
from change in valuation allowance 1,512,000 --
-------------- -------------
$ -- $ --
-------------- -------------
-------------- -------------
</TABLE>
DEFERRED TAX ASSETS/LIABILITIES
Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The significant components of the deferred income tax assets and
deferred income tax liabilities as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
1999
--------------
<S> <C>
Deferred tax assets:
Tax operating loss carryforward $ 4,352,000
Inventory and other reserves 800,000
Other 28,000
--------------
5,180,000
Less valuation allowance (4,048,000)
--------------
$ 1,132,000
--------------
Deferred tax liabilities:
Book basis of intangible assets greater than tax basis $ (710,000)
Book basis of fixed assets greater than tax basis (422,000)
--------------
$(1,132,000)
--------------
Net deferred tax asset $ -
--------------
--------------
</TABLE>
The Company has recorded net tax assets in an amount approximately equal to
net tax liabilities because management believes that these items will offset
in future periods, considering statutory carryforward periods and
limitations. Management believes that sufficient uncertainty exists regarding
the realizability of the deferred tax asset items and that a valuation
allowance, equal to the net deferred tax asset amount, is required.
As of March 31, 1999, the Company has available for federal income tax
purposes a net operating loss ("NOL") carryforward of approximately
$12,800,000 which can offset future consolidated taxable income and which
begins to expire in fiscal year 2000. The utilization of this NOL may be
subject to an annual limitation under Section 382 of the Internal Revenue
Code.
10. EMPLOYEE BENEFIT PLANS
The Company maintains defined contribution savings and investment plans for
the benefit of all full-time employees. The Company's expense related to the
plans was $55,000 and $55,000 in 1999 and 1998, respectively. The Company has
no significant post-employment or post-retirement obligations.
On June 5, 1998, the Board of Directors authorized the Photomatrix Employee
Stock Purchase Plan (the "Purchase Plan") and authorized the purchase of up
to $250,000 of Photomatrix common stock for the Purchase Plan on the open
market. The purpose of the Purchase Plan is to serve as an incentive to and
to
F-19
<PAGE>
encourage stock ownership by eligible employees of the Company so that they
may acquire or increase their proprietary interest in the success of the
Company and to encourage them to remain in the service of the Company.
All full-time employees of the Company who have been in the continuous
employment of the Company for more than nine months are eligible to
participate in the Purchase Plan, provided that no employee may be granted
the right to purchase stock under the Purchase Plan if, immediately after the
right to purchase such stock is granted, such employee owns stock
representing 5% or more of the total combined voting power or value of all
classes of the Company's stock. The option price will be determined by the
Company, provided that it will be at least 85% of the fair value of the
Company's common stock on the date the option is granted. Each participating
employee may elect to contribute to the Purchase Plan up to the lesser of
$8,000 or 10% of his or her base compensation during each calendar year.
A total of 750,000 shares of stock are available for purchase under the
Purchase Plan, subject to adjustment for various changes in the
capitalization of the Company. As of March 31, 1999, the Company had
purchased approximately 117,000 shares of the Photomatrix common stock on the
open market on behalf of the Purchase Plan and arranged for the stock to be
held in trust by an independent trustee. The Company has recorded
approximately $114,000 as a repurchase of common stock.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company's operations are conducted in facilities that are occupied under
operating leases. The leases require payment of taxes, maintenance expenses
and insurance. Rental expense for continuing operations (net of rental income
under sublease of $17,000 and $0 in 1999 and 1998, respectively) incurred
under operating leases (including leases which have expired) was $157,000 and
$0, in fiscal year 1999 and 1998, respectively.
Future minimum lease commitments as of March 31, 1999, are as follows:
<TABLE>
<S> <C>
1999 $ 645,000
2000 658,000
2001 755,000
2002 698,000
2003 609,000
Thereafter 7,007,000
-------------
$10,372,000
-------------
-------------
</TABLE>
On June 3, 1999, the Company entered into a sale-and-leaseback transaction of
its Carlsbad facility for $2,925,000. Under the terms of the Purchase and
Sale Agreement between Cabot Industrial Properties, L. P. ("Cabot") and the
Company, Cabot acquired all buildings, building improvements and land located
at 1958 Kellogg Avenue, Carlsbad, California. The proceeds from the sale were
used to retire mortgage debt and pay down a portion of the outstanding
balance under the Company's line of credit. In a separate lease agreement,
the Company agreed to lease the Carlsbad facility under a fifteen-year lease
with Cabot, starting out at a monthly rental of approximately $25,000. The
sale resulted in a gain of approximately $240,000, which will be amortized to
income over the 15-year life of the lease. Future minimum lease commitments
of this lease are as follows:
<TABLE>
<S> <C>
1999 $ 302,000
2000 309,000
2001 318,000
2002 328,000
2003 338,000
Thereafter 3,765,000
-------------
$5,360,000
-------------
-------------
</TABLE>
F-20
<PAGE>
In June 1998, the Company moved its corporate headquarters, assigned the
lease of its former principal operating facility, and provided the lessor
with a guarantee of the lease through its expiration in September 2002.
LEGAL PROCEEDINGS
The Company and its subsidiaries are, from time to time, involved in legal
proceedings, claims and litigation arising in the ordinary course of
business. While amounts may be substantial, the ultimate liability cannot
presently be determined because of uncertainties that exist. Therefore, it is
possible the outcome of such legal proceedings, claims and litigation could
have a material effect on the quarterly or annual operating results or cash
flows when resolved in a future period. However, based on facts currently
available, management believes such matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or cash flows.
The Company has indemnified Stenograph Corporation in connection with a
product liability case pending in the Nineteenth Judicial District, East
Baton Rouge Perish, in which Stenograph is a defendant (BROWN V. STENOGRAPH
ET AL). The Company has tendered this claim to its insurance carrier, St.
Paul Fire ("St. Paul"). St. Paul has assumed the Company's defense. The
insurance carriers have prevailed in all similar judgments rendered to date.
It may take several years before this litigation is ultimately resolved. The
Company believes that this remaining case is without merit and further
believes that if any liability results from these claims, the liability
(excluding punitive damages, if any) will be covered by its insurance
policies.
EMPLOYMENT AGREEMENTS.
The Company's Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO") are employed under employment agreements that expire on September 30,
1999. The Company's former President was employed under an employment
agreement, which expired on July 31, 1999. The former President resigned as
an officer on June 21, 1999 and his employment terminated on July 31, 1999.
The CFO's employment will terminate on September 30, 1999. If the CEO's, or
the CFO's employment is terminated by the Company without cause prior to the
end of his term, then he will be entitled to receive his base salary, stock
option vesting and health insurance benefits for the remainder of the term.
OFFICERS SEVERANCE POLICY.
In 1988, the Company's Board of Directors adopted an Officers Severance
Policy that was modified in November 1990, February 1997 and in April 1999.
Under the policy, the former President began receiving twelve weeks'
compensation beginning August 1, 1999 and the CFO will begin receiving eight
weeks compensation beginning October 1, 1999. In addition, the CEO is to
receive twelve weeks' compensation upon termination of employment by the
Company, in addition to amounts due him under his employment contract.
DIVIDEND RESTRICTION
Pursuant to state laws, the Company may be restricted from paying dividends
to its stockholders as a result of its accumulated deficit as of March 31,
1999.
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized on September 1,
1999.
PHOTOMATRIX, INC.
by /s/ Patrick W. Moore
------------------------------------------
Patrick W. Moore, Chief Executive
Officer and Acting Chairman of the Board
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Patrick W. Moore and Roy L. Gayhart, jointly
and severally, his attorney-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendment to the Report on Form
10-KSB and file the same with the exhibits thereto and any other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or a
substitute or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- -------------------- ------------------------------------- -----------------
<S> <C> <C>
/s/ Patrick W. Moore September 3, 1999
- -------------------- Chief Executive Officer -----------------
Patrick W. Moore and Acting Chairman of the Board
/s/ Roy L. Gayhart September 3, 1999
- -------------------- Chief Financial Officer -----------------
Roy L. Gayhart
/s/ Larry Naritelli September 3, 1999
- -------------------- Principal Accounting Officer -----------------
Larry Naritelli
</TABLE>
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized on September 1,
1999.
PHOTOMATRIX, INC.
by /s/ Patrick W. Moore
------------------------------------------
Patrick W. Moore, Chief Executive
Officer and Acting Chairman of the Board
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Patrick W. Moore and Roy L. Gayhart, jointly
and severally, his attorney-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendment to the Report on Form
10-KSB and file the same with the exhibits thereto and any other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or a
substitute or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- -------------------- ------------------------------------- -----------------
<S> <C> <C>
/s/ Patrick W. Moore September 3, 1999
- -------------------- Chief Executive Officer and -----------------
Patrick W. Moore Acting Chairman of the Board
/s/ Roy L. Gayhart September 3, 1999
- -------------------- Chief Financial Officer -----------------
Roy L. Gayhart
/s/ Larry Naritelli September 3, 1999
- -------------------- Principal Accounting Officer -----------------
Larry Naritelli
/s/ James P. Hill August 31, 1999
- -------------------- Director -----------------
James P. Hill
/s/ Michael J. Genovese September 1, 1999
- -------------------- Director -----------------
Michael J. Genovese
/s/ Suren G. Dutia September 1, 1999
- -------------------- Director -----------------
Suren G. Dutia
/s/ Ira H. Sharp September 3, 1999
- -------------------- Director -----------------
Ira H. Sharp
/s/ John F. Staley September 2, 1999
- -------------------- Director -----------------
John F. Staley
</TABLE>
F-23
<PAGE>
<PAGE>
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT (the "Settlement Agreement") is made this 24
day of March, 1999 by and between BELL & HOWELL COMPANY, a Delaware
corporation ("Buyer") and PHOTOMATRIX CORPORATION, a Nevada corporation
("Seller").
RECITALS
A. Buyer and Seller entered into an OEM Purchase Agreement on June 19,
1996, pursuant to which Buyer would purchase and Seller would sell the
Products and Accessories set forth in the Agreement.
B. Buyer and Seller entered into "amendments" to the OEM Purchase
Agreement, including an addendum (the "B&H-Photomatrix Business
Agreement, December 29, 1997") and a second addendum (the
"B&H-Photomatrix Business Agreement Addendum, January 5, 1998) and an
amendment (the "B&H/Photomatrix Business Agreement, May 19, 1998). The
OEM Purchase Agreement, the two addenda and the amendment are
collectively referred to in this Settlement Agreement as the "OEM
Agreement."
C. Disputes have arisen between the parties with respect to their
respective rights under the OEM Agreement.
D. By agreeing to the compromise, resolution and settlement contained
in this Settlement Agreement, neither of the parties hereto admits that
such party has breached any provisions or obligations of the OEM
Agreement or any other agreements, whether written or oral, entered into
by and between the parties as a direct consequence of the OEM Agreement.
Now therefore, the parties for good and valuable consideration and the mutual
promises herein set forth, agree as follows:
<PAGE>
COVENANTS AND AGREEMENTS
1. Bell & Howell will cease sales of B&H PS II or Series 9000 immediately
and will no longer offer this product to its customers or distribution
channel.
2. Photomatrix is no longer restricted and is completely free to distribute
or sale any and all of its products through whichever means or
distribution channel it selects.
3. Commencing on the date hereof and ending on July 31, 1999, Photomatrix
will repurchase from Bell & Howell 17 Series 9000 (B&H PS II) scanners
and 20 SmartFeeders (herein called the ("Products") under the OEM
Agreement. The purchase price on all Products sold to Bell & Howell
prior to April 1, 1998 or which were used by Bell & Howell as loaners,
demonstrators or were used for more than sixty (60) days by customers,
will be 50 percent of the price at which they were sold to Bell &
Howell. The purchase price on all other Products will be 80 percent of
the price at which they were sold to Bell & Howell.
Notwithstanding the foregoing, should a customer of Bell & Howell
request that Bell & Howell sell it a B&H PS II or Series 9000 scanner,
the transaction will be referred to and handled directly by and through
Photomatrix, but Bell & Howell will be paid 105% of the price at which
Bell & Howell purchased it from Photomatrix, the difference constituting
a finder's fee.
4. Photomatrix will issue a purchase order concurrent with the execution of
this Settlement Agreement for three to four scanners and three to four
SmartFeeders and thereafter will issue monthly purchase orders to Bell &
Howell for three to four scanners and three to four SmartFeeders with
appropriate shipping instructions.
BUYER FOR ITSELF, ITS AFFILIATES, SUBSIDIARIES, SUCCESSORS AND ASSIGNS,
AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND REPRESENTATIVES,
MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF
MERCHANTABILITY OR FITNESS OF THE PRODUCTS FOR A PARTICULAR PURPOSE. All
Products shall be delivered by Buyer "As Is/Where Is". Seller understands
and agrees that if the Products are unsatisfactory or perform
unsatisfactorily for any reason, Seller has no recourse to make a claim
and waives all claims against Buyer, its affiliates, subsidiaries,
successors and assigns, and their respective directors, officers,
employees and representatives under this Settlement Agreement or any
other agreement or document, oral or written.
5. Bell & Howell will be paid within thirty days of shipments, unless the
terms for payment to Photomatrix is shorter for a particular unit sold
by Photomatrix, in which event Bell & Howell will be paid on the basis
of the shorter payment term. In the event Photomatrix pays for at least
four (4) scanners and four (4) SmartFeeders in any one month,
Photomatrix may, at its sole discretion, purchase additional Products
during such month
<PAGE>
on one week's notice.
6. All Products are to be prepared and packed for shipment to secure safe
delivery, the lowest transportation rates, and to meet the applicable
carrier's requirements. External containers will be plain and marked
with Seller's name or logo, as directed. All Products shall be shipped
by the method of transportation selected by Seller. Buyer covenants that
each Product now in Buyer's possession is in the same condition as
originally delivered by Seller to Buyer, except as Buyer may have
disclosed to Seller in writing prior to the execution of this Settlement
Agreement. In any event the risk of any (i) loss, (ii) damage to, or
(iii) deterioration in Products or Accessories, howsoever arising, shall
be borne by Seller once the Products have been delivered to the carrier
selected by Seller.
7. Except as set forth herein specifically to the contrary, the warranties
(and exceptions) set forth in Section 5 of the OEM Agreement are fully
incorporated herein. The term of this warranty is limited to a period of
twelve (12) months from the date of the shipment by Seller of the
Products.
8. Notwithstanding the effective termination of the OEM Agreement, Seller
shall from time to time and for five years after the execution of the
Settlement Agreement (the "Spare parts Period"), sell to Buyer upon the
issuance by Buyer of its purchase order, spare parts at 75% of the
prices shown on the price list published by Seller from time to time
(but no less than annually) through December 31, 2001 and at 80% of the
prices on the price list published by Seller from time to time (but no
less than annually) from January 1, 2002 through December 31, 2003. Bell
& Howell will issue its purchase order for the required spare parts with
net thirty (30) day payment terms. After the expiration of the spare
Parts Period, Seller shall grant to Buyer access to any vendors able to
supply any spare parts no longer being used in any other Product being
manufactured by Seller. In addition, Seller shall provide accessibility
to all drawings and other information necessary for Buyer to
manufacture, such discontinued spare parts.
9. Seller agrees to provide to Buyer on a timely basis, at no charge, such
illustrations, recommended spare parts lists or other suitable materials
as Buyer may require for spare parts identification.
10. Buyer shall use its best efforts to maintain sufficient quantities of
parts on hand to meet reasonable demands. Nonetheless, Seller agrees to
provide to Buyer any replacement parts on an emergency basis. Emergency
delivery will be accomplished by the most expedient method to a location
specified by Buyer. Parts ordered on an emergency basis will be shipped
by Seller with 24 hours after receipt of Buyer's purchase order. In the
event that an emergency ordered part is temporarily out of stock, Seller
shall immediately notify Buyer.
11. Seller and Buyer represent and warrant that each of them shall comply in
all material respects with all applicable permits and licenses and all
requirements of applicable laws,
<PAGE>
orders, regulations and standards in their respective performance of
this Settlement Agreement. Seller further represents and warrants that
the actions contemplated hereby and the subject matter of this Agreement
(i) will not violate or infringe any rights of third parties and (ii)
are not in conflict with any agreements by which it is bound.
12. Seller shall indemnify, defend and hold Buyer and each of its
affiliates, subsidiaries, divisions, and their respective directors,
officers, employees, agents, successors and assigns harmless against all
claims, demands, causes of action, judgments, damages, expenses, costs
and attorney's fees of every kind and character including with
limitation for damage to or loss of property, or for injury to or death
of persons, arising directly or indirectly, for the use or operation of
the Products and Accessories, either on a standalone basis or as a
component of a product or system, save for such claims, demands, causes
of action to the extent they arise out of the negligence or willful
conduct of Buyer.
13. Seller shall indemnify, defend and hold Buyer, its affiliates, its
customers, and its directors, officers, employees, agents and their
respective heirs, successors and assigns and their customers
("Indemnitees") harmless from and against any claims that the marketing,
distribution, sale, lease, rent operation or use of the Products or the
Accessories by any Indemnitee infringes any U.S. or foreign patent,
trade secrets, copyrights or other right of a third party. Buyer shall
provide Seller reasonably prompt notice of such claim filed against
Buyer or any other Indemnitee. In the event that the marketing,
distribution, sale, lease, rent, operation or use of the Products or any
Accessory shall be enjoined or shall be held by a final judgment from
which no appeal has been taken or the time to appeal from which has
expired to not permit Seller to perform under this Agreement or for
Buyer to receive the full benefits contemplated by this Agreement (an
"Event"), then Buyer, at its sole election, may terminate this Agreement
and recover damages from Seller.
14. Seller shall vigorously pursue any parties infringing any of the
proprietary rights which are the subject of this Agreement, including
rights evidenced by any patents which now exist or hereafter issue. If
Buyer becomes aware of any such infringement, it shall provide notice to
Seller of the infringement. If within sixty (60) days from receipt of
Buyer's notice (or within any applicable statute of limitations less
than sixty days), the unlicensed infringement has not ceased or Seller
has not commenced legal action against the infringer, (i) Buyer shall
have the right to file suit against the infringer, (ii) Seller may not
commence any action against the infringer or join in any action other
than as a necessary party, (iii) all damages or other awards shall inure
to the benefit of Buyer and (iv) Buyer shall have the authority, in its
name and on behalf of Seller, to enter into a licensing arrangement in
settlement of the infringement dispute with all payments being for the
account of Buyer.
15. Both parties will instruct their staff, in writing, to refrain from
making any disparaging comments to any current or prospective customers
(including end users, distributors, VARs, systems integrators or
resellers) or trade publications about each others products, technology
or financial health.
<PAGE>
16. With the exception of information that is required to be disclosed in
any public filings or in conjunction with any judicial proceedings, both
parties agree not to disclose the existence or content of the OEM
Agreement or this Settlement Agreement, or the matters made the basis
hereof, to any party, except to its directors, officers, employees,
legal representatives or any financing parties, lenders or authorized
representatives of corporate entities conducting due diligence of
Photomatrix and who have a need to know its existence or content,
without prior approval from the other party.
17. Except as herein provided, including, without limitation, Paragraphs 5,
12, 13 and 14 hereof, each of the parties and their respective
affiliates, subsidiaries, divisions, and their respective directors,
officers, employees, agents, successors and assigns, does hereby release,
acquit and discharge the other party and their respective affiliates,
subsidiaries, divisions, and their respective directors, officers,
employees, agents, successors and assigns of and from any and all
claims, liabilities, demands, causes of action or rights, of any nature
whatsoever, whether absolute, contingent, accrued or otherwise and
whether or not now known, based in whole or in part on any act,
occurrence, or condition existing as of the date hereof (hereinafter
"Claims"), including without limitation, all Claims relating in whole or
in part to (i) the OEM Agreement and (ii) the manufacture, design,
performance and operation of the Products and Accessories.
18. To the extent of any inconsistency between the terms of this Settlement
Agreement and the OEM Agreement, the terms of this Settlement Agreement
shall control.
19. Any notices which may or should be given hereunder shall be in writing
and shall be personally delivered against receipt or sent by registered
or certified first class mail, postage prepaid, as follows:
If to Bell & Howell, Bell & Howell Imaging Components
DMPC or IMPG: 3000 Malmo Drive
Arlington Heights, IL 60005
Attention: Bruce Moeller
With a copy to: Bell & Howell Company
5215 Old Orchard Road
Skokie, IL 60077-1076
Attention: Law Department
If to Photomatrix Corporation: 1958 Kellogg Avenue
Carlsbad, CA 92008
Attention: Patrick W. Moore
<PAGE>
With a copy to: James P. Hill, Esq.
Sullivan, Hill, Lewin, Rez,
Engel & LaBazzo
550 W. C Street, Suite 1500
San Diego, CA 92101-3540
20. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, but neither
party shall assign this Agreement or any rights or obligations hereunder
without the express written consent of the other; provided however,
that a successor in interest by merger, consolidation, operation of law,
assignment, purchase or otherwise, of all or substantially all of the
business of either party, shall acquire all interests of such party
hereunder without the written consent of the other. All subsidiaries or
affiliates of Buyer which have purchased Products under the OEM
Agreement are entitled to the benefits of this Settlement Agreement as
if they were signatories hereto.
21. Wherever possible, each provision of this Settlement Agreement and each
related document shall be interpreted in such a manner as to be
effective and valid under applicable law. However, if any provision of
this Settlement Agreement or any related document shall be prohibited by
or invalid under applicable law, such provision shall be ineffective
only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or the remaining provisions
of this Settlement Agreement or such related document.
22. No failure on the part of either party to exercise any right, power or
privilege under this Agreement, or under any instrument executed pursuant
hereto, shall operate as a waiver. No single or partial exercise of any
right, power or privilege shall preclude any other, or further exercise of
any other right, power or privilege. All rights and remedies granted
herein shall be in addition to other rights and remedies to which the
parties may be entitled at law or in equity. No waiver of any of the
provisions hereof shall be affected unless in writing and signed by the
party charged with such waiver. No waiver shall be deemed a continuing
waiver, or a waiver in respect of any breach of default whether similar
or different in nature unless expressly so stated in writing.
23. This Agreement cannot be, and shall not be deemed on construed to have
been, modified, amended, rescinded, canceled or waived, in whole or in
part, except by written instrument signed by the parties hereto.
24. This Settlement Agreement shall be governed by, and shall be construed
in accordance with the laws of the State of Nevada, notwithstanding any
choice of law provisions to the contrary.
<PAGE>
25. This Settlement Agreement constitutes the entire agreement between the
parties hereto and supersedes and cancels any and all prior agreements
between the parties as to the matters covered herein.
IN WITNESS WHEREOF, each of the parties has caused this Settlement
Agreement and Release to be executed on its behalf by a duly authorized
officer as of the date first above written.
BELL & HOWELL COMPANY
By: /s/ Bruce Moeller
-----------------------------------
Title: President Bell & Howell ICG
--------------------------------
PHOTOMATRIX CORPORATION
By: /s/ [ILLEGIBLE]
-----------------------------------
Title: CEO
--------------------------------
<PAGE>
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PURCHASE AND SALE AGREEMENT
AND ESCROW INSTRUCTIONS
1958 KELLOGG AVENUE
CARLSBAD, CALIFORNIA
BY AND BETWEEN
SELLER:
I-PAC MANUFACTURING, INC.,
A CALIFORNIA CORPORATION
BUYER:
CABOT INDUSTRIAL PROPERTIES, L.P.,
A DELAWARE LIMITED PARTNERSHIP
DATED AS OF:
APRIL 20, 1999
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<PAGE>
- -------------------------------------------------------------------------------
(2)
<PAGE>
PURCHASE AND SALE AGREEMENT AND ESCROW INSTRUCTIONS
Buyer and Seller hereby enter into this Purchase and Sale Agreement and
Escrow Instructions ("AGREEMENT") as of the Effective Date. In consideration
of the mutual covenants set forth herein, Seller agrees to sell, assign and
transfer the Property to Buyer upon Seller's acquisition thereof, and Buyer
agrees to buy the Property from Seller upon Seller's acquisition thereof, on
the terms and conditions set forth in this Agreement.
A. DEFINED TERMS. The terms listed below shall have the following
meanings throughout this Agreement:
APPROVALS: All permits, licenses, franchises, certifications,
authorizations, approvals and permits issued by any
governmental or quasi-governmental authorities for the
ownership, operation, use and occupancy of the Property
or any part thereof, excluding applications for
development approvals that have been denied.
BROKER: BRE Brokerage Company
5050 Avenida Encinas, No. 150
Carlsbad, California 92008
BUYER: Cabot Industrial Properties, L.P., a Delaware limited
partnership
BUYER'S ADDRESS: Two Center Plaza, Suite 200
Boston, Massachusetts 02108-1906
Attention: Ms. Jean Murphy
Facsimile Number: (617) 723-8237
CLOSING: The consummation of the sale and purchase of the
Property, as evidenced by the recordation of the Deed
(as hereinafter defined).
CLOSING DATE: Ten (10) days after the end of the Contingency Period,
as the same may be extended as provided in SECTION 4,
and SECTION 14.
CLOSING LEASE: A lease in the form to be attached hereto as EXHIBIT D
pursuant to Section 3(D) hereof.
(1)
<PAGE>
CONTINGENCY PERIOD: Thirty (30) calendar days commencing on the later of
(a) the execution and delivery of the First Amendment
by Buyer and Seller, or (b) Seller's Delivery Date (as
hereinafter defined).
DEPOSIT: One Hundred Thousand Dollars ($100,000)
EFFECTIVE DATE: The date upon which the execution of this Agreement was
completed and delivered by Buyer and Seller.
ESCROW HOLDER: Commonwealth Land Title Company
ESCROW HOLDER'S
ADDRESS: Commonwealth Land Title Company
888 West Sixth Street, 4th Floor
Los Angeles, California 90017
Attn: Ms. Mai Ly Marsh
EXHIBITS: Exhibit A - Legal Description of the Land
Exhibit B - Documents
Exhibit C - Audit Letter
Exhibit D - Closing Lease
Exhibit E - Guaranty
EXISTING CONTRACTS: All written insurance, brokerage, service, maintenance,
operating, repair, supply, purchase, consulting,
professional service, advertising and other contracts
relating to the ownership operation or management of
the Property (excluding any recorded documents
evidencing the Permitted Exceptions) in any way
relating to the Property or any part thereof.
GUARANTY: A guaranty in the form to be attached hereto as
EXHIBIT E pursuant to Section 3(D) hereof.
GUARANTOR: Photomatrix, Inc., a California corporation.
IMPROVEMENTS: All buildings and other improvements located on or
affixed to the Land, including, without limitation, the
existing building containing approximately 39,898
aggregate square feet of rentable space (the
"BUILDING") and the parking lot, together with any and
all mechanical
(2)
<PAGE>
systems (including without limitation, all heating,
air conditioning and ventilating systems and
overhead doors), fixtures, (excluding any tenant
trade fixtures) facilities, equipment, conduits,
motors, appliances, boiler pressure systems and
equipment, air compressors, air lines, gas-fixed
unit heaters, baseboard heating systems, water
heaters and water coolers, plumbing fixtures,
lighting systems (including all fluorescent and
mercury vapor fixtures), transformers, switches,
furnaces, bus ducts, controls, risers, facilities,
installations and sprinkling systems to provide fire
protection, security, heat, air conditioning,
ventilation, exhaust, electrical power, light,
telephone, storm drainage, gas, plumbing,
refrigeration, sewer and water thereto, all cable
television fixtures and antenna, elevators,
escalators, incinerators, disposals, rest room
fixtures and other fixtures required for the
operation, maintenance and/or ownership of the
Building and Land (excluding Seller's trade fixtures
and personal property ("SELLER'S PROPERTY")),
equipment, motors and machinery located in or upon
the Building and required for the operation,
maintenance and/or ownership of the Building and
Land, and other improvements now or hereafter on the
Land.
INTANGIBLE PROPERTY: All intangible property now or on the Closing Date
owned by Seller in connection with the Real Property or
the Personal Property including without limitation all
of Seller's right, title and interest in and to all
environmental reports, soil reports, utility
arrangements, warranties, guarantees, indemnities,
claims, licenses, applications, permits, governmental
approvals, plans, drawings, specifications, surveys,
maps, engineering reports and other technical
descriptions, books and records, licenses,
authorizations, applications, permits and all other
Approvals, insurance proceeds and condemnation awards,
Seller's right, title and interest in all agreements
and contracts relating to the Real Property or the
Personal Property, or any part thereof (but not
Seller's obligations under any Rejected Contracts (as
hereinafter defined)), and all other intangible rights
used in connection with or relating to
(3)
<PAGE>
the Real Property or the Personal Property or any
part thereof, but excluding such items used solely
for the conduct of Seller's business, such as (but
not limited to) trademarks, trade names and
copyrights and excluding any of Seller's obligations
under any Existing Contracts.
LAND: That certain land located in the City of Carlsbad, San
Diego County, California consisting of approximately
1.8 acres and described in EXHIBIT A hereto, together
with all rights and interests appurtenant thereto,
including, without limitation, any water and mineral
rights, development rights, air rights, easements and
all rights of Seller in and to any alleys, passages or
other rights-of-way.
LEASES: Any and all leases, occupancy agreements, licenses or
other agreements to occupy all or any portion of the
Property.
LETTER OF CREDIT: A letter of credit in the face amount of Two Hundred
Seventy-Five Thousand Dollars ($275,000) issued by an
issuer, and otherwise in the form required by the
Closing Lease.
PERSONAL PROPERTY: Other than Seller's Property, all personal property
owned, now or on the Closing Date, by Seller and used
in conjunction with the operation, maintenance and/or,
ownership of, and located on, the Real Property,
including, without limitation, all landscaping, plants
and lawn equipment; all tools and supplies (whether
stored on or off the Real Property), maintenance
equipment, materials and supplies used in the operation
of the Real Property or Personal Property; but
excluding all furniture, furnishings, art work,
sculptures and paintings; all equipment and machinery
not otherwise included within the definition of the
Improvements, office equipment and supplies.
PROPERTY: The Real Property, the Personal Property, the Approved
Contracts (as defined in SECTION 3), and the Intangible
Property.
(4)
<PAGE>
PURCHASE PRICE: Two Million Nine Hundred Twenty-Five Thousand Dollars
($2,925,000).
REAL PROPERTY: The Land and the Improvements.
SECURITY DEPOSIT: The security deposit in the amount of Twenty-Five
Thousand One Hundred Thirty Seven Dollars ($25,137)
required pursuant to the Closing Lease.
SELLER: I-PAC Manufacturing, Inc., a California corporation.
SELLER'S ADDRESS: I-PAC Manufacturing, Inc.
1958 Kellogg Avenue
Carlsbad, California 92008
Attn: Patrick W. Moore
Chief Executive Officer
Facsimile Number: (760) 930-0115
SELLER'S DELIVERY DATE: The date on which Seller shall have delivered to Buyer
all of the Documents and the Document Certification (as
such terms are defined in SECTION 2 below).
SELLER'S PROPERTY: Defined in the definition of "Improvements".
TITLE COMPANY: Commonwealth Land Title Company
888 West Sixth Street, 4th Floor
Los Angeles, California 90017
Attn: Mr. Don Hallman
Facsimile Number: (213) 627-8722
WORKING DAY: Any day that is not a Saturday or Sunday or a holiday
in the state in which the Real Property is located.
1. DEPOSIT AND PAYMENT OF PURCHASE PRICE. Within three (3) Working
Days after the Effective Date, Buyer shall deposit with Escrow Holder, at
Escrow Holder's office, by check or by wire transfer, funds in the amount of
the Deposit as a deposit on account of the Purchase Price. Immediately upon
Escrow Holder's receipt of the Deposit, Escrow Holder shall place the Deposit
in an interest-bearing account, the interest to accrue to Buyer (any
subsequent references herein to the Deposit shall be deemed to include any
interest accrued thereon).
(5)
<PAGE>
If the transactions contemplated hereby close as provided herein, the
Deposit shall be paid to Seller and shall be credited toward the Purchase
Price. If this Agreement is terminated pursuant to the terms hereof or if the
transactions do not close where such termination or such failure to close is
a result of any reason other than default by Buyer, Escrow Holder shall
promptly return the Deposit to Buyer. If the Closing fails to occur due to a
default by Buyer hereunder (all of the conditions to Buyer's obligations to
close having been satisfied or waived), then Seller shall have the right to
terminate this Agreement and to receive and retain the Deposit in accordance
with the provisions of SECTION 10.B of this Agreement.
2. DELIVERY OF MATERIALS FOR REVIEW. Prior to, or concurrently with,
the execution by Seller of this Agreement, Seller shall deliver the materials
listed on EXHIBIT B (collectively, the "DOCUMENTS") to Buyer for its review,
and upon such delivery shall certify to Buyer that the Documents delivered to
Buyer constitute true, accurate and complete copies of such Documents and
constitute all of the Documents required by this Section to be delivered by
Seller to Buyer (the "DOCUMENT CERTIFICATION").
Without limitation on the foregoing, Seller shall make any other documents,
files and information concerning the Property in Seller's possession or
control available for Buyer's inspection at Seller's general offices or such
other location as shall be mutually convenient to the parties.
3. CONTINGENCIES. Buyer's obligation under this Agreement to purchase
the Property and consummate the transactions contemplated hereby is subject
to and conditioned upon, among other things, the satisfaction or waiver by
Buyer, in its sole and absolute discretion and in the manner hereinafter
provided, of each of the contingencies (individually, a "CONTINGENCY", and
collectively, the "CONTINGENCIES") set forth in this SECTION 3 in each case
within the Contingency Period.
A. PROPERTY REVIEW. On or before the expiration of the
Contingency Period, Buyer shall have completed and shall be satisfied,
in Buyer's sole and absolute discretion, with Buyer's due diligence
review, investigation and analysis of the Property (the "DUE DILIGENCE
REVIEW"), which may include, but shall not necessarily be limited to,
Buyer's review, investigation and analysis of: (i) all of the
Documents; (ii) the physical condition of the Property; (iii) the
adequacy and availability at reasonable prices of all necessary
utilities; (iv) the adequacy and suitability of applicable zoning and
Approvals; (v) the Existing Contracts and the obligations from and to
the parties thereunder; (vi) market feasibility studies; and (viii)
such tests and inspections of the Property as Buyer may deem necessary
or desirable.
B. ENVIRONMENTAL AUDIT. On or before the expiration of the
Contingency Period, Buyer shall have completed to the satisfaction of
Buyer, in
(6)
<PAGE>
its sole and absolute discretion, and at its expense, an environmental
audit and assessment of the Real Property (the "ENVIRONMENTAL AUDIT"),
including but not limited to the performance of such tests and
inspections as Buyer may deem necessary or desirable in order to
determine the presence or absence of any Hazardous Materials (as
hereinafter defined).
The foregoing Due Diligence Review and Environmental Audit Contingencies
are solely for Buyer's benefit and only Buyer may determine such
Contingencies to be satisfied or waived. Buyer shall have the Contingency
Period in which to satisfy or waive such Contingencies by delivering written
notice to Seller. A Contingency shall be deemed not to have been satisfied
or waived by Buyer unless prior to the expiration of the Contingency Period,
Buyer shall deliver to Seller a written notice to such effect (each such
notice being herein referred to as an "APPROVAL NOTICE").
If Buyer provides an Approval Notice for each of the Contingencies, then
the Contingencies shall be deemed satisfied or waived and the parties shall,
subject to the satisfaction of all other terms and conditions applicable to
the respective parties' obligations hereunder, be obligated to proceed to
Closing. If Buyer does not provide an Approval Notice with respect to any or
all of the Contingencies, then such Contingency(ies) shall be deemed not
satisfied or waived, and this Agreement shall automatically terminate and be
of no further force and effect without the further action of either party.
Upon any such termination, Escrow Holder shall return the Deposit to Buyer
and the parties shall have no obligation to proceed to Closing.
C. EXISTING CONTRACTS. With respect to the Existing Contracts only,
on or before expiration of the Contingency Period, Buyer shall furnish Seller
with a written notice of the contracts and agreements (the "APPROVED
CONTRACTS ") which Buyer has elected to assume at the Closing. All Existing
Contracts not included in any such notice shall be excluded from the Property
to be conveyed to Buyer and are herein respectively referred to as the
"REJECTED CONTRACTS". Prior to the Closing Date, Seller shall, at Seller's
sole cost and expense, terminate all Rejected Contracts and deliver to Buyer
evidence satisfactory to Buyer of Seller's termination of the Rejected
Contracts on or prior to Closing. If Buyer fails to give the notice described
in this paragraph within the Contingency Period, then Buyer shall be deemed
to have elected to terminate all of the Existing Contracts.
D. FORM OF CLOSING LEASE AND GUARANTY. On or before the fifth (5th)
Working Day after the Effective Date, which date may be extended by Buyer, in
its sole discretion, up to the tenth (10th) Working Day after the Effective
Date, Buyer and Seller shall amend this Agreement (the "FIRST AMENDMENT") to
include the form of Closing Lease as EXHIBIT D and the form of Guaranty as
EXHIBIT E. If Buyer and Seller cannot agree upon the form of the Closing
Lease and Guaranty within the time provided in this Section 3(D), then Buyer
shall have the right to terminate this Agreement by written notice to Seller.
If Buyer elects to
(7)
<PAGE>
terminate this Agreement pursuant to this Section 3(D), Escrow Holder shall
return the Deposit to Buyer and the parties shall have no obligation to
proceed to Closing.
4. TITLE COMMITMENT; SURVEY; SEARCHES. Buyer's obligation to purchase
the Property and to consummate the transactions contemplated hereby shall
also be subject to and conditioned upon Buyer's having approved the condition
of title to the Property and a survey of the Real Property in the manner
provided for in this SECTION 4.
A. TITLE COMMITMENT. Buyer shall cause the Title Company to
deliver a commitment (the "TITLE COMMITMENT") for the Title Policy (as
defined in SECTION 5 hereof), issued by the Title Company showing
Seller as the owner of the Real Property, together with legible copies
of all documents ("EXCEPTION DOCUMENTS") referred to in Schedule B of
the Title Commitment.
B. SURVEY. Buyer may, at its expense, obtain a survey (the
"SURVEY") of the Real Property, by a surveyor acceptable to Buyer, in
a form acceptable to, and certified to, Buyer and the Title Company,
and any such surveyor shall be afforded reasonable access to the
Property.
C. SEARCHES. Buyer may obtain current UCC, tax lien and
judgment searches with respect to Seller in the appropriate records
located in San Diego County, California and searches of the
appropriate records of San Diego, California and for the State of
California for the Real Property and the Personal Property showing all
liens, security interests and adverse claims affecting the Seller's
interest in the Real Property and/or the Personal Property
(collectively, "SEARCHES").
D. PERMITTED/UNPERMITTED EXCEPTIONS. On or before the end of
the Contingency Period, Buyer shall provide Seller with written notice
("BUYER'S EXCEPTION NOTICE") setting forth a list of the matters set
forth or disclosed in the Title Commitment, Survey and/or Searches
that are acceptable to Buyer (herein referred to, together with the
Closing Lease, as "PERMITTED EXCEPTIONS") and a list of such matters
that are unacceptable to Buyer (herein referred to as "UNPERMITTED
EXCEPTIONS"); provided however, that each financial encumbrance such
as a mortgage, deed of trust, or other debt security, attachment,
judgment, lien for delinquent real estate taxes and delinquent
assessments, mechanic's or materialmen's lien, and each other lien or
encumbrance of a definite or ascertainable amount which may be removed
by the payment of money and which is outstanding against the Property,
or any part thereof, that is revealed or disclosed by the Title
Commitment and/or the Searches (herein such matters are referred to as
"FINANCIAL ENCUMBRANCES") shall automatically, and without any
requirement for Buyer to provide notice thereof to Seller, be deemed
an
(8)
<PAGE>
Unpermitted Exception and Seller hereby covenants to remove all such
Financial Encumbrances on or before the Closing.
E. EXCEPTION CURE PERIOD. Except with respect to Financial
Encumbrances, which are governed by the last sentence of SUBSECTION
4.D., Seller shall have the right, but not the obligation, within five
(5) Working Days after receipt of the Buyer's Exception Notice
("SELLER'S ELECTION PERIOD"), to provide Buyer with written notice
that Seller has agreed to remove or otherwise remedy all Unpermitted
Exceptions set forth therein on or before the Closing Date. If Seller
provides Buyer with such written notice within Seller's Election
Period, Seller shall be obligated to remove or otherwise remedy all
Unpermitted Exceptions in a manner acceptable to Buyer on or before
the Closing Date, and Seller's failure to so remove or remedy all
Unpermitted Exceptions on or before the Closing Date shall constitute
a default by Seller hereunder.
F. TERMINATION OF AGREEMENT OR WAIVER OF DISAPPROVAL OF UNCURED
UNPERMITTED EXCEPTIONS. If Seller does not agree within Seller's
Election Period to remove all Unpermitted Exceptions on or before the
Closing Date as hereinbefore provided, Buyer shall have five (5)
Working Days to give Seller notice that Buyer waives its objections to
such Unpermitted Exceptions. If Buyer does not give such notice,
Buyer shall be deemed to have disapproved the Title Commitment, Survey
and/or Searches, as the case may be, which contain(s) or disclose(s)
the Unpermitted Exceptions, the condition set forth in this SECTION 4
shall be deemed to be unsatisfied and this Agreement shall
automatically terminate and be of no further force and effect. Upon
any such termination, Escrow Holder shall return the Deposit to Buyer
and the parties shall have no obligation to proceed to Closing. If
Buyer provides the foregoing notice of waiver within the aforesaid
five (5) Working Day period, then the condition set forth in this
SECTION 4 shall be deemed satisfied or waived and the parties shall,
subject to the satisfaction of all other terms and conditions
applicable to the respective parties' obligations hereunder, be
obligated to proceed to Closing. In the event Buyer shall expressly
waive in writing its objections to any Unpermitted Exceptions, the
term "PERMITTED EXCEPTIONS" as used herein in connection with the
status of title to be conveyed to Buyer or the Title Policy to be
delivered to Buyer shall mean and include all exceptions designated by
Buyer as Permitted Exceptions pursuant to SECTION 4.D. hereof, as well
as any Unpermitted Exceptions as to which Buyer has so waived its
objections.
G. EXTENSION OF CLOSING DATE. The Closing Date shall be
extended for such period of time as may be necessary in order to
afford the parties their
(9)
<PAGE>
respective review, consideration and notice periods otherwise
contemplated in this SECTION 4.
H. APPROVED TITLE AND SURVEY. The condition of title as
approved by Buyer in accordance with this SECTION 4 is referred to
herein as the "APPROVED TITLE" and the Survey as approved by Buyer in
accordance with this SECTION 4 is referred to herein as the "APPROVED
SURVEY".
5. DEED; TITLE POLICY. Seller shall convey the Real Property to Buyer
by a grant deed in form and substance to be agreed upon between Buyer and
Seller (the "DEED"). As a condition to Buyer's obligation to consummate the
purchase of the Property and other transactions contemplated hereby, as of
Closing the Title Company shall be unconditionally committed to issue to
Buyer an ALTA Form B (revised 1970) extended coverage Owner's Title Insurance
Policy issued by the Title Company, dated the Closing Date and naming Buyer
(or its nominee or assignee, if applicable) as the insured, in the face
amount of the Purchase Price, showing Buyer (or its nominee or assignee, as
applicable) to be the owner in fee simple of the Real Property, subject to no
exceptions other than Permitted Exceptions, together with such endorsements
as required by Buyer, all in form and substance reasonably satisfactory to
Buyer (the "TITLE POLICY"). Seller shall, subject to the provisions of
SECTION 4 above, deliver to the Title Company such instruments, documents,
payments, indemnities, releases and agreements and shall perform such acts as
the Title Company shall reasonably require in order to issue the Title Policy.
6. PRORATIONS. Real property taxes and assessments, utility charges,
insurance premiums and charges payable under the Existing Contracts shall not
be prorated between Buyer and Seller in connection with the sale of the
Property contemplated by this Agreement since (A) Seller is responsible for
all such charges, as owner of the Property, prior to the Closing, and (B)
Seller shall remain responsible for all such charges, as the sole tenant of
the Property under the terms of the Closing Lease, from and after the
Closing. If Seller has made any deposit with any utility company, local
authority or third party in connection with services to be provided to the
Property, such deposits shall remain the property of Seller.
7. CLOSING.
A. CLOSING REQUIREMENTS. The consummation of the sale and
purchase of the Property (the "CLOSING") shall be effected through a
closing escrow which shall be established by Seller and Buyer with the
Escrow Holder. All documents to be delivered at the Closing and all
payments to be made shall be delivered on or before the Closing Date
as provided herein, in escrow, pending the recording of the Deed
(following a datedown of title to the time of recording which does not
disclose any new matter affecting title to the Real Property which is
not acceptable to Buyer), and other instruments as are
(10)
<PAGE>
required to be recorded to effect the transfer and conveyance of the
Property, upon which recording all instruments and funds shall then be
delivered out of escrow.
B. ADDITIONAL CONDITIONS TO CLOSING. It is a condition to
Buyer's obligations to proceed to Closing and to consummate the
transactions contemplated hereby, that, as of the Closing Date, (i)
all of the Seller's representations and warranties hereunder shall be
true and correct in all material respects and the closing certificate
delivered pursuant to SECTION 8.A.(VI) hereof shall not disclose any
qualifications or changes in Seller's representations and warranties
set forth in SECTION 11 hereof, which, in Buyer's sole discretion,
would have a material adverse effect on the use, operation, value,
marketability or financeability of the Property by Buyer; (ii) Seller
shall have performed all of its covenants hereunder; (iii) no
moratorium, statute, order, regulation, ordinance or judgment of any
court or governmental agency shall have been enacted, adopted, issued
or initiated that would materially and adversely affect the Property;
(iv) the Property shall be delivered to Buyer at Closing free and
clear of any occupants or rights to possession other than the rights
of Seller under the Closing Lease; (v) all Contingencies shall have
been satisfied or waived in accordance with SECTION 3 hereof; (vi) the
Title Company shall be unconditionally committed to issue the Title
Policy upon the recordation of the Deed; (vii) Seller shall have
delivered all other documents and other deliveries listed in SECTION
8.A. hereof; (viii) there shall not have occurred a material adverse
change in Seller's financial condition or in its ability to perform
its obligations under the Closing Lease; (ix) there shall not have
occurred a material adverse change in Guarantor's financial condition
or its ability to perform its obligations under the Guaranty; and (x)
all other conditions to Buyer's obligations to proceed to Closing
which are set forth in this Agreement shall have been satisfied or
waived in writing in the manner herein provided. If any condition to
Buyer's obligations hereunder is not fulfilled, including any
condition not set forth in this SUBSECTION 7.B., Buyer shall have no
obligation to proceed to Closing or to consummate the transactions
contemplated hereby. Nothing in this Agreement shall restrict Buyer's
rights and remedies in the event that the failure of any of the
foregoing conditions to be satisfied also constitutes a default by
Seller hereunder.
8. ESCROW.
A. SELLER'S CLOSING DELIVERIES. On or prior to the Closing
Date, Seller shall deliver to Escrow Holder the Security Deposit and
the following documents and materials, all of which shall be in form
and substance acceptable to Buyer:
(11)
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(i) DEED; TRANSFER DECLARATIONS. The Deed, duly
executed, acknowledged and in recordable form, accompanied
by all necessary transfer tax declarations of Seller as may
be required under applicable law in order to permit the
recording of the Deed.
(ii) BILL OF SALE. A duly executed bill of sale for
the Personal Property and Intangible Property, conveying to
Buyer all of the Personal Property and Intangible Property
free from all leases, liens and encumbrances other than any
Permitted Exceptions that may be applicable thereto (the
"BILL OF SALE").
(iii) CLOSING LEASE. Two (2) originals of the Closing
Lease.
(iv) GUARANTY. Two (2) originals of the Guaranty.
(v) LETTER OF CREDIT. One original of the Letter of
Credit duly issued by the issuer.
(vi) ASSIGNMENT OF CONTRACTS. Two (2) originals of
an assignment of the Approved Contracts, duly executed and
acknowledged by Seller and to the extent required under the
terms of any Approved Contract, consented to by the other
party to such Contract (the "ASSIGNMENT OF CONTRACTS").
(vii) TITLE CLEARANCE DOCUMENTS. All statements,
releases, undertakings, affidavits, instruments and
indemnities duly executed by Seller required of Seller in
accordance with the provisions of SECTION 5 of this
Agreement.
(viii) CLOSING CERTIFICATE. A certificate duly
executed by Seller to the effect that as of the Closing
Date, all representations and warranties by Seller set forth
in this Agreement remain true and correct to the same extent
as if made on and as of the Closing Date and disclosing no
changes or qualifications objectionable to Buyer in its sole
discretion (the "CLOSING CERTIFICATE").
(ix) FIRPTA AFFIDAVIT. A non-foreign certification,
duly executed by Seller under penalty of perjury, certifying
that Seller is not a "foreign person", pursuant to Section
1445 (as may be amended) of the Internal Revenue Code of
1986, as amended
(12)
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("SECTION 1445") and a California Form 590 (collectively, the
"FIRPTA AFFIDAVIT"). If Seller shall fail or be unable to deliver
the same, then Buyer shall have the right to withhold such portion
of the Purchase Price as may be necessary, in the opinion of Buyer
or its counsel, to comply with Section 1445 and applicable
California law.
(x) EVIDENCE OF AUTHORITY. Evidence of (a) Seller's
power and authority to enter into this Agreement, the
Closing Lease and the other documents contemplated herein
and to perform its obligations hereunder and thereunder; and
(b) Guarantor's power and authority to enter into the
Guaranty and to perform its obligations thereunder.
On or prior to the Closing Date, Seller shall deliver to Buyer
the following documents and materials, all of which shall be in form
and substance reasonably acceptable to Buyer:
(a) INSURANCE POLICIES AND CERTIFICATES. Copies of all
insurance policies and current insurance certificates
evidencing that all insurance policies required to be
maintained by the Closing Lease are in full force and effect
as therein required.
(b) DOCUMENTS. Originals of all Documents, if not
already delivered, or copies of same certified by Seller to
the extent originals do not exist.
(c) KEYS; MANUALS. To the extent in Seller's
possession, keys to all entrance doors in the Improvements,
properly tagged for identification, and all operating
manuals relating to operation of the equipment and systems
which are part of the Property.
(d) CLOSING STATEMENT. A duplicate counterpart of a
closing statement (the "CLOSING STATEMENT") prepared by
Escrow Holder, and signed by Seller, setting forth all
prorations and credits required hereunder, signed by Seller,
together with copies of the most recent tax bills.
(e) OTHER DOCUMENTS. Such additional documents and
instruments as may reasonably be requested by Buyer in order
to effectuate the transactions contemplated hereby.
(13)
<PAGE>
B. BUYER'S DELIVERIES AT CLOSING. On the Closing Date, Buyer
shall deliver to Escrow Holder the Purchase Price for the Property as
provided in SECTION 1. On or prior to the Closing Date, Buyer shall
deliver to Escrow Holder two (2) duly executed counterparts of the
Assignment of Contracts, the Closing Lease and the Closing Statement
and such additional documents and instruments as may reasonably be
requested by Seller in order to effectuate the transactions
contemplated hereby.
C. ESCROW AGREEMENT. This Agreement shall constitute both an
agreement between Buyer and Seller and escrow instructions for Escrow
Holder. If Escrow Holder requires separate or additional escrow
instructions which it deems necessary for its protection, Seller and
Buyer hereby agree promptly upon request by Escrow Holder to execute
and deliver to Escrow Holder such separate or additional standard
escrow instructions of Escrow Holder (the "ADDITIONAL INSTRUCTIONS").
In the event of any conflict or inconsistency between this Agreement
and the Additional Instructions, this Agreement shall prevail and
govern, and the Additional Instructions shall so provide. The
Additional Instructions shall not modify or amend the provisions of
this Agreement unless otherwise agreed to in writing by Seller and
Buyer.
D. ACTIONS OF ESCROW HOLDER. On the Closing Date, provided
Buyer and Seller have satisfied (or waived in writing) the conditions
set forth in this Agreement, Escrow Holder shall take the following
actions in the order indicated below:
(i) Record the Deed in the Official Records of San
Diego County, California;
(ii) Deliver to Buyer a conformed copy of the
recorded Deed, the Bill of Sale, Closing Certificate and
FIRPTA Affidavit one fully executed original of the Closing
Lease, Guaranty and Assignment of Contracts and the original
Letter of Credit;
(iii) Deliver to Seller, in cash or current funds, all
sums due Seller pursuant to this Agreement and one original
of the fully executed Closing Lease and Assignment of
Contracts;
(iv) Cause the Title Company to issue the Title
Policy; and
(v) Deliver to Seller and Buyer a closing statement
which has been certified by Escrow Holder to be true and
correct.
(14)
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E. PROCEDURES UPON FAILURE OF CONDITION. Except as otherwise
expressly provided herein, if any of the conditions set forth in this
Agreement is not timely satisfied or waived for a reason other than
the default of Buyer or Seller in the performance of their respective
obligations under this Agreement:
(i) This Agreement, the escrow and the respective
rights and obligations of Seller and Buyer hereunder shall
terminate;
(ii) Escrow Holder shall promptly return to Buyer all
funds of Buyer in its possession, including but not limited
to the Deposit, and to Seller and Buyer all documents
deposited by them respectively, which are then held by
Escrow Holder; and
(iii) Any escrow cancellation and title charges shall
be borne by Seller.
F. DISTRIBUTION OF FUNDS FOR THE SELLER. Seller hereby instructs
Escrow Holder that any proceeds due to Seller at the close of escrow should
be remitted to Imperial Bank as payment against any credit obligations due to
Imperial Bank by Seller at the close of escrow. Seller may not change this
instruction to escrow without the written consent of Imperial Bank or a zero
demand notice to escrow from Imperial Bank. The balance of said proceeds,
after payment to Imperial Bank, if any, shall be remitted to Seller at the
close of escrow. Buyer has no responsibilities or obligations with respect
to this SECTION 8(f).
9. CLOSING COSTS; PROPERTY COSTS. Seller shall pay (A) all recording
fees and transfer taxes payable in connection with the transfer of the
Property to Buyer and the recording of the Deed; (B) the cost of a CLTA
Owners Title Insurance Policy provided by the Title Company for the Property
(or "CLTA POLICY"); (C) one-half of all escrow fees and charges owing to
Escrow Holder; (D) the commission due Broker; and (E) all of the Seller's
legal fees and expenses and the cost of all opinions, certificates,
instruments, documents and papers Seller is required to deliver or to cause
to be delivered hereunder, and, without limitation, the cost of all
performances by Seller of its obligations hereunder.
Buyer shall pay (A) one-half of all escrow fees and charges owing to
Escrow Holder; (B) the difference in cost between the CLTA Policy and the
Title Policy and (C) all of Buyer's legal fees and expenses and the cost of
preparing all documents and papers Buyer is required to deliver or to cause
to be delivered hereunder, and, without limitation, the cost of all
performances by Buyer of its obligations hereunder.
(15)
<PAGE>
10. REMEDIES.
A. SELLER'S SOLE REMEDY. If the closing of this transaction
fails to occur due to Buyer's default under this Agreement (all of the
conditions to Buyer's obligations to close having been satisfied or
waived), Seller's sole and exclusive remedy shall be to terminate the
escrow and receive and retain the Deposit in accordance with SECTION
10(B).
B. LIQUIDATED DAMAGES ON BUYER'S DEFAULT. BUYER AND SELLER
HEREBY ACKNOWLEDGE AND AGREE THAT, IN THE EVENT THE CLOSING FAILS TO
OCCUR DUE TO A BUYER DEFAULT (ALL OF THE CONDITIONS TO BUYER'S
OBLIGATIONS TO CLOSE HAVING BEEN SATISFIED OR WAIVED), SELLER WILL
SUFFER DAMAGES IN AN AMOUNT WHICH WILL, DUE TO THE SPECIAL NATURE OF
THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT AND THE SPECIAL NATURE
OF THE NEGOTIATIONS WHICH PRECEDED THIS AGREEMENT, BE IMPRACTICAL OR
EXTREMELY DIFFICULT TO ASCERTAIN. IN ADDITION, BUYER WISHES TO HAVE A
LIMITATION PLACED UPON THE POTENTIAL LIABILITY OF BUYER TO SELLER IN
THE EVENT THE CLOSING FAILS TO OCCUR DUE TO A BUYER DEFAULT, AND
WISHES TO INDUCE SELLER TO WAIVE OTHER REMEDIES WHICH SELLER MAY HAVE
IN THE EVENT OF A BUYER DEFAULT. BUYER AND SELLER, AFTER DUE
NEGOTIATION, HEREBY ACKNOWLEDGE AND AGREE THAT THE AMOUNT OF THE
DEPOSIT REPRESENTS A REASONABLE ESTIMATE OF THE DAMAGES WHICH SELLER
WILL SUSTAIN IN THE EVENT OF SUCH BUYER DEFAULT. BUYER AND SELLER
HEREBY AGREE THAT SELLER MAY, IN THE EVENT THE CLOSING FAILS TO OCCUR
DUE TO A BUYER DEFAULT, TERMINATE THIS AGREEMENT AND CANCEL THE ESCROW
BY WRITTEN NOTICE TO BUYER AND ESCROW HOLDER, WHEREUPON ESCROW HOLDER
SHALL DELIVER THE DEPOSIT TO SELLER AND SELLER SHALL RECEIVE THE
DEPOSIT AS LIQUIDATED DAMAGES. SUCH RETENTION OF THE DEPOSIT BY
SELLER IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO SELLER PURSUANT
TO SECTIONS 1671, 1676 AND 1677 OF THE CALIFORNIA CIVIL CODE, AND
SHALL NOT BE DEEMED TO CONSTITUTE A FORFEITURE OR PENALTY WITHIN THE
MEANING OF SECTION 3275 OR SECTION 3369 OF THE CALIFORNIA CIVIL CODE,
OR ANY SIMILAR PROVISION. FOLLOWING TERMINATION OF THIS AGREEMENT,
CANCELLATION OF THE ESCROW AND THE DELIVERY TO AND RETENTION OF THE
DEPOSIT BY SELLER AS LIQUIDATED DAMAGES PURSUANT TO THIS SECTION
10(B), ALL OF
(16)
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THE RIGHTS AND OBLIGATIONS OF BUYER AND SELLER UNDER THIS AGREEMENT
SHALL BE TERMINATED.
BUYER AND SELLER ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTAND
THE PROVISIONS OF THIS SECTION 10(B) AND BY THEIR INITIALS IMMEDIATELY
BELOW AGREE TO BE BOUND BY ITS TERMS.
BUYER: SELLER:
------------------ -----------------
(Initials) (Initials)
C. BUYER'S REMEDIES. In the event of a default by Seller hereunder,
the Deposit shall immediately be returned to Buyer, Seller shall pay all
escrow cancellation and title charges and Buyer may, at its option (i)
terminate this Agreement, (ii) specifically enforce the terms and
conditions of this Agreement, (iii) exercise any remedy available at law or
in equity, or (iv) avail itself of any combination of the foregoing.
11. SELLER'S REPRESENTATIONS AND WARRANTIES. As a material inducement
to the execution and delivery of this Agreement by Buyer and the performance
by Buyer of its duties and obligations hereunder, Seller does hereby
acknowledge, warrant, represent and agree to and with Buyer that as of the
Effective Date and as of the Closing Date:
A. DELIVERY OF WRITTEN MATERIALS. Seller has not made to Buyer
any misstatement of any material fact relating to the Property or this
Agreement, nor failed to deliver to Buyer any written materials in
Seller's possession or of which Seller has knowledge which contain
information that would have a material adverse impact on Buyer's
ability to use and operate the Property as it is currently being used
and operated or the marketability of the Property, and all written
materials delivered to Buyer (including, without limitation, all of
the Documents) are true, accurate and complete in all material
respects.
B. COMPLIANCE WITH LAWS. Seller has received no notice of and
to Seller's knowledge, there is no violation or alleged violation of
any legal requirement affecting the Property, including, without
limitation, any violation or alleged violation of any local, state or
federal environmental, zoning, handicap or fire law, ordinance, code,
regulation, rule or order, and specifically including, without
limitation, variances or special permits affecting the Property and
the Americans With Disabilities Act.
C. LITIGATION. Seller has received no notice of and there is
no pending or, to Seller's knowledge, threatened litigation or
governmental
(17)
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proceeding affecting Seller, Guarantor, or the Property, that relates to
the Property, the validity or enforceability of this Agreement, the
Closing Lease, the Guaranty, or any instrument or document to be
delivered by Seller in connection with the transactions contemplated
hereby. Seller has received no notice of and there is no pending or, to
Seller's knowledge, threatened litigation or governmental proceeding
affecting (i) Seller (and not relating to the Property) which would have
a material adverse effect upon Seller's ability to perform its
obligations under this Agreement or the Closing Lease or (ii) Guarantor's
ability to perform its obligations under the Guaranty.
D. OTHER AGREEMENTS. There are no agreements, instruments,
documents or understandings, oral or written, with any person, entity
or governmental authority affecting the Property or which could give
rise to claims affecting the Property after the Closing Date, except
those disclosed and specifically set forth in writing by Seller to
Buyer during the Contingency Period.
E. GOVERNMENTAL ACTIONS. There is no pending or, to Seller's
knowledge, threatened or proposed (i) proceeding or governmental
action to modify the zoning classification of, or to condemn, or
purchase in lieu thereof, all or any part of the Property; (ii)
reassessment or special assessments or penalties or interest with
respect to real estate taxes or any other assessments applicable to
the Property, other than any reassessment that may result solely from
the sale of the Property to Buyer; (iii) proceeding before any court
or administrative agency, the adverse resolution of which would have a
materially adverse effect on the value or operations of the Property;
or (iv) rent controls, governmental moratoria or environmental
controls affecting the Property, or any other impediments that might
significantly interfere with the Buyer's use or disposition of the
Property or the value or operations of the Property and Seller has
received no notice of any of the above.
F. DUE AUTHORIZATION/SELLER. Seller is a California
corporation organized, validly existing and in good standing under the
laws of the State of California. Seller has full power to execute,
deliver and carry out the terms and provisions of this Agreement, the
Closing Lease and each of the other agreements, instruments and
documents herein required to be made or delivered by Seller pursuant
hereto, and has taken all necessary action in connection with the
execution, delivery and performance of this Agreement, the Closing
Lease and such other agreements, instruments and documents. The
individuals executing this Agreement, the Closing Lease and all other
agreements, instruments and documents herein required to be made or
delivered by Seller
(18)
<PAGE>
pursuant hereto on behalf of Seller are and shall be duly authorized to
sign the same on Seller's behalf and to bind Seller thereto.
G. DUE AUTHORIZATION/GUARANTOR. Guarantor is a California
corporation organized, validly existing and in good standing under the
laws of the State of California. Guarantor has full power to execute,
deliver and carry out the terms and provisions of the Guaranty, and
has taken all necessary action in connection with the execution,
delivery and performance of the Guaranty. The individuals executing
the Guaranty on behalf of Guarantor are and shall be duly authorized
to sign the same on Guarantor's behalf and to bind Guarantor thereto.
H. ENFORCEABILITY/SELLER. This Agreement has been, and the
Closing Lease each and all of the other agreements, instruments and
documents herein required to be made or delivered by Seller pursuant
hereto have been, or on the Closing Date will have been, executed by
Seller and when so executed, are and shall be legal, valid, and
binding obligations of Seller enforceable against Seller in accordance
with their respective terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium, and other similar laws
affecting the rights of creditors generally and, as to enforceability,
the general principles of equity (regardless of whether enforcement is
sought in a proceeding in equity or at law).
I. ENFORCEABILITY/GUARANTOR. The Guaranty has been, or on the
Closing Date will have been, executed by Guarantor and when so
executed, are and shall be a legal, valid, and binding obligation of
Guarantor enforceable against Guarantor in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization,
moratorium, and other similar laws affecting the rights of creditors
generally and, as to enforceability, the general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity
or at law).
J. NO CONFLICT/SELLER. The execution and delivery of, and
consummation of the transactions contemplated by this Agreement, the
Closing Lease or any of the other agreements, instruments and
documents to be executed in connection herewith are not prohibited by,
and will not conflict with, constitute grounds for termination of, or
result in the breach of any of the agreement or instrument to which
Seller is now a party or by which it or the Property is bound, or any
order, rule or regulation of any court or other governmental agency or
official.
(19)
<PAGE>
K. NO CONFLICT/GUARANTOR. The execution and delivery of, and
consummation of the transactions contemplated by the Guaranty are not
prohibited by, and will not conflict with, constitute grounds for
termination of, or result in the breach of any of the agreement or
instrument to which Guarantor is now a party or by which it is bound,
or any order, rule or regulation of any court or other governmental
agency or official.
L. ENVIRONMENTAL MATTERS. To Seller's knowledge (i) no
asbestos or PCB compounds were used in the construction of the
Improvements nor are any asbestos or PCB compounds located in, at or
upon the Property; (ii) the Property is not in violation of any
Environmental Law (as defined below); and (iii) there are no Hazardous
Materials (as defined below) present on the Property other than the
Excluded Materials (as defined below). During the time in which
Seller owned the Property, neither Seller nor, to Seller's knowledge,
any third party has placed, used, generated, stored, or disposed of
on, under or about the Property, or transported to or from it, any
Hazardous Material (as defined below) other than Excluded Materials.
Seller has received no notice from any governmental agency of any
investigation or proceeding by such agency concerning the presence or
alleged presence of Hazardous Materials on the Property. To Seller's
knowledge, there are no underground storage tanks located on the Real
Property. There are no present, pending or, to Seller's knowledge,
threatened actions or proceedings by any governmental agency or any
other entity regarding public health risks or the environmental
condition of the Property, or the disposal or presence of Hazardous
Material, or regarding any Environmental Law (collectively,
"ENVIRONMENTAL ACTIONS"), and Seller has not received any notice of
any such Environmental Actions. During Seller's period of ownership of
the Property there have been no Environmental Actions and, to Seller's
knowledge, prior to Seller's acquisition of the Property there were no
Environmental Actions. To Seller's knowledge, the Property
(including underlying groundwater), and the use and operation thereof,
have been and are currently in compliance with all Environmental Laws.
To Seller's knowledge, all governmental permits and licenses required
under Environmental Laws are in effect, and Seller is in compliance
therewith. To Seller's knowledge, there is no proceeding or inquiry by
any governmental agency or authority with respect to the presence of
Hazardous Materials on the Property or the migration thereof from or
to other property, and Seller has not received any notice of any such
proceeding.
The term "ENVIRONMENTAL LAWS" means all federal, state or local
laws, ordinances, requirements and regulations (including consent
decrees and administrative orders) relating to health, safety,
industrial hygiene, waste disposal, or the protection of the
environment, including, without limitation: the
(20)
<PAGE>
federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980, the federal Superfund Amendments and Reauthorization Act of
1986, the federal Resource Conservation and Recovery Act of 1976, the
federal Clean Air Act, the federal Water Pollution Control Act and
federal Clean Water Act of 1977, the federal Insecticide, Fungicide and
Rodenticide Act, the federal Pesticide Act of 1978, the federal Toxic
Substances Control Act, the federal Safe Drinking Water Act, the federal
Hazardous Materials Transportation Act, and all amendments thereto and
regulations adopted and publications promulgated pursuant thereto. The
term "HAZARDOUS MATERIALS" includes oil and petroleum products,
asbestos, polychlorinated biphenyls, radon and urea formaldehyde, and
all other materials classified as hazardous or toxic under any
Environmental Law. The term "EXCLUDED MATERIALS" means (a) ordinary
office supplies, (b) household cleaning supplies and (c) the materials
used by the tenants of the Property as of the date hereof in the
ordinary course of their business at the Property, in each case only so
long as the presence and use thereof does not violate any Environmental
Law and so long as such use is in accordance with the terms of the
applicable Lease.
M. BANKRUPTCY MATTERS. Neither Seller nor Guarantor has made a
general assignment for the benefit of creditors, filed any voluntary
petition in bankruptcy or suffered the filing of an involuntary
petition by its creditors, suffered the appointment of a receiver to
take possession of substantially all of its assets, suffered the
attachment or other judicial seizure of substantially all of its
assets, admitted its inability to pay its debts as they come due, or
made an offer of settlement, extension or composition to its creditors
generally.
N. INSURANCE. Seller carries fire and extended coverage
insurance with respect to the Property in the amount of the full
replacement value thereof and adequate liability insurance. All
insurance is in full force and effect. To Seller's knowledge, the
Property complies with all requirements of each such policy and Seller
has not received from any of the insurers thereunder any notice
requiring or suggesting that any work be performed at the Property.
O. APPROVALS. All Approvals necessary for the occupancy,
operation, maintenance and ownership of the Property are in full force
and effect and Seller has not received notice of any intention on the
part of the issuing authority to cancel, suspend or modify any of the
Approvals or to take any action or institute any proceeding to effect
such cancellation, suspension or modification. The Property is
operated and occupied in compliance with each of the Approvals.
(21)
<PAGE>
P. LEASES. Except for that certain Communications Site Lease
Agreement (Building) by and between Nextel of California, Inc., a
Delaware corporation d/b/a Nextel Communications and Seller (the
"NEXTEL LEASE"), there are no Leases.
12. BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer hereby makes the
following representations and warranties to Seller as of the Effective Date
and as of the Closing Date:
A. DUE AUTHORIZATION. Buyer is a limited partnership, validly
existing and in good standing under the laws of the State of Delaware.
Buyer has full power to execute, deliver and carry out the terms and
provisions of this Agreement and each of the other agreements,
instruments and documents herein required to be made or delivered by
Buyer pursuant hereto, and has taken all necessary action to authorize
the execution, delivery and performance of this Agreement and such
other agreements, instruments and documents. The individuals
executing this Agreement and all other agreements, instruments and
documents herein required to be made or delivered by Buyer pursuant
hereto on behalf of Buyer are and shall be duly authorized to sign the
same on Buyer's behalf and to bind Buyer thereto.
B. ENFORCEABILITY. This Agreement has been, and each and all
of the other agreements, instruments and documents herein required to
be made or delivered by Buyer pursuant hereto have been, or on the
Closing Date will have been, executed by Buyer or on behalf of Buyer,
and when so executed, are and shall be legal, valid, and binding
obligations of Buyer enforceable against Buyer in accordance with
their respective terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium, and other similar laws affecting the
rights of creditors generally and, as to enforceability, the general
principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law).
13. ACTIONS AFTER THE EFFECTIVE DATE. The parties covenant to do the
following through the Closing Date:
A. TITLE. Seller shall not make or permit any changes to the
Property or to the condition of title to the Property that would
change the Approved Title or the Approved Survey except with Buyer's
advance written consent, which consent may be withheld in Buyer's sole
discretion. In this regard, Seller shall not sell, assign or create
any right, title or interest in the Property, or any part thereof, or
create, or permit to exist, any lien,
(22)
<PAGE>
encumbrance or charge thereon, without the prior consent of Buyer, which
consent may be withheld in Buyer's sole discretion.
B. MAINTENANCE AND OPERATION OF PROPERTY. Seller shall
maintain the Property in substantially its current condition, shall
maintain existing insurance coverage in full force and effect, and
shall operate and maintain the Property in compliance with all
applicable laws and regulations, shall not delay or defer any repair
or maintenance item, and shall pay all bills and obligations arising
from the Property as payment becomes due. Seller shall not make any
material alterations to or upon the Property, except with Buyer's
advance written consent, which consent may be withheld in Buyer's sole
discretion.
C. LEASES AND AGREEMENTS. Seller shall not amend or terminate
the Nextel Lease or any of the Approved Contracts, shall not make any
other agreement concerning the Property, including, without
limitation, any new leases of space in the Property, without Buyer's
advance written consent, which may be withheld in Buyer's sole
discretion, and shall perform all of its obligations under the
Approved Contracts and the Nextel Lease.
D. REPRESENTATIONS AND WARRANTIES. Each party shall use its
reasonable best efforts to prevent any act or omission that would
render any of its representations and warranties herein untrue or
misleading, and shall immediately notify the other party if such act
or omission occurs.
E. ENTRY. As of the Effective Date, at all times prior to the
Closing, Buyer and its agents, employees and contractors
(collectively, "PERMITTEES") may enter the Real Property for purposes
of performing Buyer's Due Diligence Review and Environmental Audit.
Buyer and its Permittees may enter upon the Land and Improvements,
including all leased areas, to perform such tests and inspections as
Buyer may deem necessary or desirable, including, without limitation,
conducting: soils, ground water, engineering and Hazardous Materials
tests; inspections of all roofs, foundations, walls and structural
components in the Improvements; inspections of all mechanical systems,
building materials, office spaces, utility areas, storage and
warehouse areas; operating expense, income and other financial
analyses and real estate tax analyses; inspections and audits of (and
making copies of) any and all books, records, correspondence, reports
and other files maintained by Seller relating to the Property; and
such other tests and inspections as Buyer, in its discretion, deems
necessary or desirable in connection with its Due Diligence Review
and/or Environmental Audit. Buyer shall repair any damage and
indemnify, defend and hold Seller harmless from any cost, claim or
expense arising directly from such entry by Buyer or its Permittees or
from the performance of any such
(23)
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tests by Buyer or its Permittees, except that Buyer's agreements as set
forth in this sentence shall not extend to any condition that is
discovered by Buyer to be present on, under or about the Real Property.
F. APPLICATIONS. Following the Effective Date, Seller shall
not make application to any governmental entity for any Approvals or
any change in the zoning, affecting the Real Property, except in each
case with Buyer's advance written consent.
14. DAMAGE TO PROPERTY; TAKING.
A. TAKING. If the Property or any part thereof is taken or is
the subject of a notice of taking by eminent domain prior to the
Closing Date, Seller shall promptly notify Buyer. Within ten (10)
Working Days after such notice, Buyer shall give notice that it elects
to (a) terminate this Agreement, in which event Escrow Holder shall
return the Deposit to Buyer and the parties shall have no further
obligations hereunder, or (b) proceed to Closing, in which event
Seller shall pay over and assign to Buyer all awards recovered or
recoverable on account of such taking. If Buyer elects to proceed
under clause (b) above, Seller shall not compromise, settle, or adjust
any claims to such awards without Buyer's prior written consent.
B. DAMAGE. Risk of loss up to and including the Closing Date
shall be borne by Seller. In the event of any material damage to or
destruction of the Property or any portion thereof, Buyer may, at its
option, by notice to Seller given within ten (10) Working Days after
Seller notifies Buyer in writing of such damage or destruction (and if
necessary the Closing Date shall be extended, but not beyond the
Outside Closing Date, to give Buyer the full 10-day period to make
such election): (i) terminate this Agreement, in which event Escrow
Holder shall return the Deposit to Buyer and the parties shall have no
further obligations hereunder, or (ii) proceed under this Agreement
with no adjustment of the Purchase Price, receive any insurance
proceeds (including any rent loss insurance applicable to any period
on and after the Closing Date) due Seller as a result of such damage
or destruction and assume responsibility for such repair, and Buyer
shall receive a credit at Closing for any deductible, uninsured or
coinsured amount under said insurance policies. If Buyer elects (ii)
above, Seller will cooperate (at no material expense to Seller) with
Buyer in obtaining the insurance proceeds and such agreements from
Seller's insurers. If the Property is not materially damaged, then
Buyer shall not have the right to terminate this Agreement, but Seller
shall, at its cost, repair the damage before the Closing in a manner
reasonably satisfactory to Buyer or if repairs cannot be completed
before the Closing, credit Buyer at Closing for the reasonable cost to
(24)
<PAGE>
complete the repair. "MATERIAL DAMAGE" and "MATERIALLY DAMAGED" means
damage (x) reasonably exceeding $250,000, or (y) that entitles any
tenant of the Property to terminate its lease, or (z) which, in
Buyer's reasonable estimation, will take longer than 90 days to
repair.
C. WAIVER. Failure of Buyer to timely provide a notice of
election in accordance with this SECTION 14, shall be deemed an
election by Buyer to terminate this Agreement. Seller and Buyer each
expressly waive the provisions of California Civil Section 1662 and
hereby agree that the provisions of this SECTION 14 shall govern the
parties' obligations in the event of any damage or destruction to the
Property or the taking of all or any part of the Real Property.
15. SURVIVAL. All representations and warranties by the respective
parties contained herein are intended to and shall remain true and correct as
of the Closing, shall be deemed to be material, and shall survive the
delivery of the Deed and transfer of title for a period of twelve (12)
months. Any covenants and conditions herein that must be operative after
delivery of the Deed to be effective shall be so operative and shall not be
deemed to have been merged in the Deed.
16. SUCCESSORS AND ASSIGNS. The terms, covenants and conditions herein
contained shall be binding upon and inure to the benefit of the successors
and assigns of the parties hereto. This Agreement and all rights of Buyer
hereunder may be assigned or transferred by Buyer to any of its affiliates,
in which event all instruments, documents and agreements required to be
delivered to the Buyer hereunder shall be delivered to, and run for the
benefit of such entity, and such entity (rather than Buyer) shall execute and
deliver any instruments, documents or agreements required to be executed and
delivered by Buyer hereunder.
17. NO THIRD PARTY BENEFITS. This Agreement is made for the sole
benefit of the Buyer and Seller and their respective successors and assigns,
and no other person shall have any right or remedy or other legal interest of
any kind under or by reason of this Agreement.
18. COUNTERPARTS. This Agreement may be executed in multiple
counterparts and shall be valid and binding with the same force and effect as
if all parties had executed the same Agreement.
19. ENTIRE AGREEMENT. This Agreement contains all of the covenants,
conditions and agreements between the parties and shall supersede all prior
correspondence, agreements and understandings, both verbal and written. The
parties intend that this Agreement constitutes the complete and exclusive
statement of its terms and that no extrinsic evidence may be introduced in
any proceeding involving this Agreement.
(25)
<PAGE>
20. ATTORNEYS' FEES. In the event of any litigation regarding the
rights and obligations under this Agreement, the prevailing party shall be
entitled to reasonable attorneys, fees and court costs.
21. NOTICES. All notices required or permitted to be given pursuant to
the terms hereof shall be in writing and shall be delivered either by (a)
certified mail, return receipt requested, in which case notice shall be
deemed delivered five (5) Working Days after deposit, postage prepaid in the
U.S. mail, (b) a reputable messenger service or a nationally recognized
overnight courier, in which case notice shall be deemed delivered one (1)
Working Day after deposit with such messenger or courier, (c) facsimile or
other telecopy transmission (followed with "hard copy" sent by a nationally
recognized overnight courier or mail as aforesaid), in which case notice
shall be deemed delivered when the facsimile or other telecopy transmission
is received (as evidenced by the sender's electronic confirmation), or (d)
personal delivery with receipt acknowledged in writing, in which case notice
shall be deemed delivered when received. All such notices shall be addressed
to Seller at Seller's Address, with a copy to Sullivan, Hill, Lewin, Rez,
Engel & LaBazzo 505 "C" Street, San Diego, California, 92101, Attention:
James P. Hill, Facsimile Number (619) 231-4372 to Buyer at Buyer's Address,
with a copy to Mayer, Brown & Platt, 350 South Grand Avenue, 25th Floor, Los
Angeles, California 90071, Attention: Lorie Soares Griffen, Esq., Facsimile
Number: (213) 625-0248; and to Escrow Holder at Escrow Holder's Address.
The foregoing addresses may be changed by written notice to the other party
as provided herein.
22. CONSTRUCTION OF AGREEMENT. In construing this Agreement, all
headings and titles are for the convenience of the parties only and shall not
be considered a part of this Agreement. Whenever required by the context,
the singular shall include the plural and the masculine shall include the
feminine and vice versa. This Agreement shall not be construed as if
prepared by one of the parties, but rather according to its fair meaning as a
whole, as if both parties had prepared it. All Exhibits attached hereto are
incorporated in this Agreement by reference thereto.
23. TIME. Time is of the essence of every provision herein contained.
Whenever the date or deadline for any action to be taken is not a Working
Day, the relevant date or deadline shall be the next Working Day.
24. APPLICABLE LAW. This Agreement shall be governed by the internal
laws of the state in which the Real Property is located.
25. NO ORAL MODIFICATION OR WAIVER. This Agreement may not be changed
or amended orally, but only by an agreement in writing. No waiver shall be
effective hereunder unless given in writing, and waiver shall not be inferred
from any conduct of either party.
(26)
<PAGE>
26. LIMITATION OF LIABILITY. In accordance with the Declaration of
Trust of Cabot Industrial Trust, a Maryland real estate investment trust, all
persons dealing with the trust shall look to the assets of the trust for the
enforcement of any claim against the trust, as neither the trustees,
officers, employees, partners nor shareholders of the trust assume any
personal liability for obligations entered into by or on behalf of the trust.
27. MARKETING OF PROPERTY. Unless and until this Agreement is duly
terminated pursuant to the terms hereof, Seller shall not enter into any
negotiations, understandings or agreements with any party other than Buyer
relating to the sale, transfer or other disposition of the Property or any
portion thereof and Seller and the Broker shall not offer the Property or any
portion thereof for sale to any other party.
28. BROKERAGE COMMISSION. On the Closing Date, Seller shall pay a real
estate commission to the Broker. Seller and Buyer each represent and warrant
to the other party that its sole contact with the other party or the Property
regarding this transaction has been directly with the other party or through
Broker. Seller and Buyer further represent and warrant to each other that no
other broker or finder can properly claim a right to a commission or finder's
fee based upon contacts between the claimant and the warranting party with
respect to the other party or the Property. Seller and Buyer shall
indemnify, defend and hold the other party harmless from and against any
loss, cost or expense, including, but not limited to, attorneys' fees and
court costs, resulting from any claim for a fee or commission by any broker
or finder in connection with the Property, and this Agreement resulting from
the indemnifying party's actions.
29. INDEMNITY. Seller hereby agrees to indemnify Buyer and its
successors, assigns, and the affiliates, directors, officers, employees and
partners of any of them, and hold each of them harmless from any and all
claims, liabilities, damages, and penalties and any and all loss, cost, or
expense incurred by Buyer incident to, resulting from, or in any way arising
out of any tort claim or breach of contract claim or other claim for money
due and owing in connection with the ownership or operation of the Property
but only to the extent that such claim arises from circumstances, acts or
omissions which occurred prior to the Closing. Buyer hereby agrees to
indemnify Seller and its successors, assigns, and the affiliates, directors,
officers, employees and partners of any of them and hold each of them
harmless from any and all claims, liabilities, damages, and penalties and any
and all loss, costs, or expense incurred by the Seller incident to, resulting
from, or in any way arising out of any tort claim or breach of contract claim
or other claim for money due and owing in connection with the ownership or
operation of the Property but only to the extent that such claim arises from
circumstances, acts or omissions which occurred after the Closing. Each of
the parties hereto further agrees, upon notice from the other, to contest any
demand, claim, suit, or action against which each party has hereinabove
agreed to indemnify and hold the other and all such other parties harmless,
and to defend any action that may be brought in connection with any such
demand, claim, suit, or action, or with respect to which each party has
hereinabove
(27)
<PAGE>
agreed to hold the other and all such other parties harmless, and to bear all
costs and expenses of such contest and defense. The indemnities set forth
herein shall be deemed to be material and shall survive the delivery of the
Deed and transfer of title.
30. INFORMATION AND AUDIT COOPERATION. At Buyer's request, at any time
before or after the Closing, Seller shall provide to Buyer's designated
independent auditor access to the books and records of the Property, and all
related information regarding the period for which Buyer is required to have
the Property audited under the regulations of the Securities and Exchange
Commission, and Seller shall provide to such auditor a representation letter
regarding the books and records of the Property, in substantially the form of
EXHIBIT C attached hereto, in connection with the normal course of auditing
the Property in accordance with generally accepted auditing standards. Buyer
agrees to indemnify and hold harmless Seller from any claim, damage, loss, or
liability to which Seller is at any time subjected by any person who is not a
party to this Agreement as a result of Seller's compliance with this
paragraph, except to the extent any such claim, damage, loss or liability
arises from Seller's fraud or intentional misrepresentation.
31. 1031 EXCHANGE. Buyer may consummate the purchase of the Property
as part of a so-called like kind exchange (the "Exchange") pursuant to
Section 1031 of the Internal Revenue Code of 1986, as amended (the "Code"),
provided that: (i) the Closing shall not be delayed or affected by reason of
the Exchange nor shall the consummation or accomplishment of the Exchange be
a condition precedent or condition subsequent to Buyer's obligations under
this Agreement; (ii) Buyer shall effect the Exchange through an assignment of
this Agreement, or its rights under this Agreement, to a qualified
intermediary; (iii) Seller shall not be required to take an assignment of the
purchase agreement for the relinquished property or be required to acquire or
hold title to any real property for purposes of consummating the Exchange;
and (iv) Buyer shall pay any additional costs that would not otherwise have
been incurred by Buyer or Seller had Buyer not consummated its purchase
through the Exchange. Seller shall not, by this agreement or acquiescence to
the Exchange, (1) have its rights under this Agreement affected or diminished
in any manner, or (2) be responsible for compliance with or be deemed to have
warranted to Buyer that the Exchange in fact complies with Section 1031 of
the Code.
(28)
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed one or more copies
of this Agreement as a sealed instrument the day and year first above written.
SELLER:
I-PAC MANUFACTURING, INC.,
a California corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
BUYER:
CABOT INDUSTRIAL PROPERTIES, L.P.,
a Delaware limited partnership
By: Cabot Industrial Trust,
a Maryland real estate investment
trust its general partner
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
(29)
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF THE LAND
LOT 37 OF CARLSBAD TRACT NO. 81-46 UNIT NO. 2, IN THE CITY OF CARLSBAD,
COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO THE MAP THEREOF NO.
11288, FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY.
EXCEPTING THEREFROM 50% OF ALL OIL, MINERAL, GAS, AND OTHER HYDROCARBON
SUBSTANCES BELOW A DEPTH OF 500 FEET UNDER THE REAL PROPERTY, WITHOUT RIGHT
OF SURFACE ENTRY, AS RESERVED IN DEED BY CARLSBAD PROPERTIES, A PARTNERSHIP
RECORDED JULY 5, 1978 AS FILE/PAGE NO. 78-279136 OF OFFICIAL RECORDS.
(30)
<PAGE>
EXHIBIT B
DOCUMENTS
1. OPERATING STATEMENTS. Operating statements of the Property for the 3 years
preceding the date of this Agreement and the current year-to-date
("OPERATING STATEMENTS").
2. MANAGEMENT AND/OR LEASING AGREEMENTS. Copies of any management and/or
leasing agreements under which the Property is managed and/or leased.
3. TAX STATEMENTS. Copies or a summary of ad valorem tax statements for the
current or most recently available tax period and for the prior 36 months
including the Property's tax identification number(s); and latest value
renditions.
4. INSURANCE. Copies of Seller's certificate of insurance for the Property,
all insurance policies, a loss history, a list of any current claims
relating to the Property, and any notices received by insurance carriers.
5. BUDGET. Seller's most recent budget for the Property, including the
forthcoming year, if applicable
6. SERVICE CONTRACTS. A list together with copies of all security,
maintenance, service, supply, equipment rental and other contracts related
to the operation of the Property ("SERVICE CONTRACTS").
7. PROCEEDINGS. Copies of any documents or materials relating to any current
litigation, investigation, condemnation, or other proceeding pending or
threatened against Seller or affecting the Property.
8. TANGIBLE PERSONAL PROPERTY. A current inventory of all fixtures (other
than the Seller's Property).
9. MAINTENANCE RECORDS. All maintenance work orders for the prior 12 months.
10. LIST OF CAPITAL IMPROVEMENTS. A list of all capital improvements performed
on the Property within the prior 24 months.
11. REPORTS. Any environmental, geotechnical, soil, engineering and drainage
reports, assessments, audits and surveys.
(31)
<PAGE>
12. AS-BUILT SURVEY; TITLE POLICY. All existing as-built surveys of the
Property; and all existing title policies related to the Property.
13. SITE PLANS. All site plans relating to the Property.
14. AS-BUILT PLANS AND SPECIFICATIONS. All as-built construction,
architectural, mechanical, electrical, plumbing, landscaping and grading
plans and specifications relating to the Property.
15. PERMITS AND WARRANTIES. Copies of all warranties and guaranties, permits,
certificates of occupancy, licenses and other approvals.
16. GENERAL. Any other documents or information pertaining to the Property in
Contributor's possession or control or in the possession or control of
Contributor's agents or independent contractors.
17. FINANCIAL STATEMENTS. Copies of financial statements reflecting the
operation of the Property for the prior 2 calendar years, including
statements of cash flow and year-end balance sheets, and statements of
income, expense, accounts payable and accounts receivable for each such
year, each prepared in accordance with generally accepted accounting
principles consistently applied, and fairly presenting the financial
position of Contributor with respect to the Property at the end of each
such year and the results of the operations thereof for such year and
copies of any financial statements reflecting the operation of the Property
for the three years prior to that to the extent that Seller has copies of
such statements in its possession or control.
(32)
<PAGE>
EXHIBIT C
AUDIT LETTER
(Date)
(To Buyer's Auditors)
- ------------------------------
- ------------------------------
- ------------------------------
RE:
Dear Sirs:
We are writing at your request to confirm our understanding that the
audit of the statement of operating income for the year ended ,
199 , was made on behalf of Cabot Industrial Trust for the purpose of
expressing an opinion as to whether the statement of operating income
presents fairly, in all material respects, the results of operations of
[Name of Project] in conformity with generally accepted accounting
principles. These representations are made exclusively to [Auditor] and not
to the buyer of the Project or any other third party. In connection with
your , 199 audit we confirm, to the best of our knowledge and
belief, with respect to our daily operations and without independent inquiry
or investigation, the following representations made during your audits:
1. We have made available to you all financial records and related data
concerning this Project, which are in our possession.
2. We are not aware of any:
(a) Irregularities involving any member of management or employees that
could have a materially adverse effect on the statement of operating
income.
(b) Notices of violations of laws or regulations, the effects of which
should be considered for disclosure in the financial statements or as
a basis for recording a loss contingency.
(33)
<PAGE>
(c) Material liabilities, gain or loss contingencies or other transactions
(including oral and written guarantees) that are required to be but
have not been accrued or disclosed).
(d) Material events that have occurred subsequent to , 199
that would require material adjustment to the statement of operating
income.
3. The Company has complied with all material aspects of contractual
agreements relating to the Project (e.g. management contracts) that would
have a material affect on the statement of operating in the event of
noncompliance.
4. All significant payments to affiliated companies of the undersigned have
been properly recorded or disclosed in the financial statements.
[ ]
-------------------------------------
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
(34)
<PAGE>
EXHIBIT D
CLOSING LEASE
[TO BE ATTACHED PURSUANT TO THE
FIRST AMENDMENT]
(35)
<PAGE>
EXHIBIT E
GUARANTY
[TO BE ATTACHED PURSUANT TO THE
FIRST AMENDMENT]
(36)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
A. DEFINED TERMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1)
1. DEPOSIT AND PAYMENT OF PURCHASE PRICE. . . . . . . . . . . . . . . . . .(5)
2. DELIVERY OF MATERIALS FOR REVIEW . . . . . . . . . . . . . . . . . . . .(6)
3. CONTINGENCIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(6)
4. TITLE COMMITMENT; SURVEY; SEARCHES . . . . . . . . . . . . . . . . . . .(7)
5. DEED; TITLE POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . (10)
6. PRORATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10)
7. CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10)
8. ESCROW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11)
9. CLOSING COSTS; PROPERTY COSTS. . . . . . . . . . . . . . . . . . . . . (15)
10. REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15)
11. SELLER'S REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . (17)
12. BUYER'S REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . (21)
13. ACTIONS AFTER THE EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . (22)
14. DAMAGE TO PROPERTY; TAKING . . . . . . . . . . . . . . . . . . . . . . (23)
15. SURVIVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24)
16. SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . . . . . (25)
17. NO THIRD PARTY BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . (25)
18. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
(i)
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<CAPTION>
PAGE
----
<S> <C>
19. ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
20. ATTORNEYS' FEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
21. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
22. CONSTRUCTION OF AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . (26)
23. TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26)
24. APPLICABLE LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26)
25. NO ORAL MODIFICATION OR WAIVER . . . . . . . . . . . . . . . . . . . . (26)
26. LIMITATION OF LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . (26)
27. MARKETING OF PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . (26)
28. BROKERAGE COMMISSION . . . . . . . . . . . . . . . . . . . . . . . . . (26)
29. INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27)
30. INFORMATION AND AUDIT COOPERATION. . . . . . . . . . . . . . . . . . . (27)
31. 1031 EXCHANGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28)
</TABLE>
(ii)
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT (the "LEASE") is entered into by and between
CABOT INDUSTRIAL PROPERTIES, L.P., a Delaware limited partnership
("LANDLORD"), and I-PAC MANUFACTURING, INC., a California corporation
("TENANT"), on May __, 1999.
RECITALS
WHEREAS, Landlord and Tenant have entered into that certain purchase
agreement dated as of April 20, 1999 (the "PURCHASE AGREEMENT") pursuant to
which Tenant has agreed to sell and Landlord has agreed to purchase (subject
to the terms and conditions more particularly set forth therein) (the "SALE")
the real estate and improvements, located at 1958 Kellogg Avenue, Carlsbad,
California 90028, which real estate and improvements are more particularly
described on SCHEDULE A attached hereto (the "LEASED PROPERTY");
WHEREAS, after the Sale, Tenant desires to engage in the business of
electronic manufacturing services (the "BUSINESS") on the Leased Property;
WHEREAS, Landlord and Tenant desire that, upon completion of the Sale,
the Leased Property shall be the subject of this Lease and be used by Tenant
in its operation of the Business;
NOW, THEREFORE, in consideration of the foregoing premises and of
their respective agreements and undertakings herein, and of other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant agree as follows:
I. LEASE AGREEMENT, LEASED PROPERTY AND TERM
1.01 LEASE AGREEMENT. Landlord does hereby lease unto Tenant, and
Tenant does hereby lease from Landlord the Leased Property, which shall
consist of the following, to the extent the same were conveyed by Tenant to
Landlord pursuant to the Purchase Agreement:
(a) The land located at the address listed in SCHEDULE A,
with all rights, titles, covenants, licenses, privileges and benefits thereto
belonging, and any easements, rights-of-way, rights of ingress or egress or
other interests appurtenant thereto, subject to all liens, encumbrances,
restrictions and agreements related thereto (the "LAND");
(b) All buildings, improvements, structures and Fixtures (as
hereinafter defined) now located or to be located or to be constructed on the
Land, including, without limitation, sidewalks, landscaping, parking lots and
structures, roads, drainage and all above ground and underground utility
structures and conduits (on-site or off-site), equipment systems and other so
called "infrastructure" improvements (the "IMPROVEMENTS");
<PAGE>
(c) All equipment, machinery, fixtures, and other items of
real and/or personal property, including all components thereof, located in,
on or used in connection with, and permanently affixed to or incorporated
into the Improvements, including, without limitation, any furnaces, boilers,
heaters, electrical equipment, heating, plumbing, lighting, ventilating,
refrigerating, incineration, air and water pollution control, waste disposal,
air-cooling and air conditioning systems and apparatus, sprinkler systems and
fire and theft protection equipment and similar systems, together with all
replacements, modifications, alterations and additions thereto (collectively
the "FIXTURES"); and
(d) All easements, rights and appurtenances relating to the
Land and the Improvements.
The Leased Property shall, however, exclude all furniture, equipment,
inventory and items of moveable personal property attached to the Land or
Improvements that relate to the Business being conducted on the Leased
Property which items may readily be removed without material damage to the
Land and Improvements whether or not such items might legally be considered
to be fixtures (all of which are owned by Tenant and shall hereinafter be
defined as the "EXCLUDED PERSONAL PROPERTY") and all real and personal
property leased to Nextel of California, Inc., a Delaware corporation.
1.02 COMMENCEMENT DATE. The commencement date of this Lease (the
"COMMENCEMENT DATE") shall be the Closing Date as defined in the Purchase
Agreement. Tenant understands that Landlord will not own the Leased Property
until the Closing Date.
1.03 [Intentionally Omitted.]
1.04 TERM. The initial term of this Lease (the "TERM") shall be for
a fixed term of fifteen (15) years commencing on the Commencement Date.
Tenant shall have the right to extend this Lease on the same terms and
conditions set forth herein (except as to Base Annual Rent and the right to
renew) at Tenant's option for an additional five (5) year renewal term (the
"FIRST EXTENSION TERM") from the expiration of the Term, provided that no
Event of Default (as defined in SECTION 9.01 hereof) shall exist and be
continuing. In addition, if Tenant exercises the option for the First
Extension Term, Tenant shall have the right to extend this Lease on the same
terms and conditions set forth herein (except as to Base Annual Rent and the
right to renew) Tenant's option, for a second five (5) year renewal term (the
"SECOND EXTENSION TERM;" each an "EXTENSION TERM," and collectively with the
First Extension Term, the "EXTENSION TERMS") from the expiration of the First
Extension Term, provided that no Event of Default (as defined in SECTION 9.01
hereof) shall exist and be continuing. Tenant shall exercise the First
Extension Term by written notice to Landlord no earlier than fifteen (15)
months and no later than twelve (12) months prior to the end of the Term.
Tenant shall exercise the Second Extension Term by written notice to Landlord
no earlier than fifteen (15) months and no later than twelve (12) months
prior to the end of the First Extension Term. Notwithstanding anything
2
<PAGE>
else to the contrary in this Agreement, the Base Annual Rent (as hereinafter
defined) during the First Extension Term shall be the Fair Market Rent (as
hereinafter defined) for the Leased Property. The Base Annual Rent during
the Second Extension Term shall be the Fair Market Rent for the Leased
Property. Fair Market Rent shall be determined as soon as possible after
receipt by Landlord of Tenant's notice of option exercise, on the basis of
appraisals of independent appraisers selected in accordance with the
provisions of SECTION 16.01. Fair Market Rent during the Extension Terms
shall be subject to Base Annual Rent Adjustments as set forth in SECTION 2.03.
1.05 HOLDING OVER. Should Tenant, without the express consent of
Landlord, continue to hold and occupy the Leased Property after the
expiration or earlier termination of the Term or any Extension Term, as the
case may be, such holding over beyond the Term and the acceptance or
collection of rent (as hereinafter defined) by Landlord shall operate and be
construed as creating a tenancy from month-to-month and not for any other
term whatsoever. During any such holdover period Tenant shall pay to
Landlord for each month (or portion thereof) Tenant remains in the Leased
Property, in lieu of the Base Annual Rent for the Leased Property, an amount
equal to the sum of one-twelfth (1/12) of (i) one hundred fifty percent
(150%) of such Base Annual Rent, and (ii) as applicable, one hundred percent
(100%) of the Additional Rent (as hereinafter defined) for the Leased
Property, each as in effect on the expiration date. Said month-to-month
tenancy may be terminated by Landlord by giving Tenant thirty (30) days
written notice, and at any time thereafter Landlord may re-enter and take
possession of the Leased Property.
1.06 SURRENDER. Except as a result of (a) Tenant Improvements and
Capital Additions (as hereinafter defined); (b) normal and reasonable wear
and tear (subject to the obligation of Tenant to maintain the Leased Property
in good order and repair during the Term); and (c) casualty, taking or other
damage and destruction not required to be repaired by Tenant, Tenant shall
surrender and deliver up the Leased Property at the expiration or termination
of the Term or the Extension Term, as the case may be, broom clean, in good
order and repair, free of the Excluded Personal Property and any additional
items of Tenant's personal property (together with the Excluded Personal
Property, the "TENANT'S PERSONAL PROPERTY"), all of which Tenant shall remove
prior to such surrender and delivery, and in as good order and condition as
of the Commencement Date.
1.07 DELIVERIES AT COMMENCEMENT. On the Date of Possession, Tenant
shall deliver to Landlord:
(a) A binding insurance certificate stating that Landlord is
an additional named insured under the Tenant's insurance policy;
(b) A consent or resolutions of the Tenant authorizing
Tenant to enter into this Lease.
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II. RENT
2.01 BASE ANNUAL RENT. Tenant shall pay Landlord annual base rent
(the "BASE ANNUAL RENT") during the Term or the Extension Term, paid to
Landlord in twelve (12) equal monthly installments, which Base Annual Rent
for the initial Lease Year shall be as set forth on SCHEDULE 2.01 attached
hereto. For purposes of this Lease, the term "LEASE YEAR" shall mean the
period of June 1 through May 31.
2.02 ADDITIONAL RENT. In addition to the Base Annual Rent, Tenant
shall pay all other amounts, liabilities, obligations and Impositions (as
defined in SECTION 3.02 hereto), and, except as otherwise specifically
excluded herein, all cost and expenses related to the ownership and operation
of the Leased Property, including association fees, and any fine, penalty,
interest, charge and cost which may be added for nonpayment or late payment
of such items (collectively, the "ADDITIONAL RENT"; the Base Annual Rent and
Additional Rent are sometimes hereinafter referred to as "RENT"). Tenant's
obligation to pay Additional Rent shall begin on the Commencement Date.
2.03 BASE ANNUAL RENT ADJUSTMENT.
(a) The Base Annual Rent shall be adjusted upward during the
Term beginning June 1, 2000, and each Lease Year thereafter, and each year
during the Extension Terms (the "BASE ANNUAL RENT ADJUSTMENT") as follows:
(i) The base for computing the adjustment is the CPI
which is in effect on the first day of the Lease Year immediately prior to
the applicable Lease Year (the "BEGINNING INDEX"). The CPI which is in
effect on the last day of the Lease Year immediately prior to the applicable
Lease Year (the "ADJUSTMENT INDEX") is to be used in determining the amount
of the adjustment. If the Adjustment Index has increased over the Beginning
Index, the Base Annual Rent for the following year (until the next Base
Annual Rent Adjustment) shall be set by multiplying the Base Annual Rent by a
fraction, the numerator of which is the Adjustment Index and the denominator
of which is the Beginning Index.
(ii) In no case shall the Base Annual Rent be less
than the Base Annual rent in effect immediately prior to the adjustment date
then occurring.
(iii) In no case shall the CPI increase be greater than
six percent (6%) or less than three percent (3%) for any Base Annual Rent
Adjustment.
(iv) On adjustment of the Base Annual Rent as provided
in this Lease, the parties shall immediately execute an amendment to this
Lease stating the new Base Annual Rent; however, failure to execute an
amendment shall in no way affect the adjustment of the Base Annual Rent.
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(b) As used herein, "CPI" shall mean the Consumer Price
Index published by the United States Department of Labor, Bureau of Labor
Statistics, Consumer Price Index for All Urban Consumers (base years
1982-1984=100), for San Diego MSA. If at any time during the Term or the
Extension Term, as the case may be, the CPI shall be discontinued, Landlord
shall select a substitute index, being an existing official index published
by the Bureau of Labor Statistics or its successor or another, similar
governmental agency, which index is most nearly equivalent to the CPI.
2.04 PLACE OF PAYMENT OF RENT; DIRECT PAYMENT OF ADDITIONAL RENT.
Tenant shall pay the Base Annual Rent without notice, demand, set-off or
counterclaim in advance, in lawful money of the United States of America and
payable in consecutive monthly installments commencing on the Commencement
Date and thereafter on the first day of each month during the Term and any
Extension Terms. Unless Landlord shall direct otherwise, Tenant shall make
all payments of Base Annual Rent to Landlord at the address set forth in
SECTION 17.01. Tenant shall pay the Impositions to Lease as set forth in
SECTION 3.04. At the direction of the Landlord, Tenant shall make payments of
Additional Rent directly to the person or persons to whom such amount is
owing at or before the time and times when such payments are due, and Tenant
shall give to Landlord such evidence of such direct payments as Landlord
shall reasonably request. Landlord shall have all legal, equitable and
contractual rights, powers and remedies provided in this Lease or by statute
or otherwise in the case of nonpayment of the Rent for the Leased Property.
2.05 NET LEASE. This Lease shall be deemed and construed to be
"triple net lease" (i.e. that Tenant shall pay all costs and expenses related
to the ownership and operation of the Leased Property, thereby leaving all
Rent as a net return to Landlord). Tenant shall pay all Rent, Impositions,
and other charges and expenses in connection with the Leased Property
throughout the Term and any Extension Term, without abatement, deduction or
set-off.
2.06 NO TERMINATION, ABATEMENT, ETC. Except as otherwise
specifically provided herein, Tenant shall remain bound by this Lease in
accordance with its terms. Except as otherwise specifically provided herein,
Tenant shall not, without the prior written consent of Landlord, modify,
surrender or terminate this Lease nor seek nor be entitled to any abatement,
deduction, deferment or reduction of Rent or set-off against the Rent for any
reason whatsoever. Except as specifically provided herein, the obligations
of Landlord and Tenant shall not be affected by reason of (a) the lawful or
unlawful prohibition of, or restriction upon, Tenant's use of the Leased
Property, or any part thereof, the interference with such use by any person,
corporation, partnership or other entity, or by reason of eviction by
paramount title; (b) any claim which Tenant has or might have against
Landlord or by reason of any default or breach of any warranty by Landlord
under this Lease or any other agreement between Landlord and Tenant, or to
which Landlord and Tenant are parties; (c) Tenant's bankruptcy, insolvency,
reorganization, composition, readjustment, liquidation, dissolution, winding
up or other proceeding's effect on Landlord or any assignee or transferee of
Landlord; (d) any damage to, or destruction of, the
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Leased Property or any portion thereof for whatever cause, or any taking of
the Leased Property or any portion thereof; or (e) any other cause, whether
similar or dissimilar to any of the foregoing, other than a discharge of
Tenant from any such obligations as a matter of law. Except as otherwise
specifically provided herein, and to the maximum extent permitted by law,
Tenant hereby specifically waives all rights, including but not limited to,
any rights under any statute relating to rights of tenants in the
jurisdiction where the Leased Property is located, which may now be conferred
upon it by law, relating to: (aa) the modification, surrender or termination
of this Lease, or the quitting or surrender of the Leased Property or any
portion thereof; (bb) any abatement, reduction, suspension or deferment of
the Rent or other sums payable by Tenant hereunder; (cc) any rights of
redemption; and (dd) any right to demand or notice of termination or
eviction. The obligations of Landlord and Tenant hereunder shall be separate
and the Rent and all other sums shall continue to be payable in all events
unless the obligations to pay the same shall be terminated pursuant to the
express provisions of this Lease or by termination of this Lease other than
by reason of an Event of Default.
2.07 LATE CHARGE. Tenant's payment of Rent that is made more than
five (5) business days after the due date shall be subject to a late charge
of six percent (6%) of the amount of such overdue payment.
2.08 INTEREST. Any Rent or other amount due to Landlord, if not
paid when due, shall bear interest from the date due until paid at the rate
of fifteen percent (15%) per annum or, if a higher rate is legally
permissible, at the highest rate legally permitted, PROVIDED THAT interest
shall not be payable on late charges incurred by Tenant nor on any amounts
upon which late charges are paid by Tenant to the extent such interest would
cause the total interest to be in excess of that legally permitted. Payment
of interest shall not excuse or cure any default hereunder by Tenant.
2.09 SECURITY DEPOSIT . Tenant shall deposit with Landlord on the
date of this Lease security (the "SECURITY DEPOSIT") for the performance of
all of its obligations under this Lease, in the form of (a) a letter of
credit in the face amount of Two Hundred Seventy-Five Thousand Dollars
($275,000) (the "LETTER OF CREDIT") or cash or a cashiers check in the amount
of Two Hundred Seventy-Five Thousand Dollars ($275,000) (the "CASH
REPLACEMENT"); and (b) cash or a cashiers check in the amount of Twenty-Five
Thousand One Hundred Thirty-Seven Dollars ($25,137). In the event that
Tenant initially deposits with Landlord the Cash Replacement rather than the
Letter of Credit, Tenant, at its sole election, so long as no Event of
Default has occurred and is continuing or there is no other default which,
with the giving of notice or the passage of time would become an Event of
Default, may provide Landlord with a letter of credit in the face amount of
Two Hundred Seventy-Five Thousand Dollars ($275,000) in lieu of the Cash
Replacement (also a "LETTER OF CREDIT"). Upon receipt of such Letter of
Credit, and so long as no Event of Default has occurred and is continuing or
there is no other default which, with the giving of notice or the passage of
time would become an Event of Default, Landlord shall return the Cash
Replacement to Tenant and such Letter of Credit shall constitute a "Security
Deposit" under this Lease. In the event that
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Tenant initially deposits with Landlord the Letter of Credit rather than the
Cash Replacement, Tenant, at its sole election, so long as no Event of
Default has occurred and is continuing or there is no other default which,
with the giving of notice or the passage of time would become an Event of
Default, may provide Landlord with cash or a cashiers check in the face
amount of the Letter of Credit in lieu of the Letter of Credit (the "L/C CASH
REPLACEMENT") at any time prior to a draw by Landlord under the Letter of
Credit. Upon receipt of the L/C Cash Replacement, and so long as no Event of
Default has occurred and is continuing or other default which, with the
giving of notice or the passage of time would become an Event of Default,
Landlord shall return the Letter of Credit to Tenant and such L/C Cash
Replacement shall constitute a portion of the "Security Deposit" under this
Lease. If Tenant elects to deposit the Letter of Credit at any time
hereunder, such Letter of Credit shall (i) be in form set forth in SCHEDULE
2.09 attached hereto or otherwise in form and substance satisfactory to
Landlord, (ii) name Landlord as beneficiary, and (iii) be drawable on a
Permitted Issuer (as hereinafter defined). As used herein, "PERMITTED
ISSUER" means a financial institution which (a) is a national association or
bank chartered by the United States or in one of the states of the United
States, in either case, the accounts of which are FDIC insured, or a foreign
bank incorporated in any jurisdiction governed by the Organization for
Economic Cooperation and Development, (b) has a minimum capital and surplus
of $500 million, and (c) maintain at all times until the L/C Termination Date
a branch office in California at which Landlord may draw on the Letter of
Credit (and if at any time such Permitted Issuer fails to meet these
conditions, Tenant shall within ten (10) days thereafter deliver to Landlord
a substitute Letter of Credit meeting the requirements of this Section 2.09
issued by a Permitted Issuer).
If Tenant does not provide Landlord with a substitute Letter of Credit
complying with all of the requirements hereof or the L/C Cash Replacement at
least ten (10) days before the stated expiration date (except the L/C
Termination Date (as hereinafter defined)) of the current Letter of Credit,
Landlord shall have the right to draw upon the current Letter of Credit and
hold the funds drawn as the Security Deposit, subject to the provisions of
this Section 2.09.
Landlord may, at its option, apply all or part of the Security
Deposit, including, without limitation, any draw upon the Letter of Credit,
to any unpaid Rent or other charges due from Tenant, cure any other defaults
of Tenant, or compensate Landlord for any loss or damage which Landlord may
suffer due to Tenant's default. In the event that an Event of Default shall
have occurred and be continuing, Landlord shall be entitled to draw upon the
Letter of Credit (or use the proceeds of the Letter of Credit if they are
then held by Landlord as a result of Tenant's failure to renew the Letter of
Credit before the stated expiration date as provided herein) and apply such
amount towards curing the Event of Default. As a requirement for such draw
on the Letter of Credit Landlord shall only be obligated to deliver the
Letter of Credit to the Permitted Issuer.
Except as expressly provided in this Section 2.09, the Letter of
Credit, Cash Replacement or L/C Cash Replacement, as applicable, shall remain
outstanding in accordance
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with the terms of this Section 2.09 through the date which is thirty (30)
days after the last day of the fourth Lease Year provided that no Event of
Default or other default which, with the giving of notice or the passage of
time would become an Event of Default, has occurred and is continuing (the
"L/C TERMINATION DATE"). On the L/C Termination Date, provided that no Event
of Default other default which, with the giving of notice or the passage of
time would become an Event of Default, has occurred and is continuing,
Landlord shall return to Tenant the Letter of Credit, Cash Replacement or L/C
Cash Replacement, as applicable. The remainder of the Security Deposit shall
remain outstanding throughout the Term.
Tenant hereby waives any restriction on the use or application of the
Security Deposit by Landlord set forth in California Civil Code Section
1950.7. All claims of Tenant to the Security Deposit shall be prior to the
claim of any creditor of Landlord, except a trustee in bankruptcy. To the
extent any portion of the Security Deposit is used, Tenant shall within five
(5) days after demand from Landlord reinstate the Security Deposit to its
full amount (whether by delivery of a new Letter of Credit (in the amount so
used) meeting the requirements of this Section 2.09, by amending the Letter
of Credit then held by Landlord to increase the face amount by the amount so
used or by the deposit of L/C Cash Replacement in the amount so used).
Nothing contained in this Section 2.09 shall waive or impair any of
Landlord's rights or remedies in the event of an Event of Default by Tenant
or modify any party's obligation of good faith and fair dealing under
applicable law. The Security Deposit shall not serve as an advance payment
of Rent or a measure of Landlord's damages for any Event of Default under
this Lease.
If Landlord transfers its interest in the Leased Property or this
Lease, Landlord may transfer the Security Deposit to its transferee. Upon
such transfer, Landlord shall have no further obligation to return the
Security Deposit to Tenant, and Tenant's right to the return of the Security
Deposit shall apply solely against Landlord's transferee.
No interest shall be paid on the Security Deposit, no trust
relationship is created herein between Landlord and Tenant with respect to
the Security Deposit, and the Security Deposit may be commingled with other
funds of Landlord. If Tenant shall perform all of its obligations under this
Lease (or Landlord shall use any portion of the Security Deposit to cure any
Event of Default by Tenant) and return the Leased Property (including,
without limitation, all personal property required to remain in the Leased
Property) to Landlord at the end of the Term in accordance with the terms of
this Lease, Landlord shall return any unused Security Deposit within two (2)
weeks after Termination Date so long as no Event of Default shall have
occurred and be continuing.
III. IMPOSITIONS AND UTILITIES
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3.01 PAYMENT OF IMPOSITIONS. Landlord and Tenant intend that
Landlord shall bear none of the costs of the ownership and operation of the
Leased Property except for payment of the federal, state or local income
taxes, and that Tenant shall pay all costs in every respect of the ownership
and operation of the Leased Property except for Landlord's payment of
federal, state or local income taxes. By way of example, and in no means by
way of limitation, Tenant shall pay as follows: subject to the adjustments
set forth herein, Tenant shall pay, in the manner set forth in SECTION 3.04,
as Additional Rent, to the Landlord an amount equal to the amount necessary
to pay all Impositions that may be levied or become a lien on the Leased
Property or any part thereof at any time (whether prior to or during the
Term), without regard to prior ownership of the Leased Property, before the
same becomes delinquent. Tenant's obligation to pay such Impositions shall
be deemed absolutely fixed upon the date such Impositions become a lien upon
the Leased Property or any part thereof or delinquent. Tenant, at its
expense, shall prepare and file all tax returns and reports in respect of any
Imposition as may be required by governmental authorities; PROVIDED, HOWEVER,
that Tenant shall provide to Landlord copies of all mailings of such tax
returns or reports in respect of any real or personal property owned by
Landlord. Tenant shall be entitled to any refund due in respect of such
Impositions from any Taxing authority if no Event of Default shall have
occurred and be continuing. Any refunds in respect of such Impositions
retained by Landlord due to an Event of Default shall be applied as provided
in SECTION 9.08. Landlord and Tenant shall, upon request of the other,
provide such data as is maintained by the party to whom the request is made
with respect to the Leased Property as may be necessary to prepare any
required tax returns and reports. In the event governmental authorities
classify any property covered by this Lease as personal property, Landlord
and Tenant shall file all personal property tax returns with respect to their
respective owned personal property. Landlord, to the extent it possesses the
same, and Tenant to the extent it possesses the same, will provide the other
party, upon request, with cost and depreciation records necessary for filing
such returns or reports for any property so classified as personal property.
Tenant may, upon notice to Landlord, at Tenant's option and at Tenant's sole
cost and expense, protest, appeal, or institute such other proceedings as
Tenant may deem appropriate to effect a reduction of real estate or personal
property assessments. Landlord, at Tenant's expense, shall fully cooperate
with Tenant in such protest, appeal, or other action. Tenant shall provide
Landlord copies of all materials filed or presented in connection with any
such proceeding. Impositions imposed with respect to the tax-fiscal period
during which the Term commences and terminates shall be adjusted and prorated
between Landlord and Tenant. Tenant shall also pay to Landlord a sum equal
to the amount which Landlord may be caused to pay of any privilege tax, sales
tax, gross receipts tax, rent tax, occupancy tax or like tax (excluding any
tax based on net income), hereafter levied, assessed, or imposed by any
governmental authority, upon or measured by Rent or other consideration
required to be paid by Tenant under this Lease.
3.02 DEFINITION OF IMPOSITIONS.
The term "IMPOSITIONS" means, collectively: (i) taxes
(including without limitation, all real estate and personal property ad
valorem (whether assessed as part of the real
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estate or separately assessed as unsecured personal property), sales and use,
business or occupation, single business, gross receipts, transaction,
privilege, rent or similar taxes, but not including income or franchise or
excise taxes payable with respect to Landlord's receipt of Rent); (ii)
assessments, whether in the nature of a special assessment or otherwise
(including, without limitation, all assessments for public improvements or
benefits, whether or not commenced or completed prior to the Commencement
Date and whether or not to be completed within the Term or any Extension
Term, as the case may be), including, without limitation, assessments under
the CC&Rs (as hereinafter defined); (iii) ground rents, water, sewer or other
rents and charges, excises, tax levies, and fees (including, without
limitation, license, permit inspection, authorization and similar fees); (iv)
to the extent they may become a lien on the Leased Property, all taxes
imposed on Tenant's operations of the Leased Property (including, without
limitation, employee withholding taxes, income taxes and intangible taxes);
and (v) all other governmental charges, in each case whether general or
special, ordinary or extraordinary, foreseen or unforeseen, of every
character in respect of the Leased Property or any part thereof (including
without limitation, any increase in real property taxes resulting from the
transfer of ownership of the Leased Property), the Business conducted by
Tenant thereon, and/or the Rent (including all interest and penalties thereon
due to any failure in payment by Tenant), which at any time prior to, during
or in respect of the Term or any Extension Term, as the case may be, may be
assessed or imposed on, in respect of or a lien upon (aa) Landlord or
Landlord's interest in the Leased Property or any part thereof; (bb) the
Leased Property or any part thereof or any rent therefrom or any estate,
right, title or interest therein; or (cc) any occupancy, operation, use or
possession of, or activity conducted on, or in connection with the Leased
Property or the leasing of the Leased Property or any part thereof. If any
tax, assessment, tax levy or charge which Tenant is obligated to pay pursuant
to this SECTION 3.02 and which is in effect at any time during the Term
hereof is totally or partially repealed, and a tax, assessment, tax levy or
charge is levied, assessed or imposed expressly in lieu thereof, Tenant shall
then pay such tax, levy or charge.
3.03 UTILITIES. Tenant shall contract for, in its own name, and
will pay, as Additional Rent all taxes, assessments, charges/deposits, and
bills for utilities, including without limitation charges for water, gas,
oil, sanitary and storm sewer, electricity, telephone service, trash
collection, and all other utilities which may be charged against the occupant
of the Improvements during the Term.
3.04 ESCROW OF IMPOSITIONS. Unless waived by written notice from
Landlord to Tenant, or as otherwise instructed by Landlord, Tenant shall
thereafter deposit with Landlord on the first day of each month during the
Term and any Extension Term, as the case may be, a sum equal to one-twelfth
(1/12) of the Impositions assessed against the Leased Property which sums
shall be used by Landlord toward payment of such Impositions. If, at the end
of any applicable tax year, any such funds held by Landlord are insufficient
to make full payment of taxes or other Impositions for which such funds are
held, Tenant, on demand, shall pay to Landlord any additional funds necessary
to pay and discharge in full the obligations of Tenant pursuant to the
provisions of this Section. If, however, at the end of any applicable tax
year, such funds held by
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Landlord are in excess of the total payment required to satisfy taxes or
other Impositions for which such funds are held, and so long as no Event of
Default has occurred and is continuing, Landlord shall apply such excess
amounts to a tax and Imposition escrow fund for the next tax year. If any
such excess exists following the expiration or earlier termination of this
Lease, and so long as no Event of Default has occurred, subject to SECTION
9.08 below, Landlord shall promptly refund such excess amounts to Tenant.
The receipt by Landlord of the payment of such Impositions by and from Tenant
shall only be as an accommodation to Tenant and the taxing authorities, and
shall not be construed as rent or income to Landlord, Landlord servicing if
at all, only as a conduit for delivery purposes.
3.05 DISCONTINUANCE OF UTILITIES. Landlord will not be liable for
damages to person or property or for injury to, or interruption of, business
for any discontinuance of utilities at the Leased Property nor will such
discontinuance in any way be construed as an eviction of Tenant from the
Leased Property, cause an abatement of Rent as to the Leased Property or
operate to release Tenant from any of Tenant's obligations under this Lease,
unless to the extent such damages or injury are caused by the willful
misconduct of Landlord.
3.06 LIENS. Subject to SECTION 17.18 relating to contests, Tenant
shall not directly or indirectly create or allow to remain, and will promptly
discharge at its expense, any lien, encumbrance, attachment, title retention
agreement or claim upon the Leased Property or any attachment, levy, claim or
encumbrance in respect of any Rent provided under this Lease, not including,
however: (a) this Lease; (b) such encumbrances as are subsequently consented
to in writing by Landlord in advance, but excluding liens in respect of
Impositions required to be paid under SECTION 3.01; (c) liens for
Impositions, so long as (i) the same are not yet payable or are payable
without the addition of any fine or penalty or imposition of any Lien upon
the Leased Property, or (ii) such liens are being contested as permitted
under SECTION 17.18; and other encumbrances, easements, rights of way or
liens, (A) provided the same do not adversely affect the intended use of the
Leased Property (including the Improvements) and do not create a material
adverse effect on the value of the Leased Property, (B) do not create a lien
upon the Leased Property, or (C) which result solely from the action or
inaction of Landlord.
3.07 IMPOSITIONS STATEMENTS. Except with respect to Impositions
subject to escrow as set forth in SECTION 3.04, and, to the extent it has not
already done so, Tenant shall immediately after the Commencement Date notify
the appropriate taxing authorities, utility providers, and other entities
that would send invoices for Impositions that all tax statements, assessments
and bills for Impositions shall be delivered directly to Tenant for payment,
Tenant shall deliver to Landlord copies of all statements of taxes, special
assessments or other Impositions within ten (10) days of Tenant's receipt
thereof.
IV. INSURANCE
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4.01 INSURANCE. Tenant shall, at Tenant's expense, keep the
Excluded Personal Property, Improvements, Fixtures and other components of
the Leased Property insured against the following risks:
(a) loss or damage by fire with extended coverage (including
windstorm and subsidence), vandalism and malicious
mischief, sprinkler leakage and all other physical loss
perils commonly covered by "All Risk" insurance in an
amount not less than one hundred percent (100%) of the then
full replacement cost thereof (as hereinafter defined).
Such policy shall include an agreed amount endorsement if
available at a reasonable cost. Such policy shall also
include endorsements for contingent liability for operation
of building laws, demolition costs and increased cost of
construction;
(b) loss or damage by explosion of steam boilers, pressure
vessels, or similar apparatus, now or hereafter installed
on the Leased Property, in commercially reasonable amounts
acceptable to Landlord;
(c) business interruption insurance, providing in the event of
damage or destruction of the Leased Property an amount
sufficient to sustain Tenant for a period of not less than
one (1) year for: (i) the net profit that would have been
realized had Tenant's business continued; and (ii) such
fixed charges and expenses as must necessarily continue
during a total or partial suspension of business to the
extent to which they would have been incurred had no
business interruption occurred, including, but not limited
to, interest on indebtedness of Tenant, salaries of
executives, foremen, and other employees under contract,
charges under noncancelable contracts, charges for
advertising, legal or other professional services, taxes
and rents that may still continue, trade association dues,
insurance premiums, and depreciation.
(d) workers' compensation insurance as required by statute in
respect of any work or other operations on or about the
Leased Property;
(e) comprehensive general liability insurance for bodily
injury, property damage (including loss of use of property)
and personal injury at the Leased Property in amounts equal
to Five Million Dollars ($5,000,000) for each occurrence;
the liability insurance obtained by Tenant under this
SECTION 4.01 shall (i) be primary and (ii) insure Tenant's
obligations to Landlord under SECTION 5.01. The amount and
coverage of such insurance shall not limit Tenant's
liability nor relieve Tenant of any other obligation under
this Lease. Landlord may also obtain commercial general
liability
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insurance in an amount and with coverage determined by
Landlord insuring Landlord against liability with
respect to the Leased Property. The policy obtained by
Landlord shall not provide primary insurance, shall not
be contributory and shall be excess over any insurance
maintained by Tenant;
(f) commercial comprehensive catastrophic liability insurance
with limits of liability of not less than Five Million
Dollars ($5,000,000);
(g) during the period when any addition, alteration,
construction, installation or demolition is being made or
performed to any part of the Leased Property, contingent
liability, public liability, completed value, builder's
risk (non-reporting form), workers' compensation and other
insurance as is deemed prudent by Landlord;
(h) automobile liability insurance, including but not limited
to, passenger liability, on all owned, non-owned, and hired
vehicles used in connection with the Leased Property, with
a combined single limit per occurrence of not less than One
Million Dollars ($1,000,000) for injuries or death of one
or more persons or loss or damage to property.
4.02 INSURANCE LIMITS. Deductible provisions for the insurance
required under SECTION 4.01(A) shall not exceed Five Thousand Dollars
($5,000) per occurrence and Twenty Thousand Dollars ($20,000) aggregate per
occurrence; under clause (e), Five Thousand Dollars ($5,000) per occurrence;
under clause (f), Five Thousand Dollars ($5,000) per occurrence.
4.03 INSURANCE REQUIREMENTS.
(a) Tenant shall be the "named insured" and Landlord, Cabot
Industrial Trust and any mortgagee of Landlord shall be an
"additional named insureds" on each policy.
(b) Any insurance which Tenant shall be required to maintain
under this Lease shall include a provision which requires
the insurance carrier to give Landlord not less than thirty
(30) days' written notice prior to any cancellation or
modification of such coverage.
(c) Prior to the earlier of Tenant's entry into the Leased
Property or the Commencement Date, Tenant shall deliver to
Landlord an insurance company certificate that Tenant
maintains the insurance required by
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Section 4.01 and not less than thirty (30) days prior to
the expiration or termination of any such insurance,
Tenant shall deliver to Landlord renewal certificates
therefor. Tenant shall provide Landlord with copies of
the policies promptly upon request from time to time.
If Tenant shall fail to deliver any certificate or
renewal certificate to Landlord required under this
Lease within the prescribed time period or if any such
policy shall be canceled or modified during the Term
without Landlord's consent, Landlord may obtain such
insurance, in which case Tenant shall reimburse
Landlord, as Additional Rent, for 110% of the cost of
such insurance within ten (10) days after receipt of a
statement of the cost of such insurance.
(d) Tenant shall maintain all insurance required under this
Lease with companies having a "General Policy Rating" of
A-;X or better, as set forth in the most current issue
of the Best Key Rating Guide. Landlord and Tenant, on
behalf of themselves and their insurers, each hereby
waive any and all rights of recovery against the other,
or against the officers, partners, employees, agents, or
representatives of the other, for loss of or damage to
its property or the property of others under its
control, if such loss or damage shall be covered by any
insurance policy in force (whether or not described in
this Lease) at the time of such loss or damage. All
property insurance carried by either party shall contain
a waiver of subrogation against the other party to the
extent such right shall have been waived by the insured
party prior to the occurrence of loss or injury.
(e) Landlord shall have the right to review the insurance
coverages required hereunder with Tenant from time to time,
to obtain the input of third party professional insurance
advisers (at Landlord's expense) with respect to such
insurance coverages, to consult with Tenant in Tenant's
annual review and renewal of such insurance coverages and
to require periodic increases in coverage amounts based
upon inflation, increased liability awards, recommendations
of Landlord's professional insurance advisors and other
relevant factors. All insurance coverages hereunder shall
be in such form, substance and amounts as are customary or
standard in Tenant's industry, but at a minimum shall
comply with the requirements set forth herein.
4.04 LANDLORD'S PROPERTY AND RENTAL INCOME INSURANCE. During the
Term, Landlord shall maintain in effect all risk insurance covering loss of
or damage to the Leased Property in the amount of its replacement value with
such endorsements and deductibles as Landlord shall determine from time to
time. Landlord shall have the right to obtain flood, earthquake, and such
other insurance as Landlord shall determine from time to time or shall be
required by any lender
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holding a security interest in the Property. Landlord shall not obtain
insurance for Tenant's fixtures or equipment or building improvements
installed by Tenant. During the Term, Landlord shall also maintain a rental
income insurance policy, with loss payable to Landlord, in an amount equal to
one year's Base Rent, plus estimated real property taxes, operating expenses,
and insurance premiums. Tenant shall be liable for the payment of any
deductible amount under Landlord's insurance maintained pursuant to this
Section 4 Seven, in an amount not to exceed Twenty-Five Thousand Dollars
($25,000). Tenant shall not do or permit anything to be done which shall
invalidate any such insurance. Any increase in the cost of Landlord's
insurance due to Tenant's use or activities at the Leased Property shall be
paid by Tenant to Landlord as Additional Rent hereunder.
4.05 PAYMENT OF INSURANCE PREMIUMS. Landlord shall pay the premiums
of the insurance policies maintained by Landlord under Section 4.04 and 4.01
(if applicable), and, Tenant shall reimburse Landlord for such premiums.
Tenant shall pay directly the premiums of the insurance policies maintained
by Tenant under Sections 4.01.
4.06 REPLACEMENT COST. The term "FULL REPLACEMENT COST" means the
actual replacement cost of the Improvements from time to time including
increased cost of construction, with no reductions or deductions. Tenant
shall, not later than thirty (30) days after the anniversary of each policy
of insurance, increase the amount of the replacement cost endorsement for the
Improvements to the extent necessary to reflect increased costs of
construction. If Tenant makes any Permitted Alterations (as hereinafter
defined) to the Leased Property, Landlord may have such full replacement cost
redetermined at any time after such Permitted Alterations are made,
regardless of when the full replacement cost was last determined.
4.07 BLANKET POLICY. Tenant may carry the insurance required by
this Article under a blanket policy of insurance, provided that the coverage
afforded Tenant will not be reduced or diminished or otherwise be different
from that which would exist under a separate policy meeting all of the
requirements of this Lease and Landlord approves the form of the policy.
4.08 NO SEPARATE INSURANCE. Tenant shall not take out separate
insurance concurrent in form or contributing in the event of loss with that
required in this Article, or increase the amounts of any then existing
insurance by securing an additional policy or additional policies, unless all
parties having an insurable interest in the subject matter of the insurance,
including Landlord and any mortgagees, are included therein as additional
named insureds or loss payees, the loss is payable under said insurance in
the same manner as losses are payable under this Lease, and such additional
insurance is not prohibited by the existing policies of insurance required
pursuant to this Article. Tenant shall immediately notify Landlord of the
taking out of such separate insurance or the increasing of any of the amounts
of the existing insurance by securing an additional policy or additional
policies. The term "mortgages" as used in this Lease includes, but is not
limited to, deeds of trust and the term "mortgagee" includes, but is not
limited to, beneficiaries under a deed of trust.
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4.09 WAIVER OF SUBROGATION. Landlord and Tenant hereby each waives
any and every claim which arises or may arise in its favor and against the
other party during the Term or any Extension Term or renewal thereof, for any
and all loss of, or damage to, any of its property located within or upon or
constituting a part of, the Leased Property, which loss or damage is covered
by valid and collectible insurance policies, to the extent that such loss or
damage is recoverable in full under such policies. This mutual waiver shall
be in addition to, and not in limitation or derogation of, any other waiver
or release contained in this Lease with respect to any loss or damage to
property of the parties hereto. Inasmuch as this waiver will preclude the
assignment of any aforesaid claim by way of subrogation (or otherwise) to an
insurance company (or any other person), Landlord and Tenant agree
immediately to give each insurance company which has issued to it policies of
insurance, written notice of the terms of this mutual waiver, and to have
such insurance policies properly endorsed, if necessary, to prevent the
invalidation of the insurance coverage by reason of this waiver, so long as
such endorsement is available at a reasonable cost.
4.10 MORTGAGES. The following provisions shall apply if Landlord
now or hereafter places a mortgage on the Leased Property or any part
thereof: (a) Tenant shall obtain a standard form of mortgage clause insuring
the interest of the mortgagee; (b) Tenant shall deliver evidence of insurance
to such mortgagee; (c) loss adjustment shall require the consent of the
mortgagee but such consent shall not be unreasonably withheld and may not
include any requirement that the funds be paid to mortgagee in lieu of
reconstruction as long as no Event of Default has occurred and is continuing
and the Lease is in full force and effect; and (d) Tenant shall obtain such
other coverages and provide such other information and documents as may be
reasonably required by the mortgagee.
4.11 OTHER INSURANCE REQUIREMENTS. Notwithstanding anything in this
Lease to the contrary and not by way of limitation, in addition to the types
and amounts of insurance required to be carried by Tenant herein, Tenant
covenants to insure and continue in effect such types and amounts of
insurance as Tenant shall be required to carry pursuant to any contract,
agreement, instrument, statute, law, rule or regulation relating to the use
of the Leased Property and the operations of the Business or other activities
thereon.
V. INDEMNITY; SUBSTANCES OF CONCERN
5.01 TENANT'S INDEMNIFICATION. Subject to SECTION 4.07, Tenant
hereby agrees to indemnify, defend and hold harmless Landlord, its officers,
directors, shareholders, agents, employees, successors and assigns, from and
against any and all demands, claims, causes of action, fines, penalties,
damages (including punitive and consequential damages), losses, liabilities
(including strict liability), judgments, costs and expenses (including,
without limitation, attorneys' fees, court costs, and the costs set forth in
SECTION 9.06) (the "CLAIMS") incurred in connection with or arising from: (a)
the use, condition, operation or occupancy of the Leased Property; (b) any
activity, work, or thing done, or permitted or suffered by Tenant in, on
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or about the Leased Property; (c) any acts, omissions, or negligence of Tenant
or any person claiming under Tenant, or the contractors, agents, employees,
invitees, or visitors of Tenant or any such person; (d) any breach,
violation, or nonperformance by Tenant or any person claiming under Tenant or
the employees, agents, contractors, invitees, or visitors of Tenant or of any
such person, of any term, representation, warranty, covenant, or provision of
this Lease or any law, ordinance, or governmental requirement of any kind;
(e) any injury or damage to the person, property or Business of Tenant its
employees, agents, contractors, invitees, visitors, or any other person
entering upon the Leased Property; (f) any accident, injury to or death of
persons or loss or damage to any of property occurring on or about the Leased
Property; (g) any Environmental Law or any pollution or other threat to human
health or the environment at, arising out of or relating to the Leased
Property as set forth in SECTION 5.05, and (h) any brokers' or agents' fees
and commissions. If any action or proceeding is brought against Landlord,
its officers, directors, shareholders, employees or agents by reason of any
Claim, Tenant, upon notice from Landlord, will defend the same at Tenant's
expense with counsel reasonably satisfactory to Landlord. In the event
Landlord reasonably determines that its interests and the interests of Tenant
in any such action or proceeding are not substantially the same and that
Tenant's counsel cannot adequately represent the interests of Landlord
therein, Landlord shall have the right to hire separate counsel in any such
action or proceeding and the reasonable costs thereof shall be paid for by
Tenant. Tenant's indemnification obligations with respect to a Claim shall
survive the expiration or earlier termination of this Lease.
5.02 SUBSTANCES OF CONCERN.
(a) For purposes of this Section 5:
(i) "SUBSTANCES OF CONCERN" means, without limitation,
chemicals, pollutants, contaminants, wastes, toxic
substances, radioactive materials or genetically
modified organisms, which are, have been or become
regulated by any federal, state or local government
authority including, without limitation, (1)
petroleum or any fraction thereof, (2) asbestos, (3)
any substance or material defined as a "hazardous
substance" pursuant to Section 101 of the
Comprehensive Environmental Response Compensation
and Liability Act (42 U.S.C. Section 9601), or (4)
any substance or material defined as a "hazardous
chemical" pursuant to the federal Hazard
Communication Standard (29 C.F.R. Section
1910.1200).
(ii) "ENVIRONMENTAL LAWS" means all federal, state,
local, and foreign laws and regulations relating to
pollution or protection of human health or the
environment (including, without limitation, ambient
air, surface water, ground water, wetlands, land
surface, subsurface strata, and indoor and outdoor
workplace), including, without
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limitation, (1) laws and regulations relating to
emissions, discharges, releases, or threatened
releases of Substances of Concern, and (2) common
law principles of tort liability.
(b) Tenant shall not, either with or without negligence,
injure, overload, deface, damage or otherwise harm the Leased Property or any
part thereof; commit any nuisance, permit the emission of any Substances of
Concern; allow the release or other escape of any biologically or chemically
active substances or materials or other Substances of Concern so as to
impregnate, impair or in any manner affect, even temporarily, any element or
part of the Leased Property or neighboring property; or allow the storage or
use of such substances or materials in any manner not sanctioned by law and
by reasonable standards prevailing in the industry of the Business for the
storage and use of such substances or materials; nor shall Tenant permit the
occurrence of objectionable noise or odors, or make, allow or suffer any
waste whatsoever to the Leased Property. Landlord may inspect the Leased
Property from time to time, and Tenant will cooperate with such inspections.
(c) Notwithstanding the foregoing, Tenant anticipates using,
storing and disposing of certain Substances of Concern normally used in
connection with the operation of the Business. Tenant shall ascertain and
comply fully with all applicable Environmental Laws and environmental
standards and requirements set by federal, state or local laws, rules,
regulations or governmental directives related to the Leased Property or
Tenant's use or occupancy of the Leased Property ("ENVIRONMENTAL STANDARDS"),
including but not limited to any laws or standards (a) regulating the use,
storage, generation or disposal of Substances of Concern; (b) regulating the
monitoring or use of any underground or aboveground storage tanks at the
Leased Property; or (c) establishing any permitting, notification or
reporting requirements. As promptly as practicable after the Commencement
Date (but in no event later than 120 days thereafter), Tenant shall establish
and implement a proof of compliance with all applicable Environmental Laws
and Environmental Standards ("ENVIRONMENTAL COMPLIANCE PROGRAM"). Tenant
shall update such Environmental Compliance Program every three (3) years
during the Term and any Extension Term. Tenant shall submit its Environmental
Compliance Program and each update thereto to Landlord; PROVIDED, HOWEVER,
such submittal shall not relieve Tenant of its obligations pursuant to this
Section 5. Tenant's Environmental Compliance Program shall include a program
for monitoring Tenant's compliance with Environmental Laws and Environmental
Standards and a plan for correcting immediately any incident of
noncompliance. Tenant shall comply with its Environmental Compliance Program.
(d) In the event of any noncompliance with any Environmental
Laws or Environmental Standards or any spill, release or discharge of
Substances of Concern in a reportable quantity under federal, state or local
law, Tenant shall:
(i) give Landlord immediate notice of the incident by
telephone or facsimile, providing as much detail as
possible;
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(ii) as soon as possible, but no later than seventy-two
(72) hours, after discovery of an incident of
noncompliance, submit a written report to Landlord,
identifying the source or case of the noncompliance
or spill, release or discharge (including the names
and quantities of any Substances of Concern
involved) and the method or action required to
correct the problem; and.
(iii) cooperate with Landlord or its designated agents or
contractors with respect to the investigation and
correction of such problem.
Tenant shall also be solely responsible for providing any notice to
any federal, state or local governmental authority required by applicable
laws and regulations as a result of such incident.
5.03 AUDITS. Landlord shall have the right to conduct, at its
expense, periodic audits of Tenant's compliance with the Environmental
Compliance Program and management of Substances of Concern at the Leased
Property and/or periodic tests of air, soil, surface water or groundwater at
or near the Leased Property. Landlord shall not be obligated to provide
Tenant with the results of any audit or tests unless such results are the
basis for a claim by Landlord that Tenant has breached its obligations under
this Lease or a demand by Landlord that Tenant modify its Environmental
Compliance Program or operations or remediate or remove a spill, release or
discharge of Substances of Concern in accordance with SECTION 5.06 below.
Tenant agrees promptly to modify its Environmental Compliance Program or the
conduct of its operations in accordance with Landlord's reasonable
recommendations directed at improvement of Tenant's handling, use and
disposal of Substances of Concern in, on or from the Leased Property. If, as
a result of an environmental audit performed by Landlord with respect to the
Leased Property, Landlord reasonably determines in its judgment that
alterations or improvements of equipment or buildings located on the Leased
Property are necessary, Tenant shall perform such alterations or improvements
as are reasonable under the circumstances and pay all costs and expenses
related thereto. If Tenant shall fail to pay any such costs or expenses,
Tenant shall deposit with Landlord the full amount necessary to pay such
costs within ten (10) days of Landlord's demand. Nothing contained herein
shall be construed to obligate or require Landlord to perform any audits,
tests, inquiry or investigation. Should Landlord elect or be required to
disclose to Tenant the results of any audit or tests, Landlord shall not be
liable in any way for the truth or accuracy of such information.
5.04 LANDLORD'S OPTION RE: COMPLIANCE. If Tenant, after notice from
Landlord, fails to comply with or perform any of its obligations pursuant to
this ARTICLE 5, including, but not limited to, obligations to clean up
spills, releases or discharges, Landlord may, but shall not be obligated to,
perform such obligations and Tenant shall pay Landlord within ten (10) days
of demand Landlord's costs therefor, including any overhead and
administrative costs.
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5.05 ENVIRONMENTAL INDEMNIFICATION. Tenant shall indemnify, defend
and hold harmless Landlord, its officers, directors, shareholders, employees,
agents, successors and assigns, from and against all demands, claims, causes
of action, fines, penalties, damages (including punitive and consequential
damages), losses, liabilities (including strict liability), judgments, and
expenses (including, without limitation, attorneys' fees, court costs, and
the costs set forth in SECTION 9.06) imposed upon or asserted against Tenant,
Landlord or the Leased Property on account of any Environmental Law
(irrespective of whether there has occurred any violation of any
Environmental Law) relating to the Leased Property, including (a) response
costs and costs of removal and remedial action incurred by the any
governmental unit to any other person or entity, or damages from injury to or
destruction or loss of natural resources, including the reasonable costs of
assessing such injury, destruction or loss, incurred pursuant to any
Environmental Law; (b) costs and expenses of abatement, investigation,
removal, remediation, correction or cleanup, fines, damages, response costs
or penalties which arise from the provisions of any Environmental Law; (c)
liability for personal injury or property damage arising under any statutory
or common-law tort theory, including, without limitation, damages assessed
for the maintenance of a public or private nuisance or for carrying on of a
dangerous activity; (d) liability by reason of a breach of an environmental
representation or warranty by Tenant; and (e) failure of Tenant to complete
in a timely manner alterations or improvements of equipment or buildings
located on the Leased Property deemed necessary or advisable by Landlord
pursuant to SECTION 5.03 in a manner acceptable to Landlord.
5.06 TENANT'S CLEANUP OBLIGATION. If any spill, release or
discharge of Substances of Concern occurs on, at or from the Leased Property
during the Term or any Extension Term, Tenant shall promptly take all
actions, at its sole expense, as are necessary to remove or remediate such
spill, release or discharge and to return the Leased Property to the
condition existing prior to the introduction of any such Substances of
Concern to the Leased Property, provided that Landlord's written approval of
such action shall first be obtained, which approval shall not be unreasonably
withheld so long as such actions would not potentially have any material
adverse effect on the Leased Property.
5.07 SURVIVAL OF TENANT'S OBLIGATIONS. Tenant's obligations under
this Section 5 shall survive the expiration or earlier termination of this
Lease. During any period of time after the termination of this Lease that
Tenant is completing the removal from the Leased Property of any Substances
of Concern for which Tenant is responsible, Tenant shall continue to pay the
full amount of rent due under this Lease if the Leased Property is not
rentable for uses contemplated under this Lease, which Rent shall be prorated
daily for the final month of such period of time.
VI. USE AND ACCEPTANCE OF THE LEASED PROPERTY
6.01 USE OF LEASED PROPERTY. For so long as this Lease is in
effect, Tenant shall use and occupy the Leased Property exclusively for the
purpose of conducting the Business, and for no other purpose without the
prior written consent of Landlord. Tenant shall obtain and maintain
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all approvals, licenses, and consents needed to use and operate the Leased
Property for such purposes. Tenant shall promptly deliver to Landlord
complete copies of surveys, examinations, certification and licensure
inspections, compliance certificates, and other similar reports issued to
Tenant by any governmental agency.
6.02 ACCEPTANCE OF LEASED PROPERTY. Except as otherwise
specifically provided in this Lease, Tenant acknowledges (i) Tenant has been
in occupancy of the Leased Property prior to the Commencement Date; (ii)
Tenant has found the Leased Property fit for Tenant's use; (iii) delivery of
the Leased Property to Tenant is in an "as-is" condition; (iv) Landlord is
not obligated to make any improvements or repairs to the Leased Property; and
(v) the roof, walls, foundation, heating, ventilating, air conditioning,
telephone, sewer, electrical, mechanical utility, plumbing, and other
portions of the Leased Property are in good working order. Tenant waives any
claim or action against Landlord with respect to the condition of the Leased
Property. LANDLORD MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED,
IN RESPECT OF THE LEASED PROPERTY OR ANY PART THEREOF, EITHER AS TO ITS
FITNESS FOR USE, DESIGN OR CONDITION OR ANY PARTICULAR USE OR PURPOSE OR
OTHERWISE, AS TO QUALITY OR THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR
PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY TENANT.
6.03 CONDITIONS OF USE. Tenant agrees that during the Term and any
Extension Term it shall use and keep the Leased Property in a careful, safe
and proper manner; not commit or suffer waste thereon; not use or occupy the
Leased Property for any unlawful purposes; not use or occupy the Leased
Property or permit the same to be used or occupied, for any purpose or
business deemed extra hazardous on account of fire or otherwise; keep the
Leased Property in such repair and condition as may be required by the local
board of health, or other city, state or federal authorities, free of all
cost to Landlord; not permit any acts to be done which will cause the
cancellation, invalidation, or suspension of any insurance policy; and permit
Landlord and its agents to enter upon the Leased Property at all reasonable
times to examine the condition thereof. In addition, at any time and from
time to time upon not less than fifteen (15) days prior written notice,
Tenant shall permit Landlord's mortgagee or lender and their authorized
representatives, to inspect the Leased Property during normal business hours,
provided that such inspections shall not unreasonably interfere with the
Business.
6.04 FINANCIAL STATEMENTS AND OTHER INFORMATION. Tenant shall
provide Landlord and any mortgagee or lender regularly (or more often as may
be reasonably requested by Landlord in writing), the following financial
information: (a) within forty-five (45) days after each fiscal quarter during
the Term or any Extension Term (except the fourth quarter), Tenant-prepared
financial statements prepared in accordance with generally accepted
accounting principles consistently applied; and (b) as to the Leased Property
and itself, Tenant shall use its best efforts to provide Landlord within
ninety (90) days after the end of each fiscal year of Tenant during the Term
or any Extension Term and in no event later than one hundred and twenty (120)
days after
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the end of each fiscal year of Tenant during the Term or any Extension Term,
financial statements, audited, reviewed or compiled by a certified public
accountant (the "ANNUAL FINANCIAL STATEMENTS"). Tenant shall also deliver to
Landlord such additional financial information as Landlord may reasonably
request, provided the same is of a type normally maintained by Tenant or can
be obtained without undue cost or burden on Tenant's personnel and does not
constitute information which Tenant reasonably determines to be proprietary
or confidential.
VII. REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS
7.01 MAINTENANCE. Tenant shall maintain the Leased Property in good
order, repair and appearance, and repair the Leased Property, including
without limitation, all interior and exterior, structural and nonstructural
repairs and replacements to the roof, foundations, exterior walls, building
systems, HVAC systems, parking areas, sidewalks, water, sewer and gas
connections, pipes, and mains. Tenant shall pay as Additional Rent the full
cost of such maintenance, repairs, and replacements. Tenant shall maintain
all drives, sidewalks, parking areas and lawns on or about the Leased
Property in a clean and orderly condition, free of accumulations of dirt and
rubbish. Tenant shall permit Landlord to inspect the Leased Property at all
reasonable times, and shall implement all reasonable suggestions of Landlord
as to the maintenance and repair of the Leased Property.
7.02 COMPLIANCE WITH LAWS. Tenant shall comply with all conditions,
covenants and restrictions affecting the Project, insurance requirements,
laws, ordinances, orders, rules, regulations and other governmental
requirements relating to the use, condition or occupancy of the Leased
Property, whether now or hereafter enacted and in force, including, without
limitation: (a) licensure requirements for operation of the Business; (b)
requirements of any board of casualty insurance underwriters or insurance
service office for any other similar body having jurisdiction over the Leased
Property; (c) all zoning and building codes; (d) Environmental Laws; (e)
those certain covenants, conditions and restrictions recorded on September
12, 1986 as File/Page No. 86-401456 of the Official Records of San Diego
County, California (the "Official Records") (as amended from time to time,
the "CC&Rs"); and (f) that certain agreement dated December 21, 1990, by and
between Carlsbad Airport Centre, a California limited partnership and Jack D.
McCormick, Trustee of the McCormick Family Trust and The City of Carlsbad,
recorded on January 16, 1991 as File/Page no. 1991-0021341 in the Official
Records. At Landlord's request, from time to time, Tenant shall deliver to
Landlord copies of certificates or permits evidencing compliance with such
laws, including without limitation, copies of any applicable licenses,
certificates of occupancy and building permits. Tenant shall promptly
provide Landlord with copies of any notice from any governmental authority
alleging any non-compliance by Tenant or the Leased Property with any of the
foregoing requirements and such evidence as Landlord may reasonably require
of Tenant's remediation thereof. Tenant hereby agrees to defend, indemnify
and hold harmless Landlord, its officers, directors, shareholders, agents and
employees from and against any and all demands,
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claims, causes of action, fines, penalties, damages (including punitive and
consequential damages), losses, liabilities (including strict liability),
judgments, costs and expenses (including, without limitation, attorneys'
fees, court costs, and the costs set forth in SECTION 9.06) resulting from
any failure by Tenant to comply with any laws, ordinances, rules, regulations
and other governmental requirements.
7.03 CHANGES TO THE LEASED PROPERTY. Subject to Landlord's approval
as set forth in SECTION 8.01, Tenant shall, at Tenant's sole cost and
expense, make any additions, changes, improvements or alterations to the
Leased Property, including structural alterations, which may be required by
any governmental authorities, including those required to continue to satisfy
any licensure requirements related to the operation of the Business, whether
such changes are required by Tenant's continued use, changes in the law,
ordinances, or governmental regulations, defects existing as of the date of
this Lease, or any other cause whatsoever. Tenant shall provide thirty (30)
days prior written notice to Landlord of any changes to the Leased Property
pursuant to this SECTION 7.03 which involve changes to the structural
integrity thereof or materially affect the operational capabilities thereof.
All such additions, changes, improvements or alterations shall be deemed to
be a Tenant Improvement and shall comply with all laws relating to such
alterations and with the provisions of SECTION 8.01.
7.04 MECHANIC'S LIENS. Tenant shall have no authority to permit or
create a lien against Landlord's interest in the Leased Property, and Tenant
shall post notices or file such documents as may be required to protect
Landlord's interest in the Leased Property against liens. Tenant hereby
agrees to defend, indemnify, and hold Landlord harmless from and against any
mechanics' liens or other liens against the Leased Property by reason of
work, labor services or materials supplied or claimed to have been supplied
on or to the Leased Property. Tenant shall immediately remove, bond-off, or
otherwise obtain the release of any mechanic's lien filed against the Leased
Property. Tenant shall pay all expenses in connection therewith, including
without limitation, damages, interest, court costs and reasonable attorneys'
fees.
7.05 REPLACEMENT OF FIXTURES. Tenant shall not remove Fixtures from
the Leased Property except to replace such Fixtures with other items used for
similar or analogous purposes, which replacement items are of equal or
greater quality and value. Items being replaced by Tenant may be removed and
shall become the property of Tenant, and items replacing the same shall be
and remain the property of Landlord. Tenant shall execute, upon written
request from Landlord, any and all documents necessary to evidence Landlord's
ownership of the Fixtures and replacements therefor. Tenant may not finance
replacements by security agreement or equipment lease unless: (a) Landlord
has consented to the terms and conditions of the equipment lease or security
agreement; (b) the equipment lessor or lender has entered into a
non-disturbance agreement with Landlord upon terms and conditions acceptable
to Landlord, including without limitation (i) Landlord shall have the right
(but not the obligation) to assume such security agreement or equipment lease
upon the occurrence of an Event of Default by Tenant hereunder; (ii) the
equipment lessor or lender shall promptly notify Landlord of any default by
Tenant under
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the equipment lease or security agreement and give Landlord a reasonable
opportunity to cure such default; and (iii) Landlord shall have the right to
assign its rights under the equipment lease, security agreement, or
non-disturbance agreement; (c) the equipment lessor or lender shall
subordinate its security interest to the security interest of any of
Landlord's lessors, mortgagees or lenders, whether now created or hereafter
existing; and (d) Tenant shall, within ten (10) days after receipt of an
invoice from Landlord, reimburse Landlord for all costs and expenses incurred
in reviewing and approving the equipment lease, security agreement, and
non-disturbance agreement, including without limitation, reasonable
attorneys' fees and costs.
7.06 ENCROACHMENT RESTRICTIONS. If any of the Improvements shall,
at any time, encroach upon any property, street or right-of-way adjacent to
the Leased Property, or shall violate the agreements or conditions contained
in any restrictive covenant or other agreement affecting the Leased Property,
other than one which is created or consented to by Landlord without Tenant's
consent, or shall impair the rights of others under an easement or
right-of-way to which the Leased Property is subject, other than one which is
created or consented to by Landlord without Tenant's consent, then promptly
upon the request of Landlord or at the request of any person affected by any
such encroachment, violation or impairment, Tenant shall, at its expense,
subject to its right to contest the existence of any encroachment, violation
or impairment and in such case, in the event of an adverse final
determination, either (a) obtain valid and effective waivers or settlements
of all claims, liabilities and damages resulting from each such encroachment,
violation or impairment whether the same shall affect Landlord or Tenant, or
(b) subject to Landlord's approval as set forth in SECTION 8.01, make such
changes in the Improvements and take such other actions as shall be necessary
to remove such encroachment and to end such violation or impairment,
including, if necessary, the alteration of improvements. Any such alteration
shall be made in conformity with the requirements of ARTICLE VIII.
VIII. ALTERATIONS AND SIGNS: TENANT'S PROPERTY: CAPITAL ADDITIONS TO THE
LEASED PROPERTY
8.01 TENANT'S RIGHT TO CONSTRUCT. During the Term of this Lease or
any Extension Term, so long as no Event of Default shall have occurred and be
continuing, Tenant may make Capital Additions (as defined herein), or other
alterations, additions, changes and/or improvements to the Leased Property as
deemed necessary or useful to operate the Leased Property for the Business
(individually, a "TENANT IMPROVEMENT," or collectively, the "TENANT
IMPROVEMENTS"). "CAPITAL ADDITIONS" shall mean the construction of one or
more new buildings or one or more additional structures annexed to any
portion of any of the Improvements, including the construction of a new
floor, or the repair, replacement, restoration, remodeling or rebuilding of
the Improvements or any portion thereof which are not normal, ordinary or
recurring to maintain the Leased Property. Except as otherwise agreed to by
Landlord herein or otherwise in writing, any such Tenant Improvement or
Capital Addition shall be made at Tenant's sole expense and shall become the
property of Landlord upon termination of this Lease.
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Unless made on an emergency basis to prevent injury to person or property,
Tenant must obtain Landlord's prior written approval, such approval not to be
unreasonably withheld or delayed, for any Capital Addition, and for any
Tenant Improvement which is not a Capital Addition and which (a) has a cost
of more than Twenty-Five Thousand Dollars ($25,000) or a cost which, when
aggregated with the costs of all such Tenant Improvements on the Leased
Property in a given Lease Year, would cause the total costs of all such
Tenant Improvements on the Leased Property to exceed One Hundred Thousand
Dollars ($100,000); or (b) would, in Landlord's reasonable judgment, impair
the value of the Leased Property. Additionally, in connection with any
Tenant Improvement, including any Capital Addition, Tenant shall provide
Landlord with copies of any plans and specification therefor, Tenant's budget
relating thereto, any required governmental permits or approvals, any
construction contracts or agreements relating thereto, and any other
information relating to such Tenant Improvement as Landlord shall reasonably
request. Notwithstanding anything to the contrary contained in this Lease,
Landlord may require Tenant to remove any Tenant Improvements or Capital
Additions (whether or not made with Landlord's consent) prior to the
expiration of the Lease and to restore the Leased Property to its prior
condition, all at Tenant's expense. With respect to any Tenant Improvements
or Capital Additions that require Landlord's approval, at the time of such
approval, Landlord shall specify if Tenant shall not be required to remove
the same, and such items shall become Landlord's property and shall be
surrendered to Landlord upon the expiration or earlier termination of the
Lease, except that Tenant may remove any of Tenant's machinery or equipment
which can be removed without damage to the Leased Property. Tenant shall
repair, at Tenant's expense, any damage to the Leased Property caused by the
removal of any such machinery or equipment. In no event, however, shall
Tenant remove any of the following materials or equipment (which shall be
deemed Landlord's property), without Landlord's prior written consent.
8.02 TENANT'S RIGHTS. Subject to SECTION 8.01 herein and SECTION
7.03 and SECTION 7.06 concerning required alterations, at Tenant's cost and
expense, Tenant shall have the right to:
(a) seek any governmental approvals, including building
permits, licenses and conditional use permits that Tenant
requires to construct any Tenant Improvement;
(b) erect upon the Leased Property such Tenant Improvements as
Tenant deems desirable;
(c) make additions, alterations, changes and improvements in
any Tenant Improvement so erected; and
(d) engage in any other lawful activities that Tenant
determines are necessary or desirable for the development
of the Leased Property in accordance with the Business;
PROVIDED, HOWEVER, Tenant shall not make any Tenant
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Improvement which would, in Landlord's reasonable judgment,
impair the value of the Leased Property without Landlord's
prior written consent and provided, further that Tenant
shall not be permitted to create a mortgage, lien or any
other encumbrance on the Leased Property without Landlord's
prior written consent.
8.03 COOPERATION OF LANDLORD. Landlord shall cooperate with Tenant
and take such actions, including the execution and delivery to Tenant of any
applications or other documents, reasonably requested by Tenant in order to
obtain any governmental permits, licenses or approvals sought by Tenant to
construct any Tenant Improvement within fifteen (15) business days following
the later of (a) the date Landlord receives Tenant's written request, or (b)
the date of delivery of any such application or document to Landlord;
provided, the taking of such action by Landlord shall be without cost to
Landlord (or if there is a cost to Landlord, such cost shall be reimbursed by
Tenant), shall not cause Landlord to be in violation of any law, ordinance or
regulation, and shall not be deemed a waiver by Landlord of any of its rights
or of any of Tenant's obligations, including but not limited to
indemnification.
8.04 COMMENCEMENT OF CONSTRUCTION. Tenant agrees that:
(a) Tenant shall diligently seek all governmental approvals
relating to the construction of any Tenant Improvement;
(b) once Tenant begins the construction of any Tenant
Improvement, Tenant shall diligently oversee any such
construction to completion in accordance with applicable
insurance requirements and the laws, rules and regulations
of all governmental bodies or agencies having jurisdiction
over the Leased Property;
(c) Landlord shall have the right at any time and from time to
time to post and maintain upon the Leased Property such
notices as may be necessary to protect Landlord's interest
from mechanic's liens, materialmen's liens or liens of a
similar nature;
(d) Tenant shall not suffer or permit any mechanic's liens or
any other claims or demands arising from the work of
construction of any Tenant Improvement to be enforced
against the Leased Property or any part thereof, and Tenant
agrees to indemnify, defend and hold Landlord, its
officers, directors, shareholders, agents and employees and
the Leased Property free and harmless from all demands,
claims, causes of action, fines, penalties, damages
(including punitive and consequential damages), losses,
liabilities (including strict liability), judgments, costs
and expenses
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(including, without limitation, attorneys' fees, court
costs, and the costs set forth in SECTION 9.06) incurred
in connection with or arising therefrom;
(e) all work shall be performed in a satisfactory and
workmanlike manner consistent with standards in the
industry; and
(f) subject to SECTION 8.08 in the case of Capital Additions,
Tenant shall not secure any construction or other financing
for the Tenant Improvements which is secured by the Leased
Property without Landlord's prior written consent, and any
such financing (i) shall not exceed the cost of the Tenant
Improvements, (ii) shall be subordinate to any mortgage or
encumbrance now existing or hereinafter created with
respect to the Leased Property, and (iii) shall be limited
solely to Tenant's interest in the Leased Property.
8.05 RIGHTS OF TENANT IMPROVEMENTS. Notwithstanding anything to the
contrary in this Lease, all Tenant Improvements existing on the Leased
Property or constructed upon the Leased Property pursuant to SECTION 8.01,
any and all subsequent additions thereto and alterations and replacements
thereof shall be the sole and absolute property of Tenant during the Term and
any Extension Term. Upon the expiration or early termination of this Lease,
all such Tenant Improvements located on the Leased Property shall become the
property of Landlord, subject to Landlord's right to require their removal by
Tenant pursuant to the provisions of Section 8.01. Without limiting the
generality of the foregoing, prior to the expiration or earlier termination
of this Lease, Tenant shall be entitled to all federal and state income tax
benefits associated with all Tenant Improvements located on the Leased
Property.
8.06 PERSONAL PROPERTY. Tenant shall install, place and use on the
Leased Property such fixtures, furniture, equipment, inventory and other
personal property in addition to the Fixtures as may be required or as Tenant
may, from time to time, deem necessary or useful to operate the Leased
Property in the operation of the Business.
8.07 REQUIREMENTS FOR THE TENANT'S PERSONAL PROPERTY. Tenant shall
comply with all of the following requirements in connection with Tenant's
Personal Property:
(a) Tenant's Personal Property shall be installed in a good and
workmanlike manner, in compliance with all governmental
laws, ordinances, rules and regulations and all insurance
requirements, and be installed free and clear of any
mechanic's liens;
(b) Tenant shall, at Tenant's sole cost and expense, maintain,
repair and replace Tenant's Personal Property.
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(c) Tenant shall pay all Impositions and other taxes applicable
to Tenant's Personal Property;
(d) unless an Event of Default has occurred and is continuing,
Tenant may remove Tenant's Personal Property from the
Leased Property from time to time provided that Tenant
promptly repairs any damage to the Leased Property
resulting from the removal of Tenant's Personal Property;
(e) Tenant shall remove all of Tenant's Personal Property upon
the termination or expiration of the Lease and shall
promptly repair any damage to the Leased Property resulting
from the removal thereof to the reasonable satisfaction of
Landlord; PROVIDED, HOWEVER, if Tenant fails to remove
Tenant's Personal Property from the Leased Property within
thirty (30) days after the termination or expiration of
this Lease, then Tenant shall be deemed to have abandoned
such items of Tenant's Personal Property, all of which
shall become the property of Landlord, and Landlord may
remove, store and dispose of such property, and Tenant
shall have no claim or right against Landlord for such
property or the value thereof regardless of the disposition
thereof by Landlord. Tenant shall pay Landlord, upon
demand, all expenses incurred by Landlord in removing,
storing and disposing of such items of Tenant's Personal
Property and repairing any damage caused by such removal.
(f) Tenant shall perform its obligations under any equipment
lease or security agreement for Tenant's Personal Property;
(g) Tenant's obligations hereunder shall survive the
termination or expiration of this Lease.
IX. DEFAULTS AND REMEDIES
9.01 EVENTS OF DEFAULT. The occurrence of any one or more of the
following shall be an event of default ("EVENT OF DEFAULT") hereunder:
(a) Tenant fails to pay in full any installment of Rent, or any
other monetary obligation payable by Tenant hereunder,
within three (3) business days after the due date thereof
and after written notice thereof and an opportunity to cure
within a three (3) business day period after such notice is
given to Tenant by Landlord;
(b) Tenant shall abandon or vacate the Leased Property;
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(c) Any insurance required to be carried by Tenant hereunder
shall have lapsed; Tenant shall fail to observe the
covenant in respect to insurance under ARTICLE IV provided
Landlord shall have provided notice of such failure to
Tenant, and Tenant shall have failed to cure such failure
within three (3) business days of such notice;
(d) Tenant fails to observe and perform any covenant, condition
or agreement hereunder to be performed by Tenant (except
the covenants in respect of insurance, or the payment of
Rent or under Section 2.09) and such failure continues for
a period of twenty (20) days after written notice thereof
is given to Tenant by Landlord;
(e) if Tenant or Photomatrix, Inc. ("GUARANTOR"): (i) admits in
writing its inability to pay its debts generally as they
become due; (ii) files a petition in bankruptcy or a
petition to take advantage of any insolvency act; (iii)
makes an assignment for the benefit of its creditors; (iv)
is unable to pay its debts as they mature; (v) consents to
the appointment of a receiver of itself or of the whole or
any substantial part of its property; or (vi) files a
petition or answer seeking reorganization or arrangement
under the federal bankruptcy laws or any other applicable
law or statute of the United States of America or any state
thereof;
(f) if Tenant or Guarantor, on insolvency proceedings or on a
petition in bankruptcy filed against it, is adjudicated as
bankrupt or a court of competent jurisdiction enters an
order or decree appointing, without the consent of Tenant
or Guarantor, as the case may be, a receiver of Tenant or
Guarantor, as the case may be, of the whole or
substantially all of its property, or approving a petition
filed against it seeking, reorganization or arrangement of
Tenant, or Guarantor, as the case may be, under the federal
bankruptcy laws or any other applicable law or statute of
the United States of America or any state thereof, and such
judgment, order or decree is not vacated, dismissed or set
aside within sixty (60) days from the date of the entry
thereof;
(g) if the estate or interest of Tenant in the Leased Property
or any part thereof is levied upon or attached in any
proceeding and the same is not vacated or discharged within
fifteen (15) days after commencement thereof (unless Tenant
is contesting such lien or attachment in accordance with
this Lease) or if such estate or interest of Tenant is
assigned, conveyed or involuntarily transferred in
violation of this Lease;
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(h) any representation, warranty or covenant made by Tenant on
behalf of itself or an Affiliate in this Lease or in any
certificate, demand or request made pursuant hereto proves
to be incorrect, in any material respect, as of the date of
issuance or making thereof;
(i) a final, non-appealable judgment or judgments for the
payment of money not fully covered (excluding deductibles)
by insurance is rendered against Tenant and the same
remains undischarged, unvacated, unbonded, unappealed or
unstayed for a period of thirty (30) consecutive days;
(j) except after the effective date of a permitted assignment
meeting the requirements of ARTICLE XIII if Tenant is
liquidated or dissolved, or begins proceedings toward
liquidation or dissolution, or in any manner permits the
sale or divestiture of substantially all of its assets; or
(k) Tenant shall fail to observe and perform any covenant,
condition or agreement to be performed under Section 2.09.
9.02 REMEDIES. Upon the occurrence of an Event of Default, Landlord
may, with or without further notice or demand, and without limiting Landlord
in the exercise of any right or remedy which Landlord may have by reason of
such Event of Default:
(a) Terminate Tenant's right to possession of the Leased
Property by any lawful means, in which case this Lease
shall terminate and Tenant shall immediately surrender
possession to Landlord. In such event Landlord may
repossess the Leased Property and may, at tenant's sole
cost, remove any of tenant's signs and any of its other
property without relinquishing its right to receive Rent or
any other right against Tenant. Without limiting the
generality of the foregoing, upon the termination of this
Lease or the termination of Tenant's right of possession,
it shall be lawful for Landlord, without formal demand or
notice of any kind, to re-enter the Leased Property by
summary dispossession proceedings or any other action or
proceeding authorized by law and to remove Tenant and all
persons and property therefrom. Except as otherwise
provided in Section 9.02(b), if Tenant abandons the Leased
Property prior to the end of the term hereof, or if
Tenant's right to possession is terminated by Landlord
because of an Event of Default, this Lease shall terminate.
Upon such termination, Landlord shall be entitled to
recover from Tenant the following, as provided in Section
1951.2 of the California Civil Code:
(i) the unpaid Rent which had been earned at the time of
termination;
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(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 Tenant 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 Tenant proves could be reasonably
avoided; and
(iv) any other amount necessary to compensate Landlord
for all the detriment proximately caused by Tenant's
failure to perform its obligations under 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
Leased Property, expenses of reletting, including
necessary renovation and alteration of the Leased
Property, reasonable attorneys' fees, and that
portion of any leasing commission paid by Landlord
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 at the time of award plus
four percent (4%).
Efforts by Landlord to mitigate damages caused by Tenant's default
of this Lease shall not waive Landlord's right to recover damages
as provided herein. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Landlord
shall have the right to recover in such proceeding any unpaid Rent
and damages as are recoverable therein, or Landlord may reserve
the right to recover all or any part thereof in a separate suit.
If a notice and grace period required under SECTION 9.01 was not
previously given, a notice to pay rent or quit, or to perform or
quit given to Tenant under the unlawful detainee statute shall
also constitute the notice required by SECTION 9.01. In such case,
the applicable grace period required by SECTION 9.01 and the
unlawful detainee statute shall run concurrently, and the failure
of Tenant to cure the Event of Default within the greater of the
two such grace periods shall constitute both an unlawful detainer
and an Event of Default entitling Landlord to the remedies
provided for in this Lease and/or by said statute.
(b) Even if Tenant has abandoned the Leased Property, this Lease shall
continue in effect for so long as Landlord does not terminate
tenant's right to possession, and
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Landlord may enforce all its rights and remedies under this
Lease, including, without limitation, the right to recover Rent
as it becomes due. This remedy is intended to be the remedy
described in California Civil Code Section 1951.4, and the
following provision from such Civil Code Section is hereby
repeated: "The Lessor has the remedy described in California
Civil Code Section 1951.4 (lessor may continue lease in effect
after lessee's breach and abandonment and recover rent as it
becomes due, if lessee has right to sublet or assign, subject
only to reasonable limitations)." Any such payments due
Landlord shall be made upon demand therefor from time to time
and Tenant agrees that Landlord may file suit to recover any
sums falling due from time to time. Notwithstanding any such
reletting without termination, Landlord may at any time
thereafter elect in writing to terminate this Lease for such
previous breach.
(c) If Landlord terminates Tenant's right to possession without
terminating the Lease, and Landlord takes possession of the Leased
Property itself, Landlord may relet any part of the Leased
Property for such Rent, for such time, and upon such terms as
Landlord, in its sole discretion, shall determine. Any proceeds
from reletting the Leased Property shall first be applied to the
expenses of reletting, including, without limitation,
redecoration, repair, alteration, and advertising, brokerage,
legal, and other reasonably necessary expenses. If the reletting
proceeds after such payment of expenses are insufficient to pay
the full amount of Rent under this Lease, Tenant shall pay such
deficiency to landlord monthly upon demand as it becomes due. Any
excess proceeds shall be retained by Landlord.
(d) Make a draw upon the Letter of Credit.
(e) Pursue any other remedy now or hereafter available under the laws
or judicial decisions of the state wherein the Leased Property is
located. The expiration or termination of this Lease and/or the
termination of Tenant's right to possession shall not relieve
Tenant from liability under any indemnity provisions of this Lease
as to matters occurring or accruing during the Term or any
Extension Term or by reason of Tenant's occupancy of the Leased
Property.
9.03 RIGHT OF SET-OFF. Landlord may, and is hereby authorized by
Tenant, at any time and from time to time, after advance notice to Tenant, to
set-off and apply any and all sums held by Landlord in respect of the Leased
Property, including all sums held in any escrow for Impositions, any
indebtedness of Landlord to Tenant, and any claims by Tenant against
Landlord, against any obligations of Tenant under this Lease and against any
claims by Landlord against Tenant, whether or not Landlord has exercised any
other remedies hereunder. Landlord shall set-off and apply such sums first
to delinquent real estate taxes, unless such taxes are being protested in
good faith and no lien has attached to the Leased Property with respect
thereto; second, to currently due and owing real estate taxes; and next, to
other Tenant's obligations in
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the order which Landlord may determine. The rights of Landlord under this
Section are in addition to any other rights and remedies Landlord may have
against Tenant.
9.04 PERFORMANCE OF TENANT'S COVENANTS. Landlord may, without
waiving or releasing any obligation of Tenant, and without waiving or
releasing any obligation or default, perform any obligation of Tenant which
Tenant has failed to perform within five (5) business days after Landlord has
sent a written notice to Tenant informing it of its specific failure
(provided no such notice shall be required if Landlord has previously
notified Tenant of such failure under the provisions of SECTION 9.01). In the
event Landlord deems, in its discretion, that Tenant's failure to perform
such obligation has given rise to an emergency situation, Landlord may
perform such obligation without waiving or releasing any obligation of
Tenant, and without waiving or releasing any obligation or default; PROVIDED,
HOWEVER, that Landlord shall notify Tenant of such performance as soon as it
is reasonably practicable to do so. Tenant shall reimburse Landlord on
demand, as Additional Rent, for any expenditures thus incurred by Landlord
and shall pay interest thereon at the rate of ten percent (10%) per annum.
9.05 [INTENTIONALLY OMITTED]
9.06 LITIGATION; ATTORNEYS' FEES. Within ten (10)days after Tenant
has knowledge of any litigation or other proceeding (a) against Tenant or
Guarantor in an amount in excess of One Hundred Thousand Dollars ($100,000),
(b) related to or arising out of this Agreement or the Leased Property in an
amount in excess of Fifty Thousand Dollars ($50,000) or (c) that (i) may be
instituted against Tenant, (ii) may be instituted against the Leased Property
to secure or recover possession thereof, or (iii) may affect the title to or
the interest of Landlord or Tenant in the Leased Property, Tenant shall give
written notice thereof to Landlord. In the event that Landlord determines
that Tenant has failed to give adequate cooperation or information with
respect to any such litigation, investigation, receivership, administrative,
bankruptcy insolvency or other similar proceeding, Landlord may, after notice
to Tenant, undertake such investigation or proceeding and Tenant shall pay
all reasonable costs and expenses (the "COSTS") related thereto that are
incurred by Landlord, whether or not Landlord has received notice from Tenant
of such investigation or proceeding, and whether or not an Event of Default
has actually occurred or has been declared and thereafter cured, which Costs
shall include, without limitation: (aa) the fees, expenses and costs of any
litigation, investigation, receivership, administrative, bankruptcy
insolvency or other similar proceeding; (bb) reasonable attorneys',
paralegal, consulting and witness fees and disbursements; and (cc) the
expenses, including, without limitation, lodging, meals, and transportation,
of Landlord and its employees, agents, attorneys, and witnesses in
investigating or preparing for litigation, administrative, bankruptcy
insolvency or other similar proceedings and attendance at hearings,
depositions and trials in connection therewith. Within ten (10) days of
Landlord's presentation of an invoice of Costs incurred by Landlord pursuant
to the preceding sentence or otherwise incurred by Landlord in enforcing or
preserving Landlord's rights under this Lease, whether or not an Event of
Default has actually occurred or has been
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declared and thereafter cured, Tenant shall pay all such Costs. All such
Costs as incurred shall be deemed to be Additional Rent under this Lease.
9.07 REMEDIES CUMULATIVE. The remedies of Landlord herein are
cumulative to and not in lieu of any other remedies available to Landlord at
law or in equity. The use of or failure to use, any one remedy shall not be
taken to exclude or waive the right to use any other remedy.
9.08 ESCROWS AND APPLICATION OF PAYMENTS. As security for the
performance of its obligations hereunder, Tenant hereby assigns to Landlord
all its right, title and interest in and to all monies escrowed with Landlord
under this Lease and all deposits with utility companies, taxing authorities,
and insurance companies; PROVIDED, HOWEVER, that Landlord shall not exercise
its rights hereunder with respect to the Leased Property until an Event of
Default has occurred. Any payments received by Landlord under any provisions
of this Lease during the existence or continuance of an Event of Default
shall be applied to Tenant's obligations; first to delinquent real estate
taxes, unless such taxes are being protested in good faith and no lien has
attached to the Leased Property with respect thereto; second, to currently
due and owing real estate taxes; and next, to other Tenant's obligations in
the order which Landlord may determine.
9.09 POWER OF ATTORNEY. Tenant hereby irrevocably and
unconditionally appoints Landlord, or Landlord's authorized officer, agent,
employee or designee, as Tenant's true and lawful attorney-in-fact to act
after an Event of Default, for Tenant in Tenant's name, place and stead, and
for Tenant's and Landlord's use and benefit, to execute, deliver and file all
applications and any and all other necessary documents or things, to effect a
transfer, reinstatement, renewal and/or extension of any and all licenses and
other governmental authorizations issued to Tenant in connection with
Tenant's operation of the Leased Property, and to do any and all other acts
incidental to any of the foregoing. Tenant irrevocably and unconditionally
grants to Landlord as its attorney-in-fact full power and authority to do and
perform, after an Event of Default, every act necessary and proper to be done
in the exercise of any of the foregoing powers as fully as Tenant might or
could do if personally present or acting, with full power of substitution,
hereby ratifying and confirming all that said attorney shall lawfully do or
cause to be done by virtue hereof. This power of attorney is coupled with an
interest and is irrevocable prior to the full performance of Tenant's
obligations hereunder.
X. DAMAGE OR DESTRUCTION
10.01 DAMAGE TO LEASED PROPERTY.
10.01(a) Tenant shall notify Landlord in writing
immediately upon the occurrence of any damage to the Leased Property. If the
Leased Property shall be only partially damaged (i.e., the restoration shall
be estimated by Landlord to require less than six (6) months from the date of
such damage) and if the proceeds received by Landlord from the insurance
policies described in Section 4.03 shall be sufficient to pay for the
necessary repairs, this Lease
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shall remain in effect and Landlord shall repair the damage as soon as
reasonably possible. Landlord may elect (but shall not be required) to
repair any damage to Tenant's fixtures, equipment, or improvements at
Tenant's expense.
10.01(b) If the insurance proceeds received by Landlord
shall not be sufficient to pay the entire cost of repair, or if the damage
shall not be covered by the insurance policies which Landlord shall maintain
under Section 4.03, Landlord may elect either to (i) repair the damage as
soon as reasonably possible, in which case this Lease shall remain in full
force and effect, or (ii) terminate this Lease as of the date the damage
occurred. Landlord shall notify Tenant within thirty (30) days after receipt
of notice of the occurrence of the damage whether Landlord elects to repair
the damage or terminate this Lease. If Landlord shall elect to repair the
damage, Tenant shall pay Landlord the portion of the "deductible amount"
under Landlord's insurance allocable to the damage to the Leased Property
and, if the damage shall have been due to an act or omission of Tenant, or
Tenant's employees, agents, contractors or invitees, the difference between
the actual cost of repair and any insurance proceeds received by Landlord.
10.01(c) If the damage to the Leased Property shall occur
during the last six (6) months of the Lease Term and such damage shall be
estimated by Landlord to require more than thirty (30) days to repair, either
Landlord or Tenant may elect to terminate this Lease as of the date the
damage shall have occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate this Lease shall give written
notification to the other party of such election within ten (10) days after
Tenant's notice to Landlord of the occurrence of the damage.
10.02 TEMPORARY REDUCTION OF RENT. If the Property shall be
destroyed or damaged and Landlord shall repair or restore the Property
pursuant to the provisions of this Article X, any Rent payable during the
period of such damage, repair and/or restoration shall be reduced according
to the degree, if any, to which Tenant's use of the Leased Property shall be
impaired. Such reduction shall not exceed the sum of one year's payment of
Base Rent, insurance premiums and real property taxes. Except for such
possible reduction in Base Rent, insurance premiums and real property taxes,
Tenant shall not be entitled to any compensation, reduction or reimbursement
from Landlord as a result of any damage, destruction, repair, or restoration
of the Leased Property.
10.03 WAIVER. Tenant waives the protection of any statute, code or
judicial decision which shall grant a tenant the right to terminate a lease
in the event of the damage or destruction of the leased property and the
provisions of this Article X shall govern the rights and obligations of
Landlord and Tenant in the event of any damage or destruction of or to the
Property.
XI. CONDEMNATION
11.01 CONDEMNATION. If more than twenty percent (20%) of the floor
area of the Leased Property or more than twenty-five percent (25%) of the
parking on the Leased Property shall be
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taken by eminent domain either Landlord or Tenant may terminate this Lease as
of the date the condemning authority takes title or possession, by delivering
notice to the other within ten (10) days after receipt of written notice of
such taking (or in the absence of such notice, within ten (10) days after the
condemning authority shall take title or possession). If neither Landlord
nor Tenant shall terminate this Lease, this Lease shall remain in effect as
to the portion of the Leased Property not taken, except that the Base Rent
shall be reduced in proportion to the reduction in the floor area of the
Leased Property. If this Lease shall be terminated, any condemnation award
or payment shall be distributed to the Landlord. Tenant shall have no claim
against Landlord for the value of the unexpired lease term or otherwise.
XII. ADDITIONAL REPRESENTATION,
WARRANTIES AND FINANCIAL COVENANTS
Tenant hereby represents, warrants and covenants to Landlord as
follows:
12.01 ORGANIZATION AND QUALIFICATION.
(a) Tenant is duly organized, validly existing and in good
standing under the laws of its state of incorporation or
organization, with all power and authority, corporate or
otherwise, necessary to: (i) enter into and perform this
Lease and (ii) own and lease its assets and properties, and
conduct the Business, as it is now being conducted or
proposed to be conducted. Tenant is duly qualified as a
foreign corporation or other entity, as the case may be, to
conduct the Business and own and lease its assets and
properties, and is in good standing, in each jurisdiction
where the character of its assets and properties owned or
held under lease or the nature of its Business makes such
qualification necessary or advisable, and is duly qualified
and licensed under all laws, regulations, ordinances or
orders of public or governmental authorities, or otherwise
to carry on the Business and own or lease its assets and
properties in the places and in the manner in which they
are owned, leased or conducted or proposed to be owned,
leased or conducted, except where the failure to be so
organized, qualified and in good standing or to have such
authority, qualification or licensing could not result in a
Material Adverse Change. Complete and correct copies of
Tenant's articles of incorporation, as in effect on the
date hereof, and Tenant's bylaws, also as in effect on the
date hereof, have been delivered to Landlord.
(b) Each Affiliate that conducts operations or business on or
from the Leased Property, whether now or at any time in the
future, is duly organized, validly existing and in good
standing under the laws of its organization, with all power
and authority, corporate or otherwise, necessary to own
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and lease its assets and properties, and conduct its
business, as it is now being conducted or proposed to be
conducted. Each Affiliate is duly qualified as a foreign
corporation or other entity, as the case may be, to do
business and own and lease its assets and properties,
and is in good standing, in each jurisdiction where the
character of its assets and properties owned or held
under lease or the nature of its activities or business
makes such qualification necessary or advisable, and is
duly qualified and licensed under all laws, regulations,
ordinances or orders or public or governmental
authorities or otherwise to carry on its business and
own or lease its assets and properties in the places and
in the manner in which they are owned, leased or is
conducted or proposed to be owned, leased or conducted,
except where the failure to be so organized, qualified
and in good standing or to have such authority,
qualification or licensing could not result in a
Material Adverse Change.
"Material Adverse Change" since a particular specified
date, or a date which may be specified from the
circumstances existing immediately prior to the happening
of a specified event or occurrence, or, if no date or event
is specified, with reference to the most recent Annual
Financial Statements delivered pursuant to this Lease,
means a material adverse change in the Business, assets,
properties, franchises, financial condition or income of
Tenant or the operations, business, assets, properties,
franchises, financial condition, income or prospects of any
Affiliate, whether or not such event or occurrence is an
Event of Default.
"Affiliate" means with respect to any Person, (i) any
Person that holds direct or indirect beneficial ownership
(as deemed in Rule 13d-3 under the Securities Exchange Act
of 1934, as amended) of voting securities or other voting
interests representing at least five percent (5%) of the
outstanding voting power of a Person or equity securities
or other equity interests representing at least five
percent (5%) of the outstanding equity securities or
interests in a Person, or (ii) any Person that directly, or
indirectly through one or more intermediaries, controls, or
is controlled by, or is under common control with such
Person. Guarantor shall be deemed an Affiliate of Tenant.
A "Person" shall mean and include natural persons,
corporations, limited partnerships, general partnerships,
joint stock companies, joint ventures, associations,
companies, trusts, banks, trust companies, land trusts,
business trusts, Indian tribes or other organizations,
whether or not legal entities, and governments and agencies
and political subdivisions thereof.
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12.02 CHANGES IN CONDITION. Since the date of the latest Annual
Financial Statements, no Material Adverse Change has occurred between such
date and the date hereof, and neither Tenant nor any Affiliate has entered
into any material transaction outside the ordinary course of its or their
operations or business, including the Business, except as set forth in
Schedule 12.02 and the matters contemplated by this Lease.
12.03 LITIGATION. No litigation, at law or in equity, or any
proceeding before any court, board or other governmental or administrative
agency or any arbitrator or other forum of alternative dispute resolution is
pending or, to the knowledge of Tenant or any Affiliate, threatened which
involves any risk of any final judgment, order or liability which, after
giving effect to any applicable insurance, has resulted, or could result in
any Material Adverse Change or which seeks to enjoin the execution and
consummation of this Lease or the performance of Tenant's obligations
hereunder. No judgment, decree or order of any court, board or other
governmental or administrative agency or any arbitrator has been issued
against or binds Tenant or any Affiliate, which has resulted, or could
result, in any Material Adverse Change.
12.04 AUTHORIZATION AND ENFORCEABILITY. Tenant has taken all
corporate or other action required to execute, deliver and perform this
Lease. This Lease constitutes the legal, valid and binding obligation of
Tenant and is enforceable against Tenant in accordance with its terms.
12.05 NO LEGAL OBSTACLE TO LEASE. Neither the execution and delivery
of this Lease nor the performance of any obligation hereunder has constituted
or resulted in or will constitute or result in (a) any breach, violation of,
conflict with, default under or termination of any agreement, contract,
mortgage, instrument, deed or lease to which Tenant or any Affiliate is a
party or by which it or they are bound; (b) the violation of or conflict with
any law, statute, ordinance, judgment, decree, order, rule or regulation
applicable to Tenant, any Affiliate, any Improvements or the Leased Property;
or (c) any violation of or conflict with Tenant's or any Affiliate's articles
or bylaws or other organizational documents, as the case may be.
No approval, authorization or other action by, or declaration to or
filing with, any governmental or administrative authority or any other Person
is required to be obtained or made by Tenant in connection with the
execution, delivery and performance of this Lease.
12.06 DISCLOSURE. This Lease does not contain any untrue statement
of a material fact or omit to state a material fact necessary in order to
make any statement contained herein not misleading in light of the
circumstances under which it was made. To Tenant's knowledge, there is no
event, fact or occurrence that has resulted, or in the future (so far as
Tenant can reasonably foresee) could result, in any Material Adverse Change,
except to the extent that present or future general and sector-specific
economic conditions may result in a Material Adverse Change.
XIII. ASSIGNMENT AND SUBLETTING; ATTORNMENT
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13.01 PROHIBITION AGAINST SUBLETTING AND ASSIGNMENT. Subject to
SECTION 13.03, Tenant shall not, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld, assign, sublease,
mortgage, pledge, hypothecate, encumber or otherwise transfer (except to an
Affiliate) this Lease or any interest herein, or all or any part of the
Leased Property, or suffer or permit this Lease or the leasehold estate
created hereby or any other rights arising hereunder to be assigned,
subleased, transferred, mortgaged, pledged, hypothecated or encumbered, in
whole or in part, whether voluntarily, involuntarily or by operation of law.
For purposes of this SECTION 13.01, an assignment of this Lease shall be
deemed to include any Change of Control of Tenant, as if such Change of
Control were an assignment of the Lease. No assignment shall in any way
impair the continuing primary liability of the Tenant.
13.02 CHANGES OF CONTROL. A Change of Control requiring the consent
of Landlord shall mean (a) the issuance and/or sale by Tenant or the sale by
any shareholder or equity holder of Tenant of a controlling interest (which
shall mean, as applied to any Person, the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies
of such Person, whether through the ownership of voting securities, by
contract or otherwise) in Tenant to a Person other than an Affiliate of
Tenant, other than in either case a distribution to the public pursuant to an
effective registration statement under the Securities Act of 1933, as
amended; (b) the sale, conveyance or other transfer of all or substantially
all of the assets of Tenant (whether by operation of law or otherwise); or
(c) any transaction pursuant to which Tenant is merged with or consolidated
into another entity (other than an entity owned and controlled by an
Affiliate), and Tenant is not the surviving entity.
13.03 ASSIGNMENT. No consent to any assignment or sublease in a
particular instance shall be deemed to be a general waiver of the prohibition
set forth in ARTICLE XIII. Any assignment shall be solely of Tenant's entire
interest in this Lease with respect to the Leased Property and shall not
relieve Tenant of its obligations hereunder. Any assignment or other
transfer of all or any portion of Tenant's interest in this Lease in
contravention of ARTICLE XIII shall be voidable at Landlord's option. If
Tenant shall assign or sublease, the following shall apply: Tenant shall pay
to Landlord as Additional Rent fifty percent (50%) of the Proceeds (defined
below) on such transaction (such amount being Landlord's share) as and when
received by Tenant, unless Landlord shall give notice to Tenant and the
assignee or subtenant that Landlord's Share shall be paid by the assignee or
subtenant to Landlord directly. Proceeds shall mean (a) all Rent and all
fees and other consideration paid for or in respect of the assignment or
sublease, including fees under any collateral agreements less (b) the Rent
and other sums payable under this Lease (in the case of a sublease of less
than all of the Premises, allocable to the subleased premises) and all
reasonable costs and expenses directly incurred by Tenant in connection with
the execution and performance of such assignment or sublease for reasonable
real estate broker's commissions and reasonable costs of renovation or
construction of tenant improvements required under such assignment or
sublease. Tenant shall be entitled to recover such reasonable costs and
expenses before Tenant shall be obligated to pay Landlord's Share to
Landlord. Tenant shall provide Landlord a written statement certifying all
amounts to be paid
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from any assignment or sublease of the Premises within thirty (30) days after
the transaction shall be signed and from time to time thereafter on
Landlord's request, and Landlord may inspect Tenant's books and records to
verify the accuracy of such statement. On written request, Tenant shall
promptly furnish to Landlord copies of all the transaction documentation, all
of which shall be certified by Tenant to be complete, true and correct.
Tenant shall promptly reimburse Landlord for all legal costs and expenses
incurred by Landlord in connection with a request for a sublease or
assignment of this Lease.
13.04 ATTORNMENT. Tenant shall insert in each sublease permitted
hereunder provisions to the effect that: (a) such sublease is subject and
subordinate to all of the terms and provisions of this Lease and to the
rights of Landlord hereunder; (b) in the event this Lease shall terminate
before the expiration of such sublease, the sublessee thereunder will, at
Landlords' option, attorn to Landlord and waive any right the sublessee may
have to terminate the sublease or to surrender possession thereunder, as a
result of the termination hereof; and (c) in the event the sublessee receives
a written notice from Landlord or Landlord's assignees, if any, stating that
Tenant is in default under this Lease, the sublessee shall thereafter be
obligated to pay all rentals accruing under said sublease directly to the
party giving such notice, or as such party may direct. All rentals received
from the sublessee by Landlord or Landlord's assignees in respect of a Leased
Property, if any, as the case may be, shall be credited against the amounts
owing by Tenant hereunder with respect to the Leased Property.
XIV. ARBITRATION
14.01 CONTROVERSIES. Except with respect to the payment of Rent
hereunder or to the existence of any default or Event of Default hereunder,
each of which shall be subject to the provisions of SECTION 9.02, in the
event a controversy arises between the parties as to any of the requirements
of this Lease or the performance hereunder, which the parties are unable to
resolve, the parties agree to waive the remedy of litigation (except for
extraordinary relief in an emergency situation) and agree that such
controversy or controversies shall be determined by arbitration as hereafter
provided in this ARTICLE XIV.
14.02 APPOINTMENT OF ARBITRATORS. The party or parties requesting
arbitration shall serve upon the other a demand therefor, in writing,
specifying in detail the controversy and matter(s) to be submitted to
arbitration before the American Arbitration Association. The selection of
arbitrators shall be conducted pursuant to the rules for resolution of
commercial disputes promulgated by the American Arbitration Association. The
party or parties giving notice shall request a listing of available
arbitrators from the American Arbitration Association, and each party shall
respond in the selection process within fifteen (15) days after each receipt
of such listings until a panel of three (3) arbitrators has been designated.
If either party fails to respond within fifteen (15) days, it is agreed that
the American Arbitration Association may make such selections as are
necessary to complete the panel of three (3) arbitrators.
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14.03 ARBITRATION PROCEDURE. Within five (5) business days after the
selection of the arbitration panel, the arbitrators shall give written notice
to each party as to the time and the place of each meeting, which shall be
held in San Diego, California, at which the parties may appear and be heard,
which shall be no later than fifteen (15) days after certification of the
arbitration panel. The parties specifically waive discovery, and further
waive the applicability of rules of evidence or rules of procedure in the
proceedings. The applicable rules shall be those in effect at the time for
the resolution of commercial disputes promulgated by the American Arbitration
Association. The arbitrators shall take such testimony and make such
examination and investigations as the arbitrators reasonably deem necessary.
The decision of the arbitrators shall be in writing signed by a majority of
the panel which decision shall be final and binding upon the parties to the
controversy; PROVIDED, HOWEVER, in rendering their decisions and making
awards, the arbitrators shall not add to, subtract from or otherwise modify
the provisions of this Lease.
14.04 EXPENSES. The expenses of the arbitration shall be assessed by
the arbitrators and specified in the written decision. In the absence of a
determination or assessment of expenses of the arbitration procedure in the
award, all of the expenses of such arbitration shall be divided equally
between Landlord and Tenant. Each party in interest shall be responsible for
and pay the fees, costs and expenses of its own counsel, unless the
arbitration award provides for an assessment of reasonable attorneys' fees
and costs.
14.05 ENFORCEMENT OF THE ARBITRATION AWARD. There shall be no appeal
from the decision of the arbitrators, and upon the rendering of an award, any
party thereto may file the arbitrators' decision in the appropriate
jurisdiction for enforcement as provided by applicable law.
XV. QUIET ENJOYMENT, SUBORDINATION, ATTORNMENT, CERTIFICATES
15.01 QUIET ENVIRONMENT. So long as Tenant performs all of its
obligations under this Lease, subject to the provisions of this ARTICLE 15,
Tenant's possession of the Leased Property will not be disturbed by or
through Landlord.
15.02 LANDLORD MORTGAGES: SUBORDINATION. Subject to SECTION 15.03,
without the consent of Tenant, Landlord may, from time to time, directly or
indirectly, create or otherwise cause to exist any liens, encumbrances,
security interests or title retention agreements on the Leased Property, or
any portion thereof or any interest therein, whether to secure any borrowing
or other means of financing or refinancing. Tenant shall execute,
acknowledge and deliver to Landlord, at any time and from time to time upon
demand by Landlord or any mortgagee or any holder of any mortgage or other
instrument described in this Section, without cost to Landlord, a
Subordination and Non-Disturbance Agreement incorporating any reasonable
requests of Landlord, mortgagee or beneficiary, and otherwise substantially
in the form attached hereto as SCHEDULE 15.02, which provides that (a)
Tenant's rights hereunder are subordinate to any ground
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lease or underlying lease, first mortgage, first deed of trust, or other
first lien against the Leased Property, together with any renewal,
consolidation, extension, modification, or replacement thereof, which now or
at any subsequent time affects the Leased Property or any interest of
Landlord in the Leased Property, except to the extent that any such
instrument expressly provides that this Lease is superior; and (b) in the
event such party succeeds to Landlord's interest under the Lease and provided
that no Event of Default by Tenant exists, such party will not disturb
Tenant's possession, use or occupancy of the Leased Property. If Tenant
fails or refuses to execute, acknowledge and deliver such Subordination and
Non-Disturbance Agreement within ten (10) days after such written demand,
then Landlord or such successor in interest may execute, acknowledge and
deliver such Subordination and Non-Disturbance Agreement on behalf of Tenant
as Tenant's attorney-in-fact. Tenant hereby constitutes and irrevocably
appoints Landlord, its successors and assigns, as Tenant's attorney-in-fact
to execute, acknowledge, and deliver on behalf of Tenant the Subordination
and Non-Disturbance Agreement. This power of attorney is coupled with an
interest and is irrevocable.
15.03 ATTORNMENT. If any holder of any mortgage, indenture, deed of
trust or other similar instrument described in SECTION 15.02 succeeds to
Landlord's interest in the Leased Property, Tenant will pay to such holder
all Rent subsequently payable hereunder. Tenant shall, upon request of
anyone succeeding to the interest of Landlord, automatically become the
tenant of, and attorn to, such successor in interest without changing this
Lease. The successor in interest will not be bound by: (a) any payment of
Rent for more than one (1) month in advance; (b) any amendment or
modification hereof made without its written consent after the date such
successor became a mortgagee or beneficiary as to the Leased Property; (c)
any claim against Landlord arising prior to the date on which the successor
succeeded to Landlord's interest; or (d) any claim or offset of Rent against
Landlord.
15.04 ESTOPPEL CERTIFICATES. At the request of Landlord or any
mortgagee or purchaser of the Leased Property, Tenant shall execute,
acknowledge, and deliver an estoppel certificate in favor of Landlord or any
mortgagee or purchaser of the Leased Property certifying the following: (a)
that this Lease is unmodified and in full force and effect, or if there have
been modifications that the same is in full force and effect as modified and
stating the modifications; (b) the date to which Rent and other charges have
been paid; (c) that neither Tenant nor Landlord is in default nor is there
any fact or condition which, with notice or lapse of time, or both would
constitute a default, if that be the case, or specifying any existing
default; (d) that Tenant has accepted and occupies the Leased Property; (e)
that Tenant has no defenses, set-offs, deductions, credits, or counterclaims
against Landlord, if that be the case, or specifying such that exist; (f)
that Landlord has no outstanding construction or repair obligations; and (g)
such other information as may reasonably be requested by Landlord or any
mortgagee or purchaser. Any purchaser or mortgagee may rely on this estoppel
certificate. If Tenant fails to deliver the estoppel certificates to
Landlord within ten (10) days after such request by Landlord, then Tenant
shall be deemed to have certified that: (aa) this Lease is in full force and
effect and has not been modified, or that this Lease has been modified as set
forth in the certificate delivered to Tenant; (bb) Tenant has
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not prepaid any Rent or other charges except for the current month; (cc)
Tenant has accepted and occupies the Leased Property; (dd) neither Tenant nor
Landlord is in default nor is there any fact or condition which, with notice
or lapse of time, or both, would constitute a default; (ee) Landlord has no
outstanding construction or repair obligation; and (ff) Tenant has no
defenses, set-offs, deductions, credits or counterclaims against Landlord.
Tenant hereby irrevocably appoints Landlord as Tenant's attorney-in-fact to
execute, acknowledge and deliver on Tenant's behalf any estoppel certificate
which Tenant does not object to within ten (10) days after Landlord sends the
certificate to Tenant. This power of attorney is coupled with an interest
and is irrevocable.
XVI. APPRAISAL METHOD
16.01 APPRAISAL METHOD. When an appraisal is required under this
Lease, the Fair Market Rent of the Leased Property shall be determined by (1)
an independent appraiser, who is a member of the Appraisal Institute, and
will be selected by Landlord (the "LANDLORD MAI APPRAISER"), and (2) a second
appraiser, who is a member of the Appraisal Institute, and will be selected
by Tenant (the "TENANT MAI APPRAISER") (each an "APPRAISER" and,
collectively, the "APPRAISERS"). Landlord and Tenant shall, as promptly as
possible, but in no event later than thirty (30) days following the date
Tenant exercises its option to extend, select its respective Appraiser. The
costs of the Appraisers' appraisals shall be shared equally by the parties.
As promptly as possible but in no event later than fifteen (15) days after
selection of the Appraisers, each Appraiser shall deliver his or her written
report of the Appraisers' determination of the Fair Market Rent of the Leased
Property, which determination shall be based upon the appropriate use of the
Leased Property and taking into consideration the location of the Leased
Property and rentals for other properties comparable thereto. The Fair
Market Rent of the Leased Property shall be equal to the average of the two
(2) Fair Market Rent determinations of the Appraisers. In the event Landlord
and Tenant do not concur with the Appraisers' determination of Fair Market
Rent, within five (5) days after such determination, the two Appraisers shall
appoint a third MAI appraiser (the "THIRD MAI APPRAISER"). The Third MAI
Appraiser shall determine the Fair Market Rent, which Fair Market Rent shall
fall between the two appraisals by the Landlord MAI Appraiser and the Tenant
MAI Appraiser. Notwithstanding the foregoing, in no event shall the Fair
Market Rent be less than the Base Annual Report for the Lease Year
immediately preceding the year for which the Fair Market Rent is being
determined.
XVII. MISCELLANEOUS
17.01 NOTICES.
Any notice or other communication to be given under this Agreement by
either party to the other will be in writing and delivered personally or
mailed by certified mail, postage prepaid and return receipt requested, or
delivered by an express overnight delivery service, charges prepaid, or
transmitted by facsimile, as follows:
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If to Tenant: I-PAC Manufacturing, Inc.
1958 Kellogg Avenue
Carlsbad, California 92008
Attn: Patrick W. Moore
Chief Executive Officer
Fax No. (760) 930-0115
With copy to: James P. Hill, Esq.
Sullivan, Hill, Lewin, Rez & Engel
550 "C" Street, Suite 1500
San Diego, CA 92101
Fax No. (619) 231-4372
If to Landlord: Cabot Industrial Properties, L.P.
Two Center Plaza, Suite 200
Boston, Massachusetts 02108
Attn: Ms. Jean Murphy
Facsimile Number: (617) 722-8237
With copy to: Lorie Soares Griffen, Esq.
Mayer, Brown & Platt
350 South Grand Avenue, Suite 2500
Los Angeles, California 90071
Facsimile Number: (213) 625-0248
Any address or name specified above may be changed by a notice given
by the addressee to the other party in accordance with this numbered
paragraph. Any notice will be deemed given and effective (i) if given by
personal delivery, as of the date of delivery in person; or (ii) if given by
mail, upon receipt as set forth on the return receipt; or (iii) if given by
overnight courier, one (1) business day after timely deposit with the
courier; or (iv) if given by facsimile, upon receipt of the appropriate
confirmation of transmission by facsimile. The inability to deliver because
of a changed address of which no notice was given or the rejection or other
refusal to accept any notice will be deemed to be the receipt of the notice
as of the date of such inability to deliver or the rejection or refusal to
accept.
17.02 ADVERTISEMENT OF THE LEASED PROPERTY. In the event the parties
hereto have not executed a renewal lease or agreed to the Extension Term
within twelve (12) months prior to the expiration of the Term or an Extension
Term, as the case may be, then Landlord or its agent shall have the right to
enter the Leased Property at all reasonable times for the purpose of
exhibiting the Leased Property to others and to place upon the Leased
Property for and during the period commencing twelve (12) months prior to the
expiration of the Term or an Extension Term, as the case may be, "for sale"
or "for rent" notices or signs.
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17.03 LANDLORD'S ACCESS. Landlord, or its designated agents or
contractors, shall have the right to enter upon the Leased Property, upon
reasonable prior notice to Tenant, for purposes of inspecting the same and
assuring Tenant's compliance with this Lease.
17.04 ENTIRE AGREEMENT. This Lease and the exhibits and schedules
attached hereto and incorporated by reference, contains the entire agreement
between Landlord and Tenant with respect to the Leased Property. No
representations or warranties have been made by the parties as Landlord or
Tenant except as set forth in this Lease.
17.05 SEVERABILITY. If any term or provision of this Lease is held
by a court of competent jurisdiction to be invalid or unenforceable, such
holding shall not affect the remainder of this Lease, and the same shall
remain in full force and effect, unless such holding substantially deprives
Tenant of the use of the Leased Property or Landlord of the Rents therefor,
in which case this Lease shall forthwith terminate as if by expiration of the
Term or an Extension Term, as the case may be.
17.06 CONSENTS AND APPROVALS. The captions and headings are inserted
only as a matter of convenience and for reference and in no way define, limit
or describe the scope of this Lease or the intent of any provision hereof.
17.07 GOVERNING LAW. This Lease shall be construed under the laws of
the State of California (without application of choice of law provisions).
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17.08 MEMORANDUM OF LEASE OR CERTAIN RIGHTS UNDER THE LEASE.
Landlord and Tenant agree that a record of this Lease or of certain rights
under this Lease may be recorded by either party in a memorandum of lease
approved by Landlord and Tenant with respect to the Leased Property. The
party recording such memorandum must bear all costs of such recording.
17.09 WAIVER. No waiver by Landlord of any condition or covenant
herein contained, or of any breach of any such condition or covenant, shall
be held or taken to be a waiver of any subsequent breach of such covenant or
condition, or to permit or excuse its continuance or any future breach
thereof or of any condition or covenant, nor shall the acceptance of Rent by
Landlord at any time when Tenant is in default in the performance or
observance of any condition or covenant herein be construed as a waiver of
such default, or of Landlord's right to terminate this Lease or exercise any
other remedy granted herein on account of such default.
17.10 ASSIGNMENT; BINDING EFFECT. Except as otherwise set forth
herein, this Lease shall not be assignable by Tenant, without the prior
written consent of Landlord. This Lease will be binding upon and inure to
the benefit of the heirs, successors, personal representatives, and permitted
assigns of Landlord and Tenant.
17.11 CONSENTS AND APPROVALS. In each instance in this Lease where
Landlord is required or permitted to give a consent or approval, Landlord
shall not unreasonably withhold consent.
17.12 MODIFICATION. This Lease may be modified only by a writing
signed by both Landlord and Tenant.
17.13 INCORPORATION BY REFERENCE. All schedules and exhibits
referred to in this Lease are incorporated herein by reference.
17.14 NO MERGER. The surrender of this Lease by Tenant or the
cancellation of this Lease by agreement of Tenant and Landlord or the
termination of this Lease on account of Tenant's default will not work a
merger, and will, at Landlord's option, terminate any subleases or operate as
an assignment to Landlord of any subleases. Landlord's option under this
paragraph will be exercised by notice to Tenant and all known subtenants of
the Leased Property.
17.15 FORCE MAJEURE. Landlord, its officers, directors,
shareholders, agents and employees, will not be liable for any loss, injury,
death or damage (including consequential damages) to persons, property or the
Business occasioned by theft, act of God, public enemy, injunction, riot,
strike, insurrection, war, court order, requisition, order of governmental
body or authority, fire, explosion, falling objects, steam, water, leak or
flow of water or rain from the Leased Property or into the Leased Property or
from the roof, street, subsurface or from any other
46
<PAGE>
place, or by dampness or from the breakage, leakage, obstruction or other
defects of the pipes, sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures of the Leased Property, or from
construction, repair or alteration of the Leased Property or from any acts or
omissions of any other occupant or visitor of the Leased Property, or from
the release, emission, discharge, presence or disposal of any hazardous
substance or material on or from the Leased Property, or from any other cause
beyond Landlord's control.
17.16 LACHES. No delay or omission by either party hereto to
exercise any right or power accruing upon any noncompliance or default by the
other party with respect to any of the terms hereof shall impair any such
right or power or be construed to be a waiver thereof.
17.17 WAIVER OF JURY TRIAL. To the extent that there is any claim by
one party against the other that is not to be settled by arbitration as
provided in ARTICLE XIV hereof, Landlord and Tenant waive trial by jury in
any action, proceeding or counterclaim brought by either of them against the
other on all matters arising out of this Lease or the use and occupancy of
the Leased Property (except claims for personal injury or property damage).
If Landlord commences any summary proceeding for nonpayment of Rent, Tenant
will not interpose, and waives the right to interpose, any counterclaim in
any such proceeding.
17.18 PERMITTED CONTESTS. Tenant, on its own or on Landlord's
behalf, but at Tenant's expense, may contest, by appropriate legal
proceedings conducted in good faith and with due diligence, the amount or
validity or application, in whole or in part, of any Imposition or any legal
requirement or insurance requirement or any lien, attachment levy,
encumbrance, charge or claim provided that (a) in the case of an unpaid
Imposition, lien, attachment, levy, encumbrance, charge or claim, the
commencement and continuation of such proceedings shall suspend the
collection thereof from Landlord and from the Leased Property; (b) neither
the Leased Property nor any Rent therefrom nor any part thereof or interest
therein would be in any immediate danger of being sold, forfeited, attached
or lost; (c) in the case of a legal requirement, Landlord would not be in any
immediate danger of civil or criminal liability for failure to comply
therewith pending the outcome of such proceedings; (d) in the event that any
such contest shall involve a sum of money or potential loss in excess of
Twenty Five Thousand Dollars ($25,000), Tenant shall deliver to Landlord and
its counsel an opinion of Tenant's counsel to the effect set forth in clauses
(a), (b) and (c), to the extent applicable; (e) in the case of a legal
requirement and/or an Imposition, lien, encumbrance or charge, Tenant shall
give such reasonable security as may be demanded by Landlord to insure
ultimate payment of the same and to prevent any sale or forfeiture of the
Leased Property or the Rent in respect thereof by reason of such nonpayment
or noncompliance; PROVIDED, HOWEVER, the provisions of this Section shall not
be construed to permit Tenant to contest the payment of Rent (except as to
contests concerning the method of computation or the basis of levy of any
Imposition or the basis for the assertion of any other claim) or any other
sums payable by Tenant to Landlord hereunder; (f) in the case of an insurance
requirement, the coverage required by ARTICLE IV shall be maintained; and (g)
if such contest be finally resolved against Landlord or Tenant, Tenant shall,
as Additional Rent due
47
<PAGE>
hereunder, promptly pay the amount required to be paid, together with all
interest and penalties accrued thereon, or comply with the applicable legal
requirement or insurance requirement. Landlord, at Tenant's expense, shall
execute and deliver to Tenant such authorizations and other documents as may
be reasonably required in any such contest, and, if reasonably requested by
Tenant or if Landlord so desires, Landlord shall join as a party therein.
Tenant hereby agrees to indemnify and hold harmless Landlord, its officers,
directors, shareholders, employees, affiliates and agents from and against
any and all demands, claims, causes of action, fines, penalties, damages
(including punitive and consequential damages), losses, liabilities
(including strict liability), judgments, costs and expenses (including,
without limitation, attorneys' fees, court costs, and the costs set forth in
SECTION 9.06) that may be incurred in connection with or arise from any such
contest.
17.19 CONSTRUCTION OF LEASE. This Lease has been reviewed by
Landlord and Tenant and their respective professional advisers. Landlord and
Tenant believe that this Lease is the product of all their efforts, that they
express their agreement, and agree that they shall not be interpreted in
favor of either Landlord or Tenant or against either Landlord or Tenant
merely because of any party's efforts in preparing such documents.
17.20 COUNTERPARTS. This Lease may be executed in duplicate
counterparts, each of which shall be deemed an original hereof or thereof.
17.21 RELATIONSHIP OF LANDLORD AND TENANT. The relationship of
Landlord and Tenant is the relationship of lessor and lessee. Landlord and
Tenant are not partners, joint venturers, or associates.
17.22 GUARANTY. This Lease shall be guaranteed by Guarantor, Inc.
pursuant to a guaranty in the form attached hereto as SCHEDULE 17.23.
17.23 NON-DISCRIMINATION. Tenant agrees that it will not permit any
discrimination against, or segregation of, any person or group of persons on
the basis of race, color, sex, creed, national origin or ancestry in the
leasing, subleasing, transferring, occupancy, tenure or use of the Leased
Property or any portion thereof.
17.24 LANDLORD'S LIABILITY; CERTAIN DUTIES.
17.24(a) LIMITATION OF LANDLORD'S LIABILITY. No owner of
the Leased Property shall be liable under this Lease except for breaches of
Landlord's obligations occurring while owner of the Leased Property and upon
any transfer of any Landlord's interest in the Leased Property, such
transferring party shall be automatically relieved of all obligations
thereafter accruing under this Lease. The obligations of Landlord shall be
binding upon the assets of Landlord which comprise the Leased Property but
not upon other assets of Landlord. No individual partner, trustee,
stockholder, officer, member, director, employee, advisor or
48
<PAGE>
beneficiary of Landlord, or any partner, trustee, stockholder, officer,
member, director, employee, advisor or beneficiary of any of the foregoing,
shall be personally liable under this Lease and Tenant shall look solely to
Landlord's interest in the Leased Property in pursuit of its remedies upon an
event of default hereunder, and the general assets of Landlord, its partners,
trustees, stockholders, members, officers, employees, advisors or
beneficiaries, and the partners, trustees, stockholders, members, officers,
employees, advisors or beneficiaries of any of the foregoing, shall not be
subject to levy, execution or other enforcement procedure for the
satisfaction of the remedies of Tenant.
17.24(b) NOTICE. Tenant shall give written notice of any
failure by Landlord to perform any of its obligations under this Lease to
Landlord and to any ground lessor, mortgagee or beneficiary under any deed of
trust encumbering the Leased Property whose name and address shall have been
furnished to Tenant. Landlord shall not be in default under this Lease
unless Landlord (or such ground lessor, mortgagee or beneficiary) shall fail
to cure such non-performance within thirty (30) days after receipt of
Tenant's notice. However, if such non-performance shall reasonably require
more than thirty (30) days to cure, Landlord shall not be in default if such
cure shall be commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
17.25 NO OTHER BROKERS. Tenant represents and warrants to Landlord
that BRE Brokerage Company is the only agent, broker, finder or other party
with whom Tenant has dealt who may be entitled to any commission or fee with
respect to this Lease or the Leased Property. Tenant agrees to indemnify and
hold Landlord harmless from any claim, demand, cost or liability, including,
without limitation, attorneys' fees and expenses, asserted by any party other
than BRE Brokerage Company based upon dealings of that party with Tenant.
49
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease or
caused the same to be executed by their respective duly authorized officers
as of the date first set forth above.
"LANDLORD" "TENANT":
CABOT INDUSTRIAL PROPERTIES, L.P., a I-PAC MANUFACTURING, INC.,
Delaware limited partnership a California corporation
By: Cabot Industrial Trust, a By:
Maryland real estate --------------------------------
investment trust Name:
its general partner -----------------------------
Title:
-----------------------------
By:
-----------------------------
Name:
--------------------------
Title:
-------------------------
S-1
<PAGE>
SCHEDULE A
LEGAL DESCRIPTION OF THE LAND
PARCEL A:
LOT 37 OF CARLSBAD TRACT NO. 81-46 UNIT NO. 2, IN THE CITY OF CARLSBAD,
COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO THE MAP THEREOF
NO. 11288, FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO
COUNTY.
EXCEPTING THEREFROM 50% OF ALL OIL, MINERAL, GAS, AND OTHER HYDROCARBON
SUBSTANCES BELOW A DEPTH OF 500 FEET UNDER THE REAL PROPERTY, WITHOUT
RIGHT OF SURFACE ENTRY, AS RESERVED IN DEED BY CARLSBAD PROPERTIES, A
PARTNERSHIP RECORDED JULY 5, 1978 AS FILE/PAGE NO. 78-279136 OF OFFICIAL
RECORDS OF SAN DIEGO COUNTY, CALIFORNIA.
PARCEL B:
EASEMENTS AS MORE FULLY SET FORTH IN DECLARATION OF COVENANTS, CONDITIONS
AND RESTRICTIONS RECORDED SEPTEMBER 12, 1986 AS FILE/PAGE NO. 86-401456
OF THE OFFICIAL RECORDS OF SAN DIEGO COUNTY, STATE OF CALIFORNIA.
PARCEL C:
EASEMENT OVER PORTIONS OF MAPS 11287, 11288 AND 11289 FOR COMMON AREA
PURPOSES AS GRANTED IN DOCUMENT RECORDED OCTOBER 31, 1986 AS FILE/PAGE
NO. 86-497819 OF OFFICIAL RECORDS OF SAN DIEGO COUNTY, CALIFORNIA.
Address of the Leased Property:
1958 Kellogg Avenue
Carlsbad, California 92008
<PAGE>
SCHEDULE 2.01
BASE ANNUAL RENT
<TABLE>
<CAPTION>
MONTHLY
PERIOD INSTALLMENT BASE ANNUAL RENT
- ------ ----------- ----------------
<S> <C> <C>
Commencement Date
to May 31, 2000 $25,137 $301,644
</TABLE>
<PAGE>
SCHEDULE 2.07
LETTER OF CREDIT
(See attached)
<PAGE>
FORM OF LETTER OF CREDIT
[LETTERHEAD OF LETTER OF CREDIT BANK]
[DATE]
Cabot Industrial Properties, L.P. ("BENEFICIARY")
Two Center Plaza, Suite 200
Boston, Massachusetts 02108
Attention: Ms. Jean Murphy
Re: Irrevocable Transferrable Letter of Credit
No.
-------------------------------------------
Beneficiary:
By order of our client, I-Pac Manufacturing, Inc., a California
corporation (the "APPLICANT"), we hereby establish this Irrevocable
Transferrable Letter of Credit No. _______________ in your favor for an
amount up to but not exceeding the aggregate sum of Two Hundred Seventy-Five
Thousand and No/100 Dollars ($275,000) (as reduced from time to time in
accordance with the terms hereof, the "LETTER OF CREDIT AMOUNT"), effective
immediately, and expiring on the close of business at our office at the
address set forth above one year from the date hereof unless renewed as
hereinafter provided.
Funds under this Letter of Credit are available to you on or prior to
the expiry date against presentation by you of your request in the form of
Annex 1 hereto (a "DRAWING REQUEST"), completed and signed by one of your
officers. Presentation of your Drawing Requests may be made by you to us at
the address set forth above or may be made by facsimile transmission, to the
following facsimile number . You may present to us one
or more Drawing Requests from time to time prior to the expiry date in an
aggregate amount not to exceed the Letter of Credit Amount then in effect (it
being understood that the honoring by us of each Drawing Request shall reduce
the Letter of Credit Amount then in effect).
This Letter of Credit will be automatically renewed for a one-year
period upon the expiration date set forth above and upon each anniversary of
such date, unless at least sixty (60) days prior to such expiration date, or
prior to any anniversary of such date, we notify both you and the Applicant
in writing by certified mail that we elect not to so renew the Letter of
Credit.
This Letter of Credit sets forth in full the terms of our undertaking
and such undertaking shall not in any way be modified, amended or amplified
by reference to any document or instrument referred to herein or in which
this Letter of Credit is referred to or to which this Letter of Credit
relates, and no such reference shall be deemed to incorporate herein by
reference any document or instrument.
All bank charges and commissions incurred in this transaction are for
the Applicant's account.
This Letter of Credit is transferrable by you and your successors and
assigns any number of times in its entirety and not in part, but only by
delivery to us of a Notice of Assignment in the form of Annex 2 hereto.
We hereby agree with the drawers, endorsers, and bona fide holders of
drafts drawn under and in compliance with the terms of this Letter of Credit
that such drafts will be duly honored upon presentation to the drawee from
our own funds and not the funds of the Applicant and shall be available to
such drawers, endorsers, and bona fide holders, as the case may be, on or
before noon, time, on the Business Day (defined
<PAGE>
below) next following the date on which such drafts are received by us.
"Business Day" shall mean any day which is not a Saturday, Sunday or day on
which we are required or authorized by law to be closed in .
To the extent not inconsistent with the express terms hereof, this
Letter of Credit shall be governed by, and construed in accordance with, the
terms of the Uniform Customs and Practice for Commercial Documentary Credits
(1993 Revision), I.C.C. Publication No. 500 (the "UCP 500") and as to matters
not governed by the UCP 500, this Letter of Credit shall be governed by and
construed in accordance with the laws of the State of .
Very truly yours,
[NAME OF LETTER OF CREDIT BANK]
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
ANNEX 1
DRAWING REQUEST
, 199
[NAME AND ADDRESS OF LETTER
OF CREDIT BANK]
Re: Irrevocable Transferrable Letter of Credit No. (the
"LETTER OF CREDIT")
The undersigned (the "BENEFICIARY"), hereby certifies to [Name of Letter
of Credit Bank] (the "ISSUER") that:
(a) The Beneficiary is making a request for payment in lawful
currency of the United States of America under Irrevocable Transferrable
Letter of Credit No. (the "Letter of Credit") in the amount of
$ .
(b) The Letter of Credit Amount (as defined in the Letter of
Credit) as of the date hereof and prior to payment of the amount demanded in
this Drawing Request is $ . The amount requested by this Drawing
Request does not exceed the Letter of Credit Amount.
Please wire transfer the proceeds of the drawing to the following
account of the Beneficiary at the financial institution indicated below:
Unless otherwise defined, all capitalized terms used herein have the
meanings provided in, or by reference in, the Letter of Credit.
<PAGE>
IN WITNESS WHEREOF, the undersigned has duly executed and delivered this
Drawing Request as of the day of , 199 .
CABOT INDUSTRIAL PROPERTIES, L.P.,
a Delaware limited partnership
By: Cabot Industrial Trust,
a Maryland real estate investment trust
its general partner
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
<PAGE>
ANNEX 2
NOTICE OF ASSIGNMENT
, 199
[NAME AND ADDRESS OF
LETTER OF CREDIT BANK]
Re: Irrevocable Transferable Letter of Credit No.
The undersigned (the "BENEFICIARY"), hereby notifies [Name of Letter
of Credit Bank] (the "ISSUER") that it has irrevocably assigned the
above-referenced Letter of Credit to (the "ASSIGNEE") with an
address at effective as of the date the Issuer receives this
Notice of Assignment. The Assignee acknowledges and agrees that the Letter
of Credit Amount may have been reduced pursuant to the terms thereof, and
that the Assignee is bound by any such reduction.
IN WITNESS WHEREOF, the undersigned has duly executed and delivered this
Notice of Assignment as of this day of , 199 .
CABOT INDUSTRIAL PROPERTIES, L.P.,
a Delaware limited partnership
By: Cabot Industrial Trust,
a Maryland real estate investment trust
its general partner
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Agreed:
[Assignee]
- --------------------------------
<PAGE>
SCHEDULE 12.02
Material Adverse Change: None.
<PAGE>
SCHEDULE 15.02
SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT
RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:
[ ]
-------------
- --------------------------------------------------------------------------------
(SPACE ABOVE THIS LINE FOR RECORDER'S USE ONLY)
SUBORDINATION, NON-DISTURBANCE AND
ATTORNMENT AGREEMENT
NOTICE: THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT
AGREEMENT RESULTS IN YOUR LEASEHOLD ESTATE IN THE PROPERTY BECOMING SUBJECT
TO AND OF LOWER PRIORITY THAN THE LIEN OF SOME OTHER OR LATER SECURITY
INSTRUMENT.
THIS AGREEMENT is entered into as of [ , ], by and
among CABOT INDUSTRIAL PROPERTIES, L.P., a Delaware limited partnership
("LANDLORD"), I-PAC MANUFACTURING, INC., a California corporation ("TENANT"),
and ("LENDER").
RECITALS
A. Tenant is the lessee and Landlord is the lessor under
that certain lease dated , 1999 (the "LEASE").
B. Concurrently herewith, Lender is making a loan to
Landlord in a principal amount up to Dollars ($ ) (the
"LOAN"). The Loan is secured by, among other things, that certain deed of
trust from Landlord (the "DEED OF TRUST"), covering the property wherein the
premises (the "PREMISES") covered by the Lease are located, which property is
described more fully in EXHIBIT "A" attached hereto (the "PROPERTY"). The
Deed of Trust and all other documents to be executed by Landlord in
connection with the requested loan being herein collectively called the "LOAN
DOCUMENTS".
<PAGE>
C. Tenant has requested that Landlord and Lender execute
this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and in order to
induce Lender to make the Loan, Tenant, Landlord and Lender hereby agree and
covenant as follows:
1. SUBORDINATION. Notwithstanding anything to the contrary
contained in the Lease, Tenant and Lender hereby agree that the Lease
(including specifically, without limitation, (a) any option or options to
purchase or rights of first refusal affecting the Property, or any portion
thereof, contained therein, (b) any extension, renewal or modification of the
Lease, (c) the leasehold estate in the Premises created by the Lease and (d)
all of Tenant's rights under the Lease) is and shall at all times be
completely and unconditionally subject and subordinate in all respects (i) to
the Deed of Trust and other Loan Documents, the lien thereof and to all
renewals, modifications, extensions, substitutions, rearrangements and
replacements thereof, and all advances made or to be made thereunder by
Lender in Lender's good faith discretion to protect the Property or to
enforce its rights under the Deed of Trust and other Loan Documents, and (ii)
to any and all renewals, modifications, replacements, extensions,
substitutions and rearrangements of any and all obligations and indebtedness
secured by the Deed of Trust or the other Loan Documents.
2. NON-DISTURBANCE AND ATTORNMENT. Provided that Tenant is
not in default under any of the terms, covenants or conditions of the Lease
and Tenant makes monthly payments to Lender equal to at least the amount of
monthly payments previously required to be made under the Note plus all
operating expenses (and the Lease shall be deemed modified at such time to
the extent lesser payments are required thereunder), and Tenant is then in
possession of the Premises, Tenant's rights under the Lease and possession of
the Premises thereunder shall not be affected or disturbed by Lender in the
exercise of any of its rights and remedies under the Note or the Loan
Documents (as that term is defined in the Deed of Trust). Upon foreclosure
of the Loan Documents, or any of them, Tenant shall continue in occupancy of
the Premises upon the terms and conditions of the Lease, shall attorn to
Lender to the same extent and with the same force as if Lender were the
Landlord under the Lease, and shall be bound by and perform all of the
obligations imposed upon Tenant by the Lease. Tenant's attornment hereunder
shall be effective and self-operative without the execution of any other
instruments on the part of any party hereto, immediately upon Lender's
acquisition of title to the Property. Tenant shall, within ten (10) days
after request by Lender, execute any instrument or take any action specified
by Lender further to confirm attornment hereunder in accordance with the
provisions of this Agreement.
<PAGE>
3. RIGHTS OF LENDER. If Lender exercises its rights or
remedies under the Loan Documents, or any of them, then Lender shall be
entitled, but not obligated, to exercise any and all claims, rights, powers,
privileges and remedies of Landlord under the Lease and shall be further
entitled to the benefits of and to receive and enforce performance of all of
the covenants, terms and conditions to be performed by Tenant under the
Lease. Lender shall not, by execution of this Agreement, be or become subject
to any liability or obligation to Tenant under the Lease or otherwise, unless
and until Lender has obtained title to the Premises by foreclosure or
otherwise, and then only to the extent of liabilities or obligations accruing
subsequent to the date Lender acquires (and prior to the date it disposes of)
title to the Premises; PROVIDED, HOWEVER, that Lender shall not be:
(a) liable for any act or omission of any prior lessor
(including Landlord) or subsequent lessor; or
(b) subject to any counterclaims, offsets or defenses which
Tenant might have against any prior lessor (including Landlord);
(c) bound by any rent or additional rent which Tenant might
have paid in advance to any prior lessor (including Landlord) for any period
beyond the month in which Lender succeeds to the interest of Landlord under
the Lease;
(d) responsible for any security deposit, cleaning deposit
or other prepaid charge which Tenant may have paid in advance to any prior
lessor (including Landlord) which has not been delivered to Lender (Lender
acknowledging that Lender will be responsible for any security deposit that
is delivered or obtained by Lender);
(e) bound by any previous amendment or modification of the
Lease or by any waiver or forbearance by any prior landlord (including
Landlord) unless the same was approved in writing by Lender;
(f) responsible for the performance of (or contribution
toward) any work to be done by the landlord under the Lease to render the
Premises ready or available for occupancy by the Tenant, or required to
remove any person occupying the Premises or any part thereof; or
(g) personally liable under or in connection with the Lease
(Tenant's recourse being limited to Lender's interest in the Property).
4. CERTAIN ACKNOWLEDGMENTS AND AGREEMENTS BY TENANT.
(a) LOAN DISBURSEMENTS. Lender, in making any disbursements
of the loan evidenced by the Note to Landlord, shall be under no obligation
or duty to oversee or direct the
<PAGE>
application of the proceeds of such disbursements, and such disbursements may
be used by Landlord for purposes other than improvement of the Property.
(b) NOTICE AND CURE. If Landlord commits any act or
omission which constitutes a default under the Lease, or which would give
Tenant the right, either immediately or after a lapse of time, to terminate
the Lease, or to claim a partial or total eviction, Tenant shall not exercise
any such right, or remedy with respect thereto: (i) until it has given notice
of such act or omission to Lender; and (ii) until Lender is entitled under
the Loan Documents to remedy Landlord's default and Lender has thereafter
been afforded a reasonable time, at Lender's option, to cure Landlord's
default. As used herein, a "reasonable time" shall include, without
limitation, any time which may be necessary to enable Lender to invoke and
perfect its remedies under the Loan Documents, or any of them, such as
appointment of a receiver for the Property or foreclosure thereof, plus not
less than sixty (60) days. Nothing contained herein shall obligate Lender to
effect a cure of any act or omission of Landlord.
(c) NOTICES. Tenant shall send to Lender a copy of any
notice or statement given by Tenant to Landlord under the Lease at the same
time such notice or statement is sent to Landlord.
(d) OPTION RIGHTS. Tenant warrants and represents that it
has no right or option of any nature whatsoever, whether pursuant to the
Lease or otherwise, to purchase the Premises or the Property, or any portion
thereof, or any interest therein, but to the extent that Tenant has had or
hereafter acquires any such right or option, Tenant hereby acknowledges that
such right or option is made subject and subordinate to the Loan Documents
pursuant to this Agreement and is hereby waived and released against Lender.
(e) NEW LEASE. Upon Lender's written request at or after
any foreclosure under the Loan Documents, or any of them, Tenant shall
execute a new lease of the Premises upon the same terms and conditions as the
Lease between Landlord and Tenant, which new lease shall cover any unexpired
term of the Lease existing prior to such foreclosure (but there shall be no
requirement for an additional deposit).
(f) RENTAL PAYMENTS AND PERFORMANCE UNDER LEASE. Tenant
shall not pay any installment of rent, or any other amount or charge due
under the Lease, more than 30 days prior to the due date thereof, and Lender
shall be entitled to recover from Tenant any such payments or charges made by
Tenant in violation hereof. Tenant shall observe and perform, throughout the
term of the Lease, all of the terms, covenants, conditions and obligations to
be performed by Tenant thereunder.
(g) MODIFICATION AND CANCELLATION OF LEASE. Tenant shall
not enter into any agreement, cancellation, surrender, amendment or
modification of the Lease without Lender's prior written consent.
<PAGE>
(h) TENANT ESTOPPEL STATEMENT. Tenant, for the benefit of
Lender, hereby confirms, acknowledges, warrants, represents and certifies as
follows: (i) the Lease is in full force and effect and a valid and binding
obligation of Landlord and Tenant (subject only to Landlord's acquisition of
the Property) enforceable in accordance with its terms; (ii) neither Landlord
not Tenant is in default under any of the terms, covenants or conditions of
the Lease, and there are no setoffs, counterclaims or credits against rentals
or other amounts payable under the Lease, and no event or circumstance has
occurred or pertains which, but for the giving of required notice or the
lapse of an applicable grace period, would result in any of the foregoing;
(iii) Tenant has no notice of any prior assignment, hypothecation or pledge
of the Lease or any of the amounts payable thereunder; and (iv) the Lease is
a complete statement of the agreement of the parties thereto with respect to
the leasing of the Premises, and no modifications, amendments, supplements,
assignments or subleases (whether written or oral) have been made to the
Lease.
5. CERTAIN ACKNOWLEDGMENTS AND AGREEMENTS BY LANDLORD.
(a) RIGHT OF LENDER TO RECEIVE RENTAL PAYMENTS. In the
event of any Event of Default under the Loan Documents, Lender has the right
to give notice to Tenant to pay all rent and all other sums due or payable
under the Lease directly to Lender. Landlord hereby expressly authorizes and
directs Tenant (and Tenant agrees) to make such payments to Lender upon
receipt of such notice (regardless of any conflicting claims made by Landlord
as to whether a default exists or otherwise) and Landlord hereby releases and
discharges Tenant of and from any liability to Landlord on account of any
such payments made by Tenant hereunder.
(b) AGREEMENT DOES NOT ALTER LOAN DOCUMENTS. Landlord
acknowledges that the Note and the Loan Documents remain in full force and
effect, enforceable in accordance with their terms, and that this Agreement
does not constitute a waiver by Lender of any of its rights thereunder, or in
any way release Landlord from its obligations to comply with any of the
terms, provisions, conditions, covenants, agreements or obligations under the
Note or the Loan Documents.
6. NO MERGER. Landlord, Tenant and Lender agree that unless Lender
shall otherwise expressly consent in writing, fee title to the Property and
the leasehold estate created by the Lease shall not merge but shall remain
separate and distinct, notwithstanding the union of said estates either in
the Landlord or the Tenant or any third party by purchase, assignment or
otherwise.
7. MODIFICATIONS; LEASE NOT AMENDED; ALTERATIONS TO LOAN. This
Agreement may not be modified orally or in any other manner other than by an
agreement in writing signed by the parties hereto or their respective
successors in interest. This Agreement shall not be deemed to alter or
modify any of the terms, covenants, conditions or obligations of the Lease,
except to the extent specifically set forth herein. No renewal, extension,
modification, consolidation or replacement of the Loan Documents, or any of
them, or any other provision of the loan
<PAGE>
evidenced by the Note, or any waiver of any term thereof, shall in any manner
affect the obligations of Tenant under the Lease or this Agreement, and
Tenant hereby unconditionally relinquishes, waives and releases any and all
claims or defenses based thereon.
8. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the parties hereto, and their respective
heirs, successors and assigns; and PROVIDED, HOWEVER, that the obligations
and liabilities of Lender, and each of its successors and assigns, shall be
binding upon Lender and each such successor only during such period as Lender
or such successor retains an interest in the Loan Documents; provided,
further, that the interest of Tenant under this Agreement may not be assigned
or transferred without the prior written consent of Lender (which consent
shall not be unreasonably withheld). As used herein, the term "Tenant" shall
include the original Tenant designated herein and its heirs, successors and
assigns; the term "Landlord" shall include the original Landlord designated
herein and its heirs, successors and assigns; the term "Lender" shall include
the original Lender designated herein and its heirs, successors and assigns,
including anyone who shall have succeeded to Landlord's interest in the
Premises by, through or under foreclosure of the Loan Documents, or any of
them; and the term "foreclosure" shall be deemed to include judicial
foreclosure, foreclosure by any power of sale granted under the Loan
Documents, or the acquisition of Landlord's estate in the Property by
voluntary deed or assignment in lieu of foreclosure.
9. SEVERABILITY. If any term of this Agreement, or the application
thereof to any person or circumstance, shall to any extent be invalid or
unenforceable, the remainder of this Agreement, or the application of such
term to persons or circumstances other than those to which it is invalid and
unenforceable, shall, at Lender's option, not be affected thereby, and in
such event this Agreement shall be construed to the extent necessary as if
such invalid or unenforceable provision had never been contained herein.
10. GOVERNING LAW. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of
California (without regard to conflicts of law).
11. ATTORNEYS' FEES. If any action or proceeding is brought by any
party against any other party under this Agreement, the prevailing party
shall be entitled to recover for the fees of its attorneys in such action or
proceeding such amount as the court may adjudge reasonable.
12. NOTICES. Whenever a party shall desire to give or serve any
notice, demand, request or other communications with respect to this
Agreement ("Notice"), each such Notice shall be in writing and shall be
personally served or sent by a commercial overnight delivery service or by
certified mail, return receipt requested, and shall be deemed to have been
received on the date actually received if personally served or on the next
business day after deposit with an overnight delivery service or on the date
of receipt or refusal as shown on the return receipt if sent by certified
mail. The addresses of the parties to which Notices shall be sent (until
notice of
<PAGE>
a change is served as provided in this paragraph) are as set forth below the
signature of such party on the signature page of this Agreement. Notice of a
change of address shall be given by 15 days' advance written notice in the
manner set forth in this paragraph.
13. TERMINOLOGY. Whenever used in this Agreement (including any
Exhibit hereto), the word "including", "includes", or "include" shall be read
as though the phrase "without limitation," immediately followed the same.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
Address: "Tenant"
1958 Kellogg Avenue I-PAC MANUFACTURING, INC.,
Carlsbad, California 92008 a California corporation
Attn: Patrick W. Moore
Chief Executive Officer By:
Facsimile No.: (760) (930-0115) --------------------------------
Name:
------------------------------
Title:
-----------------------------
Address:
"Landlord"
Two Center Plaza, Suite 200 CABOT INDUSTRIAL PROPERTIES, L.P.,
Boston, Massachusetts 02108-1906 a Delaware limited partnership
Attn: Ms. Jean Murphy
Facsimile No.: (617) 723-8237
By: Cabot Industrial Trust,
a Maryland real estate
investment trust
its general partner
By:
--------------------------
Name:
------------------------
Title:
-----------------------
Address: "Lender"
- --------------------------------
- --------------------------------
- --------------------------------
<PAGE>
State of California )
County of )
On before me, a notary public in and for said state,
personally appeared , personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s) whose
name(s) is/are subscribed to the within instrument and acknowledged to me
that he or she executed the same in the capacity(ies) indicated at the
signature point.
WITNESS my hand and official seal.
Signature
--------------------------------
Capacity of Signatory
--------------------
<PAGE>
State of California )
County of )
On before me, a notary public in and for said state,
personally appeared , personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s) whose
name(s) is/are subscribed to the within instrument and acknowledged to me
that he or she executed the same in the capacity(ies) indicated at the
signature point.
WITNESS my hand and official seal.
Signature
--------------------------------
Capacity of Signatory
--------------------
<PAGE>
State of California )
County of )
On before me, a notary public in and for said state,
personally appeared , personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s) whose
name(s) is/are subscribed to the within instrument and acknowledged to me
that he or she executed the same in the capacity(ies) indicated at the
signature point.
WITNESS my hand and official seal.
Signature
--------------------------------
Capacity of Signatory
---------------------
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF THE LAND
PARCEL A:
LOT 37 OF CARLSBAD TRACT NO. 81-46 UNIT NO. 2, IN THE CITY OF CARLSBAD,
COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO THE MAP THEREOF
NO. 11288, FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO
COUNTY.
EXCEPTING THEREFROM 50% OF ALL OIL, MINERAL, GAS, AND OTHER HYDROCARBON
SUBSTANCES BELOW A DEPTH OF 500 FEET UNDER THE REAL PROPERTY, WITHOUT
RIGHT OF SURFACE ENTRY, AS RESERVED IN DEED BY CARLSBAD PROPERTIES, A
PARTNERSHIP RECORDED JULY 5, 1978 AS FILE/PAGE NO. 78-279136 OF OFFICIAL
RECORDS OF SAN DIEGO COUNTY, CALIFORNIA.
PARCEL B:
EASEMENTS AS MORE FULLY SET FORTH IN DECLARATION OF COVENANTS, CONDITIONS
AND RESTRICTIONS RECORDED SEPTEMBER 12, 1986 AS FILE/PAGE NO. 86-401456
OF THE OFFICIAL RECORDS OF SAN DIEGO COUNTY, STATE OF CALIFORNIA.
PARCEL C:
EASEMENT OVER PORTIONS OF MAPS 11287, 11288 AND 11289 FOR COMMON AREA
PURPOSES AS GRANTED IN DOCUMENT RECORDED OCTOBER 31, 1986 AS FILE/PAGE
NO. 86-497819 OF OFFICIAL RECORDS OF SAN DIEGO COUNTY, CALIFORNIA.
<PAGE>
SCHEDULE 17.22
GUARANTY OF LEASE
GUARANTY OF LEASE
THIS GUARANTY OF LEASE ("GUARANTY") is made on , 1999, by
PHOTOMATRIX, INC., a California corporation ("GUARANTOR"), in favor of CABOT
INDUSTRIAL PROPERTIES, L.P., a Delaware limited partnership, ("LANDLORD", in
connection with that certain lease agreement dated of even date herewith (the
"LEASE") pursuant to which Landlord leases to I-PAC MANUFACTURING, INC., a
California corporation ("TENANT"), the premises located at 1958 Kellogg
Avenue, Carlsbad, California, 92008 (the "PREMISES"). As a material
inducement to and in consideration of Landlord's entering into the Lease,
Landlord having indicated that it would not enter into the Lease without the
execution of this Guaranty, Guarantor does hereby agree with Landlord as
follows:
14. Guarantor does hereby unconditionally guarantee, without deduction by
reason of set off, defense or counterclaim, as a primary obligor and not as a
surety, and promises to perform and be liable for any and all obligations and
liabilities of Tenant under the terms of the Lease, including without
implied limitation the Tenant's obligation to pay such rents, charges, costs
and impositions as are set forth in the Lease. Guarantor further agrees to
defend with counsel acceptable to Landlord, and to indemnify and save
Landlord harmless from and against any and all loss, cost, damage or
liability arising out of any breach by Tenant of any of the terms, conditions
and covenants of the Lease, or out of any breach of warranty or
misrepresentation made by Tenant under the Lease or heretofore or hereafter
made to Landlord, including reasonable attorneys' fees and any other costs
incurred by Landlord in connection therewith.
15. DIRECT ENFORCEMENT. The undertakings contained in this Guaranty shall
be the personal liability of Guarantor. Guarantor acknowledges that after
any event of default by Tenant in the performance of any term, condition or
covenant of the Lease, the liability of Guarantor under this Guaranty shall
be primary and that, in the enforcement of its rights, Landlord shall be
entitled to look to Guarantor for the performance of the obligations of
Tenant which Guarantor has guaranteed, without first commencing any action or
proceedings against Tenant, and likewise, enforcement of Landlord's rights
against Tenant shall not impair the right of Landlord to enforce this
Guaranty, and any such action by Landlord shall not operate as a release of
the liability of Guarantor under this Guaranty. The guaranteed obligations
include both payment and performance. The obligations of the Guarantor shall
be absolute and unconditional and shall remain in full force and effect until
all amounts due pursuant to the Lease have been paid in full and all of
Tenant's obligations thereunder have been performed in full.
16. If Tenant shall at any time default in the performance or observance
of any of the terms, covenants or conditions in the Lease on Tenant's part to
be kept performed or observed,
1
<PAGE>
Guarantor will keep, perform and observe same, as the case may be, in the
place and stead of Tenant.
17. The obligations of Guarantor hereunder shall not be released by
Landlord's receipt, application or release of any security given for the
performance and observance of any covenant or condition in the Lease on
Tenant's part to be performed or observed, regardless of whether Guarantor
consents thereto or receives notice thereof.
18. The liability of Guarantor hereunder shall in no way be affected by
(a) the release or discharge of Tenant in any creditor's receivership,
bankruptcy or other proceeding; (b) the impairment, limitation or
modification of the liability of Tenant or the estate of Tenant in
bankruptcy, or of any remedy for the enforcement of Tenant's liability under
the Lease resulting from the operation of any present or future provision of
the Bankruptcy Act or other statute or from the decision in any court; (c)
the rejection of the Lease in any such proceedings; (d) the assignment or
transfer of the Lease by Tenant; (e) any disability or other defense of
Tenant; (f) the cessation from any cause other than as provided under the
Lease whatsoever of the liability of Tenant; (g) the exercise by Landlord of
any of its rights or remedies reserved under the Lease or by law; or (h) any
termination of the Lease, other than as provided under the Lease.
19. Guarantor agrees that none of its obligations and no right against
Guarantor hereunder shall in any way be discharged, impaired, or otherwise
affected by any extension of time for, or by any partial of complete waiver
of the performance of any of Tenant's obligations under the Lease, or by any
other alteration, amendment, assignment, expansion, extension or modification
in or to the Lease, or by any release or waiver of any term, covenant or
condition of the Lease, or by any delay in the enforcement of any rights
against Tenant, Guarantor or any other person or entity under the Lease.
Without limitation, Guarantor agrees that the Lease may be altered, amended,
assigned, expanded, extended or modified from time to time on such terms and
provisions as may be satisfactory to Landlord without notice to or further
assent by Guarantor, and Guarantor hereby waives notice of acceptance of this
Guaranty, notice of any obligations guaranteed hereby or of any action taken
or omitted in reliance hereon, and notice of any defaults of Tenant under the
Lease and waives presentment, demand for payment or performance, protest,
notice of dishonor, nonpayment or nonperformance of any such obligations,
suit or taking of other action by Landlord against, and any other notice to,
any party liable thereon and waives suretyship defenses generally, other than
full and timely payment and performance of all obligations hereby guaranteed,
and Guarantor agrees to cause Tenant to preserve the enforceability of all
instruments hereby guaranteed, as modified with Landlord's consent, and to
cause Tenant to refrain from any act or omission which might be the basis for
a claim that Guarantor has any defense to Guarantor's obligations hereunder,
exclusive only of the defense that Tenant has fully and timely paid and
performed all obligations hereby guaranteed. No invalidity, irregularity or
unenforceability of all or any part of such obligations or of any security
therefor and no insolvency, bankruptcy, liquidation proceeding or dissolution
affecting Tenant or Guarantor shall affect, impair or be a defense to this
Guaranty. The liability of the Guarantor
2
<PAGE>
hereunder is primary and unconditional and shall not be subject to any
offset, defense (other than the defense of full and timely payment and
performance) or counterclaim of Guarantor. This is a continuing guaranty.
20. Guarantor represents that this Guaranty, and the Lease hereby
guaranteed, as originally delivered and as modified, amended or supplemented,
have been duly authorized and are the legal, valid and binding obligations of
Guarantor and Tenant, enforceable in accordance with their respective terms,
and Guarantor further agrees that no invalidity of any such Guaranty shall
affect or impair Guarantor's liability under this Guaranty.
21. This instrument is intended to be fully effective in accordance with
its terms notwithstanding any exculpatory provisions inconsistent herewith
contained in the Lease.
22. Without in any manner limiting the generality of the foregoing,
Guarantor hereby waives the benefits of the provisions of Section 2809, 2819,
2845 and 2850 of the California Civil Code and any similar or analogous
statutes of California or any other jurisdiction.
23. Guarantor further agrees that it may be joined in any action against
Tenant in connection with the obligations of Tenant under the Lease and
recovery may be had against Guarantor in any such action. Landlord may
enforce the obligations of Guarantor hereunder without first taking any
action whatsoever against Tenant or its successors and assigns, or pursue any
other remedy or apply any security it may hold.
24. Until all of Tenant's obligations under the Lease are fully performed,
Guarantor: (a) shall have no right of subrogation against Tenant by reason of
any payments or actions of performance by Guarantor under this Guaranty; and
(b) subordinates any liability or indebtedness of Tenant now or hereafter
held by Guarantor to the obligations of Tenant under, arising out of or
related to the Lease or Tenant's use of the Premises. Furthermore, from and
after the occurrence of any default by Tenant in the performance of any term,
condition, covenant or obligation under the Lease, Guarantor agrees that it
will not accept or receive any dividend, payment or reimbursement from
Tenant, including any payment on account of any indebtedness from Tenant to
Guarantor, and that if Guarantor does then receive any such dividend, payment
or reimbursement the same shall be held in trust for Landlord and forthwith
will be turned over to Landlord in the form received.
25. The liability of Guarantor and all rights, powers and remedies of
Landlord hereunder and under any other agreement now or at any time hereafter
in force between Landlord and Guarantor relating to the Lease shall be
cumulative and not alternative and such rights, powers and remedies shall be
in addition to all rights, powers and remedies given to Landlord by law.
3
<PAGE>
26. This Guaranty applies to, inures to the benefit of and binds all
parties hereto, and their successors and assigns. This Guaranty may be
assigned by Landlord voluntarily or by operation of law.
27. Guarantor shall provide quarterly financial statements, within
forty-five (45) days following each quarter, to Landlord. The financial
statements shall be prepared in accordance with generally accepted accounting
principles and shall be true and correct in all material respects.
28. If Landlord desires to sell, finance or refinance the Premises, or any
part thereof, Guarantor hereby agrees to deliver to any lender or buyer
designated by Landlord such financial statements of Guarantor as may be
reasonably required by such lender or buyer. Such statements shall include
the past three (3) years' financial statements of Guarantor. All such
financial statements shall be received by Landlord in confidence and shall be
used only for the foregoing purposes.
29. If claim is ever made upon Landlord for repayment of any amount or
amounts received by Landlord in payment of the obligations under the Lease
and Landlord repays all or any part of said amount, then, notwithstanding any
revocation or termination of this Guaranty or the termination of the Lease,
Guarantor shall be and remain liable to Landlord for the amount so repaid.
30. This Guaranty shall constitute the entire agreement between Guarantor
and the Landlord with respect to the subject matter hereof. No provision of
this Guaranty or right of Landlord hereunder may be waived nor may any
guarantor be released from any obligation hereunder except by a writing duly
executed by an authorized officer of Landlord.
31. When the context and construction so requires, all words used in the
singular herein shall be deemed to have been used in the plural. The word
"person" as used herein shall include an individual, company, firm,
association, partnership, corporation, trust or other legal entity of any
kind whatsoever.
32. Should any one or more provisions of this Guaranty be determined to be
illegal or unenforceable, all other provisions shall nevertheless be
effective.
33. The waiver or failure to enforce any provision of this Guaranty shall
not operate as a waiver of any other breach of such provision or any other
provisions hereof.
34. If either party hereto participates in an action against the other
party arising out of or in connection with this Guaranty, the prevailing
party shall be entitled to have and recover from the other party reasonable
attorneys' fees, collection costs and other costs incurred in and in
preparation for the action.
4
<PAGE>
35. Guarantor agrees that this Guaranty shall be governed by and construed
in accordance with the laws of the State of California.
36. If Guarantor is a corporation, each individual executing this Guaranty
on behalf of said corporation represents and warrants that he or she is duly
authorized to execute and deliver this Guaranty on behalf of said
corporation, in accordance with a duly adopted resolution of the Board of
Directors and said corporation or in accordance with the bylaws of said
corporation, and that this Guaranty is binding upon said corporation in
accordance with its terms. If Guarantor is a corporation, Landlord, at its
option, may require Guarantor to concurrently, with the execution of this
Guaranty, deliver to Landlord a certified copy of a resolution of the Board
of Directors of said corporation authorizing or ratifying the execution of
this Guaranty.
37. The term "Landlord" whenever used herein refers to and means the
Landlord in the foregoing Lease specifically named and also any assignee of
said Landlord, whether by outright assignment or by assignment for security,
and also any successor to the interest of said Landlord or of any assignee of
such Lease or any part thereof whether by assignment or otherwise. The term
"Tenant" whenever used herein refers to and means the Tenant in the foregoing
Lease specifically named and also any assignee of said Tenant, assignee or
sublessee of such Lease or any part thereof, whether by assignment, sublease
or otherwise.
38. Any notice or other communication to be given under this Agreement by
either party to the other will be in writing and delivered personally or
mailed by certified mail, postage prepaid and return receipt requested, or
delivered by an express overnight delivery service, charges prepaid, or
transmitted by facsimile, as follows:
If to Landlord: Cabot Industrial Properties, L.P.
Two Center Plaza, Suite 200
Boston, Massachusetts 02108
Attn: Ms. Jean Murphy
Fax No. (617) 722-8237
With copy to: Lorie Soares Griffen, Esq.
Mayer, Brown & Platt
350 South Grand Avenue, Suite 2500
Los Angeles, California 90071
Fax No. (213) 625-0248
If to Guarantor: Photomatrix, Inc.
1958 Kellogg Avenue
Carlsbad, CA 92008
Fax No. (619) 930-0115
5
<PAGE>
With a copy to: James P. Hill, Esq.
Sullivan, Hill, Lewin, Rez & Engel
550 W C Street, Suite 1500
San Diego, CA 92101
Fax No. (619) 231-4372
Any address or name specified above may be changed by a notice given
by the addressee to the other party in accordance with this numbered
paragraph. Any notice will be deemed given and effective (i) if given by
personal delivery, as of the date of delivery in person; or (ii) if given by
mail, upon receipt as set forth on the return receipt; or (iii) if given by
overnight courier, one (1) business day after timely deposit with the
courier; or (iv) if given by facsimile, upon receipt of the appropriate
confirmation of transmission by facsimile. The inability to deliver because
of a changed address of which no notice was given of the rejection or other
refusal to accept any notice will be deemed to be the receipt of the notice
as of the date of such inability to deliver or the rejection or refusal to
accept.
39. WAIVER OF JURY TRIAL. THE PARTIES HERETO WAIVE TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY(IES) AGAINST ANY
OTHER PARTY(IES) ON ANY MATTER ARISING OUT OF OR IN ANY WAY CONNECTED WITH
THIS GUARANTY OR THE RELATIONSHIP OF THE PARTIES CREATED HEREUNDER.
6
<PAGE>
IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the
date first above written.
"Guarantor"
PHOTOMATRIX, INC.,
A California corporation
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
7
<PAGE>
Exhibit 10.55
ASSET PURCHASE AGREEMENT
by and among
SCAN-OPTICS, INC.
as Buyer,
PHOTOMATRIX IMAGING CORPORATION
as Seller,
I-PAC MANUFACTURING, INC.
and
PHOTOMATRIX, INC.
June _____, 1999
<PAGE>
ASSET PURCHASE AGREEMENT
INDEX
<TABLE>
<S> <C>
SECTION 1. PURCHASE AND SALE OF ASSETS.................................................................2
1.1 Sale of Assets........................................................................2
1.2 Assumption of Liabilities............................................................13
1.3 Closing Date Payment.................................................................20
1.4 Calculation and Payment of Purchase Price............................................21
1.5 Time and Place of Closing............................................................22
1.6 Delivery of Agreement for Assumption of Liabilities, Lease Assignments and Licenses..23
1.7 Transfer of Subject Assets...........................................................23
1.8 Delivery of Records and Contracts....................................................23
1.9 Further Assurances...................................................................24
1.10 Allocation of Purchase Price.........................................................24
1.11 Sales and Transfer Taxes.............................................................25
1.12 Accounts Receivable..................................................................25
1.13 Procedures for Assets not Transferable...............................................26
1.14 Employees, Wages and Benefits........................................................28
SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER.............................................31
2.1 Making of Representations and Warranties.............................................31
2.2 Organization and Qualifications of Seller............................................32
2.3 Subsidiaries.........................................................................32
2.4 Authority of Seller, I-PAC and Parent................................................32
2.5 Real and Personal Property...........................................................34
2.6 Financial Statements.................................................................38
2.7 Taxes................................................................................39
2.8 Account Receivables..................................................................42
2.9 Inventory............................................................................43
2.10 Ordinary Course; Absence of Certain Changes..........................................43
2.11 Intellectual Property................................................................46
2.12 Contracts............................................................................48
2.13 Litigation...........................................................................50
2.14 Compliance with Laws.................................................................51
2.15 Insurance............................................................................51
2.16 Warranty or Other Claims.............................................................51
2.17 Powers of Attorney...................................................................52
2.18 Permits; Burdensome Agreements.......................................................52
2.19 Corporate Records; Copies of Documents...............................................52
2.20 Related Transactions.................................................................53
2.21 Employee Benefit Programs............................................................53
2.22 Environmental Matters................................................................56
</TABLE>
<PAGE>
<TABLE>
<S> <C>
2.23 Employees; Labor Matters.............................................................58
2.24 Customers, Distributors and Suppliers................................................58
2.25 Purchase Commitments.................................................................59
2.26 Required Consents....................................................................59
2.27 Adequacy of Subject Assets...........................................................59
2.28 Year 2000 Compliance.................................................................59
2.29 Brokers..............................................................................60
2.30 Disclosure...........................................................................61
SECTION 3. COVENANTS OF SELLER AND BUYER........................................................61
3.1 Making of Covenants and Agreements...................................................61
3.2 Notice of Default....................................................................61
3.3 Consummation of Agreement............................................................62
3.4 Cooperation of Seller................................................................62
3.5 Non-competition......................................................................63
3.6 No Solicitation of Employees.........................................................63
3.7 Confidentiality......................................................................64
3.8 Tax Returns..........................................................................65
3.9 Bank Accounts........................................................................65
SECTION 4. REPRESENTATIONS AND WARRANTIES OF BUYER..............................................65
4.1 Making of Representations and Warranties.............................................65
4.2 Organization of Buyer................................................................65
4.3 Authority of Buyer...................................................................65
4.4 Litigation...........................................................................67
4.5 Brokers..............................................................................67
SECTION 5. U.K. VAT MATTERS.....................................................................67
5.1 Transfer of a Going Concern..........................................................67
5.2 Effect of Certain Representations....................................................68
5.3 Buyer VAT Representations............................................................70
SECTION 6. CONDITIONS...........................................................................70
6.1 Conditions to Obligations of Buyer...................................................70
6.2 Conditions to Obligations of Seller..................................................73
SECTION 7. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING.........................................75
7.1 Survival of Representations and Warranties...........................................75
7.2 Collection of Assets.................................................................75
7.3 Payment of Obligations...............................................................76
7.4 Assistance After Closing.............................................................76
SECTION 8. INDEMNIFICATION......................................................................76
8.1 Indemnification by Seller, I-PAC and Parent..........................................76
8.2 Limitations on Indemnification by Seller, I-PAC and Parent...........................77
8.3 Indemnification by Buyer.............................................................78
8.4 Limitation on Indemnification by Buyer...............................................79
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
8.5 Notice; Defense of Claims............................................................80
8.6 Additional Provisions................................................................83
SECTION 9. MISCELLANEOUS........................................................................84
9.1 Bulk Sales Law.......................................................................84
9.2 Fees and Expenses....................................................................84
9.3 Governing Law........................................................................84
9.4 Notices..............................................................................84
9.5 Entire Agreement.....................................................................85
9.6 Assignability; Binding Effect........................................................86
9.7 Captions and Gender..................................................................86
9.8 Execution in Counterparts............................................................86
9.9 Amendments...........................................................................87
9.10 Publicity and Disclosures............................................................87
9.11 Dispute Resolution...................................................................87
9.12 Consent to Jurisdiction..............................................................91
9.13 Third Party Beneficiaries............................................................91
</TABLE>
-iii-
<PAGE>
ASSET PURCHASE AGREEMENT
AGREEMENT entered into as of June _____, 1999 by and among Scan-Optics,
Inc., a Delaware corporation with offices at 169 Progress Drive, Manchester,
Connecticut 06040-2294 (the "Buyer"), and Photomatrix Imaging Corporation, a
Nevada corporation with offices at 1958 Kellogg Avenue, Carlsbad, California
92008 (the "Seller"), I-PAC Manufacturing Inc., a California corporation with
offices at 1958 Kellogg Avenue, Carlsbad, California 92008 ("I-PAC") and
Photomatrix, Inc., a California corporation with offices at 1958 Kellogg Avenue,
Carlsbad, California 92008 (the "Parent").
W I T N E S S E T H
WHEREAS, subject to the terms and conditions set forth herein, Buyer
desires to purchase from Seller, and Seller desires to sell, transfer and assign
to Buyer, the Subject Assets (as defined in Section 1.1 hereof), which
constitute certain properties and assets of Seller related to, used or held for
use in connection with the scanner product manufacturing, engineering, sales and
service portion of the business and operations of Seller (such business and
operations are referred to herein as the "Business");
WHEREAS, subject to the terms and conditions hereof, Buyer desires to
purchase such Subject Assets and to assume the Assumed Liabilities (as defined
in Section 1.2 hereof) for the consideration specified herein; and
WHEREAS, Parent owns all of the outstanding capital stock of Seller and
I-PAC and Buyer will not purchase the Subject Assets and assume the Assumed
Liabilities unless I-PAC and Parent agree to indemnify Buyer as provided herein;
<PAGE>
NOW, THEREFORE, in order to consummate said purchase and sale and in
consideration of the mutual agreements and consents set forth herein, the
parties hereto agree as follows:
SECTION 1. PURCHASE AND SALE OF ASSETS.
1.1 SALE OF ASSETS.
(a) SUBJECT ASSETS. Subject to the provisions of this
Agreement, Seller agrees to sell and Buyer agrees to purchase, at the Closing
(as defined in Section 1.5 hereof), all of Seller's right, title and interest
in, to and under all of the following properties, assets and business of Seller
related to, used in or held for use in the Business, including without
limitation, goodwill (except as hereinafter provided in Section 1.1(b)), of
every kind and description, tangible and intangible, real, personal or mixed,
and wherever located:
(i) INVENTORY. All inventory related to manufacturing
(including raw materials, work in process, rework products, including
those for Bell & Howell Company ("Bell & Howell"), and finished goods),
engineering, service and spare parts for products, including, but not
limited to, document scanners, aperture card scanners, duplicators and
any other systems currently under maintenance (including those under
maintenance for Eastman Kodak Corporation), sold as part of the
Business, including but not limited to Inventory identified in SCHEDULE
1.1(a)(i), (collectively, the "Inventory"), all warranties held by
Seller with respect to the Inventory, and, to the extent assignable,
any rights of Seller to the warranties received from other suppliers
and any related claims,
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credits, rights of recovery and set off with respect to such Inventory;
provided, however, that if any such rights are not so assignable,
Buyer's rights in respect thereof shall be governed pursuant to the
terms and conditions of Section 1.13 hereof;
(ii) EVALUATION UNITS. All products of the Business
that are located at a customer's or prospective customer's site as an
evaluation unit, for purposes of evaluation for purchase as identified
on SCHEDULE 1.1(a)(ii) ("Evaluation Units");
(iii) EQUIPMENT. All machinery, furnishings,
equipment and leasehold and personal property to the extent related to
the Business and all tools and dies and other machinery and equipment
for the manufacture of products sold in the Business, located in
Carlsbad, California, Chandler, Arizona, the United Kingdom and
elsewhere, including, but not limited to, those identified in SCHEDULE
1.1(a)(iii) (collectively, the "Fixed Assets"), and, to the extent
assignable, any rights of Seller to the warranties received from the
manufacturers and distributors of said items and to any related claims,
credits, rights of recovery and set off with respect to such items;
provided, however, that if any such rights are not so assignable,
Buyer's rights in respect thereof shall be governed pursuant to the
terms and conditions of Section 1.13 hereof;
(iv) INTELLECTUAL PROPERTY. All goodwill and
intellectual property rights, including, but not limited to, the
Millennium Technology (as defined in Section 1.l(a)(v)), trade secrets,
proprietary business information,
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designs, styles, technologies, inventions, works of authorship,
know-how, formulae, processes, industrial models, industrial designs,
trade secrets, trade secret rights, procedures, research records, test
information, software and software documentation (including but not
limited to market surveys, marketing know-how and manufacturing,
research and technical information, trade names, emblems, logos,
insignias, copyrights and copyright registrations, service marks and
trademarks and related trademarks and registrations (including
applications and registrations therefor), patents and patent
applications (including, without limitation, the trade names,
copyrights and copyright registrations, service mark and trademark
registrations and applications and patents and patent applications
described in SCHEDULE 1.1(a) (iv)), specifications, technical manuals
and data, libraries, blueprints, drawings, proprietary processes,
product information and development work-in-process and all licenses to
or from third parties with respect to the foregoing or rights related
thereto, in each case which is related to, used in or held for use in
the Business (collectively, the "Intellectual Property"), excluding the
trade name "Photomatrix" and its associated insignia and logo;
(v) MILLENNIUM TECHNOLOGY. Subject to the terms and
conditions contained in this Agreement, Seller does hereby assign to
Buyer all of its right, title, and interest, now owned or hereafter
acquired, in and to the Millennium Hardware, Millennium Software,
Documentation, Intangible Property, and Related Technology
(collectively, "Millennium Technology"), including the right to sue and
recover for past and future infringements of the Millennium Technology.
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(1) DEFINITIONS.
a. MILLENNIUM HARDWARE. "Millennium
Hardware" shall mean all Seller's right, title, and interest,
throughout the world, in and to any products, prototypes, projects,
components, or parts, or any tangible items relating thereto, at any
stage of development, in any way related to the desktop scanners known
as "Millennium," including, without limitation, the products described
on SCHEDULE 1.1(a)(v).
b. MILLENNIUM SOFTWARE. "Millennium
Software" shall mean all Seller's right, title, and interest,
throughout the world, in and to the software known as "Millennium," and
any other software used or useful in connection with the Millennium
Hardware, all supplements, enhancements, and modifications thereto
(regardless of the state of development), and all personal property
relating thereto, including, without limitation, source codes, object
codes, technical documentation, and similar information necessary for
the practical utilization thereof. For purposes of further
identification, the Millennium Software includes, without limitation,
the source code modules listed on SCHEDULE 1.1(a)(v).
c. DOCUMENTATION. "Documentation" shall mean
all user manuals, brochures, and other written information describing
any aspect of the Millennium Hardware, Millennium Software, Intangible
Property, or Related Technology, or designed to facilitate the use or
modification or enhancement of any of the foregoing.
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d. INTANGIBLE PROPERTY. "Intangible
Property" shall mean all patents, copyright, copyright registrations,
and patent applications therefor, together with all divisions,
renewals, and continuations of any of the foregoing, and all know-how,
unpatented inventions, trade secrets, and other intangible,
intellectual property embodied in or pertaining to the Millennium
Hardware, Millennium Software, Documentation, or Related Technology.
e. RELATED TECHNOLOGY. "Related Technology"
shall mean all things authored, discovered, developed, made, perfected,
improved, designed, engineered, acquired, produced, conceived, or first
reduced to practice by Seller or any of its employees or agents that
are embodied in, derived from, or relate to the Millennium Hardware,
Millennium Software, Documentation, or Intangible Property, in any
stage of development, including without limitation, inventions, whether
or not patentable, patents and patent rights, patent applications,
trade secrets, know-how, and proprietary information, whether or not
reduced to writing, software and source code, engineering and
manufacturing information, electronic control circuits, specifications,
diagrams, drawings, schematics, blueprints, and parts lists,
modifications, enhancements, designs, concepts, techniques, methods,
ideas, flow charts, coding sheets, programs, programmers' notes,
prototypes, techniques, methods, ideas, concepts, data, and all other
information relating to the Millennium Hardware, Millennium Software,
Documentation, or Intangible Property, and not generally known within
the computer or technology industries.
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f. NET SALES PRICE. "Net Sales Price" shall
mean the actual price invoiced by Buyer for any Millennium Product,
less quantity discounts granted at the time of invoice, amounts
refunded for faulty or defective products, freight, insurance and other
transportation, costs, duties, income taxes, and other governmental
charges paid.
(2) ROYALTIES. In exchange for the grant of rights
under this Agreement, and upon satisfactory Delivery of the Millennium
Technology by Seller to Buyer, Buyer will pay Seller quarterly
royalties on the aggregate Net Sales Price of products incorporating
the Millennium Technology ("Millennium Products") as follows: three
percent (3.0 %) of the Net Sales Price over the first three (3) years
from the date of first commercial shipment of the initial Millennium
product, with the aggregate amount of royalties paid hereunder
("Aggregate Royalty") not to exceed Two Hundred Fifty Thousand Dollars
($250,000). For any Millennium Products sold together with other
products that are not subject to royalty hereunder ("Bundled
Products"), the aggregate Net Sales Price for such Millennium Products
is calculated by multiplying the aggregate net sales price for the
Bundled Products by [A/(A+B)] where A and B are the average Net Sales
price of (A) the Millennium Product and (B) all other products that are
not subject to royalty hereunder, respectively. Royalty payments are
due forty-five (45) days after the end of each calendar quarter (i.e.,
on February 15 for the quarter ending December 31, on May 15 for the
quarter ending March 31, etc.) including the calendar quarter during
which the first commercial shipment occurs. Notwithstanding any
contrary provisions contained
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herein, no royalty shall be paid on the Net Sales Prices after
aggregate Royalties have amounted to Two Hundred Fifty Thousand Dollars
($250,000).
(3) DELIVERY. Not later than ten (10) days after the
Closing, Seller shall deliver to Buyer the Millennium Technology,
including a master copy of all currently available Millennium Software,
Documentation, and source code, as identified on SCHEDULE 1.1(a)(v)
("Delivery").
(4) CONFIDENTIALITY AND NON-DISCLOSURE. Seller
acknowledges and agrees that the Millennium Technology constitutes
valuable confidential and proprietary information and trade secrets
(the "Confidential Information"). Seller agrees to use commercially
reasonable efforts to prevent disclosure of the Confidential
Information to third parties. This Section shall survive the
consummation of the sale and termination of this Agreement.
(vi) ACCOUNTS RECEIVABLE. All accounts receivable of
Seller from customers of the Business (the "Receivables");
(vii) CONTRACTS. To the extent related to the
Business, and to the extent assignable, all of Seller's rights and
interests in and to all contracts, contract deposits, deferred revenue
obligations, agreements, leases, supply contracts, purchase orders,
sales orders, commitments, consulting agreements and instruments that
Seller has received or is a party to, including, but not limited to,
all license agreements under which Seller has licensed other parties to
use, distribute, modify, manufacture or re-sell products (including
software) of the Business, the backlog of orders for the manufacture,
sale or lease of products or
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services for which no revenues have been recognized by Seller
(collectively, the "Contracts"), including, but not limited to, those
Contracts identified on SCHEDULE 1.1(a)(vii) hereto; but excluding any
contracts or agreements pursuant to which Seller or an affiliate
purchases products or services from a third party for any purpose other
than solely for the Business, none of which such excluded contracts are
material to the Business; provided, however, that to the extent any
such rights and interests in and to such Contracts are not so
assignable, Buyer's rights and interests in respect thereof shall be
governed pursuant to the terms and conditions of Section 1.13 hereof;
(viii) REAL PROPERTY LEASES. To the extent related to
the Business, and to the extent assignable, all of Seller's rights and
interests in and to the real property leases of Seller listed on
SCHEDULE 1.1(a)(vii) hereto (the "Leases");
(ix) APPROVALS, GOVERNMENT PERMITS. All of Seller's
right, title and interest in and to all franchises, licenses, permits,
certifications, registrations, certificates of inspection, approvals
and authorizations used solely in the Business issued by any unit,
division, department, commission, board, agency, bureau or official of
any federal, state, local or foreign governmental entity (collectively,
the "Governmental Permits"), but only to the extent that any such
Governmental Permits are assignable or transferable by Seller to Buyer.
Where annual fees are payable and previously paid (as set forth in
SCHEDULE 1.1(a)(ix)), Buyer shall reimburse Seller for a PRO RATA share
of such payments;
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(x) INVESTMENTS, PREPAID EXPENSES. As allocable to
the Business, all assets, investments ("Investments") and prepaid
expenses ("Prepaid Expenses") related to the operations of the Business
(as set forth in SCHEDULE 1.1(a)(x));
(xi) PROPRIETARY BUSINESS INFORMATION. All mailing
lists, customer lists, customer records and histories, customer
invoices, lists of suppliers and vendors and all records relating
thereto, engineering drawings and files, records with respect to
production, manufacturing, engineering, product development and costs,
advertising matter, catalogues, photographs, sales literature and
materials, purchasing materials, media materials, manufacturing and
quality control records and procedures, research and development files,
data and laboratory books, vendor data, equipment maintenance records,
warranty information, records of operations, standard forms of
documents, service records, manuals of operation or business procedures
and other similar information used in the Business, and all trade
secret and copyright rights therein (collectively, in either hard copy
or electronic form, the "Proprietary Business Information");
(xii) BOOKS AND RECORDS. All books and records of
Seller (including all discs, tapes and other media-storing data and
other information) to the extent used in the Business, and all
confidentiality agreements entered into with third parties regarding
the Business, but excluding the Excluded Records (as defined in Section
1.l(b)(iv)(3)) (collectively, the "Books and Records");
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(xiii) CLAIMS, CAUSES OF ACTION. All of Seller's
rights, claims or causes of action against third parties related to any
Subject Asset or Assumed Liability (but not any Excluded Asset or
Excluded Liability) arising out of transactions occurring prior to the
Closing Date;
(xiv) LICENSES. All of Seller's right, title and
interest in and to the licenses, agreements and other arrangements
under which Seller has the right to use any propriety information of a
third party, or the right to use, reproduce, distribute or modify any
works of authorship of a third party, in either case, to the extent
used or held for use in the conduct of the Business, including, but not
limited to, those identified on SCHEDULE 1.1(a)(xiv) (the "Licenses"),
but only to the extent that any such License is by its terms or by law
assignable or transferable to Buyer; and
(xv) OTHER ASSETS. All other assets and properties of
every nature whatsoever tangible and intangible, wherever located and
to the extent related to, used in or held for use in connection with
the Business, including, but not limited to, all assets shown or
reflected in the Closing Balance Sheet (as defined in Section 2.6
hereof).
(b) EXCLUDED ASSETS. Notwithstanding the foregoing, there
shall be excluded from such purchase and sale the following property
and assets:
(i) OTHER ASSETS. Any assets or property of Seller
that are not Subject Assets, including those specified on
SCHEDULE 1.1(b)(i);
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(ii) ADMINISTRATION EQUIPMENT AND SUPPLIES.
Furnishings and equipment used in general administration and not
primarily used in the operation of the Business;
(iii) CLAIMS, CAUSES OF ACTION. Except for any of
Seller's rights, claims or causes of action related to a Subject Asset
or Assumed Liability, all of Seller's rights, claims or causes of
action against third parties relating to any Excluded Liability or
Excluded Asset; and
(iv) EXCLUDED RECORDS.
(1) CORPORATE RECORDS. Seller's corporate
franchise, stock record books, corporate record books containing
minutes of meetings of directors and stockholders and such other
records as have to do exclusively with Seller's organization or stock
capitalization, as well as any records not related to the Business
(collectively, the "Corporate Records");
(2) PERSONNEL RECORDS. Any of Seller's
personnel records pertaining to any employees of Seller, except
employees hired by Buyer after the Closing (collectively, the
"Personnel Records"); and
(3) RETAINED RECORDS. Any other books and
records related to the Business that Seller is required by law to
retain (the "Retained Records", and together with the Corporate Records
and the Personnel Records, the "Excluded Records"); provided, however,
that, except to the extent prohibited under any applicable law, Seller
shall provide Buyer with access to the Excluded Records for the purpose
of allowing Buyer to make copies.
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The assets, property and business of Seller to be sold to and purchased
by Buyer under Section 1.1(a) are hereinafter sometimes referred to as the
"Subject Assets", and the assets, property and business of Seller which are
excluded from the Subject Assets under this Section 1.1(b) are hereinafter
sometimes referred to as the "Excluded Assets".
1.2 ASSUMPTION OF LIABILITIES.
(a) ASSUMED LIABILITIES. Upon the sale and purchase of the
Subject Assets, Buyer shall assume and agree to pay or discharge when and as due
in accordance with their respective terms only the following liabilities:
(i) TRADE PAYABLES AND ACCRUED LIABILITIES. Those
trade payables and accrued liabilities of Seller directly attributable
to the Business or the Subject Assets, as listed on SCHEDULE 1.2(a)(i),
and which trade payables and accrued liabilities are outstanding at the
time of the Closing (collectively, the "Trade Payables");
(ii) SALES TAX. Any sales tax that has accrued with
respect to Receivables related to the Business and any tax that has
been collected but not remitted to the appropriate taxing authority,
but only to the extent that such Receivables (1) are acquired by Buyer
pursuant to Section 1.1(a)(vi) and (2) have not been collected by
Seller prior to the Closing (the "Sales Tax");
(iii) PERMITTED ENCUMBRANCES. Any Permitted
Encumbrances attaching to the Subject Assets including, but not limited
to, the Permitted Encumbrances listed on SCHEDULE 1.2(a)(iii). For the
purposes of this Agreement,
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"Permitted Encumbrances" means (1) to the extent arising by operation
of law, statutory liens for taxes not yet due and payable, (2) to the
extent arising by operation of law, statutory liens of landlords, liens
of carriers, warehouseman, mechanics and material men incurred in the
ordinary course of business, for sums not yet due and payable, (3) to
the extent arising by operation of law, liens incurred or deposits made
in the ordinary course of business to secure the performance of
tenders, statutory obligations, surety and appeal bonds, bids, leases,
government contracts, performance and return of money bonds and similar
obligations, (4) to the extent arising by operation of law, purchase
money liens incurred in the ordinary course of business, and (5) with
respect to leasehold interests, minor imperfections in title and minor
encroachments, if any, not material in amount and that, individually or
in the aggregate, do not materially interfere with the conduct of the
Business or with the use of such leasehold interests and do not
materially affect the value of the Business as a whole;
(iv) CUSTOMER DEPOSITS/DEFERRED REVENUE. Any deposits
or deferred revenue obligations that have been accepted with respect to
Contracts related to the Business, but only to the extent that such
Contracts and the cash related thereto are acquired by Buyer pursuant
to Section 1.1(a)(vii); and
(v) PROJECT MILLENNIUM OBLIGATION. The Widecom
obligation in the approximate amount of Sixty Thousand Dollar ($60,000)
arising out of Project Millennium.
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(b) ADDITIONAL ASSUMED LIABILITIES. With respect to the period
commencing from and after the Closing, Buyer shall also assume and agree to pay
the following liabilities:
(i) CONTRACTS, LICENSES, GOVERNMENT PERMITS. All
liabilities relating to the Contracts (including, but not limited to,
the employment contract between Seller and Rob Wiley), the Leases, the
Licenses and the Governmental Permits in each case arising under such
Contracts, Leases, Licenses and Governmental Permits in accordance with
their terms for the period from and after the Closing in each case to
the extent assignable; provided, however, with respect to any Contract
or Lease not so assignable, Buyer's rights and obligations in respect
thereof shall be governed pursuant to the terms and conditions of
Section 1.13 hereof; and
(ii) EMPLOYMENT-RELATED LIABILITIES. As related to
the Business, any employment-related liabilities and obligations
arising from Buyer's employment after the Closing of any employees of
Seller. Buyer will also assume obligations for accumulated vacation,
holiday and sick leave to employees of Seller who are employed by
Buyer. Buyer will not assume employee liabilities related to the
employment and employment contract of Suren Dutia and employee-related
liabilities and obligations arising from liabilities for those
employees who are not employed by Buyer.
The Assumed Liabilities not listed on SCHEDULE 1.2(a)(i) are listed on
SCHEDULE 1.2(b).
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(c) EXCLUDED LIABILITIES. Except for the Assumed Liabilities,
Buyer shall not assume or be bound by any obligations or liabilities of Seller
or any affiliate of Seller of any kind or nature, known, unknown, accrued,
absolute, contingent or otherwise, whether now existing or hereafter arising
whatsoever.
In connection therewith and notwithstanding the foregoing, except for
the Assumed Liabilities, it is specifically agreed that Buyer shall not assume
and shall not pay any other liabilities of Seller, including, without
limitation, the following:
(i) SELLER TRANSACTION EXPENSES. Liabilities incurred
by Seller in connection with or relating to this Agreement and the
transactions provided for herein, including, without limitation,
counsel and accountant's fees, any broker's commissions or finder's
fees and expenses pertaining to the performance by Seller and its
affiliates of its or their obligations hereunder;
(ii) TAXES. Taxes (as defined in Section 2.7 hereof),
other than the Sales Tax, of Seller (whether relating to periods before
or after the transactions contemplated in this Agreement or incurred by
Seller in connection with this Agreement, including any increase in
taxes as a result of the applicability of Section 280G of the Internal
Revenue Code of 1986 (the "Code") and the transactions provided for
herein);
(iii) WARRANTY LIABILITIES. Prior to the Closing,
with respect to the Business, any product or service warranty
liabilities arising from Seller's sales
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of products or services (the "Warranty Liabilities"); provided,
however, that with respect to all "9000 feeders", Seller agrees to
manufacture up to fifty (50) sets of replacement parts, within a
commercially reasonable amount of time, to enable the Buyer to re-build
the feeder to the latest feeder specifications, at no additional cost
to Buyer. When Buyer has repaired the feeder, Buyer shall re-install
the repaired feeder and pay the costs to ship the repaired feeder back
to the customer;
(iv) DEBT. Liabilities relating to all debt owed to
third parties or to related parties or affiliates of Seller, including,
but not limited to, any and all bank debt, other indebtedness for
borrowed money, obligations related to the promissory notes dated April
30, 1993, in the original aggregate principal amount of Seven Hundred
Seventy-Six Thousand Six Hundred Six Dollars and Eighty-One Cents
($776,606.81), from Seller to Wyly (which Wyly debt includes
non-negotiable term notes for First Dallas Limited, Donald Miller, Sam
Wyly, Charles J. Wyly, Evan Wyly and Premier Partners Inc. as described
in SCHEDULE 1.2(c)(iv)) and any inter-company liabilities of Seller to
Parent or any related parties or affiliates of Parent;
(v) OTHER TRADE PAYABLES. All trade
liabilities of Seller which are not Trade Payables;
(vi) DUTIA CONTRACT. All obligations and liabilities
to Suren Dutia, including, but not limited to, all obligations and
liabilities of Seller under the contract dated June 5, 1998 between
Seller and him; and
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(vii) LITIGATION AND PROCEEDINGS. Liabilities in
connection with or relating to all actions, suits, claims, proceedings,
demands, assessments and judgments, costs, losses, liabilities,
damages, deficiencies and expenses (whether or not arising out of
third-party claims), including, without limitation, interest,
penalties, reasonable attorneys' and accountants' fees and all amounts
paid in investigation, defense or settlement of any of the foregoing
Excluded Liabilities.
In furtherance of the foregoing, with the exception of claims based
upon the Assumed Liabilities, Seller shall be responsible for and pay any and
all of its losses, damages, obligations, liens, assessments, judgments, fines,
disposal and other costs and expenses, liabilities and claims, including,
without limitation, interest, penalties and reasonable fees of counsel,
engineers and experts, as the same are incurred, of every kind or nature
whatsoever (all the foregoing being a "Claim" or the "Claims"), made by or owed
to any person to the extent any of the foregoing relates to the operations and
assets of the Business and arises in connection with or on the basis of events,
acts, omissions, conditions or any other state of facts occurring or existing
prior to the Closing (including, in each case, without limitation, any Claim
relating to or associated with product liability matters, warranty claims, tax
matters, pension and benefit matters, any failure to comply with applicable laws
and/or permitting or licensing requirements, personal injury and property damage
matters and environmental and worker health and safety matters). Buyer shall be
responsible for and pay any and all Claims to the extent they relate to (1) the
liabilities set forth in Section 1.2(a) and (b) hereof to be assumed by Buyer or
(2) the operation by Buyer of the Subject Assets after the Closing and arise in
connection with or on the basis of events, acts, omissions, conditions or any
other state of facts occurring or
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existing after the Closing. Any Claim, other than for the payment of the Trade
Payables, relating to operations and assets of the Business and arising in
connection with or on the basis of events, acts, omissions, conditions or any
other state of facts (collectively, "Facts") occurring or existing both before
and after the Closing will be apportioned between Seller and Buyer according to
their relative degrees of causation. Pursuant to the foregoing, Seller agrees
with Buyer that Seller shall be responsible for any and all warranty claims or
claims for injury (including death) or claims for damage, direct or
consequential, resulting from or connected with products or services of the
Business manufactured, sold or provided on or prior to the Closing, and Buyer
shall have no liability for such claims. Buyer represents to Seller that its
product liability insurance is on an occurrence rather than a claims-made basis.
Buyer, for its part, shall be responsible for and pay any and all
Claims made by or owed to any person to the extent that the Claim (i) is based
upon an Assumed Liability, or (ii) relates to the operations and assets of the
Business and arises in connection with or on the basis of any Facts occurring or
existing after the Closing (including, in each case, except as otherwise
provided herein, any Claim relating to or associated with product liability
matters, warranty claims, tax matters, pension and benefit matters, any failure
to comply with applicable laws and/or permitting or licensing requirements,
personal injury and property damage matters and environmental and worker health
and safety matters). Seller shall be responsible for and pay any and all Claims
to the extent they relate to (1) the Excluded Liabilities set forth in Section
1.2(c) which will not be assumed by Buyer or (2) the operation by Seller of the
Subject Assets before the Closing and which arise in connection with or on the
basis of Facts occurring or existing before the Closing. Any
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Claim, other than for the payment of the Trade Payables, relating to operations
and assets of the Business and arising in connection with or on the basis of
Facts occurring or existing both before and after the Closing will be
apportioned between Seller and Buyer according to their relative degrees of
causation. Pursuant to the foregoing, Buyer agrees with Seller that Buyer shall
be responsible for any and all warranty claims or claims for injury (including
death) or claims for damage, direct or consequential, resulting from or
connected with products or services of the Business manufactured, sold or
provided after the Closing, and Seller shall have no liability for such claims.
The liabilities set forth in Section 1.2(a) and (b) hereof to be
assumed by Buyer under this Agreement are hereinafter sometimes referred to as
the "Assumed Liabilities" and all other liabilities which are not assumed by
Buyer under this Agreement are hereinafter sometimes referred to as the
"Excluded Liabilities." The assumption of said liabilities by any party
hereunder shall not enlarge any rights of third parties under contracts or
arrangements with Buyer or Seller and nothing herein shall prevent any party
from contesting in good faith with any third party any of said liabilities.
1.3 CLOSING DATE PAYMENT. In consideration of the sale by Seller to
Buyer of the Subject Assets, subject to the assumption by Buyer of the Assumed
Liabilities and the satisfaction of all of the conditions contained herein,
Buyer agrees that at the Closing, except as otherwise provided in Section 1.4,
it will deliver to Seller ninety percent (90%) of the Estimated Purchase Price
(as defined in Section 1.4) by bank cashier's checks, certified funds or other
same-day funds. In addition, Buyer shall pay such royalties to Seller as set
forth in Section 1.1(a)(v)(2).
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1.4 CALCULATION AND PAYMENT OF PURCHASE PRICE. Seller has provided to
Buyer an unaudited Closing Balance Sheet (as set forth in SCHEDULE 2.6), and on
the basis of it Seller and Buyer have agreed on an estimated purchase price of
Two Million One Hundred Thousand Dollars ($2,100,000) (the "Estimated Purchase
Price"), and ninety percent (90%) of that amount will be paid to Seller at the
Closing as provided in Section 1.3. The remaining ten percent (10%) of the
Estimated Purchase Price will be held in escrow (the "Escrow Amount"), in
accordance with the terms of the Escrow Agreement which shall be substantially
in the form attached hereto as EXHIBIT 1.4.
The Estimated Purchase Price will be subject to adjustment in
accordance with paragraphs (a) and (b) below and in accordance with Section 8.6.
The Estimated Purchase Price, if and as so adjusted, will be deemed to be, and
will be, the "Purchase Price" for the sale by Seller to Buyer of the Subject
Assets, subject to the assumption by Buyer of the Assumed Liabilities, in
accordance with the provisions of this Agreement.
(a) The Closing Balance Sheet (as set forth in SCHEDULE 2.6 hereof) has
been certified by the chief financial officer of the Seller. Within ninety (90)
days of the Closing, Buyer and Buyer's accountants shall verify the correctness
of the Closing Balance Sheet. If the actual net worth calculated from the
Closing Balance Sheet is less than One Million Nine Hundred Ninety-Five Thousand
Dollars ($1,995,000), the difference between the actual net worth and One
Million Nine Hundred Ninety-Five Thousand Dollars ($1,995,000) ("Net Worth
Shortfall") will be paid from the Escrow Amount to the Buyer. If the Escrow
Amount is insufficient to fund the Net Worth Shortfall, the Seller shall
promptly pay the excess to Buyer.
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(b) If the actual net worth calculated from the Closing Balance Sheet
is in excess of Two Million Two Hundred Five Thousand Dollars ($2,205,000), the
difference between the actual net worth and Two Million Two Hundred Five
Thousand Dollars ($2,205,000) shall be paid by Buyer to Seller as additional
consideration. The net worth amounts of One Million Nine Hundred Ninety-Five
Thousand Dollars ($1,995,000) and Two Million Two Hundred Five Thousand Dollars
($2,205,000) shall be calculated without regard to employee-related liabilities
assumed by Buyer with respect to Seller's employees that are employed by Buyer.
Any payments due from Seller to Buyer under paragraph (a) and on
account of any breach of Seller's representations and warranties as to the
Closing Balance Sheet shall be taken first from the Escrow Amount, and if such
payments exceed the Escrow Amount, Seller shall promptly pay the excess to
Buyer.
All disputes, claims or controversies under this Section 1.4 which are
not resolved by mutual agreement shall be resolved under Section 9.11.
1.5 TIME AND PLACE OF CLOSING. The closing of the purchase and sale
provided for in this Agreement (herein called the "Closing") shall be held at
the offices of Day, Berry & Howard LLP, CityPlace I, Hartford, Connecticut, at
10:00 a.m. on June _____, 1999 or at such other time and place as shall be
mutually agreed to by the parties, such Closing to be effective as of 5:00 p.m.
on the date thereof (the "Closing Date"). All documents to be delivered at the
Closing and acts to be performed thereat shall be deemed to have been delivered
and performed simultaneously.
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1.6 DELIVERY OF AGREEMENT FOR ASSUMPTION OF LIABILITIES, LEASE
ASSIGNMENTS AND LICENSES. At the Closing, Buyer shall deliver or cause to be
delivered to Seller, an Agreement for Assumption of Liabilities by Buyer in the
form of EXHIBIT 1.6(a) hereto and an Assignment and Assumption of Lease with
respect to the Leases relating to the premises located in Chandler, Arizona, in
the form of EXHIBIT 1.6(b) hereto.
1.7 TRANSFER OF SUBJECT ASSETS. At the Closing, Seller shall deliver or
cause to be delivered to Buyer good and sufficient instruments of transfer
transferring to Buyer title to all the Subject Assets. Such instruments of
transfer (i) shall be in the forms of the Assignment and Bill of Sale and the
Patent and Trademark Assignment attached hereto as EXHIBITS 1.7(a) AND (b),
respectively (collectively, the "Transfer Instruments"), and (ii) shall
effectively vest in Buyer good and valid title to all the Subject Assets, free
and clear of all liens and restrictions, other than Permitted Encumbrances, and
subject to Seller's representations and warranties set forth in Section 2.
1.8 DELIVERY OF RECORDS AND CONTRACTS. At the Closing, Seller shall
deliver or cause to be delivered to Buyer all of Seller's leases, contracts,
commitments, agreements (including without limitation non-competition
agreements) and rights relating to the conduct and operation of the Business,
with such assignments thereof and consents to assignments as are identified on
SCHEDULE 1.8 to assure Buyer of the adequate benefit of the same. Seller shall
also deliver to Buyer at the Closing all of the Books and Records other than the
Excluded Records in accordance with the terms of Section 1.1(b)(iv), and Seller
shall take all requisite steps to put Buyer in actual possession and operating
control of such assets. Notwithstanding the foregoing, to the extent that any
such Books and Records are located at the premises of the Business in Chandler,
Arizona or Watford,
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Hertfordshire, England, at the Closing Date, Seller shall be deemed to have
delivered such Books and Records to Buyer pursuant to this Section 1.8.
1.9 FURTHER ASSURANCES. Seller from time to time after the Closing at
the request of Buyer and without further consideration shall execute and deliver
further instruments of transfer and assignment and take such other action as
Buyer may reasonably require to more effectively transfer and assign to, and
vest in, Buyer each of the Subject Assets in accordance with this Agreement.
Seller shall cooperate with Buyer to permit Buyer to enjoy Seller's rating and
benefits under worker's compensation laws and unemployment compensation laws of
applicable jurisdictions, to the extent permitted by such laws. Nothing herein
shall be deemed a waiver by Buyer of its right to receive at the Closing an
effective assignment of each of the leases, contracts, commitments or rights of
Seller as otherwise set forth in this Agreement.
1.10 ALLOCATION OF PURCHASE PRICE. Buyer will allocate the Purchase
Price based on Buyer's determination of fair market value of the Inventory,
Fixed Assets, Receivables, Trade Payables and other categories as exist on the
Closing Date, which allocation will be in accordance with Section 1.1060-IT of
the Treasury Regulations promulgated under the Code, as amended. Such allocation
shall be conclusive and binding on Buyer and Seller for tax purposes. Neither
Seller nor Buyer shall, without written approval of the other, file any tax
returns which take any position inconsistent with such allocation. Buyer and
Seller will notice each other as soon as reasonably practicable of any audit
adjustment or proposed audit adjustment by any taxing authority which affects
the allocation.
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1.11 SALES AND TRANSFER TAXES. All sales and transfer taxes, fees,
duties and other similar expenses under applicable law incurred in connection
with this Agreement or the transactions contemplated thereby will be borne and
paid by Buyer, and Buyer shall promptly reimburse Seller for the payment of any
such tax, fee or duty which it is required to make under applicable law.
1.12 ACCOUNTS RECEIVABLE.
(a) Seller shall use its commercially reasonable efforts to
assist Buyer in collecting the Receivables following the Closing. Any and all
amounts received by Seller in respect of any Receivables shall be remitted to
Buyer within ten (10) business days. Buyer will follow its normal and customary
practices in trying to collect the Receivables, but it will not be obligated to
begin or prosecute any legal actions to collect them. Buyer, at its option, may
reassign to Seller any Receivables which Buyer has not collected within ninety
(90) days after the Closing Date and may then pursue its remedies under Section
8 with respect to such uncollected Receivables.
(b) "Commercially reasonable efforts" or similar variations
thereof when used in this Agreement mean that the obligated party is required to
make a diligent, reasonable and good faith effort to accomplish the applicable
objective. Such obligation, however, does not require an expenditure of funds or
the incurring of a liability on the part of the obligated party, nor does it
require that the obligated party act in a manner that would be contrary to
normal commercial practices in order to accomplish the objective. The fact that
the objective is not actually accomplished is no indication that the obligated
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party did or did not in fact utilize its reasonable commercial efforts in
attempting to accomplish the objective.
(c) Seller shall reimburse Buyer for any tax Buyer paid on a
Receivable acquired by Buyer where the customer of that Receivable subsequently
demonstrates that such customer was tax exempt.
1.13 PROCEDURES FOR ASSETS NOT TRANSFERABLE.
(a) If any of the Subject Assets, including any Contract,
Lease, License, Governmental Permit, certificate, approval, authorization,
agreement, or other right, is not assignable or transferable either by virtue of
the provisions thereof or under applicable law without the consent of some party
or parties (each a "Nonassignable Asset") and any such consent is not obtained
prior to the Closing, this Agreement and the related instruments of transfer
shall not constitute an assignment or transfer thereof and, unless otherwise
agreed between Buyer and Seller with respect to any such Nonassignable Asset,
Buyer shall not assume Seller's obligations with respect thereto as provided
herein, but Seller shall use all commercially reasonable efforts to obtain any
such consent as soon as possible after the Closing or otherwise obtain for Buyer
the practical benefit of such property or rights and Buyer shall use all
commercially reasonable efforts to assist in that endeavor; provided, however,
that this Section 1.13 shall not apply with respect to Leases related to the
Leased Real Property located in the United Kingdom which will be governed
pursuant to the License to Occupy. Any Nonassignable Asset is set forth in
SCHEDULE 1.13.
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(b) To the extent permitted by applicable law, in the event
consents to assignment cannot be obtained, such Nonassignable Assets shall be
held, as and from the Closing Date, by Seller in trust for Buyer and the
covenants and obligations thereunder shall be performed by Buyer in Seller's
name and all benefits and obligations existing thereunder shall be for Buyer's
account. Seller shall, as Buyer may reasonably request, take or cause to be
taken at Buyer's expense such action in its name or otherwise so as to provide
Buyer with the benefits of the Nonassignable Assets and to effect collection of
money or other consideration to become due and payable under the Nonassignable
Assets, and Seller shall promptly pay over to Buyer all money or other
consideration received by it with respect to all Nonassignable Assets. As of and
from the Closing Date, Seller authorizes Buyer, to the extent permitted by
applicable law and the terms of the Nonassignable Assets, at Buyer's expense, to
perform all the obligations and receive all the benefits of Seller under the
Nonassignable Assets and appoints Buyer its attorney-in-fact to act in its name
on its behalf with respect thereto.
(c) In the event that any purchase order included in the
Subject Assets is not assigned by Seller by reason of the foregoing provisions
of this Section 1.13, Buyer agrees to purchase from Seller at the contract price
all property thereunder which Seller is obligated to purchase and Seller agrees
to sell the same to Buyer at such price. In the event that any sales order
included in the Subject Assets is not assigned by Seller by reason of the
foregoing provisions of this Section 1.13, Buyer agrees to sell to Seller any
products required to complete such contracts at the same price provided for
therein and otherwise to complete such contracts on behalf of Seller and Seller
agrees to purchase the same from Buyer at such price. If Seller fails to comply
with the provisions of this
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Section 1.13, Buyer may, to the extent permitted by applicable law, on its own
behalf undertake to complete such contracts and collect amounts due thereunder
in the name of Seller.
1.14 EMPLOYEES, WAGES AND BENEFITS.
(a) All employees of Seller related to the Business are set
forth on SCHEDULE 1.14. In each case such Schedule includes the current job
title and aggregate annual compensation of each individual. Seller shall
terminate all employees set forth on SCHEDULE 1.14 and Seller shall be
responsible for making all unpaid wage payments and providing any other benefits
due upon termination of employment to such terminated employees and their
spouses or beneficiaries, where applicable, in respect of such terminations,
except for accumulated vacation, holiday or sick leave. Buyer shall assume
obligations and liabilities with respect to any employees of Seller whom Buyer
employs that are associated with or arise out of the Closing and the termination
of their employment by Seller. It is contemplated that Buyer will offer
employment to all such terminated employees, listed on SCHEDULE 1.14A,
immediately after the Closing as at-will employees, at substantially the same
salary as previously provided by Seller, provided that each such employee
agrees, as a condition of employment, to execute Buyer's standard form of
Confidentiality Agreement (as modified to reflect any changes required by or
appropriate under California or other applicable law) and such other agreements
as Buyer deems reasonably necessary to conduct its business. It is understood
that the employment of the employees of the Business who accept Buyer's offer of
employment will not commence until immediately following the close of business
on the Closing Date. Notwithstanding the foregoing, Buyer shall have no
obligation to offer employment to any employees of Seller who are treated by
Seller as a temporary employee, lease employee, or contract employee. Further,
Buyer shall have no obligation to offer
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employment to any employee of Seller who is on an approved leave of absence that
has lasted longer than or is expected to last longer than thirty (30) days other
than any employees on any legally protected leave of absence (e.g. military
leave or leave under the Family and Medical Leave Act), in which case, such
employment shall be effective as of the date they present themselves for work
with Buyer immediately upon the termination of such protected leave of absence.
Any employee that falls within the immediately preceding sentence is so
indicated on SCHEDULE 1.14.
(b) Buyer specifically reserves to itself the right to employ
or reject any of Seller's employees or other applicants in its sole and absolute
discretion. Seller acknowledges and agrees that Buyer may interview and discuss
employment terms and issues with Seller's employees related to the Business.
Nothing in this Agreement shall be construed as a commitment or obligation of
Buyer to accept for employment, or otherwise employ, any of Seller's employees.
(c) (i) Seller shall pay all wages, salaries, commissions and
the cost of all fringe benefits provided to each employee of Seller that is
engaged in employment with respect to the Business, which wages, salaries,
commissions and benefits shall have become due for work performed by such
employee as of and through the Closing, and Seller shall collect and pay all
taxes in respect of such wages, salaries, commissions and benefits. Seller shall
retain liability for benefits to all individuals entitled to benefits required
to be provided by the continuation health care coverage requirements of Section
4980B of the Code and Sections 601 through 607 of the
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Employee Retirement Income Security Act of 1974 ("ERISA") as of the Closing
including, without limitation, with respect to any individual entitled to such
coverage prior to the Closing and any individual who loses health care coverage
as a result of the transactions contemplated by this Agreement; and
(ii) Buyer shall pay all wages, salaries, commissions and
the cost of all fringe benefits provided to each employee of Buyer that is
engaged in employment by Buyer with respect to the Business, which wages,
salaries, commissions and benefits shall have become due for work performed by
such employee from and after the Closing, and Buyer shall perform all tax
withholding, collection, payment and reporting duties in respect of such wages,
salaries, commissions and benefits.
(d) Seller acknowledges and agrees that Buyer is not assuming
and shall not have any obligations or liabilities under any Employee Program (as
defined in Section 2.21 hereof) maintained by, or for the benefit of employees
of, Seller, except obligations for accumulated vacation, holiday and sick leave
to employees who are employed by Buyer.
(e) As regards any of the employees of Seller in the United
Kingdom ("UK Employees"), if any contract of employment of a person who is not a
UK Employee has effect as if originally made between Buyer and such person as a
result of the Transfer of Undertakings (Protection of Employment) Regulations
1981 (the "Regulations"):
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(i) Buyer may within three (3) months of becoming
aware of the application of the Regulations to such contract, give notice to
such person to terminate such contract; and
(ii) Seller shall indemnify and keep indemnified
Buyer against any costs (including any costs relating to settlement), claims,
liabilities or expenses arising out of or in connection with such termination
and against any sums payable to or in relation to such person under or in
connection with such contract to the date of such termination.
Furthermore, if as of the Closing, any of the terms and conditions of
employment of any of the UK Employees differs or was omitted from those which
have been provided by Seller to Buyer prior to the Closing, Seller shall
indemnify and keep indemnified Buyer against any cost (including any costs
relating to settlement), claims, liabilities or expenses incurred by Buyer which
Buyer would not have incurred in the absence of such difference or omission.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER.
2.1 MAKING OF REPRESENTATIONS AND WARRANTIES. As a material inducement
to Buyer to enter into this Agreement and consummate the transactions
contemplated hereby, Seller hereby makes to Buyer the representations and
warranties contained in this Section 2.
2.2 ORGANIZATION AND QUALIFICATIONS OF SELLER. Seller is a corporation
duly organized, validly existing and in good standing under the laws of Nevada
with full corporate power and authority to own or lease its properties related
to, used in or held for
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use in connection with the Business and to conduct the Business in the manner
and in the places where such properties are owned or leased or the Business is
currently conducted or proposed to be conducted. The copies of Seller's Articles
of Incorporation as amended to date, certified by the Secretary of State of the
State of Nevada, and of Seller's bylaws, as amended to date, certified by
Seller's Secretary, and heretofore delivered to Buyer's Counsel, are complete
and correct, and no amendments thereto are pending. Seller is not in violation
of any term of its Articles of Incorporation or bylaws. Seller is duly qualified
or licensed as a foreign corporation to do business and is in good standing in
each jurisdiction where the failure to so qualify would have a material adverse
effect upon the Business.
2.3 SUBSIDIARIES. Seller does not have any subsidiary, other than
Photomatrix Ltd., and does not own or have any direct or indirect interest in or
control over any other corporation, partnership, limited liability company,
joint venture or entity of any kind, which corporation, partnership, limited
liability company, joint venture or other entity is engaged in activities or
operations related to the conduct and operations of the Business.
2.4 AUTHORITY OF SELLER, I-PAC AND PARENT. Seller, I-PAC and Parent
have all necessary corporate power and authority to enter into this Agreement
and each agreement, document and instrument to be executed and delivered by
Seller, I-PAC or Parent pursuant to this Agreement and to carry out the
transactions contemplated hereby. The execution, delivery and performance by
Seller, I-PAC or Parent of this Agreement and each such other agreement,
document and instrument have been duly authorized by all necessary corporate
action of Seller, I-PAC or Parent and no other action on the part of Seller,
I-PAC or Parent is required in connection therewith. Approval by the Board of
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Directors of Seller's Parent of this Agreement and the transfer of the Subject
Assets and the Business to Buyer has been obtained.
This Agreement and each agreement, document and instrument executed and
delivered by Seller, I-PAC or Parent pursuant to this Agreement constitutes, or
when executed and delivered will constitute, valid and binding obligations of
Seller, I-PAC or Parent enforceable in accordance with their terms, except to
the extent that enforcement of the rights and remedies created hereby and
thereby may be affected by bankruptcy, reorganization, moratorium, insolvency
and similar laws of general application affecting the rights and remedies of
creditors and by general equity principles. Except as specifically identified on
SCHEDULE 2.4, the execution, delivery and performance by Seller of this
Agreement and each such agreement, document and instrument:
(i) does not and will not violate any provision of
the organizational documents of Seller, I-PAC or Parent;
(ii) does not and will not violate any applicable
law, order, judgment, decree, rule or regulation of any court or any
governmental body having jurisdiction over Seller, I-PAC or Parent or
any of the Subject Assets or require Seller, I-PAC or Parent to obtain
any approval, consent or waiver of, or make any filing with, any person
or entity (governmental or otherwise), except for consents of third
parties that are required to transfer or assign to Buyer any Subject
Assets or assign the benefits of or delegate performance with regard
thereto; and
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(iii) does not and will not result in a breach of,
constitute a default under, accelerate any obligation under, give rise
to a right of termination of, or permit any third party to exercise any
additional rights under, any indenture or loan or credit agreement or
any other agreement, contract, instrument, mortgage, lien, lease,
permit, authorization, order, writ, judgment, injunction, decree,
determination or arbitration award to which Seller, I-PAC or Parent is
a party or by which Seller's, I-PAC's or Parent's property is bound or
affected, or result in the creation or imposition of any mortgage,
pledge, lien, security interest or other charge or encumbrance on any
of the Subject Assets, other than a Permitted Encumbrance arising as a
result of the transactions contemplated hereby, except in each case
(i), (ii) or (iii) which would not have a material adverse effect on
the Subject Assets and the Business taken as a whole.
2.5 REAL AND PERSONAL PROPERTY.
(a) OWNED REAL PROPERTY. Seller does not own any real
property.
(b) LEASED REAL PROPERTY. All of the real property leased by
Seller as tenant or lessee and utilized in the Business is identified on
SCHEDULE 2.5(b) (collectively referred to herein as the "Leased Real Property").
Seller hereby makes the following representations and warranties with respect to
the Leased Real Property:
(i) LEASES. The copies of the leases of the Leased
Real Property, together with any amendments thereto (collectively, the
"Leases"), delivered by Seller to Buyer and the information with
respect to each of the
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Leases set forth in SCHEDULE 2.5(b) is complete, accurate, true and
correct. With respect to each of the Leases, except as set forth on
SCHEDULE 2.5(b):
(1) each of the Leases is in full force and
effect and has not been further modified, amended, or altered,
in writing or otherwise;
(2) all obligations of the landlord and/or
tenant under the Leases which have accrued have been
performed, and to the best of the knowledge of Seller, there
is no default under any Lease by Seller, and to Seller's
knowledge, there is no default under any Lease by the
landlord; and
(3) Seller has obtained or will obtain prior
to the Closing the consent of each landlord or lessor under
any Leases whose consent is required to the assignment of the
Leased Real Property to Buyer;
(ii) TITLE AND DESCRIPTION. Seller holds a valid and
enforceable leasehold interest in the Leased Real Property, free and
clear of all liens, restrictions and incumbrances (except as disclosed
in Schedule 2.5(b) and other than Permitted Encumbrances);
(iii) REAL ESTATE TAXES. To Seller's knowledge,
Seller has not received notice of any pending or threatened real
estate tax deficiency or reassessment or condemnation of all or any
portion of any of the Leased Real Property;
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(iv) CONDITION. Except as set forth on SCHEDULE
2.5(b), to the best of Seller's knowledge there are no material defects
in the physical condition of any improvements constituting a part of
the Leased Real Property leased by Seller, including, without
limitation, structural elements, mechanical systems, roofs or parking
and loading areas, and all of such improvements are in good operating
condition and repair, have been well maintained and are free from
infestation by rodents or insects. Except as set forth on SCHEDULE
2.5(b), none of such Leased Real Property is subject to special flood
or mudslide hazards or within the 100 year flood plain. All water,
sewer, gas, electric, telephone, drainage and other utilities required
by law or necessary for the current or planned operation of such Leased
Real Property have been installed and connected pursuant to valid
permits, and are sufficient to service such Leased Real Property; and
(v) COMPLIANCE WITH LAW; GOVERNMENT APPROVALS. Seller
has not received notice from any governmental authority of any
violations of any law, ordinance, regulation, license, permit or
authorization issued with respect to any of the Leased Real Property
that has not been corrected heretofore, and no such violation now
exists which could have an adverse effect on the operation or value of
such Leased Real Property. To the best of Seller's knowledge all
improvements constituting a part of the Leased Real Property are in
compliance in all respects with all applicable laws, ordinances,
regulations, licenses, permits and authorizations, and there are
presently in effect all licenses, permits and authorizations required
by law, ordinance or regulation. The transfer of the
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Leased Real Property to Buyer shall include all rights to use of any
off-site facilities necessary to ensure compliance with all such laws,
ordinances, codes and regulations. There is at least the minimum access
required by applicable subdivision or similar law to the Leased Real
Property. Seller has not received notice of any pending or threatened
real estate tax deficiency or reassessment or condemnation of all or
any portion of any of the Leased Real Property.
(c) PERSONAL PROPERTY. A complete description of the
machinery, equipment and other tangible property of Seller relating to, used in
or held for use in the Business is contained in SCHEDULE 2.5(c). Except as
specifically disclosed in said Schedule, Seller has good and valid title to or a
leasehold interest in all of such personal property. The transfer of such
personal property from Seller to Buyer pursuant to the terms of this Agreement
and the Transfer Instruments shall effectively transfer to Buyer good and valid
title to or a leasehold interest in all of such personal property, free and
clear of all liens, restrictions and encumbrances (except as disclosed in
SCHEDULE 2.5(c) and other than Permitted Encumbrances). None of such personal
property or assets relating to, used in or held for use in the Business, is
subject to any mortgage, pledge, lien, conditional sale agreement, security
agreement, encumbrance or other charge except for Permitted Encumbrances or as
specifically disclosed in said SCHEDULE 2.5(c). Except as otherwise specified
SCHEDULE 2.5(c), any such items related to, used in or held for use in the
Business are in good repair, have been well maintained, substantially comply
with all applicable laws, ordinances and regulations, and are in good working
order.
2.6 FINANCIAL STATEMENTS.
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(a) Seller has delivered to Buyer the following, copies of
which are attached hereto as SCHEDULE 2.6:
(i) a balance sheet of the Business for its fiscal
year ended on March 31, 1998 and statements of income, retained earning
and cash flow for the year then ended, audited by Seller's independent
accountants; said financial statements having been prepared in
accordance with generally accepted accounting principles ("GAAP"), are
complete and correct in all material respects, and present fairly in
all material respects the financial condition of the Business at the
date of said financial statements; and
(ii) a balance sheet of the Business as of a date
within three (3) business days of the Closing Date (the "Closing
Balance Sheet"), with Accounts Receivable reserves of One Hundred
Forty-Two Thousand Dollars ($142,000) and Inventory reserves of Six
Hundred Ninety-Nine Thousand Dollars ($699,000) (together, the
"Reserves"), certified by the chief financial officer of Seller that
said Closing Balance Sheet has been prepared on a basis consistent with
that of the aforementioned financial statements (i.e., in accordance
with GAAP as to the Company's accounting practices and methods), is
complete and correct in all material respects, and presents fairly in
all material respects the financial condition of the Business at the
date of said Closing Balance Sheet. It is understood between the
parties that the Closing Balance Sheet is not intended to be a complete
set of financial statements prepared in accordance with GAAP.
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The financial condition of the Business at the Closing Date will not
differ in any material respect from the financial condition of the Business at
the date of the Closing Balance Sheet.
(b) As of the date of the Closing Balance Sheet and as of the
Closing, Seller has and will have no liabilities related to the Business which
will become liabilities or obligations of Buyer of any nature, whether accrued,
absolute, contingent or otherwise, asserted or unasserted, known or unknown
(including without limitation liabilities as guarantor or otherwise with respect
to obligations of others, or liabilities for taxes due or then accrued or to
become due or contingent or potential liabilities relating to the conduct of
Business, or the activities of Seller related thereto, prior to the date of the
Closing Balance Sheet, regardless of whether claims in respect thereof had been
asserted as of such date), except liabilities stated or adequately reserved
against on the Closing Balance Sheet which will be Assumed Liabilities.
(c) As of the date hereof and immediately prior to the
Closing, Seller, I-PAC and Parent had and each will have assets greater than its
liabilities and, immediately after the Closing, each will be able to pay its
debts and obligations as they become due in the ordinary course of business.
2.7 TAXES.
(a) Seller has paid or caused to be paid all federal, state,
local, foreign, and other taxes, including, without limitation, income taxes,
estimated taxes, alternative minimum taxes, excise taxes, sales taxes, use
taxes, value-added taxes, gross receipts taxes, franchise taxes, capital stock
taxes, employment and payroll-related taxes,
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withholding taxes, stamp taxes, transfer taxes, windfall profit taxes,
environmental taxes and property taxes, whether or not measured in whole or in
part by net income, and all deficiencies, or other additions to tax, interest,
fines and penalties (collectively, "Taxes"), required to be paid by it with
respect to the Business through the date hereof.
(b) U.K. TAXES GENERAL.
(i) None of the Subject Assets of that part of the
Business currently carried on in the United Kingdom are subject to an
outstanding Inland Revenue charge as defined in Section 237 Inheritance
Tax Act 1984;
(ii) No circumstances exist, or but for Section
204(6) Inheritance Tax Act 1984 would exist, such that a power of sale
could be exercised in relation to any of the Subject Assets pursuant to
Section 212 Inheritance Tax Act 1984 (contingent liability of
transferee for unpaid inheritance tax); and
(iii) There is no instrument which is necessary to
establish Seller's title to any of the Subject Assets pursuant to this
Agreement which is liable to stamp duty in the United Kingdom but which
has not been duly stamped or which would attract stamp duty if brought
within the United Kingdom.
(c) U.K. VALUE ADDED TAX ("VAT").
(i) Seller is a registered and taxable person for
the purposes of the VAT Act 1994;
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(ii) So far as Seller is aware, none of the Subject
Assets is an asset to which Part XV of the Value Added Tax Regulations
1995 (adjustments to the deductions of input tax on capital items)
applies;
(iii) So far as Seller is aware, it is not approved
for the purposes of the Customs Duties (Deferred Payment) Regulations
1976 (deferral of duty on imports); and
(iv) Neither Seller nor any member of its VAT group
has made an election pursuant to the provisions of paragraph 2 Schedule
10 of the VAT Act 1994 in respect of the Subject Assets and Seller
undertakes that neither it nor any member of its VAT group will make
any such election prior to Closing.
(d) U.K. TAXATION AND EMPLOYEES.
(i) None of Seller's employees to be transferred to
Buyer have any interest in or right to any readily convertible asset
provided by Seller prior to Closing (as defined in Section 203F Income
and Corporation Taxes Act 1988) in respect of which so far as Seller is
aware Buyer will have a liability to account for income tax under Pay
As You Earn ("PAYE") or national insurance contributions in the three
months following Closing; and
(ii) Seller has properly operated the U.K. PAYE and
other tax and national insurance contribution systems relating to the
U.K. Business and has deducted tax as required by U.K. law from all
payments to or treated as made to or benefits provided for Seller's
employees and ex-employees and consultants and has duly accounted to
the Inland Revenue and/or the Department of Social
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Security (as the case may be) for tax so deducted and contributions
payable. Seller has maintained and retained such books and records
relating to PAYE and to national insurance contributions as it is
required to maintain and retain.
(e) U.K. CAPITAL ALLOWANCES CLAUSE.
(i) The parties agree that, as soon as practicable
following the Closing, they will agree on an apportionment of the
Purchase Price to be attributed to those Subject Assets of the Business
in the United Kingdom which constitute machinery and plant for the
purposes of the Capital Allowances Act 1990 and the proportion which
represents fixtures and shall execute an election under Section 59B if
appropriate.
2.8 ACCOUNT RECEIVABLES. The Receivables represent valid obligations
arising from sales actually made or services actually performed by Seller in the
ordinary course of the Business and are or will be at the Closing valid and
enforceable claims and subject to no set off or counterclaim except as set forth
in SCHEDULE 2.8. All Receivables on the Closing Balance Sheet are collectible,
subject to the One Hundred Forty-Two Thousand Dollar ($142,000) accounts
receivable reserve stated thereon. No Receivables exist from any person, firm or
corporation which is affiliated with Seller or from any director, officer or
employee of Seller, except as disclosed in SCHEDULE 2.8; any Receivable from any
such person, firm or corporation shall be paid in cash prior to the Closing.
2.9 INVENTORY. The Inventory is of quality and quantity usable or
saleable in the ordinary course of the Business at prices consistent with
Seller's experience during the fiscal year ended March 31, 1999, except for
obsolete items and items of below-
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standard quality to net realizable values that have been adjusted through the
recording of inventory reserves on Seller's Books and Records. The Inventory on
the Closing Balance Sheet has been valued at the lower of cost or market as
stated on a consistent basis in accordance with GAAP and with Seller's
accounting practices and methods consistently applied. The quantities of
purchase commitments for Inventory are consistent with the conduct of the
Business in the ordinary course by Seller. The Inventory is located on the
Leased Real Property or with field service technicians, or, as set forth on
SCHEDULE 2.9, on the property of customers or perspective customers or vendors
of the Business.
2.10 ORDINARY COURSE; ABSENCE OF CERTAIN CHANGES.
(a) Since March 31, 1998, Seller has conducted the Business
only in the ordinary course and consistently with its prior practices. Except in
the ordinary course consistent with past practices, since March 31, 1998 there
has not been with respect to the Business:
(i) any change in the Subject Assets or the Assumed
Liabilities or the Business taken as a whole (except
continuing operating losses at a level consistent with those
experienced since March 31, 1998), which change by itself or
in conjunction with all other such changes, whether or not
arising in the ordinary course of business, has been
materially adverse with respect to the Business;
(ii) any cancellation of any material debt or claim
owing to, or waiver of any material right of, Seller;
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(iii) any mortgage, encumbrance or lien (other than
Permitted Encumbrances) placed on any of the Subject Assets
which remains in existence on the date hereof or will remain
on the Closing Date;
(iv) any material liabilities related to customers or
suppliers of the Business that are not set forth on Seller's
Books and Records as of March 31, 1998 or incurred in the
ordinary course of the Business since that date (it being
understood that product or service liability claims shall not
be deemed to be incurred in the ordinary course of business);
(v) any purchase, sale or other disposition, or any
agreement or other arrangement for the purchase, sale or other
disposition, of any of the properties or assets of Seller
related to, used in or held for use in the Business, other
than in the ordinary course of the Business;
(vi) any damage, destruction or loss, whether or not
covered by insurance, that had or could reasonably be expected
to have a material adverse effect with respect to the
Business;
(vii) any labor trouble or claim of unfair labor
practices involving the Business; any change in the
compensation payable or to become payable by Seller to any of
its officers, employees, agents or independent contractors
engaged in employment or activities related to the Business,
other than normal merit increases in accordance with its usual
practices, or any bonus payment or arrangement made to or with
any of such officers, employees, agents or independent
contractors;
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(viii) any change with respect to the officers or
management of Seller engaged in employment or activities
related to the Business;
(ix) any obligation or liability incurred by Seller
to any of its officers or employees engaged in employment or
activities related to the Business, or any loans or advances
made by Seller to any of its officers or employees engaged in
employment or activities related to the Business, except
normal compensation and expense allowances payable to officers
or employees;
(x) any other transaction entered into by Seller with
respect to the Business other than transactions in the
ordinary course of business;
(xi) since March 31, 1998, any Inventory which has
been sold or disposed of, except in the ordinary course of the
Business; or
(xii) any agreement or understanding whether in
writing or otherwise, for Seller to take any of the actions
specified in paragraphs (i) through (xi) above.
(b) Since March 31, 1998 there has not been with respect to the
Business, any change in accounting methods or practices, credit practices or
collection policies used by Seller with respect to the Business.
2.11 INTELLECTUAL PROPERTY.
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(a) Except as described in SCHEDULE 2.11, Seller has exclusive
ownership of or a valid right to use the Intellectual Property. Seller's rights
in all of the Intellectual Property are freely transferable. To Seller's
knowledge, there are no claims or demands of any other person pertaining to any
of such Intellectual Property and no material proceedings have been instituted,
or are pending or, to Seller's knowledge, threatened, which challenge the rights
of Seller in respect thereof. Seller, to the best of its knowledge, has the
right to use, free and clear of claims or rights of other persons, all customer
lists, designs, processes, computer software, systems, data compilation research
results and other information required for or incident to the Business as
presently conducted or contemplated to be conducted.
(b) To the knowledge of Seller, the licensors under the
Licenses have and had all requisite power and authority to grant the rights
purported to be conferred thereby.
(c) Seller has taken all steps required in accordance with
sound business practices to establish and preserve its ownership of all
Intellectual Property rights with respect to the services and technology
employed in the Business. Seller has required all of its professional and
technical employees employed in connection with the Business, and other
employees having access to the Millennium Technology or the Proprietary Business
Information, to execute agreements under which such employees are required to
convey to Seller ownership of all inventions and developments conceived or
created by them in the course of their employment and to maintain the
confidentiality of all such information of Seller. Seller has not made any such
information available to any person other than employees of Seller employed in
connection with the Business
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except pursuant to written agreements requiring the recipients to maintain the
confidentiality of such information and appropriately restricting the use
thereof, except for disclosures of information which are not material in amount
or kind. Seller has no knowledge of any material infringement by others of the
Millennium Technology, the Proprietary Business Information or the Trademarks.
(d) To Seller's knowledge, the present and contemplated
business, activities and products of the Business do not infringe any
Intellectual Property of any other person. No proceeding charging Seller with
infringement of any adversely held Intellectual Property has been filed or, to
Seller's knowledge, is threatened to be filed. To Seller's knowledge, there
exists no unexpired patent or patent application owned by any person (including,
without limitation, any affiliates of Seller, other than patents transferred in
connection with Project Millennium) which includes claims that would be
infringed by products of the Business being produced or sold or actively planned
for production or sale at the Closing Date. To Seller's knowledge, Seller is not
making unauthorized use of any confidential information or trade secrets of any
person, including without limitation any former employer of any past or present
employee of Seller. To Seller's knowledge, the activities of Seller's employees
in the Business on behalf of Seller do not violate any agreements or
arrangements which any such employees have with former employers or other
persons.
2.12 CONTRACTS. Except for Contracts listed on SCHEDULE 1.1(a)(vii) and
the Licenses listed on SCHEDULE 1.1(a)(xiv) (true and complete copies of which
Contracts and Licenses have been delivered to Buyer) or as otherwise set forth
on SCHEDULE 2.12, Seller
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is not a party to or subject to any of the following with respect to the Subject
Assets or the Business:
(a) any plan or contract providing for bonuses, pensions,
options, stock purchases, deferred compensation, retirement payments, profit
sharing, collective bargaining or the like, or any agreement with any labor
union;
(b) any employment contract, contract for services, loan or
advance, severance arrangement, golden parachute or the like;
(c) any contract or agreement for the purchase of any
commodity, material or equipment except purchase orders in the ordinary course
of less than One Thousand Dollars ($1,000) each, such orders not exceeding
Fifteen Thousand Dollars ($15,000) in the aggregate;
(d) any other material contracts or agreements creating any
material obligations of Seller not specifically disclosed elsewhere under this
Agreement or which will impose any liability or obligation on Buyer;
(e) any contract or agreement providing for the purchase of
all or substantially all of its requirements of a particular product from a
supplier;
(f) any contract or agreement which by its terms does not
terminate or is not terminable without penalty by Seller or any successor or
assign within one year after the date hereof;
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(g) any contract or agreement for the manufacture, sale or
lease of its products not made in the ordinary course of business;
(h) any contract which, as a result of the execution,
delivery and performance of this Agreement and each agreement, document and
instrument executed and delivered by Seller pursuant to this Agreement, will
give rise to or permit any third party to exercise additional rights under any
contract or agreement to which Seller is a party and which is included in or
related to the Subject Assets or the Assumed Liabilities, including, without
limitation, any contract which provides for the transfer of any intellectual
property, such as source code or other information, upon a change in control of
Seller;
(i) any contract with any sales agent or distributor of
products or services of Seller;
(j) any contract containing covenants limiting the freedom of
Seller or its assignees or successors to compete in any line of business or with
any person or entity;
(k) any contract or agreement for the purchase of any fixed
asset;
(l) any license agreement (as licensor or licensee);
(m) any indenture, mortgage, promissory note, loan agreement,
guaranty or other agreement or commitment for the borrowing of money; or
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(n) any contract or agreement with any officer, employee,
director or stockholder of Seller or with any persons or organizations
controlled by or affiliated with it.
Seller is not in default under any such contracts, commitments, plans,
agreements or licenses described in said Schedule and has no knowledge of
conditions or facts which with notice or passage of time, or both, would
constitute a default.
2.13 LITIGATION. SCHEDULE 2.13 hereto lists all currently pending
litigation (including without limitation any arbitration proceedings) and
governmental or administrative proceedings or investigations relating to the
Business to which Seller is a party. Except for matters described in SCHEDULE
2.13, there is no litigation or governmental or administrative proceeding or
investigation pending or, to the knowledge of Seller, threatened against Seller
or any affiliate of Seller which could reasonably be expected to have any
adverse effect on the Subject Assets or the Business taken as a whole or which
would prevent or hinder the consummation of the transactions contemplated by
this Agreement. With respect to each matter set forth therein, SCHEDULE 2.13
sets forth a description of the matter, the forum (if any) in which it is being
conducted, the parties thereto and the type and amount of relief sought.
2.14 COMPLIANCE WITH LAWS. Except as set forth in SCHEDULE 2.14, Seller
is in compliance to the best of its knowledge with all applicable statutes,
ordinances, orders, judgments, decrees and rules and regulations promulgated by
any federal, state, municipal or other governmental authority which apply to
Seller with respect to the conduct of the Business, and Seller has not received
notice of a violation or alleged
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violation of any such statute, ordinance, order, rule or regulation. Seller does
not know of any pending or threatened change of any laws, ordinances or
regulations which could reasonably be expected to have a material adverse effect
on the Subject Assets and the Business taken as a whole.
2.15 INSURANCE. The physical properties and assets of Seller related
to, used in or held for use in, the Business are insured to the extent disclosed
in SCHEDULE 2.15 and all insurance policies and arrangements of Seller with
respect thereto are disclosed in said Schedule. Said insurance policies and
arrangements are in full force and effect, all premiums with respect thereto are
currently paid, and Seller is in compliance in all material respects with the
terms thereof. Said insurance is adequate and customary for the activities
engaged in by Seller with respect to the Business and is sufficient for
compliance by Seller with all requirements of law and all agreements and leases
in which Seller is a party with respect to the Business.
2.16 WARRANTY OR OTHER CLAIMS. Except as set forth in SCHEDULE 2.16,
and since March 31, 1997 there have been no, and there are no existing or to
Seller's knowledge, threatened product liability, warranty, price
redetermination or renegotiation or other similar claims with respect to the
Business, or any facts upon which a material claim of such nature could be
based, against Seller or its products for products or services which are
defective or fail to meet any product or service warranties.
2.17 POWERS OF ATTORNEY. With respect to the conduct and operations of
the Business, Seller has not granted powers of attorney which are presently
outstanding.
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2.18 PERMITS; BURDENSOME AGREEMENTS. SCHEDULE 2.18 lists all
Governmental Permits necessary in order for Seller to conduct the Business as it
is now being operated, which Governmental Permits are required by currently
effective laws, rules or regulations. Seller has obtained all such Governmental
Permits, which are valid and in full force and effect, and is operating in
compliance therewith. Except as disclosed in SCHEDULE 2.18, all such
Governmental Permits will be available and assigned to Buyer and remain in full
force and effect upon Buyer's purchase of the Subject Assets, and no further
Governmental Permits will be required in order for Buyer to conduct the Business
subsequent to the Closing as currently conducted by Seller. Except as disclosed
in SCHEDULE 2.18 or in any other Schedule hereto, Seller is not subject to or
bound by any judgment, decree or order which could reasonably be expected to
have a material adverse effect on the Subject Assets and the Business taken as a
whole.
2.19 CORPORATE RECORDS; COPIES OF DOCUMENTS. Seller has made, or upon
request will make, available for inspection and copying by Buyer and its counsel
complete and correct copies of the Books and Records, the Excluded Records and
any documents referenced in the Schedules delivered to Buyer pursuant to this
Agreement.
2.20 RELATED TRANSACTIONS. Neither Seller nor any of its affiliates,
stockholders, directors, officers or supervisory employees, nor, to the
knowledge of Seller, any of their respective spouses or family members owns
directly or indirectly on an individual or joint basis any material interest in,
or serves as an officer or director or in another similar capacity of, any
competitor or supplier of the Business, or any organization which has a material
contract or arrangement with Seller related to the Business, other than PHRX
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Precision Manufacturing (d.b.a. Amcraft Manufacturing), I-PAC Manufacturing
Inc., Parent, and National Metal Technology.
2.21 EMPLOYEE BENEFIT PROGRAMS.
(a) SCHEDULE 2.21 lists every Employee Program (as defined
below) that Seller has maintained, contributed to or under which it has any
liability at any time since December 31, 1992. With respect to each such
Employee Program, Seller has made available to Buyer true and complete copies of
the most recent summary plan or other written description.
(b) Each Employee Program which has ever been maintained by
Seller or any Affiliate with respect to any employees of Seller engaged in
employment related to the Business and which has at any time been intended to
qualify under Section 401(a) or 501(c)(9) of the Code has received a favorable
determination or approval letter from the Internal Revenue Service ("IRS")
regarding its qualification under such section and has, in fact, been
continuously qualified under the applicable section of the Code since the
effective date of such Employee Program. No event or omission has occurred which
would cause any such Employee Program to lose its qualification under the
applicable Code section.
(c) All payments and/or contributions required to have been
made (under the provisions of any agreements or other governing documents or
applicable law) with respect to all Employee Programs ever maintained by Seller
or any Affiliate with respect to any employees of Seller engaged in employment
related to the Business, have been timely made.
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(d) Except as described in SCHEDULE 2.21, no Employee Program
maintained by Seller or any Affiliate with respect to any employees of Seller
engaged in employment related to the Business (i) that is subject to Title IV of
ERISA (other than a Multiemployer Plan, as defined in Section 3(37) of ERISA)
has any "unfunded benefit liabilities" within the meaning of ERISA Section
4001(a)(18), or (ii) fails to comply with any provision of ERISA, other
applicable law, or any agreement which, in the case of either (i) or (ii) could
subject Buyer to any material liability either directly or indirectly
(including, without limitation, through any obligation of indemnification or
contribution) for any damages, penalties, or taxes, or any other loss or
expense. Neither Seller nor any Affiliate has ever maintained a Multiemployer
Plan, covering any employees of Seller engaged in employment related to the
Business. None of the Employee Programs ever maintained by Seller or any
Affiliate has ever provided health care or any other non-pension benefits to any
employees of Seller engaged in employment related to the Business after their
employment is terminated (other than as required by part 6 of subtitle B of
Title I of ERISA) or has ever promised to provide such post-termination
benefits.
(e) For purposes of this section:
(i) "Employee Program" means, in respect of any
employee of the Business, each "employee benefit plan," as defined in
Section 3(3) of ERISA (including any "multiemployer plan" as defined in
Section 3(37) of ERISA) and each profit-sharing, bonus, stock option,
stock purchase, stock ownership, pension, retirement, severance,
deferred compensation, excess benefit, supplemental unemployment,
post-retirement medical or life insurance, welfare or incentive plan,
or sick leave, long-term disability, medical, hospitalization, life
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insurance, other insurance plan, or other employee benefit plan program
or arrangement, whether written or unwritten, qualified or
non-qualified, funded or unfunded, maintained or contributed to by
Seller;
(ii) An entity "maintains" an Employee Program if
such entity sponsors, contributes to, or provides (or has promised to
provide) benefits under such Employee Program, or has any obligation
(by agreement or under applicable law) to contribute to or provide
benefits under such Employee Program, or if such Employee Program
provides benefits to or otherwise covers employees of such entity, or
their spouses, dependents, or beneficiaries; and
(iii) An entity is an "Affiliate" of Seller if it
would have ever been considered a single employer with Seller under
ERISA Section 4001(b) or part of the same "controlled group" as Seller
for purposes of ERISA Section 302(d)(8)(C).
2.22 ENVIRONMENTAL MATTERS.
(a) In connection with the operation of the Business conducted
on the Leased Premises, except as set forth in SCHEDULE 2.22 or as otherwise
permitted by law, (i) Seller has never generated, transported, used, stored,
treated, disposed of, or managed any Hazardous Substance (as defined below);
(ii) no Hazardous Substance has ever been spilled, released, discharged, or
disposed of by Seller, or used by Seller, or to Seller's knowledge is currently
located in the soil or groundwater on the Leased Premises; (iii) no Hazardous
Substance has ever been transported by or for Seller for treatment, storage, or
disposal at any other place; and (iv) in connection with the presence of any
Hazardous
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Substance, to Seller's knowledge no lien has ever been imposed by any
governmental agency on any property, facility, machinery, or equipment owned,
operated, leased, or used by Seller.
(b) In connection with the operation of the Business conducted
on the Leased Premises, except as set forth in SCHEDULE 2.22, (i) Seller has to
the best of its knowledge never violated any Environmental Law (as defined
below) nor, to Seller's knowledge, has any material liability under, any
Environmental Law; (ii) Seller is presently in compliance with all applicable
Environmental Laws in all material respects; (iii) Seller has never entered into
or been subject to any judgment, consent decree, compliance order, or
administrative order with respect to any environmental or health and safety
matter or received any request for information, notice, demand letter,
administrative inquiry, or formal or informal complaint or claim with respect to
any environmental or health and safety matter or the enforcement of any
Environmental Law; and (iv) Seller has no knowledge or reason to know that any
of the items enumerated in clause (iii) of this subsection will be forthcoming.
(c) Except as set forth in SCHEDULE 2.22, to Seller's
knowledge, the Leased Premises do not contain any asbestos or
asbestos-containing material, any polychlorinated biphenyls (PCBs) or equipment
containing PCBs, or any urea formaldehyde foam insulation.
(d) Seller has provided to Buyer copies of all documents,
records, and information maintained by Seller for regulatory purposes concerning
any environmental or health and safety matter relevant to Seller and that
relates to the operations of the
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Business, whether generated by Seller or others and given to Seller, including,
without limitation, environmental audits, environmental risk assessments, site
assessments, documentation regarding off-site disposal of Hazardous Substances,
spill control plans, and reports, correspondence, permits, licenses, approvals,
consents, and other authorizations related to environmental or health and safety
matters issued by any governmental agency.
(e) For purposes of this Section 2.22, (i) "Hazardous
Substance" means any substance or material that is regulated under any
Environmental Law or is deemed by any Environmental Law to be "hazardous",
"toxic", a "contaminant", "waste", "a source of contamination" or a "pollutant",
other than normal office and janitorial products; (ii) "Environmental Law" shall
mean any environmental or health and safety-related law, regulation, rule,
ordinance, or by-law at the foreign, federal, state, or local level, whether
existing as of the date hereof, previously enforced, or subsequently enacted;
and (iii) "Seller" shall mean and include Seller and any affiliates of Seller
for whose conduct Seller is or may be held responsible under any Environmental
Law.
2.23 EMPLOYEES; LABOR MATTERS. With respect to the Business, Seller
employs approximately thirty-three (33) full time employees, no part-time
employees and no temporary employees. Seller generally enjoys good
employer-employee relationships. None of such employees is covered by any union,
collective bargaining or other similar labor agreement, nor is Seller engaged in
the negotiation of any of the same, nor has Seller received notice from any
union of a request to negotiate any of the same. Except as set forth on SCHEDULE
2.23, Seller does not have any policy, practice, plan or program of paying
severance pay or any form of severance compensation in connection with the
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termination of employment. There is no requirement for a work permit in relation
to the employment of any of the employees in the Business and, other than as set
forth on SCHEDULE 1.14, no such employee has given notice to terminate his
contract of employment or is under notice of termination. Seller has received no
information to indicate that any of its employment policies or practices with
respect to the Business is currently being audited or investigated by any
federal, state, local or foreign governmental agency. No person has a right to
return to work or to be reinstated or reengaged in the Business. Seller is, and
at all times since November 6, 1986 has been, in compliance with the
requirements of this Immigration Reform Control Act of 1986 with respect to
employees in the Business.
2.24 CUSTOMERS, DISTRIBUTORS AND SUPPLIERS. SCHEDULE 2.24(a) lists each
customer, representative or distributor of the Business (whether pursuant to a
commission, royalty or other arrangement) (collectively, the "Customers and
Distributors"). SCHEDULE 2.24(b) is a true and complete list of the suppliers of
the Business (the "Suppliers"). With respect to the Business, the relationships
of Seller with its Suppliers, Customers and Distributors are good commercial
working relationships.
2.25 PURCHASE COMMITMENTS. Except as set forth in SCHEDULE 2.25, Buyer
shall have no obligation to Seller or Seller's affiliates for open purchase
orders as of the Closing or thereafter.
2.26 REQUIRED CONSENTS. SCHEDULE 2.26 lists all of the Contracts and
whether (i) such Contracts require consent to permit them to be assigned to
Buyer, (ii) such
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Contracts are silent on whether consent is required or (iii) such Contracts do
not require consent to permit them to be assigned to Buyer.
2.27 ADEQUACY OF SUBJECT ASSETS. Except for the Excluded Assets set
forth in Section 1.1(b)(ii)-(iv), the Subject Assets represent all of the
properties and assets that the Buyer requires in order to operate the Business
in the same manner as the Seller operated it on and prior to the Closing Date.
In the event this Section 2.27 is breached because Seller has failed to identify
and transfer any assets or properties used in the Business, such breach shall be
deemed cured if Seller promptly transfers such properties or assets to Buyer and
Buyer shall have no further remedy with respect thereto.
2.28 YEAR 2000 COMPLIANCE.
(a) PRODUCTS OF THE BUSINESS. The products of the Business can
properly receive, transmit, process, manipulate, store, retrieve, re-transmit or
in any other way utilize data and information due to the occurrence of the year
2000 or the inclusion of dates on or after January 1, 2000.
(b) INTERNAL SYSTEMS AND OPERATIONS. Except as set forth
SCHEDULE 2.28(b), all material internal systems used by or on behalf of Seller
in the operation and management of the Business and that are being transferred
to Buyer, including without limitation financial management and accounting,
manufacturing, order processing, distribution, and similar systems used in
operations, are Year 2000 Compliant.
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(c) THIRD PARTIES. Seller has made the inquiries and
investigation as to the Year 2000 Compliance of all third parties as set forth
in SCHEDULE 2.28(c). Responses received thereto are set forth in SCHEDULE
2.28(c).
(d) DEFINITION. For purposes of this Agreement, "Year 2000
Compliant" shall mean, as to any product (including without limitation
software), service or system, (i) that such product, service or system shall
operate in the same manner during and after January 1, 2000 (without limitation
as to time); and (ii) record, process, store and present data containing dates
in the Year 2000, and thereafter (without limitation as to time) in the same
manner as data containing dates prior to the Year 2000.
2.29 BROKERS. Seller has not engaged any broker, investment banker,
financial advisor or other person in respect of which Buyer would be responsible
for or obligated in respect of the payment of any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the transactions
contemplated by this Agreement, and Seller agrees to pay any such fees or
commissions of any such person which it has engaged.
2.30 DISCLOSURE. The representations, warranties and statements
contained in this Agreement and in the certificates, Exhibits and Schedules
delivered by Seller pursuant to this Agreement to Buyer do not contain any
untrue statement of a material fact, and, when taken together, do not omit to
state a material fact necessary in order to make such representations,
warranties or statements not misleading in the light of the circumstances under
which they were made. To Seller's knowledge there are no facts which would
reasonably be likely to have a material adverse affect on the Subject Assets
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and the Business taken as a whole which have not been specifically disclosed
herein or in a Schedule furnished herewith, other than general economic
conditions affecting Seller's industry as applicable to the Business.
SECTION 3. COVENANTS OF SELLER AND BUYER.
3.1 MAKING OF COVENANTS AND AGREEMENTS. Seller and Buyer hereby make
their respective covenants and agreements set forth in this Section 3.
3.2 NOTICE OF DEFAULT. Promptly upon the occurrence of, or promptly
upon either Seller or Buyer becoming aware of the impending or threatened
occurrence of, any event which would cause or constitute a breach or default, or
would have caused or constituted a breach or default had such event occurred or
been known to either Seller or Buyer prior to the date hereof, of any of the
representations, warranties or covenants of either Seller or Buyer contained in
or referred to in this Agreement or in any Schedule or Exhibit referred to in
this Agreement, Seller or Buyer shall give detailed written notice thereof to
Buyer or Seller, as the case may be.
3.3 CONSUMMATION OF AGREEMENT. Seller and Buyer shall each use their
commercially reasonable efforts to perform and fulfill all conditions and
obligations on their or any of their affiliates' parts to be performed and
fulfilled under this Agreement and the Transition Agreement. To this end, Seller
will promptly in connection with or following the Closing take all appropriate
actions to transfer the Subject Assets, including all Intellectual Property, to
Buyer.
3.4 COOPERATION OF SELLER.
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(a) Seller shall cooperate with all reasonable requests of
Buyer and Buyer's counsel in connection with the consummation of the
transactions contemplated hereby, including, without limitation, providing all
necessary audited financial statements and consents of the auditors preparing
such audited financial statements, and access to all other financial information
required for Buyer to comply with its reporting obligations under the Securities
Exchange Act of 1934, as amended, and shall use its best efforts to cause its
counsel and auditors to cooperate with all such requests of Buyer and Buyer's
counsel. The expense of all reasonable necessary consents of Seller's auditors
required for Buyer to comply with its reporting obligations under the Securities
Exchange Act of 1934, as amended, including, without limitation, any auditor's
consents necessary in connection with the filing of a Form 8-K in connection
with the transaction contemplated hereby, shall be borne by Buyer.
(b) Seller shall, from time to time after the Closing, at the
request of Buyer and without further consideration, cooperate with Buyer to the
extent such cooperation is required by Buyer to enable Buyer, at Buyers expense,
to complete a full audit of the Business.
3.5 NON-COMPETITION. As a material inducement to Buyer to enter into
this Agreement and consummate the transactions contemplated hereby, Seller,
Parent and I-PAC agree, on behalf of themselves and their subsidiaries, that,
for five (5) years after the Closing (the "Non-Compete Period"), they will not,
without the prior written consent of Buyer, directly or indirectly, engage or
participate in, be employed by or assist in any manner or in any capacity, or
have any interest in or make any loan to any person, firm, corporation or
business which engages in any activity anywhere in the world where
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Buyer does business which is similar to or competitive with the Business.
Seller, Parent and I-PAC agree to enforce, and to cause any of their existing or
future subsidiaries to enforce, the agreements with their respective employees
who are retained by Seller, Parent or I-PAC or such existing or future
subsidiaries following the Closing prohibiting such employees from disclosing
confidential information relating to the Business.
3.6 NO SOLICITATION OF EMPLOYEES. Neither Seller, Parent, I-PAC nor any
of their existing or future subsidiaries will at any time during the three (3)
year period after the Closing, directly or indirectly, hire, solicit or accept
for hire the employment of any person who, at the time of the Closing, was an
employee of Buyer or of Seller in the Business being sold pursuant to this
Agreement. The term "solicit the employment" shall not be deemed to include
generalized searches for employees through media advertisements, employment
firms or otherwise. This restriction shall not apply to any employee of the
Business who is not employed by Buyer immediately subsequent to Closing, or
whose employment with Buyer is involuntarily terminated by Buyer after the
Closing. Seller, Parent and I-PAC agree to give, and to cause such subsidiaries
to give, notice of this provision to all recruiters and all headhunters or
recruiting, employment and executive search firms or other similar types of
organizations that are currently or that in the future are engaged by them.
Seller, Parent and I-PAC further agree not to and to cause such subsidiaries not
to, pay any incentive fees, referral bonuses or similar types of compensation to
any of their employees in the event that any employee of the Business employed
by Buyer is offered employment by any of them after the Closing.
3.7 CONFIDENTIALITY. Seller, Parent and I-PAC agree that, after the
Closing has been consummated, they and their subsidiaries, and their respective
officers, directors,
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and employees, will hold in strict confidence, and will not use, distribute or
make available to others, any confidential or proprietary data or information of
Seller that is used in connection with or related to the Business and the
Subject Assets. For this purpose, the following shall be deemed not to
constitute confidential or proprietary data or information: (a) information
which is generally known to the public or in the trade, or becomes so generally
known without breach of this Agreement by Seller; (b) information disclosed to
Seller without restriction by a third party who is not in breach of any
obligation of confidentiality in making such disclosure; or (c) information
which is required to be disclosed by law or legal process, provided that Seller
shall notify Buyer prior to making such disclosure and shall permit Buyer to
intervene in any relevant proceeding to protect its interests. However, Seller
may disclose information as a consequence of a requirement of any Securities
Exchange Act filing or disclosure requirement.
3.8 TAX RETURNS. To the extent reasonably necessary to Buyer's
compliance with federal, state, local and foreign tax laws, from and after the
Closing, Seller shall provide Buyer with reasonable access to all books and
records with respect to the Business.
3.9 BANK ACCOUNTS. Immediately following the Closing, Seller agrees to
eliminate the signing authority of Seller and any officer or other agent or
representative of Seller to each of Seller's bank or similar accounts
established with respect to the Business that are transferred to Buyer.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF BUYER.
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4.1 MAKING OF REPRESENTATIONS AND WARRANTIES. As a material inducement
to Seller to enter into this Agreement and consummate the transactions
contemplated hereby, Buyer hereby makes the representations and warranties to
Seller contained in this Section 4.
4.2 ORGANIZATION OF BUYER. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of Delaware with full
corporate power to own or lease its properties and to conduct business in the
manner and in the places where such properties are owned or leased or such
business is conducted by it.
4.3 AUTHORITY OF BUYER. Buyer has all necessary corporate power and
authority to enter into this Agreement and each agreement, document and
instrument to be executed and delivered by Buyer pursuant to this Agreement and
to carry out the transactions contemplated hereby. The execution, delivery and
performance by Buyer of this Agreement and each such other agreement, document
and instrument have been duly authorized by all necessary corporate action of
Buyer and no other action on the part of Buyer is required in connection
therewith. This Agreement and each other agreement, document and instrument
executed and delivered by Buyer pursuant to this Agreement constitute, or when
executed and delivered will constitute, valid and binding obligations of Buyer
enforceable in accordance with their terms, except to the extent that
enforcement of the rights and remedies created hereby and thereby may be
affected by bankruptcy, reorganization, moratorium, insolvency and similar laws
of general application affecting the rights and remedies of creditors and by
general equity principles. The execution, delivery and performance by Buyer of
this Agreement and each such agreement, document and instrument:
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(i) does not and will not violate any provision of the
organization documents or bylaws of Buyer;
(ii) does not and will not violate any applicable law,
order, judgment, decree, rule or regulation of any
court or any governmental body having jurisdiction over
Buyer or require Buyer to obtain any approval, consent
or waiver of, or make any filing with, any person or
entity (governmental or otherwise) which has not been
obtained or made; and
(iii) does not and will not result in a breach of,
constitute a default under, accelerate any obligation
under, give rise to a right of termination of, or
permit any third party to exercise any additional
rights under, any indenture or loan or credit agreement
or any other agreement, contract, instrument, mortgage,
lien, lease, permit, authorization, order, writ,
judgment, injunction, decree, determination or
arbitration award to which Buyer is a party or by which
the property of Buyer is bound or affected, except in
each case (i), (ii) or (iii) which would not have a
material adverse effect on the business of Buyer.
4.4 LITIGATION. There is no litigation or governmental or
administrative proceeding or investigation pending or, to its knowledge,
threatened against Buyer which would prevent or hinder the consummation of the
transactions contemplated by this Agreement.
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4.5 BROKERS. Buyer has not engaged any broker, investment banker,
financial advisor or other person in respect of which Seller would be
responsible for or obligated in respect of the payment of any broker's,
finder's, financial advisor's or other similar fee or commission in connection
with the transactions contemplated by this Agreement, and Buyer agrees to pay
any such fees or commissions of any such person which it has engaged.
SECTION 5. U.K. VAT MATTERS
5.1 TRANSFER OF A GOING CONCERN.
(a) All amounts expressed in this Agreement to be payable by
Buyer are expressed exclusive of any VAT which may be chargeable thereon.
(b) The parties acknowledge and agree that the transfer of the
Subject Assets of the U.K. Business pursuant to this Agreement constitutes a
transfer of a business as a going concern for the purposes of Section 49 of the
VAT Act of 1994 and Article 5 of the VAT (Special Provisions) Order 1995 (the
"Special Provisions Order"), and accordingly the transfer of the Subject Assets
of the U.K. Business is neither a supply of goods nor a supply of services for
the purposes of U.K. VAT.
(c) The parties agree to use all their reasonable endeavors to
ensure that the sale of the Subject Assets of the U.K. Business is treated as
neither a supply of goods nor a supply of services for VAT purposes.
5.2 EFFECT OF CERTAIN REPRESENTATIONS.
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(a) Notwithstanding Section 5.1(b) and 5.1(c), if H.M. Customs
& Excise subsequently determine (the "Determination") that Seller is obliged to
account for VAT on the transfer of the Business, Seller shall issue a valid VAT
invoice in respect thereof against which Buyer shall pay to Seller by way of
additional consideration the amount of VAT chargeable on the transfer of the
Subject Assets pursuant to this Agreement.
(b) Seller hereby undertakes to Buyer that, at the date of
Closing, Seller shall deliver to Buyer the VAT business records relating to the
Business. Buyer shall preserve the records for such period as may be required by
law and shall allow Seller on reasonable notice to inspect and make copies of
the same.
(c) If Buyer disagrees with the Determination referred to in
Section 5.2(a) it may, within twenty-one (21) business days of being notified by
Seller of the Determination, by notice require Seller to request H.M. Customs &
Excise to review the Determination, such notice to specify the reasons to be
advanced by Seller when requesting the review. Seller shall make that request in
writing forthwith upon receiving the notice.
(d) Seller shall forthwith, upon receipt, forward to Buyer the
Determination following any review made in accordance with Section 5.1(c). If
Buyer is not satisfied with the Determination as reviewed, Buyer may by notice
require Seller, provided Seller has been indemnified to its reasonable
satisfaction against any costs, expenses or losses which may be incurred in so
doing, to appeal against the Determination and Seller shall delegate the conduct
of such appeal and of any further
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appeals entirely to Buyer. Buyer shall indemnify Seller against all reasonable
costs and expenses that Seller may incur in respect of any such appeal. In any
case where an appeal cannot be made against the Determination without Seller
accounting for the VAT, Seller shall deliver to Buyer a valid VAT invoice,
against which Buyer will pay to Seller the amount of the VAT.
(e) Following the Determination, upon any review referred to
in Section 5.2(c),or if pursuant to Section 5.2(d) an appeal has been made
against the Determination, following the final determination of that appeal and
any further appeal, Seller shall deliver to Buyer a valid VAT invoice against
which Buyer shall pay to Seller the amount of VAT that has been determined to be
properly chargeable on the transfer of the Subject Assets pursuant to this
Agreement, less any amount previously paid by Buyer to Seller under Section
5.2(a) and/or Section 5.2(d). If the amount paid by Buyer to Seller under
Section 5.2(a) and/or Section 5.2(d) is greater than the amount of VAT properly
chargeable, Seller shall refund the difference to Buyer together with interest
at the rate or rates then current for refunds by H.M. Customs & Excise of VAT.
5.3 BUYER VAT REPRESENTATIONS. Buyer hereby represents to Seller that:
(a) with effect from Closing, Buyer is a taxable person for
VAT purposes; and
(b) for the purposes of paragraph 5 of the Special Provisions
Order, Buyer intends to use the Subject Assets of the U.K. Business in carrying
on the same kind of business as that currently carried on by Seller with the
Subject Assets of the U.K. Business.
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SECTION 6. CONDITIONS.
6.1 CONDITIONS TO OBLIGATIONS OF BUYER. The obligation of Buyer to
consummate this Agreement and the transactions contemplated hereby are subject
to the fulfillment of the following conditions:
(a) REPRESENTATIONS; WARRANTIES: COVENANTS. Each of the representations
and warranties of Seller contained in Section 2 shall be true and correct as
though made on and as of the Closing except (i) as affected by the transactions
contemplated hereby and (ii) to the extent that such representations and
warranties are made as of a specified date, in which case such representations
and warranties shall be true and correct as of the specified date; and Seller
shall, on or before the Closing, have performed all of its obligations hereunder
which by the terms hereof are to be performed on or before the Closing.
(b) NO MATERIAL CHANGE. There shall have been no material adverse
change (except continuing operating losses at a level consistent with those
experienced since September, 1998) in the financial condition, prospects,
properties, assets, liabilities, business or operations of the Business since
March 31, 1998, whether or not in the ordinary course of business.
(c) CERTIFICATE FROM OFFICERS. Seller shall have delivered to Buyer a
certificate of Seller's President dated as of the Closing to the effect that the
statements set forth in paragraph (a) and (b) above in this Section 6.1 are true
and correct.
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(d) APPROVAL OF BUYER'S COUNSEL. All actions, proceedings, instruments
and documents required to carry out this Agreement and the transactions
contemplated hereby and all related legal matters contemplated by this Agreement
shall have been approved by Day, Berry & Howard LLP as counsel for Buyer, and
such counsel shall have received on behalf of Buyer such other certificates,
opinions, and documents, in form satisfactory to such counsel, as Buyer may
reasonably require from Seller to evidence compliance with the terms and
conditions hereof as of the Closing.
(e) OPINION OF COUNSEL. On the date of the Closing, Buyer shall have
received from counsel for Seller, an opinion as of the date of the Closing, in
the form attached hereto as EXHIBIT 6.1(e).
(f) NO LITIGATION. There shall have been no commencement by any person
or any federal, state, local, foreign or other governmental authority of
litigation, proceedings or other action against Buyer, Seller or any of its
respective affiliates that seeks to enjoin, restrain, condition or prohibit
consummation of this Agreement, nor shall there have been a material adverse
change in the laws or regulations applicable to Seller or any of its affiliates
with respect to the Business.
(g) CONSENTS. Seller shall have made, or shall have caused to be made,
all filings with and notifications to governmental authorities, regulatory
agencies and other governmental entities required to be made by Seller or any of
its affiliates in connection with the execution and delivery of this Agreement
by Seller or the performance by Seller of the transactions contemplated hereby;
and Seller shall have received all authorizations, waivers, consents and
permits, required from all third parties, including, without
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limitation, applicable governmental authorities, regulatory agencies, lessors,
lenders and contract parties, required to permit the consummation by Seller of
the transactions contemplated by this Agreement.
(h) EMPLOYEE PROGRAMS. Seller shall have taken all steps necessary to
provide Buyer with such pertinent data or information as Buyer may reasonably
request with respect to each employee of Seller offered employment by Buyer in
order to effect a transition of employment and employee benefits as of the
Closing Date.
(i) NO LIENS. Prior to or at the Closing, the Subject Assets shall be
free and clear of all liens, encumbrances and charges other than Permitted
Encumbrances.
(j) TRANSITION AGREEMENT. Seller and Buyer shall have executed and
delivered a transition agreement ("Transition Agreement") in substantially the
form of EXHIBIT 6.1(j) attached hereto.
(k) LANDLORD CONSENTS AND/OR LICENSES. Buyer shall have received from
Seller consents from the applicable landlords with respect to the assignment by
Seller to Buyer of the Leases concerning premises located in the United States
identified on SCHEDULE 2.5(b) or, with respect to those Leases concerning
premises located in the United Kingdom, a license or licenses, as applicable,
from Seller to use the premises in respect of such leases.
(l) BOARD OF DIRECTOR APPROVAL. Buyer's Board of Directors shall have
authorized the execution and delivery by Buyer of this Agreement and all related
agreements and the consummation of the transactions contemplated hereby.
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(m) EMPLOYEES. Each former employee of Seller shall, as a condition to
being hired by Buyer, execute Buyer's standard form of Confidentiality
Agreement, with such modifications required by or appropriate under California
law.
6.2 CONDITIONS TO OBLIGATIONS OF SELLER. Seller's obligation to
consummate this Agreement and the transactions contemplated hereby is subject to
the fulfillment, prior to or at the Closing, of the following conditions
precedent:
(a) REPRESENTATIONS; WARRANTIES; COVENANTS. Each of the representations
and warranties of Buyer contained in Section 4 shall be true and correct in all
respects as though made on and as of the Closing except (i) as affected by the
transactions contemplated hereby and (ii) to the extent such representations and
warranties are made as of a specified date, in which case such representations
and warranties shall be true and correct as of the specified date. Buyer shall,
on or before the Closing, have performed all of its obligations hereunder which
by the terms hereof are to be performed on or before the Closing; and Buyer
shall have delivered to Seller a certificate of the President or any Vice
President of Buyer dated on the Closing to such effect.
(b) APPROVAL OF SELLER'S COUNSEL. All actions, proceedings, instruments
and documents required to carry out this Agreement and the transactions
contemplated hereby and all related legal matters contemplated by this agreement
shall have been approved by Luce, Forward, Hamilton & Scripps LLP as counsel for
Seller, and such counsel shall have received on behalf of Seller such other
certificates, opinions and documents in form satisfactory to counsel for Seller
as Seller may reasonably require from Buyer to evidence compliance with the
terms and conditions hereof as of the Closing.
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(c) NO LITIGATION. There shall have been no commencement by any person
or any federal, state, local, foreign or other governmental authority of
litigation, proceedings or other action against Buyer, Seller or any of its
respective affiliates that seeks to enjoin, restrain, condition or prohibit
consummation of this Agreement.
(d) OPINION OF BUYER'S COUNSEL. On the date of the Closing, Seller
shall have received from counsel for Buyer, an opinion as of the date of the
Closing, in the form attached hereto as EXHIBIT 6.2(d).
(e) MANUFACTURING AGREEMENT. Seller and Buyer shall have defined and
executed the Manufacturing Agreement, in the form attached hereto as
EXHIBIT 6.2(e).
SECTION 7. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING.
7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Each of the
representations, warranties, agreements, covenants and obligations herein or any
other agreement entered into in connection therewith are material, shall be
deemed to have been relied upon by the other party and shall survive the Closing
regardless of any investigation and shall not merge in the performance of any
obligation by either party hereto. Notwithstanding the foregoing, the
representations and warranties shall only survive for the period of time as to
which indemnification is available under Section 8. Neither Seller nor Buyer
shall have any liability whatsoever with respect to a breach of any such
representations and warranties after the expiration of the period of time as to
which indemnification is available under Section 8.
7.2 COLLECTION OF ASSETS. Subsequent to the Closing, Buyer shall have
the right and authority to collect all Receivables and other items transferred
and assigned to it
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by Seller hereunder and to endorse with the name of Seller any checks received
on account of such Receivables or other items, and Seller agrees that it will
promptly transfer or deliver to Buyer within ten (10) business days any cash or
other property that Seller may receive with respect to any Receivables of any
character or any other items included in the Subject Assets.
7.3 PAYMENT OF OBLIGATIONS. Seller shall pay all of the Excluded
Liabilities in the ordinary course of business as they become due, and Buyer
shall pay all of the Assumed Liabilities in the ordinary course of business as
they become due.
7.4 ASSISTANCE AFTER CLOSING. For a period of six (6) months after the
Closing Date, Seller shall provide commercially reasonable assistance to Buyer
with respect to the transfer of the Subject Assets and in preserving
relationships with clients of the Business and otherwise facilitating the
transition of ownership of the Subject Assets. Such assistance shall include
furnishing Buyer with any information concerning the Business as Buyer may
reasonable request.
SECTION 8. INDEMNIFICATION.
8.1 INDEMNIFICATION BY SELLER, I-PAC AND PARENT. Seller, I-PAC and
Parent agree subsequent to the Closing jointly and severally to indemnify and
hold Buyer and its representatives, subsidiaries and affiliates and persons
serving as officers, directors, partners or employees thereof (individually a
"Buyer Indemnified Party" and collectively the "Buyer Indemnified Parties")
harmless from and against any damages, liabilities, diminution in value, losses,
taxes, fines, penalties, costs, and expenses (including, without limitation,
reasonable fees of counsel) of any kind or nature whatsoever (whether or not
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arising out of third-party claims and including all amounts paid in
investigation, defense or settlement of the foregoing) which may be sustained or
suffered by any of them arising out of or based upon any of the following
matters:
(a) any breach of any representation or warranty of Seller under this
Agreement or in any other agreement, or in any certificate, schedule or exhibit
delivered by it pursuant hereto or thereto, or by reason of any claim, action or
proceeding asserted or instituted growing out of any matter or thing
constituting a breach of such representations or warranties;
(b) any breach of any agreement or covenant of Seller under this
Agreement, to the extent not waived in writing by Buyer;
(c) all claims asserted under any bulk transfer or bulk sales act; and
(d) any failure by Seller to perform and discharge any of the Excluded
Liabilities as set forth in this Agreement.
8.2 LIMITATIONS ON INDEMNIFICATION BY SELLER, I-PAC AND PARENT.
Notwithstanding the foregoing, the right of Buyer Indemnified Parties to
indemnification under Section 8.1 shall be subject to the following provisions:
(a) No indemnification shall be payable pursuant to Subsection 8.1(a)
above to any Buyer Indemnified Party, unless the total of all claims for
indemnification pursuant to Section 8.1(a) shall exceed Twenty Thousand Dollars
($20,000) in the aggregate, whereupon the amount in excess of such sum shall be
recoverable as follows: at any point in time, once the aggregate total of all
claims for indemnification exceeds
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Fifty Thousand Dollars ($50,000), Buyer may petition Seller for reimbursement of
those claims. If the aggregate amount of all claims for indemnification in
either the first year (Closing Date through the first anniversary of the Closing
Date) or the second year (first anniversary of the Closing Date through the
second anniversary of the Closing Date) does not exceed Fifty Thousand Dollars
($50,000) for that year, but does exceed Twenty Thousand Dollars ($20,000), then
Buyer shall petition Seller within thirty (30) days of the Closing Date
anniversary date for such reimbursement;
(b) No indemnification shall be payable to a Buyer Indemnified Party
with respect to claims asserted pursuant to Section 8.1(a) (exclusive of claims
for indemnification for a breach of any representation or warranty with respect
to title to the Subject Assets, Taxes, environmental matters or product
liability or any breach relating to or involving fraud or intentional
misrepresentation) after the second anniversary of the Closing Date (the
"Indemnification Cut-Off Date"); provided, however, if prior to the relevant
date of expiration, a Buyer Indemnified Party shall have given written notice of
a claim for indemnification under Section 8.5, then the right to indemnification
with respect thereto shall remain in effect without regard to when such matter
shall have been finally determined and disposed of in accordance with this
Agreement, according to the date on which notice of the applicable claim is
given; and
(c) No indemnification shall be payable to a Buyer Indemnified Party
with respect to claims asserted pursuant to Subsection 8.1(a) (exclusive of
claims for a breach of any representation or warranty with respect to title to
the Subject Assets or any breach relating to or involving fraud or intentional
misrepresentation) to the extent that the aggregate amount payable under Section
8.1(a) exceeds the Purchase Price.
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8.3 INDEMNIFICATION BY BUYER. Buyer agrees subsequent to the Closing to
indemnify and hold Seller and its representatives, affiliates, subsidiaries and
persons serving as officers, directors, partners or employees thereof
(individually a "Seller Indemnified Party" and collectively the "Seller
Indemnified Parties") harmless from and against any damages, liabilities,
diminution in value, losses, fines, penalties, costs and expenses (including,
without limitation, reasonable fees of counsel) of any kind or nature whatsoever
(whether or not arising out of third-party claims and including all amounts paid
in investigation, defense or settlement of the foregoing) which may be sustained
or suffered by any of them arising out of or based upon any of the following
matters:
(a) any breach of any representation or warranty of Buyer under this
Agreement or in any other agreement, or in any certificate, schedule or exhibit
delivered by it pursuant hereto or thereto;
(b) any breach of any agreement or covenant of Buyer under this
Agreement to the extent not waived in writing by Seller; and
(c) any failure by Buyer to perform and discharge any of the Assumed
Liabilities as set forth in this Agreement.
8.4 LIMITATION ON INDEMNIFICATION BY BUYER. Notwithstanding the
foregoing, the right of Seller Indemnified Parties to indemnification under
Section 8.3 shall be subject to the following provisions:
(a) No indemnification pursuant to Section 8.3(a) shall be payable to
any Seller Indemnified Party, unless the total of all claims for indemnification
pursuant to
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Section 8.3(a) shall exceed Twenty Thousand Dollars ($20,000) in the aggregate,
whereupon the amount in excess of such sum shall be recoverable in accordance
with the terms hereof;
(b) No indemnification shall be payable to any Seller Indemnified Party
with respect to claims asserted pursuant to Section 8.3(a) above (exclusive of
any breach relating to or involving fraud or intentional misrepresentation)
after the Indemnification Cut-Off Date; provided, however, if prior to the
relevant date of expiration, a Seller Indemnified Party shall have given written
notice of a claim for indemnification under Section 8.5, then the right to
indemnification with respect thereto shall remain in effect without regard to
when such matter shall have been finally determined and disposed of in
accordance with this Agreement, according to the date on which notice of the
applicable claim is given; and
(c) No indemnification shall be payable to any Seller Indemnified Party
with respect to claims asserted pursuant to Section 8.3(a) above (exclusive of
any breach relating to or involving fraud or intentional misrepresentation) to
the extent that the aggregate amount payable under Section 8.3(a) exceeds the
Purchase Price.
8.5 NOTICE; DEFENSE OF CLAIMS. An indemnified party may make claims for
indemnification hereunder by giving written notice thereof to the indemnifying
party within the period in which indemnification claims can be made hereunder.
If indemnification is sought for a claim or liability asserted by a third party,
the indemnified party shall also give written notice thereof to the indemnifying
party promptly after it receives notice of the claim or liability being
asserted, but the failure to do so shall not
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relieve the indemnifying party from any liability except to the extent that it
is prejudiced by the failure or delay in giving such notice. Such notice shall
summarize the bases for the claim for indemnification and any claim or liability
being asserted by a third party. Within thirty (30) days after receiving such
notice the indemnifying party shall give written notice to the indemnified party
stating whether it disputes the claim for indemnification and whether it will
defend against any third party claim or liability at its own cost and expense.
If the indemnifying party fails to give notice that it disputes an
indemnification claim within thirty (30) days after receipt of notice thereof,
it shall be deemed to have accepted and agreed to the claim, which shall become
immediately due and payable. The indemnifying party shall be entitled to direct
the defense against a third party claim or liability with counsel reasonably
selected by it as long as the indemnifying party is conducting a good faith and
diligent defense. The indemnified party shall at all times have the right to
fully participate in the defense of a third party claim or liability at its own
expense directly or through counsel; provided, however, that if the named
parties to the action or proceeding include both the indemnifying party and the
indemnified party and the indemnified party is advised that representation of
both parties by the same counsel would be inappropriate under applicable
standards of professional conduct, the indemnified party may engage separate
counsel at the expense of the indemnifying party. If no such notice of intent to
dispute and defend a third party claim or liability is given by the indemnifying
party, or if such good faith, and diligent defense is not being or ceases to be
conducted by the indemnifying party and written notice by the indemnified party
is given to the indemnifying party to such effect, the indemnified party shall
have the right, at the expense of the indemnifying party, to undertake the
defense of such claim or
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liability (with counsel selected by the indemnified party), and to compromise or
settle it, exercising reasonable business judgment if such claim is one that (i)
involves (and continues to involve) solely money damages or (ii) involves (or
continues to involve) claims for both money damages and equitable relief,
against the indemnifying party that cannot be severed, where the claims for
money damages are the primary claims asserted by a third party and the claims
for equitable relief are incidental to the claims for money damages. If the
third party claim or liability is one that by its nature cannot be defended
solely by the indemnifying party, then the indemnified party shall make
available such information and assistance as the indemnifying party may
reasonably request and shall cooperate with the indemnifying party in such
defense, at the expense of the indemnifying party.
The indemnifying party, if it has assumed the defense of any
third-party claim as provided in this Agreement, shall not consent to a
settlement of, or the entry of any judgment arising from, any such third-party
claim without the indemnified party's prior written consent (which consent shall
not be unreasonably withheld) unless such settlement or judgment relates solely
to monetary damages. The indemnifying party shall not, without the indemnified
party's prior written consent, enter into any compromise or settlement that (i)
commits the indemnified party to take, or to forbear to take, any action or (ii)
does not provide for a complete release by such third party of the indemnified
party. The indemnified party shall have the sole and exclusive right to settle
any third-party claim, on such terms and conditions as it deems reasonably
appropriate, to the extent such third-party claim involves equitable or other
non-monetary relief against the indemnified party, and shall have the right to
settle any third-party claim involving
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money damages for which the indemnifying party has not assumed the defense
pursuant to this Section 8.5 with the written consent of the indemnifying party,
which consent shall not be unreasonably withheld or delayed.
8.6 ADDITIONAL PROVISIONS. Amounts payable in respect to the parties'
indemnification obligations shall be treated as an adjustment to the Purchase
Price, subject to the provisions of Section 1.4. Buyer and Seller agree to
cooperate in the preparation of a supplemental allocation of the Purchase Price
under Section 1.10 and as required by Treas. Reg. ss. 1.1060-1T(f) and
(h)(2)(ii) as a result of any adjustment to the Purchase Price pursuant to the
preceding sentence. Whether or not an indemnifying party chooses to defend or
prosecute any third-party claim, each party hereto shall cooperate in the
defense or prosecution thereof and shall furnish such records, information and
testimony, and attend such conferences, discovery proceedings, hearings, trials
and appeals, as may be reasonably requested in connection therewith. The amount
of the indemnifying party's liability under this Agreement shall be determined
taking into account any applicable insurance proceeds actually received by the
indemnified party. The indemnification provided in this Section 8 shall be the
sole and exclusive remedy after the Closing Date for damages available to the
parties to this Agreement for breach of any of the representations or warranties
contained herein. Notwithstanding anything contained in this Agreement to the
contrary, no party shall be liable to the other party for indirect, special,
punitive, exemplary or consequential loss or damage (including any loss of
revenue or profit) for breach of any representation or warranty contained in
this Agreement, provided, however, the foregoing shall not be construed to
preclude recovery
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by the indemnified party in respect of any losses directly incurred from third
party claims. Both parties shall use commercially reasonably efforts to mitigate
their damages.
SECTION 9. MISCELLANEOUS.
9.1 BULK SALES LAW. Buyer waives compliance by Seller with the
provisions of any applicable bulk sales, bulk transfer, fraudulent conveyance or
other law for the protection of creditors (collectively, "Bulk Sales Act") in
connection with the transfer of the Subject Assets under this Agreement.
9.2 FEES AND EXPENSES. Each of the parties will bear its own expenses
in connection with the negotiation and the consummation of the transactions
contemplated by this Agreement, and no expenses of any party relating in any way
to the purchase and sale of the Subject Assets hereunder and the transactions
contemplated hereby, including without limitation legal, accounting or other
professional expenses of any party, shall be charged to or paid by any other
party or included in the Assumed Liabilities.
9.3 GOVERNING LAW. This Agreement shall be construed under and governed
by the internal laws of the State of Connecticut without regard to its conflict
of laws provisions.
9.4 NOTICES. Any notice, request, demand or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been given if delivered or sent by facsimile transmission, upon receipt, or if
sent by registered or certified mail or by a nationally recognized commercial
carrier, upon the sooner of the date on which receipt is acknowledged or the
expiration of five (5) days after deposit in United States post office
facilities properly addressed with postage prepaid. All notices
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to a party will be sent to the addresses set forth below or to such other
address or person as such party may designate by notice to each other party
hereunder:
TO BUYER: Scan-Optics, Inc.
169 Progress Drive
Manchester, CT 06040-2294
Attn: President
Facsimile No.: (860) 645-7995
With a copy to: Day, Berry & Howard LLP
CityPlace I
Hartford, CT 06103-3499
Attn: William H. Cuddy, Esq.
Facsimile No.: (860) 275-0343
TO SELLER, I-PAC Photomatrix, Inc.
OR PARENT: 1958 Kellogg Ave.
Carlsbad, CA 92008
Attn: CEO
Facsimile No.: (760) 930-0115
With a copy to: Luce, Forward, Hamilton & Scripps LLP
600 West Broadway
Suite 2600
San Diego, CA 92101
Attn: Otto Sorenson, Esq.
Facsimile No.: (619) 232-8311
Any notice given hereunder may be given on behalf of any party by his counsel or
other authorized representatives.
9.5 ENTIRE AGREEMENT. This Agreement together with the other agreements
contemplated hereby, including the Schedules and Exhibits referred to herein and
therein and the other writings specifically identified herein and therein or
contemplated hereby, is complete, reflects the entire agreement of the parties
with respect to its subject matter, and supersedes all previous written or oral
negotiations, commitments and writings. No promises, representations,
understandings, warranties and agreements, express or
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implied, have been made by any of the parties hereto except as referred to
herein or therein or in such Schedules and Exhibits or in such other writings;
and all inducements to the making of this Agreement relied upon by either party
hereto have been expressed herein or in such Schedules or Exhibits or in such
other writings.
9.6 ASSIGNABILITY; BINDING EFFECT. This Agreement may not be assigned
by Seller or Buyer without the prior written consent of Buyer or Seller, as the
case may be. This Agreement shall be binding upon and enforceable by, and shall
inure to the benefit of, the parties hereto and their respective successors and
permitted assigns. The provisions of this Agreement are severable, and in the
event that any one or more provisions are deemed illegal or unenforceable, the
remaining provisions shall remain in full force and effect unless the deletion
of such provision shall cause this Agreement to become materially adverse to
either party, in which event the parties shall use reasonable commercial efforts
to arrive at an accommodation that best preserves for the parties the benefits
and obligations of the offending provision.
9.7 CAPTIONS AND GENDER. The captions and Index in this Agreement are
for convenience only and shall not affect the construction or interpretation of
any term or provision hereof. The use in this Agreement of the masculine pronoun
in reference to a party hereto shall be deemed to include the feminine or
neuter, as the context may require.
9.8 EXECUTION IN COUNTERPARTS. For the convenience of the parties and
to facilitate execution, this Agreement may be executed in two or more
counterparts, each
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of which shall be deemed an original, but all of which shall constitute one and
the same document.
9.9 AMENDMENTS. This Agreement may not be amended or modified, nor may
compliance with any condition or covenant set forth herein be waived, except by
a writing duly and validly executed by each party hereto, or in the case of a
waiver, the party waiving compliance.
9.10 PUBLICITY AND DISCLOSURES. As soon as practicable after the
Closing Date, Seller and Buyer shall issue a press release substantially in the
form agreed to by them. Neither Seller nor Buyer shall, without the approval of
the other party, make any other press release or other announcement concerning
the existence of this Agreement or the terms of the transactions contemplated by
this Agreement, except as and to the extent that any such party shall be so
obligated by law, in which case the other party shall be advised and the parties
shall use their respective reasonable commercial efforts to cause a mutually
agreeable release or announcement to be issued; provided, however, that the
foregoing shall not preclude communications or disclosures necessary to comply
with accounting and federal securities law disclosure obligations.
9.11 DISPUTE RESOLUTION.
(a) All disputes, claims, or controversies, whether based on contract,
tort, statute or other legal theory (including, but not limited to, any claim of
fraud or misrepresentation), arising out of or relating to this Agreement or the
negotiation, validity or performance hereof, that are not resolved by mutual
agreement shall be resolved solely and exclusively by binding arbitration which
shall be held in Hartford, Connecticut and
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shall be conducted in accordance with the rules of the American Arbitration
Association now in force or hereafter adopted unless specifically modified
herein. Arbitration shall be conducted by a single arbitrator approved by all
parties or, in the event that the parties are unable to agree upon a single
arbitrator within seven (7) days after notice of the dispute, by a board of
three (3) arbitrators, one to be appointed by Seller, Parent and I-PAC and one
to be appointed by Buyer, said arbitrators to be appointed within five (5) days
after the end of the seven (7) day period referred to above. The two arbitrators
so selected shall select the third arbitrator within twenty (20) days after the
last of the first two arbitrators has been appointed. If any of said arbitrators
are not appointed within the allowed time as herein provided, then any
arbitrator not so appointed shall be appointed by the American Arbitration
Association. The duty to arbitrate shall extend to any affiliate, officer,
employee, shareholder, principal, agent, trustee in bankruptcy, subsidiary,
third-party beneficiary or guarantor of a party making or defending any claim
which would otherwise be arbitrable hereunder. Notwithstanding the foregoing,
either party shall have the right to proceed in court without prior arbitration
for the limited purpose of seeking a temporary or preliminary injunction so as
to avoid immediate and irreparable harm.
(b) The parties covenant and agree that the arbitration shall commence
within one hundred twenty (120) days after the date on which a written demand
for arbitration is filed by any party hereto. In connection with the arbitration
proceeding, the arbitrator shall have the power to order the production of
documents by each party and any third-party witnesses, the answering of
interrogatories and responses to requests for admission. In addition, each party
may take up to three depositions as of right, and the arbitrator may
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in his or her discretion allow additional depositions upon good cause shown by
the moving party. In connection with any arbitration, each party shall provide
to the other, no later than seven (7) business days before the date of the
arbitration, the identity of all persons that may testify at the arbitration and
a copy of all documents that may be introduced at the arbitration or considered
or used by a party's witness or expert. The arbitrator's decision and award
shall be made and delivered within six (6) months after the selection of the
arbitrator. The arbitrator's decision (i) shall set forth a reasoned basis for
any award of damages or finding of liability; (ii) may in appropriate
circumstances include injunctive relief; and (iii) may be continued and entered
in any court. The arbitrator shall not have power to award damages in excess of
actual compensatory damages and shall not multiply actual damages or award
punitive damages or any other damages that are specifically excluded under, or
in excess of any applicable damage limitations expressed in this Agreement, and
each party hereby irrevocably waives any claim to such damages.
(c) The parties covenant and agree that they will participate in the
arbitration in good faith and that they will share equally its costs, except as
otherwise provided herein. The arbitrator may in his or her discretion assess
costs and expenses (including the reasonable legal fees and expenses of the
prevailing party) against any party to a proceeding. Any party unsuccessfully
refusing to comply with an order of the arbitrators shall be liable for costs
and expenses, including attorneys' fees, incurred by the other party in
enforcing the award. The provisions of this Section 9.11 shall be enforceable in
any court of competent jurisdiction.
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(d) Issues of arbitrability shall be determined in accordance with the
federal substantive and procedural laws relating to arbitration; all other
aspects of this Agreement shall be interpreted in accordance with, and the
arbitrator shall apply and be bound to follow, the substantive laws of the State
of Connecticut without regard to its principles of conflicts of law.
(e) Except as provided in Sections 9.11(a) and (g), the parties agree
not to submit a dispute subject to this Agreement to any federal, state, local
or foreign court or arbitration association, except as may be necessary to
enforce the arbitration procedures of this Section 9.11 or to enforce the award
of the arbitrator. If court proceedings to stay litigation or compel arbitration
are necessary, the party who unsuccessfully opposes such proceedings shall pay
all associated costs, expenses and attorneys' fees which are reasonably incurred
by the other party.
(f) Except to its board of directors, officers, counsel and
accountants, neither party nor the arbitrator may disclose the contents or
results of any arbitration hereunder without prior written consent of all
parties, unless and then only to the extent required to enforce or challenge the
award, as required by law, the rules of any securities exchange or the National
Association of Securities Dealers ("NASD"), as applicable, or as necessary for
financial and tax reports and audits.
(g) Notwithstanding anything to the contrary in this Section 9.11, in
the event of alleged violation of a party's intellectual property rights
(including, but not limited to, unauthorized disclosure of confidential
information), that party may seek temporary
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injunctive relief from any court of competent jurisdiction. The party requesting
such relief shall simultaneously file a demand for arbitration of the dispute.
(h) If any part of this Section 9.11 is held to be unenforceable, it
shall be severed and shall not affect either the duty to arbitrate hereunder or
any other party of this Section 9.11.
9.12 CONSENT TO JURISDICTION. Each of the parties hereto irrevocably
and unconditionally consents to the exclusive jurisdiction of the arbitrator(s)
to resolve all disputes, claims or controversies arising out of or relating to
(i) this Agreement or the negotiation, validity or performance hereof and
further consents to the jurisdiction of the courts of the State of Connecticut
for the purposes of enforcing the arbitration provisions of Section 9.11 of this
Agreement. Each party further irrevocably waives any objection to proceeding
before the arbitrator(s) based upon lack of personal jurisdiction or to the
laying of venue and further irrevocably and unconditionally waives and agrees
not to make a claim in any court that arbitration before the arbitrator(s) has
been brought in an inconvenient forum. Each of the parties hereto hereby
consents to service of process by registered mail at the address to which
notices are to be given. Each of the parties hereto agrees that its or his
submission to jurisdiction and its or his consent to service of process by mail
is made for the express benefit of the other parties hereto.
9.13 THIRD PARTY BENEFICIARIES. Nothing herein expressed or implied is
intended to or shall (a) confer on any person other than the parties hereto and
their respective successors or assigns any rights (including third party
beneficiary rights), remedies, obligations or liabilities under or by reason of
this Agreement or (b) constitute
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the parties hereto as partners or as participants in a joint venture. This
Agreement shall not provide third parties with any remedy, claim, liability,
reimbursement, cause of action or other right in excess of those existing
without reference to the terms of this Agreement. Nothing in this Agreement
shall be construed as giving to any employee of the Business, or any other
individual, any right or entitlement under any Employee Program, policy or
procedure maintained by Buyer or any affiliate thereof or by Seller or an
affiliate thereof, except as expressly provided in such Employee Program, policy
or procedure. No third party shall have any rights under Section 502, 503 or 504
of ERISA or any regulations thereunder because of this Agreement that would not
otherwise exist without reference to this Agreement. No third party shall have
any right, independent of any right that exists irrespective of this Agreement,
under or granted by this Agreement, to bring any suit at law or equity for any
matter governed by or subject to the provisions of this Agreement.
[THIS SPACE LEFT INTENTIONALLY BLANK]
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IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed as of the date set forth above by their duly authorized
representatives.
BUYER:
SCAN-OPTICS, INC.
By:________________________________
Name:______________________________
Title:_______________________________
SELLER:
PHOTOMATRIX IMAGING CORPORATION
By:________________________________
Name:______________________________
Title:_______________________________
I-PAC MANUFACTURING, INC.
By:________________________________
Name:______________________________
Title:_______________________________
PARENT:
PHOTOMATRIX, INC.
By:________________________________
Name:______________________________
Title:_______________________________
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LIST OF SCHEDULES AND EXHIBITS
Schedule 1.1(a)(i) Inventory
Schedule 1.1(a)(ii) Evaluation Units
Schedule 1.1(a)(iii) Fixed Assets
Schedule 1.1(a)(iv) Intellectual Property included in Subject Assets
Schedule 1.1(a)(v) Millennium Software Source Code Modules and related
products
Schedule 1.1(a)(vii) Contracts
Schedule 1.1(a)(ix) Government Permits - Annual Fees
Schedule 1.1(a)(x) Investments and Pre-Paid Expenses
Schedule 1.1(a)(xiv) Licenses
Schedule 1.2(a)(i) Trade Payables
Schedule 1.2(a)(iii) Permitted Encumbrances
Schedule 1.2(b) Assumed Liabilities not listed on Schedule 1.2(a)(i)
Schedule 1.2(c)(iv) Wyly Debt Promissory Notes
Schedule 1.3 AIIM `99 Expenses
Schedule 1.8 Consents to Assignment
Schedule 1.13 Nonassignable Assets
Schedule 1.14 Employees
Schedule 1.14A Terminated Employees to be Offered Employment
Schedule 2.4 Breaches
Schedule 2.5(b) Leased Real Property
Schedule 2.5(c) Defects in Personal Property
Schedule 2.6 Financial Statements
Schedule 2.8 Accounts or Loans Receivable from Affiliated
Persons/Entities
Schedule 2.9 Inventory Not Located on Leased Property
Schedule 2.11 Intellectual Property (where no exclusive ownership or
valid right to use)
Schedule 2.12 Contracts
Schedule 2.13 Litigation
Schedule 2.14 Compliance with Laws
Schedule 2.15 Insurance
Schedule 2.16 Warranty or Other Claims
Schedule 2.18 Governmental Permits
Schedule 2.21 Employee Benefit Programs
Schedule 2.22 Environmental Matters
Schedule 2.23 Employees; Labor Matters
Schedule 2.24(a) Customers and Distributors
Schedule 2.25(b) Suppliers
Schedule 2.25 Purchase Commitments
Schedule 2.26 Required Consents
Schedule 2.28(b) Year 2000 Compliance - Internal Systems and Operations
Schedule 2.28(c) Year 2000 Compliance - Third Parties
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EXHIBITS
Exhibit 1.4 Form of Escrow Agreement
Exhibit 1.6(a) Form of Agreement for Assumption of Liabilities
Exhibit 1.6(b) Form of Lease Assumption and Assignment (Arizona, USA)
Exhibit 1.7(a) Form of Assignment and Bill of Sale
Exhibit 1.7(b) Form of Trademark Assignment
Exhibit 6.1(e) Form of Opinion of Counsel for Seller
Exhibit 6.1(j) Form of Transition Agreement
Exhibit 6.2(d) Form of Opinion of Counsel for Buyer
Exhibit 6.2(e) Form of Manufacturing Agreement
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Exhibit 10.56
TRANSITION SERVICES AGREEMENT
This TRANSITION SERVICES AGREEMENT (this "Agreement") is entered into
between Scan-Optics, Inc., a Delaware corporation ("Buyer"), Photomatrix Imaging
Corporation, a Nevada corporation ("Seller"), I-PAC Manufacturing Inc., a
California corporation ("I-PAC") and Photomatrix, Inc., a California corporation
("Parent"), as of this ____ day of June, 1999.
RECITALS
WHEREAS, Buyer, Seller, I-PAC and Parent have entered into an Asset
Purchase Agreement dated as of June __________, 1999 (the "Asset Purchase
Agreement"), pursuant to which Buyer has agreed to purchase from Seller, and
Seller has agreed to sell, convey, transfer, assign and deliver to Buyer and
Buyer has agreed to purchase from Seller, free and clear of all liens,
encumbrances, security interests, purchase rights, pledges, charges, mortgages,
claims or any other limitations or restrictions whatsoever except to the extent
permitted by the Asset Purchase Agreement, all of Seller's right, title and
interest in, to and under the Subject Assets (as defined in Section 1.1 of the
Asset Purchase Agreement), which constitute certain properties and assets of
Seller related to, used or held for use in connection with the scanner product
manufacturing, engineering, sales and service portion of the business and
operations of Seller (such business and operations are referred to herein as the
"Business");
WHEREAS, Buyer, Seller, I-PAC and Parent intend that capitalized terms
used and not otherwise defined herein shall have the same meanings as are
ascribed to such terms in the Asset Purchase Agreement;
WHEREAS, Buyer, Seller, I-PAC and Parent wish to set forth herein the
terms on which the transfer and transition of Seller's Subject Assets will occur
to the extent that such terms are not set forth in the Asset Purchase Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein and in the Asset Purchase Agreement,
Buyer, Seller, I-PAC and Parent do hereby agree as follows:
1. TRANSITION PERIOD
"Transition Period" shall mean a period commencing on the date hereof
and ending as provided in Section 5.2.
2. SCOPE OF AGREEMENT
This Agreement is entered into pursuant to the terms of the Asset
Purchase Agreement and is subject in all respects to the terms thereof,
provided, however, that in the event of any inconsistency between the terms of
the Asset Purchase Agreement and the terms hereof, the terms of this Agreement
shall control. This Agreement shall be effective upon execution, but
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will terminate automatically in the event of the termination of the Asset
Purchase Agreement in accordance with the terms thereof.
3. SERVICES TO BE PROVIDED BY THE SELLER AND PAID FOR BY BUYER
3.1 DATA RETENTION. During the Transition Period, in addition to the
Books and Records transferred pursuant to Section 1.1(a)(xii) and other copies
required to be provided under the Asset Purchase Agreement, Seller will retain
and maintain at Buyer's direction the accounting, financial and tax records
relating to the Subject Assets. Seller shall maintain all such accounting
records in the form and format established under and in accordance with Seller's
prior policies and practices. Seller will provide Buyer access to all said
records and permit Buyer to make copies and/or take extracts of the same, except
for any documents that Seller is prohibited from disclosing by reason of
confidentiality agreements made by Seller and previously disclosed to Buyer.
3.2 COMPUTER/ACCOUNTING SYSTEM. During the Transition Period, Seller
shall maintain an accounting system for the Subject Assets being conveyed as
part of the Agreement. This accounting system will maintain inventory and fixed
assets used in the manufacturing operations. All historical data required to
operate the accounting system effectively will be provided by the Seller. Seller
shall provide Buyer with cooperative use of such accounting system as such
relates to the Subject Assets during the term of the Transition Period.
3.3 ACCOUNTING SYSTEM PERSONNEL. During the Transition Period, Seller
shall reasonably make its accounting system personnel available to Buyer for the
purpose of cost accounting, fixed asset accounting, inventory control, accounts
payable and other related matters consistent with current use ("Accounting
System Services"). Such personnel will also continue to handle accounting
matters for Seller. Seller shall continue to pay the cost of such personnel.
Buyer will reimburse Seller for the Accounting System Services provided at
Buyer's request, as well as the support for transitioning the inventory records,
bills of material, routings, Dac/drawing files, account payable and receivable
files and other necessary data or technical assistance related to the Asset
Purchase Agreement, at an hourly rate of thirty-five dollars ($35) per hour. At
Buyer's request, Seller shall provide advance estimates of the costs of such
Accounting System Services and such support. Buyer will also reimburse Seller
for third-party costs for operation of such system which Seller incurs with
Buyer's prior approval.
3.4 ACCOUNTS RECEIVABLE. In accordance with the Asset Purchase
Agreement, in the event that Seller shall receive payment on any of the
Receivables, it shall promptly pay any such amounts over to Buyer in accordance
with the Asset Purchase Agreement.
4. SPECIFIC ARRANGEMENTS REGARDING MANUFACTURING BUSINESS
4.1 TRANSITION PERSONNEL. The individuals currently engaged in the
manufacture of scanners and spare parts (the "Transition Personnel") are:
Larry Medlin
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Pam Medlin
Charles (Everett) McGehee
Kevin Phlek
Patrick Lillo
Tim Brandt
Kelly Graboyes
Hung Luong
Duc Van Le
Robert Armenta
4.2 TRANSITION SERVICES. The Transition Personnel will continue on
Seller's payroll, performing manufacturing-related work for Buyer for document
scanners, aperture card scanners, feeders and all spare parts to support the
Business that Buyer has purchased from Seller ("Transition Services"). Such
Transition Personnel will work under the supervision of Larry Medlin, who in
turn will be supervised by Joe Crouch, or such other representative as Buyer may
from time to time designate.
4.3 SCHEDULING; ALLOCATION OF RESOURCES. The determination of work
priorities, production schedules, and allocation of Transition Personnel
resources shall be at the sole discretion of Buyer.
4.4 LABOR COSTS. Seller will invoice Buyer, as provided in Section
4.11(a), for the labor cost of the Transition Personnel. Seller shall bill Buyer
for labor costs at the rate (consistent with such Transition Personnel's
customary rate consistent with past practice) of actual wages, plus payroll tax
and fringe benefit burden at the rate of thirty percent (30%), plus ten percent
(10%) of this combined total for administration ("Administration Costs").
4.5 BENEFIT PLANS. The Transition Personnel shall continue to receive
health insurance, dental insurance, 401K, life insurance, workers compensation
insurance and general liability insurance plan benefits under Seller's existing
benefits plans. The Administration Costs compensate Seller for payroll services
and administration of the benefit plan participation by the Transition
Personnel.
4.6 ADDITIONAL PERSONNEL. If Buyer determines that additional personnel
are required to perform the Transition Services, Buyer shall recruit and select
such additional Transition Personnel at its sole discretion (i.e., Larry Medlin
at Joe Crouch's direction). Seller shall employ such additional Transition
Personnel and enroll them in Seller's benefit plans as described in Section 4.5
above; however, Seller reserves the right to not employ an individual so
selected if it determines that the process of selection of an individual would
expose it to legal action, or if the individual was deemed by the Seller to be
wholly unsuitable as an employee with access to its facilities.
4.7 WHEN SERVICES OF TRANSITION PERSONNEL NO LONGER REQUIRED. If Buyer
in its sole discretion determines that the services of one or more of the
Transition Personnel are not required for production, (a) Buyer shall give
notice to Seller that Buyer no longer wishes to
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obtain the services of such Transition Personnel under the Agreement and (b)
Buyer shall have no further obligation in respect of such Transition Personnel
under this Agreement.
4.8 MATERIALS REIMBURSEMENT. Buyer shall reimburse Seller for any
materials belonging to Seller used during this Transition Period by the
Transition Personnel, if any, at Seller's actual cost.
4.9 DIRECT SERVICES; PHONE SERVICE. Buyer, in its discretion, shall
either (i) reimburse Seller for Seller's reception, long distance phone charges,
freight or other such service costs or (ii) elect to install its own direct
phone lines and other direct services.
4.10 RENT FOR SPACE UTILIZED. Buyer shall pay rent to Seller for any
such manufacturing or office space utilized pursuant to this Agreement. Such
rent shall be billed to Buyer at a gross rate equal to the current $0.63 triple
net square feet lease costs that Seller currently pays. This equates to $0.80
per square foot, which rate includes all triple net charges (i.e., taxes,
utilities, maintenance, association fees, insurance, operating cost
assessments).
4.11 PAYMENT TERMS. (a) Labor reimbursement costs will be billed
bi-weekly (per payroll period) and are payable in ten (10) days.
(b) Rent will be due on the first day of each month.
(c) Any materials used and service and use reimbursements will
be invoiced as used and will be due on net thirty (30) day terms.
4.12 TRANSITION PERSONNEL WORK PERFORMANCE, FACILITY ACCESS. Buyer
shall assume the responsibility for the work performance and the output of the
Transition Personnel. Seller will provide keys, security codes and facility
access to these individuals consistent with current business practices.
4.13 SUPPLY OF COMPONENT PARTS. During this period, Seller, Parent, and
Parent's subsidiaries will continue to supply outsourced component parts to
Buyer on a contract manufacturing basis for printed circuit boards (I-PAC),
precision machined metal parts (Amcraft), and sheet metal (National Metal
Technologies, Inc.). This will be done pursuant to purchase orders issued by
Buyer based on Buyer's requirements, at the current turn-key, standard cost for
any of these components. Seller, I-PAC and Parent shall be jointly and severally
liable for each others' obligations under this Agreement.
4.14 SALES AND TECHNICAL LITERATURE. Buyer shall have the right to use
sales and technical literature which incorporate the use of Seller's, I-PAC's
and Parent's logo and company name for a period of six (6) months from the date
of this Agreement.
5. TERM
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5.1 TERM. The term of this Agreement shall continue for the period
beginning as of the date hereof and continuing through the close of business on
such date as this Agreement is terminated pursuant to Section 5.2 hereof.
5.2 TERMINATION. Notwithstanding any contrary provision contained
herein, this Agreement may be terminated:
(a) by the mutual written consent of all of the parties
hereto;
(b) by the Buyer at any time upon thirty (30) days prior
written notice to the Seller;
(c) by a party in the event of the material breach by the
other party of any provision of this Agreement, which breach is not remedied by
the breaching party within thirty (30) days after receipt of notice thereof from
the non-breaching party.
6. RIGHT TO AUDIT
For purposes of verifying the accuracy of charges and payments made by
Seller hereunder, the Buyer shall be entitled, prior or subsequent to any
payment of charges hereunder, on reasonable notice and during normal business
hours to inspect and copy the records of the Seller and its agents providing
services hereunder as may be reasonably necessary for such purpose. This section
shall survive termination of this Agreement for a period of six (6) months.
7. MISCELLANEOUS
7.1 AMENDMENT AND MODIFICATION. This Agreement may not be amended or
modified, nor may compliance with any condition or covenant set forth herein be
waived, except by a writing duly and validly executed by each party hereto, or
in the case of a waiver, the party waiving compliance.
7.2 ASSIGNMENT. This Agreement may not be assigned by Seller or Buyer
without the prior written consent of Buyer or Seller, as the case may be. This
Agreement shall be binding upon and enforceable by, and shall inure to the
benefit of, the parties hereto and their respective successors and permitted
assigns.
7.3 ENTIRE AGREEMENT. This Agreement supersedes all prior negotiations,
commitments and rights pertaining to the subject matter hereof; provided,
however, that this Agreement is intended to supplement the Asset Purchase
Agreement and does not supersede or replace the provisions thereof.
7.4 SEVERABILITY. If at any time subsequent to the date hereof, any
provision of this Agreement shall be held by any court of competent jurisdiction
to be illegal, void or unenforceable, such provision shall be of no force and
effect, but the illegality or unenforceability of such provision shall have no
effect upon and shall not impair the enforceability of any other provision of
this Agreement.
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7.5 CAPTIONS AND GENDER. The captions in this Agreement are for
convenience only and shall not affect the construction or interpretation of any
term or provision hereof. The use in this Agreement of the masculine pronoun in
reference to a party hereto shall be deemed to include the feminine or neuter,
as the context may require.
7.6 COUNTERPART FACSIMILE. For the convenience of the parties and to
facilitate execution, this Agreement may be executed in two or more counterparts
and by facsimile, each of which shall be deemed an original, but all of which
shall constitute one and the same document.
7.7 NOTICES. Any notice, request, demand or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been given if delivered or sent by facsimile transmission, upon receipt, or if
sent by registered or certified mail or by a nationally recognized commercial
carrier, upon the sooner of the date on which receipt is acknowledged or the
expiration of five (5) days after deposit in United States post office
facilities properly addressed with postage prepaid. All notices to a party will
be sent to the addresses set forth below or to such other address or person as
such party may designate by notice to each other party hereunder:
TO BUYER: Scan-Optics, Inc.
169 Progress Drive
Manchester, CT 06040-2294
Attn: CFO
Facsimile No.: (860) 645-7995
With a copy to: Day, Berry & Howard LLP
CityPlace I
Hartford, CT 06103-3499
Attn: William H. Cuddy, Esq.
Facsimile No.: (860) 275-0343
TO SELLER, I-PAC Photomatrix, Inc.
OR PARENT: 1958 Kellogg Ave.
Carlsbad, CA 92008
Attn: CEO
Facsimile No.: (760) 930-0115
With a copy to: Luce, Forward, Hamilton & Scripps LLP
600 West Broadway
Suite 2600
San Diego, CA 92101
Attn: Otto Sorensen, Esq.
Facsimile No.: (619) 232-8311
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Any notice given hereunder may be given on behalf of any party by his counsel or
other authorized representatives.
7.8 GOVERNING LAW. This Agreement shall be construed under and governed
by the internal laws of the State of California without regard to its conflict
of laws provisions.
7.9 NO IMPLIED THIRD PARTY RIGHTS OR BENEFICIARIES. Except as otherwise
expressly provided herein, nothing herein expressed or implied is intended to or
shall (a) confer on any person other than the parties hereto and their
respective successors or assigns any rights (including third party beneficiary
rights), remedies, obligations or liabilities under or by reason of this
Agreement or (b) constitute the parties hereto as partners or as participants in
a joint venture. This Agreement shall not provide third parties with any remedy,
claim, liability, reimbursement, cause of action or other right in excess of
those existing without reference to the terms of this Agreement. Nothing in this
Agreement shall be construed as giving to any employee of the Business, or any
other individual, any right or entitlement under any Employee Program, policy or
procedure maintained by Buyer or any affiliate thereof or by Seller or an
affiliate thereof, except as expressly provided in such Employee Program, policy
or procedure. No third party shall have any rights under Section 502, 503 or 504
of ERISA or any regulations thereunder because of this Agreement that would not
otherwise exist without reference to this Agreement. No third party shall have
any right, independent of any right that exists irrespective of this Agreement,
under or granted by this Agreement, to bring any suit at law or equity for any
matter governed by or subject to the provisions of this Agreement.
(THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK)
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
BUYER:
SCAN-OPTICS, INC.
By:________________________________
Name:______________________________
Title:_______________________________
SELLER:
PHOTOMATRIX IMAGING CORPORATION
By:________________________________
Name:______________________________
Title:_______________________________
I-PAC:
I-PAC MANUFACTURING, INC.
By:________________________________
Name:______________________________
Title:_______________________________
PARENT:
PHOTOMATRIX, INC.
By:________________________________
Name:______________________________
Title:_______________________________
<PAGE>
LOAN AND SECURITY AGREEMENT
NOTICE - CONTAINS WAIVER OF TRIAL BY JURY
THIS LOAN AND SECURITY AGREEMENT is entered into as of June 18, 1999,
by and between PHOTOMATRIX, INC., a California corporation ("Borrower"), and
CELTIC CAPITAL CORPORATION ("Lender").
1. CERTAIN RULES OF CONSTRUCTION; CERTAIN DEFINITIONS. Unless
otherwise specified herein, all accounting terms used herein shall be
interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared in
accordance with generally accepted accounting principles and practices
consistently applied. All references herein to the singular or plural shall
also mean the plural or singular, respectively. All terms used herein which
are defined in the California Uniform Commercial Code (as amended from time
to time) shall have the meanings ascribed thereto therein unless otherwise
defined in this Agreement. As used herein, the following terms shall have
the following meanings:
1.1 "ACCOUNT DEBTOR" - the obligor on any Account.
1.2 "ACCOUNT" - an account receivable arising in the
ordinary course of Borrower's business.
1.3 "ADVANCES" - A/R Advances and/or Inventory Advances, as
applicable.
1.3A "AFFILIATES" - Photomatrix, Inc., a California
corporation; Photomatrix Imaging Corporation, a Nevada corporation; I-PAC
Manufacturing, Inc., a California corporation; IPAC Precision Machining,
Inc., a California corporation; National Metal Technologies, a California
corporation.
1.4 "AGREEMENT" - this Loan and Security Agreement, together
with all exhibits and schedules hereto, as the same may be amended from time
to time in accordance with the terms hereof.
1.5 "ALLOWABLE AMOUNT" - the A/R Allowable Amount or the
Inventory Allowable Amount, as applicable.
1.6 "ANNIVERSARY DATE" - the date which is two years from
the date of the first Credit Accommodation hereunder.
1.7 "A/R ADVANCES" - advances made pursuant to the first
sentence in subsection 2.1.1.
1.8 "A/R ALLOWABLE AMOUNT" - the lesser of the A/R Borrowing
Base and the A/R Maximum Commitment.
1.9 "A/R BORROWING BASE" - eighty percent (80%) of the Net
Face Amount of Eligible Accounts.
1.10 "A/R COLLATERAL MANAGEMENT FEE" - two-tenths of one
percent (.2%) per month, of the average monthly balance of gross face amount
of the Accounts outstanding.
1.11 "A/R MAXIMUM COMMITMENT" - at any time of determination,
the amount, if any, by which $1,200,000.00 exceeds the aggregate principal
amount of any advances or other extensions of credit outstanding from Lender
to or on behalf of any of the Affiliates other than Borrower for the purpose
of financing accounts receivable.
1.12 "AVAILABILITY RESERVES" - shall mean, as of any date of
determination, such amounts as Lender may from time to time establish and
revise in good faith reducing the amount of Advances which would otherwise be
available to Borrower hereunder: (a) to reflect events, conditions,
contingencies or risks which, as determined by Lender in good faith, do or
may affect either (i) the Collateral or any other property which is security
for the Obligations or its value, (ii) the assets, business or prospects of
Borrower or any Obligor, or (iii) the security interest and other rights of
Lender in the Collateral (including the enforceability, perfection and
priority thereof), or (b) to reflect Lender's good faith belief that any
Collateral report or financial information furnished by or on behalf of
Borrower or any Obligor to Lender is or may have been incomplete, inaccurate
or misleading in any material respect, or (c) in respect of any state of
facts which Lender determines in good faith constitutes an Event of Default
or may, with notice or passage of time or both, constitute an Event of
Default.
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1.13 "BORROWER'S ACCOUNT" - the deposit account of Borrower,
account number 0011-059-147 maintained by Borrower with Imperial Bank at its
office located at 701 B Street, San Diego, CA 92101.
1.14 "BORROWING BASE" - the A/R Borrowing Base or the
Inventory Borrowing Base, as applicable.
1.15 "CLOSING DATE" - the date of this Agreement.
1.16 "COLLATERAL" -
1.16.1 all of the following present and future assets
of Borrower, together with all collateral now or hereafter described in any
form UCC-1 filed against Borrower naming Lender as the secured party:
1.16.1.1 Accounts, returned, reclaimed or
repossessed goods with respect thereto and rights as an unpaid vendor;
contract rights; chattel paper; general intangibles (including, but not
limited to, tax and duty refunds, registered and unregistered patents,
trademarks, service marks, copyrights, trade names, and applications for the
foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer
lists, licenses, whether as licensor or licensee, choses in action and other
claims, and existing and future leasehold interests in equipment, and
fixtures); documents; instruments; letters of credit, deposits accounts;
1.16.1.2 goods, including, but not limited to:
1.16.1.2.1 inventory, wherever located,
including raw materials, work-in-process, finished goods, and all names or
marks affixed to or to be affixed thereto for purposes of selling same by the
seller, manufacturer, lessor or licensor thereof;
1.16.1.2.2 equipment and fixtures,
including, without limitation, all motor vehicles, furniture, and any and all
additions, substitutions, replacements (including spare parts), and
accessions thereof and thereto (the foregoing items described in this
subsection 1.11.1.2.2 only shall be referred to collectively as "Equipment");
1.16.2 any goods in Borrower's possession, custody, or
control;
1.16.3 books and records relating to any of the above
including, without limitation, all computer programs, printed output and
computer readable data in the possession or control of the Borrower, any
computer service bureau or other third party;
1.16.4 products and proceeds of the foregoing in
whatever form and wherever located, including, without limitation, all
insurance proceeds, all claims against third parties for loss or destruction
of or damage to any of the foregoing, and all income from the lease or rental
of any of the foregoing.
1.16.5 any claim of Borrower on any policy of
insurance, including claims for premium refund under any workmen's
compensation policy, or claims under any business interruption or similar
coverage.
1.16.6 all investment property, but specifically not
including any real property owned by Borrower.
1.17 "COLLATERAL MANAGEMENT FEE" - collectively, the A/R
Collateral Management Fee and the Inventory Collateral Management Fee .
1.18 "CREDIT ACCOMMODATION" - any advance or other extension
of credit by Lender to or on behalf of Borrower hereunder or under any
Evidence of Special Credit Accommodation.
1.19 "DEFAULT RATE" - five percentage points (5.0%) per annum
in excess of the Interest Rate. To the extent the Default Rate is calculated
with reference to the Prime Rate, any change in the Default Rate shall be
effective as of the date of any change in Prime Rate.
1.20 "DELINQUENT ACCOUNTS" - Accounts which remain
uncollected more than ninety days from invoice date.
1.21 "DOCUMENTS" - this Agreement, the Term Note, any riders,
supplements and amendments thereto, and all other documents, instruments or
agreements now or hereafter executed and/or delivered in connection with this
Agreement, including but not limited to any Evidences of Special Credit
Accommodations, mortgages, Security Agreements, assignments, pledges,
Subordination Agreements, and Guaranties.
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1.22 "ELIGIBLE ACCOUNT" - an Account, excluding the following:
1.22.1 A Delinquent Account;
1.22.2 An Account due from an Account Debtor which has
suffered a business failure or the termination of its existence, or as to
which a dissolution, insolvency or bankruptcy proceeding has been commenced,
any assignment for the benefit of creditors has been made, or a trustee,
receiver or conservator has been appointed for all or any part of the assets
of such Account Debtor;
1.22.3 An Account due from an Account Debtor affiliated
with Borrower in any manner, including, without limitation, as stockholder,
owner, officer, director, agent or employee;
1.22.4 An Account with respect to which payment is or
may be conditional;
1.22.5 An Account due from an Account Debtor who is not
a resident or citizen of, located in, or subject to service of process in,
the United States of America;
1.22.6 An Account due from an Account Debtor who is any
national government including, without limitation, any instrumentality,
division, agency, body or department thereof EXCEPT if the Account Debtor is
the United States of America ("USA") and the USA, Lender and Borrower all
enter into an assignment of claims agreement in form and substance
satisfactory to Lender;
1.22.7 An Account arising from progress billings or
retainages or "bill and hold" sales or any other similar arrangements;
1.22.8 An Account due from an Account Debtor as to
which twenty-five percent or more of the aggregate dollar amount of all
outstanding Accounts owing from such Account Debtor are Delinquent Accounts;
1.22.9 That portion of an Account due from an Account
Debtor which is in excess of fifteen percent of the aggregate dollar amount
of all outstanding accounts receivable of the Affiliates, with the exception
of Walt Disney Imagineering, Artecon, Alliant Techsystems Inc., Palomar
Technological and subsidiaries, Primex Technology and Scan-optics, Inc. who
shall not exceed twenty-five percent of the aggregate dollar amount of all
outstanding accounts receivable of the Affiliates, or other entities
submitted by Borrower and approved by Lender;
1.22.10 An Account as to which Borrower is or may
become liable to the Account Debtor for any reason to the extent of such
liability;
1.22.11 An Account which is not free of all liens,
encumbrances, charges, rights and interest of any kind;
1.22.12 An Account which is supported or represented by
a promissory note, post-dated check or letter of credit unless such
instrument is actually delivered to Lender;
1.22.13 An Account which is unsuitable for purposes of
determining the Borrowing Base, as determined by Lender in its sole
discretion.
1.23 "ELIGIBLE INVENTORY" - means Inventory which:
1.23.1 is free of all liens, encumbrances, charges,
rights and interest of any kind (other than those in favor of Lender);
1.23.2 is permanently located at locations at which
Borrower conducts business in the State of California (or such other states
as to which Lender shall give its advance consent in writing), and is not
covered by a negotiable document of title or warehouse receipt (unless such
document has been delivered to Lender and Lender has given its advance
consent in writing thereto);
1.23.3 in Lender's opinion, is not obsolete, unsalable,
damaged, or unfit for further processing;
1.23.4 does not consist of miscellaneous supplies,
display items, packing and shipping materials, discontinued or slow-moving
items, or finished goods of substandard quality;
1.23.5 is not placed by Borrower on consignment;
1.23.6 is of a type held for sale in the ordinary
course of Borrower's business; and
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1.23.7 is otherwise suitable for purposes of
determining the Inventory Borrowing Base, as determined by Lender in its sole
discretion.
1.24 "EVENTS OF DEFAULT" - see Section 10.1 hereof.
1.25 "EVIDENCE OF SPECIAL CREDIT ACCOMMODATION" - see Section
2.1.3 hereof.
1.26 "GUARANTORS" - all entities now or hereafter
guaranteeing the Obligations.
1.27 "GUARANTY" - a continuing guaranty in form and substance
acceptable to Lender by which a Guarantor guarantees the Obligations.
1.28 "INTEREST RATE" - the greater of: (a) four percent
(4%), per annum, in excess of the Prime Rate; and (b) eleven percent (11.0%)
per annum. To the extent the Interest Rate is calculated with reference to
the Prime Rate, any change in the Interest Rate shall be effective as of the
first day of the month following the date of any change in Prime Rate.
1.29 "INVENTORY ADVANCES" - advances made pursuant to the
second sentence of subsection 2.1.1.
1.29A "INVENTORY ALLOWABLE AMOUNT" - the lesser of the
Inventory Borrowing Base and the Inventory Maximum Commitment.
1.30 "INVENTORY BORROWING BASE" - zero percent (0%) of
Eligible Inventory.
1.31 "INVENTORY COLLATERAL MANAGEMENT FEE" - zero percent
(0%) per month of the average monthly Inventory of Borrower, as determined by
Lender in its sole discretion.
1.32 "INVENTORY MAXIMUM COMMITMENT" - at any time of
determination, the amount, if any, by which $0 exceeds the aggregate
principal amount of any advances or other extensions of credit outstanding
from Lender to or on behalf of any of the Affiliates other than Borrower for
the purpose of financing inventory.
1.33 "KEY EMPLOYEES" - none.
1.34 "LENDING OFFICE" - Lender's office described in Section
21.1 hereof.
1.35 "LIEN" - any lien, mortgage, security interest, pledge,
encumbrance, or charge of any kind, including, but not limited to, any
conditional sale or other title retention arrangement or similar preferential
arrangement.
1.36 "LOAN FEE" - $0.
1.37 "MAXIMUM COMMITMENT" - the A/R Maximum Commitment or the
Inventory Maximum Commitment, as applicable.
1.38 "MINIMUM MONTHLY CHARGE" - $6,000.00.
1.39 AMISDIRECTED PAYMENT FEE@ - Fifteen percent (15%)
percent of the amount of any payment on an account where said payment has
been received by Borrower and not delivered in kind by Borrower to Lender
within five (5) business days of receipt thereof.
1.40 "MONETARY COLLATERAL" - cash, checks or other proceeds
of Collateral in tangible form.
1.41 "NEGOTIABLE COLLATERAL" - see Section 5.6.1 hereof.
1.42 "NET FACE AMOUNT" - with respect to an Account , the
gross face amount of such Account less all trade discounts or other
deductions to which the Account Debtor is entitled.
1.43 "OBLIGATED PARTY" - see Section 5.2 hereof.
1.44 "OBLIGATIONS" - all present and future obligations owing
by Borrower to Lender whether or not for the payment of money, whether or not
evidenced by any note or other instrument, whether direct or indirect,
absolute or contingent, due or to become due, joint or several, primary or
secondary, liquidated or unliquidated, secured or unsecured, original or
renewed or extended, whether arising before, during or after the commencement
of any case with respect to Borrower under the United States Bankruptcy Code
or any similar statute, including but not limited to: the Revolving Credit
Facility, the Term Loan, the Term Note, any guaranty executed by Borrower in
respect of the obligations of any Affiliates to Lender, any obligations
arising pursuant to letters of credit or acceptance transactions or any other
financial accommodations; and all
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principal, interest, fees, charges, expenses, attorneys' fees and
accountants' fees chargeable to Borrower or incurred by Lender in connection
with this Agreement and/or the transaction(s) related thereto.
1.45 "OBLIGORS" - Borrower and all Guarantors.
1.46 "PRIME RATE" - at any time any determination thereof is
to be made, the "prime rate", base rate or reference rate announced by Wells
Fargo Bank, N.A. at its head office in San Francisco, California.
1.47 "REVOLVING CREDIT FACILITY" - see Section 2.1 hereof.
1.48 "SECURITY AGREEMENT" - any security agreement which
grants or purports to grant Lender a security interest in the Collateral.
1.49 "SPECIAL CREDIT ACCOMMODATION" - see Section 2.1.3
hereof.
1.50 "SPECIAL CREDIT ACCOMMODATION FEE" - three percent (3%)
of the original amount of any Special Credit Accommodation.
1.51 "STANDARD FEE SCHEDULE" - the schedule of Lender's
standard fees for services. 1.52 "SUBORDINATING CREDITOR" -
any Affiliate, or any individual or legal entity that holds any direct or
indirect equity interest in any Affiliate, that extends any credit to
Borrower.
1.53 "SUBORDINATION AGREEMENT" - a subordination agreement in
form and substance acceptable to Lender whereby a subordinating creditor
subordinates in favor of Lender obligations owed to it by Borrower.
1.54 "TERM LOAN" - see Section 2.2 hereof.
1.55 "TERM LOAN TERMINATION DATE" - the earlier of (i) the
date Lender may accelerate the Term Loan pursuant to Lender's rights under
Section 10.2 hereof, or (ii) June 1, 2001.
1.56 "TERM NOTE" - the promissory note substantially in the
form of Exhibit "C" hereto, executed by Borrower in favor of Lender to
evidence the Term Loan.
1.57 "TERMINATION DATE" - the earlier of the next Anniversary
Date (unless extended pursuant to the terms hereof) or the date on which
Lender elects to terminate this Agreement pursuant to the terms herein.
1.58 "TERMINATION CHARGES" -
1.58.1 the greater of: (i) the monthly average of all
interest and fees paid by Borrower to Lender hereunder for the 180 days (or
portion thereof if obligations have not been outstanding for at least 180
days) preceding the date which this calculation is to be made, for the period
from the date on which this determination is to be made to the next
Anniversary Date, or (ii) the Minimum Monthly Charge for the period from the
date on which this determination is to be made to the next Anniversary Date.
1.58.2 Notwithstanding the foregoing, if either (i) any
entity acquires at least twenty-five percent (25%) of the equity of Borrower
and the proceeds of such equity investment are used to pay in full the
Obligations, or (ii) a commercial bank refinances the Obligations in full,
then the Termination Charges shall be, either, two percent (2%) of the A/R
Maximum Commitment and the Inventory Maximum Commitment, if said refinance
occurs within twelve months of the first Credit Accommodation hereunder, or
one percent (1%) of the A/R Maximum Commitment and the Inventory Maximum
Commitment, if said refinance occurs between the thirteenth and eighteenth
months of the first Credit Accommodation hereunder, or one-half of one
percent (.5%) of the A/R Maximum Commitment and the Inventory Maximum
Commitment, if said refinance occurs between the nineteenth and twenty-fourth
months of the first Credit Accommodation hereunder.
2. CREDIT FACILITIES.
2.1 REVOLVING CREDIT FACILITY. Subject to the terms and
conditions of this Agreement, from the date on which this Agreement becomes
effective and until termination pursuant to the terms hereof:
2.1.1 ADVANCES. Lender shall, from time to time make
A/R Advances to Borrower, less any Availability Reserves, so long as, before
and after such A/R Advance, the Obligations relating only to the A/R Advances
do not exceed the A/R Allowable Amount. In addition, Lender shall, from time
to time make Inventory Advances to Borrower, less any Availability Reserves,
so long as, before and after such Inventory Advances, the Obligations
relating only to the Inventory Advances do not exceed the Inventory Allowable
Amount; provided, however, that the aggregate advances and other extensions
of credit by Lender to the Affiliates for the purpose of financing inventory
may not exceed 0% of the aggregate advances and other extensions of credit by
Lender to the Affiliates for the purpose of financing accounts receivable.
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2.1.2 REDUCTION OF BORROWING BASE. Lender may, in its
discretion, from time to time, upon not less than five (5) days prior notice
to Borrower, reduce the A/R Borrowing Base to the extent that Lender
determines in good faith that: (a) the dilution with respect to the Accounts
for any period (based on the ratio of (i) the aggregate amount of reductions
in Accounts other than as a result of payments in cash to (ii) the aggregate
amount of total sales) has increased in any material respect or may be
reasonably anticipated to increase in any material respect above historical
levels, or (b) the general creditworthiness of Account Debtors has declined.
In determining whether to reduce the A/R Borrowing Base, Lender may consider
events, conditions, contingencies or risks which are also considered in
determining Eligible Accounts or in establishing Availability Reserves.
2.1.3 SPECIAL CREDIT ACCOMMODATIONS. Lender may in its
sole and absolute discretion, from time to time, extend Credit Accommodations
to Borrower in excess of the Allowable Amount (any Credit Accommodation
extended to Borrower pursuant to this Section being a "Special Credit
Accommodation"). Each Special Credit Accommodation shall be evidenced by a
writing in form and substance satisfactory to Lender in its sole discretion
(any such writing, an "Evidence of Special Credit Accommodation").
Notwithstanding the terms and provisions of any Evidence of Special Credit
Accommodation, each Special Credit Accommodation shall be payable upon demand
unless otherwise agreed by Borrower and Lender.
2.1.4 GENERAL PROVISIONS RELATING TO REVOLVING CREDIT
FACILITY.
2.1.4.1 CREDITING OF BORROWER'S ACCOUNT. All
Advances by Lender may be made by deposits or transfers to Borrower's Account.
2.1.4.2 AUTHORIZATION FOR CREDIT ACCOMMODATIONS.
Subject to the terms and conditions of this Agreement, Lender is authorized
to make Credit Accommodations:
2.1.4.2.1 upon telephonic, facsimile or
other instructions received from anyone purporting to be an officer, employee
or representative of Borrower; or
2.1.4.2.2 at the sole discretion of
Lender, and notwithstanding any other provision in this Agreement, if
necessary to meet any Obligations, including but not limited to any interest
not paid when due.
2.1.5 CONDITIONS OF LENDER'S OBLIGATIONS. All
conditions of Lender's obligation to make Advances hereunder are imposed
solely and exclusively for the benefit of Lender and may be freely waived or
modified in whole or in part by Lender at any time.
2.2 TERM LOAN. On or after the Closing Date, subject to
Section 6 hereof, Lender will make to Borrower a term loan in the original
principal amount of Zero dollars ($0) (the "Term Loan"). The Term Loan shall
be evidenced by the Term Note and shall be amortized and fully repaid in
accordance with the terms thereof on or before the Term Loan Termination Date.
2.2.1 INTEREST ON TERM LOAN. Interest on the
outstanding principal balance of the Term Loan shall accrue daily from the
date of disbursement of the Term Loan until paid in full at the Prime Rate
plus four percent (4%) per annum ("Term Loan Interest Rate"). Interest on
the Term Loan shall be payable as set forth in the Term Note.
3. PAYMENTS BY BORROWER.
3.1 IN GENERAL.
3.1.1 PLACE OF PAYMENTS. All payments hereunder shall
be made by Borrower to Lender at the Lending Office, or at such other place
as Lender may designate in writing.
3.1.2 CREDITING OF PAYMENTS.
3.1.2.1 INTEREST CALCULATIONS. Any payments
received by Lender from Account Debtors shall, for the purpose of computation
of interest on the A/R Advances under the Revolving Credit Facility, be
credited to the A/R Advances under the Revolving Credit Facility on the
fourth (4th) business day after receipt by Lender.
3.1.2.2 GENERALLY. No payments received by
Lender purportedly in satisfaction of any of the Obligations shall constitute
payment thereof unless and until final payment thereof.
3.1.3 PREPAYMENTS; APPLICATION OF PAYMENTS. Borrower
shall have the right to make payments at any time in reduction of the
Revolving Credit Facility, in whole or in part, provided, however, that
Lender may apply any payments received to the Revolving Credit Facility in
any manner and in any order as Lender may determine in its sole discretion,
notwithstanding contrary instructions. Borrower shall have the
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right to make payments at any time in reduction of the Term Loan, in whole or
in part, provided, however, that Lender may apply any payments received to
the Term Loan in any manner and in any order as Lender may determine in its
sole discretion, notwithstanding contrary instructions, PROVIDED HOWEVER that
if Borrower satisfies in full its obligations under the Revolving Credit
Facility, Borrower must concurrently satisfy in full its obligations under
the Term Loan.
3.2 INTEREST AND FEES.
3.2.1 LOAN FEE. Borrower shall pay the Loan Fee to
Lender on an annual basis without offset, deduction, demand or proration (i)
concurrently with the first Credit Accommodation hereunder ("Loan Fee Date")
and (ii) on each anniversary of such Loan Fee Date. Any portion not paid
when due shall accrue interest at the applicable interest rate set forth
herein.
3.2.2 BASIC INTEREST. Subject to Section 3.2.3 hereof,
interest on the Obligations shall be payable monthly, in arrears, shall be
computed at the Interest Rate for the Revolving Credit Facility and on the
Term Loan Interest Rate for the Term Loan, and shall be due on the first day
of each month following the accrual thereof.
3.2.3 DEFAULT INTEREST. In lieu of Basic Interest,
immediately upon the occurrence of an Event of Default, unless waived by
Lender, Borrower shall pay Lender, monthly, until the first Anniversary Date
on which all Obligations have been fully paid, the greater of:
3.2.3.1 interest, before as well as after
judgment, at the Default Rate; or
3.2.3.2 the greater of:
3.2.3.2.1 the monthly average of all
interest and fees paid by Borrower to Lender hereunder for the preceding 180
days (or portion thereof if Obligations have not been outstanding for at
least 180 days): or
3.2.3.2.2 the Minimum Monthly Charge.
3.2.4 CALCULATION OF INTEREST. All interest charged
hereunder shall be computed on the basis of a three hundred sixty (360) day
year for the actual number of days elapsed. Notwithstanding anything to the
contrary contained herein, any interest rate calculated hereunder shall be
rounded to the closest 1/4 of 1%, with no adjustment made for rate changes of
less than 1/4 of 1%.
3.2.5 COLLATERAL MANAGEMENT FEE. Borrower shall pay
Lender the Collateral Management Fee monthly, in arrears, on the first day of
each month following the accrual thereof.
3.2.6 SPECIAL CREDIT ACCOMMODATION FEE. Simultaneously
with the making of a Special Credit Accommodation, Borrower shall pay to
Lender the Special Credit Accommodation Fee.
3.2.7 ADDITIONAL FEES. Borrower shall pay Lender fees
for such services as Lender customarily charges fees, as set forth in Lender
Standard Fee Schedule, a copy of which will be provided to Borrower on
demand. Lender shall have the right to change all or any of such fees upon
ten (10) days notice to Borrower.
3.2.8 MINIMUM MONTHLY CHARGE.
3.2.8.1 For any full month in which the sum of
(i) the aggregate interest paid by the Affiliates to Lender, and (ii) the
aggregate collateral management fees (including, without limitation, the
Collateral Management Fee) paid by the Affiliates to Lender is less than the
Minimum Monthly Charge, Lender shall debit the difference to the Obligations
as of the first day of the following month, until the date on which all
Obligations have been fully repaid (whether or not this Agreement has
heretofore been terminated).
3.2.8.2 In the event that this Agreement begins
on other than the first day of a month, or that the Obligations are fully
repaid on other than the last day of a month, the preceding section shall
apply pro-rata to such month.
3.2.8.3 If Borrower requests Lender to consent
to termination of this Agreement on a date earlier than Section 11 permits,
Borrower shall pay Lender the Termination Charges as computed pursuant to
Section 1.58.
3.2.9 MISDIRECTED PAYMENT FEE. Immediately upon
accrual, Borrower shall pay any misdirected Payment Fee to Lender.
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3.3 PAYMENTS UPON TERMINATION. Upon the Termination Date, the
unpaid balance of the Obligations (other than the Term Loan and the other
Obligations arising under Section 2.2 hereof) shall be due and payable
without demand or notice.
4. GRANT OF SECURITY INTEREST. To secure the payment and performance
in full of all of the Obligations, Borrower hereby grants to Lender a
continuing security interest in the Collateral.
5. COLLECTION AND ADMINISTRATION OF ACCOUNTS.
5.1 COLLECTION.
5.1.1 MONETARY COLLATERAL. Borrower is authorized to
collect Monetary Collateral on behalf of and in trust for Lender, at
Borrower's expense, but such authority shall automatically terminate upon an
Event of Default. Lender may modify or terminate such authority at any time
irrespective of whether an Event of Default has occurred and directly collect
any of the Monetary Collateral. Borrower shall, at Borrower's expense and in
the manner requested by Lender from time to time, direct that Monetary
Collateral be (or, if received by Borrower, shall cause same to be) (a) sent
to a post office box designated by and/or in the name of Lender, or in the
name of Borrower, but as to which access is limited solely to Lender and/or
(b) deposited into a bank account maintained in the name of Lender and/or a
blocked bank account under arrangements with the depository bank under which
all funds deposited to such blocked bank account are required to be
transferred to Lender. In connection therewith, Borrower shall execute such
post office box and/or blocked bank account agreements as Lender shall
specify.
5.1.2 ELECTRONIC PROCEEDS OF COLLATERAL. In the event
Borrower receives proceeds of Collateral in the form of wire transfer or
other intangible funds transfer mechanism, Borrower shall immediately pay
such proceeds to Lender.
5.2 NOTIFICATIONS, ETC. Lender may, at any time, irrespective
of whether an Event of Default has occurred, without notice to or the assent
of Borrower, (a) notify any entity obligated with respect to any Monetary
Collateral (an "Obligated Party"), by means of the letter attached as EXHIBIT
A, to the form and substance of which Borrower hereby consents, that the
underlying Monetary Collateral has been assigned to Lender by Borrower and
that payment thereof is to be made to the order of and directly and solely to
Lender, (b) send, or cause to be sent by its designee, requests (which may
identify the sender by a pseudonym) for verification of any Monetary
Collateral directly to the appropriate Obligated Party or any bailee with
respect thereto, and (c) demand, collect or enforce payment of any
Collateral, but without any duty to do so, and Lender shall not be liable for
any failure to collect or enforce payment thereof. At Lender's request, all
invoices and statements sent to any Obligated Party or any bailee, shall
state that the relevant Monetary Collateral has been assigned to Lender and
that any payments in respect thereof are payable directly and solely to
Lender.
5.3 LENDER'S POWERS. Borrower hereby authorizes Lender and
any designee of Lender, at Borrower's sole expense, to exercise at any time
in Lender's or such designee's discretion all or any of the following powers,
which powers are irrevocable until all of the Obligations have been paid in
full: (a) receive, take, endorse, assign, deliver, accept and deposit, in the
name of Lender or Borrower, any and all cash, checks, commercial paper,
drafts, remittances and other instruments and documents relating to the
Collateral or the proceeds thereof, (b) transmit to any Obligated Party or
any bailee notice of the interest of Lender in the Collateral or request from
any such entity, at any time, in the name of Borrower or Lender or any
designee of Lender, information concerning the Monetary Collateral and any
amounts owing with respect thereto, (c) notify any Obligated Party to make
payment directly and solely to Lender, or notify bailees as to the
disposition of Collateral, (d) take or bring, in the name of Lender or
Borrower, all steps, actions, suits or proceedings deemed by Lender necessary
or desirable to effect collection of or other realization upon any
Collateral, (e) after an Event of Default, change the address for delivery of
mail to Borrower and to receive and open mail addressed to Borrower, (f)
after an Event of Default, upon any terms and conditions, extend the time of
payment of, compromise, or settle for cash, credit, return of merchandise,
any and all Monetary Collateral and discharge or release any Obligated Party
without affecting any of the Obligations, (g) execute in the name of Borrower
and file against Borrower in favor of Lender financing statements or
amendments with respect to any or all of the Collateral, and (h) execute in
the name of Borrower and file on behalf of Borrower with such governmental
authorities as are appropriate such documents (including, without limitation,
applications and certificates) as may be required for purposes of having
Borrower qualified to transact business in a particular state or georaphic
location.
5.4 RELEASE. Borrower hereby releases and exculpates Lender,
its officers, employees, agents, designees, attorneys, and accountants from
any liability arising from any acts under this Agreement or in furtherance
thereof, whether of omission or commission, and whether based upon any error
of judgment or mistake of law or fact, except for gross negligence or willful
misconduct. In no event shall Lender have any liability to Borrower for lost
profits or other special or consequential damages.
5.5 NO AMENDMENTS. After written notice by Lender to
Borrower, and automatically, without notice, after an Event of Default,
Borrower shall not, without the prior written consent of Lender in each
instance, (a) grant any extension of time for payment of any Monetary
Collateral, (b) compromise or settle any
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Monetary Collateral for less than the full amount thereof, (c) release in
whole or in part any Obligated Party, or (d) grant any credits, discounts,
allowances, deductions, return authorizations or the like with respect to any
Monetary Collateral.
5.6 DELIVERY OF COLLATERAL. At such times as Lender may
request and in the manner specified by Lender, Borrower shall deliver to
Lender or Lender's representative original invoices, agreements, proof of
rendition of services and delivery of goods and other documents evidencing or
relating to the transactions which gave rise to any of the Collateral,
together with customer statements, schedules describing the Monetary
Collateral and/or statements of account and confirmatory assignments to
Lender of the Monetary Collateral, in form and substance satisfactory to
Lender and duly executed by Borrower. Without limiting the provisions of any
other section of this Agreement, Borrower will promptly notify Lender, in
writing, of Borrower's granting of credits, discounts, allowances,
deductions, return authorizations or the like with respect to any Monetary
Collateral other than in the ordinary course of Borrower's business. In no
event shall any such schedule or confirmatory assignment (or the absence
thereof or omission of any Monetary Collateral therefrom) limit or in any way
be construed as a waiver, limitation, or modification of the Liens or rights
of Lender or the warranties, representations, and covenants of Borrower under
this Agreement.
5.6.1 In addition, in the event that any Collateral,
including proceeds, is evidenced by or consists of a contract, letter of
credit, advice of credit, instrument, money, negotiable documents, chattel
paper, or similar property (collectively, the "Negotiable Collateral"),
Borrower shall, immediately upon written request therefor from Lender,
endorse and assign such Negotiable Collateral over to Lender and deliver
actual physical possession of the Negotiable Collateral to Lender.
5.7 INSPECTION. From time to time as requested by Lender, at
the sole expense of Borrower, Lender or its designee shall have access,
during reasonable business hours if prior to an Event of Default and at any
time if on or after an Event of Default, to all premises where Collateral is
located for the purposes of inspecting (and removing, if after the occurrence
of an Event of Default) any of the Collateral, including Borrower's books and
records, and Borrower shall permit Lender or its designee to make copies of
such books and records or extracts therefrom as Lender may request. Without
expense to Lender, Lender may use any of Borrower's personnel, equipment,
including computer equipment, programs, printed output and computer readable
media, supplies and premises for the collection of accounts and realization
on other Collateral as Lender, in its sole discretion, deems appropriate.
Borrower hereby irrevocably authorizes all accountants and third parties, in
the form attached hereto as EXHIBIT B, to disclose and deliver to Lender at
Borrower's expense all financial information, books and records, work papers,
management reports and other information in their possession relating to
Borrower. In addition to the foregoing, Borrower hereby authorizes Lender at
any time to access electronically information concerning any accounts
maintained by Borrower with any bank or other financial institution so long
as such access is in furtherance of, or to monitor compliance with, the terms
of this Agreement.
6. CONDITIONS PRECEDENT TO ALL CREDIT ACCOMMODATIONS. Subject to the
other terms and conditions contained herein, Lender's obligation to make any
Credit Accommodation or Term Loan available to Borrower is subject to the
satisfaction of, or waiver of, immediately prior to or concurrently with the
making of such Credit Accommodation, the following conditions precedent:
6.1 EXECUTIONS. This Agreement and all other Documents
required by Lender shall be executed by Borrower and all other Obligors.
6.2 REPRESENTATIONS AND WARRANTIES. All representations and
warranties of Borrower to Lender set forth herein or in any of the Documents
shall be true and accurate and complete in all respects;
6.3 NO EVENT OF DEFAULT. There shall not exist an Event of
Default or an event which with the giving of notice or the passage of time,
or both, would be or become an Event of Default; and
6.4 PAYMENT OF ALL FEES. Borrower shall have paid to Lender
all accrued and unpaid fees and other amounts due and payable hereunder and
pursuant to the terms hereof including, without limitation, all of Lender's
attorneys' fees.
7. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower represents
and warrants to Lender as follows, the truth and accuracy of which, and
compliance with which, shall be continuing conditions of the making of any
Credit Accommodations:
7.1 PRIORITY INTEREST. No entity other than Lender has (or,
in the case of after-acquired Collateral, will have, at the time Borrower
acquires rights therein) any interest in the Collateral, including but not
limited to any security interest or other lien or charge.
7.2 ACCOUNTS. As to each Account, except as disclosed in
writing to Lender at the time such Account Receivable arises: (a) each is
valid and legally enforceable and represents an undisputed bona fide
indebtedness incurred by the account debtor for the sum reported to Lender;
(b) each arises from an absolute and unconditional sale of goods, without any
right of return or consignment, or from a completed rendition of
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services; (c) each is not, at the time such Account Receivable arises,
subject to any defense, offset, dispute, contra relationship, counterclaim,
or any given or claimed credit, allowance or discount; and (d) all statements
made and all unpaid balances and other information appearing in the invoices,
agreements, proofs of rendition of services and delivery of goods and other
documentation relating to the Accounts Receivable, and all confirmatory
assignments, schedules, statements of account and books and records with
respect thereto, are true and correct and in all respects what they purport
to be.
7.3 CONDITION OF EQUIPMENT. With respect to Borrower's
equipment, Borrower shall keep the Equipment in good order and repair, and in
running and marketable condition, ordinary wear and tear excepted.
8. BORROWER'S AFFIRMATIVE COVENANTS. Until payment in full of the
Obligations, Borrower agrees to:
8.1 FINANCIAL STATEMENTS, REPORTS AND CERTIFICATIONS. Furnish
to Lender, in form and substance satisfactory to Lender:
8.1.1 ANNUAL FINANCIAL STATEMENTS. As soon as possible
after the end of each fiscal year of Borrower, and in any event within ninety
(90) days thereafter: (a) a complete copy of Borrower's financial
statements, including but not limited to (i) the management letter, if any,
(ii) the balance sheet as of the close of the fiscal year, and (iii) the
income statement for such year, together with a statement of cash flows,
reviewed by certified public accountants selected by Borrower and
satisfactory to Lender; and (b) a statement certified by the chief financial
officer or president of Borrower that Borrower is in compliance with all the
terms, conditions, covenants and warranties of this Agreement; and
8.1.2 OTHER FINANCIAL STATEMENTS. No later than sixty
(60) days after the close of each fiscal quarter (an "Accounting Period"),
Borrower's balance sheet as of the close of such Accounting Period and its
income statement for that portion of the then current fiscal year through the
end of such Accounting Period certified by Borrower's chief financial officer
or president as being complete, correct, and fairly representing its
financial condition and results of operations.
8.1.3 INVENTORY REPORTS. On or before (I) the
fifteenth day of each month and (ii) the last day of each month, a statement
describing all Inventory of Borrower as of such date, including the
composition thereof, which statement shall be in form and substance
satisfactory to Lender. Said reports are required only when Lender is making
Inventory Advances.
8.2 EXPENSES.
8.2.1 GENERALLY. Pay all out-of-pocket expenses of
Lender (including, but not limited to, fees and disbursements of Lender's
counsel) incident to (whether by judicial proceedings or otherwise, and
whether any resulting dispute resolution procedure involving tort, contract
or other claims):
8.2.1.1 the preparation, negotiation, execution,
administration and enforcement of the Documents, any amendments, extensions
and renewals thereof, and any other documents prepared in connection with any
transactions between Borrower and Lender, whether or not executed;
8.2.1.2 any expenses incurred by Lender (whether
or not for the benefit of Borrower) under this Agreement, including, without
limitation, all expenses for postage relating to the mailing of statements,
invoices, and verifications, and all expenses relating to any audits of all
or any portion of the Collateral;
8.2.1.3 the protection of Lender's rights under
the Documents;
8.2.1.4 defending against any and all claims
against Lender relating to any of its acts of commission or omission directly
or indirectly relating to the Documents;
8.2.1.5 or in any way arising out of a
bankruptcy proceeding commenced by or against Borrower, including but not
limited to expenses incurred in enforcing or defending Lender's claims
against Borrower or the Collateral, defending any avoidance actions, and
expenses related to the administration of said proceeding;
8.2.2 INDEMNIFICATION. Indemnify and save Lender
harmless from any and all liability with respect to any stamp or other taxes
(other than transfer or income taxes) which may be determined to be payable
in connection with the execution of the Documents or any action of Lender
with respect to the Collateral, including, without limitation, the transfer
of the Collateral to Lender's name or that of Lender's nominee or any
purchaser at a foreclosure sale.
8.3 COSTS AND EXPENSES - ENFORCEMENT OF JUDGMENTS. Reimburse
Lender for all costs and expenses, including attorneys' fees, which Lender
incurs in enforcing any judgment rendered in connection with
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this Agreement. This provision is severable from all other provisions hereof
and shall survive, and not be deemed merged into, any such judgment.
8.4 TAXES AND EXPENSES REGARDING BORROWER'S ASSETS. Make
timely payment or deposit of all taxes, assessments or contributions required
of Borrower. If Borrower fails to make any such payment or deposit or
furnish the required proof, Lender may, in its sole discretion and without
notice to Borrower, (a) make payment of the same or any part thereof, or (b)
set up such reserves against the Obligations as Lender deems necessary to
satisfy the liability therefore, or both. Lender may conclusively rely on
statements of the amount owing or other official statements issued by the
appropriate governmental agency. Any payment made by Lender shall constitute
neither (i) an agreement by Lender to make similar payments in the future,
nor (ii) a waiver by Lender of any default under the Documents. Lender need
not inquire into, nor contest the validity of, any expense, tax, security
interest, encumbrance or lien, and the receipt of the usual official notice
requiring the payment thereof shall be conclusive evidence that the same was
validly due and owing.
8.5 LOCATION OF COLLATERAL. Give Lender written notice
immediately upon forming an intention to change the location of its chief
place of business or any of the Collateral.
8.6 CHANGE IN NAME. Give Lender written notice immediately
upon forming an intention to change its name or form of business organization.
8.7 INSURANCE. At all times maintain, with financially sound
and reputable insurers, casualty insurance with respect to the Collateral and
other assets. All such insurance policies shall be in such form, substance,
amounts and coverage as may be satisfactory to Lender and shall provide for
thirty (30) days prior written notice to Lender of cancellation or reduction
of coverage. Borrower hereby irrevocably authorizes Lender and any designee
of Lender to obtain at Borrower's expense, and, after an Event of Default, to
adjust or settle any claim or other matter under or arising pursuant to such
insurance or to amend or cancel such insurance. Borrower shall deliver to
Lender evidence of such insurance and a Lender's loss payable endorsement
naming Lender as loss payee as to all existing and future insurance policies
relating to the Collateral. Borrower shall deliver to Lender, in kind, all
instruments representing proceeds of insurance received by Borrower. Lender
may apply any and all insurance proceeds received at any time to the cost of
repairs to or replacement of any portion of the Collateral and/or, at
Lender's option, to the payment of or as security for any of the Obligations,
whether or not due, in any order or manner as Lender determines.
9. BORROWER'S NEGATIVE COVENANTS.
9.1 Until payment in full of the Obligations, Borrower shall
not suffer to exist any Lien upon any of its assets, except that Borrower may
acquire new equipment encumbered with purchase money security interests;
9.2 Borrower agrees that so long as it is indebted to Lender,
or so long as Lender has any obligation to extend credit to Borrower, it will
not, without Lender's written consent make any change in the character of its
business; or make any change in its executive management (Chairman of the
Board, Chief Executive Officer, President, and Chief Financial Officer).
10. EVENTS OF DEFAULT AND REMEDIES.
10.1 EVENTS OF DEFAULT. Each of the following events or
conditions shall constitute an "Event of Default":
10.1.1 Borrower defaults in the payment of any
Obligations when due, whether at maturity, upon acceleration, or otherwise;
10.1.2 Borrower and/or any Guarantor is in default with
respect to the Documents and/or any other document, instrument, agreement or
indebtedness entered into by and between Lender and any Obligor;
10.1.3 The Obligations at any time exceed the Allowable
Amount;
10.1.4 Borrower or any Guarantor fails to pay any loan
when due;
10.1.5 Borrower or any Guarantor fails to pay any
payroll tax obligation when due;
10.1.6 An order for relief is entered against any
Obligor by any United States Bankruptcy Court; or Borrower or any Guarantor
does not generally pay its debts as they become due (within the meaning of 11
U.S.C. 303(h) as at any time amended, or any successor statute thereto); or
makes an assignment for the benefit of creditors; or any Obligor applies for
or consents to the appointment of a custodian, receiver, trustee, or similar
officer for it or for all or any substantial part of its assets, or such
custodian, receiver, trustee, or similar officer is appointed without the
application or consent of any Obligor; or any Obligor institutes (by
petition, application, answer, consent, or otherwise) any bankruptcy,
insolvency, reorganization,
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moratorium, arrangement, readjustment of debt, dissolution, liquidation or
similar proceeding relating to it under the laws of any jurisdiction; or any
such proceeding shall be instituted (by petition, application, or otherwise)
against any Obligor; or any judgment, writ, warrant of attachment, execution,
or similar process shall be issued or levied against a substantial portion of
the assets of any Obligor; or
10.1.7 An adverse change occurs with respect to the
financial condition or operations of Borrower which results in a material
impairment of the prospect of repayment of the Obligations;
10.1.8 A sale, hypothecation or other disposition is
made of the beneficial interest in any class of voting stock of Borrower
which results in a change in control of Borrower's business;
10.1.9 Any Guarantor fails to perform or observe any of
such Guarantor's obligations under any Guaranty, or shall notify Lender of
its intention to rescind, modify, terminate or revoke the Guaranty with
respect to future transactions, or the Guaranty shall cease to be in full
force and effect for any reason whatever;
10.1.10 Any Subordinating Creditor fails to perform or
observe any of such Subordinating Creditor's obligations under any
Subordination Agreement, or notifies Lender of the Subordinating Creditor's
intention to rescind, modify, terminate or revoke the Subordination Agreement
with respect to future transactions, or the Subordination Agreement ceases to
be in full force and effect for any reason whatsoever;
10.1.11 Any of the Key Employees fails to devote 100%
of their efforts in furtherance of the business affairs of Borrower for any
one month, or ceases to be employed by Borrower.
10.2 REMEDIES.
10.2.1 Upon the occurrence of any Event of Default
(other than an Event of Default arising under Section 10.1.6 hereof), at
Lender's option:
10.2.1.1 Lender may declare this Agreement and
all of Lender's obligations hereunder terminated;
10.2.1.2 Lender may declare all Obligations to
be immediately due and payable, without presentment, demand, protest, or
notice of any kind, all of which are hereby expressly waived by Borrower;
10.2.1.3 all Obligations shall accrue interest
at the Default Rate; and
10.2.1.4 Lender may, immediately and without
expiration of any period of grace, enforce payment of all Obligations and
exercise any and all other remedies granted to it under the Documents, at
law, in equity, or otherwise.
10.2.2 Upon the occurrence of any Event of Default
arising under Section 10.1.6 hereof:
10.2.2.1 this Agreement and all of Lender's obligations
hereunder shall automatically terminate;
10.2.2.2 all Obligations shall be immediately
due and payable, without presentment, demand, protest, or notice of any kind,
all of which are hereby expressly waived by Borrower;
10.2.2.3 all Obligations shall accrue interest
at the Default Rate; and
10.2.2.4 Lender may, immediately and without
expiration of any period of grace, enforce payment of all Obligations and
exercise any and all other remedies granted to it under the Documents, at
law, in equity, or otherwise.
10.3. LIQUIDATION SUCCESS PREMIUM. To induce Lender to
collect, sell or otherwise dispose of the Collateral (the ALiquidation@) in
accordance with standards higher than that which may be commercially
reasonable (but without obligating Lender to exercise such higher standards),
Borrower agrees that if it shall essentially cease operating as a going
concern, and the proceeds from the Liquidation after the occurrence of an
Event of Default (the ADefault@) are in excess of the Obligations at the time
of Default, Borrower shall pay to Lender a liquidation success premium of ten
(10%) percent of the amount of such excess.
11. TERMINATION. The Revolving Credit Facility shall continue in
effect until the next Anniversary Date, and shall thereafter be automatically
renewed from year to year thereafter, subject to the terms of this Agreement,
unless:
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11.1 Lender gives Borrower notice of non-renewal, in which
event the Revolving Credit Facility shall terminate sixty (60) days from the
date of such notice; or
11.2 Borrower gives Lender notice of non-renewal, in which
event the Revolving Credit Facility shall terminate on the Anniversary Date
which is at least sixty (60) days from the date on which such notice of
termination is actually received by Lender.
11.3 The Term Loan may not be renewed without a signed
writing by Lender.
12. REVOCATION OF BORROWER'S RIGHT TO SELL INVENTORY FREE AND CLEAR OF
LENDER'S SECURITY INTEREST. Lender may, upon the occurrence of an Event of
Default, (a) revoke Borrower's right to sell inventory free and clear of
Lender's security interest therein and (b) notify Borrower's account debtors,
or any other party(ies), of such revocation by means of language
substantially equivalent to that contained in EXHIBIT A attached hereto.
13. NO LIEN TERMINATION WITHOUT RELEASE. In recognition of Lender's
right to have all its attorneys' fees and other expenses incurred in
connection with this Agreement secured by the Collateral, notwithstanding
payment in full of all Obligations by Borrower, Lender shall not be required
to record any terminations or satisfactions of any of its liens on the
Collateral unless and until Borrower and all Guarantors have executed and
delivered to Lender general releases which conform to California Civil Code
Sections 1541-2.
14. DISCLAIMER FOR NEGLIGENCE. Lender shall not be liable for any
claims, demands, losses or damages made, claimed or suffered by Borrower,
except such as may arise through or could be caused by Lender's gross
negligence or willful misconduct.
15. LIMITATION OF CONSEQUENTIAL DAMAGE. Lender shall not be
responsible for any lost profits of Borrower arising from any breach of
contract, tort (excluding the Lender's gross negligence or willful
misconduct), or any other wrong arising from the establishment,
administration or collection of the Obligations.
16. ACCOUNT STATED. Lender shall render to Borrower a statement
setting forth the transactions arising hereunder. Each statement shall be
considered correct and binding upon Borrower as an account stated, except to
the extent that Lender receives, within thirty (30) days after the mailing of
such statement, written notice from Borrower of any specific exceptions by
Borrower to that statement.
17. RETENTION OF RECORDS. Lender shall retain any documents,
schedules, invoices or other papers delivered by Borrower only for such
period as Lender, at its sole discretion, may determine necessary, after
which time Lender may destroy such records without notice to or consent from
Borrower.
18. NOTICES TO THIRD PARTIES. Upon the occurrence of an Event of
Default as described in Section 10.1 hereof, Lender shall have the right to
give any Guarantor or Subordinating Creditor notice of any fact or event
relating to this Agreement, as Lender may deem necessary or desirable in
Lender's sole discretion, including, without limitation, Borrower's financial
condition. Borrower shall provide to each Guarantor and Subordinating
Creditor a copy of each notice, statement or report required to be given to
Lender under any of the paragraphs of this section.
19. INFORMATION TO PARTICIPANTS. Lender may furnish any financial or
other information concerning Borrower, or any of its subsidiaries, heretofore
or hereafter provided by Borrower to Lender, pursuant to this Agreement or
otherwise, to any prospective or actual purchaser of any participation or
other interest in any loans made by Lender to Borrower (whether under this
Agreement or otherwise), or to any prospective purchaser of any securities
issued or to be issued by Lender.
20. ENTIRE AGREEMENT. This Agreement supersedes all prior agreements
and understandings relating to the subject matter hereof. No course of prior
dealings between the parties, no usage of the trade, and no parol or
extrinsic evidence of any nature, shall be used or be relevant to supplement,
explain or modify any term used herein. In the event of any conflict between
a term or condition of this Agreement and a term or condition of any
document(s) executed in connection herewith, the term or condition of this
Agreement shall govern. This Agreement has been fully reviewed and negotiated
between the parties and no uncertainty or ambiguity in any term or provision
of this Agreement shall be construed strictly against Lender or Borrower
under any rule of construction or otherwise.
19. MISCELLANEOUS.
19.1 NOTICES. All notices required to be given to any entity
other than Lender shall be deemed given upon the first to occur of (a)
deposit thereof in a receptacle under the control of the United States Postal
Service, (b) transmittal by electronic means to a receiver under the control
of such entity, or (c) actual receipt by such party or an employee or agent
of such entity. All notices required to be given to Lender hereunder shall
be deemed given upon actual receipt by a responsible officer of Lender. For
the purposes hereof, notices hereunder shall be sent to the following
addresses, or to such other addresses as each such entity may in writing
hereafter indicate:
13
<PAGE>
BORROWER
ADDRESS: PHOTOMATRIX, INC.
1958 Kellogg Ave.
Carlsbad, CA 92008
Telephone Number: (760) 431-4999
Telefacsimile Number: (760) 438-5517
Attention: Patrick W. Moore, President
LENDER
(Lending Office)
ADDRESS: CELTIC CAPITAL CORPORATION
2951 28th Street
Suite 2030
Santa Monica, CA 90405
Telephone Number: (310) 314-7333
Telefacsimile Number: (310) 314-7338
Attention: Mark Hafner, President
19.2 SURVIVAL. All representations, warranties and
agreements herein contained on the part of Borrower shall survive the making
of Advances hereunder, and all such representations, warranties and
agreements shall be effective so long as any obligations owed to Lender by
Borrower remain unsatisfied or for such longer periods as may be expressly
stated.
19.3 AMENDMENT AND WAIVER. Neither this Agreement nor any
provisions hereof may be changed, waived, discharged or terminated orally,
but only by an instrument in writing signed by the party against whom
enforcement of the change, waiver, discharge or termination is sought.
19.4 NO WAIVER. No failure to exercise and no delay in
exercising any right, power, or remedy hereunder shall impair any right,
power, or remedy which Lender may have, nor shall any such delay be construed
to be a waiver of any of such rights, powers, or remedies, or any
acquiescence in any breach or default hereunder; nor shall any waiver of any
breach or default of Borrower hereunder be deemed a waiver of any default or
breach subsequently occurring. All rights and remedies granted to Lender
hereunder shall remain in full force and effect notwithstanding any single or
partial exercise of, or any discontinuance of action begun to enforce, any
such right or remedy. The rights and remedies specified herein are
cumulative and not exclusive of each other or of any rights or remedies which
Lender would otherwise have. Any waiver, permit, consent or approval by
Lender of any breach or default hereunder must be in writing and shall be
effective only to the extent set forth in such writing and only as to that
specific instance.
191.5 CHOICE OF LAW. All issues arising in connection
herewith shall be governed by and construed in accordance with the internal
laws of the State of California.
19.6 WAIVER OF STATUTE OF LIMITATIONS. Borrower waives the
pleading of any statute of limitations with respect to any and all actions in
connection herewith.
19.7 VENUE. Borrower irrevocably agrees that, subject to
Lender's sole discretion, all actions and proceedings in any way, manner or
respect, arising in connection herewith (collectively, the "Actions") shall
be litigated in courts having situs within the County of Los Angeles, State
of California, and Borrower hereby consents and submits to the jurisdiction
of any local, state or federal court located within said County and State.
Borrower hereby waives any right it may have to transfer or change the venue
of any litigation brought against Borrower by Lender in accordance with this
paragraph.
19.8 WAIVER OF TRIAL BY JURY. IN RECOGNITION OF THE HIGHER
COSTS AND DELAY WHICH MAY RESULT FROM A JURY TRIAL, THE PARTIES HERETO WAIVE
ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION
(a) ARISING HEREUNDER, OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT
HERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND
CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE
DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY HERETO MAY FILE AN
ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO
TRIAL BY JURY.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the day and year first written above.
PHOTOMATRIX, INC.
14
<PAGE>
-------------------------------------
Patrick W. Moore
Title: CEO
CELTIC CAPITAL CORPORATION
-------------------------------------
Mark Hafner
Title: President
15
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
Photomatrix Imaging, Inc., Nevada
I-PAC Manufacturing, Inc., California
National Metal Technologies, Inc., California
I-PAC Precision Machining, California
Photomatrix Acquisition Inc., California
PHRX Rep Co., California
I-PAC Express Assembly, Inc.
Lexia Systems, Inc., California
Xscribe Imaging, Inc., California
Xscribe Legal Systems, Inc. California
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Photomatrix, Inc.:
We hereby consent to the incorporation by reference in the Registration
Statements (Nos. 33-18896, 33-72122 and 33-61951) on Form S-8 of our report
dated July 16, 1999, relating to the consolidated financial statements of
Photomatrix, Inc. and subsidiaries appearing in the Company's Annual Report
on Form 10-KSB for the year ended March 31, 1999.
BDO SEIDMAN, LLP
Costa Mesa, California
September 3, 1999
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Photomatrix, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-18896, 33-72122 and 33-61951) on Form S-8 of Photomatrix, Inc. and
subsidiaries of our report dated May 29, 1998, except as to Note 4 to the
consolidated financial statements as to which the date is September 3, 1999,
relating to the consolidated statements of operations, shareholders' equity, and
cash flows of Photomatrix, Inc. and subsidiaries for the year ended March 31,
1998, which report appears in the March 31, 1999, annual report on Form 10-KSB
of Photomatrix, Inc.
Our report dated May 29, 1998, except as to Note 4 to the consolidated
financial statements as to which the date is September 3, 1999, contains an
emphasis paragraph that states that in March 1999 the Company approved a plan
to sell its document scanner operations. Operations and cash flows for the
year ended March 31, 1998 have been reclassified to discontinued operations.
KPMG LLP
San Diego, California
September 2, 1999
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<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 42,000
<SECURITIES> 0
<RECEIVABLES> 1,740,000
<ALLOWANCES> (292,000)
<INVENTORY> 725,000
<CURRENT-ASSETS> 5,283,000
<PP&E> 2,141,000
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0
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<COMMON> 21,376,000
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<TOTAL-LIABILITY-AND-EQUITY> 9,354,000
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