UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
____________
Commission file number: 0-22515
MILLENNIUM ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Nevada 33-0750730
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
31462 South Coast Highway, Suite 100
Laguna Beach, California 92677
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 499-0877
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ..X.. No .....
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the Registrant's $.001 Par Value Common Stock (based
on the price at which such equity was sold) held by non-affiliates of the
Registrant. -- $16,152,276.
At March 12, 1998, there were 8,282,366 shares of the Registrant's $.001 Par
Value Common Stock outstanding.
Documents Incorporated By Reference
The information required by Part III of this report is incorporated herein by
reference from the Registrant's definitive proxy statement relating to the
annual meeting of stockholders to be held in 1998, which definitive proxy
statement will be filed with the Securities and Exchange Commission within 120
days after the end of the fiscal year to which this Report relates.
Exhibit Index on Page 53
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PART I
ITEM 1. BUSINESS
The following discussion contains trend information and other
forward-looking statements (including statements regarding future operating
results, future capital expenditures and facility expansion, new product
introductions, technological developments and industry trends) that involve a
number of risks and uncertainties. The Company's actual results could differ
materially from the Company's historical results of operations and those
discussed in the forward-looking statements. Given these uncertainties,
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revisions to any of the forward-looking
statements contained or incorporated by reference herein to reflect any events
or developments. Factors that could cause actual results to differ materially
include, but are not limited to, those identified in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors That May Affect Future Results." All period references are to the years
ended December 31, 1997, 1996 or 1995, unless otherwise indicated.
General
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Millennium Electronics, Inc., a Nevada Corporation (the "Company" or
"Registrant"), was incorporated as Millennium Holdings, Inc. in February 1997.
The Company manufactures and sells personal computer ("PC") systems and
semiconductor memory products through its wholly owned subsidiary, Millennium
Memory, Inc., a California corporation ("MMI") originally incorporated as USA
Systems Distribution, Inc. in November 1994. The Company is the successor by
merger to Beacon Capital Investments, Inc., a Delaware corporation incorporated
in November 1991 ("Beacon"), effective March 31, 1997. In a substantially
concurrent reverse triangular merger, MMI became a wholly owned subsidiary of
the Company. Prior to the mergers, Beacon and the Company had no business
activity.
Pursuant to an Agreement of Merger by and among the Company, MMI,
NetRam and the Shareholders of NetRam dated as of September 30, 1997, the
Company acquired 100% of the outstanding common stock of NetRam Components,
Inc., a California corporation ("NetRam") and nationwide provider of high-end,
high-powered PC systems, and NetRam was merged with and into MMI, establishing a
new business division of the Company. As of December 31, 1997, the Company had
35 employees.
PRODUCTS
Semiconductor Memory Products
- -----------------------------
The Company manufactures, through subcontractors, and distributes
memory upgrade components for PC's, laptop and notebook computers, file servers
and printers. The Company provides DRAM memory upgrade products to value added
resellers ("VARs"), value added distributors ("VADs"), original equipment
manufacturers ("OEM's"), aggregators, and distributors. There are seven major
Japanese manufacturers of RAM memory: (1) Toshiba; (2) Mitsubishi; (3) NEC;
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(4) Hitachi; (5) Oki; (6) Matsushita/Panasonic; and (7) Fujitsu. Other
Japanese memory manufacturers include NMPX and Mosel-Vitelic. There are three
major Korean manufacturers of RAM memory: (1) Samsung; (2) Gold Star; and (3)
Hyundai. United States memory manufacturers include Micron Technology, IBM,
Motorola and Texas Instruments ("TI"). In addition, Siemens is a European memory
manufacturer. The Company purchases memory chips in the spot market from memory
trading companies who have direct allocations with the chip manufacturers listed
above. The Company also purchases directly from semiconductor manufacturers.
Once memory chips have been purchased, the Company has historically
sent the chips to a subcontractor which builds and tests the finished goods
memory modules. After the Company receives the assembled memory modules from the
subcontractor, the Company tests all finished goods and adds a unique Company
serial number to each product. Memory inventory purchased by the Company is
usually pre-sold, so once assembly, testing and serializing has been completed,
products are placed in anti-static wrapping to assure electronic static
distribution ("EDS") shielding and shipped to customers.
Industry Background
The demand for semiconductor memory devices in digital electronic
systems has grown dramatically over the last several years as a result of the
increasing importance of memory in determining system performance. The demand
for greater system performance has required that electronics manufacturers
increase the number and functionality of memory devices incorporated into
systems. As a result of this trend, and prior to 1996, the percentage of total
system costs represented by memory devices rose steadily for several years.
Other factors which have contributed to the increasing demand for memory devices
include the expanding unit sales of personal computers in the business and
consumer market segments; the increasing use of personal computers to perform
memory-intensive graphics and multimedia functions; the volume of memory
required to support faster microprocessors; the proliferation of increasingly
complex personal computer software; and the increasing performance requirements
of workstations, servers and networking and telecommunications equipment. Memory
integrated circuits encompass several types of devices designed to perform
specific functions within computer and other electronic systems.
One of the most significant categories of semiconductor memory is DRAM.
DRAM provides large capacity "main" memory. DRAMs are the most commonly used
memory devices for storage and retrieval of data during a system's operation.
The market for DRAMs continues to represent a majority of the market for all
memory devices. The development of more powerful personal computers and
workstations and the increasing emphasis on high-throughput networking and
telecommunications products have resulted in the need for higher volumes and
greater varieties of DRAM memory in electronic systems. For example, PCs
currently based on 486, Pentium and PowerPC microprocessors frequently employ
eight to 32 megabytes ("Mbytes") of DRAM, which is significantly more memory
than that employed by older generation PCs. There was a dramatic increase in the
demand for and price of DRAM in 1995 accompanying the release of Windows 95(R)
which requires 16 Mbytes of DRAM memory for higher performance to support
Windows 95(R) multitasking capabilities. However, as a result of overproduction
and lower than anticipated sales of Windows 95, in 1996 the price of DRAM
declined by as much as 80% from the beginning of 1996. Nevertheless, during 1997
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the Company's primary product was the 16 Mbyte DRAM which it sold in various
configurations. DRAM sales volumes increased in 1997 over 1996 while prices
continued to decline as a result of oversupply and increased competition. The
Company believes the overall DRAM market is becoming more diversified as a
variety of architectures, features, organizations, densities and operating
voltages have been introduced to address different applications and performance
requirements. Examples of such architectures and features include Synchronous
DRAM ("SDRAM"), Synchronous Graphics RAM ("SGRAM"), RAMBUS, Video RAM ("VRAM"),
Fast Page Mode ("FPM"), Extended Data Out ("EDO") and Burst EDO. DRAM modules
are available in configurations ranging from one bit to 72 bits wide, densities
of up to 256 megabits ("MBits") and in operating voltages of 5.0 volts and 3.3
volts. The Company has begun production of its 256 Mbyte modules and expects to
increase production of its 256 Mbyte modules as customer demand shifts away from
16 Mbyte DRAM.
Memory Modules
Memory modules are compact circuit board assemblies consisting of DRAM
or other semiconductor memory devices and related circuitry. Electronic systems
increasingly employ memory modules as building blocks in system design as a
result of the many advantages memory modules offer OEMs and end users. The use
of memory modules enables OEMs to offer a relatively easy path for
upgradeability of a personal computer or workstation, a feature of system design
which is increasingly required by end users. The use of memory modules allows
OEMs to increase flexibility by enabling them to easily configure a system with
a variety of different levels of memory, thus enabling OEMs to address multiple
price points or applications with a single base system design. To achieve this
upgradeability and flexibility, both PC and communications OEMs frequently
design their systems to use memory modules as a "daughter card," reducing the
need to include memory devices on the motherboard. This design structure frees
up space on the motherboard and enables the OEM to use a single motherboard as a
common central element of a variety of different systems, resulting in
significant cost savings. The use of memory modules further reduces costs by
reducing OEMs work-in-process inventories by allowing them to add expensive
memory devices to products during the final stages of the manufacturing process.
The market for memory modules includes both standard and specialty
modules. The high volume standard memory module market includes modules that can
be sourced from many module suppliers, and are designed to be incorporated into
a wide variety of equipment. Such modules employ designs which meet widely used
industry specifications primarily utilizing DRAM memory and are available with a
variety of options to address the needs of multiple OEMs. Standard memory
modules are typically used in desktop personal computers and printers and are
sold both to OEMs and through computer resellers directly to end users.
Strategy for Memory Products
A significant portion of the DRAM memory module market is serviced by
the OEMs, as they ship computers with DRAM already installed. Because the
pre-installed memory in the OEM's computers are often inadequate to efficiently
run today's software, a large third party memory upgrade market exists. The
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Company's objective is to strengthen its position as a supplier of memory
modules in high growth markets. The Company believes that its specialization in
the memory module market provides it with significant competitive advantages.
Since the Company's products, memory upgrade components, are generally
considered to be commodities, price is one of the main selling points of the
Company's memory.
Broader OEM Relationships and Distribution Channels
The Company plans to continue to develop relationships with its
existing VARs and OEM customers and to establish relationships with new VARs
and OEM customers nationwide. The Company is increasing its sales force to
address new opportunities and plans to broaden its distribution channels by
focusing additional marketing and sales resources on the computer reseller
channel. The Company uses name brand components, such as Toshiba, Oki, Samsung,
Fugitsu, Mitsubishi, Panasonic, TI and Motorola that are sold at wholesale
prices to resellers and has its own brand name for proprietary products. The
Company provides its customers with the Millennium Memory Configurator, a
catalog of over 3,000 different systems including notebooks, PCs, servers,
workstations and printers, with memory upgrade solutions. The Company's product
line includes a wide variety of memory SIMMs and DRAM cards for 95% of all major
brand notebooks, PCs, servers, workstations and printers.
Customers, Sales and Marketing
The Company's principal customers for its semiconductor memory products
include major electronics OEMs, computer distributors, corporate end users,
retailers, VARs and distributors. In fiscal 1995, 1996 and 1997, the Company's
ten largest customers accounted for approximately 25%, 80% and 61%,
respectively, of net semiconductor memory product sales. In fiscal 1995, 1996
and 1997, CompUSA accounted for approximately 12%, 50% and 23% of net
semiconductor memory products sales, respectively. In 1997, Avnet, Inc., the
second largest customer of the Company's semiconductor memory products in 1997,
accounted for approximately 11% of net sales of semiconductor memory products.
See "Risk Factors -- Significant Customer Concentration." The Company's direct
sales and marketing efforts are conducted in an integrated process involving
direct salespeople, customer service representatives and senior executives.
Since most of the memory inventory of the Company is pre-sold, the Company
maintains minimum inventory and backlog. Accordingly, and since orders
constituting the Company's current backlog are subject to change in delivery
schedules and are subject to cancellation with only limited or no penalties,
backlog is not a reliable indication of future net sales. There can be no
assurance that current backlog will necessarily lead to net sales in any future
period.
Manufacturing
The Company currently subcontracts all of its memory module production
requirements to third party manufacturers. Because of the large number of
companies qualified to assemble memory components into modules, the Company
believes that it has achieved and maintains a rapid manufacturing cycle and is
able to offer its customers quick turn around of both small and large projects.
The Company is frequently able to provide turn around on major customer orders
within days or weeks.
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Competition in Memory Module Industry
The memory module industry is intensely competitive. The memory module
manu facturing market is comprised of a large number of competitive companies,
several of which have achieved a substantial share of the market. Certain of the
Company's competitors have sub stantially greater financial, marketing,
technical, distribution and other resources, greater name recognition, lower
cost structure and larger customer bases than the Company. The Company competes
against semiconductor manufacturers that maintain captive memory module
production capabilities, including Celestica (a division of IBM), Integrated
Device Technology, Inc., Micron Electronics, Inc. (a subsidiary of Micron
Technology Inc.) and Multichip Technology, Inc. (a division of Cypress
Semiconductor Corporation). The Company also competes with independent memory
module manufacturers, including PNY Electronics, Inc. In the computer systems
reseller market for memory modules, the Company competes with, among others,
Kingston Technology, Inc., Smart Modular Technology, Inc., Viking Technology,
Inc. and Vision Tek, Inc.
The Company also faces competition from current and prospective
customers that evaluate the Company's capabilities against the merits of
manufacturing products internally. In addition, the Company competes and expects
to continue to compete with certain of its suppliers. Those suppliers may have
the ability to manufacture competitive products at lower costs than the Company
as a result of their higher levels of integration. The Company also faces and
may face competition from new and emerging companies that have recently entered
or may in the future enter the markets the Company serves. The Company believes
that the primary basis of competition in its targeted markets is price and
responsiveness to customer requirements in both quality and delivery time. The
Company expects its competitors to continue to improve the performance of their
current products, to reduce their current product sales prices and to introduce
new products that may offer greater performance and improved pricing, any of
which could cause a decline in sales or loss of market acceptance of the
Company's products and thereby have a material adverse effect on the Company's
business, financial condition and results of operations.
There can be no assurance that enhancements to or future generations of
competitive products will not be developed that offer prices and technical
performance features superior to the Company's products. To be competitive, the
Company must continue to provide technologically advanced products, maintain
quality levels, offer flexible delivery schedules, deliver finished products on
a reliable basis and compete favorably on the basis of price. In addition,
increased competitive pressure has led in the past and may continue to lead to
intensified price competition, resulting in lower prices and gross margins,
which could materially adversely affect the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to compete successfully in the future. See "Factors That May Affect
Future Results -- Intense Competition."
Personal Computers
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The Company develops, markets, assembles, sells and supports a wide
range of high-quality, high-performance desktop PC systems as well as a line of
network servers under the NetRam brand name. The Company also develops markets,
assembles, sells and supports a limited range of quality, low-cost basic
computers for home and business under the Laguna Computer brand name. In
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addition, the Company offers a variety of other system components with its PC
systems and network servers, including monitors, modems, audio and video cards,
CD-ROM drives, hard drives, floppy drives and network cards.
The Company's PC systems are designed to include name brand components
specified by the Company and, currently, are assembled and tested by a third
party manufacturer. The Company expects to begin assembling the PC systems
conponents internally by mid-April 1998. The Company is scheduled to achieve ISO
9000 certification by the end of 1998. The Company's PC system manufacturing
process is designed to provide PC products to its customers which, generally,
are configured by the customer. The customer specifies the desired configuration
from those features available in the Company's defined feature sets. The
manufacturing process includes assembling components, loading software and
testing each system prior to shipment. The Company's PC systems are generally
assembled based on customer specifications.
The Company is currently shifting its focus from its semiconductor
memory products to its PC systems. While the Company expects to continue to sell
memory modules, it expects to increasingly emphasize sales of PC systems. Net
sales of PC systems represented 28% of the Company's total net sales for 1997.
The Company anticipates that the net sales of PC systems will represent a larger
percentage of the Company's total net sales in the future.
PC System Product Lines
The Company's PC systems product lines include the NetRam line and the
Laguna line. The NetRam line is targeted for business users and PC enthusiasts
and has enhanced multimedia and communication performance. These systems use
Pentium and Pentium II microprocessors manufactured by Intel Corporation
("Intel") and are assembled in various memory and storage configurations. NetRam
servers are PC compatible platforms that run Microsoft NT and Novell
IntraNetware. The Company believes that its NetRam servers provide a high degree
of reliability and reduced downtime resulting from hardware and software
failures. The Laguna Computer line is designed to provide a flexible and
affordable solution for individuals and businesses which require a price point
of less than $1,000, computing stability and performance. The Laguna Computer
product line uses microprocessors produced by a variety of manufacturers.
PC System Suppliers
The Company relies on third party suppliers for its PC system
components and seeks to identify suppliers who can provide these components
promptly and at competitive prices. The Company purchases substantially all of
its PC components, subassemblies and software from suppliers on a purchase order
basis and generally does not have long-term supply arrangements with its
suppliers. Although the Company is committed to use standard components,
subassemblies and software available from multiple suppliers, certain of its
components, subassemblies and software are available only from sole suppliers or
a limited number of suppliers. Any interruption in the supply of any of the
components, subassemblies and software currently obtained from a single source
or relatively few sources, or a decrease in the general availability of any
other components, subassemblies or software used in the Company's PC systems,
could result in production delays and adversely affect the Company's business,
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financial condition and results of operations. See "Factors That May Affect
Future Results - Dependence on Limited Sources of Supply."
Customers, Sales And Marketing
The Company's channel marketing approach is aimed toward PC users who
evaluate products based on performance, price, reliability, service and support.
The Company's PC customer base is comprised of retailers, VARs and certain
strategic end-user accounts. The end-users are individuals, small to medium
sized businesses, large business and educational entities. The Company markets
its PC systems primarily by strategically placing product with select retailers
and VARs. The Company directly sells only a limited number of its PC products to
certain strategic end-user accounts.
The Company's sales representatives assist customers in determining
system configuration, compatibility and current pricing. Customers generally
order systems configured with varying feature sets differentiated by
microprocessor speed, hard drive capacity, amount of memory, video and audio
capability as well as other features. The Company offers its customers a variety
of payment alternatives, including commercial trade terms and cash on delivery.
The Company's NetRam systems are sold through the Company's direct sales force,
selected high end retail locations and through VARs nationally.
Levels of unfilled orders for PC systems fluctuate depending upon
component availability, demand for certain products, the timing of large volume
customer orders and the Company's production schedules. Customers frequently
change delivery schedules and orders depending on market conditions and other
reasons. Unfilled orders can be canceled by the customer prior to shipment. Due
to a customer's ability to cancel or reschedule orders, industrial seasonal and
customer buying patterns, unfilled orders may not be representative of actual
sales for any succeeding period.
Net sales of PC systems represented 28% of the Company's total net
sales for 1997. The Company's two largest customers for PC systems, CompUSA and
Fry's Electronics, Inc., purchased 36.3% and 30.8%, respectively, of the total
PC systems sales. See "Risk Factors -- Significant Customer Concentration."
Manufacturing
The Company's manufacturing process consists of assembling components,
loading software and testing the Company's computer systems. These computer
systems are generally built-to-order based on customer specifications. The
Company believes that this build-to-order manufacturing process allows the
Company to produce customized systems quickly and to achieve rapid inventory
turnover, which decreases, although it does not eliminate, exposure to the risks
of declining inventory values and the obsolescence of components in inventory
caused by the rapid technological change which characterizes the computer
industry.
Following the move into its new facility in the second quarter of 1998,
the Company plans to assemble the PC systems internally instead of
subcontracting the work. The Company believes that by assembling the PC systems
internally, it will be able to increase the efficiency of its manufacturing
process. However, there is no assurance that any efficiency will result from
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the Company's increased participation in the manufacturing of its PC systems or
that the Company will be able to maintain or improve the pace of its current
manufacturing cycle. See "Factors That May Affect Future Results - Risks
Associated With New Facility" and "- No Assurance of Product Quality,
Performance and Reliability."
Competition
Competition in the PC industry is based primarily upon brand name
recognition, performance, price, and reliability and service and support. The PC
industry is highly competitive and has been characterized by intense pricing
pressure, generally low gross margin percentages, rapid technological advances
in hardware and software, frequent introduction of new products and rapidly
declining component costs. Any general decline in demand, or a decline in the
rate of increase of demand, for PC systems could increase competition and could
have a material adverse effect on the Company's business, financial condition
and results of operations. To remain competitive, the Company must frequently
introduce new products as component technologies improve or change and price
its products and offer customers lead times comparable to its competitors. In
addition, to remain competitive, the Company generally reduces the selling
prices of its PC systems in connection with declines in its cost of components.
The Company competes with a number of PC manufacturers which sell their products
primarily through direct channels, including Dell Computer, Inc. and Gateway
2000, Inc. The company also competes with PC manufacturers, such as Apple
Computer, Inc., Compaq Computer Corporation, Hewlett Packard Company, and
International Business Machines Corporation, among others, which have
traditionally sold their products through national and regional distributors,
dealers and VARs, retail stores and direct sales forces. In addition the
Company's server products compete with manufacturers of high-end personal
computers and workstations as well as manufacturers of mini and mainframe
computers, including Data General Corporation and Sun Microsystems, Inc. Many of
the Company's PC competitors offer broader product lines and have substantially
greater financial, technical, marketing, and other resources than the Company
and may enjoy access to more favorable component volume purchasing arrangements
than does the Company.
Strategy for PC Systems
In the future, the Company expects to face increased competition in the
U.S. PC systems market. In order to gain an increased share of the U.S. PC
system market, these competitors may effect a pricing strategy that is more
aggressive than the current pricing in the market. The Company's ability to
continue to produce competitively priced products and to maintain existing gross
margin percentages will depend on, among other factors, the Company's ability to
(i) sustain high levels of sales and (ii) contain and reduce manufacturing and
component costs. Any failure by the Company to transition to new products
effectively or to accurately forecast demand for its products may adversely
affect the Company's business, financial condition and results of operations.
In contrast to most of its competitors who generally use many
proprietary components, the Company's ability to technologically and
functionally differentiate its products comes from its core strategy of using
only widely recognized name brand components. In addition, unlike some of its
competitors, the Company does not solder any of the components into place in
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the course of assembling its PC systems. This allows such components to be
easily replaced thereby providing customers with an easier upgrade path for
their computers. This easy upgrade path allows a customer to more easily take
advantage of technological improvements to specific components or to reconfigure
the computer to meet increased demands upon it, whether such demands are the
result of increased use by the customer or new hardware or software
technologies. There can be no assurance that these strategies will allow the
Company to compete successfully in the market for PC systems.
Intellectual Property
- ---------------------
The Company attempts to protect its intellectual property rights
including its trademarks and trade secrets through a variety of measures
including federal trademark applications and non-disclosure agreements. There
can be no assurance, however, that such measures will provide adequate
protection for the Company's intellectual property, that disputes with respect
to the ownership of its intellectual property rights will not arise, that the
Company's trade secrets or proprietary technology will not otherwise become
known or be independently developed by competitors or that the Company can
otherwise meaningfully protect its intellectual property rights. There can be no
assurance that third parties will not develop similar products or duplicate the
Company's products or that third parties will not assert intellectual property
infringement claims against the Company. There can be no assurance that foreign
intellectual property laws will adequately protect the Company's intellectual
property rights abroad. The failure of the Company to protect its proprietary
rights could have a material adverse effect on its business, financial condition
and results of operations. The Company has filed two trademark applications with
the United States Patent and Trademark Office for the "MILLENNIUM MEMORY, INC."
mark and logo. In addition, in connection with the acquisition of NetRam, the
Company was assigned the federal trademark application for registration of the
"NETRAM" mark and logo. There is no assurance that registration of these marks
will be unopposed or granted even if not opposed. The word "MILLENNIUM," the
word "RAM" and the ram's head logo are employed by other companies involved in
the manufacture and/or sale of computer products which may reduce the likelihood
that trademark registrations will be issued to the Company.
In the semiconductor and computer industries, it is typical for
companies to receive notices from time to time alleging infringement of third
party intellectual property rights. While there is currently no pending
intellectual property litigation involving the Company, the Company may from
time to time in the future be notified of claims alleging infringement of third
party intellectual property rights. There can be no assurance that third parties
will not in the future pursue claims against the Company with respect to the
alleged infringement of third party intellectual property rights. Litigation may
be necessary to protect the Company's intellectual property rights, to determine
the validity of and scope of the proprietary rights of others, or to defend
against third party claims of invalidity. Litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that infringement, invalidity, right to use or ownership claims by
third parties or claims for indemnification resulting from infringement claims
will not be asserted in the future. If any claims or actions are asserted
against the Company, the Company may seek to obtain a license for third party
intellectual property rights. There can be no assurance, however, that a license
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will be available under reasonable terms or at all. The failure to obtain a
license for third party technology or marks used by the Company could cause the
Company to incur substantial liabilities and to suspend the manufacture of the
products utilizing the invention or bearing the disputed mark. Should the
Company decide to litigate such claims, such litigation could be extremely
expensive and time consuming and could materially adversely affect the Company's
business, financial condition and results of operations, regardless of the
outcome of the litigation. See "Factors That May Affect Future Results --
Uncertainty Regarding Protection of Proprietary Rights."
Environmental Regulation
- ------------------------
The Company's operations are subject to certain federal, state, local
and foreign environmental protection laws and regulations. However, the
Company's operations are not currently impacted significantly by federal, state,
local and foreign environmental protection laws and regulations. Nevertheless,
public attention has increasingly been focused on the environmental impact of
manufacturing operations which use hazardous materials or generate hazardous
wastes, and environmental laws and regulations may become more stringent over
time. There can be no assurance that the Company and the subcontractors it
employs will be able to comply with either present or future regulations, or to
obtain all necessary permits required under such regulations, so as not to
subject such subcontractors and, hence, the Company to significant compliance
expenses, production suspensions or delay, the acquisition of costly equipment
or other liabilities. See "Factors That May Affect Future Results --
Environmental Issues."
ITEM 2. PROPERTIES
The Company leases approximately 4,000 square feet of administrative
offices in Laguna Beach, California, and approximately 4,000 square feet of
manufacturing facility in Costa Mesa, California. The Company is moving to a
34,000 square foot facility in April 1998. This new facility will be a combined
headquarters for both manufacturing and administration.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in
the ordinary course of its business. Management does not believe that the
outcome of any of those matters will have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
There were no matters submitted to a vote of security holders through a
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. The Company's common stock began trading on the over-the-counter
securities market in April, 1997. The over-the-counter market quotations reflect
interdealer bid prices, without retail markup, markdown or commission, and may
not necessarily represent actual transactions. The prices were retrieved from
ACAP Financial, a market maker for the Company's common stock.
Common Stock
- ------------
For Fiscal Year Ended December 31, 1997 High Low
- --------------------------------------- ---- ---
2nd Quarter $ 5.50 $ 1.40
3rd Quarter 5.25 5.00
4th Quarter 5.375 5.00
Prior to April 1997 there was no active market for the Company's
securities.
B. Holders
As of March 5, 1998, there were 265 holders of record and the Company
believes that approximately 178 additional stockholders hold shares of the
Company's common stock in "street name."
C. Dividends
The Company has never paid a cash dividend on its common stock. The
Company intends to retain earnings for use in its business and it is not
anticipated that the Company will pay any dividends for at least the next twelve
months.
D. Recent Sales of Unregistered Securities - Conversion of
Warrants and Options
On March 25, 1998, the Company completed a private offering of up to
824,220 shares of its common stock to be issued upon the exercise of certain
warrants ("Warrants") and options ("Options") originally granted by the
Company's predecessor, Beacon Capital Investment, Inc. Each Warrant and Option
entitled the holder thereof (each a "Holder," and, collectively, the "Holders")
to purchase one share of the Company's common stock at a price of $3.125 per
share. Of the 560,220 outstanding Warrants and the 264,000 outstanding Options,
the Holders of 403,105 Warrants and 181,805 Options exercised and an aggregate
of 584,910 shares of the Company's common stock were issued. Any Warrant or
Option which was not exercised was canceled.
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<PAGE>
The offering was made under the exemption from the registration
requirements of the Securities Act of 19933, as amended, set forth in Rule 506
of Regulation D promulgated by the Securities and Exchange Commission. The
Company provided each purchaser with the information required under paragraph
(b)(2) of Rule 502 of Regulation D prior to the sale. The Company has made the
required filing under Rule 503 of Regulation D. All but six of the Holders who
purchased shares of the Company's common stock were accredited investors as
defined in Rule 501 of Regulation D and each of those six represented to the
Company that they had such knowledge and experience in financial and business
matters that they were capable of evaluating the merits and risks of the
investment.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATIONS DATA
Millennium Electronics, Inc.
Selected Financial Data
as of 12/31/97
11/4/94
to
12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- --------
Net Sales 47,468,949 34,345,569 11,976,797 31,784
Gross Profits 5,351,229 3,820,058 1,129,053 3,049
Income from Operations 1,302,495 1,259,939 295,591 (1,774)
Net Income 612,195 958,439 170,122 (870)
Basic Earnings per Share 0.09 0.18 0.04 0.00
Diluted Earnings per Share 0.08 0.18 0.04 0.00
Weighted Average Shares
Outstanding 6,892,587 5,203,868 4,127,760 4,127,760
Current Assets 10,570,209 6,890,469 3,021,273 237,682
Total Assets 13,090,556 7,154,616 3,092,878 239,130
Current Liabilities 6,194,515 6,174,549 2,620,135 --
Total Liabilities 6,219,515 6,473,360 2,918,626 235,000
Stockholder's Equity 6,871,041 681,256 174,252 4,130
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the consolidated
financial statements of the Company included in this Form 10-K.
Forward Looking Statements
- --------------------------
The statements contained in this Management's Discussion and Analysis
of Financial Condition and Results of Operations include "forward looking"
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
and are subject to the safe harbor created by those sections. The actual future
results of the Company could differ materially from those projected in the
forward looking information. For a discussion of certain factors that could
cause actual results to differ materially from those projected by the forward
looking information see "Factors That May Affect Future Results" herein.
Background
- ----------
The Company manufactures, through subcontractors, and distributes DRAM
memory upgrade components for PC's, laptop and notebook computers, file servers
and printers to retailers, resellers, VARs, VADs, OEMs, aggregators and national
or regional distributors. In 1997, the Company began manufacturing and selling
computer systems, which are manufactured on a pre-sold basis and are sold
primarily to the Company's two largest customers.
MMI effectively commenced operations in April of 1995 focusing on the
manufacture, through subcontractors, and sale of standard memory modules to
retailers, resellers, VARs, VADs, OEM's, aggregators, and national and regional
distributors. Standard memory modules implement industry standard specifications
and are designed to be incorporated into a wide variety of electronic equipment.
The Company's net sales and gross profits have increased substantially over the
last two years.
The demand for memory upgrades in digital electronic systems has grown
dramatically over the last several years. The factors which have contributed to
the increasing demand for memory devices include the expanding unit sales of
personal computers in the business and consumer market segments; the
proliferation of increasingly complex personal computer software; and the
increasing performance requirements of workstations, servers and networking and
telecommunications equipment.
The Company purchases memory chips in the domestic spot market and
from overseas trading companies, which have direct allocations from chip
manufacturers. The Company also purchases directly from chip manufacturers.
Once memory chips have been purchased, the Company sends the chips to a
subcontractor, which builds and tests the finished goods memory product. After
the Company receives the assembled memory boards from the subcontractor, the
Company tests and adds a unique Company warranty label to each product. For the
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most part, memory products are pre-sold before the chips are purchased and
assembled into memory boards.
In September 1997, the Company expanded its sales of PC Computer
Systems with the acquisition of NetRam Components, Inc., a California
corporation ("NetRam"). The company acquired NetRam in a merger pursuant to
which the former shareholders of NetRam received $120,000 and 576,000 shares of
the Company's common stock. NetRam manufactures and distributes PC computer
systems both to wholesale and retail markets.
In 1995, 1996 and 1997 the Company's top ten customers accounted for
approximately 25%, 80% and 63%, respectively, of the Company's net sales. While
the Company expects to continue to be dependent upon these customers for a
significant percentage of its net sales, the composition of the Company's top
ten customers may change in the future. The Company has added a number of new
customers in recent months, and its strategy is to increase its sales to both
existing and new customers. In 1995, 1996 and 1997, the Company's net sales
represented by the Company's largest customer accounted for approximately 12%,
50% and 33%, respectively. The Company is currently expanding its base to
represent more than two large customers. International sales by the Company were
minimal for fiscal 1995, 1996 and 1997.
Income as a Percentage of Net Sales
- -----------------------------------
The following table sets forth-certain statement of income data of the
Company expressed as a percentage of net sales:
Year Ended December 31,
-----------------------
1995 1996 1997
---- ---- ----
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 90.6 88.9 88.7
Gross Profits 9.4 11.1 11.3
Selling, general & administrative 7.0 7.5 8.5
Income from operations 2.4 3.6 2.8
Other income (expense), net (1.0) (.8) (1.3)
Income before provision for income taxes 1.4 2.8 1.5
Provision for income taxes -- -- 0.2
Net income 1.4 2.8 1.3
Results of Operations
---------------------
1996 vs. 1997
Net Sales
- ---------
Net sales increased approximately 38% from $34.3 million in 1996 to
$47.4 million in 1997. Net sales of $47.4 million consist of $13.4 million, or
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28%, for personal computers and $34.0 million, or 72%, for memory modules and PC
cards. The personal computer sales increased from $0 in 1996 to $13.4 million
principally due to the acquisition of NetRam in September 1997. Sales of memory
modules and PC cards decreased only slightly from $34.3 million in 1996 to $34.0
million in 1997.
Gross Profit
- ------------
Cost of sales includes the costs of computer components, memory chips,
and other components and materials purchased by the Company for its products, as
well as subcontractor charges and overhead costs associated with testing and
manufacturing.
Gross profit increased 40% from $3.8 million in 1996 to $5.4 million in
1997 while gross profit as a percentage of net sales increased from 11.1% in
1996 to 11.3% in 1997. The stability in gross margin was principally due to
sales of personal computer systems, which carry higher margins, offsetting
declining memory product margins.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative costs include all personnel costs,
including salaries, commissions, performance-based bonuses and employee
benefits, the costs of advertising, promotions and trade shows, and rental costs
and other support costs, including utilities, insurance and professional fees.
Selling, general and administrative expenses increased 58% from $2.6 million in
1996 to $4.0 million in 1997. As a percentage of net sales, selling, general and
administrative expenses increased from 7.5% in 1996 to 8.5% in 1997. Travel has
affected the increase in selling expenses due to marketing to a wider geographic
area for potential growth. G&A expenses have increased in areas relating to the
costs of public relations efforts to promote and grow business. The Company has
also incurred additional costs as a result of being a public company.
Additionally, there has been an increase in the hiring of upper management to
accompany the current growth of the company.
Other Income (Expense), Net
- ---------------------------
Other income (expense), net increased 109% from a net expense of
approximately $285,000 in 1996 to a net expense of approximately $598,000 in
1997. The increase is principally due to additional interest expense incurred as
a result of increased borrowing under the Company's line of credit agreement to
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fund working capital. The Company expects that utilization of its line of credit
will continue to increase as sales increase.
Provision for Income Taxes
- --------------------------
The Company's effective tax rate for fiscal year 1996 and 1997 was 1.6%
and 13.1%, respectively. The provision for income taxes increased because prior
to March 31, 1997, the Company was taxed as an "S" corporation. Effective with
the reverse triangular merger on March 31, 1997, the Company lost its "S"
corporation status and began to be taxed as a "C" corporation at which time the
Company recorded a deferred tax asset in the amount of $87,600 in accordance
with SFAS No. 109.
1995 vs. 1996
Net Sales
- ---------
Net sales increased 186% from $12.0 million in 1995 to $34.3 million in
1996. The increase was primarily due to an increase in sales of memory products
to both existing and new customers and the fact that the Company effectively
commenced operations in April of 1995. The Company's sales of PC cards to both
new and existing customers also increased significantly from period to period.
Gross Profit
- ------------
Cost of sales includes the costs of memory chip and other components
and materials purchased by the Company for its products, as well as
subcontractor charges and overhead costs associated with testing. Gross profit
increased 238% from $1.1 million in 1995 to $3.8 million in 1996. Gross profit
as a percent of net sales increased from 9.4% in 1995 to 11.1% in 1996. The
increase was principally due to more favorable pricing from suppliers and
subcontractors resulting from increasing purchasing power as the Company's
volume of purchases increased. The increase in gross profit was also due to the
fact that the Company did not effectively begin operations until April of 1995.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses increased 207% from
$833,000 in 1995 to $2.6 million in 1996. As a percentage of net sales, general
and administrative expenses increased from 7.0% in 1995 to 7.5% in 1996. Such
increases were primarily due to the Company's overall growth and the fact that
the Company did not effectively begin operations until April of 1995. Also
included in 1996 are the distributions made to the Company's President, which
have been reclassified as salary expenses. No such distributions were made in
1995.
Other Income (Expense), Net
- ---------------------------
Other income (expense) consists primarily of interest income less
interest expense. Interest expense is attributable to the Company's utilization
of its line of credit agreement. The Company's use of its principal line of
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credit has increased in each year since 1995. The increase was used to fund
increased inventory as a result of increased sales.
Provision (Benefit) for Income Taxes
- ------------------------------------
The Company's effective tax rate for 1995 and 1996 was 1.5% and 1.6%,
respectively. Prior to March 31, 1997, the Company was taxed as an "S"
corporation, which resulted in a minimal state tax and no federal income tax.
Liquidity and Capital Resources
- -------------------------------
Since its inception, the Company has used funds generated from
borrowings to support its operations, finance inventory and acquire capital
equipment. In 1995, 1996 and 1997 the Company used cash from operating
activities of $2,655,876, $2,440,213 and $1,591,638, respectively. On December
31, 1996 and 1997, the Company had $1,767,250 and $5,122,700 available under its
principal line of credit, and working capital of $715,920 and $4,375,700,
respectively. The increase in working capital in 1997 over 1996 is attributable
to (i) the increase in accounts receivable and inventory due to use of the $3
million in proceeds from the private placement which closed at the beginning of
the second quarter of 1997 for working capital purposes, and (ii) subscriptions
to purchase the Company's common stock of $1,494,366. This amount was collected
subsequent to the balance sheet date and is shown as the asset "stock
subscription receivable" in the consolidated balance sheet.
The Company has a revolving line of credit of $10,000,000 expiring on
September 30, 1999 that is secured by substantially all of the Company's assets.
On the expiration date the line will automatically and continuously renew for
successive additional terms of one year unless terminated at the option of the
Company or the bank on the anniversary date. Amounts available for borrowing
under the Company's existing line of credit are limited to the lower of the
commitment amount or a borrowing base amount calculated based on certain levels
of inventory and accounts receivable. On December 31, 1996 and 1997, the
outstanding balances under the accounts receivable line of credit were
$5,082,754 and $4,877,286, respectively. Financial covenants set forth in the
Company's line of credit agreement prohibit the Company from paying dividends
where the payment of such dividends would reduce the Company's net worth below
certain levels and prohibits the Company from engaging in certain transactions
without lender approval.
Capital expenditures totaled approximately $37,310, $39,331 and
$101,706 in 1995, 1996 and 1997, respectively. Such expenditures were primarily
for office and test equipment. The Company is moving to a new 34,000 square foot
manufacturing facility in April of 1998, and expects to make associated capital
expenditures of approximately $200,000.
Although the Company may in the future seek additional funding to
accelerate the Company's expansion, the Company believes that the net proceeds
from the stock subscription receivable, anticipated cash flow from operations
and amounts available under its existing lines of credit will be sufficient to
meet its working capital and capital expenditure requirements for the next 12
months.
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<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
- --------------------------------------
The Company's business, financial condition and results of operations
may be impacted by a number of factors including, without limitation, the
factors discussed below.
Significant Customer Concentration
- ----------------------------------
During the years ended December 31, 1995, 1996, and 1997, the Company
had two major customers which accounted for approximately 12%, 50% and 42% of
the Company's net sales, respectively. The amounts due from these major
customers on December 31, 1996 and 1997 amounted to approximately $4,785,000 and
$5,335,000, respectively. The Company's ten largest customers accounted for 25%,
80% and 63% of net sales in 1995, 1996 and 1997, respectively. The Company
expects to continue to be dependent upon those customers for a significant
percentage of its sales. However, there can be no assurance that such customers
will continue to utilize the Company's products at current levels, if at all.
The loss of a major customer or any reduction in orders by any such customer
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company generally has no firm long-term volume commitments from its
customers and generally enters into individual purchase orders with its
customers. The Company has experienced cancellations of orders and fluctuations
in order levels from period to period and expects it will continue to experience
such cancellations and fluctuations in the future. In addition, customer
purchase orders may be canceled and order volume levels can be changed, canceled
or delayed with limited or no penalties. The replacement of canceled, delayed or
reduced purchase orders with new business cannot be assured. Moreover, the
Company's business, financial condition and results of operations will depend
upon its ability to obtain orders from new customers, as well as the financial
condition and success of its customers, its customers' products and the general
economy. The factors affecting any of the Company's major customers or their
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
Intense Competition
- -------------------
The memory module and personal computer industries are intensely
competitive. The memory module and personal computer manufacturing markets are
comprised of a large number of competitive companies, several of which have
achieved a substantial share of their respective markets. Certain of the
Company's competitors in each of these markets have substantially greater
financial, marketing, technical, distribution and other resources, greater name
recognition, lower cost structures and larger customer bases than the Company.
In the OEM memory module market, the Company competes against semiconductor
manufacturers that maintain captive memory module production capabilities,
including Celestica (a division of IBM), Integrated Device Technology, Inc.,
Micron Electronics, Inc. (a subsidiary of Micron Technology Inc.), and Multichip
Technology, Inc. (a division of Cypress Semiconductor Corporation). The Company
also competes with independent memory module manufacturers, including PNY
Electronics, Inc. In the computer systems reseller market for memory modules,
the Company primarily competes with Kingston Technology, Inc., SMART Modular
Technologies, Viking Technology, Inc. and Vision Tek. In the PC manufacturing
market, the Company competes against PC manufacturers that maintain captive PC
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systems production capabilities, including but not limited to companies such as
Compaq Computer Corporation, Packard Bell NEC. Inc., Dell Computer Corporation,
Gateway 2000, Inc. and Hewlett-Packard Company. The Company faces competition
from current and prospective customers that evaluate the Company's capabilities
against the merits of manufacturing products internally. In addition, the
Company competes and expects to continue to compete with certain of its
suppliers. Those suppliers may have the ability to manufacture competitive
products at lower costs than the Company as a result of their integration. The
Company also faces and may face competition from new and emerging companies that
have recently entered or may in the future enter the markets, which the Company
serves. To be competitive, the Company must continue to produce products
promptly, maintain quality levels, offer flexible delivery schedules, deliver
finished products on a reliable basis and compete favorably on the basis of
price. In addition, increased competitive pressure has led in the past and may
continue to lead to intensified price competition, resulting in lower prices and
gross margins, which could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to compete successfully in the future.
Fluctuations in Operating Results
- ---------------------------------
The Company's results of operations and gross margins have in the past
fluctuated significantly and may in the future continue to fluctuate
significantly from period to period. The primary factors that have affected and
may affect in the future the Company's results of operations include the
inability to procure required components, adverse changes in the mix of products
sold by the Company, fluctuating market demand for and declines in the selling
prices of the Company's products, market acceptance of new products and enhanced
versions of the Company's products, delays in the introduction of new products
and enhancements to existing products, manufacturing inefficiencies associated
with the start up of new product introductions, the timing of new product
announcements and releases by the Company or its competitors, the timing of
significant orders, patterns of spending by customers, delays, cancellations or
rescheduling of orders due to customer financial difficulties or other events,
inventory obsolescence, including the reduction in value of the Company's
inventories due to unexpected price declines, unexpected product returns, and
cycles in the Company's targeted markets. Other factors which may affect the
Company's results of operations in the future include the loss of a principal
customer or the short term loss of a customer due to product inventory
accumulation by the customer (such as occurred in the second quarter of 1997),
the ability to volume produce products and meet customer requirements, the
timing of expenditures in anticipation of increased sales, and regulatory
changes.
In addition, operating results in future periods may be impacted by
general economic conditions and various competitive factors, including
price-based competition and competition from other parties employing competing
technologies. The Company's operating results could also be affected in any
given period by business interruptions or costs associated with an earthquake,
fire, theft or other similar events outside the control of the Company, which
events may not be fully covered by applicable insurance coverage.
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<PAGE>
The Company's gross margins have varied and will continue to vary
significantly based on a variety of factors, including the mix of products sold
and the manufacturing services provided, the channels through which the
Company's products are sold, declines in selling prices, the level of
manufacturing efficiencies achieved and pricing by competitors or suppliers. The
selling prices of the Company's memory products have declined in the past and
the Company expects that prices will decline in the future. The decline in
selling price may be offset by increased unit sales volumes of existing memory
products or the introduction and sale of new semiconductor memory products in
quantities sufficient to compensate for any declines in selling prices. There
can be no assurance that the Company will be able to increase unit sales volumes
of its semiconductor memory products, introduce and sell new semiconductor
memory products or reduce its cost per unit.
Alternatively, the Company could, and expects to, compensate for such
declines by an increase in the sales of PC systems. The margins associated with
the sale of the Company's PC systems are higher than those associated with the
Company's semiconductor memory products. Accordingly, the Company's ability to
maintain or increase net sales will be, in part, dependent upon its ability to
transition from primarily selling semiconductor memory products to primarily
selling PC systems. Declining selling prices of its PC systems may also have a
material adverse effect on the Company's gross margins unless the Company is
able to reduce its cost per unit to offset declines in selling prices or
increase the unit sales volume of its PC systems. There can be no assurance that
the Company will be able to successfully change its focus from selling
semiconductor memory products to selling PC systems, reduce its cost per units
of its PC products or increase the unit sales volumes of its PC systems.
The Company's results of operations may also be affected by inflation
and the value of the United States dollar due to the fact that the Company
purchases components from foreign suppliers. Fluctuations in the value of the
United States dollar in relation to foreign currencies could increase the cost
of certain components for the Company's products and could also make the price
of the Company's products in foreign countries more expensive compared to the
price of other companies' products denominated in other currencies.
There can be no assurance that the Company will maintain its current
level of net sales or rate of growth for any period in the future. Accordingly,
there can be no assurance that the Company will be able to be profitable or that
it will not sustain losses in future periods. The Company believes that the
period-to-period comparisons of the Company's financial results should not be
relied upon as indications of future performance. Due to the foregoing factors,
it is likely that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors.
Dependence on Limited Sources of Supply
- ---------------------------------------
The Company depends on third party manufacturers to produce certain of
the Company's memory modules and PC computer products. The electronics industry
has experienced shortages in semiconductor memory devices and computer
components, including DRAM. Shortages may occur in the future or supplies could
be available only with increased lead times. The Company generally has no
written agreements with its suppliers. The inability to continue to obtain
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sufficient supplies of components as required, or to develop alternative sources
if required, could cause delays, disruptions or reductions in product shipments
which could damage relationships with current or prospective customers, could
impede the Company's ability to respond quickly to changes in demand, could
increase prices and could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will receive adequate supplies on a timely basis in
the future despite the strong relationships with its current suppliers.
Risks Associated With New Facility
- ----------------------------------
The Company expects to begin operations at its new facility and to be
fully operational in the second quarter of 1998. This facility requires the
expenditure of significant management resources. In addition to the usual risk
of establishing a new manufacturing facility, such as installation of equipment,
implementation of systems, procedures and controls and the hiring and training
of qualified personnel, there are additional risks associated with this
facility. The Company is expanding its business to include the process of
assembling its PC systems. There can be no assurance that the Company will not
to experience delays and other start-up difficulties or that once the facility
is fully operational that it will produce high quality and low cost memory
modules and PC systems. Manufacturing and other problems which occur in
connection with the commencement, expansion and integration of operations at
this facility could materially adversely affect the Company's results of
operations and financial condition.
Difficulties Inherent In The Acquisition Of Or Merger With Other Entities
- -------------------------------------------------------------------------
Acquisitions and mergers involve numerous risks, including difficulties
in the assimilation of the operations, technologies and products of the acquired
companies, the diversion of management's attention from other business concerns,
risks of entering markets in which the Company has no or limited direct prior
experience and where competitors in such markets have stronger market positions,
and the potential loss of key employees of the acquired company. Achieving the
anticipated benefits of the NetRam merger will depend in part upon whether the
integration of businesses is accomplished in an efficient and effective manner,
and there can be no assurance that this will occur. The successful combination
of companies in the high technology industry may be more difficult to accomplish
than in other industries. The combination of companies requires, among other
things, integration of the companies' respective product offerings and
coordination of their sales and marketing and research and development efforts.
There can be no assurance that such integration will be accomplished smoothly or
successfully. The integration of certain operations following the NetRam merger
will require the dedication of management resources that may distract attention
from the day-to-day business of the combined company. The inability of
management to successfully integrate the operations of NetRam could have a
material adverse effect on the business and results of operations of the
Company.
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Inventory Purchasing Policy
- ---------------------------
The Company's current policy is to purchase 75% of its inventory only
if it has been pre-sold; the balance is generally purchased at reduced prices in
anticipation of future sales. Such anticipatory purchases will expose the
Company to the risk that it will not be able to use such components before they
become obsolete and to adverse fluctuations in the price of such components and
of the products the Company sells, while the non-anticipatory purchasing policy
exposes the Company to the risk that it will either not be able to receive
inventory in a timely manner or will have to pay a higher price for such
inventory. Accordingly, there can be no assurance that the Company's purchasing
policy will be profitable.
Management of Growth; Expansion of Operations
- ---------------------------------------------
The Company has significantly expanded its operations since its
inception. Projected future growth will significantly increase the
responsibility of existing management, which may place a significant strain on
the Company's limited personnel, management and other resources. The Company's
ability to manage future growth will depend upon continued expansion of its
accounting and other internal management systems, procedures and controls. The
Company is scheduled to become ISO 9000 certified by the end of 1998. There can
be no assurance that significant problems in those areas will not occur. Any
failure to expand those systems, procedures and controls in an efficient manner
and at a pace consistent with the Company's business could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In connection with the Company's recent growth, the Company's operating
expenses have increased significantly and the Company anticipates that operating
expenses will continue to increase significantly in the future. Should the
Company increase its expenditures in anticipation of a future level of sales
that does not materialize, the Company's business, financial condition and
results of operations would thereby be subject to material adverse effects.
Certain customers have required and may continue to require accelerated delivery
schedules, which have placed and may continue to place an excessive burden on
the Company's resources. In order to achieve anticipated sales levels and
profitability, the Company will continue to be required to manage its assets and
operations efficiently. In addition, should the Company expand geographically,
it may experience certain inefficiencies from management of geographically
dispersed facilities.
Dependence on Semiconductor and Computer Industries
- ---------------------------------------------------
The semiconductor industry has been characterized by cyclical market
conditions. The industry has experienced significant economic downturns at
various times, characterized by diminished product demand, accelerated erosion
of average selling prices and production overcapacity. As a result of
overproduction and lower than anticipated sales of Windows 95(R), in 1996 the
price of DRAM declined by as much as 80% from the beginning of the year,
resulting in much lower profit per memory unit. During 1996 and 1997, there were
significant declines in DRAM and SRAM semiconductor prices and declines in Flash
semiconductor prices. Price declines can have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
the Company may experience substantial period-to-period fluctuations in future
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operating results due to general industry conditions or events occurring in the
general economy.
The Company's Laguna product line is directed towards a segment of the
personal computer market which is characterized by even greater competition than
that segment in which the Company's NetRam line competes. There are
correspondingly greater market pressures on the pricing and margins of the
Laguna product line. While the competition in the higher-end segment of the
personal computer market to which the NetRam product line caters is currently
less, there can be no assurance that the competition will remain less and that
there will be less downward pressure on prices of the NetRam products than there
currently is on the Laguna products.
From time to time, the computer industry, like the semiconductor
industry, has experienced significant downturns, often in connection with, or in
anticipation of, declines in general economic conditions. Accordingly, any
factor adversely affecting the semiconductor or computer industries or
particular segments within the semiconductor or computer industries, such as the
market for memory products, could materially adversely affect the Company's
sales and results of operations.
Requirements for Response to Rapid Technological Change
- -------------------------------------------------------
The semiconductor and computer industries are subject to rapid
technological change, short product life cycles, frequent new product
introductions and enhancements, changes in end-user requirements and evolving
industry standards. The Company's ability to be competitive in these markets
will depend in significant part upon its ability to provide technologically
advanced products, maintain quality levels, offer flexible delivery schedules,
deliver finished products on a reliable basis and compete favorably on the basis
of price.
Dependence on Key Personnel
- ---------------------------
The Company's future operating results depend in significant part upon
the continued contributions of its senior management and sales personnel, many
of whom would be difficult to replace. Of such persons only Mr. Troy D. Barnes,
the Company's Chief Executive Officer, Douglas P. Morris, its Vice President of
Capital Markets, John Torres, the President of its NetRam Division, Terry
Tonini, the Vice President of Retail Marketing and Rusty Wilson, the Senior Vice
President of Sales and Marketing, have written employment agreements with the
Company. The Company's future operating results also depend in significant part
upon its ability to attract and retain qualified management, manufacturing and
quality assurance, engineering, marketing, and sales personnel. The Company is
actively recruiting such personnel. However, competition for such personnel is
intense; and there can be no assurance that the Company will be successful in
attracting or retaining such personnel now or in the future. There may be only a
limited number of persons with the requisite skills to serve in such positions,
and it may be increasingly difficult for the Company to hire such persons over
time. The loss of any key employee, the failure of any key employee to perform
in his or her current position, the Company's inability to attract and retain
skilled employees as needed or the inability of the officers and key employees
of the Company to expand, train and manage the Company's employee base could
materially adversely affect the Company's business, financial condition and
results of operations.
Page 24 of 146
<PAGE>
No Assurance of Product Quality, Performance and Reliability
- ------------------------------------------------------------
The Company expects that its customers will continue to establish
demanding specifications for quality, performance, reliability and delivery. In
the past, the Company has not experienced significant quality problems, in part
because the manufacturers of memory modules sold by the Company have accepted
responsibility for any product returns. However, there can be no assurance that
problems will not occur in the future with respect to the quality, performance,
reliability and delivery of the Company's semiconductor memory products. If such
problems occur, the Company could experience increased costs associated with
such products, delays in or cancellations or rescheduling of orders or shipments
of semiconductor memory products, delays in collecting accounts receivable and
increases in product returns and discounts, any of which could have a material
adverse effect on the Company's business, financial condition or results of
operations.
In addition, the Company's management has had no experience managing
the assembly of its PC systems. Although management has overseen the work
performed by the subcontractors who have historically assembled the Company's PC
systems and has hired consultants to assist them during the transition to
internal assembly of the PC systems, there can be no assurance that management's
lack of experience will not result in an increase in problems with PC systems
product quality and returns of PC systems. If such problems occur, the Company
could experience increased costs associated with the PC systems, delays in or
cancellations or rescheduling of orders or shipments of PC systems, delays in
collecting accounts receivable and increases in product returns and discounts,
any of which could have a material adverse effect on the Company's business,
financial condition or results of operations.
Uncertainty Regarding Protection of Proprietary Rights
- ------------------------------------------------------
The Company attempts to protect its intellectual property rights
including its trademarks and trade secrets through a variety of measures,
including federal trademark applications and non-disclosure agreements. There
can be no assurance, however, that such measures will provide adequate
protection for the Company's intellectual property, that disputes with respect
to the ownership of its intellectual property rights will not arise, that the
Company's trade secrets or proprietary technology will not otherwise become
known or be independently developed by competitors or that the Company can
otherwise meaningfully protect its intellectual property rights. There can be no
assurance that third parties will not assert intellectual property infringement
claims against the Company. There can be no assurance that foreign intellectual
property laws will adequately protect the Company's intellectual property rights
abroad. The failure of the Company to protect its proprietary rights could have
a material adverse effect on its business, financial condition and results of
operations. The Company has filed two trademark applications with the United
States Patent and Trademark Office for the "MILLENNIUM MEMORY, INC." mark and
logo. In addition, in connection with the acquisition of NetRam, the Company
was assigned the federal trademark application for registration of the "NETRAM"
mark and logo. There is no assurance that registration of these marks and logos
Page 25 of 146
<PAGE>
will be unopposed or granted even if not opposed. The word "MILLENNIUM," the
word "RAM" and the ram's head design are employed by other companies involved in
the manufacture and/or sale of computer products, which may reduce the
likelihood that trademark registrations will be issued to the Company.
In the semiconductor and computer industries, it is typical for
companies to receive notices from time to time alleging infringement
intellectual property rights. While there is currently no pending intellectual
property litigation involving the Company, the Company may from time to time in
the future be notified of claims alleging infringement of third party
intellectual property rights. There can be no assurance that third parties will
not in the future pursue claims against the Company with respect to the alleged
infringement of third party intellectual property rights. Litigation may be
necessary to protect the Company's intellectual property rights, to determine
the validity of and scope of the proprietary rights of others, or to defend
against third party claims of invalidity. Litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, financial condition and results of operations.
There can be no assurance that infringement, invalidity, right to use
or ownership claims of third parties or claims for indemnification resulting
from infringement claims will not be asserted in the future. If any claims or
actions are asserted against the Company, the Company may seek to obtain a
license for third party intellectual property rights. There can be no assurance,
however, that a license will be available under reasonable terms or at all. The
failure to obtain a license for third party technology or marks used by the
Company could cause the Company to incur substantial liabilities and to suspend
the manufacture of the products utilizing the invention or bearing a disputed
mark. Should the Company decide to litigate such claims, such litigation could
be extremely expensive and time consuming and could materially adversely affect
the Company's business, financial condition and results of operations,
regardless of the outcome of the litigation.
Environmental Issues
- --------------------
The Company's operations are not currently impacted significantly by
federal, state, local and foreign environmental protection laws and regulations.
However, changes in environmental laws and regulations and in the Company's
business could subject the Company to significant compliance expenses,
production suspensions or delay, restrictions on expansion, the acquisition of
costly equipment or other liabilities.
Recently Issued Accounting Pronouncement
- ----------------------------------------
SFAS No. 130, "Reporting Comprehensive Income," issued by the Financial
Accounting Standards Board ("FASB") is effective for financial statements with
fiscal years beginning after December 15, 1997. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The Company does not
believe the adoption of SFAS No. 130 will have a material impact on its
financial position or results of operations.
Page 26 of 146
<PAGE>
Year 2000
- ---------
The Company has not made a formal assessment of Year 2000 issues.
Generally, "Year 2000 issues" refers to problems that may arise due to the
inability of some computer software to distinguish between the early part of the
present century and the early part of the next because the software only uses
two digits to identify the year. Thus, 2001 would be indistinguishable from
1901. The Company believes that there are three possible ways that it could be
impacted by this problem. First, the Company's internal software could fail. If
the Company's software should fail it might disrupt accounting, inventory
control, order processing and similar tasks. Although it has not made an
assessment of its software, the Company does not believe that its internal
software is susceptible to Year 2000 problems. The Company believes that even if
its software should fail, remediation would not create a material expense.
The second concern posed by Year 2000 issues is the impact that such
software failure would have on the Company's suppliers and customers. The
Company does not believe that either its suppliers or customers could not
continue to conduct business even in the face of Year 2000 problems. In
addition, the Company believes that its customers and suppliers are sufficiently
sophisticated computer users that they will not experience problems, either by
remediation or because they are already using software which can make the
distinction between centuries ("Year 2000 compliant"). In the event that either
its suppliers or customers should experience software failure, the Company
believes that the impact of either eventuality would not be material. The third
possible threat posed to the Company by Year 2000 issues is one of a general
downturn in the economy due to software failures. The Company believes that this
is a remote possibility.
Although the Company believes that it will not suffer any material
adverse effects as a result of Year 2000 issues, it has not made a formal
assessment of the problem and it cannot be certain its judgment regarding Year
2000 is correct. In the event that the Company, its supplier or customers
experience a software failure such a failure could have a material adverse
impact on the Company's business financial condition and results of operations.
Similarly, if the economy as a whole should be adversely impacted by Year 2000
problems, it could have a material adverse effect on the Company's business
financial condition and results of operations.
Page 27 of 146
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
MILLENNIUM ELECTRONICS, INC.
AND SUBSIDIARIES
CONTENTS
December 31, 1997
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page 28 of 146
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Millennium Electronics, Inc.
We have audited the accompanying consolidated balance sheets of Millennium
Electronics, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Millennium
Electronics, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
February 6, 1998, except for
Note 14 as to which the date
is March 3, 1998
Page 29 of 146
<PAGE>
MILLENNIUM ELECTRONICS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
ASSETS
1997 1996
---- ----
Current Assets
Cash and cash equivalents $ 211,273 $ --
Accounts receivable, net of an allowance
for doubtful accounts of $175,000 and
$136,000, respectively 6,876,495 6,193,241
Stock subscription receivable 1,494,366 --
Inventories 1,541,666 663,882
Prepaid expenses 100,139 33,346
Income taxes receivable 163,719 --
Deferred tax asset 125,000 --
Other current assets 57,551 --
----------- -----------
Total current assets 10,570,209 6,890,469
Furniture and equipment, net 147,675 55,608
Other assets 97,735 208,539
Excess cost over fair value of net assets
acquired, net of accumulated amortization
of $84,258 2,274,937 --
----------- -----------
Total Assets: $13,090,556 $ 7,154,616
=========== ===========
The accompanying notes are an integral part of these financial statements.
Page 30 of 146
<PAGE>
MILLENNIUM ELECTRONICS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
For the Years Ended December 31,
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
---- ----
Current Liabilities
Book overdraft $ -- $ 191,742
Lines of credit 4,877,286 5,232,754
Accounts payable and accrued liabilities 1,317,229 739,172
Income tax payable -- 10,881
----------- -----------
Total current liabilities 6,194,515 6,174,549
Subordinated Debt - Stockholder -- 298,811
Deferred tax liability 25,000 --
----------- -----------
Total liabilities 6,219,515 6,473,360
----------- -----------
Commitments and Contingencies (Notes 4 and 7)
Stockholders' Equity
Preferred stock, $0.001 par value
5,000,000 shares authorized
no shares issued and outstanding -- --
Common stock, $0.001 par value
25,000,000 shares authorized
8,167,150 and 5,203,868 shares issued
and outstanding, respectively 8,167 5,204
Additional paid-in capital 6,575,359 38,196
Receivables from stockholder -- (151,339)
Retained earnings 287,515 789,195
----------- -----------
Total stockholders' equity 6,871,041 681,256
----------- -----------
Total liabilities and stockholders' equity $13,090,556 $ 7,154,616
=========== ===========
The accompanying notes are an integral part of these financial statements.
Page 31 of 146
<PAGE>
MILLENNIUM ELECTRONICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
1997 1996 1995
---------- ---------- ----------
Net sales $ 47,468,949 $ 34,345,569 $ 11,976,797
Cost of sales 42,117,720 30,525,511 10,847,744
------------ ------------ ------------
Gross profit 5,351,229 3,820,058 1,129,053
Selling, general, and
administrative expenses 4,048,734 2,560,119 833,462
------------ ------------ ------------
Income from operations 1,302,495 1,259,939 295,591
------------ ------------ ------------
Other income (expense)
Other income 20,280 125,257 28,455
Interest expense (617,974) (410,957) (151,324)
------------ ------------ ------------
Total other income (expense) (597,694) (285,700) (122,869)
------------ ------------ ------------
Income before provision for
income taxes 704,801 974,239 172,722
Provision for income taxes 92,606 15,800 2,600
------------ ------------ ------------
Net income $ 612,195 $ 958,439 $ 170,122
============ ============ ============
Basic earnings per share $ 0.09 $ 0.18 $ 0.04
============ ============ ============
Diluted earnings per share $ 0.08 $ 0.18 $ 0.04
============ ============ ============
Weighted average shares
outstanding 6,892,587 5,203,868 4,127,760
============ ============ ============
The accompanying notes are an integral part of these financial statements.
Page 32 of 146
<PAGE>
MILLENNIUM ELECTRONICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Receivable
Common Stock Paid-in from Retained
Shares Amount Capital Stockholder Earnings Total
------ ------ ------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 4,127,760 $ 4,128 $ 872 $ -- $ (870) $ 4,130
Net income -- -- -- -- 170,122 170,122
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 4,127,760 4,128 872 -- 169,252 174,252
Issuance of common
stock for services 1,076,108 1,076 37,324 -- -- 38,400
Increase in receivable
from stockholder -- -- -- (151,339) -- (151,339)
Net income -- -- -- -- 958,439 958,439
Distribution to stockholders -- -- -- -- (338,496) (338,496)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 5,203,868 5,204 38,196 (151,339) 789,195 681,256
Distributions to "S"
corporation stockholders -- -- -- -- (612,788) (612,788)
Cancellation of shares (130,098) (130) 130 -- -- --
Transfer of capital
resulting from converting
from "S" corporation to
"C" corporation -- -- 501,087 -- (501,087) --
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 33 of 146
<PAGE>
MILLENNIUM ELECTRONICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (Continued)
For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Receivable
Common Stock Paid-in from Retained
Shares Amount Capital Stockholder Earnings Total
------ ------ ------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
for:
private placement 1,575,000 1,575 2,377,160 -- -- 2,378,735
exercise of options
and warrants 478,197 478 1,493,888 -- -- 1,494,366
merger of Beacon Capital
Investment, Inc. 464,183 464 387,474 -- -- 387,938
purchase of NetRam
Components, Inc. 576,000 576 1,727,424 -- -- 1,728,000
Issuance of warrants in lieu
of loan origination fees -- -- 50,000 -- -- 50,000
Repayment of receivable from
stockholder $ -- $ -- $ 151,339 $ -- $ 151,339 --
Net income -- -- -- -- 612,195 612,195
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 $ 8,167,150 $ 8,167 $ 6,575,359 $ -- $ 287,515 $ 6,871,041
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 34 of 146
<PAGE>
MILLENNIUM ELECTRONICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 612,195 $ 958,439 $ 170,122
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation and amortization 113,270 11,888 10,591
Deferred income taxes (100,000) -- --
Stock issued for services rendered -- 38,400 --
(Increase) decrease in
Accounts receivable 2,227,388 (3,763,497) (2,429,744)
Inventories (776,486) (98,894) (564,988)
Income taxes receivable (163,719) -- --
Prepaid expenses (66,793) (6,805) (20,223)
Other assets 8,224 (12,519) (43,440)
Increase (decrease) in
Accounts payable and accrued liabilities (3,434,836) 424,494 219,206
Income tax payable (10,881) 8,281 2,600
----------- ----------- -----------
Net cash used in operating activities (1,591,638) (2,440,213) (2,655,876)
----------- ----------- -----------
Cash flows from investing activities
Acquisition of furniture and equipment (101,706) (39,331) (37,308)
Repayment (issuance) of note receivable to
stockholder 151,339 (151,339) --
Acquisition of Beacon Capital Investment,
Inc., net of cash acquired 513,534 -- --
Acquisition of NetRam Components, Inc., net
of cash acquired 261,712 -- --
Other 999 -- --
----------- ----------- -----------
Net cash provided by (used in) investing
activities 825,878 (190,670) (37,308)
----------- ----------- -----------
Cash flows from financing activities
Increase (decrease) in book overdraft (191,742) (144,342) 336,084
Net proceeds from (payments on) line of
credit facility (355,468) 3,170,509 2,062,245
Proceeds from (payments on) stockholder
note payable (298,811) 320 63,491
Proceeds from private placement 3,000,000 -- --
Payment of offering costs (564,158) (57,108) --
Distribution to "S" corporation stockholders (612,788) (338,496) --
----------- ----------- -----------
Net cash provided by financing activities 977,033 2,630,883 2,461,820
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 35 of 146
<PAGE>
MILLENNIUM ELECTRONICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net increase (decrease) in cash $ 211,273 $ -- $ (231,364)
Cash and cash equivalents, beginning of
period -- -- (231,364)
----------- ----------- -----------
Cash and cash equivalents, end of period $ 211,273 $ -- $ --
=========== =========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
During the years ended December 31, 1997, 1996, and 1995, the Company paid
income taxes of $356,325, $7,519, and $0, respectively, and interest of
approximately $618,000, $411,000, and $151,000, respectively.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In 1997, the Company issued warrants for loan origination fees valued at $50,000
and issued stock subscription receivables in the amount of $1,494,366.
In 1996, the Company issued 1,076,108 shares of common stock for compensation
and services rendered valued at $38,400.
See Notes 8 and 13 for other non-cash investing and financing activities.
The accompanying notes are an integral part of these financial statements.
Page 36 of 146
<PAGE>
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
- ---------------------------------
Millennium Electronics, Inc. ("MEI") was incorporated in Nevada on February 13,
1997 with the intent to be a holding company. MEI, through its wholly-owned
subsidiaries (collectively the "Company"), is engaged in the manufacturing,
through subcontractors, and distribution of Dynamic Random Access Memory, memory
upgrade components for personal computers, laptops, and notebook computers, file
servers and printers to retailers, resellers, value added resellers, value added
distributors, original equipment manufacturers, aggregators, and national or
regional distributors. In addition, the Company is engaged in the manufacture
and distribution of computers to resellers.
Mergers
- -------
MEI is the successor by merger to Beacon Capital Investments, Inc., a Delaware
corporation ("Beacon"), effective March 31, 1997. The exchange rate in the
re-incorporation merger was two and one-half shares of Beacon for one share of
MEI. Due to Beacon's lack of business activity prior to the merger, no excess
cost over fair value of net assets acquired was recorded.
In addition, in a substantially concurrent reverse triangular merger, Millennium
Memory, Inc., a California corporation ("MMI") became a wholly owned subsidiary
of MEI. MEI issued 6,778,868 shares of its common stock in a one-for-one
exchange for all of the issued and outstanding common stock of MMI. Prior to the
mergers, Beacon and MEI had no business activity. For accounting purposes, the
acquisition by merger was treated as a recapitalization of MMI (reverse
acquisition). MMI is presented as the continuing entity, and the historical
financial statements are those of MMI. Historical stockholders' equity of MMI
prior to the merger was retroactively restated for the equivalent number of
shares received in the merger. In conjunction with the merger, MMI completed a
private placement offering (see Note 8).
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of MEI,
MMI, and NetRam Components, Inc. ("NetRam") from the date of acquisition (see
Note 13), September 30, 1997, after the elimination of intercompany accounts and
transactions.
Cash and Cash Equivalents
- -------------------------
For purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with original maturities of three months or less to
be cash equivalents.
Stock Subscription Receivable
- -----------------------------
At December 31, 1997, the Company had subscriptions to purchase its common stock
of $1,494,366. This amount was collected subsequent to the balance sheet date;
therefore, the amount is shown as an asset in the accompanying consolidated
balance sheet.
Page 37 of 146
<PAGE>
Inventories
- -----------
Inventories are stated at the lower of cost or market. Cost is determined by the
weighted average method.
Furniture and Equipment
- -----------------------
Furniture and equipment are stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets as follows:
Computer and telephone equipment 5 years
Office furniture 7 years
Test equipment 5 years
Betterments, renewals, and extraordinary repairs that extend the lives of the
assets are capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation applicable to assets
retired are removed from the accounts, and the gain or loss on disposition is
recognized in current operations.
Excess Cost over Fair Value of Net Assets Acquired
- --------------------------------------------------
The Company continually monitors its excess cost over fair value of net assets
acquired (which is amortized over seven years) to determine whether any
impairment of this asset has occurred. In making such determination with respect
to excess cost over fair value of net assets acquired, the Company evaluates the
performance, on an undiscounted cash flow basis, of the underlying assets or
group of assets, which gave rise to this amount.
Revenue Recognition
- -------------------
The Company recognizes revenue from product sales at the time of shipment net of
expected returns.
Income Taxes
- ------------
For the years ended December 31, 1996 and 1995, and for the period from
January 1, 1997 to March 31, 1997, the Company elected to be taxed as an "S"
corporation. Under these provisions, the stockholders are liable for income tax
on their respective shares of the Company's taxable income. In addition, there
is a 1.5% tax on the Company's taxable income for state purposes.
Effective April 1, 1997, the Company elected to be taxed as a "C" corporation.
At that date, the retained earnings of the "S" corporation of $501,087 were
transferred to additional paid-in capital.
Effective March 31, 1997, the Company began accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," and the Company recorded a deferred tax asset and
deferred tax liability of $95,200 and $7,600, respectively, upon implementation.
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences, and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
Page 38 of 146
<PAGE>
allowance when, in the opinion of management, it is more likely than not that
some portion of all of the deferred tax assets will not be realized. No
valuation allowance was established as of December 31, 1997 as full realization
of the future deductions is anticipated. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment. For the nine months ended December 31, 1997, such timing differences
arose primarily from differences in the methods of accounting for book and tax
purposes.
Earnings per Share
- ------------------
For the year ended December 31, 1997, the Company adopted SFAS No. 128,
"Earnings per Share." Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
available. Diluted earnings per share is computed similar to basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
Earnings per share for 1996 and 1995 have been restated using the methodologies
of SFAS No. 128
Estimates
- ---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of sales and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
- -----------------------------------
The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's financial
instruments, including cash and cash equivalents, accounts receivable, and
accounts payable and accrued liabilities, the carrying amounts approximate fair
value due to their short maturities. The amounts shown for the line of credit
facility and subordinated debt obligation also approximate fair value because
current interest rates and terms offered to the Company for similar debt are
substantially the same.
Concentrations of Credit Risk
- -----------------------------
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist of cash and trade receivables. The Company places its
cash with high quality financial institutions and at times may exceed the FDIC
$100,000 insurance limit. The Company sells products in the United States and
extends credit based on an evaluation of the customer's financial condition,
generally without requiring collateral. Exposure to losses on receivables is
principally dependent on each customer's financial condition. The Company
monitors its exposure for credit losses and maintains allowances for anticipated
losses. The Company also has credit insurance that covers a majority of its
accounts receivable balance.
Page 39 of 146
<PAGE>
Reclassifications
- -----------------
Certain amounts in the 1996 and 1995 consolidated financial statements have been
reclassified to conform to the 1997 presentation with no effect on previously
reported net income or stockholders' equity.
NOTE 2 - INVENTORIES
Inventories consisted of the following at December 31:
1997 1996
-------- --------
Memory components $ 767,826 $ 663,882
Computer components 773,840 --
---------- ----------
Total $1,541,666 $ 663,882
========== ==========
NOTE 3 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following at December 31:
1997 1996
-------- --------
Computer and telephone equipment $ 112,714 $ 61,411
Office furniture 28,337 4,132
Test equipment 58,168 12,596
---------- ----------
199,219 78,139
Less accumulated depreciation 51,544 22,531
---------- ----------
Total $ 147,675 $ 55,608
========== ==========
NOTE 4 - LINES OF CREDIT
As of December 31, 1997, the Company had a $10,000,000 line of credit (accounts
receivable credit line) expiring September 30, 1999. On the expiration date, the
line shall automatically and continuously renew for successive additional terms
of one year unless terminated at the option of the Company or the lender on the
anniversary date. The line bears interest at prime plus 3%. (Prime rate was 8.5%
and 8.25% on December 31, 1997 and 1996, respectively). The Company's ability to
borrow money under this line of credit agreement is based upon a percentage of
defined accounts receivable. In addition, the line is collateralized by
substantially all assets of the Company.
The debt agreement contains certain restrictions and covenants that prohibits
the Company from entering into certain transactions without lender approval and
also limits distributions to stockholders. The Company was in compliance with
all its covenants as of December 31, 1997 and 1996. In addition, the Company is
Page 40 of 146
<PAGE>
required to make a credit facility fee payment of $3,500 per quarter in advance,
and a $50,000 loan fee is payable on the earlier of the third anniversary date
(September 1998) or the date the loan agreement is terminated or terminates by
its terms. The $50,000 loan fee is being accrued over the term of the agreement.
As of December 31, 1997, the Company had a $500,000 line of credit (inventory
credit line). The Company borrowed an initial amount of $150,000, which was
repaid on March 31, 1997. Any additional advances are repaid by applying 25% of
each advance from the accounts receivable credit line. The Company's ability to
borrow money under this line of credit agreement is based upon a percentage of
defined inventories. This line of credit's remaining terms are identical to the
accounts receivable credit line.
The outstanding balance under the accounts receivable line of credit agreement
at December 31, 1997 and 1996 was $4,877,286 and $5,082,754, respectively. The
outstanding balance under the inventory line of credit agreement at December 31,
1997 and 1996 was $0 and $150,000, respectively.
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at
December 31:
1997 1996
-------- --------
Accounts payable $1,192,824 $ 478,504
Accrued commissions 67,500 211,607
Other accrued liabilities 56,905 49,061
---------- ----------
Total $1,317,229 $ 739,172
========== ==========
NOTE 6 - SUBORDINATED DEBT - STOCKHOLDER
As of December 31, 1996, the Company obtained a line of credit from the majority
stockholder of the Company, which is subordinated to the lines of credit (Note
4). The stockholder line of credit may not exceed $500,000. Interest on the
credit line is 7.6% per annum. The entire principal and accrued interest was
paid in full during the year ended December 31, 1997. The balance on the
stockholder credit line was $0 and $298,811 as of December 31, 1997 and 1996,
respectively.
Page 41 of 146
<PAGE>
NOTE 7 - COMMITMENTS
Lease Agreements
- ----------------
The Company leases certain facilities for its corporate and operations offices
under non-cancelable operating lease agreements that expire in 2003.
The minimum commitments under these lease agreements are as follows:
Year Ended
December 31,
------------
1998 $ 223,353
1999 306,732
2000 315,666
2001 326,589
2002 338,505
Thereafter 85,371
----------
Total $1,596,216
==========
Rent expense was approximately $73,000, $57,000, and $22,000 for the years ended
December 31, 1997, 1996, and 1995, respectively.
Employment Agreements
- ---------------------
The Company entered into a five-year employment agreement with its CEO and
majority stockholder. Under the terms of the agreement, the Company's CEO will
receive an annual salary, plus a performance bonus to be determined by the Board
of Directors, of which nothing was granted for the years ended December 31,
1997, 1996, and 1995, and a monthly car allowance of $2,160.
NOTE 8 - STOCKHOLDERS' EQUITY
Stock Option Plans
- ------------------
The Company's 1996-97 Stock Incentive Plan (the "Non-Qualified Plan") provides
for the granting of stock options to employees and certain consultants to the
Company (but not to officers or directors). The Board has authority to amend,
suspend, or terminate the Non-Qualified Plan, provided that no such action may
affect any option previously issued under the Non-Qualified Plan, and will
administer the Non-Qualified Plan. A total of 260,193 shares of common stock
have been reserved for issuance upon exercise of options granted under the
Non-Qualified Plan. Options under the Non-Qualified Plan may be exercised in
various installments, not to be exercised beyond ten years.
The Company's 1997 Incentive Stock Option Plan (the "Qualified Plan") provides
for the granting of stock options to eligible persons, as determined by the
Board of Directors. The Board has authority to amend, suspend, or terminate the
Qualified Plan, provided that no such action may affect any options previously
issued under the Qualified Plan, and will administer the Qualified Plan. The
Qualified Plan will terminate in April 2007. A total of 1,000,000 shares of
common stock have been reserved for issuance upon exercise of options granted
under the Qualified Plan. Options under the Qualified Plan may be exercised in
various installments, not to be exercised beyond ten years. The exercise price
Page 42 of 146
<PAGE>
is not to be less than 100% of the fair market value of the common stock at the
time of grant. No options may be granted to any person who, at the time the
option is granted, owns shares of outstanding common stock possessing more than
10% of the total combined voting power of all classes of stock of the Company,
unless the exercise price is at least 110% of the fair market value of the
common stock and is not exercisable after the expiration of five years from the
date of grant.
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies Accounting Principles
Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than for
restricted stock and options issued to outside third parties. If the Company had
elected to recognize compensation expense based upon the fair value at the grant
date for awards under these plans consistent with the methodology prescribed by
SFAS No. 123, the Company's net income and income per share would be reduced to
the pro forma amounts indicated below:
Year Ended
December 31, 1997
-----------------
Net income
As reported $ 612,195
Pro forma $ 144,455
Basic income per common share
As reported $ 0.09
Pro forma $ 0.02
The fair value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for the year ended December 31, 1997: dividend yield of 0%; expected
volatility of 65.0%; risk-free interest rate of 5.7%; and expected life of 2.27
years. The weighted average fair value of options granted during the year ended
December 31, 1997 was $1.24, and the weighted average exercise price was $3.21.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
For the year ended December 31, 1997, the Company has recognized $50,000 in the
accompanying financial statements related to options issued to outside third
parties.
Page 43 of 146
<PAGE>
The officers, directors, and stockholders of Beacon have options and warrants to
purchase 364,000 and 560,220 shares, respectively, of the Company's common stock
at a price of $3.125. As of December 31, 1997, 156,894 and 321,303 of the
options and warrants, respectively, were exercised.
Weighted- Weighted-
Average Average
Non-Qualified Exercise Qualified Exercise
Plan Price Plan Plan
------------- -------- --------- --------
Balance, January 1, 1997 -- -- -- --
Granted 173,790 $ 3.00 630,000 $ 3.00
Exercised -- $ -- -- $ --
Canceled -- $ -- (490,000) $ 3.00
-------- --------
Balance, December 31, 1997 173,790 $ 3.00 140,000 $ 3.00
======== ========
The weighted average remaining contractual life of options outstanding issued
under the Non-Qualified Plan and Qualified Plan is 9.75 and 2.25 years,
respectively, at December 31, 1997.
Weighted Weighted
Average Average
Other Exercise Other Exercise
Options Price Warrants Plan
------- -------- -------- --------
Balance, January 1, 1997 -- $ -- -- $ --
Transferred from Beacon 364,000 $3.125 560,220 $3.125
Granted 490,000 $ 3.41 203,191 $ 3.15
Exercised (156,894) $3.125 (321,303) $3.125
Canceled $ -- --
--------- ---------
Balance, December 31, 1997 697,106 $ 3.33 442,108 $ 3.14
========= =========
The weighted average remaining contractual life of other options and other
warrants issued is 3.00 and 1.75 years, respectively, at December 31, 1997.
Page 44 of 146
<PAGE>
Common Stock Split
- ------------------
On December 11, 1996, the Company's Board of Directors declared a 412.77607 to 1
stock split. All applicable share and per share data have been adjusted for the
stock split.
Common Stock Issued
- -------------------
During the year ended December 31, 1997, the Company completed the following
common stock transactions of previously unissued common shares:
Issued 1,575,000 shares for the private placement of MMI for net
proceeds of $2,378,735, of which 75,000 shares were given to the
placement agent as compensation.
Issued 576,000 shares for the acquisition of NetRam (see Note 13).
Issued 478,197 shares for options and warrants exercised for proceeds of
$1,494,366.
Canceled 130,098 shares that were placed in escrow upon the merger with
Beacon.
During the year ended December 31, 1996, the Company completed the
following common stock transactions of previously unissued common
shares:
Issued to two consultants for services rendered 173,779 shares each for
an aggregate value of $12,400.
Issued to an employee for services rendered 728,550 shares for $26,000.
NOTE 9 - SALES
During the years ended December 31, 1997, 1996, and 1995, the Company had two
major customers which accounted for approximately 42%, 50%, and 12% of total
sales, respectively. At December 31, 1997 and 1996, the amounts due from these
two major customers amounted to approximately $5,335,000 and $4,785,000,
respectively.
NOTE 10 - RELATED PARTY TRANSACTION
The Company pays, on behalf of the majority stockholder of the Company, monthly
lease payments for two vehicles of approximately $2,160.
As of December 31, 1996, $151,339 of the receivable from stockholder was offset
against stockholders' equity. The receivable was repaid on March 31, 1997.
Page 45 of 146
<PAGE>
For the year ended December 31, 1996, a stockholder of the Company earned
commissions of approximately $327,000 of which $136,000 was paid in 1996 and the
remainder was paid in 1997.
NOTE 11 - PROVISION FOR INCOME TAXES
The following table presents the current and deferred income tax provision
(benefit) for federal and state income taxes:
Years Ended December 31
------------------------------------------
1997 1996 1995
-------- -------- --------
Current
Federal $ 145,000 $ -- $ --
State 47,606 15,800 2,600
--------- ------- ------
192,606 15,800 2,600
Deferred
Federal (75,000) -- --
State (25,000) -- --
--------- ------- ------
(100,000) -- --
--------- ------- ------
Provision for income taxes $ 92,606 $15,800 $2,600
========= ======= ======
The tax effects of temporary differences which give rise to the deferred tax
provision (benefit) at December 31, 1997 consisted of:
Depreciation of furniture and equipment $ 16,000
Amortization of intangible assets (17,000)
Accounts receivable allowance (92,000)
Other (7,000)
Total $(100,000)
=========
The provision for income taxes differs from the amount that would result from
applying the federal statutory rate as follows. No reconciliation is shown for
the years ended December 31, 1996 and 1995 as the Company elected to be taxed as
an "S" corporation until March 31, 1997.
Page 46 of 146
<PAGE>
Year Ended
December 31, 1997
-----------------
Statutory regular federal income tax rate 34.0%
State income taxes, net of federal benefit 6.2
Deferred taxes recognized upon conversion
to "C" corporation (12.2)
Income taxes as an "S" corporation (11.8)
Other (3.1)
----
Total 13.1%
====
The components of the deferred income tax assets (liabilities) as of December
31, 1997 are as follows:
Deferred tax assets
Amortization of intangible assets $ 17,000
Accounts receivable allowance 92,000
Other 16,000
--------
Total $125,000
========
Deferred tax liabilities
Furniture and equipment 16,000
Other 9,000
Total $ 25,000
========
NOTE 12 - EARNINGS PER SHARE
Earnings per share for the year ended December 31, 1997 is as follows:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common
stockholders $612,195 6,892,587 $0.09
Effect of dilutive securities
Options and warrants -- 525,350
-------- ---------
Diluted EPS
Income available to common
stockholders plus
assumed conversions $612,195 7,417,937 $0.08
======== =========
Page 47 of 146
<PAGE>
NOTE 13 - ACQUISITIONS
On September 30, 1997, the Company acquired 100% of the outstanding common stock
of NetRam in exchange for $120,000 and 576,000 shares of the Company's common
stock valued at $1,728,000. The acquisition was accounted for by the purchase
method of accounting; accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based on the estimated fair values at
the date of the acquisition. The excess of the purchase price over the estimated
fair value of net assets acquired of $2,359,195 has been recorded as excess cost
over fair value of net assets acquired, which is being amortized over seven
years.
In addition, as described in Note 1, the Company is the successor by merger to
Beacon effective March 31, 1997. Due to Beacon's lack of business activity prior
to the merger, no excess cost over fair value of net assets acquired was
recorded.
The estimated fair value of assets acquired and liabilities assumed is
summarized as follows:
NetRam Beacon
------ ------
Cash $ 381,712 $ 513,534
Accounts receivable 2,910,642 --
Other assets 179,221 --
Intangible assets 2,359,195 --
Accounts payable and other liabilities (3,982,770) (125,596)
----------- ---------
Purchase price $ 1,848,000 $ 387,938
=========== =========
The following table presents the unaudited pro forma condensed statement of
operations for the year ended December 31, 1997 and reflects the results of
operations of the Company as if the acquisitions of Beacon and NetRam had been
effective January 1, 1997. The pro forma amounts are not necessarily indicative
of the combined results of operations had the acquisition been effective as of
that date, or of the anticipated results of operations, due to cost reductions
and operating efficiencies that are expected as a result of the acquisition.
December 31, 1997
-----------------
(unaudited)
Net sales $9,394,010
Gross profit $5,985,935
Selling, general, and administrative expenses $4,569,368
Net income $ 668,487
==========
Basic income per share $ 0.09
==========
Page 48 of 146
<PAGE>
NOTE 14 - SUBSEQUENT EVENTS
Subsequent to December 31, 1997, 25,296 options and 81,870 warrants were
exercised at an exercise price of $3.125. As of March 3, 1998, total proceeds of
$1,734,602 were received by the Company of which $1,494,366 relates to the
156,894 options and 321,303 warrants exercised in 1997, and the remaining
$240,236 relates to the 25,296 options and 81,870 warrants exercised in 1998.
The Company expects to receive an additional $94,657 related to the options and
warrants exercised in 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Incorporated herein by reference from the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the end of the fiscal year to which this Report relates.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed in Part II of this Annual Report on
Form 10-K:
1. Financial Statements.
Report of Independent Certified Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Other schedules have been omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or notes thereto.
Page 49 of 146
<PAGE>
(b) Reports on Form 8-K
On October 10, 1997, the Registrant filed with the SEC a current report
on Form 8-K dated September 12, 1997 to report (i) the extension of the exercise
period of certain options and the Common Stock Purchase Warrants originally
issued by the Registrant's predecessor from September 30, 1997 to December 15,
1997 and (ii) the acquisition of NETRAM Components, Inc. by the Registrant. The
financial statements of the business acquired, prepared pursuant to Rule 3-05 of
the Regulation S-X, and the pro forma financial information required pursuant to
Article 11 of Regulation S-X were not filed on October 10, 1997 with the current
report on Form 8-K, but were filed by an amendment within sixty days following
the filing date of the current report.
On December 15, 1997, the Registrant filed with the SEC the amendment
to the Current Report on Form 8-K dated September 12, 1997 (the "Amendment").
The Amendment contained the following financial statements of the business
acquired, prepared pursuant to Rule 3-05 of the Regulation S-X, and the pro
forma financial information required pursuant to Article 11 of Regulation S-X:
Report of Independent Certified Accountants
Balance Sheet
Statement of operations and Partners' Capital
Statement of Cash Flows
Notes to Financial Statements
Pro Forma Statements of Operations for the period ended December 31,
1996 and the nine months ended September 30, 1997 Notes to Pro Forma
Financial Statements
In addition, the Amendment reported the extension of the exercise period of
certain options and the Common Stock Purchase Warrants originally issued by the
Registrant's predecessor from December 15, 1997 to December 31, 1997.
On January 14, 1998, the Registrant filed with the SEC a current report
on Form 8-K dated December 29, 1997 to report the extension of the exercise
period of certain options and the Common Stock Purchase Warrants originally
issued by the Registrant's predecessor from December 31, 1997 to January 31,
1998.
(c) Exhibits
Exhibit No. Description
- ----------- -----------
2.1(*) Agreement and Plan of Merger dated as of December 31, 1996, by
and among Beacon Capital Investment, Inc., Millennium Memory,
Inc. and Troy Barnes, as amended. Incorporated herein by
reference from Exhibit 1 to Registrant's Current
Report on Form 8-K dated April 14, 1997.
2.2(*) Agreement of Merger, dated as of September 30, 1997 by and among
NetRam Components, Inc., John Torres, Terry Tonini, Jeff Hylton,
Don Klosterman, David Erickson, Bret Pool, Millennium
Electronics, Inc. and Millennium Memory, Inc. Incorporated
herein by reference from Registrant's Current Report on
Form 8-K dated September 12, 1997.
Page 50 of 146
<PAGE>
3.1(*) Articles of Incorporation of Millennium Electronics, Inc., as
amended. Incorporated herein by reference from Exhibit 2 to
Registrant's Current Report on Form 8-K dated April 14, 1997.
3.2(*) Bylaws of Millennium Electronics, Inc., as amended. Incorporated
herein by reference from Exhibit 3 to Registrant's Current Report
on Form 8-K dated April 14, 1997.
4.1(*) See Articles of Incorporation (Exhibit 3.1) for definition of
the rights of the Preferred and Common Stock.
4.2(*) Registration Rights Agreement dated March 31, 1997 between Beacon
Capital Investment, Inc. and Certain Option and Warrant Holders.
Incorporated herein by reference from Exhibit 10 to Registrant's
Report on Form 10Q for the Quarterly Period ended March 31, 1997.
4.3 Amendment to Registration Rights Agreement dated November 18,
1997 by and among Registrant, Certain Stockholders and Larry
Meek.
10.1 Industrial Lease Between The Irvine Company and Millennium
Electronics, Inc. dated as of December 23, 1997.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
* Previously filed with the Securities and Exchange Commission.
Page 51 of 146
<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.
MILLENNIUM ELECTRONICS, INC.
Date: March 30, 1998 /s/ Troy D. Barnes
-----------------------------
Troy D. Barnes
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and dates indicated.
Signature Title Date
- --------- ----- ----
Chief Executive Officer
President
/s/ Troy D. Barnes Secretary
- ----------------------- Director
Troy D. Barnes (Principal Executive Officer) March 30, 1998
/s/ Gail Campbell
- ----------------------- Controller
Gail Campbell (Principal Accounting Officer) March 30, 1998
/s/ Daniel H. Glick
- ----------------------- Director March 30, 1998
Daniel H. Glick
/s/ Douglas P. Morris
- ----------------------- Director March 30, 1998
Douglas P. Morris
- ----------------------- Director March __, 1998
Fred O. Newton
Page 52 of 146
<PAGE>
EXHIBIT INDEX
Exhibit Page
- ------- ----
2.1(*) Agreement and Plan of Merger dated as of December 31,
1996, by and among Beacon Capital Investment, Inc.,
Millennium Memory, Inc. and Troy Barnes, as amended.
Incorporated herein by reference from Exhibit 1 to
Registrant's Current Report on Form 8-K dated April 14,
1997.
2.2(*) Agreement of Merger, dated as of September 30, 1997 by and
among NetRam Components, Inc., John Torres, Terry Tonini,
Jeff Hylton, Don Klosterman, David Erickson, Bret Pool,
Millennium Electronics, Inc. and Millennium Memory, Inc.
Incorporated herein by reference from Registrant's Current
Report on Form 8-K dated September 12, 1997.
3.1(*) Articles of Incorporation of Millennium Electronics, Inc.,
as amended. Incorporated herein by reference from Exhibit
2 to Registrant's Current Report on Form 8-K dated April
14, 1997.
3.2(*) Bylaws of Millennium Electronics, Inc., as amended.
Incorporated herein by reference from Exhibit 3 to
Registrant's Current Report on Form 8-K dated April 14,
1997.
4.1(*) See Articles of Incorporation (Exhibit 3.1) for definition
of the rights of the Preferred and Common Stock.
4.2(*) Registration Rights Agreement dated March 31, 1997 between
Beacon Capital Investment, Inc. and Certain Option and
Warrant Holders. Incorporated herein by reference from
Exhibit 10 to Registrant's Report on Form 10Q for the
Quarterly Period ended March 31, 1997.
4.3 Amendment to Registration Rights Agreement dated November 54
18, 1997 by and among Registrant, Certain Stockholders and
Larry Meek.
10.1 Industrial Lease Between The Irvine Company and Millennium 57
Electronics, Inc. dated as of December 23, 1997.
21.1 Subsidiaries of Registrant. 144
23.1 Consent of Independent Accountants. 145
27.1 Financial Data Schedule. 146
* Previously filed with the Securities and Exchange Commission.
Page 53 of 146
<PAGE>
AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
This Amendment to Registration Rights Agreement (this "Amendment") is
entered into as of November 18, 1997 by and among Millennium Electronics, Inc.,
a Nevada corporation (the "Company"), the individuals and companies listed on
Exhibit A hereto (the "Holders") and Larry Meek ("Meek").
BACKGROUND
The Company and the Holders entered into a Registration Rights Agreement
as of March 31, 1997 (the "Registration Rights Agreement"), pursuant to which
the Company granted the Holders certain rights to have the Company register
under the Securities Act of 1933 certain shares of the Company's common stock
which they hold or which they are entitled to acquire under various options or
warrants.
Meek was granted options to acquire 20,000 shares of the Company's common
stock at a price of $3.25 per share for his role in the Company's merger with
Millennium Electronics, Inc. ("MMI"), pursuant to an agreement under which Meek
was to be given the same registration rights as have been granted to the Holders
under the Registration Rights Agreement.
Coast Business Credit, a division of Southern Pacific Thrift & Loan
Association ("Coast"), recently increased the line of credit it has extended MMI
in return for, among other things, additional warrants to purchase an additional
78,191 shares of the Company's common stock at a price of $5.00 per share,
pursuant to an agreement under which Coast is to be given the same registration
rights as it was previously granted under the Registration Rights Agreement as
to the shares of the Company's common stock underlying the warrants granted to
it earlier this year;
The most efficient way for the Company to grant Meek and Coast such
registration rights is to add Meek as a party to the Registration Rights
Agreement and to modify Exhibit A to the Registration Rights Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, and for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Capitalized terms set forth herein, unless otherwise specifically
defined herein, shall have the meanings given to such terms in the Registration
Rights Agreement.
-1-
Page 54 of 146
<PAGE>
2. Exhibit A to the Registration Rights Agreement is hereby amended to
correspond to Exhibit A attached to this Amendment.
3. Meek hereby agrees to be bound by all of the terms of the Registration
Rights Agreement as a Holder thereunder.
4. This Amendment may be executed in two or more counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
5. This Amendment shall be construed and enforced in accordance with, and
the rights of the parties hereto shall be governed by, the laws of the State of
California applicable to agreements made in and to be performed in the State of
California; provided, however, that in the event that any California law or laws
requires or permits the application of the laws of any other jurisdiction, such
California law or laws shall be disregarded with the result that the remaining
laws of the State of California shall nonetheless be applied.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
The "COMPANY" The "HOLDERS"
MILLENNIUM ELECTRONICS, INC. COAST BUSINESS CREDIT, a division of
Southern Pacific Thrift & Loan Ass'n
By: /s/ Troy D. Barnes By: /s/ Edit Kondoros
------------------------------- -----------------------------------
Its: President/CEO Its: Senior Vice President
--------------------------- -----------------------------
[Printed Name and Title] [Printed Name and Title]
"MEEK" ACAP FINANCIAL, INC.
/s/ Larry Meek By: /s/ Kirk Ferguson
- ---------------------------------- ----------------------------------
Larry Meek, an individual Its: President
-----------------------------
[Printed Name and Title]
/s/ Douglas P. Morris
--------------------------------------
Douglas P. Morris, an individual
/s/ Kirk Ferguson
--------------------------------------
Kirk Ferguson, an individual
-2-
Page 55 of 146
<PAGE>
EXHIBIT A
Holder Shares
------ ------
Douglas P. Morris 300,000
Coast Business Credit, 128,191
a division of Southern Pacific
Thrift & Loan Association
Kirk Ferguson 100,000
ACAP Financial, Inc. 103,011
Larry Meek 20,000
-3-
Page 56 of 146
<PAGE>
INDUSTRIAL LEASE
(Multi-Tenant; Net)
BETWEEN
THE IRVINE COMPANY
AND
MILLENNIUM ELECTRONICS, INC.
Page 57 of 146
<PAGE>
TABLE OF CONTENTS
[included in original -
not recreated for EDGAR purposes]
Page 58 of 146
<PAGE>
EXHIBITS
Exhibit A Depiction of the Premises
Exhibit B Environmental Questionnaire
Exhibit C Hazardous Materials Disclosure
Exhibit D Form of Assignment of Lease
Exhibit E Rules and Regulations
Exhibit X Work Letter
Exhibit Y Depiction of the Project
Page 59 of 146
<PAGE>
INDUSTRIAL LEASE
(Multi-Tenant; Net)
THIS LEASE is made as of the ___ day of December, 1997, by
and between THE IRVINE COMPANY, hereafter called "Landlord," and
MILLENNIUM ELECTRONICS, INC., a California corporation,
hereinafter called "Tenant."
ARTICLE I. BASIC LEASE PROVISIONS
Each reference in this Lease to the "Basic Lease Provisions"
shall mean and refer to the following collective terms, the
application of which shall be governed by the provisions in the
remaining Articles of this Lease.
1. Premises: Suite No. 100 (the Premises are more particularly
described in Section 2.1).
Address of Building: 51 Discovery, Irvine, CA 92618
2. Project Description (if applicable): That portion of Irvine
Spectrum 6 shown on Exhibit Y.
3. Use of Premises: General office, assembly and warehousing of
computers and related products, and any other uses permitted
under applicable laws and recorded restrictions for the
Project, provided that no retail uses shall be permitted.
4. Estimated Commencement Date: April 1, 1998
5. Lease Term: Sixty (60) months, plus such additional days as
may be required to cause this Lease to terminate on the
final day of the calendar month.
6. Basic Rent: Twenty-Four Thousand Eight Hundred Seventeen
Dollars ($24,817.00) per month, based on $.75 per rentable
square foot.
Basic Rent is subject to adjustment as follows:
Commencing on the first day of the thirteenth (13th) month
of the Lease Term, the Basic Rent shall be Twenty-Five
Thousand Eight Hundred Nine Dollars ($25,809.00) per month,
based on $.78 per rentable square foot.
Commencing on the first day of the twenty-fifth (25th) month
of the Lease Term, the Basic Rent shall be Twenty-Six
Thousand Four Hundred Seventy-One Dollars ($26,471.00) per
month, based on $.80 per rentable square foot.
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Commencing on the first day of the thirty-seventh (37th)
month of the Lease Term, the Basic Rent shall be Twenty-
Seven Thousand Four Hundred Sixty-Four Dollars ($27,464.00)
per month, based on $.83 per rentable square foot.
Commencing on the first day of the forty-ninth (49th) month
of the Lease Term, the Basic Rent shall be Twenty-Eight
Thousand Four Hundred Fifty-Seven Dollars ($28,457.00) per
month, based on $.86 per rentable square foot.
7. Guarantor(s): N/A
8. Floor Area of Premises: Approximately 33,089 rentable square
feet
9. Security Deposit: $31,303.00
10. Broker(s): Lee & Associates
11. Additional Insureds: Insignia Commercial Group, Inc.
12. Address for Payments and Notices:
LANDLORD TENANT
INSIGNIA COMMERCIAL GROUP, INC. Millennium Electronics, Inc.
One Technology Drive, Suite F-207 51 Discovery, Suite 100
Irvine, CA 92618 Irvine, CA 92618
with a copy of notices to:
IRVINE INDUSTRIAL COMPANY
P.O. Box 6370
Newport Beach, CA 92658-6370
Attn: Vice President, Industrial Operations
13. Tenant's Liability Insurance Requirement: $ 1,000,000.00
14. Vehicle Parking Spaces: Ninety-Six (96)
15. Estimated Space Plan Approval Date: January 5, 1998
ARTICLE II. PREMISES
SECTION 2.1. LEASED PREMISES. Landlord leases to Tenant
and Tenant leases from Landlord the premises shown in Exhibit A
(the "Premises"), containing approximately the floor area set
forth in Item 8 of the Basic Lease Provisions and known by the
suite number identified in Item 1 of the Basic Lease Provisions.
The Premises are located in the building identified in Item 1 of
the Basic Lease Provisions (which together with the underlying
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real property, is called the "Building"), and is a portion of the
project shown in Exhibit Y (the "Project"). Tenant understands
that the floor area set forth in Item 8 of the Basic Lease
Provisions may include, at Landlord's option, a factor
approximating the total square footage of any common lobby or
internal common features of the Building times the ratio of the
actual square footage of the Premises to the total square footage
of the Building. If, upon completion of the space plans for the
Premises, Landlord's architect or space planner reasonably
determines (and Tenant reasonably confirms) that the rentable
square footage of the Premises differs from that set forth in the
Basic Lease Provisions, then Landlord shall so notify Tenant and
the Basic Rent (as shown in Item 6 of the Basic Lease Provisions)
shall be promptly adjusted in proportion to the change in square
footage. Within five (5) days following Landlord's request, the
parties shall memorialize the adjustments by executing an
amendment to this Lease prepared by Landlord, provided that the
failure or refusal by either party to execute the amendment shall
not affect its validity.
SECTION 2.2. RIGHT OF FIRST OFFER. Provided Tenant is not
in material default under this Lease at the time of exercise of
the rights set forth in this Section 2.2 or at the time of
commencement of any lease for Available Space (as hereinafter
defined), throughout the original Term of this Lease Tenant shall
have a one time right of first offer to lease the space which
becomes available for lease in the Building and which is not
already occupied by Tenant ("Available Space"). Landlord shall
notify Tenant of Available Space, which notice shall specify the
date the same is or will be available and the terms on which
Landlord is prepared to lease such Available Space, including the
basic rent, the lease term and tenant improvement allowance for
such Available Space (a "Space Notice"). Tenant shall have five
(5) business days from the delivery of any Space Notice within
which to deliver to Landlord, Tenant's written commitment (the
"Commitment Notice"), to lease the Available Space which is the
subject of a Space Notice. Tenant shall exercise its rights
hereunder, if at all, only to the entire space identified by
Landlord as the Available Space. If Tenant fails to timely
deliver its commitment, Landlord shall be free to lease the space
to a third party on terms acceptable to Landlord whether or not
such terms are the same as those set forth in the Space Notice;
provided, however, that should Landlord fail to lease such space
within one hundred eighty (180) days thereafter, then Landlord
shall reinitiate the foregoing procedures. If Tenant timely
delivers its Commitment Notice, Landlord and Tenant shall
endeavor to enter into a lease for the applicable space within
fifteen (15) days after the date of Tenant's Commitment Notice.
If the parties are unable to finalize and execute a lease for the
applicable space within such fifteen (15) day period for any
reason whatsoever, Landlord shall, in addition to any right or
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remedy available to Landlord at law or in equity, be free to
lease such space to a third party. Any attempt to assign or
transfer any rights or interests created by this Section 2.2,
except pursuant to a transfer which, under the terms of Section
9.4 hereof does not require the consent of Landlord, shall be
void from its inception.
SECTION 2.3. ACCEPTANCE OF PREMISES. Tenant acknowledges
that neither Landlord nor any representative of Landlord has made
any representation or warranty with respect to the Premises or
the Building or the suitability or fitness of either for any
purpose, including without limitation any representations or
warranties regarding zoning or other land use matters, and that
neither Landlord nor any representative of Landlord has made any
representations or warranties regarding (i) what other tenants or
uses may be permitted or intended in the Building and the
Project, or (ii) any exclusivity of use by Tenant with respect to
its permitted use of the Premises as set forth in Item 3 of the
Basic Lease Provisions. Tenant further acknowledges that neither
Landlord nor any representative of Landlord has agreed to
undertake any alterations or additions or construct any
improvements to the Premises except as expressly provided in this
Lease. The taking of possession or use of the Premises by Tenant
for any purpose other than construction shall conclusively
establish that the Premises and the Building were in satisfactory
condition and in conformity with the provisions of this Lease in
all respects, except for those matters which Tenant shall have
brought to Landlord's attention on a written punch list. The
list shall be limited to any items required to be accomplished by
Landlord under the Work Letter attached as Exhibit X, and shall
be delivered to Landlord within thirty (30) days after the term
('Term') of this Lease commences as provided in Article III
below. Nothing contained in this Section shall affect the
commencement of the Term or the obligation of Tenant to pay rent.
Landlord shall diligently complete all punch list items of which
it is notified as provided above. Nothing in this Section shall
affect or diminish any of Landlord's representations, warranties,
obligations, or covenants contained in any other provisions of
this Lease.
SECTION 2.4. BUILDING NAME AND ADDRESS. Tenant shall not
utilize any name selected by Landlord from time to time for the
Building and/or the Project as any part of Tenant's corporate or
trade name. Landlord shall have the right to change the name,
address, number or designation of the Building or Project without
liability to Tenant.
SECTION 2.5 LANDLORD'S RESPONSIBILITIES. Landlord shall
correct, repair or replace, at Landlord's sole cost and expense
and not as a Building Cost, any non-compliance of the Premises,
the exterior of the Building and the Common Areas with all
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applicable building permits and codes in effect as of the
Commencement Date, including without limitation, the provisions
of Title III of the Americans With Disabilities Act ("ADA") in
effect as of the Commencement Dale, but Landlord makes no
representation or warranty with respect to such permits or code
which are applicable to Tenant's specific use of the Premises.
All other ADA compliance issues which pertain to the Premises,
including without limitation, in connection with Tenant's
construction of any alterations or other improvements in the
Premises (and any resulting ADA compliance requirements in the
Common Areas which are caused solely by Tenant's specific use of
the Premises, as opposed to those which are required solely
because Tenant has made a governmental application giving rise to
a right for the City of Irvine to require changes to the Common
Areas), and the operation of Tenant's business and employment
practices in the Premises, shall be the responsibility of Tenant
at its sole cost and expense. The repairs, corrections, or
replacements required of Landlord or of Tenant under the
foregoing provisions of this Section shall be made promptly
following notice of non-compliance from any applicable
governmental agency. Tenant shall promptly forward any such
notice that Tenant receives to Landlord.
ARTICLE III. TERM
SECTION 3.1. GENERAL. The Term shall be for the period
shown in Item 5 of the Basic Lease Provisions. Subject to the
provisions of Section 3.2 below, the Term shall commence
("Commencement Date") on the earlier of (a) the date upon which
all relevant governmental authorities have approved the Tenant
Improvements in accordance with applicable building codes, as
evidenced by written approval thereof in accordance with the
building permits issued for the Tenant Improvements or issuance
of a temporary or final certificate of occupancy for the
Premises, or (b) the date Tenant acquires possession or commences
use of the Premises for any purpose other than construction of
Tenant Improvements by Tenant under the Work Letter. Within ten
(10) days after possession of the Premises is tendered to Tenant,
the parties shall memorialize on a form provided by Landlord the
actual Commencement Date and the expiration date ("Expiration
Date") of this Lease. Tenant's failure to execute that form
shall not affect the determination of those dates.
SECTION 3.2. DELAY IN POSSESSION. If Landlord, for any
reason whatsoever, cannot deliver possession of the Premises to
Tenant on or before the Estimated Commencement Date, this Lease
shall not be void or voidable nor shall Landlord be liable to
Tenant for any resulting loss or damage. However, Tenant shall
not be liable for any rent and the Commencement Date shall not
occur until Landlord delivers possession of the Premises and the
Premises are in fact available for Tenant's occupancy with any
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Tenant Improvements that have been approved as per Section 3.1
(a) above, except that if Landlord's failure to so deliver
possession on the Estimated Commencement Date is attributable to
any action or inaction by Tenant (including without limitation
any Tenant Delay described in the Work Letter attached to this
Lease), then the Commencement Date shall not be advanced to the
date on which possession of the Premises is tendered to Tenant,
and Landlord shall be entitled to full performance by Tenant
(including the payment of rent) from the date Landlord would have
been able to deliver the Premises to Tenant but for Tenant
Delay(s). Notwithstanding anything to the contrary contained in
this Section 3.2, however, if for any reason other than "Tenant
Delays" (as defined in the Work Letter), the Commencement Date
has not occurred by the date that is one hundred eighty (180)
days following the Estimated Commencement Date, then Tenant may,
by written notice to Landlord given at any time thereafter but
prior to the actual occurrence of the Commencement Date, elect to
terminate this Lease. Notwithstanding the foregoing, if at any
time during the construction period, Landlord reasonably believes
that the Commencement Date will not occur on or before one
hundred eighty (180) days following the Estimated Commencement
Date, Landlord may notify Tenant in writing of such fact and of a
new outside date on or before which the Commencement Date will
occur, and Tenant must elect within ten (10) days of receipt of
such notice to either terminate this Lease or waive its right to
terminate this Lease provided the Commencement Date occurs on or
prior to the new outside date established by Landlord in such
notice to Tenant, Tenant's failure to elect to terminate this
Lease within such ten (10) day period shall be deemed Tenant's
waiver of its right to terminate this Lease as provided in this
paragraph as to the previous outside date, but not as to the new
outside date established by said notice.
SECTION 3.3. RIGHT TO EXTEND THIS LEASE. Provided that
Tenant is not in default under any provision of this Lease,
either at the time of exercise of the extension right granted
herein or at the time of the commencement of such extension, and
provided further that Tenant is occupying not less than 75 % of
the entire Premises and has not assigned (except as provided
below) or sublet more than 25% of the Premises, or its interest
in this Lease, Tenant may extend the Term of this Lease for one
(1) period of sixty (60) months. Tenant shall exercise its right
to extend the Term by and only by delivering to Landlord, not
less than nine (9) months or more than twelve (12) months prior
to the expiration date of the Term, Tenant's irrevocable written
notice of its commitment to extend (the "Commitment Notice").
The Basic Rent payable under the Lease during any extension of
the Term shall be at the fair market rental, including subsequent
adjustments, for comparable industrial space being leased by
Landlord in the Irvine Spectrum; provided that such rate shall in
no event be less than the rate payable by Tenant during the final
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month of the initial Term. In the event that the parties are not
able to agree on the fair market rental within one hundred twenty
(120) days prior to the expiration date of the Term, then either
party may elect, by written notice to the other party, to cause
said rental, including subsequent adjustments, to be determined
by appraisal as follows.
Within ten (10) days following receipt of such appraisal
election, the parties shall attempt to agree on an appraiser to
determine the fair market rental. If the parties are unable to
agree in that time, then each party shall designate an appraiser
within ten (10) days thereafter. Should either party fail to so
designate an appraiser within that time, then the appraiser
designated by the other party shall determine the fair rental
value. Should each of the parties timely designate an appraiser,
then the two appraisers so designated shall appoint a third
appraiser who shall, acting alone, determine the fair rental
value of the Premises. Any appraiser designated hereunder shall
have an M.A.I. certification with not less than five (5) years
experience in the valuation of commercial industrial buildings in
Orange County, California.
Within thirty (30) days following the selection of the appraiser,
such appraiser shall determine the fair market rental value,
including subsequent adjustments of the Premises. In determining
such value, the appraiser shall first consider rental comparables
for the Project, provided that if adequate comparables do not
exist then the appraiser may consider transactions involving
similarly improved space in the Irvine Spectrum area with
appropriate adjustments for differences in location and quality
of project. In no event shall the appraiser attribute factors
for market tenant improvement allowances or brokerage
commissions, to reduce said fair market rental. The fees of the
appraiser(s) shall be shared equally by both parties.
Within twenty (20) days after the determination of the fair
market rental, Landlord shall prepare a reasonably appropriate
amendment to this Lease for the extension period and Tenant shall
execute and return same to Landlord within ten (10) days. Should
the fair market rental not be established by the commencement of
the extension period, then Tenant shall continue paying rent at
the rate in effect during the last month of the initial Term, and
a lump sum adjustment shall be made promptly upon the
determination of such new rental.
If Tenant fails to timely comply with any of the provisions of
this paragraph, Tenant's right to extend the Term shall be
extinguished and the Lease shall automatically terminate as of
the expiration date of the Term, without any extension and
without any liability to Landlord. Except as provided
specifically herein, any attempt to assign or transfer any right
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or interest created by this paragraph shall be void from its
inception. Tenant shall have no other right to extend the Term
beyond the single sixty (60) month extension created by this
paragraph. Unless agreed to in a writing signed by Landlord and
Tenant, any extension of the Term, whether created by an
amendment to this Lease or by a holdover of the Premises by
Tenant, or otherwise, shall be deemed a part of, and not in
addition to, any duly exercised extension period permitted by
this paragraph.
The option to extend granted in this Section may only be assigned
in connection with an assignment of all of Tenant's rights under
this Lease to a Permitted Transferee (as defined in Section 9.4
hereof). Except as provided in the preceding sentence, the
option to extend granted herein is personal to the original
Tenant and may not be assigned or exercised by any other party
(including any sublessees).
ARTICLE IV. RENT AND OPERATING EXPENSES
SECTION 4.1. BASIC RENT. From and after the Commencement
Date, Tenant shall pay to Landlord without deduction or offset,
Basic Rent for the Premises in the total amount shown (including
subsequent adjustments, if any) in Item 6 of the Basic Lease
Provisions. Any rental adjustment shown in Item 6 shall be
deemed to occur on the specified monthly anniversary of the
Commencement Date, whether or not that date occurs at the end of
a calendar month. The rent shall be due and payable in advance
commencing on the Commencement Date (as prorated for any partial
month) and continuing thereafter on the first day of each
successive calendar month of the Term. No demand, notice or
invoice shall be required for the payment of Basic Rent. An
installment of rent in the amount of one (1) full month's Basic
Rent at the initial rate specified in Item 6 of the Basic Lease
Provisions shall be delivered to Landlord concurrently with
Tenant's execution of this Lease and shall be applied against the
Basic Rent first due hereunder.
SECTION 4.2. OPERATING EXPENSES.
(a) Tenant shall pay to Landlord, as additional rent,
Tenant's Share of "Operating Expenses", as defined below,
incurred by Landlord in the operation of the Building and
Project. The term "Tenant's Share" means that portion of an
Operating Expense determined by multiplying the cost of such item
by a fraction, the numerator of which is the floor area of the
Premises and the denominator of which is the total square footage
of the floor area of the Building or Project, as relevant to the
calculation, whether leased or not leased, as of the date on
which the computation is made, to be charged with such Operating
Expense, based on Landlord's reasonable allocation.
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(b) Commencing prior to the start of the first full
"Expense Recovery Period" (as defined below) of the Lease, and
prior to the start of each full or partial Expense Recovery
Period thereafter, Landlord shall give Tenant a written estimate
of the amount of Tenant's Share of Operating Expenses for the
Expense Recovery Period. Tenant shall pay the estimated amounts
to Landlord in equal monthly installments, in advance, with Basic
Rent. If Landlord has not furnished its written estimate for any
Expense Recovery Period by the time set forth above, Tenant shall
continue to pay cost reimbursements at the rates established for
the prior Expense Recovery Period, if any; provided that when the
new estimate is delivered to Tenant, Tenant shall, at the next
monthly payment date, pay any accrued cost reimbursements based
upon the new estimate. For purposes hereof, "Expense Recovery
Period" shall mean every twelve month period during the Term (or
portion thereof for the first and last lease years) commencing
July I and ending June 30.
(c) Within one hundred twenty (120) days after the end of
each Expense Recovery Period, Landlord shall furnish to Tenant a
statement showing in reasonable detail the actual or prorated
Operating Expenses incurred by Landlord during the period, and
the parties shall within thirty (30) days thereafter make any
payment or allowance necessary to adjust Tenant's estimated
payments, if any, to the actual Tenant's Share as shown by the
annual statement. Any delay or failure by Landlord in delivering
any statement hereunder shall not constitute a waiver of
Landlord's right to require Tenant to pay Tenant's Share of
Operating Expenses pursuant hereto. Any amount due Tenant shall
be credited against installments next coming due under this
Section 4.2, and any deficiency shall be paid by Tenant together
with the next installment. If Tenant has not made estimated
payments during the Expense Recovery Period,. any amount owing by
Tenant pursuant to subsection (a) above shall be paid to Landlord
in accordance with Article XV1. Should Tenant fail to object in
writing to Landlord's determination of actual Operating Expenses
within twelve (I 2) months following delivery of Landlord's
expense statement, Landlord's determination of actual Operating
Expenses for the applicable Expense Recovery Period shall be
conclusive and binding on the parties and any future claims to
the contrary shall be barred. If Tenant timely objects to
Landlord's determination of Operating Expenses, Tenant shall have
the right to audit Landlord's books and records relating to the
Operating Expenses at Landlord's or its property manager's
offices upon reasonable notice to Landlord. Any such audit shall
be performed by a certified public accountant and shall not be
permitted to be performed by any party whose compensation in
connection with such audit is based upon a percentage of Tenant's
savings on account of such audit. In any such event Tenant shall
make any payments required based upon Landlord's determination of
Tenant's Share of Operating Expenses when the same are due, and
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any adjustment to be made based upon the parties' resolution of
any audit by Tenant shall be made after the audit is performed
and any disagreements as to Operating Expenses based upon such
audit are resolved between the parties. All audit and related
expenses shall be borne by Tenant unless the final determination
of such Operating Expenses discloses that Landlord had charged
Tenant more than 105% of Tenant's Share of Operating Expenses as
so determined in the audit, in which event Landlord shall
reimburse Tenant for the reasonable costs of such audit. If
Landlord and Tenant are unable to resolve any disputes as to
Operating Expenses resulting from a timely audit by Tenant, the
parties shall resolve the same by arbitration with the Judicial
Arbitration and Mediation Service of Orange County, California,
as provided in Section 22.7 of this Lease. All of the
information obtained by Tenant and/or its auditor in connection
with such audit, as well as any compromise, settlement, or
adjustment reached between Landlord and Tenant as a result
thereof, shall be held in strict confidence and, except as may be
required pursuant to litigation and except for inadvertent
disclosures despite Tenant's reasonable efforts to keep the
disclosed information confidential, shall not be disclosed to any
third party, directly or indirectly, by Tenant or its auditor or
any of their officers, agents or employees. Landlord may require
Tenant's auditor to execute a separate confidentiality agreement
affirming the foregoing as a condition precedent to any audit.
(d) Even though the Lease has terminated and the Tenant has
vacated the Premises, when the final determination is made of
Tenant's Share of Operating Expenses for the Expense Recovery
Period in which the Lease terminates, Tenant shall upon notice
pay the entire increase due over the estimated expenses paid.
Conversely, any overpayment made in the event expenses decrease
shall be rebated by Landlord to Tenant.
(e) If, at any time during any Expense Recovery period, any
one or more of the Operating Expenses are increased to a rate(s)
or amount(s) in excess of the rate(s) or amount(s) used in
calculating the estimated expenses for the year, then the
estimate of Tenant's Share of Operating Expenses shall be
increased for the month in which such rate(s) or amount(s)
becomes effective and for all succeeding months by an amount
equal to Tenant's Share of the increase. Landlord shall give
Tenant written notice of the amount or estimated amount of the
increase, the month in which the increase will become effective,
Tenant's Share thereof and the month for which the payments are
due. Tenant shall pay the increase to Landlord as a part of
Tenant's monthly payments of estimated expenses p provided in
paragraph (b) above, commencing with the month in which
effective.
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(f) The term "Operating Expenses" shall mean and include
all "Project Costs" (as hereafter defined) and "Property Taxes"
(as hereafter defined).
(g) The term "Project Costs" shall include all expenses of
operation and maintenance of the Building and the Project,
together with all appurtenant Common Areas (as defined in Section
6.2), and shall include the following charges by way of
illustration but not limitation: water and sewer charges;
insurance premiums or reasonable premium equivalents should
Landlord elect to self-insure any risk that Landlord is
authorized to insure hereunder; license, permit, and inspection
fees; heat; light; power; janitorial services to any interior
Common Areas; air conditioning; supplies; materials; equipment;
tools; the cost of any environmental, insurance, tax or other
consultant utilized by Landlord in connection with the Building
and/or Project; establishment of reasonable reserves for
replacements and/or repair of Common Area improvements, equipment
and supplies; costs incurred in connection with compliance of any
laws or changes in laws applicable to the Building or the
Project; the cost of any capital investments (other than tenant
improvements for specific tenants or the costs of any expansion
of the Building or Project) to the extent of the amortized amount
thereof over the useful life. of such capital investments
calculated at a market cost of funds, all as reasonably
determined by Landlord, for each such year of useful life during
the Term; costs associated with the procurement and maintenance
of an air conditioning, heating and ventilation service
agreement, and procurement and maintenance of an intrabuilding
network cable service agreement for any intrabuilding network
cable telecommunications lines within the Project, and any other
installation, maintenance, repair and replacement costs
associated with such lines; labor; reasonably allocated wages and
salaries, fringe benefits, and payroll taxes for administrative
and other personnel directly applicable to the Building and/or
Project, including both Landlord's personnel and outside
personnel; any expense incurred pursuant to Sections 6.1, 6.2,
6.4, 7.2, and 10.2; and a reasonable overhead/management fee for
the professional operation of the Project. Notwithstanding
anything to the contrary herein, Tenant's Share of any such
property management fees shall be determined by multiplying the
actual property management fee charged (which from time to time
may be with respect to the Building only, a portion of the
Project only, the entire Project, or the Project together with
other properties owned by Landlord and/or its affiliates) by a
fraction, the numerator of which is the floor area of the
Premises (as set forth in Item 8 of the Basic Lease Provisions
contained in the Lease), and the denominator of which is the
total square footage of space charged with such management fee
actually leased to tenants (including Tenant). It is understood
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that Project Costs shall include competitive charges for direct
services provided by any subsidiary or division of Landlord.
Notwithstanding anything herein to the contrary, "Project
Costs" shall not include any of the following:
(i) any costs incurred in connection with any defect in the
foundation or other structural element of any Building;
(ii) any costs which would constitute capital costs under
generally accepted accounting principles, consistently applied,
except as specifically permitted in this subsection 4.2(g) above;
(iii) costs incurred for services and/or goods provided
for the exclusive benefit of a specific tenant or Building, and
not provided to Tenant;
(iv) legal fees incurred for the benefit of the Landlord, as
opposed to the Project, leasing fees or commissions and
advertising costs;
(v) ground rent, interest and other mortgage charges;.
(vi) costs of reconstruction or other work incurred in
connection with any casualty loss, other than reasonable
deductible amounts, as provided in Article XI of this Lease;
(vii) any expenses which are reimbursed by insurance
proceeds, reimbursement, discounts or allowances actually
received by Landlord;
(viii) except as expressly provided in Section 5.3 of
this Lease, any costs relating in any manner to (a) any Hazardous
Materials or contamination now or hereafter existing on or about
the Project, or (b) the removal, containment or remediation of
any building materials (including without limitation asbestos) in
order to comply with any applicable laws, regulations, or orders
of governmental or quasi-governmental authorities;
(h) The term "Property Taxes" as used herein shall include
the following: (i) all real estate taxes or personal property
taxes, as such property taxes may be reassesses from time to
time; and (ii) other taxes, charges and assessments which are
levied with respect to this Lease or to the Budding and/or the
Project, and any improvements, fixtures and equipment and other
property of Landlord located in the Building and/or the Project,
except that general net income and franchise taxes imposed
against Landlord shall be excluded; and (iii) all assessments and
fees for public improvements, services, and facilities and
impacts thereon, including without limitation arising out of any
Community Facilities Districts, "Mello Roos" districts, similar
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assessment districts, and any traffic impact mitigation
assessments or fees; (iv) any tax, surcharge or assessment which
shall be levied in addition to or in lieu of real estate or
personal property taxes, other than taxes covered by Article
VIII; and (v) costs and expenses incurred in contesting the
amount or validity of any Property Tax by appropriate
proceedings.
SECTION 4.3. SECURITY DEPOSIT. Concurrently with Tenant's
delivery of this Lease, Tenant shall deposit with Landlord the
sum, if any, stated in Item 9 of the Basic Lease Provisions, to
be held by Landlord as security for the full and faithful
performance of Tenant's obligations under this Lease (the
"Security Deposit"). Subject to the last sentence of this
Section, the Security Deposit shall be understood and agreed to
be the property of Landlord upon Landlord's receipt thereof, and
may be utilized by Landlord in its discretion towards the payment
of all prepaid expenses by Landlord for which Tenant would be
required to reimburse Landlord under this Lease, including
without limitation brokerage commissions and Tenant Improvement
costs. Upon any default by Tenant, including specifically
Tenant's failure to pay rent or to abide by its obligations under
Sections 7.1 and 15.3 below, whether or not Landlord is informed
of or has knowledge of the default, the Security Deposit shall be
deemed to be automatically and immediately applied, without
waiver of any rights Landlord may have under this Lease or at law
or in equity as a result of the default, as a setoff for full or
partial compensation for that default. If any portion of the
Security Deposit is applied after a default by Tenant, Tenant
shall within five (5) days after written demand by Landlord
deposit cash with Landlord in an amount sufficient to restore the
Security Deposit to its original amount. Landlord shall not be
required to keep this Security Deposit separate from its general
funds, and Tenant shall not be entitled to interest on the
Security Deposit. If Tenant fully performs its obligations under
this Lease, the Security Deposit shall be returned to Tenant (or,
at Landlord's option, to the last assignee of Tenant's interest
in this Lease) after the expiration of the Term, provided that
Landlord may retain the Security Deposit to the extent and until
such time as all amounts due from Tenant in accordance with this
Lease have been determined.
ARTICLE V. USES
SECTION 5.1. USE. Tenant shall use the Premises only for
the purposes stated in Item 3 of the Basic Lease Provisions, all
in accordance with applicable laws and restrictions and pursuant
to approvals to be obtained by Tenant from all relevant and
required governmental agencies and authorities. The parties
agree that any contrary use shall be deemed to cause material and
irreparable harm to Landlord and shall entitle Landlord to
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injunctive relief in addition to any other available remedy.
Tenant, at its expense, shall procure, maintain and make
available for Landlord's inspection throughout the Term, all
governmental approvals, licenses and permits required for the
proper and lawful conduct of Tenant's permitted use of the
Premises. Tenant shall not do or permit anything to be done in
or about the Premises which will in any way interfere with the
rights of other occupants of the Building or the Project, or use
or allow the Premises to be used for any unlawful purpose, nor
shall Tenant permit any nuisance or commit any waste in the
Premises or the Project. Tenant shall not perform any work or
conduct any business whatsoever in the Project other than inside
the Premises. Tenant shall not do or permit to be done anything
which will invalidate or increase the cost of any insurance
policy(ies) covering the Building, the Project and/or their
contents, and shall comply with all applicable insurance
underwriters rules and the requirements of the Pacific Fire
Rating Bureau or any other organization performing a similar
function. Tenant shall comply at its expense with all present
and future laws, ordinances, restrictions, regulations, orders,
rules and requirements of all governmental authorities that
pertain to Tenant or its use of the Premises, including without
limitation all federal and state occupational health and safety
requirements, whether or not Tenant's compliance will necessitate
expenditures or interfere with its use and enjoyment of the
Premises. Tenant shall comply at its expense with all present
and future covenants, conditions, easements or restrictions now
or hereafter affecting the Building and/or Project, and any
amendments or modifications thereto, including without limitation
the payment by Tenant of any periodic or special dues or
assessments charged against the Premises or Tenant which may be
allocated to the Premises or Tenant in accordance with the
provisions thereof. Tenant shall promptly upon demand reimburse
Landlord for any additional insurance premium charged by reason
of Tenant's failure to comply with the provisions of this
Section, and shall indemnify Landlord from any liability and/or
expense resulting from Tenant's noncompliance.
SECTION 5.2 SIGNS. Provided Tenant continues to occupy the
entire Premises, Tenant shall have the right to one (1) exterior
sign on the Building, subject to Landlord's right of prior
approval that such exterior signage is in compliance with the
Signage Criteria (defined below). Except as provided in the
foregoing or as otherwise approved in writing by Landlord, in its
sole and absolute discretion, Tenant shall have no right to
maintain identification signs in any location in, on or about the
Premises, the Building or the Project and shall not place or
erect any signs, displays or other advertising materials that are
visible from the exterior of the Building. The size, design,
graphics, material, style, color and other physical aspects of
any permitted sign shall be subject to Landlord's written
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approval prior to installation (which approval may be withheld in
Landlord's discretion), any covenants, conditions or restrictions
encumbering the Premises, Landlord's signage program for the
Project, as in effect from time to time and approved by the City
of Irvine ("Signage Criteria"), and any applicable municipal or
other governmental permits and approvals. Tenant acknowledges
having received and reviewed a copy of the current Signage
Criteria for the Project. Tenant shall be responsible for the
cost of any permitted sign, including the fabrication,
installation, maintenance sign, or if Tenant fails to remove same
upon termination of this Lease and repair any damage caused by
such removal, Landlord may do so at Tenant's expense.
SECTION 5.3 HAZARDOUS MATERIALS.
(a) For purposes of this Lease, the term "Hazardous
Materials" includes (i) any "hazardous materials" as defined in
Section 25501(n) of the California Health and Safety Code, (ii)
any other substance or matter which results in liability to any
person or entity from exposure to such substance or matter under
any statutory or common law theory, and (iii) any substance or
matter which is in excess of permitted levels set forth in any
federal, California or local law or regulation pertaining to any
hazardous or toxic substance, material or waste.
(b) Tenant shall not cause or permit any Hazardous
Materials to be brought upon, stored, used, generated, released
or disposed of on, under, from or about the Premises (including
without limitation the soil and groundwater thereunder) without
the prior written consent of Landlord. Notwithstanding the
foregoing, Tenant shall have the right, without obtaining prior
written consent of Landlord, to utilize within the Premises
standard office products that may contain Hazardous Materials
(such as photocopy toner, "White Out', and the like), provided
however, that (i) Tenant shall maintain such products in their
original retail packaging, shall follow all instructions on such
packaging with respect to the storage, use and disposal of such
products, and shall otherwise comply with all applicable laws
with respect to such products, and (ii) all of the other terms
and provisions of this Section 5.3 shall apply with respect to
Tenant's storage, use and disposal of all such products.
Landlord may, in its sole discretion, place such conditions as
Landlord deems appropriate with respect to any such Hazardous
Materials, and may further require that Tenant demonstrate that
any such Hazardous Materials are necessary or useful to Tenant's
business and will be generated, stored, used and disposed of in a
manner that complies with all applicable laws and regulations
pertaining thereto and with good business practices. Tenant
understands that Landlord may utilize an environmental consultant
to assist in determining conditions of approval in connection
with the storage, generation, release, disposal or use of
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Hazardous Materials by Tenant on or about the Premises, and/or to
conduct periodic inspections of the storage, generation, use,
release and/or disposal of such Hazardous Materials by Tenant on
and from the Premises, and Tenant agrees that any costs incurred
by Landlord in connection therewith shall be reimbursed by Tenant
to Landlord as additional rent hereunder upon demand.
Notwithstanding the above, Tenant shall be permitted to
utilize the Hazardous Materials described on Tenant's
Environmental Questionnaire, in the manner, and in the quantities
set forth therein, provided that in all events such use shall be
in conformity with all laws, rules, and regulations pertaining to
same. In the event that Tenant deviates from the items,
quantities, or procedures set forth in said Environmental
Questionnaire, Landlord shall have the right to exercise all of
its remedies set forth herein, including, without limitation, the
right to require insurance with respect to same.
(c) Prior to the execution of this Lease, Tenant shall
complete, execute and deliver to Landlord an Environmental
Questionnaire and Disclosure Statement (the "Environmental
Questionnaire") in the form of Exhibit B attached hereto. The
completed Environmental Questionnaire shall be deemed
incorporated into this Lease for all purposes, and Landlord shall
be entitled to rely fully on the information contained therein.
On each anniversary of the Commencement Date until the expiration
or sooner termination of this Lease, Tenant shall disclose to
Landlord in writing the names and amounts of all Hazardous
Materials which were stored, generated, used, released and/or
disposed of on, under or about the Premises for the twelve-month
period prior thereto, and which Tenant desires to store,
generate, use, release and/or dispose of on, under or about the
Premises for the succeeding twelve-month period.
In addition, to the extent Tenant is permitted to utilize
Hazardous Materials upon the Premises, Tenant shall promptly
provide Landlord with complete and legible copies of all the
following environmental documents relating thereto: reports filed
pursuant to any self-reporting requirements; permit applications,
permits, monitoring reports, workplace exposure and community
exposure warnings or notices and all other reports, disclosures,
plans or documents (even those which may be characterized as
confidential) relating to water discharges, air pollution, waste
generation or disposal, and underground storage tanks for
Hazardous Materials; orders, reports, notices, listings and
correspondence (even those which may be considered confidential)
of or concerning the release, investigation of, compliance,
cleanup, remedial and corrective actions, and abatement of
Hazardous Materials; and all complaints, pleadings and other
legal documents filed by or against Tenant related to Tenant's
use, handling, storage, release and/or disposal of Hazardous
Materials.
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(d) Landlord and its agents shall have the right, but not
the obligation, to inspect, sample and/or monitor the Premises
and/or the soil or groundwater thereunder at any time to
determine whether Tenant is complying with the terms of this
Section 5.3, and in connection therewith Tenant shall provide
Landlord with full access to all relevant facilities, records and
personnel. If Tenant is not in compliance with any of the
provisions of this Section 5.3, or in the event of a release of
any Hazardous Material on, under or about the Premises caused or
permitted by Tenant, its agents, employees, contractors,
licensees or invitees, Landlord and its agents shall have the
right, but not the obligation, without limitation upon any of
Landlord's other rights and remedies under this Lease, to
immediately enter upon the Premises without notice and to
discharge Tenant's obligations under this Section 5.3 at Tenant's
expense, including without limitation the taking of emergency or
long-term remedial action. Landlord and its agents shall
endeavor to minimize interference with Tenant's business in
connection therewith, but shall not be liable for any such
interference. In addition, Landlord, at Tenant's expense, shall
have the right, but not the obligation, to join and participate
in any legal proceedings or actions initiated in connection with
any claims arising out of the storage, generation, use, release
and/or disposal by Tenant or its agents, employees, contractors,
licensees or invitees of Hazardous Materials on, under, from or
about the Premises.
(e) If the presence of any Hazardous Materials on, under,
from or about the Premises or the Project caused or permitted by
Tenant or its agents, employees, contractors, licensees or
invitees, results in (i) injury to any person, (ii) injury to or
any contamination of the Premises or the Project, or (iii) injury
to or contamination of any real or personal property wherever
situated, Tenant, at its expense, shall promptly take all actions
necessary to return the Premises and the Project and any other
affected real or personal property owned by Landlord to the
condition existing prior to the introduction of such Hazardous
Materials and to remedy or repair any such injury or
contamination, including without limitation, any cleanup,
remediation, removal, disposal, neutralization or other treatment
of any such Hazardous Materials. Notwithstanding the foregoing,
Tenant shall not, without Landlord's prior written consent, take
any remedial action in response to the presence of any Hazardous
Materials on, under or about the Premises or the Project or any
other affected real or personal property owned by Landlord or
enter into any similar agreement, consent, decree or other
compromise with any governmental. agency with respect to any
Hazardous Materials claims; provided however, Landlord's prior
written consent shall not be necessary in the event that the
presence of Hazardous Materials on, under or about the Premises
or the Project or any other affected real or personal property
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owned by Landlord (i) imposes an immediate threat to the health,
safety or welfare of any individual or (ii) is of such a nature
that an immediate remedial response is necessary and it is not
possible to obtain Landlord's consent before taking such action.
To the fullest extent permitted by law, Tenant shall indemnify,
hold harmless, protect and defend (with attorneys acceptable to
Landlord) Landlord and any successors to all or any portion of
Landlord's interest in the Premises and the Project and any other
real or personal property owned by Landlord from and against any
and all liabilities, losses, damages, diminution in value,
judgments, fines, demands, claims, recoveries, deficiencies,
costs and expenses (including without limitation attorneys' fees,
court costs and other professional expenses), whether foreseeable
or unforeseeable, arising directly or indirectly out of the use,
generation, storage, treatment, release, on or off-site disposal
or transportation of Hazardous Materials on, into, from, under or
about the Premises, the Building and the Project and any other
real or personal property owned by Landlord caused or permitted
by Tenant, its agents, employees, contractors, licensees or
invitees of Hazardous Materials on, under, from or about the
Premises, the Building and the Project and any other real or
personal property owned by Landlord, and the preparation of any
closure or other required plans, whether or not such action is
required or necessary during the Term or after the expiration of
this Lease. If Landlord at any time discovers that Tenant or its
agents, employees, contractors, licensees or invitees may have
caused or permitted the release of a Hazardous Material on,
under, from or about the Premises or the Project or any other
real or personal property owned by Landlord, Tenant shall, at
Landlord's request, immediately prepare and submit to Landlord a
comprehensive plan, subject to Landlord's approval, specifying
the actions to be taken by Tenant to return the Premises or the
Project or any other real or personal property owned by Landlord
to the condition existing prior to the introduction of such
Hazardous Materials. Upon Landlord's approval of such cleanup
plan, Tenant shall, at its expense, and without limitation of any
rights and remedies of
Landlord under this Lease or at law or in equity, immediately
implement such plan and proceed to cleanup such Hazardous
Materials in accordance with all applicable laws and as required
by such plan and this Lease. The provisions of this subsection
(e) shall expressly survive the expiration or sooner termination
of this Lease.
(f) Landlord hereby discloses to Tenant, and Tenant hereby
acknowledges, certain facts relating to Hazardous Materials at
the Project known by Landlord to exist as of the date of this
Lease, as more particularly described in Exhibit C attached
hereto. Tenant shall have no liability or responsibility with
respect to the Hazardous Materials facts described in Exhibit C,
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nor with respect to any Hazardous Materials which Tenant proves
were not caused or permitted by Tenant, its agents, employees,
contractors, licensees or invitees. Notwithstanding the
preceding two sentences, Tenant agrees to notify its agents,
employees, contractors, licensees, and invitees of any exposure
or potential exposure to Hazardous Materials at the Premises that
Landlord brings to Tenant's attention.
(g) Nothing contained herein shall be deemed to make Tenant
responsible for any (i) Hazardous Materials that exist in, under,
or about the Premises as of the earlier of the date Tenant enters
the Premises for the purpose of installing its furniture,
fixtures, or equipment, or other for other purposes, or the
Commencement Date, (ii) Hazardous Materials that migrate from
other properties or sources into the soil or groundwater under
the Premises without fault of Tenant, or (iii) hazardous building
materials not installed by, or at the direction of, Tenant, such
as asbestos, that require containment or remediation. In the
event that the Premises becomes contaminated by any of the
sources set forth in this subpart (g), Landlord shall, at no cost
to Tenant, undertake such containment or mitigation activities as
are (x) required by the final issuance of a governmental order,
or (y) objectively necessary for the immediate health or safety
of the occupants.
ARTICLE VI. COMMON AREAS; SERVICES
SECTION 6.1. UTILITIES AND SERVICES. Tenant shall be
responsible for and shall pay promptly, directly to the
appropriate supplier, all charges for water, gas, electricity,
sewer, heat, light, power, telephone, refuse pickup, janitorial
service, interior landscape maintenance and all other utilities,
materials and services furnished directly to Tenant or the
Premises or used by Tenant in, on or about the Premises during
the Term, together with any taxes thereon. If any utilities or
services are not separately metered or assessed to Tenant,
Landlord shall make a reasonable determination of Tenant's
proportionate share of the cost of such utilities and services
and Tenant shall pay such amount to Landlord, as an item of
additional rent, within ten (10) days after receipt of Landlord's
statement or invoice therefor. Alternatively, Landlord may elect
to include such cost in the definition of Building Costs in which
event Tenant shall pay Tenant's proportionate share of such costs
in the manner set forth in Section 4.2. Landlord shall not be
liable for damages or otherwise for any failure or interruption
of any utility or other service furnished to the Premises, and no
such failure or interruption shall be deemed an eviction or
entitle Tenant to terminate this Lease or withhold or abate any
rent due hereunder. Notwithstanding the foregoing sentence, if
utility service to the Premises is interrupted for a continuous
period of more than three (3) consecutive business days after
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written notice of such interruption is given from Tenant to
Landlord solely as a result of Landlord's actions, and such
interruption renders the Premises unusable, then Basic Rent for
the Premises shall be abated for the period from Landlord's
receipt of notice of the interruption of utility service until
the restoration of utility service to an extent which causes the
Premises to no longer be unusable. Landlord's failure to cause
any third party, including any provider of utility services, to
correct any interruption of utility service to the Premises shall
not be construed to constitute an interruption resulting from
Landlord's actions. Subject to Section 7.5 of this Lease,
Landlord shall at all reasonable times have free access to all
electrical and mechanical installations of Landlord.
SECTION 6.2. OPERATION AND MAINTENANCE OF COMMON AREAS.
During the Term, Landlord shall operate all Common Areas within
the Building and the Project. The term "Common Areas" shall mean
all areas within the exterior boundaries of the Building and
other buildings in the Project which are not held for exclusive
use by persons entitled to occupy space, and all other
appurtenant areas, and improvements provided by Landlord for the
common use of Landlord and tenants and their respective employees
and invitees, including without limitation parking areas and
structures, driveways, sidewalks, landscaped and planted areas,
hallways and interior stairwells not located within the premises
of any tenant, common electrical rooms and roof access entries,
common entrances and lobbies, elevators, and restrooms not
located within the premises of any tenant.
SECTION 6.3. USE OF COMMON AREAS. The occupancy by Tenant
of the Premises shall include the use of the Common Areas in
common with Landlord and with all others for whose convenience
and use the Common Areas may be provided by Landlord, subject,
however, to compliance with all rules and regulations as are
prescribed from time to time by Landlord. Landlord shall operate
and maintain the Common Areas in a good, clean, lighted, well
maintained condition consistent with that of other similar, first
class properties within the Irvine Spectrum area, as Landlord
determines to be appropriate. All costs incurred by Landlord for
the maintenance and operation of the Common Areas shall be
included in Project Costs unless any particular cost incurred can
be charged to a specific tenant of the Project. Landlord shall
at all times during the Term have exclusive control of the Common
Areas, and may restrain any use or occupancy, except as
authorized by Landlord's rules and regulations. Tenant shall
keep the Common Areas clear of any obstruction or unauthorized
use related to Tenant's operations. Nothing in this Lease shall
be deemed to impose liability upon Landlord for any damage to or
loss of the property of, or for any injury to, Tenant, its
invitees or employees. Landlord may temporarily close any
portion of the Common Areas for repairs, remodeling and/or
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alterations, to prevent a public dedication or the accrual of
prescriptive rights, or for any other reason deemed sufficient by
Landlord, without liability to Landlord. Subject to the
restrictions provided in this Lease, Tenant shall have the right
to use the Common Area to access the Premises and for parking 24
hours a day, seven days a week. Landlord shall have the right,
but not the obligation, to impose reasonable rules, regulations,
and restrictions on such use occurring after normal business
hours, including, for example, the institution of electronic card
access systems, user identification systems, or other methods of
insuring that the Common Area is being used only by tenants and
their permitted invitees.
SECTION 6.4. PARKING. Tenant shall be entitled to the
number of vehicle parking spaces set forth in Item 14 of the
Basic Lease Provisions, which spaces shall be unreserved and
unassigned, on those portions of the Common Areas designated by
Landlord for parking. Tenant shall not use more parking spaces
than such number. All parking spaces shall be used only for
parking by vehicles no larger than full size passenger
automobiles or pickup trucks. Tenant shall not permit or allow
any vehicles that belong to or are controlled by Tenant or
Tenant's employees, suppliers, shippers, customers or invitees to
be loaded, unloaded or parked in areas other than those
designated by Landlord for such activities. If Tenant permits or
allows any of the prohibited activities described above, then
Landlord shall have the right, without notice, in addition to
such other rights and remedies that Landlord may have, to remove
or tow away the vehicle involved and charge the costs to Tenant.
Parking within the Common Areas shall be limited to striped
parking stalls, and no parking shall be permitted in any
driveways, access ways or in any area which would prohibit or
impede the free flow of traffic within the Common Areas. There
shall be no overnight parking of any vehicles of any kind unless
otherwise authorized by Landlord, and vehicles which have been
abandoned or parked in violation of the terms hereof may be towed
away at the owner's expense. Nothing contained in this Lease
shall be deemed to create liability upon Landlord for any damage
to motor vehicles of visitors or employees, for any loss of
property from within those motor vehicles, or for any injury to
Tenant, its visitors or employees, unless ultimately determined
to be caused by the sole active negligence or willful misconduct
of Landlord. Landlord shall have the right to establish, and
from time to time amend, and to enforce against all users all
reasonable rules and regulations (including the designation of
areas for employee parking) that Landlord may deem necessary and
advisable for the proper and efficient operation and maintenance
of parking within. Landlord shall have the right to construct,
maintain and operate lighting facilities within the parking
areas; to change the area, level, location and arrangement of the
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parking areas and improvements therein; to restrict parking by
tenants, their officers, agents and employees to employee parking
areas; to enforce parking charges (by operation of meters or
otherwise); and to do and perform such other acts in and to the
parking areas and improvements therein as, in the use of good
business judgment, Landlord shall determine to be advisable. Any
person using the parking area shall observe all directional signs
and arrows and any posted speed limits. In no event shall Tenant
interfere with the use and enjoyment of the parking area by other
tenants of the Building or their employees or invitees. Parking
areas shall be used only for parking vehicles. Washing, waxing,
cleaning or servicing of vehicles, or the storage of vehicles for
24-hour periods, is prohibited except as specifically provided
herein, or otherwise authorized in writing by Landlord. Tenant
shall be liable for any damage to the parking areas caused by
Tenant or Tenant's employees, suppliers, shippers, customers or
invitees, including without limitation damage from excess oil
leakage. Tenant shall have no right to install any fixtures,
equipment or personal property in the parking areas.
Tenant shall have the right to park five (5) company
vehicles no larger than full-size pickup trucks overnight in the
parking area, subject to each reasonable restrictions as Landlord
may impose with respect to the location for such parking, the
type of vehicles, and the appearance of same. This provision
shall not be construed as I allowing long term storage of
vehicles in the parking areas under any circumstances.
SECTION 6.5. CHANGES AND ADDITIONS BY LANDLORD. Landlord
reserves the right to make alterations or additions to the
Building or the Project, or to the attendant fixtures, equipment
and Common Areas. Landlord may at any time relocate or remove
any of the various buildings, parking areas, and other Common
Areas, and may add buildings and areas to the Project from time
to time. No change shall entitle Tenant to any abatement of rent
or other claim against Landlord, provided that the change does
not deprive Tenant of reasonable access to or use of the
Premises.
ARTICLE VII. MAINTAINING THE PREMISES
SECTION 7.1. TENANT'S MAINTENANCE AND REPAIR. Tenant at its
sole expense shall comply with all applicable laws and
governmental regulations governing the Premises and make all
repairs necessary to keep the Premises in the condition as
existed on the Commencement Date (or on any later date that the
improvements may have been installed), excepting ordinary wear
and tear, including without limitation all glass, windows, doors,
door closures, hardware, fixtures, electrical, plumbing, fire
extinguisher equipment and other equipment. Any damage or
deterioration of the Premises shall not be deemed ordinary wear
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and tear if the same could have been prevented by good
maintenance practices by Tenant. As part of its maintenance
obligations hereunder, Tenant shall, at Landlord's request,
provide Landlord with copies of all maintenance schedules,
reports and notices prepared by, for or on behalf of Tenant. All
repairs shall be at least equal in quality to the original work,
shall be made only by a licensed contractor approved in writing
in advance by Landlord and shall be made only at the time or
times approved by Landlord. Any contractor utilized by Tenant
shall be subject to Landlord's standard requirements for
contractors, as modified from time to time. Landlord may impose
reasonable restrictions and requirements with respect to repairs,
as provided in Section 7.3, and the provisions of Section 7.4
shall apply to all repairs. Alternatively, Landlord may elect to
make any such repair on behalf of Tenant and at Tenant's expense,
and Tenant shall promptly reimburse Landlord for all costs
incurred upon submission of an invoice.
SECTION 7.2. LANDLORD'S MAINTENANCE AND REPAIR. Subject to
Section 7.1 and Article XI, Landlord shall provide service,
maintenance and repair with respect to any air conditioning,
ventilating or heating equipment which serves the Premises and
shall maintain in good repair the roof, foundations, footings,
the exterior surfaces of the exterior walls of the Building, and
the structural, electrical and mechanical systems, except that
Tenant at its expense shall make all repairs which Landlord deems
reasonably necessary as a result of the act or negligence of
Tenant, its agents, employees, invitees, subtenants or
contractors. Landlord shall have the right to employ or
designate any reputable person or firm, including any employee or
agent of Landlord or any of Landlord's affiliates or divisions,
to perform any service, repair or maintenance function. Landlord
need not make any other improvements or repairs except as
specifically required under this Lease, and nothing contained in
this Section shall limit Landlord's right to reimbursement from
Tenant for maintenance, repair costs and replacement costs as
provided elsewhere in this Lease. Tenant understands that it
shall not make repairs at Landlord's expense or by rental offset.
Tenant further understands that Landlord shall not be required to
make any repairs to the roof, foundations, footings, structural,
electrical or mechanical systems unless and until Tenant has
notified Landlord in writing of the need for such repair and
Landlord shall have a reasonable period of time thereafter to
commence and complete said repair, if warranted. All costs of
any maintenance and repairs on the part of Landlord provided
hereunder shall be considered part of Project Costs.
SECTION 7.3. ALTERATIONS. Tenant shall make no alterations,
additions or improvements to the Premises without the prior
written consent of Landlord, which consent may be given or
withheld in Landlord's sole discretion. Notwithstanding the
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foregoing, Landlord shall not unreasonably withhold its consent
to any alterations, additions or improvements to the Premises
which cost less than One Dollar ($1.00) per square foot of the
improved portions of the Premises (excluding warehouse square
footage) and do not (i) affect the exterior of the Building or
outside areas (or be visible from adjoining sites), or (ii)
affect or penetrate any of the structural portions of the
Building, including but not limited to the roof, or (iii) require
any change to the basic floor plan of the Premises, any change to
any structural or mechanical systems of the Premises, or any
governmental permit as a prerequisite to the construction
thereof, or (iv) interfere in any manner with the proper
functioning of or Landlord's access to any mechanical,
electrical, plumbing or HVAC systems, facilities or equipment
located in or serving the Building, or (v) diminish the value of
the Premises. Landlord may impose, as a condition to its
consent, any requirements that Landlord in its discretion may
deem reasonable or desirable, including but not limited to a
requirement that all work be covered by a lien and completion
bond satisfactory to Landlord and requirements as to the manner,
time, and contractor for performance of the work. Tenant shall
obtain all required permits for the work and shall perform the
work in compliance with all applicable laws, regulations and
ordinances, all covenants, conditions and restrictions affecting
the Project, and the Rules and Regulations (hereafter defined).
Tenant understands and agrees that Landlord shall be entitled to
a supervision fee in the amount of five percent (5%) of the cost
of the work. If any governmental entity requires, as a condition
to any proposed alterations, additions or improvements to the
Premises by Tenant, that improvements be made to the Common
Areas, and if Landlord consents to such improvements to the
Common Areas, then Tenant shall, at Tenant's sole expense, make
such required improvements to the Common Areas in such manner,
utilizing such materials, and with such contractors (including,
if required by Landlord, Landlord's contractors) as Landlord may
require in its sole discretion. Under no circumstances shall
Tenant make any improvement which incorporates any Hazardous
Materials, including without limitation asbestos-containing
construction materials into the Premises. Any request for
Landlord's consent shall be made in writing and shall contain
architectural plans describing the work in detail reasonably
satisfactory to Landlord. Unless Landlord otherwise agrees in
writing, all alterations, additions or improvements affixed to
the Premises (excluding moveable trade fixtures and furniture)
shall become the property of Landlord and shall be surrendered
with the Premises at the end of the Term, except that Landlord
may, by notice to Tenant, require Tenant to remove by the
Expiration Date, or sooner termination date of this Lease, all or
any alterations, decorations, fixtures, additions, improvements
and the like installed either by Tenant or by Landlord at
Tenant's request and to repair any damage to the Premises arising
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from that removal. Except as otherwise provided in this Lease or
in any exhibit to this Lease, should Landlord make any alteration
or improvement to the Premises for Tenant, Landlord shall be
entitled to prompt reimbursement from Tenant for all costs
incurred.
SECTION 7.4. MECHANIC'S LIENS. Tenant shall keep the
Premises free from any liens arising out of any work performed,
materials furnished, or obligations incurred by or for Tenant.
Upon request by Landlord, Tenant shall promptly cause any such
lien to be released by posting a bond in accordance with
California Civil Code Section 3143 or any successor statute. In
the event that Tenant shall not, within thirty (30) days
following the imposition of any lien, cause the lien to be
released of record by payment or posting of a proper bond,
Landlord shall have, in addition to all other available remedies,
the right to cause the lien to be released by any means it deems
proper, including payment of or defense against the claim giving
rise to the lien. All expenses so incurred by Landlord,
including Landlord's attorneys' fees, and any consequential or
other damages incurred by Landlord arising out of such lien,
shall be reimbursed by Tenant promptly following Landlord's
demand, together with interest from the date of payment by
Landlord at the maximum rate permitted by law until paid. Tenant
shall give Landlord no less than twenty (20) days' prior notice
in writing before commencing construction of any kind on the
Premises so that Landlord may post and maintain notices of
nonresponsibility on the Premises.
SECTION 7.5. ENTRY AND INSPECTION. Landlord shall at all
reasonable times, upon not less than 24 hours written or oral
notice, (except in emergencies, when no notice shall be required)
have the right to enter the Premises to inspect them, to supply
services in accordance with this Lease, to protect the interests
of Landlord in the Premises, and to submit the Premises to
prospective or actual purchasers or encumbrance holders (or,
during the last one hundred and eighty (180) days of the Term or
when an uncured Tenant default exists, to prospective tenants),
all without being deemed to have caused an eviction of Tenant and
without abatement of rent except as provided elsewhere in this
Lease, provided that Tenant may restrict access of prospective
purchasers or tenants who are competitors of Tenant as. to
portions of the Premises as reasonably necessary to protect
Tenant from disclosure of its proprietary processes or
operations. Tenant may provide an escoct for any non-emergency
entry upon the Premises by Landlord. Landlord shall have the
right, if desired, to retain a key which unlocks all of the doors
in the Premises, excluding Tenant's vaults and safes, and
Landlord shall have the right to use any and all means which
Landlord may deem proper to open the doors in an emergency in
order to obtain entry to the Premises, and any entry to the
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Premises obtained by Landlord shall not under any circumstances
be deemed to be a forcible or unlawful entry into, or a detainer
of, the Premises, or any eviction of Tenant from the Premises.
SECTION 7.6. INTENTIONALLY DELETED
SECTION 7.7 TENANT'S SELF-HELP. If Landlord shall fail to
perform any repair obligations required under this Lease within
thirty (30) days following Tenant's written request for such
repairs, or if Landlord shall fail to perform any repairs
required under this Lease of an emergency condition within
twenty-four (24) hours after written notice from Tenant, then
Tenant may elect to make such repairs at Landlord's expense by
complying with the following provisions of this Section 7.7.
Before making any such repair, Tenant shall deliver to Landlord a
notice for the need for such repair ("Self-Help Notice"), which
notice shall specifically advise Landlord that Tenant intends to
exercise its self-help right hereunder. Should Landlord fail,
within ten (10) days following receipt of the Self-Help Notice
(or within twenty-four (24) hours following notice in the event
of necessary emergency repairs), to commence the necessary repair
or to make other arrangements reasonably satisfactory to Tenant,
then Tenant shall have the right to make such renair one-half of
Landlord. Landlord shall promptly reimburse Tenant for the
reasonable costs of such repairs, but except as provided
expressly below, in no event shall Tenant have the right to
offset rent against such costs. If Landlord fails to reimburse
Tenant as required hereunder, Tenant shall have the right to
institute a proceeding pursuant to Section 22.7 hereof. In the
event that Tenant obtains a final order in such a proceeding
requiring Landlord to reimburse Tenant for expenses incurred by
Tenant under this Section, Landlord shall pay same within thirty
(30) days of its receipt of a written copy of such order, failing
which Tenant shall be permitted to offset the amount set forth in
such order against future Basic Rent due under this Lease. In
the event that the work could affect the Building's structural,
mechanical, electrical, heating, ventilating, air conditioning,
life safety or plumbing components or systems, then Tenant shall
use only those contractors used by Landlord in the Project for
such work. If those contractors are unwilling or unable to
perform the work, Tenant may retain the services of qualified,
reputable and licensed, bonded contractors with like experience
in similar building systems. Tenant shall be responsible for
obtaining any necessary governmental permits before commencing
the repair work, and Tenant shall assume the risk of any damage,
loss or injury resulting from such work.
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
Tenant shall be liable for and shall pay, at least ten (10)
days before delinquency, all taxes and assessments levied against
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all personal property of Tenant located in the Premises, against
all improvements to the Premises made by Landlord or Tenant which
are above Landlord's Project standard in quality and/or quantity
for comparable space within the Project ("Above Standard
Improvements"), and against any alterations, additions or like
improvements made to the Premises by or on behalf of Tenant.
When possible Tenant shall cause its personal property, Above
Standard Improvements and alterations to be assessed and billed
separately from the real property of which the Premises form a
part. If any taxes on Tenant's personal property, Above Standard
Improvements and/or alterations are levied against Landlord or
Landlord's property and if Landlord pays the same, or if the
assessed value of Landlord's property is increased by the
inclusion of a value placed upon the personal property, Above
Standard Improvements and/or alterations of Tenant and if
Landlord pays the taxes based upon the increased assessment,
Tenant shall pay to Landlord the taxes so levied against Landlord
or the proportion of the taxes resulting from the increase in the
assessment. In calculating what portion of any tax bill which is
assessed against Landlord separately, or Landlord and Tenant
jointly, is attributable to Tenant's Above Standard Improvements,
alterations and personal property, Landlord's reasonable
determination shall be conclusive.
ARTICLE IX. ASSIGNMENT AND SUBLETTING
SECTION 9.1. RIGHTS OF PARTIES.
(a) Notwithstanding any provision of this Lease to the
contrary (but except as provided in paragraph 9.4, below), Tenant
will not, either voluntarily or by operation of law, assign,
sublet, encumber, or otherwise transfer all or any part of
Tenant's interest in this lease, or permit the Premises to be
occupied by anyone other than Tenant, without Landlord's prior
written consent, which consent shall not unreasonably be withheld
in accordance with the provisions of Section 9.l(b). No
assignment (whether voluntary, involuntary or by operation of
law) and no subletting shall be valid or effective without
Landlord's prior written consent and, at Landlord's election, any
such assigrunent or subletting or attempted assignment or
subletting shall constitute a material default of this Lease.
Landlord shall not be deemed to have given its consent to any
assignment or subletting by any other course of action, including
its acceptance of any name for listing in the Building directory.
To the extent not prohibited by provisions of the Bankruptcy
Code, 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"),
including Section 365(f)(1), Tenant on behalf of itself and its
creditors, administrators and assigns waives the applicability of
Section 365(e) of the Bankruptcy Code unless the proposed
assignee of the Trustee for the estate of the bankrupt meets
Landlord's standard for consent as set forth in Section 9.1(b) of
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this Lease. If this Lease is assigned to any person or entity
pursuant to the provisions of the Bankruptcy Code, any and all
monies or other considerations to be delivered in connection with
the assignment shall be delivered to Landlord, shall be and
remain the exclusive property of Landlord and shall not
constitute property of Tenant or of the estate of Tenant within
the meaning of the Bankruptcy Code. Any person or entity to
which this Lease is assigned pursuant to the provisions of the
Bankruptcy Code shall be deemed to have assumed all of the
obligations arising under this Lease on and after the date of the
assignment, and shall upon demand deliver to Landlord an
instrument confirming that assumption.
(b) If Tenant desires to transfer an interest in this
Lease, it shall first notify Landlord of its desire and shall
submit in writing to Landlord: (i) the name and address of the
proposed transferee; (ii) the nature of any proposed subtenant's
or assignee's business to be carried on in the Premises; (iii)
the terms and provisions of any proposed sublease or assignment,
including a copy of the proposed assignment or sublease form;
(iv) evidence of insurance of the proposed assignee or subtenant
complying with the requirements of Exhibit D hereto; (v) a
completed Environmental Questionnaire from the proposed assignee
or subtenant; and (vi) any other information requested by
Landlord and reasonably related to the transfer. Except as
provided in Subsection (c) of this Section, Landlord shall not
unreasonably withhold its consent, provided: (1) the use of the
Premises will be consistent with the provisions of this Lease and
with Landlord's commitment to other tenants of the Budding and
Project; (2) the proposed assignee or subtenant has not been
required by any prior landlord, lender or governmental authority
to take remedial action in connection with Hazardous Materials
contaminating a property arising out of the proposed assignee's
or subtenant's actions or use of the property in question and is
not subject to any enforcement order issued by any governmental
authority in connection with the use, disposal or storage of a
Hazardous Material; (3) at Landlord's election, insurance
requirements shall be brought into conformity with Landlord's
then current leasing practice; (4) any proposed subtenant or
assignee demonstrates that it is financially responsible by
submission to Landlord of all reasonable information as Landlord
may request concerning the proposed subtenant or assignee,
including, but not limited to, a balance sheet of the proposed
subtenant or assignee as of a date within ninety (90) days of the
request for Landlord's consent, statements of income or profit
and loss of the proposed subtenant or assignee for the two-year
period preceding the request for Landlord's consent, and/or a
certification signed by the proposed subtenant or assignee that
it has not been evicted or been in arrears in rent at any other
leased premises for the 3-year period preceding the request for
Landlord's consent; (5) any proposed subtenant or assignee
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demonstrates to Landlord's reasonable satisfaction a record of
successful experience in business; (6) the proposed assignee or
subtenant is not an existing tenant of the Building or Project or
a prospect with whom Landlord is negotiating to become a tenant
at the Building or Project; and (7) the proposed transfer will
not impose additional burdens or adverse tax effects'on Landlord.
If Tenant has any exterior sign rights under this Lease, such
rights are personal to Tenant and may not be assigned or
transferred to any subtenant of the Premises, nor to any assignee
without Landlord's prior written consent, which may be withheld
in Landlord's reasonable discretion. Reasonable grounds for
Landlord to withhold its consent to the transfer of exterior sign
rights shall include, but not be limited to, circumstances where
the proposed assignee's or subtenant's signage (A) would not
comply with the Landlord's sign criteria; (B) could be considered
offensive due to the proposed assignee's or subtenant's name or
logo, or the design, materials, wording, or color of the proposed
signage; or (C) would violate rights claimed by other tenants in
the area in which the Budding is located to restrict signage in
such area.
If Landlord consents to the proposed transfer, Tenant may
within ninety (90) days after the date of the consent effect the
transfer upon the terms described in the information furnished to
Landlord; provided that any material change in the terms shall be
subject to Landlord's consent as set forth in this Section.
Landlord shall approve or disapprove any requested transfer
within fifteen (15) business days following receipt of Tenant's
written request, the information set forth above, and the fee set
forth below.
(c) Notwithstanding the provisions of Subsection (b) above,
in lieu of consenting to a proposed assignment or subletting
which, either alone or when aggregated with other such transfers
by Tenant affects more than twenty-five percent (25%) of the
rentable square footage of the Premises, Landlord may elect to
(i) sublease the Premises (or the portion proposed to be
subleased), or take an assignment of Tenant's interest in this
Lease, upon the same terms as offered to the proposed subtenant
or assignee (excluding terms relating to the purchase of personal
property, the use of Tenant's name or the continuation of
Tenant's business), or (ii) terminate this Lease as to the
portion of the Premises proposed to be subleased or assigned with
a proportionate abatement in the rent payable under this Lease,
effective on the date that the proposed sublease or assignment
would have become effective. Landlord may thereafter, at its
option, assign or re-let any space so recaptured to any third
party, including without limitation the proposed transferee of
Tenant.
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(d) Tenant agrees that fifty percent (50%) of any amounts
paid by the assignee or subtenant, however described, in excess
of (i) the Basic Rent payable by Tenant hereunder, or in the case
of a sublease of a portion of the Premises, in excess of the
Basic Rent reasonably allocable to such portion, plus (ii)
Tenant's direct out-of-pocket costs which Tenant certifies to
Landlord have been paid to provide occupancy related services to
such assignee or subtenant of a nature commonly provided by
landlords of similar space, reasonable broker commissions and
finder's fees, and reasonable tenant improvement costs related
solely to the subtenancy (which commissions, finder's fees and
tenant improvement costs shall be deemed to be allocated evenly
over the term of the subtenancy for the purpose of determining
the amount due to Landlord hereunder), shall be the property of
Landlord and such amounts shall be payable directly to Landlord
by the assignee or subtenant or, at Landlord's option, by Tenant.
At Landlord's request, a written agreement shall be entered into
by and among Tenant, Landlord and the proposed assignee or
subtenant confirming the requirements of this subsection.
(e) Tenant shall pay to Landlord a fee of Five Hundred
Dollars ($500.00) if and when any transfer hereunder is requested
by Tenant. Such fee is hereby acknowledged as a reasonable
amount to reimburse Landlord for its costs of review and
evaluation of a proposed assignee/sublessee, and Landlord shall
not be obligated to commence such review and evaluation unless
and until such fee is paid.
SECTION 9.2. EFFECT OF TRANSFER. No subletting or
assignment, even with the consent of Landlord, shall relieve
Tenant of its obligation to pay rent and to perform all its other
obligations under this Lease. Moreover, Tenant shall indemnify
and hold Landlord harmless, as provided in Section 10.3, for any
act or omission by an assignee or subtenant. Each assignee,
other than Landlord, shall be deemed to assume all obligations of
Tenant under this Lease and shall be liable jointly and severally
with Tenant for the payment of all rent, and for the due
performance of all of Tenant's obligations, under this Lease. No
transfer shall be binding on Landlord unless any document
memorializing the transfer is delivered to Landlord and. both the
assignee/subtenant and Tenant deliver to Landlord an executed
consent to transfer instrument prepared by Landlord and
consistent with the requirements of this Article. The acceptance
by Landlord of any payment due under this Lease from any other
person shall not be deemed to be a waiver by Landlord of any
provision of this Lease or to be a consent to any transfer.
Consent by Landlord to one or more transfers shall not operate as
a waiver or estoppel to the future enforcement by Landlord of its
rights under this Lease.
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SECTION 9.3. SUBLEASEREQUIREMENTS. The following terms and
conditions shall apply to any subletting by Tenant of all or any
part of the Premises and shall be deemed included in each
sublease:
(a) Each and every provision contained in this Lease (other
than with respect to the payment of rent hereunder) is
incorporated by reference into and made a part of such sublease,
with "Landlord" hereunder meaning the sublandlord therein and
"Tenant" hereunder meaning the subtenant therein.
(b) Tenant hereby irrevocably assigns to Landlord all of
Tenant's interest in all rentals and income arising from any
sublease of the Premises, and Landlord may collect such rent and
income and apply same toward Tenant's obligations under this
Lease; provided, however, that until a default occurs in the
performance of Tenant's obligations under this Lease, Tenant
shall have the right to receive and collect the sublease rentals.
Landlord shall not, by reason of this assignment or the
collection of sublease rentals, be deemed liable to the subtenant
for the performance of any of Tenant's obligations under the
sublease. Tenant hereby irrevocably authorizes and directs any
subtenant, upon receipt of a written notice from Landlord stating
that an uncured default exists in the performance of Tenant's
obligations under this Lease, to pay to Landlord all sums then
and thereafter due under the sublease. Tenant agrees that the
subtenant may rely on that notice without any duty of further
inquiry and notwithstanding any notice or
claim by Tenant to the contrary. Tenant shall have no right or
claim against the subtenant or Landlord for any rentals so paid
to Landlord.
(c) In the event of the termination of this Lease, Landlord
may, at its sole option, take over Tenant's entire interest in
any sublease and, upon notice from Landlord, the subtenant shall
attorn to Landlord. In no event, however, shall Landlord be
liable for any previous act or omission by Tenant under the
sublease or for the return of any advance rental payments or
deposits under the sublease that have not been actually delivered
to Landlord, nor shall Landlord be bound by any sublease
modification executed without Landlord's consent or for any
advance rental payment by the subtenant in excess of one month's
rent. The general provisions of this Lease, including without
limitation those pertaining to insurance and indemnification,
shall be deemed incorporated by reference into the sublease
despite the termination of this Lease.
SECTION 9.4. CERTAIN TRANSFERS. Notwithstanding the
foregoing, Landlord's consent shall not be required for the
assigniment or subletting to any successor corporation or other
entity resulting from a merger or consolidation of Tenant or a
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conversion of Tenant into a limited liability company or other
form of entity, or to any wholly owned subsidiary or any other
person or entity that controls, or is controlled by, or is under
common control with, Tenant, or to any entity which has purchased
all or substantially all of the assets of Tenant in a bona-fide
transaction (i.e., which, among other things, is an arm's length
sale to a third party in a transaction not structured primarily
for the avoidance of obligations under the Lease) so long as (i)
the net worth of the successor or transferee entity after any
such transfer is at least equal to the net worth of Tenant
immediately prior to the date of such merger, evidence of which,
satisfactory to Landlord, shall be presented to Landlord prior to
such merger, (ii) Tenant shall provide to Landlord, prior to such
merger, written notice of any such merger and such assignment
documentation and other information as Landlord may request in
connection therewith, and (iii) all of the other terms and
requirements of this Article shall apply with respect to such
assignment, including, without limitation, the obligation to
provide Landlord with a written agreement from the transferee
acknowledging its obligations under this Lease.
ARTICLE X. INSURANCE AND INDEMNITY
SECTION 10.1. TENANT'S INSURANCE. Tenant, at its sole cost
and expense, shall provide and maintain in effect the insurance
described in Exhibit D. Evidence of that insurance must be
delivered to Landlord prior to the Commencement Date.
SECTION 10.2. LANDLORD'S INSURANCE. Landlord may, at its
election, provide any or all of the following types of insurance,
with or without deductible and in amounts and coverages as may be
determined by Landlord in its discretion: "all risk" property
insurance, subject to standard exclusions, covering the Building
or Project, and such other risks as Landlord or its mortgagees
may from time to time deem appropriate, including leasehold
improvements made by Landlord, and commercial general liability
coverage. Landlord shall not be required to carry insurance of
any kind on Tenant's property, including leasehold improvements,
trade fixtures, furnishings, equipment, plate glass, signs and
all other items of personal property, and shall not be obligated
to repair or replace that property should damage occur. All
proceeds of insurance maintained by Landlord upon the Building
and Project shall be the property of Landlord, whether or not
Landlord is obligated to or elects to make any repairs. At
Landlord's option, Landlord may self-insure all or any portion of
the risks for which Landlord elects to provide insurance
hereunder.
SECTION 10.3. TENANT'S INDEMNITY. To the fullest extent
permitted by law, Tenant shall defend, indemnify, protect, save
and hold harmless Landlord, its agents, and any and all
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affiliates of Landlord, including, without limitation, any
corporations or other entities controlling, controlled by or
under common control with Landlord, from and against any and all
claims, liabilities, costs or expenses arising either before or
after the Commencement Date from Tenant's use or occupancy of the
Premises, the Building or the Common Areas, or from the conduct
of its business, or from any activity, work, or thing done,
permitted or suffered by Tenant or its agents, employees,
invitees or licemsees, in or about the Premises, the Building or
the Common Areas, or from any default in the pe rformance of any
obligation on Tenant's part to be performed under this Lease, or
from any act or negligence of Tenant or its agents, employees,
visitors, patrons, guests, invitees or licensees. Landlord may,
at its option, require Tenant to assume Landlord's defense in any
action covered by this Section through counsel satisfactory to
Landlord. The provisions of this Section shall expressly survive
the expiration or sooner termination of this Lease.
SECTION 10.4. LANDLORD'S NONLIABILITY. Landlord shall not
be liable to Tenant, its employees, agents and invitees, and
Tenant hereby waives all claims against Landlord for loss of or
damage to any property, or loss or interruption of business or
income, or any other loss, cost, damage, injury or liability
whatsoever (including without limitation any consequential
damages and lost profit or opportunity costs) resulting from, but
not limited to, Acts of God, acts of civil disobedience or
insurrection, acts or omissions of other tenants within the
Project or their agents, employees, contractors, guests or
invitees, fire, explosion, falling plaster, steam, gas,
electricity, water or rain which may leak or flow from or into
any part of the Premises or from the breakage, leakage,
obstruction or other defects of the pipes, sprinklers, wires,
appliances, plumbing, air conditioning, electrical works or other
fixtures in the Building, whether the damage or injury results
from conditions arising in the Premises or in other portions of
the Building. It is understood that any such condition may
require the temporary evacuation or closure of all or a portion
of the Buflding. Except as provided in Sections 11.1 and 12.1
below, there shall be no abatement of rent and no liability of
Landlord by reason of any injury to or interference with Tenant's
business (including without limitation consequential damages and
lost profit or opportunity costs) arising from the making of any
repairs, alterations or improvements to any portion of the
Building, including repairs to the Premises, nor shall any
related activity by Landlord constitute an actual or constructive
eviction; provided, however, that in making repairs, alterations
or improvements, Landlord shall interfere as little as reasonably
practicable with the conduct of Tenant's business in the
Premises. Neither Landlord nor its agents shall be liable for
interference with light or other similar intangible interests.
Tenant shall immediately notify Landlord in case of fire
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Premises, the Building or the Project and of defects in any
improvements or equipment.
SECTION 10.5. WAIVER OF SUBROGATION. Landlord and Tenant
each hereby waives all rights of recovery against the other and
the other's agents on account of loss and damage occasioned to
the property of such waiving party to the extent only that such
loss or damage is required to be insured against under any "all
risk" property insurance policies required by this Article X (or,
if the party required to maintain such insurance has the right to
and does self-insure, then to the extent that such loss or damage
would otherwise have been covered by the required insurance);
provided however, that the foregoing waiver shall not apply to
the extent of Tenant's obligations to pay deductibles under any
such policies and this Lease. Further, if any loss is due to the
act, omission or negligence or willful misconduct of Tenant or
its agents, employees, contractors, guests or invitees, Tenant's
liabil ity insurance shall be primary and shall cover all losses
and damages prior to any other insurance or self-insurance
hereunder. By this waiver it is the intent of the parties that
neither Landlord nor Tenant shall be liable to any insurance
company (by way of subrogation or otherwise) insuring the othen
party for any loss or damage insured against under any "all-risk"
property insurance policies required by this Article (or, in the
case of a party who has the right to and has elected to self-
insure, then any self-insured loss which would be insured against
under such a policy), even though such loss or damage might be
occasioned by the negligence of such party, its agents,
employees, contractors, guests or invitees. For purposes of this
paragraph, if the Landlord does not maintain an all-risk
insurance policy covering the Buflding, the Landlord shall be
deemed to have self-insured in a commercially reasonable amount.
The provisions of this Section shall not limit the
indemnification provisions elsewhere contained in this Lease.
ARTICLE XI. DAMAGE OR DESTRUCTION
SECTION 11.1. RESTORATION.
(a) If the Building of which the Premises are a part is
damaged, Landlord shall repair that damage as soon as reasonably
possible, at its expense, unless: (i) Landlord reasonably
determines that the cost of repair is not covered by Landlord's
fire and extended coverage insurance plus such additional amounts
Tenant elects, at its option, to contribute, excluding however
the deductible (for which Tenant shall be responsible for
Tenant's Share); (ii) Landlord reasonably determines that the
Premises cannot, with reasonable diligence, be fully repaired by
Landlord (or cannot be safely repaired because of the presence-
of hazardous factors, including without limitation Hazardous
Materials, earthquake faults, and other similar dangers) within
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two hundred seventy (270) days after the date of the damage;
(iii) an event of default by Tenant has occurred and is
continuing at the time of such damage; or (iv) the damage occurs
during the final twelve (12) months of the Term. Should Landlord
elect not to repair the damage for one of the preceding reasons,
Landlord shall so notify Tenant in writing within sixty (60) days
after the damage occurs and this Lease shall terminate as of the
date of that notice.
(b) Unless Landlord elects to terminate this Lease in
accordance with subsection (a) above, this Lease shall continue
in effect for the remainder of the Term; provided that so long as
Tenant is not in default under this Lease, if the damage is so
extensive that Landlord reasonably determines that the Premises
cannot, with reasonable dfligence, be repaired by Landlord (or
cannot be safely repaired because of the presence of hazardous
factors, earthquake faults, and other similar dangers) so as to
allow Tenant's substantial use and enjoyment of the Premises
within two hundred seventy (270) days after the date of damage,
then Tenant may elect to terminate this Lease by written notice
to Landlord within the sixty (60) day period stated in subsection
(a).
(c) Commencing on the date of any damage to the Building,
and ending on the sooner of the date the damage is repaired or
the date this Lease is terminated, the rental to be paid under
this Lease shall be abated in the same proportion that the floor
area of the Premises that is rendered unusable by the damage from
time to time bears to the total floor area of the Premises, but
only if Tenant is maintaining business interruption insurance for
the benefit of Landlord as described in Exhibit D and Landlord
receives the benefit thereof. In the event that Tenant maintains
the business interruption insurance required pursuant to this
Lease, but the casualty which causes the damage is not an insured
loss under such policy or policies, the rent shall nonetheless be
abated in the manner described in this paragraph.
(d) Notwithstanding the provisions of subsections (a), (b)
and (c), of this Section, and subject to the provisions of
Section 10.5 above, the cost of any repairs shall be borne by
Tenant, and Tenant shall not be entitled to rental abatement or
termination rights, if the damage is due to the fault or neglect
of Tenant or its employees, subtenants, invitees or
representatives. In addition, the provisions of this Section
shall not be deemed to require Landlord to repair any
improvements or fixtures that Tenant is obligated to repair or
insure pursuant to any other provision of this Lease.
(e) Tenant shall fully cooperate with Landlord in removing
Tenant's personal property and any debris from the Premises to
facilitate all inspections of the Premises and the making of any
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repairs. Notwithstanding anything to the contrary contained in
this Lease, if Landlord in good faith believes there is a risk of
injury to persons or damage to property from entry into the
Building or Premises following any damage or destruction thereto,
Landlord may restrict entry into the Building or the Premises by
Tenant, its employees, agents and contractors in a non-
discriminatory manner, without being deemed to have violated
Tenant's rights of quiet enjoyment to, or made an unlawful
detainer of, or evicted Tenant from, the Premises. Upon request,
Landlord shall consult with Tenant to determine if there are safe
methods of entry into the Building or the Premises solely in
order to allow Tenant to retrieve flies, data in computers, and
necessary inventory, subject however to all indemnities and
waivers of liability from Tenant to Landlord contained in this
Lease and any additional indemnities and waivers of liability
which Landlord may require.
SECTION 11.2. LEASE GOVERNS. Tenant agrees that the
provisions of this Lease, including without limitation Section
11.1, shall govern any damage or destruction and shall
accordingly supersede any contrary statute or rule of law.
ARTICLE XII. EMINENT DOMAIN
SECTION 12.1. TOTAL OR PARTIAL TAKING. If all or a material
portion of the Premises is taken by any lawful authority by
exercise of the right of eminent domain, or sold to prevent a
taking, either Tenant or Landlord may terminate this Lease
effective as of the date possession is required to be surrendered
to the authority. In the event tide to a portion of the Building
or Project, other than the Premises, is taken or sold in lieu of
taking, and if Landlord elects to restore the Building in such a
way as to alter the Premises materially, either party may
terminate this Lease, by written notice to the other party,
effective on the date of vesting of title. In the event neither
party has elected to terminate this Lease as provided above, then
Landlord shall promptly, after receipt of a sufficient
condemnation award, proceed to restore the Premises to
substantially their condition prior to the taking, and a
proportionate allowance shall be made to Tenant for the rent
corresponding to the time during which, and to the part of the
Premises of which, Tenant is deprived on account of the taking
and restoration. In the event of a taking, Landlord shall be
entitled to the entire amount of the condemnation award without
deduction for any estate or interest of Tenant; provided that
nothing in this Section shall be deemed to give Landlord any
interest in, or prevent Tenant from seeking any award against the
taking authority for, the taking of personal property and
fixtures belonging to Tenant or for relocation or business
interruption expenses recoverable from the taking authority.
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SECTION 12.2. TEMPORARY TAKING. No temporary taking of the
Premises shall terminate this Lease or give Tenant any right to
abatement of rent, and any award specifically attributable to a
temporary taking of the Premises shall belong entirely to Tenant.
A temporary taking shall be deemed to be a taking of the use or
occupancy of the Premises for a period of not to exceed one
hundred eighty (180) days.
SECTION 12.3. TAKING OF PARKING AREA. In the event there
shall be a taking of the parking area such that Landlord can no
longer provide sufficient parking to comply with this Lease,
Landlord may substitute reasonably equivalent parking in a
location reasonably close (under all then prevailing
circumstances) to the Building; provided that if Landlord fails
to make that substitution within ninety (90) days following the
taking and if the taking materially impairs Tenant's use and
enjoyment of the Premises, Tenant may, at its option, terminate
this Lease by written notice to Landlord. If this Lease is not
so terminated by Tenant, there shall be no abatement of rent and
this Lease shall continue in effect.
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS
SECTION 13.1. SUBORDINATION. At the option of Landlord,
this Lease shall be either superior or subordinate to all ground
or underlying leases, mortgages and deeds of trust, if any, which
may hereafter affect the Budding, and to all renewals,
modifications, consolidations, replacements and extensions
thereof; provided, that so long as Tenant is not in default under
this Lease, this Lease shall not be terminated or Tenant's quiet
enjoyment of the Premises disturbed in the event of termination
of any such ground or underlying lease, or the foreclosure of any
such mortgage or deed of trust, to which Tenant has subordinated
this Lease pursuant to this Section. In the event of a
termination or foreclosure, Tenant shall become a tenant of and
attom to the successor-in-interest to Landlord upon the same
terms and conditions as are contained in this Lease, and shall
execute any instrument reasonably required by Landlord's
successor for that purpose. Tenant shall also, upon written
request of Landlord, execute and deliver all instruments as may
be required from time to time to subordinate the rights of Tenant
under this Lease to any ground or underlying lease or to the lien
of any mortgage or deed of trust (provided that such instruments
include the nondisturbance and attornment provisions set forth
above), or, if requested by Landlord, to subordinate, in whole or
in part, any ground or underlying lease or the lien of any
mortgage or deed of trust to this Lease. Landlord represents to
Tenant that as of the date hereof, there are no ground lessors or
lenders affecting the Building.
SECTION 13.2. ESTOPPEL CERTIFICATE.
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(a) Tenant shall, at any time upon not less than ten (10)
days prior written notice from Landlord, execute, acknowledge and
deliver to Landlord, in any form that Landlord may reasonably
require, a statement in writing (i) certifying that this Lease is
unmodified and in full force and effect (or, if modified, stating
the nature of the modification and certifying that this Lease, as
modified, is in full force and effect) and the dates to which the
rental, additional rent and other charges have been paid in
advance, if any, and (ii) acknowledging that, to Tenant's actual
knowledge, there are no uncured defaults on the part of Landlord,
or specifying each default if any are claimed, and (iii) setting
forth all fin-ther information that Landlord may reasonably
require. Tenant's statement may be relied upon by any
prospective purchaser or encumbrancer of all or any portion of
the Building or Project.
(b) Notwithstanding any other rights and remedies of
Landlord, Tenant's failure to deliver any estoppel statement
within the provided time shall be conclusive upon Tenant that (i)
this Lease is in full force and effect, without modification
except as may be represented by Landlord, (ii) there are no
uncured defaults in Landlord's performance, and (iii) not more
than one month's rental has been paid in advance.
SECTION 13.3 FINANCIALS.
(a) Tenant shall deliver to Landlord, prior, to the
execution of this Lease and thereafter at any time upon
Landlord's request, Tenant's current tax returns and financial
statements, certified true, accurate and complete by the chief
financial officer of Tenant, including a balance sheet and profit
and loss statement for the most recent prior year (collectively,
the "Statements"), which Statements shall accurately and
completely reflect the financial condition of Tenant. Landlord
agrees that it will keep the Statements confidential, except that
Landlord shall have the right to deliver the same to any proposed
purchaser of the Building or Project, and to any encumbrancer of
all or any portion of the Building or Project.
(b) Tenant acknowledges that Landlord is relying on the
Statements in its determination to enter into this Lease, and
Tenant represents to Landlord, which representation shall be
deemed made on the date of this Lease and again on the
Commencement Date, that no material change in the financial
condition of Tenant, as reflected in the Statements, has occurred
since the date Tenant delivered the Statements to Landlord. The
Statements are represented and warranted by Tenant to be correct
and to accurately and fully reflect Tenant's true financial
condition as of the date of submission by any Statements to
Landlord.
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ARTICLE XIIV. DEFAULTS AND REMEDIES
SECTION 14.1. TENANT'S DEFAULTS. In addition to any other
event of default set forth in this Lease, the occurrence of any
one or more of the following events shall constitute a default by
Tenant:
(a) The failure by Tenant to make any payment of rent or
additional rent required to be made by Tenant, as and when due,
where the failure continues for a period of five (5) days after
written notice include all amounts of any type whatsoever other
than Basic Rent to be paid by Tenant pursuant to the terms of
this Lease.
(b) Assignment, sublease, encumbrance or other transfer of
the Lease by Tenant, either voluntarily or by operation of law,
whether by judgment, execution, transfer by intestacy or testacy,
or other means, without the prior written consent of Landlord.
(c) The discovery by Landlord that any financial statement
provided by Tenant, or by any affiliate, successor or guarantor
of Tenant, was materially false.
(d) The failure of Tenant to timely and fully provide any
subordination agreement, estoppel certificate or financial
statements in accordance with the requirements of Article XIII.
(e) The failure or inability by Tenant to observe or
perform any of the express or implied covenants or provisions of
this Lease to be observed or performed by Tenant, other than as
specified in any other subsection of this Section, where the
failure continues for a period of thirty (30) days after written
notice from Landlord to Tenant or such shorter period as is
specified in any other provision of this Lease; provided,
however, that any such notice shall be in lieu of, and not in
addition to, any notice required under California Code of Civil
Procedure Section 1161 and 1161(a) as amended. However, if the
nature of the failure is such that more than thirty (30) days are
reasonably required for its cure, then Tenant shall not be deemed
to be in default if Tenant commences the cure within thirty (30)
days, and thereafter diligently pursues the cure to completion.
(f) (i) The making by Tenant of any general assignment for
the benefit of creditors; (ii) the filing by or against Tenant of
a petition to have Tenant adjudged a Chapter 7 debtor under the
Bankruptcy Code or to have debts discharged or a petition for
reorganization or arrangement under any law relating to
bankruptcy (unless, in the case of a petition filed against
Tenant, the same is dismissed within thirty (30) days); (iii) the
appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located at the Premises or
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of Tenant's interest in this Lease, if possession is not restored
to Tenant within thirty (30) days; (iv) the attachment, execution
or other judicial seizure of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease,
where the seizure is not discharged within thirty (30) days; or
(v) Tenant's convening of a meeting of its creditors for the
purpose of effecting a moratorium upon or composition of its
debts. Landlord shall not be deemed to have knowledge of any
event described in this subsection unless notification in writing
is received by Landlord, nor shall there be any presumption
attributable to Landlord of Tenant's insolvency. In the event
that any provision of this subsection is contrary to applicable
law, the provision shall be of no force or effect.
SECTION 14.2. LANDLORD'S REMEDIES.
(a) In the event of any default by Tenant, or in the event
of the abandonment of the Premises by Tenant, then in addition to
any other remedies available to Landlord, Landlord may exercise
the following remedies:
(i) Landlord may terminate Tenant's right to
possession of the Premises by any lawful means, in which case
this Lease shall terminate and Tenant shall immediately surrender
possession of the Premises to Landlord. Such termination shall
not affect any accrued obligations of Tenant under this Lease.
Upon termination, Landlord shall have the right to reenter the
Premises and remove all persons and property. Landlord shall
also be entitled to recover from Tenant:
(1) The worth at the time of award of the unpaid rent
and additional rent which had been earned at the time of
termination;
(2) The worth at the time of award of the amount by
which the unpaid rent and additional rent which would have been
earned after termination until the time of award exceeds the
amount of such loss that Tenant proves could have been reasonably
avoided;
(3) The worth at the time of award of the amount by
which the unpaid rent and additional rent for the balance of the
Term after the time of award exceeds the amount of such loss that
Tenant proves could be reasonably avoided;
(4) 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 from Tenant's default,
including, but not limited to, the cost of recovering possession
of the Premises, refurbishment of the Premises, marketing costs,
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tenant improvements and brokerage commissions funded by Landlord
in connection with this Lease, reasonable attorneys' fees, and
any other reasonable costs; and
(5) At Landlord's election, all other amounts in
addition to or in lieu of the foregoing as may be permitted by
law. The term "rent" as used in this Lease shall be deemed to
mean the Basic Rent and all other sums required to be paid by
Tenant to Landlord pursuant to the terms of this Lease. Any sum,
other than Basic Rent, shall be computed on the basis of the
average monthly amount accruing during the twenty-four (24) month
period immediately prior to default, except that if it becomes
necessary to compute such rental before the twenty-four (24)
month period has occurred, then the computation shall be on the
basis of the average monthly amount during the shorter period.
As used in subparagraphs (1) and (2) above, the 'worth at the
time of award shall be computed by allowing interest at the rate
of ten percent (10%) per annum. As used in subparagraph (3)
above, the 'worth at the time of award' shall be computed by
discounting the amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one
percent (1%).
(ii) Landlord may elect not to terminate Tenant's right
to possession of the Premises, in which event Landlord may
continue to enforce all of its rights and remedies under this
Lease, including the right to collect all rent as it becomes due.
Efforts by the Landlord to maintain, preserve or relet the
Premises, or the appointment of a receiver to protect the
Landlord's interests under this Lease, shall not constitute a
termination of the Tenant's right to possession of the Premises.
In the event that Landlord elects to avail itself of the remedy
provided by this subsection (ii), Landlord shall not unreasonably
withhold its consent to an assignment or subletting of the
Premises subject to the reasonable standards for Landlord's
consent as are contained in this Lease.
(b) Landlord shall be under no obligation to observe or
perform any covenant of this Lease on its part to be observed or
performed which accrues after the date of any default by Tenant
unless and until the default is cured by Tenant, it being
understood and agreed that the performance by Landlord of its
obligations under this Lease are expressly conditioned upon
Tenant's full and timely performance of its obligations under
this Lease. The various rights and remedies reserved to Landlord
in this Lease or otherwise shall be cumulative and, except as
otherwise provided by California law, Landlord may pursue any or
all of its rights and remedies at the same time.
(c) No delay or omission of Landlord to exercise any right
or remedy shall be construed as a waiver of the right or remedy
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or of any default by Tenant. The acceptance by Landlord of rent
shall not be a (i) waiver of any preceding breach or default by
Tenant of any provision of this Lease, other than the failure of
Tenant to pay the particular rent accepted, regardless of
Landlord's knowledge of the preceding breach or default at the
time of acceptance of rent, or (ii) a waiver of Landlord's right
to exercise any remedy available to Landlord by virtue of the
breach or default. The acceptance of any payment from a debtor
in possession, a trustee, a receiver or any other person acting
on behalf of Tenant or Tenant's estate shall not waive or cure a
default under Section 14.1. No payment by Tenant or receipt by
Landlord of a lesser amount than the rent required by this Lease
shall be deemed to be other than a partial payment on account of
the earliest due stipulated rent, nor shall any endorsement or
statement on any check or letter be deemed an accord and
satisfaction and Landlord shall accept the check or payment
without prejudice to Landlord's right to recover the balance of
the rent or pursue any other remedy available to it. No act or
thing done by Landlord or Landlord's agents during the Term shall
be deemed an acceptance of a surrender of the Premises, and no
agreement to accept a surrender shall be valid unless in writing
and signed by Landlord. No employee of Landlord or of Landlord's
agents shall have any power to accept the keys to the Premises
prior to the termination of this Lease, and the delivery of the
keys to any employee shall not operate as a termination of the
Lease or a surrender of the Premises.
SECTION 14.3. LATE PAYMENTS.
(a) Any rent due under this Lease that is not received
by Landlord within five (5) days of the date when due shall bear
interest at the maximum rate permitted by law from the date due
until fully paid. The payment of interest shall no cure any
default by Tenant under this Lease. In addition, Tenant
acknowledges that the late payment by Tenant to Landlord of rent
will cause Landlord to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult and
impracticable to ascertain. Those costs may include, but are not
limited to, administrative, processing and accounting charges,
and late charges which may be imposed on Landlord by the terms of
any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any rent due from Tenant shall not be received by
Landlord or Landlord's designee within five (5) days after the
date due, then Tenant shall pay to Landlord, in addition to the
interest provided above, a late charge in a sum equal to the
greater of five percent (5%) of the amount overdue or Two Hundred
Fifty Dollars ($250.00) for each delinquent payment. Acceptance
of a late charge by Landlord shall not constitute a waiver of
Tenant's default with respect to the overdue amount, nor shall it
prevent Landlord from exercising any of its other rights and
remedies.
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Notwithstanding the above, Landlord hereby waives the
initial late payment which would otherwise be due in any twelve
(12) month period during the Term of the Lease.
(b) Following each second consecutive installment of rent
that is not paid within five (5) days following notice of
nonpayment from Landlord, Landlord shall have the option (i) to
require that beginning with the first payment of rent next due,
rent shall no longer be paid in monthly installments but shall be
payable quarterly three (3) months in advance and/or (ii) to
require that Tenant increase the amount, if any, of the Security
Deposit by one hundred percent (100%). Should Tenant deliver to
Landlord, at any time during the Term, two (2) or more
insufficient checks, the Landlord may require that all monies
then and thereafter due from Tenant be paid to Landlord by
cashier's check.
SECTION 14.4. RIGHT OF LANDLORD TO PERFORM. All covenants
and agreements to be performed by Tenant under this Lease shall
be performed at Tenant's sole cost and expense and without any
abatement of rent or right of set-off. If Tenant fails to pay
any sum of money, other than rent, or fails to perform any other
act on its part to be performed under this Lease, and the failure
continues beyond any applicable grace period set forth in Section
14. 1, then in addition to any other available remedies, Landlord
may, at its election make the payment or perform the other act on
Tenant's part. Landlord's election to make the payment or
perform the act on Tenant's part shall not give rise to any
responsibility of Landlord to continue making the same or similar
payments or performing the same or similar acts. Tenant shall,
promptly upon demand by Landlord, reimburse Landlord for all sums
paid by Landlord and all necessary incidental costs, together
with interest at the maximum rate permitted by law from the date
of the payment by Landlord. Landlord shall have the same rights
and remedies if Tenant fails to pay those amounts as Landlord
would have in the event of a default by Tenant in the payment of
rent.
SECTION 14.5. DEFAULT BY LANDLORD. Landlord shall not be
deemed to be in default in the performance of any obligation
under this Lease unless and until it has failed to perform the
obligation within thirty (30) days after written notice by Tenant
to Landlord specifying in reasonable detail the nature and extent
of the failure; provided, however, that if the nature of
Landlord's obligation is such that more than thirty (30) days are
required for its performance, then Landlord shall not be deemed
to be in default if it commences performance within the thirty
(30) day period and thereafter diligently pursues the cure to
completion.
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SECTION 14.6. EXPENSES AND LEGAL FEES. All sums reasonably
incurred by Landlord in connection with any event of default by
Tenant under this Lease or holding over of possession by Tenant
after the expiration or earlier termination of this Lease,
including without limitation all costs, expenses and actual
accountants, appraisers, attorneys and other professional fees,
and any collection agency or other collection charges, shall be
due and payable by Tenant to Landlord on demand, and shall bear
interest at the rate of ten percent (10%) per annum. Should
either Landlord or Tenant bring any action in connection with
this Lease, the prevailing party shafl be entitled to recover as
a part of the action its reasonable attorneys' fees, and all
other costs. The prevailing party for the purpose of this
paragraph shall be determined by the trier of the facts.
SECTION 14.7. WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH
ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF
COUNSEL OF ITS CHOICE WITH RESPECT TO ITS RIGHTS TO TRIAL BY
JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND KNOWINGLY WAIVE
AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST
THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES,
AGENTS, OR SUBSIDIARY OR AFFILIATED ENTITIES) ON ANY MATTERS
WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS
LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY
CLAIM OF INJURY OR DAMAGE.
SECTION 14.8 SATISFACTION OF JUDGMENT. The obligations of
Landlord do not constitute the personal obligations of the
individual partners, trustees, directors, officers or
shareholders of Landlord or its constituent partners. Should
Tenant recover a money judgment against Landlord, such judgment
shall be satisfied only out of the proceeds of sale received upon
execution of such judgment and levied thereon against the right,
tide and interest of Landlord in the Project and out of the rent
or other income from such property receivable by Landlord or out
of consideration received by Landlord from the sale or other
disposition of all or any part of Landlord's right, title or
interest in the Project and no action for any deficiency may be
sought or obtained by Tenant. However, with respect to any
matter which is insured against and which would in all events
(i.e., whether or not Tenant's recourse against Landlord is
limited as provided hereunder) be the proper subject of a claim
against any insurance maintained by Landlord with respect to the
Building or the Project, Tenant shall have the right to make such
a claim against any such insurance carrier.
SECTION 14.9. LIMITATION OF ACTIONS AGAINST LANDLORD. Any
claim, demand or right of any kind by Tenant which is based upon
or arises in connection with this Lease shall be barred unless
Tenant commences an action thereon within twelve (12) months
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after the date that the act, onlission, event or default upon
which the claim, demand or right arises, has occurred.
ARTICLE XV. END OF TERM
SECTION 15.1. HOLDING OVER. This Lease shall terminate
without further notice upon the expiration of the Term, and any
holding over by Tenant after the expiration shall not constitute
a renewal or extension of this Lease, or give Tenant any rights
under this Lease, except when in writing signed by both parties.
If Tenant holds over for any period after the expiration (or
earlier termination) of the Term without the prior written
consent of Landlord, such possession shall constitute a tenancy
at sufferance only; such holding over with the prior written
consent of Landlord shall constitute a month-to-month tenancy
commencing on the first (1st) day following the termination of
this Lease. In either of such events, possession shall be
subject to all of the terms of this Lease, except that the
monthly Basic Rent shall be the greater of (a) one hundred fifty
percent (150%) of the Basic Rent in effect for the month
immediately preceding the date of termination during the first
two months of holdover, and one hundred seventy five percent
(175%) of same thereafter, or (b) the then currently scheduled
Basic Rent for comparable space in the Project. If Tenant fails
to surrender the Premises upon the expiration of this Lease
despite demand to do so by Landlord, Tenant shall indemnify and
hold Landlord harmless from all loss or liability, including
without limitation, any claims made by any succeeding tenant
relating to such failure to surrender. Acceptance by Landlord of
rent after the termination shall not constitute a consent to a
holdover or result in a renewal of this Lease. 'Me foregoing
provisions of this Section are in addition to and do not affect
Landlord's right of re-entry or any other rights of Landlord
under this Lease or at law.
SECTION 15.2. MERGER ON TERMINATION. The voluntary or other
surrender of this Lease by Tenant, or a mutual termination of
this Lease, shall terminate any or all existing subleases unless
Landlord, at its option, elects in writing to treat the surrender
or termination as an assignment to it of any or all subleases
affecting the Premises.
SECTION 15.3. SURRENDER OF PREMISES; REMOVAL OF PROPERTY.
Upon the Expiration Date or upon any earlier termination of this
Lease, Tenant shall quit and surrender possession of the Premises
to Landlord in as good order, condition and repair as when
received or as hereafter may be improved by Landlord or Tenant,
reasonable wear and tear and repairs which are Landlord's
obligation excepted, and shall, without expense to Landlord,
remove or cause to be removed from the Premises all personal
property and debris, except for any items that Landlord may by
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written authorization allow to remain. Tenant shall repair all
damage to the Premises resulting from the removal, which repair
shall include the patching and filling of holes and repair of
structural damage, provided that Landlord may instead elect to
repair any structural damage at Tenant's expense. If Tenant
shall fail to comply with the provisions of this Section,
Landlord may effect the removal and/or make any repairs, and the
cost to Landlord shall be additional rent payable by Tenant upon
demand. If Tenant fails to remove Tenant's personal property
from the Premises upon the expiration of the Term, Landlord may
remove, store, dispose of and/or retain such personal property,
at Landlord's option, in accordance with then applicable laws,
all at the expense of Tenant. If requested by Landlord, Tenant
shall execute, acknowledge and deliver to Landlord an instrument
in writing releasing and quitclaiming to Landlord all right,
title and interest of Tenant in the Premises.
ARTICLE XVI. PAYMENTS AND NOTICES
All sums payable by Tenant to Landlord shall be paid,
without deduction or offset, in lawful money of the United States
to Landlord at its address set forth in Item 12 of the Basic
Lease Provisions, or at any other place as Landlord may designate
in writing. Unless this Lease expressly provides otherwise, as
for example in the payment of rent pursuant to Section 4.1, all
payments shall be due and payable within five (5) days after
demand. All payments requiring proration shall be prorated on
the basis of a thirty (30) day month and a three hundred sixty
(360) day year. Any notice, election, demand, consent, approval
or other communication to be given or other document to be
delivered by either party to the other may be delivered in person
or by courier or overnight delivery service to the other party,
or may be deposited in the United States mail, duly registered or
certified, postage prepaid, return receipt requested, and
addressed to the other party at the address set forth in Item 12
of the Basic Lease Provisions, or if to Tenant, at that address
or, from and after the Commencement Date, at the Premises
(whether or not Tenant has departed from, abandoned or vacated
the Premises), or may be delivered by telegram, telex or
telecopy, provided that receipt thereof is telephonically
confirmed. Either party may, by written notice to the other,
served in the manner provided in this Article, designate a
different address. If any notice or other document is sent by
mad, it shall be deemed served or delivered twenty-four (24)
hours after mailing. If more than one person or entity is named
as Tenant under this Lease, service of any notice upon any one of
them shall be deemed as service upon all of them.
ARTICLE XVII. RULES AND REGULATIONS
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Tenant agrees to observe faithfully and comply strictly with
the Rules and Regulations, attached as Exhibit E, and any
reasonable and nondiscriminatory amendments, modifications and/or
additions as may be adopted and published by written notice to
tenants by Landlord for the, safety, care, security, good order,
or cleanliness of the Premises, Building, Project and Common
Areas. Landlord shall not be liable to Tenant for any violation
of the Rules and Regulations or the breach of any covenant or
condition in any lease by any other tenant or such tenant's
agents, employees, contractors, guests or invitees. One or more
waivers by Landlord of any breach of the Rules and Regulations by
Tenant or by any other tenant(s) shall not be a waiver of any
subsequent breach of that rule or any other. Tenant's failure to
keep and observe the Rules and Regulations shall constitute a
default under this Lease. In the case of any conflict between
the Rules and Regulations and this Lease, this Lease shall be
controlling.
ARTICLE XVIII. BROKER'S COMMISSION
The parties recognize as the broker(s) who negotiated this
Lease the firm(s), if any, whose name(s) is (are) stated in Item
10 of the Basic Lease Provisions, and agree that Landlord shall
be responsible for the payment of brokerage commissions to those
broker(s) unless otherwise provided in this Lease. Tenant
warrants that it has had no dealings with any other real estate
broker or agent in connection with the negotiation of this Lease,
and Tenant agrees to indemnify and hold Landlord harmless from
any cost, expense or liability (including reasonable attorneys'
fees) for any compensation, commissions or charges claimed by any
other real estate broker or agent employed or claiming to
represent or to have been employed by Tenant in connection with
the negotiation of this Lease. The foregoing agreement shall
survive the termination of this Lease. If Tenant fails to take
possession of the Premises or if this Lease otherwise terminates
prior to the Expiration Date as the result of failure of
performance by Tenant, Landlord shall be entitled to recover from
Tenant the unamortized portion of any brokerage commission funded
by Landlord in addition to any other damages to which Landlord
may be entitled.
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer of Landlord's interest in the
Premises, the transferor shall be automatically relieved of all
obligations on the part of Landlord accruing under this Lease
from and after the date of the transfer, provided that any funds
held by the transferor in which Tenant has an interest shall be
turned over, subject to that interest, to the transferee and
Tenant is notified of the transfer as required by law. No holder
of a mortgage and/or deed of trust to which this Lease is or may
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be subordinate, and no landlord under a so-called sale-leaseback,
shall be responsible in connection with the Security Deposit,
unless the mortgagee or holder of the deed of trust or the
landlord actually receives the Security Deposit. It is intended
that the covenants and obligations contained in th.is Lease on
the part of Landlord shall, subject to the foregoing, be binding
on Landlord, its successors and assigns, only during and in
respect to their respective successive periods of ownership.
ARTICLE XX. INTERPRETATION
SECTION 20.1. GENDER AND NUMBER. Whenever the context of
this Lease requires, the words "Landlord" and "Tenant" shall
include the plural as well as the singular, and words used in
neuter, masculine or feminine genders shall include the others.
SECTION 20.2. HEADINGS. The captions and headings of the
articles and sections of this Lease are for convenience only, are
not a part of this Lease and shall have no effect upon its
construction or interpretation.
SECTION 20.3. JOINT AND SEVERAL LIABILITY. If more than one
person or entity is named as Tenant, the obligations imposed upon
each shall be joint and several and the act of or notice from, or
notice or refund to, or the signature of, any one or more of them
shall be binding on all of them with respect to the tenancy of
this Lease, including, but not limited to, any renewal,
extension, termination or modification of this Lease.
SECTION 20.4. SUCCESSORS. Subject to Articles IX and XIX,
all rights and liabilities given to or imposed upon Landlord and
Tenant shall extend to and bind their respective heirs,
executors, administrators, successors and assigns. Nothing
contained in this Section is intended, or shall be construed, to
grant to any person other than Landlord and Tenant and their
successors and assigns any rights or remedies under this Lease.
SECTION 20.5. TIME OF ESSENCE. Time is of the essence with
respect to the performance of every provision of this Lease.
SECTION 20.6. CONTROLLING LAW. This Lease shall be governed
by and interpreted in accordance with the laws of the State of
California.
SECTION 20.7. SEVERABILITY. If any term or provision of
this Lease, the deletion of which would not adversely affect the
receipt of any material benefit by either partly or the deletion
of which is consented to by the party adversely affected, shall
be held invalid or unenforceable to any extent, the remainder of
this Lease shall not be affected and each term and provision of
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this Lease shall be valid and enforceable to the fullest extent
permitted by law.
SECTION 20.8. WAIVER AND CUMULATIVE REMEDIES. One or more
waivers by Landlord or Tenant of any breach of any term, covenant
or condition contained in this Lease shall not be a waiver of any
subsequent breach of the same or any other term, covenant or
condition. Consent to any act by one of the parties shall not be
deemed to render unnecessary the obtaining of that party's
consent to any subsequent act. No breach by Tenant of this Lease
shall be deemed to have been waived by Landlord unless the waiver
is in a writing signed by Landlord. The rights and remedies of
Landlord under this Lease shall be cumulative and in addition to
any and all other rights and remedies which Landlord may have.
SECTION 20.9. INABILITY TO PERFORM. In the event that
either party shall be delayed or hindered in or prevented from
the performance of any work or in performing any act required
under this Lease by reason of any cause beyond the reasonable
control of that party, then the performance of the work or the
doing of the act shall be excused for the period of the delay and
the time for performance shall be extended for a period
equivalent to the period of the delay. The provisions of this
Section shall not operate to excuse Tenant from the prompt
payment of rent or from the timely performance of any other
obligation under this Lease within Tenant's reasonable control.
SECTION 20.10. ENTIRE AGREEMENT. This Lease and its
exhibits and other attachments cover in full each and every
agreement of every kind between the parties concerning the
Premises, the Building, and the Project, and all preliminary
negotiations, oral agreements, understandings and/or practices,
except those contained in this Lease, are superseded and of no
further effect. Tenant waives its rights to rely on any
representations or promises made by Landlord or others which are
not contained in this Lease. No verbal agreement or implied
covenant shall be held to modify the provisions of this Lease,
any statute, law, or custom to the contrary notwithstanding.
SECTION 20.11. QUIET ENJOYMENT. Upon the observance and
performance of all the covenants, terms and conditions on
Tenant's part to be observed and performed; and subject to the
other provisions of this Lease, Tenant shall peaceably and
quietly hold and enjoy the Premises for the Term without
hindrance or interruption by Landlord or any other person
claiming by or through Landlord.
SECTION 20.12. SURVIVAL. All covenants of Landlord or
Tenant which reasonably would be intended to survive the
expiration or sooner termination of this Lease, including without
limitation any warranty or indemnity hereunder, shall so survive
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and continue to be binding upon and inure to the benefit of the
respective parties and their successors and assigns.
ARTICLE XXI. EXECUTION AND RECORDING
SECTION 21.1. COUNTERPARTS. This Lease may be executed in
one or more counterparts, each of which shall constitute an
original and all of which shall be one and the same agreement.
SECTION 21.2. CORPORATE AND PARTNERSHIP AUTHORITY. If
Tenant is a corporation or partnership, each individual executing
this Lease on behalf of the corporation or partnership represents
and warrants that he is duly authorized to execute and deliver
this Lease on behalf of the corporation or partnership, and that
this Lease is binding upon the corporation or partnership in
accordance with its terms. Tenant shall, at Landlord's request,
deliver a certified copy of its board of directors' resolution or
partnership agreement or certificate authorizing or evidencing
the execution of this Lease.
SECTION 21.3. EXECUTION OF LEASE; NO OPTION OR OFFER. The
submission of this Lease to Tenant shall be for examination
purposes only, and shall not constitute an offer to or option for
Tenant to lease the Premises. Execution of this Lease by Tenant
and its return to Landlord shall not be binding upon Landlord,
notwithstanding any time this Lease shall only become effective
upon execution by Landlord and delivery of a fully executed
counterpart to Tenant.
SECTION 21.4. RECORDING. Tenant shall not record this Lease
without the prior written consent of Landlord. Tenant, upon the
request of Landlord, shall execute and acknowledge a "short form"
memorandum of this Lease for recording purposes.
SECTION 21.5. AMENDMENTS. No amendment or termination of
this Lease shall be effective unless in writing signed by
authorized signatories of Tenant and Landlord, or by their
respective successors in interest. No actions, policies, oral or
informal arrangements, business dealings or other course of
conduct by or between the parties shall be deemed to modify this
Lease in any respect.
SECTION 21.6. EXECUTED COPY. Any fully executed photocopy
or similar reproduction of this Lease shall be deemed an original
for all purposes.
SECTION 21.7. ATTACHMENTS. All exhibits, amendments, riders
and addenda attached to this Lease are hereby incorporated into
and made a part of this Lease.
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ARTICLE XXII. MISCELLANEOUS
SECTION 22.1. NONDISCLOSURE OF LEASE TERMS. Tenant
acknowledges and agrees that the terms of this Lease are
confidential and constitute proprietary information of Landlord.
Disclosure of the terms could adversely affect the ability of
Landlord to negotiate other leases and impair Landlord's
relationship with other tenants. Accordingly, Tenant agrees that
it, and its partners, officers, directors, employees and
attorneys, shall not intentionally and voluntarily disclose the
terms and conditions of this Lease to any other tenant or
apparent prospective tenant of the Building or Project, either
directly or indirectly, without the prior written consent of
Landlord, provided, however, that Tenant may disclose the terms
to prospective subtenants or assignees under- this Lease.
SECTION 22.2. INTENTIONALLY OMITTED.
SECTION 22.3. CHANGES REQUESTED BY LENDER. If, in
connection with obtaining financing for the Project, the lender
shall request reasonable modifications in thig Lease as a
condition to the financing, Tenant will not unreasonably withhold
or delay its consent, provided that the modifications do not
materially increase the obligations of Tenant or materially and
adversely affect the leasehold interest created by this Lease.
SECTION 22.4. MORTGAGEE PROTECTION. No act or failure to
act on the part of Landlord which would otherwise entitle Tenant
to be relieved of its obligations hereunder or to terminate this
Lease shall result in such a release or termination unless (a)
Tenant has given notice by registered or certified mail to any
beneficiary of a deed of trust or mortgage covering the Building
whose address has been furnished to Tenant and (b) such
beneficiary is afforded a reasonable opportunity to cure the
default by Landlord (which in no event shall be less than sixty
(60) days), including, if necessary to effect the cure, time to
obtain possession I of the Building by power of sale or judicial
foreclosure provided that such foreclosure remedy is diligently
pursued. Tenant agrees that each beneficiary of a deed of trust
or mortgage covering the Building is an express third party
beneficiary hereof, Tenant shall have no right or claim for the
collection of any deposit from such beneficiary or from any
purchaser at a foreclosure sale unless such beneficiary or
purchaser shall have actually received and not refunded the
deposit, and Tenant shall comply with any written directions by
any beneficiary to pay rent due hereunder directly to such
beneficiary without determining whether an event of default
exists under such beneficiary's deed of trust.
SECTION 22.5. COVENANTS AND CONDITIONS. All of the
provisions of this Lease shall be construed to be conditions as
well as covenants as though the words specifically expressing or
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imparting covenants and conditions were used in each separate
provision.
SECTION 22.6. SECURITY MEASURES. Tenant hereby acknowledges
that Landlord shall have no obligation whatsoever to provide
guard service or other security measures for the benefit of the
Premises or the Project. Tenant assumes all responsibility for
the protection of Tenant, its agents, invitees and property from
acts of third parties. Nothing herein contained shall prevent
Landlord, at its sole option, from providing security protection
for the Project or any part thereof, in which event the cost
thereof shall be included within the definition of Project Costs.
SECTION 22.7. JAMS.
(a) All claims or disputes between Landlord and Tenant
arising out of, or relating to, the Lease which either party is
expressly authorized by a provision hereof to submit to
arbitration, shall be decided by the JAMS/Endispute, or its
successor, in Orange County, California ("JAMS"), unless the
parties mutually agree otherwise. Within ten (10) business days
following submission to JAMS, JAMS shall designate three
arbitrators and each party may, within five (5) business days
thereafter, veto one of the three persons so designated. If two
different designated arbitrators have been vetoed, the third
arbitrator shall hear and decide the matter. Any arbitration
pursuant to this Section 22.7 shall be decided within thirty (30)
days of submission to JAMS. The decision of the arbitrator shall
be final and binding on the parties. All costs associated with
arbitration shall be awarded to the prevailing party as
determined by the arbitrator.
(b) Notice of the demand for arbitration by either party to
the Lease shall be filed in writing with the other party to the
Lease and with JAMS and shall be made within a reasonable time
after the dispute has arisen. The award rendered by the
arbitrators shall be final, and judgment may be entered upon it
in accordance with applicable law in any court having
jurisdiction thereof. Except by written consent of the person or
entity sought to be joined, no arbitration arising out of or
relating to the Lease shall include, by consolidation, joinder or
in any other manner, any person or entity not a party to the
Lease under which such arbitration is filed if (1) such person or
entity is substantially involved in a common question or fact or
law, (2) the presence of such person or entity is required if
complete relief is to be accorded in the arbitration, or (3) the
interest or responsibility of such person or entity in the matter
is not insubstantial.
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(c) The agreement herein among the parties to the Lease and
any other written agreement to arbitrate referred to herein shall
be specifically enforceable under prevailing law.
LANDLORD: TENANT:
THE IRVINE COMPANY MILLENNIUM ELECTRONICS, INC.,
a California corporation
By: /s/ Clarence W. Barker By: /s/ Troy D. Barnes
---------------------- ----------------------
Clarence W. Barker, Name: Troy D. Barnes
President, Irvine ----------------
Industrial Company, Title: President/CEO,
a division of The Chairman of the
Irvine Company Board
----------------
By: /s/ John C. Tsu By: /s/ Celeste Barnes
---------------------- ----------------------
John C. Tsu, Name: Celeste Barnes
Assistant Secretary ----------------
Title: C.O.Operations
---------------
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[Map - Mid Tech 1 and 2 Floor Plan]
Page 113 of 146
<PAGE>
EXHIBIT B
IRVINE INDUSTRIAL COMPANY
HAZARDOUS MATERIALS SURVEY FORM
The purpose of this form is to obtain information regarding
the use of hazardous substances on Irvine Industrial Company
property. Prospective tenants and contractors should answer the
questions in light of their proposed operations on the premises.
Existing tenants and contractors should answer the questions as
they relate to ongoing operations on the premises and should
update any information previously submitted.
If additional space is needed to answer the questions, you
may attach separate sheets of paper to this form. When
completed, the form should be sent to the following address:
________________________
________________________
________________________
________________________
(insert address of Property
Management Company)
Your cooperation in this matter is appreciated. If you have
any questions, please do not hesitate to call [insert name of
Property Manager] at [insert phone number) for assistance.
1. GENERAL INFORMATION
Name of Responding Company: _____________________________
___________________
Check all that apply: Tenant ( ) Contractor ( )
Prospective ( ) Existing ( )
Mailing Address: ________________________________________
____________________
Contact Person &
Title:____________________________________________________
_________________________
Telephone Number: ( ) _______ -____________
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Address of Leased
Premises:_______________________________________________
_____________________
Length of Lease or Contract Term:_______________________
____________________
Describe the proposed operations to take place on the
property, including principal products manufactured or
services to be conducted. Existing tenants and contractors
should describe any proposed changes to ongoing operations.
___________________________________________________________
2. STORAGE OF HAZARDOUS MATERIALS
2.1 Will any hazardous materials be used or stored on-site?
Wastes Yes ( ) No ( )
Chemical Products Yes ( ) No ( )
Biological Hazards/ Yes ( ) No ( )
Infectious Wastes Yes ( ) No ( )
Radioactive Materials Yes ( ) No ( )
2.2 List any hazardous materials to be used or stored, the
quantities that will be on-site at any given time, and
the location and method of storage (e.g., bottles in
storage closet on the premises).
Location and Method
Waste/Products of Storage Quantity
_______________ _______________ ____________
_______________ _______________ ____________
_______________ _______________ ____________
2.3 Is any underground storage of hazardous substances
proposed or currently conducted on the premises?
Yes ( ) No ( )
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If yes, describe the materials to be stored, and the size
and construction of the tank. Attach copies of any permits
obtained for the underground storage of such substances.
___________________________________________________________
_____________________________________
3. SPILLS
3.1 During the past year, have any spills occurred on the
premises? Yes ( ) No ( )
If so, please describe the spill and attach the results
of any testing conducted to determine the extent of
such spills.
3.2 Were any agencies notified in connection with such
spills? Yes ( ) No ( )
If so, attach copies of any spill reports or other
correspondence with regulatory agencies.
3.3 Were any clean-up actions undertaken in connection with
the spills? Yes ( ) No ( )
If so, briefly describe the actions taken. Attach
copies of any clearance letters obtained from any
regulatory agencies involved and the results of any
fmal soil or groundwater sampling done upon completion
of the clean-up work.
4. WASTE MANAGEMENT
4.1 List the waste, if any, generated or to be generated at
the premises, whether it is as hazardous waste,
biological or radioactive hazard, its hazard class and
the quantity generated on a monthly basis.
Waste Hazard Class Quantity/Month
_______________ _____________ ________________
_______________ _____________ ________________
_______________ _____________ ________________
4.2 Describe the method(s) of disposal for each waste.
Indicate where and how often disposal will take place.
4.3 Is any treatment or processing of hazardous, infectious
or radioactive wastes currently conducted or proposed
to be conducted at the premises? Yes ( ) No ( )
If yes, please describe any existing or proposed
treatment methods. _____________________________
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4.4 Attach copies of any hazardous waste permits or
licenses issued to your company with respect to its
operations on the premises.
5. WASTEWATER TREATMENT/DISCHARGE
5.1 Do you discharge industrial wastewater to:
__ storm drain? __ sewer?
__ surface water? __ no industrial discharge
5.2 Is your industrial wastewater treated before
discharge? Yes ( ) No ( )
If yes, describe the type of treatment conducted.
5.3 Attach copies of any wastewater discharge permits
issued to your company with respect to its operations
on the premises.
6. AIR DISCHARGES
6.1 Do you have any air filtration systems or stacks that
discharge into the air? Yes ( ) No ( )
6.2 Do you operate any equipment that require air emissions
permits? Yes ( ) No ( )
6.3 Attach copies of any air discharge permits pertaining
to these operations.
7. HAZARDOUS MATERIALS DISCLOSURES
7.1 Does your company handle an aggregate of at least 500
pounds, 55 gallons or 200 cubic feet of hazardous
material at any given time? If so, state law requires
that you prepare a hazardous materials management plan.
Yes ( ) No ( )
7.2 Has your company prepared a hazardous materials
management plan ("business plan") pursuant to state and
Orange County Fire Department requirements?
Yes ( ) No ( )
If so, attach a copy of the business plan.
7.3 Are any of the chemicals used in your operations
regulated under Proposition 65? Yes ( ) No ( )
If so, describe the actions taken, or proposed actions
to be taken, to comply with Proposition 65
requirements.
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7.4 Is your company subject to OSHA Hazard Communication
Standard Requirements? Yes ( ) No ( )
If so, describe the procedures followed to comply with
these requirements.
8. ENFORCEMENT ACTIONS, COMPLAINTS
8.1 Has your company ever been sub' ject to any age ncy
enforcement actions, administrative orders, or consent
decrees? Yes ( ) No ( )
If so, describe the actions and any continuing
compliance obligations imposed as a result of these
actions.
8.2 Has your company ever received requests for
information, notice or demand letters, or any other
inquiries regarding its operations? Yes ( ) No ( )
8.3 Have there ever been, or are there now pending, any
lawsuits against your company regarding any
environmental or health and safety concerns?
Yes ( ) No ( )
8.4 Has an environmental audit ever been conducted at your
company's current facility? Yes ( ) No ( )
If so, discuss the results of the audit.
8.5 Have there been any problems or complaints from
neighbors at your company's current facility?
Yes ( ) No ( )
MILLENNIUM ELECTRONICS, INC.
By: _____________________________
Name: __________________________
Title: ___________________________
Date: __________________
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EXHIBIT C
LANDLORD'S DISCLOSURES
The capitalized terms used and not otherwise defined in this
Exhibit shall have the same definitions as set forth in the
Lease. The provisions of this Exhibit shall supersede any
inconsistent or conflicting provisions of the Lease.
1. Landlord has been informed that the El Toro Marine
Corps Air Station (MCAS) has been listed as a Federal Superfund
site as a result of chemical releases occurring over many years
of occupancy. Various chemicals including jet fuel, motor oil
and solvents have been discharged in several areas throughout the
MCAS site. A regional study conducted by the Orange County Water
District has estimated that groundwaters; beneath more than 2,900
acres have been impacted by Trichloroethlene (TCE), an industrial
solvent. There is a potential that this substance may have
migrated into the ground water underlying the, Premises. The
U.S. Environmental Protection Agency, the Santa Ana Region
Quality Control Board, and the Orange County Health Care Agency
are overseeing the investigation/cleanup of this contamination.
To the Landlord's current actual knowledge, the ground water in
this area is used for irrigation purposes only, and there is no
practical impediment to the use or occupancy of the Premises due
to the El Toro discharges.
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EXHIBIT D
TENANT'S INSURANCE
The following standards for Tenant's insurance shall be in
effect at the Building. Landlord reserves the right to adopt
reasonable nondiscriminatory modifications and additions to those
standards. Tenant agrees to obtain and present evidence to
Landlord that it has fully complied with the insurance
requirements.
1. Tenant shall, at its sole cost and expense, commencing
on the date Tenant is given access to the Premises for any
purpose and during the entire Term, procure, pay for and keep in
full force and effect: (i) commercial general liability insurance
with respect to the Premises and the operations of or on behalf
of Tenant in, on or about the Premises, including but not limited
to personal injury, owned and nonowned automobile, blanket
contractual, independent contractors, broad form property damage
(with an exception to any pollution exclusion with respect to
damage arising out of heat, smoke or fumes from a hostile fire),
fire and water legal liability, products liability (if a product
is sold from the Premises), liquor law liability (if alcoholic
beverages are sold, served or consumed within the Premises), and
severability of interest, which policy(ies) shall be written on
an "occurrence" basis and for not less than the amount set forth
in Item 13 of the Basic Lease Provisions, with a combined single
limit (with a $50,000 minimum limit on fire legal liability) per
occurrence for bodily injury, death, and property damage
liability, or the current limit of liability carried by Tenant,
whichever is greater, and subject to such increases in amounts as
Landlord may determine from time to time; (ii) workers'
compensation insurance coverage as required by law, together with
employers' liability insurance; (W) with respect to improvements,
alterations, and the like required or permitted to be made by
Tenant under this Lease, builder's all-risk insurance, in an
amount equal to the replacement cost of the work; (iv) insurance
against fire, vandalism, malicious mischief and such other
additional perils as may be included in a standard 'all risk"
form in general use in Orange County, California, insuring
Tenant's leasehold improvements, trade fixtures, furnishings,
equipment and items of personal property of Tenant located in the
Premises, in an amount equal to not less than ninety percent
(90%) of their actual replacement cost (with replacement cost
endorsement); and (v) business interruption insurance in amounts
satisfactory to cover one (1) year of loss. In no event shall
the limits of any policy be considered as limiting the liability
of Tenant under this Lease.
2. In the event Landlord consents to Tenant's use,
generation or storage of Hazardous Materials on, under or about
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the Premises pursuant to Section 5.3 of this Lease, Landlord
shall have the continuing right to require Tenant, at Tenant's
sole cost and expense (provided the same is available for
purchase upon commercially reasonable terms), to purchase
insurance specified and approved by Landlord, with coverage not
less than Five Million Dollars ($5,000,000.00), insuring (i) any
Hazardous Materials shall be removed from the Premises, (ii) the
Premises shall be restored to a clean, healthy, safe and sanitary
condition, and (iii) any liability of Tenant, Landlord and
Landlord's officers, directors, shareholders, agents, employees
and representatives, arising from such Hazardous Materials.
3. All policies of insurance required to be carried by
Tenant pursuant to this Exhibit D containing a deductible
exceeding Five Thousand Dollars ($5,000.00) per occurrence must
be approved in writing by Landlord prior to the issuance of such
policy. Tenant shall be solely responsible for the payment of
all deductibles.
4. All policies of insurance required to be carried by
Tenant pursuant to this Exhibit D shall be written by responsible
insurance companies authorized to do business in the State of
California and with a Best's rating of not less than "A" subject
to final acceptance and approval by Landlord. Any insurance
required of Tenant may be furnished by Tenant under any blanket
policy carried by it or under a separate policy, so long as (i)
the Premises are specifically covered (by rider, endorsement or
otherwise), (ii) the limits of the policy are applicable on a
'per location' basis to the Premises and provide for restoration
of the aggregate limits, and (iii) the policy otherwise complies
with the provisions of this Exhibit D. A true and exact copy of
each paid up policy evidencing the insurance (appropriately
authenticated by the insurer) or a certificate of insurance,
certifying that the policy has been issued, provides the coverage
required by this Exhibit D and contains the required provisions,
shall be delivered to Landlord prior to the date Tenant is given
the right of possession of the Premises. Proper evidence of the
renewal of any insurance coverage shall also be delivered to
Landlord not less than thirty (30) days prior to the expiration
of the coverage. Landlord may at any time, and from time to
time, inspect and/or copy any and all insurance policies required
by this Lease.
5. Each policy evidencing insurance required to be carried
by Tenant pursuant to this Exhibit D shall contain the following
provisions and/or clauses satisfactory to Landlord: (i) a
provision that the policy and the coverage provided shall be
primary and that any coverage carried by Landlord shall, be
noncontributory with respect to any policies carried by Tenant
except as to workers' compensation insurance; (ii) a provision
including Landlord, the Additional Insureds identified in Item 11
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of the Basic Lease Provisions, and any other parties in interest
designated by Landlord as an additional insured, except as to
workers' compensation insurance; (iii) a waiver by the insurer of
any right to subrogation against Landlord, its agents, employees,
contractors and representatives which arises or might arise by
reason of any payment under the policy or by reason of any act or
omission of Landlord, its agents, employees, contractors or
representatives; and (iv) a provision that the insurer will not
cancel or change the coverage provided by the policy without
first giving Landlord thirty (30) days prior written notice.
6. In the event that Tenant fails to procure, maintain
and/or pay for, at the times and for the durations specified in
this Exhibit D, any insurance required by this Exhibit D, or
fails to carry insurance required by any governmental authority,
Landlord may at its election procure that insurance and pay the
premiums, in which event Tenant shall repay Landlord all sums
paid by Landlord, together with interest at the maximum rate
permitted by law and any related costs or expenses incurred by
Landlord, within ten (10) days following Landlord's written
demand to Tenant.
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EXHIBIT E
RULES AND REGULATIONS
This Exhibit sets forth the rules and regulations governing
Tenant's use of the Premises leased to Tenant pursuant to the
terms, covenants and conditions of the Lease to which this
Exhibit is attached and therein made part thereof. In the event
of any conflict or inconsistency between this Exhibit and the
Lease, the Lease shall control.
1. Tenant shall not place anything or allow anything to be
placed near the glass of any window, door, partition or wall
which may appear unsightly from outside the Premises.
2. The walls, walkways, sidewalks, entrance passages,
courts and vestibules shall not be obstructed or used for any
purpose other than ingress and egress of pedestrian travel to and
from the Premises, and shall not be used for loitering or
gathering, or to display, store or place any merchandise,
equipment or devices, or for any other purpose. The walkways,
entrance passageways, courts, vestibules and roof are not for the
use of the general public and Landlord shall in all cases retain
the right to control and prevent access thereto by all persons
whose presence in the judgment of the Landlord shall be
prejudicial to the safety, character, reputation and interests of
the Building and its tenants, provided that nothing herein
contained shall be construed to prevent such access to persons
with whom Tenant normally deals in the ordinary course of
Tenant's business unless such persons are engaged in illegal
activities. No tenant or employee or invitee of any tenant shall
be permitted upon the roof of the Building.
3. No awnings or other projection shall be attached to the
outside walls of the Buflding. No security bars or gates,
curtains, blinds, shades or screens shall be attached to or hung
in, or used in connection with, any window or door of the
Premises without the prior written consem of Landlord. Neither
the interior nor exterior of any windows shall be coated or
otherwise sunscreened without the express written consent of
Landlord.
4. Tenant shall not mark, nail, paint, drill into, or in
any way deface any part of the Premises or the Building. Tenant
shall not lay linoleum, tile, carpet or other similar floor
covering so that the same shall be affixed to the floor of the
Premises in any manner except as approved by Landlord in writing.
The expense of repairing any damage resulting from a violation of
this rule or removal of any floor covering shall be bome by
Tenant.
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5. The toilet rooms, urinals, wash bowls and other
plumbing apparatus shall not be used for any purpose other than
that for which they were constructed and no foreign substance of
any kind whatsoever shall be thrown therein. The expense of any
breakage, stoppage or damage resulting from the violation of this
rule shall be borne by the tenant who, or whose employees or
invitees, caused it.
6. Landlord shall direct electricians as to the manner and
location of any future telephone wiring. No boring or cutting
for wires will be allowed without the prior consent of Landlord.
The locations of the telephones, call boxes and other office
equipment affixed to the Premises shall be subject to the prior
written approval of Landlord.
7. The Premises shall not be used for manufacturing or for
the storage of merchandise except as such storage may be
incidental to the permitted use of the Premises. No exterior
storage shall be allowed at any time without the prior written
approval of Landlord. The Premises shall not be used for cooking
or washing clothes without the prior written consent of Landlord,
or for lodging or sleeping or for any immoral or illegal
purposes.
8. Tenant shall not make, or permit to be made, any
unseemly or disturbing noises
or disturb or interfere with occupants of this or neighboring
buildings or premises or those having business with them, whether
by the use of any musical instrument, radio, phonograph, noise,
or otherwise. Tenant shall not use, keep or permit to be used,
or kept, any foul or obnoxious gas or substance in the Premises
or permit or suffer the Premises to be used or occupied in any
manner offensive or objectionable to Landlord or other occupants
of this or neighboring buildings or premises by reason of any
odors, fumes or gases.
9. No animals shall be permitted at any time within the
Premises.
10. Tenant shall not use the name of the Building or the
Project in connection with or in promoting or advertising the
business of Tenant, except as Tenant's address, without the
written consent of Landlord. Landlord shall have the right to
prohibit any advertising by any Tenant which, in Landlord's
reasonable opinion, tends to impair the reputation of the Project
or its desirability for its intended uses, and upon written
notice from Landlord any Tenant shall refrain from or discontinue
such advertising.
11. Canvassing, soliciting, peddling, parading, picketing,
demonstrating or otherwise engaging in any conduct that
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unreasonably impairs the value or use of the Premises or the
Project are prohibited and each Tenant shall cooperate to prevent
the same.
12. No equipment of any type shall be placed on the
Premises which in Landlord's opinion exceeds the load limits of
the floor or otherwise threatens the soundness of the structure
or improvements of the Building.
13. No air conditioning unit or other similar apparatus
shall be installed or used by any Tenant without the prior
written consent of Landlord.
14. No aerial antenna shall be erected on the roof or
exterior walls of the Premises, or on the grounds, without in
each instance, the prior written consent of Landlord. Any aerial
or antenna so installed without such written consent shall be
subject to removal by Landlord at any time without prior notice
at the expense of the Tenant, and Tenant shall upon Landlord's
demand pay a removal fee to Landlord of not less than $200.00.
15. The entire Premises, including vestibules, entrances,
doors, fixtures, windows and plate glass, shall at all times be
maintained in a safe, neat and clean condition by Tenant. All
trash, refuse and waste materials shall be regularly removed from
the Premises by Tenant and placed in the containers at the
locations designated by Landlord for refuse collection. All
cardboard boxes must be "broken down" prior to being placed in
the trash container. All styrofoam chips must be bagged or
otherwise contained prior to placement in the trash container, so
as not to constitute a nuisance. Pallets may not be disposed of
in the trash container or enclosures. The burning of trash,
refuse or waste materials is prohibited.
16. Tenant shall use at Tenant's cost such pest
extermination contractor as Landlord may direct and at such
intervals as Landlord may require.
17. All keys for the Premises shall be provided to Tenant
by Landlord and Tenant shall return to Landlord any of such keys
so provided upon the termination of the Lease. Tenant shall not
change locks or install other locks on doors of the Premises,.
without the prior written consent of Landlord. In the event of
loss of any keys furnished by Landlord for Tenant, Tenant shall
pay to Landlord the costs thereof.
18. No person shall enter or remain within the Project
while intoxicated or under the influence of liquor or drugs.
Landlord shall have the right to exclude or expel from the
Project any person who, in the absolute discretion of Landlord,
is under the influence of liquor or drugs.
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Landlord reserves the right to amend or supplement the
foregoing Rules and Regulations and to adopt and promulgate
additional rules and regulations applicable to the Premises.
Notice of such rules and regulations and amendments and
supplements thereto, if any, shall be given to the Tenant.
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EXHIBIT X
INDUSTRIAL WORK LETTER
DOLLAR ALLOWANCE
The Tenant Improvement work (herein "Tenant Improvements") shall
consist of any work, including work in place as of the date
hereof, required to complete the Premises pursuant to the
approved Working Drawings and Specifications (as hereinafter
defined). All of the Tenant Improvement work shall be performed
by a contractor selected by Landlord and in accordance with the
procedures and requirements set forth below.
I. ARCHITECTURAL AND CONSTRUCTION PROCEDURES.
A. Tenant and Landlord have approved, or shall approve
within the time period set forth below, both (i) a
detailed space plan for the Premises, prepared by
Landlord's architect, which includes interior
partitions, ceilings, interior finishes, interior
doors, suite entrance, floor coverings, window
coverings, lighting, electrical and telephone outlets,
plumbing connections, heavy floor loads and other
special requirements ("Preliminary Plan"), and (ii) an
estimate, prepared by Landlord's contractor, of the
cost for which Landlord will complete or cause to be
completed the Tenant Improvements ("Preliminary Cost
Estimate"). Tenant shall approve or disapprove each of
the Preliminary Plan and the Preliminary Cost Estimate
by signing copies of the appropriate instrument and
delivering same to Landlord within five (5) days of its
receipt by Tenant. If Tenant disapproves any matter,
Tenant shall specify in detail the reasons for
disapproval. and Landlord shall attempt to modify the
Preliminary Plan and the Preliminary Cost Estimate to
incorporate Tenant's suggested revisions in a mutually
satisfactory manner. In no event, however, shall
Tenant have the right to make additions to the
Preliminary Plan as part of its approval thereof which
would increase the improvements to be paid for by
"Landlord's Contribution" (as hereinafter defined), it
being understood and agreed that the Preliminary Plan
submitted by Landlord's architect is intended to
include all improvements desired by Tenant using
Landlord's "Standards" (as hereinafter defined),
whether or not the full amount of Landlord's
Contribution would be required to complete construction
of the improvements as shown in the Preliminary Plan.
In all events, Tenant shall approve in all respects a
Preliminary Plan and Preliminary Cost Estimate not
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later than the date set forth in Item 15 of the Basic
Lease Provisions ("Plan Approval Date"), it being
understood that Tenant's failure to do so shall
constitute a "Tenant Delay" for purposes of this Lease.
B. On or before the Plan Approval Date, Tenant shall
provide in writing to Landlord or Landlord's architect
all specifications and information requested by
Landlord for the preparation. of final construction
documents and costing, including without limitation
Tenant's final selection of wall and floor finishes,
complete specifications and locations (including load
and HVAC requirements) of Tenant's equipment, and
details of all "Non-Standard Improvements" (as defined
below) to be installed in the Premises (collectively,
"Programming Information"). Tenant's failure to
provide the Programming Information by the Plan
Approval Date shall constitute a Tenant Delay for
purposes of this Lease. Tenant understands that final
construction documents for the Tenant Improvements
shall be predicated on the Programming Information, and
accordingly that such information must be accurate and
complete.
C. Except as specified in the Preliminary Plan or
otherwise authorized by Landlord, the Tenant
Improvements shall incorporate Landlord's building
standard materials and specifications ("Standards").
No deviations from the Standards shall be permitted,
provided that Landlord may, in its sole and absolute
discretion, authorize in writing one or more of such
deviations if requested by Tenant, in which event any
excess cost of such deviations shall be part of
"Tenant's Contribution" (as hereinafter defined) and
Tenant shall be soley responsible for the cost of
replacing same with the applicable Standard iteni(s)
upon the expiration or termination of this Lease.
Landlord shall in no event be required to approve any
deviations from the Standards ("Non-Standard
Improvements") if Landlord determines that such
improvement (i) is of a lesser quality than the
corresponding Standard, (ii) fails to conform to
applicable governmental requirements, (iii) requires
building services beyond the level normally provided to
other tenants, (iv) would delay construction of the
Tenant Improvements beyond the Estimated Commencement
Date and Tenant declines to accept such delay in
writing as a Tenant Delay, or (v) would have an adverse
aesthetic impact from the exterior of the Premises.
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D. Upon Tenant's approval of the Preliminary Plan and
Preliminary Cost Estimate and delivery of the complete
Programming Information, Landlord's architect and
engineers shall prepare and deliver to Tenant working
drawings and specifications ("Working Drawings and
Specifications"), and Landlord's contractor shall
prepare a final construction cost estimate ("Final Cost
Estimate") for the Tenant Improvements in conformity
with the Working Drawings and Specifications. Landlord
shall obtain a minimum of three (3) bids from
contractors selected by Landlord, in determining the
Final Cost Estimate. The Final Cost Estimate shall be
delivered to Tenant for its approval only if such
Estimate exceeds both the approved Preliminary Cost
Estimate and the amount of the Landlord's Contribution.
Tenant shall have five (5) days from the receipt
thereof to approve or disapprove the Working Drawings
and Specifications, and (if delivered to Tenant) the
Final Cost Estimate. Tenant shall not unreasonably
withhold or delay its approval, and any disapproval or
requested modification shall be limited to items not
contained in the approved Preliminary Plan or
Preliminary Cost Estimate. Should Tenant disapprove
the Working Drawings and Specifications and the Final
Cost Estimate, such disapproval shall be accompanied by
a detailed list of revisions. Any revision requested
by Tenant and accepted by Landlord shall be
incorporated into a revised set of Working Drawings and
Specifications and Final Cost Estimate, and Tenant
shall approve same in writing within five (5) days of
receipt without further revision. Tenant's failure to
comply in a timely manner with any of the requirements
of this paragraph shall constitute a Tenant Delay.
Without limiting the rights of Landlord for Tenant
Delays as set forth herein, in the event Tenant has not
approved both the Working Drawings and Specifications
and the Final Cost Estimate within sixty (60) days
following the date of this Lease, then Landlord may, at
its option, elect to terminate this Lease by written
notice to Tenant. In the event Landlord elects to
effect such a termination, Tenant shall, within ten
(10) days following demand by Landlord, pay to Landlord
any costs incurred by Landlord in connection with the
preparation or review of plans, construction estimates,
price quotations, drawings or specifications under this
Work Letter and for all costs incurred in the
preparation and execution of this Lease, including any
leasing commissions.
E. In the event that Tenant requests in writing a revision
in the approved Working Drawings and Specifications
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("Change"), Landlord shall advise Tenant by written
change order as soon as is practical of any increase in
the Completion Cost and/or any Tenant Delay such Change
would cause. Tenant shall approve or disapprove such
change order in writing within two (2) days following
its receipt from Landlord. Tenant's approval of such
Change shall be accompanied by Tenant's payment of any
such increase in the Completion Cost. Landlord shall
have the right to decline Tenant's request for a Change
for any of the reasons set forth in Article II.C above
for Landlord's disapproval of a Non-Standard
Improvement. It is understood that Landlord shall have
no obligation to interrupt or modify the Tenant
Improvement work pending Tenant's approval of a change
order.
F. Notwithstanding any provision in the Lease to the
contrary, if Tenant fails to comply with any of the
time periods specified in this Work Letter, fails
otherwise to approve or reasonably disapprove any
submittal within five (5) days, fafls to approve in
writing both the Preliminary Plan and Preliminary Cost
Estimate for the Tenant Improvements by t4e Plan
Approval Date, fails to provide all of the Programming
Information requested by Landlord by the Plan Approval
Date, fails to approve in writing the Working Drawings
and Specifications or the Final Cost Estimate within
the time provided herein, requests any Changes,
furnishes inaccurate or erroneous specifications or
other information, or otherwise delays in any manner
the completion of the Tenant Improvements (including
without limitation by specifying materials that are not
readily available) or the issuance of an occupancy
certificate (any of the foregoing being referred to in
this Lease as a "Tenant Delay"), then Tenant shall bear
any resulting additional construction cost or other
expenses, and the Commencement Date of this Lease shall
be deemed to have occurred for all purposes, including
Tenant's obligation to pay rent, as of the date
Landlord reasonably determines that it would have been
able to deliver the Premises to Tenant but for the
collective Tenant Delays. In no event, however, shall
such date be earlier than the Estimated Commencement
Date set forth in the Basic Lease Provisions. Should
Landlord determine that the Commencement Date should be
advanced in accordance with the foregoing, it shall so
notify Tenant in writing. Tenant shall have the right,
exercisable within ninety (90) days of Landlord's
determination of the Commencement Date, to notify
Landlord in writing of its objection to same, and to
commence, within such time period, to contest same by
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arbitration with JAMS Endispute in Orange County,
California. Pending the outcome of such arbitration
proceedings, Tenant shall make timely payment of all
rent due under this Lease based upon the Commencement
Date set forth in the aforesaid notice from Landlord.
G. Landlord shall permit Tenant and its agents to enter
the Premises prior to the Commencement Date of the
Lease in order that Tenant may perform any work to be
performed by Tenant hereunder through its own
contractors, subject to Landlord's prior written
approval, and in a manner and upon terms and conditions
and at times satisfactory to Landlord's representative.
Tle foregoing license to enter the Premises prior to
the Commencement Date is, however, conditioned upon
Tenant's contractors and their subcontractors and
employees working in harmony and not interfering with
the work being performed by Landlord. If at any time
that entry shall cause disharmony or interfere with the
work being performed by Landlord, this license may be
withdrawn by Landlord upon twenty-four (24) hours
written notice to Tenant. That license is further
conditioned upon the compliance by Tenant's contractors
with all requirements imposed by Landlord on third
party contractors, including without limitation the
maintenance by Tenant and its contractors and
subcontractors of workers' compensation and public
liability and property damage insurance in amounts and
with companies and on forms satisfactory to Landlord,
with certificates of such insurance being furnished to
Landlord prior to proceeding with any such entry. The
entry shall be deemed to be under all of the provisions
of the Lease except as to the covenants to pay rent.
Landlord shall not be liable in any way for any injury,
loss or damage which may occur to any such work being
performed by Tenant, the same being solely at Tenant's
risk. In no event shall the failure of Tenant's
contractors to complete any work in the Premises extend
the Commencement Date of this Lease beyond the date
that Landlord has completed its Tenant Improvement work
and tendered the Premises to Tenant.
H. Tenant hereby designates Troy Barnes, Telephone No.
(714) 499-0877, as its representative, agent and
attorney-in-fact for the purpose of receiving notices,
approving submittals and issuing requests for Changes,
and Landlord shall be entitled to rely upon
authorizations and directives of such person(s) as if
given directly by Tenant. Tenant may amend the
designation of its construction representative(s) at
any time upon delivery of written notice to Landlord.
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II. COST OF TENANT IMPROVEMENTS
A. Landlord shall complete, or cause to be completed, the
Tenant Improvements, at the construction cost shown in
the Final Cost Estimate (subject to the provisions of
this Work Letter), in accordance with final Working
Drawings and Specifications approved by both Landlord
and Tenant. Landlord shall pay towards the final
construction costs ("Completion Cost") as incurred a
maximum of Four Hundred Sixty-Eight Thousand Two
Hundred Forty Dollars ($468,240.00) ("Landlord's
Contribution'), based on $15.00 per usable square foot
of the Premises, and Tenant shall be fully responsible
for the remainder ("Tenant's Contribution").
Landlord's Contribution shall only be used for
construction and installation of Standards incorporated
into a Preliminary Plan approved by Landlord and for
other costs outlined below. Tenant shall have no right
to receive any credit, refund or allowance of any kind
for any unused portion of the Landlord's Contribution
nor shall Tenant be allowed to make revisions to an
approved Preliminary Plan, Working Drawings and
Specifications or request a Change in an effort to
apply any unused portion of Landlord's Contribution.
B. The Completion Cost shall include all costs of Landlord
in completing the Tenant Improvements in accordance
with the approved Working Drawings and Specifications,
including but not limited to the following: (i)
payments made to architects, engineers, contractors,
subcontractors and other third party consultants in the
performance of the work, (ii) salaries and fringe
benefits of persons, if any, in the direct employ of
Landlord performing any part of the construction work,
(iii) permit fees and other sums paid to governmental
agencies, and (iv) costs of all materials incorporated
into the work or used in connection with the work. The
Completion Cost shall also include an administrative/
supervision fee to be paid to Landlord or to Landlord's
management agent in the amount of five percent (5%) of
all such costs.
C. Prior to start of construction of the Tenant
Improvements, Tenant shall pay to Landlord in full the
amount of the Tenant's Contribution set forth in the
approved Preliminary Cost Estimate or in the Final Cost
Estimate (if approved by Tenant). If the actual
Completion Cost of the Tenant Improvements is greater
than the Final Cost Estimate because of modifications
or extras not reflected on the approved Working
Drawings and Specifications, or because of Tenant
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Delays, then Tenant shall be responsible for all such
additional costs. The balance of any sums not
otherwise paid by Tenant shall be due and payable on or
before the Commencement Date of this Lease. If Tenant
defaults in the payment of any sums due under this Work
Letter, Landlord shall (in addition to all other
remedies) have the same rights as in the case of
Tenant's failure to pay rent under the Lease.
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[Site Plan - Irvine Spectrum 6 Warehouse/Mid Tech Project]
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<PAGE>
THE IRVINE COMPANY
January 15, 1998
Mr. Troy Barnes
President/CEO
Millennium Electronics, Inc.
31642 South Coast Hwy. No 100
Laguna Beach, California 92677
RE: Lease Amendment - 51 Discovery
Dear Troy:
Enclosed for your records is a fully-executed First Amendment to
Lease for the above-referenced premises. The amendment was
solely to fix a typographical error in the rent structure on the
numeric dollar amount for the 13th month in the Lease.
Please feel free to call either your property manager, Brigit
DeGeere, or me with any questions.
Sincerely,
IRVINE INDUSTRIAL COMPANY,
a division of The Irvine Company
/s/ John B. Turner
John B. Turner
Leasing Director
c: Birgit DeGeere, Insignia Commercial Group
Christine Bowen, Lee & Associates
John Matus, Lee & Associates
Enclosure
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FIRST AMENDMENT TO LEASE
I. PARTIES AND DATE.
This First Amendment to Lease (the "First Amendment") dated
January 12, 1998, is by and between THE IRVINE COMPANY
("Landlord"), and MILLENNIUM ELECTRONICS, INC., a California
corporation ("Tenant").
II. RECITALS.
On December 23, 1997, Landlord and Tenant entered into a
lease ("Lease") for space in a building located at 51 Discovery,
Irvine, California ("Premises").
Landlord and Tenant each desire to modify the Lease to
correct a typographical error in the Basic Rent payment schedule
as set forth in "III.MODIFICATIONS" next below.
III. MODIFICATIONS.
Basic Rent. Item 6 of Article I to the Lease, "Basic Lease
Provisions," is hereby amended by deleting the first rental
adjustment therefrom and substituting the following in lieu
thereof:
"Commencing on the first day of the thirteenth (13th)
month of the Lease Term, the Basic Rent shall be
Twenty-Five Thousand Eight Hundred Nine Dollars
($25,809.00) per month, based on $.78 per rentable
square foot."
IV. GENERAL.
A. Effect of Amendments. The Lease shall remain in full
force and effect except to the extent that it is modified by this
Amendment.
B. Entire Agreement. This Amendment embodies the entire
understanding between Landlord and Tenant with respect to the
modifications set forth in "III. MODIFICATIONS" above and can be
changed only by a writing signed by Landlord and Tenant.
C. Counterparts. If this Amendment is executed in
counterparts, each is hereby declared to be an original; all,
however, shall constitute but one and the same amendment. In any
action or proceeding, any photographic, photostatic, or other
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copy of this Amendment may be introduced into evidence without
foundation.
D. Defined Terms. All words commencing with initial
capital letters in this Amendment and defined in the Lease shall
have the same meaning in this Amendment as in the Lease, unless
they are otherwise defined in this Amendment.
E. Corporate and Partnership Authority. If Tenant is a
corporation or partnership, or is comprised of either or both of
them, each individual executing this Amendment for the
corporation or partnership represents that he or she is duly
authorized to execute and deliver this Amendment on behalf of the
corporation or partnership and that this Amendment is binding
upon the corporation or partnership in accordance with its terms.
F. Attorneys' Fees. The provisions of the Lease
respecting payment of attorneys fees shall also apply to this
Amendment.
V. EXECUTION.
Landlord and Tenant executed this Amendment on the date as
set forth in "I. PARTIES
AND DATE." above.
LANDLORD: TENANT:
THE IRVINE COMPANY MILLENNIUM ELECTRONICS, INC.,
a California corporation a California corporation
By: /s/ Clarence W. Barker By: Troy D. Barnes
------------------------- ---------------------------
Clarence W. Barker, Title: President/CEO
President, Irvine Industrial ---------------------
Company, a division of The
Irvine Company
By: /s/ John C. Tsu By: Celeste Barnes
-------------------------- ---------------------------
John C. Tsu, Title: C.O.O.
Assistant Secretary ---------------------
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THE IRVINE COMPANY - INVESTMENT PROPERTIES GROUP
HAZARDOUS MATERIALS SURVEY FORM
The purpose of this form is to obtain information regarding
the use of hazardous substances on Investment Properties Group
("IPG") property. Prospective tenants and contractors should
answer the questions in light of their proposed activities on the
premises. Existing tenants and contractors should answer the
questions as they relate to ongoing activities on the premises
and should update any information previously submitted.
If additional space is needed to answer the questions, you
may attach separate sheets of paper to this form. When
completed, the form should be sent to the following address:
INSIGNIA COMMERCIAL GROUP, INC.
One Tecnology Drive, F-207
Irvine, CA 92618
Your cooperation in this matter is appreciated. If you
have any questions, please call [insert name of Property Manager]
at [insert phone number] for assistance.
1. GENERAL INFORMATION
Name of Responding Company: Millennium Electronics Inc.
Check all that apply: Tenant ( ) Contractor ( )
Prospective (X) Existing ( )
Mailing Address: 31642 S. Coast Hwy #200
Contact Person & Title: Gail Campbell, Controller
Telephone Number (714) 499-0877 #34
Current TIC Tenant(s):
Address of Leased Premises: 31642 S. Coast Hwy #100, 200
Length of Lease or Contract Term: 3 yrs to June 98
Prospective TIC Tenant(s):
Address of Proposed Leased Premises:51 Discovery Irvine, CA 92715
Address of Current Operations: 31642 S. Coast Hwy Laguna Beach, CA 92677
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Describe the proposed operations to take place on the
property, including principal products manufactured or
services to be conducted. Existing tenants and contractors
should describe any proposed changes to ongoing operations.
Computer & peripheral manufacturing. Considered light
manufacturing due to components are purchased.
2. HAZARDOUS MATERIALS For the purposes of this Survey Form
the term "hazardous material" means any raw material,
product or agent considered hazardous under any state or
federal law. The term does not include waste which are
intended to be discarded.
2.1 Will any hazardous materials be used or stored on site?
Chemical Products Yes ( )No (X)
Biological Hazards/ Yes ( )No (X)
Infectious Yes ( )No (X)
Radioactive MaterialsYes ( )No (X)
Petroleum Products Yes ( )No (X)
2.2 List any hazardous materials to be used or stored, the
quantities that will be onsite at any given time, and
the location and method of storage (e.g., bottles in
storage closet on the premises)
Location and Method
Hazardous Materials of Storage Quantity
------------------- ---------- --------
None
2.3 Is any underground storage of hazardous materials
proposed or currently conducted on the premises?
Yes ( ) No (X)
If yes, describe the materials to be stored, and the
size and construction of the tank. Attach copies of
any permits obtained for the underground storage of
such substances. __________________________________
___________________________________________________
3. HAZARDOUSE WASTE. For the purposes of this Survey Form, the
term "hazardous waste" means any waste (including
biological, infectious or radioactive waste) considered
hazardous under any state or federal law, and which is
intended to be discarded.
3.1 List any hazardous waste generated or to be generated
on the premises, and indicate the quantity generated on
a monthly basis.
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Location and Method
Hazardous Materials of Storage Prior to Quantity
Disposal
------------------- ------------------- --------
None
3.2 Describe the method(s) of disposal (including
recycling) for each waste. Indicate where and how
often disposal will take place.
Location of Disposal
Hazardous Materials Site Quantity
------------------- ---- --------
None
3.3 Is any treatment or processing of hazardous, infections
or radioactive wastes currently conducted or proposed
to be conducted on the premises?
Yes ( ) No (X)
If yes, please describe any existing or proposed
treatment methods.
3.4 Attach copies of my hazardous were permits or licenses
issued to your company with respect to its operations
on the premises.
N/A
4. SPILLS
4.1 During the past year, have any spills or releases of
hazardous materials occurred on the premises?
Yes ( ) No (X)
If so, please describe the spill and attach the results
of any testing conducted to determine the extent of
such spills.
4.2 Were any agencies notified in connection with such
spills?
Yes ( ) No ( )
N/A
If so, attach copies of any spill reports or other
correspondence with regulatory agencies.
4.3 Were any clean-up actions undertaken in connection with
the spills?
Yes ( ) No ( )
N/A
If so, briefly describe the actions taken. Attach
copies of any clearance letters obtained from any
-3-
Page 140 of 146
<PAGE>
regulatory agencies involved and the results of any
final soil or groundwater sampling done upon completion
of the clean-up work.
5. WASTEWATER TREATMENT/DISCHARGE
5.1 Do you discharge industrial wastewater to:
N/A
___ storm drain? ___ sewer?
___ surface water? ___ no industrial discharge
5.2 Is your industrial wastewater treated before discharge?
Yes ( ) No ( )
N/A
If yes, describe the type of treatment conducted.
5.3 Attach copies of any wastewater discharge permits
issued to your company with respect to its operations
on the premises.
N/A
6. AIR DISCHARGES
6.1 Do you have any air filtration systems or stacks that
discharge into the air?
Yes ( ) No ( )
N/A
6.2 Do you operate any equipment that require air emissions
permits?
Yes ( ) No ( )
N/A
6.3 Attach copies of any air discharge permits pertaining
to these operations.
7. HAZARDOUS MATERIALS DISCLOSURES
7.1 Does your company handle an aggregate of at least 500
pounds, 55 gallons or 200 cubic feet of hazardous
material at any given time?
Yes ( ) No (X)
7.2 Has your company prepared a Hazardous Materials
Disclosure - Chemical Inventory and Business Emergency
Plan or similar disclosure document pursuant to state
or country requirements?
Yes ( ) No ( )
N/A
If so, attach a copy.
-4-
Page 141 of 146
<PAGE>
7.3 Are any of the chemicals used in your operations
regulated under Proposition 65?
Yes ( ) No ( )
N/A
If so, describe the procedures followed to comply with
these requirements.
7.4 Is your company OSHA Hazard Communication Standard
Requirements?
Yes ( ) No (X)
If so, describe the procedures followed to comply with
these requirements.
8. ANIMAL TESTING
8.1 Does your company bring or intend to bring live animals
onto the premises for research or development purposes?
Yes ( ) No (X)
If so, describe the activity.
8.2 Does your company bring on intend to bring animal body
parts or bodily fluids onto the premises for research
or development purposes?
Yes ( ) No (X)
If so, describe the activity.
9. ENFORCEMENT ACTIONS, COMPLAINTS
9.1 Has your company ever been subject to any agency
enforcement actions, administrative orders, lawsuits,
or consent orders/decrees regarding environmental
compliance or health and safety?
Yes ( ) No (X)
If so, describe the actions and any continuing
compliance obligations imposed as a result of these
actions.
9.2 Has your company ever received any request for
information, notice of violation or demand letter,
complaint, or inquiry regarding environmental
compliance or health and safety?
Yes ( ) No (X)
9.3 Has an environmental audit ever been conducted which
concerned operations or activities on premises occupied
by you?
Yes ( ) No (X)
-5-
Page 142 of 146
<PAGE>
9.4 If you answered "yes" to any question in this section,
describe the environmental action or complaint and any
continuing compliance obligation imposed as a result of
the same.
_____________________________________________________
_____________________________________________________
_____________________________________________________
_____________________________________________________
Millennium Electronics Inc.
- --------------------------------
COMPANY
By: Gail Campbell /s/ Gail Campbell
------------------------
Title: Controller
-----------------
Date: 12/15/97
--------------
-6-
Page 143 of 146
<PAGE>
Exhibit 21.1
Subsidiaries
Millennium Memory, Inc., a California corporation
Page 144 of 146
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
We have issued our report dated February 6, 1998, except for Note 14 as to which
the date is March 3, 1998 accompanying the consolidated financial statements
included in the Annual Report of Millennium Electronics, Inc. on Form 10-K for
the year ended December 31, 1997. We hereby consent to the incorporation by
reference of said report in the Registration Statements of Millennium
Electronics, Inc. on Form S-8 (File No. 333-34245, filed August 22, 1997).
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 31, 1998
Page 145 of 146
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