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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 NO. 0-22166
AETRIUM INCORPORATED
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1439182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2350 HELEN STREET
NORTH ST. PAUL, MINNESOTA 55109
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (651) 704-1800
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001
PAR VALUE
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 [ ].
As of March 27, 2000, 9,470,452 shares of Common Stock of the
Registrant were outstanding, and the aggregate market value of the Common Stock
of the Registrant as of that date (based upon the last reported sale price of
the Common Stock on that date as reported by the Nasdaq National Market),
excluding outstanding shares beneficially owned by directors and executive
officers, was approximately $98,555,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific pages are referred to herein) from the
Registrant's Annual Report to Shareholders for the fiscal year ended December
31, 1999 (the "1999 Annual Report"). Part III of this Annual Report on Form 10-K
incorporates by reference information (to the extent specific sections are
referred to herein) from the Registrant's Proxy Statement for its 2000 Annual
Meeting to be held May 23, 2000 (the "2000 Proxy Statement").
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PART I
This Form 10-K contains certain forward-looking statements. For this
purpose, any statements contained in this Form 10-K that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate" or "continue" or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety of factors, including those set forth under the heading "Certain
Important Factors" below.
ITEM 1. BUSINESS.
Aetrium Incorporated (the "Company") designs, manufactures and markets
a variety of electromechanical equipment used in the handling and testing of
microelectronic components, including semiconductor devices known as integrated
circuits ("ICs") and other forms of electronic components. The Company's primary
focus is on high volume electronic component types and on the latest package
designs. Aetrium's products are purchased primarily by semiconductor
manufacturers, and their assembly and test subcontractors, and are used in the
test, assembly, and packaging portion of semiconductor manufacturing. The
Company's products automate critical functions to improve manufacturing yield,
raise quality levels, increase product reliability and reduce final
manufacturing costs.
The Company has three principal product lines. The largest, in terms of
revenue, is its broad line of test handlers, which incorporate thermal
conditioning, contactor and automated handling technologies to provide automated
handling of ICs and other electronic components during production test cycles.
Test handler products are primarily produced by the Company's operations in
North St. Paul, Minnesota; San Diego, California; and Dallas, Texas. Change kits
to adapt the Company's test handlers to different IC package configurations or
to upgrade installed equipment for enhanced performance also represent a
significant part of the Company's revenue. The second product line consists of
its IC Automation products, which are produced by the Company's operations in
North St. Paul and in Dallas. The North St. Paul operation's IC Automation
products are sold to original equipment manufacturers ("OEMs") to be
incorporated as the automated handling components of such OEMs' own proprietary
technology equipment for a variety of other IC processing requirements, such as
marking, lead scanning, and lead trim and form. The Dallas operation's IC
Automation products are sold to semiconductor manufacturers, and are used to
automate the loading and unloading of burn-in boards. The Company's third
product line is specialty test equipment, which includes reliability test
equipment and environmental test equipment. The Company's reliability test
equipment provide IC manufacturers with IC performance data to aid in the
evaluation and improvement of IC designs and manufacturing processes to increase
IC yield and reliability and are produced in North St. Paul. The Company's
environmental test equipment products are used for burn-in testing of ICs and
have been manufactured in the Company's operations in Lawrence, Massachusetts.
With the planned closure of the Lawrence operation in early 2000, these products
will be discontinued and the core technology of these products will be
transferred from the Lawrence operation to the Company's operation in North St.
Paul.
The Company's strategy has focused on revenue growth through product
line expansion, by both internal development and by acquiring complementary
technology, businesses, or product lines, and through customer satisfaction. The
Company's sales have increased at an average annual compounded growth rate of
approximately 23% during the period from 1986 through 1999. Currently, the
Company believes it has the second largest installed base among all domestic
test handler manufacturers.
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In 1998, the Company acquired the equipment business of WEB Technology
Inc. ("WEB"), based in Dallas, Texas. The primary products of the acquired
business include IC Automation products used to automate the loading and
unloading of burn-in boards. This equipment can be configured to accommodate any
burn-in board currently being manufactured.
In 1997, the Company completed two acquisitions that expanded its test
handler product lines. In November 1997, the Company acquired a product line of
pick-and-place test handlers by acquiring certain assets of the Handler Division
of Advantek Inc. ("Advantek"). This acquisition extended the Company's product
line of pick-and-place test handlers for non-memory devices like analog, logic
and microcomponent ICs. The product line acquired from Advantek was incorporated
into and is produced at the Company's North St. Paul operation.
In April 1997, the Company acquired a line of test handler products
produced in Grand Prairie, Texas, by acquiring substantially all of the assets
of Forward Systems Automation, Inc. ("FSA"). In 1999, the primary products
produced in Grand Prairie, Texas included test handlers for small ICs and
discrete components. The Grand Prairie operation is being merged into the
Company's Dallas operation in early 2000, after which these test handler
products will be produced in the Dallas operation.
The Company acquired its environmental test products through its
acquisition of substantially all of the assets of E.J. Systems, Inc. ("EJ
Systems") of Lawrence, Massachusetts in December 1995. These products are
primarily environmental conditioning systems using conductive thermal techniques
for burn-in and reliability testing of ICs. With the acquisition, the Company
also obtained some early stage core technology that has been further developed
and integrated into some of the Company's key new test handler product
developments. The ongoing development of this new conductive thermal technology
will be transferred to the Company's North St. Paul operation when the Lawrence
operation is closed in early 2000.
The Company also acquired certain test handler products through its
acquisition of the assets of Sym-Tek Systems, Inc. ("SymTek") in November 1994,
which allowed the Company to expand its presence in the memory IC market. These
products were configured for high volume multi-site applications (up to 32
sites) and used both pick-and-place and gravity feed technology. The SymTek
acquisition also extended the Company's line of gravity feed test handlers for
non-memory IC test handler applications. These gravity products for non-memory
applications have since been discontinued.
The Company's reliability test systems product line originated through
the purchase of the assets of Sienna Technologies, Inc. ("Sienna") in December
1993. At the time of the acquisition, the life cycle of Sienna's primary product
was near its end, revenue was declining and customer confidence was eroding due
in part to product performance and customer service issues. Since the
acquisition, a new generation product line has evolved through internal
development and has been introduced to the market. It has been well received by
a growing customer base. The older products are still supported by the Company
and have been enhanced to improve performance and satisfy the needs of the
Company's customers. As a result, customer confidence has been substantially
restored and gross profit margins have increased.
The Company acquired the core products of its 5050 series of gravity
feed test handlers through its acquisition of Electro-Mechanical Systems, Inc.
("EMS") in 1988. Since then, the Company has expanded this series of products
through internal development to include a full range of thermal conditioning
capabilities, contactors and change kits for a wide range of small outline
package ("SOP") types. These products sell into the largest market segment of
the semiconductor industry and now incorporate high performance contactors and
multi test site capability, and can be configured for the newest IC package
types.
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The Company emphasizes both product quality and customer service to
achieve customer satisfaction, which is reflected in the certification of its
Minnesota facility in March 1995 as the first test handler producer to be
certified under the ISO 9001 program established by the European Community. In
1998, the Company's facilities in Lawrence, Massachusetts, and San Diego,
California, obtained ISO 9001 certification. All three of these facilities
successfully completed re-certification audits in 1999.
The Company was incorporated in Minnesota in December 1982. The
Company's executive offices are located at 2350 Helen Street, North St. Paul,
Minnesota 55109, and its telephone number is (651) 704-1800.
TEST HANDLER PRODUCTS
Test handlers are electromechanical systems interfaced with a tester to
form a test system designed to handle, thermally condition, contact and sort ICs
and other electronic components automatically during the final test stage of the
manufacturing process. The components are loaded into the handler from bowls,
tubes, trays, or carriers and then typically transported to a temperature
chamber within the test handler where they are thermally conditioned and
controlled to the required testing temperature. The component is then positioned
against the test handler contactor, which provides an electrical connection
between the component and the tester. After testing, the test handler sorts the
component according to test performance. In some cases, additional process steps
are completed by the test handler system. These include marking or visual
inspection of the IC packages, and automatic placement of the ICs into a device
transport media for shipment to the end user.
Traditionally, test handlers have used gravity to move ICs and other
components from tubes through the handler system and back into tubes. In order
to accommodate more fragile IC package families, gravity feed systems have
incorporated various velocity limiting techniques to reduce the speed of IC
packages and minimize IC damage upon impact with other ICs or other stopping
mechanisms. More recently, pick-and-place test handler systems have been
introduced for the IC package families most easily damaged in handling, such as
quad flatpack families ("QFPs"), ball grid array packages ("BGA") and some SOPs.
Pick-and-place systems move ICs electromechanically, and thus can avoid jarring
stops and the resulting lead damage. Pick-and-place systems are typically slower
and more costly than gravity feed handlers.
Test handlers are designed with different characteristics for analog
logic ICs, digital logic ICs, or discrete components. Memory ICs require
relatively long test times. In order to achieve acceptable throughput rates,
memory IC test handlers have been designed to test up to 64 devices at a time.
Nonmemory ICs and most forms of discrete components require relatively short
test times and require fewer test sites, as test times have not been a limiting
factor for throughput rates. Test times, however, have increased as certain
types of nonmemory ICs have become more complex and IC manufacturers have also
sought to fully utilize the capacity of their testers. Accordingly, multisite
test handlers, with as many as eight test sites, are now available for certain
nonmemory IC applications.
Test handlers must meet industry criteria for thermal conditioning,
contactor integrity and minimization of damage to the IC package during the test
cycle. Test handlers compete on the basis of cost, throughput, versatility,
reliability and the specific application requirements of the IC manufacturer.
The combination of these factors measures the cost of ownership of the test
handler per device tested. The Company believes its broad line of test handlers
competes favorably on the basis of cost of ownership for a wide range of
electronic component manufacturer applications.
The Company's primary focus continues to be on the newer generation of
surface mount devices ("SMD") which represent the largest volumes, the newest IC
device types, and the fastest growing
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markets in the industry. The Company believes it offers the broadest line of
test handling products to the semiconductor industry, addressing the full
spectrum of the industry device types, IC package types and media transport
types. The Company's test handler products are complementary with minimal
overlap of application and can be distributed and serviced through a common
organization for efficiency.
GRAVITY FEED TEST HANDLERS
5500 SERIES. The Company's newly developed 5500 Series of dual site
gravity feed test handlers for analog and logic IC applications addresses a wide
range of IC packages including SOPs and micro leadless package types. These
package types constitute the largest segment of all surface mount ICs and one of
the fastest growing new surface mount packages, respectively. These handlers
compete most favorably in high-volume applications and their high throughput
rates are an added advantage in relatively short test time applications. Models
within this series vary on simple adaptability to different contacting methods
to excel in the digital and analog applications, including the rapidly expanding
telecommunications arena. These methods adapt to third party socket, trace on
board and to internally developed proprietary contactors providing
cost-effective solutions to a wide range of customer test requirements. The
temperature range available for thermal conditioning, using mechanical
refrigeration, is from -55 degrees C to +155 degrees C. The Company expects to
increase the flexibility of this product by offering ergonomically friendly bulk
and tube input and output options in the near future.
5050 SERIES. The Company's 5050 Series of gravity feed test handlers
for analog and logic IC applications addresses a wide range of SOP package
types, which constitute the largest segment of all surface mount ICs. These
handlers compete most favorably in high-volume applications and their high
throughput rates are an added advantage in relatively short test time
applications. Models within this series can be configured for different IC
package sizes, and thermal conditioning requirements in order to provide
cost-effective solutions to a wide range of customers. The temperature range
available for thermal conditioning, using mechanical refrigeration or LN2, is
from -55 degrees C to +155 degrees C. The Company also offers dual test site and
quad test site capability within its 5050 Series of handlers to increase
productivity and reduce testing costs in certain applications.
PICK-AND-PLACE TEST HANDLERS
SERIES DTX. The Series DTX test handler is a pick-and-place,
high-volume test handler for memory and logic ICs. The DTX test handler
addresses the newest form of IC package types used for memory devices, including
chip scale packages ("CSP") and micro ball grid array ("uBGA")-type packages,
and can be adapted for strip or panel formats. Some of these new package types
cannot be effectively processed on older generation pick-and-place test
handlers. The DTX test handler provides multiple temperature massively parallel
testing using the Company's new proprietary conductive thermal technology. The
DTX test handler can be configured with up to 64 test sites. The output can be
configured to sort tested ICs in three bulk categories and 13 individual sort
categories. The temperature range available for thermal conditioning, using
mechanical refrigeration, is from -55 degrees C to +155 degrees C. The DTX test
handler's horizontal tray based system design provides package protection with
input and output modules capable of automatically loading and unloading trays.
MODELS M3200 AND M3200S. The Model M3200 test handler is a
pick-and-place, high-volume test handler for a wide range of memory ICs
including thin small outline packages ("TSOP"). The M3200 test handler addresses
a wide range of IC package types that cannot be processed on most gravity feed
test handlers. The M3200 test handler provides multiple temperature testing with
up to 32 test sites. The temperature range available for thermal conditioning is
from -55 degrees C to +155 degrees C. The M3200 test handler's horizontal tray
based system design provides package protection with input and output modules
capable of automatically loading and unloading tubes or trays. The Model M3200S
test
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handler incorporates the M3200 thermal chamber and test area, and has an
advanced input/output specifically designed to address the newest form of IC
package types used for memory devices, including CSP and uBGA that cannot be
effectively processed on older generation pick-and-place test handlers.
MODEL 3000. The Model 3000 test handler is a pick-and-place test
handler for analog, logic and microcomponent ICs in SOP, QFP, BGA and pin grid
array ("PGA") packages, which allows for significantly increased throughput as
compared to single site test handlers. The 3000 test handler provides multiple
temperature and parallel testing using a conventional oven conduction thermal
technique. The 3000 test handler has dual test sites, and can be configured to
sort tested ICs in up to 4 sort categories. The temperature range available for
thermal conditioning, using mechanical refrigeration, is from -55 degrees C to
+155 degrees C. The 3000 test handler features the Soft-Touch Probe(TM) to
handle the most fragile IC packages. Devices are transported with their leads
up, virtually eliminating the possibility of lead damage. The 3000 test handler
features "plunge to board"-type contacting, and offers complete electrostatic
discharge protection. The 3000 test handlers can be modified with change kits,
typically within 15 minutes, to accommodate nearly every IC package
configuration being manufactured in volume today.
1000 SERIES. The 1000 Series pick-and-place test handlers are offered
in a full range of temperature options for thermal conditioning, and can be
configured to gently handle a wide variety of analog, logic and microcomponent
ICs in SOP, QFP, BGA and PGA packages. The 1000 Series test handlers feature the
Soft-Touch Probe(TM) to safely and reliably handle the most fragile CSP IC
packages. Devices are transported with their leads up, virtually eliminating the
possibility of lead damage. The 1000 Series test handlers feature "plunge to
board"-type contacting, and offer complete electrostatic discharge protection.
The 1000 Series test handlers can be modified with change kits, typically within
15 minutes, to accommodate nearly every IC package configuration being
manufactured in volume today.
MODEL QT. The Model QT pick-and-place test handler is a bench-top sized
machine designed to accommodate small lot production runs and engineering
characterization testing. The QT test handler can be configured for a wide range
of device packages smaller than 2.5 inches by 2.5 inches, including ICs and
discrete electronic components. The QT test handler input can accept ICs from
metal or plastic tubes, a custom device tray, or a bulk bowl feeder. The QT test
handlers are offered with several different options for contacting, including
"plunge to board"-type contacting.
2000 SERIES. The 2000 Series of pick-and-place test handlers are
designed for production testing of transister ("TO")-type discrete electronic
components. The 2000 Series test handlers can be configured for up to four test
sites and a variety of options for contacting. The 2000 Series test handlers are
offered with a number of options for input, including bulk bowl feeders or
tubes. The output options include bulk, tube, and radial tape and reel. Other
options include the capability to perform vision inspection of the coplanarity
of leads and to mark individual devices with a laser marking system.
5000 SERIES. The 5000 Series of pick-and-place test handlers are
designed for production testing of small outline transistor ("SOT")-type
discrete electronic components. The 5000 Series test handlers can be
configured for up to four test sites and a variety of options for contacting,
including "plunge to board"-type contacting. The 5000 Series test handlers
are offered with a bulk bowl feeder input and a variety of output options
including bulk, tube, or radial tape and reel. Tested devices can be sorted
into up to 19 programmable categories. Other options include the capability
to perform vision inspection of the coplanarity of leads and to mark
individual devices with a laser marking system.
THERMAL FORCING SYSTEM HANDLER
In 1999, the Company introduced a manual thermal forcing system ("TFS")
which utilizes conductive thermal control to maintain accurate temperature set
points during device testing or characterization. The TFS addresses engineering
and low-volume production applications for a wide range of package types,
including PGAs, BGAs or bare die.
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CHANGE KITS, UPGRADES AND SPARE PARTS
The Company has an ongoing demand for IC package change kits for its
installed test handler equipment, including test handlers no longer included in
its active product line. The Company sells a variety of change kits to
accommodate the growing variety of IC packages used by the IC industry. The
demand for change kits is driven by the introduction of new IC package types and
increased production volumes experienced by the Company's end customers. Also
included in change kits are upgrade kits to enhance the performance of installed
equipment. Spare parts are sold with new orders as kits or can be purchased at
any time as piece parts or in kit form as required.
IC AUTOMATION PRODUCTS
The Company believes that the growing number and volume of fine pitch
SO type ICs and other delicate BGA packages is driving a demand for automated
equipment for all IC final manufacturing processes. Existing processing
equipment often will not accommodate these package types or the numerous tray
configurations used to transport the ICs. The Company believes that its IC
Automation product line offers the most effective handling technology to
automate these manufacturing processes for increasingly difficult to handle
newer generation ICs.
4800 SERIES. The 4800 Series is a line of products used to automate the
loading and unloading of burn-in boards. Burn-in boards vary in size and
density, and are used to place individual ICs into a convection oven for an
extensive reliability screening and stress testing procedure known as "burn-in."
Burn-in board automation products take untested ICs out of trays or other media,
place them into sockets on a burn-in board, and then lock the socket. After the
burn-in test is complete, the machine removes tested ICs from the burn-in board
sockets and sorts the ICs according to the results of the test. The burn-in
process screens for early failures by operating the IC at elevated voltages and
temperatures, usually at 125 degrees C, for periods typically ranging from 12 to
48 hours. Burn-in systems can process thousands of ICs simultaneously, utilizing
multiple boards. Most leading-edge microprocessors, microcontrollers, digital
signal processors, and memory ICs undergo burn-in testing.
The 4800 Series comes in a single pick-up head version, a dual-head
version, five-head version and a recently introduced ten-head version. The
single and dual head models are best suited for large IC packages or for those
applications requiring a quick conversion of the machine to handle a different
IC package. The five-head and ten-head systems are best suited to very high
volume production applications. All are available with a variety of input and
output options, including tubes, sleeves, or trays. Package positioning stations
ensure device alignment into socket and tray. Each version can be configured to
identify a burn-in board using bar coding, resistor array, or diode array. An
optional stacked burn-in board elevator and trolley allows the system to process
up to 32 burn-in boards without any operator intervention.
IC AUTOMATION PRODUCTS FOR OEMS. The Company began the development of
its current IC Automation product line in 1990. This product line is marketed to
other semiconductor equipment manufacturers and has been incorporated in trim
and form, marking, mark curing, lead inspection, mark inspection, lead
conditioning, media transfer and prom programming equipment to accommodate
various device characteristics and media packaging. The Company's IC Automation
modules currently consist of a series of robotic electromechanical handling
modules, each designed to perform a specific handling function. Together these
modules perform nearly all of the handling functions necessary for the various
IC manufacturing processes. The principal automation modules are:
pick-and-place; tray transport; conveyor belt; tray stacker; tray un-stacker;
inverting end effector; and taping module. Each handling module has a
microprocessor that directs the handling module's function and communicates with
other
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modules through a proprietary software protocol that enables the transfer of ICs
between modules in a logical and efficient manner.
The IC Automation handling modules can be readily assembled into
systems configured to provide nearly any IC routing pattern required by an IC
processing application, and can be readily integrated as a component of the
processing equipment. This generic nature of the IC Automation handling modules
allows the Company to provide a versatile, cost effective automation solution to
IC processing equipment OEMs that overcomes the handling automation challenges
presented by more fragile IC package types. The IC Automation modules can also
be adapted to provide an automated linkage between IC manufacturing processes,
thus offering the potential for seamless automated handling of ICs from trim and
form to packaging for shipment.
SPECIALTY TEST EQUIPMENT
RELIABILITY TEST PRODUCTS
Since the Company acquired its reliability test systems product line in
December 1993, it has improved product performance to satisfy the needs of its
customers. The IC industry's demand for higher performance devices with smaller
circuit geometries has led to significant technological changes in the materials
and processes used to manufacture ICs, including an emerging shift to copper
materials for the minute circuitry of devices. These changes in technology,
along with IC user demand for increased reliability, have created a need for
increasingly sophisticated reliability testing of IC designs and manufacturing
processes. The reliability test equipment product line includes a variety of
system configurations with which IC manufacturers can force precise levels of
voltage and current through ICs, collect and analyze relevant data, and predict
lifetime performance of ICs. This equipment can be utilized to perform
reliability testing of packaged and unpackaged ICs. The Company has reliability
test equipment installed at 19 of the top 20 semiconductor manufacturers in the
world.
In 1998, the Company formally introduced its Model 1164, including a
suite of applications for customers to perform a variety of tests. The Model
1164 is a fundamentally improved design from the Company's previous reliability
test products. The Model 1164 features a modular design that allows for great
flexibility in performing reliability tests, and can test up to 4,096 devices at
a time or perform numerous simultaneous tests on smaller batches of ICs. The
Company believes the Model 1164 is the only reliability tester to use a patented
thermal mini chamber and proprietary high temperature electronic contactors to
test semiconductor reliability structures up to 400 degrees C. The copper system
has been shipping in volume since the fourth quarter of 1999.
In mid-1999, the Company also developed a new test module for the Model
1164 for use in the production testing of MR heads used in computer disc drives.
This is a new market for the Company and the Company believes that it is
currently well positioned to take advantage of any opportunities that may be
available.
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ENVIRONMENTAL TEST PRODUCTS
The Company acquired its environmental test equipment product line from
EJ Systems in December 1995, which developed the line in response to a trend
toward higher power and higher speed device applications. The corresponding
increase in power dissipation resulted from increased device complexity (more
circuits) within smaller geometries. This phenomenon is especially evident in
high pin count application-specific integrated circuits ("ASICs") and
microprocessors. This high degree of power dissipation (heat) led to unique
thermal conditioning problems in the testing of such devices. EJ Systems
developed environmental test equipment that permitted individual IC temperature
control using a conduction (direct contact) method rather than the traditional
convection (forced hot air) method to thermally condition devices. These
techniques were patented and incorporated into the BAK-PAK(TM) Burn-In Systems.
The demand for the Company'S BAK PAK System declined significantly in 1999, and
the Company will discontinue the BAK PAK product line in early 2000 when it
closes its Lawrence operations.
COMPETITION
The semiconductor capital equipment market is highly competitive. In
the market for test handler products, the Company competes with a number of
companies ranging from very small businesses to large companies, some of which
have substantially greater financial, manufacturing, marketing and product
development resources than the Company. Some of these companies manufacture and
sell both testers and test handlers. The Company believes its test handlers are
compatible with all major testers, including those manufactured by companies
that sell both testers and test handlers. The particular companies with which
the Company competes vary with the Company's different markets, with no one
company dominating the overall test handler market. The companies with which the
Company competes most directly in the surface mount IC test handler market
include Advantest Corporation, Cohu, Inc., Multitest Electronic Systems GmbH and
Micro Component Technology, Inc. The Company also competes with Ismeca S.A. and
Tesec Corporation in the market for test handlers configured to handle passive
and discrete electronic components.
The Company competes for test handler sales primarily on the basis of
effective handler throughput, cost of ownership, temperature accuracy, contactor
integrity and other performance characteristics of its products, the breadth of
its product lines, the effectiveness of its sales and distribution channels and
its customer service. The Company believes that it competes favorably on all of
these factors.
The market for burn-in board automation products is highly competitive.
The Company competes with a number of companies ranging from very small
businesses to large companies, some of which have substantially greater
financial, manufacturing, marketing and product development resources than the
Company. The companies with which the Company competes most directly in this
market include Schlumberger Ltd., SIPA, S.p.a., and Todo Seisakusho, Ltd.
The Company competes for burn-in board automation product sales
primarily on the basis of effective throughput, cost of ownership, versatility,
and other performance characteristics of its products,
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the breadth of its product line, the effectiveness of its sales and distribution
channels and its customer service.
The Company continues to believe that the market for its IC Automation
products sold on an OEM basis has no clearly defined commercial competitors
offering similar automated handling modules to the IC industry. Historically,
OEMs supplying equipment for IC manufacturing processes have developed custom or
semi-custom handling components. Many of these OEMs have internal development
capability for automated handling and many engineering companies also have
automated handling development capability. The Company believes, however, that
its IC Automation product line of generic automation modules offers OEMs a
viable solution for their new automated handling requirements. The Company
believes the economics, the current availability and the effectiveness of its IC
Automation products provide strong incentives to the Company's OEM customers to
forego new product development and to use the Company's IC Automation handling
modules.
The market for the Company's reliability test systems is also highly
competitive and the Company's competitors include QualiTau, Ltd. and Micro
Instruments, Inc. The Company competes for reliability test system sales on the
basis of technology, price, delivery, system flexibility, and overall system
performance and believes it competes favorably on all of these factors.
There are also a number of companies that manufacture and sell
conventional burn-in equipment in the United States, which compete with the
Company's environmental test equipment product line, including Aehr Test
Systems, Inc. and Reliability, Inc. The Company is not aware of any competitors
that provide burn-in equipment which addresses the combined needs of high-power
dissipation and high-performance while maintaining sufficiently accurate thermal
conditioning.
MANUFACTURING AND SUPPLIES
The Company manufactures test handlers, reliability test equipment, and
certain of its IC Automation products in North St. Paul, Minnesota. It also
currently manufactures certain of its test handler products at its facilities in
San Diego, California, and Grand Prairie, Texas. After the Company closes its
Grand Prairie, Texas facility in March 2000, products currently manufactured at
this facility will be manufactured at the Company's Dallas, Texas facility. The
Company's IC Automation products used for burn-in board applications are
manufactured in Dallas, Texas. The Company's environmental test equipment and
TFS products are currently manufactured in Lawrence, Massachusetts. After the
Company closes and vacates the Lawrence facility in May 2000, the environmental
test equipment will be discontinued, and the TFS products and the related core
thermal technology will be transferred to the Company's North St. Paul facility.
The Company's manufacturing operations consist of procurement and inspection of
components and subassemblies, assembly and extensive test of finished products.
Quality and reliability are emphasized in both the design and manufacture of the
Company's products. This emphasis is reflected in the certification of the
Company's North St. Paul facility in March 1995, and its San Diego and Lawrence
facilities in 1998 under the ISO 9001 certification criteria established by the
European Community for the standardization of manufacturing documentation and
processes. Successful re-certification audits at all three of these facilities
were achieved in 1999.
All components and subassemblies are inspected for mechanical and
electrical compliance to Company specifications. All finished products are
tested against Company and customer specifications, and fully assembled test
handler products are tested at all temperatures for which they are designed and
with all the IC packages to be accommodated. Where appropriate, the Company's
products are shipped in custom-engineered protective packaging to minimize
potential damage during shipment.
10
<PAGE>
A significant portion of the components and subassemblies of the
Company's products, including PC boards, refrigeration systems, vacuum pumps and
contactor elements, are manufactured by third parties on a subcontract basis. As
a part of the Company's total quality management program, it has an ongoing
supplier quality program under which it selects, monitors and rates its
suppliers, and recognizes suppliers for outstanding performance.
Certain components are currently available from only a limited number
of sources. The Company believes it may not always be able to replace all of its
suppliers within a time period consistent with its business requirements. The
Company attempts to keep an adequate supply of critical components in its
inventory to minimize any significant impact the loss of a supplier may cause.
CUSTOMERS
The Company relies on a limited number of customers for a substantial
percentage of its net sales. In 1999, the Company's top three customers
accounted for approximately 30% of its net sales. In 1998, the Company's top
three customers accounted for approximately 37% of its net sales. In 1997, the
Company's top three customers accounted for approximately 44% of its net sales.
The loss of or a significant reduction in orders by these or other significant
customers, including reductions due to market, economic or competitive
conditions in the semiconductor industry, could adversely affect the Company's
financial condition and results of operations.
SALES AND MARKETING
The Company markets its test handler products, burn-in board automation
products, environmental test equipment and reliability test systems through a
combination of direct salespeople and independent manufacturers' representatives
and distributors. The Company sells its IC Automation products directly to OEM
customers through its internal sales force. As of December 31, 1999, the Company
had 16 U.S. manufacturers' representatives with an average of 3 salespeople each
located throughout the U.S. and Canada in areas critical to the Company's
success. International distributors are located in the United Kingdom, France,
Germany, Switzerland, Holland, Sweden, Japan, Taiwan, Thailand, Malaysia, Korea,
Singapore, Hong Kong, China and the Philippines.
The Company's direct sales organization, comprised of 14 salespeople,
coordinates the activities of the Company's manufacturers' representatives and
distributors and actively participates with them in selling efforts. This
enables the Company to establish strong direct ties with its customers. The
Company provides sales and technical support to its manufacturers'
representatives and distributors through the Company's sales and service
locations in North St. Paul, Minnesota; San Diego and Santa Clara, California;
Landisville, Pennsylvania; Austin and Dallas, Texas; Saugus, Marblehead and
Lawrence, Massachusetts; and Singapore.
The Company's marketing efforts include participation in industry trade
shows and production of product literature and sales support tools. These
efforts are designed to generate sales leads for the Company's manufacturers'
representatives, distributors and direct salespeople.
International shipments accounted for 29%, 25% and 41% of the Company's
net sales in 1997, 1998, and 1999, respectively. In addition, it is not uncommon
for U.S. customers to take delivery of products in the U.S. for immediate
shipment to international sites, particularly the IC Automation products that
are sold on an OEM basis. Most of the Company's international shipments are made
to international sites of U.S. electronic component manufacturers, although
there is a growing foreign customer base included in the Company's international
sales.
11
<PAGE>
All of the Company's international sales are invoiced in U.S. dollars
and, accordingly, have not historically been subject to fluctuating currency
exchange rates. Credit limits have been established from time to time on the
Company's international distributors, who purchase products from the Company and
resell to end users. Irrevocable letters of credit are often used to minimize
credit risk and to simplify the purchasing/payment cycle.
RESEARCH AND DEVELOPMENT
The Company believes it must continue to enhance, broaden and modify
its existing product lines to meet the constantly evolving needs of the
semiconductor equipment market. To date, the Company has relied both on internal
development and acquisitions of technology and product lines to extend its
product lines, increase its customer base, avoid reliance on any single
semiconductor equipment market segment, and develop its IC Automation products
that are sold on an OEM basis. The IC Automation product line required the
development of a software protocol that plays an important role in the success
of these products. Software is a critical element in the Company's reliability
test equipment and software development continues to play an increasingly
important role in test handling and burn-in board automation products. The
Company intends to bring additional resources to this area as required.
Product development expenses are typically split approximately 50% for
new product development and 50% for continuation engineering. In 1997, the
Company completed the initial development of the Model 1164 reliability tester
and added certain models to the 5000 and 7000 Series of test handlers. In 1998,
the Company substantially completed the Model 3000 and the Model M3200S test
handlers, introduced a new version of the 4800 burn-in board loader/unloader,
and developed new test capabilities for the Model 1164 reliability test system.
In 1999, the Company introduced the DTX Series massively parallel pick-and-place
test handler, the 4800 ten-head burn-in board loader/unloader, the 5500 dual
site gravity test handler for SOP and the new micro leadless devices, and a
copper capable version of the Model 1164. The Company's continuing
engineering efforts include the development of additional change kits to meet
the expanding families of IC package types, further advancement of contactor
technologies, and increasing features and performance options for existing
equipment.
The Company expenses all research and development costs, including
costs for software development as incurred. In 1997, 1998, and 1999, the
Company's expenses relating to research and development were approximately $10.5
million, $12.2 million and $9.8 million, respectively. Over time, the Company's
objective is to invest approximately 13% to 15% of its net sales in research and
development, although the percentage may be higher in periods of reduced sales.
The Company employed 97 engineering personnel as of December 31, 1999.
INTELLECTUAL PROPERTY RIGHTS
The Company attempts to protect the proprietary aspects of its products
with patents, copyrights, trade secret law and internal nondisclosure
safeguards. The Company currently holds several U.S. patents covering certain
features of its handling systems and IC Automation modules and the contactor
elements incorporated in certain of its test handlers and for elements of its
environmental conditioning chambers. The source code for the software contained
in the Company's products is considered proprietary and is not furnished to
customers. The Company has also entered into confidentiality agreements with
each of its key employees. Despite these restrictions, it may be possible for
competitors or users to copy aspects of the Company's products or to obtain
information that the Company regards as a trade secret.
There is a rapid pace of technological changes in the microelectronics
industry. The Company believes that patent, trade secret and copyright
protection are less significant to its competitive position than factors such as
the knowledge, ability and experience of the Company's personnel, new product
12
<PAGE>
development, frequent product enhancements, name recognition and ongoing,
reliable product maintenance and support.
BACKLOG
The Company's backlog, which consists of customer purchase orders that
the Company expects to ship within the next 12 months, was approximately $13.5
million as of December 31, 1999 compared to $15.0 million as of December 31,
1998. Because all purchase orders are subject to cancellation or delay by
customers with limited or no penalty, the Company's backlog is not necessarily
indicative of future revenue or earnings.
EMPLOYEES
As of December 31, 1999, the Company had 310 employees, including 133
in manufacturing, 97 in engineering and product development, 44 in sales,
marketing and customer service, and 36 in general administration and finance.
None of the Company's employees is represented by a labor union or is subject to
any collective bargaining agreement. The Company has never experienced a work
stoppage and believes that its employee relations are satisfactory.
CERTAIN IMPORTANT FACTORS
In addition to the factors identified above, there are several
important factors that could cause the Company's actual results to differ
materially from those anticipated by the Company or which are reflected in any
forward-looking statements of the Company. These factors, and their impact on
the success of the Company's operations and its ability to achieve its goals,
include the following:
1. the Company's dependence on the microelectronics market and
the capital expenditures of electronic component
manufacturers;
2. the ability of the Company to manage its growth and to
integrate and assimilate recent and future acquisitions;
3. new product development cycles and market acceptance of new
products;
4. potential fluctuations in the Company's operating results
based on factors such as cancellation or rescheduling of
orders, seasonal fluctuations in business activity, and
product announcements by the Company or by competitors;
5. the impact of competition in the test handler, IC Automation,
reliability test equipment and environmental test equipment
markets;
6. the effect of customer concentration and the loss of any
significant customer on the Company's sales; and
7. volatility of the Company's stock price based on factors
including developments in the microelectronics industry and
high-technology industries generally, as well as fluctuations
in the Company's quarterly operating results.
13
<PAGE>
ITEM 2. PROPERTIES.
The Company conducts manufacturing, product development, sales,
marketing and field service operations in North St. Paul, Minnesota. The Company
currently occupies approximately 45,000 square feet in North St. Paul under a
lease which expires in March 2006, with an annual rent of approximately
$240,000. The lease includes an option for the Company, exercisable at any time
during the initial lease term, to require construction of an additional
approximately 45,000 square feet for lease at the same rental rate. The
Company's corporate functions, and certain sales, marketing and development
activities are conducted in an adjacent, 30,000 square foot facility under a
lease that expires in March 2006, with an annual rent of approximately $198,000.
The Company conducts manufacturing, product development, and certain
sales and marketing activities in approximately 29,400 square feet in Dallas,
Texas, under a lease that expires in April 2003. The annual rent is
approximately $203,000.
The Company currently conducts manufacturing, product development, and
certain sales and marketing activities in a facility with approximately 26,600
square feet in Grand Prairie, Texas. The facility is leased from a partnership
controlled by a former officer of the Company who resigned in January 2000. The
lease provides for an annual rent of $133,000 and expires in June 2003. The
Company believes the lease terms for this facility are comparable or favorable
to the rates that could be obtained for similar properties in that area. In
January 2000, the Company announced that it is transferring its Grand Prairie
operations to its Dallas operations and closing the Grand Prairie facility. The
Company expects to vacate the Grand Prairie facility by March 31, 2000. The
Company and the landlord are utilizing a property management firm to locate a
new tenant for this facility. Based on its favorable location, condition and
design, the Company believes that the facility will be re-marketed within nine
months.
The Company conducts manufacturing, product development and certain
sales and marketing activities in a 45,000 square foot facility located in
Poway, California under a lease that expires in October 2009, with an annual
rent of approximately $421,000. The Company also leases and occupies
approximately 3,000 square feet of space in Santa Clara, California under a
lease that expires in May 2000, with a monthly rent of approximately $4,800. The
Company uses this space for sales and field service operations.
In Lawrence, Massachusetts, the Company currently conducts
manufacturing, sales and marketing and product development activities for its
environmental test product line. The Company leased approximately 61,500 square
feet under a sublease that expired in December 1999. The Company arranged to
continue leasing this facility on a month-to-month basis in 2000. In January
2000, the Company announced that it would cease the operations in Lawrence,
Massachusetts and expects to vacate this facility by approximately May 15, 2000.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal, governmental, administrative or
other proceedings to which the Company is a party or of which any of its
property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of fiscal year 1999.
14
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company, their ages and the offices held,
as of February 18, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Joseph C. Levesque 55 Chairman of the Board, President and Chief Executive Officer
Darnell L. Boehm 51 Chief Financial Officer, Secretary and Director
Douglas L. Hemer 52 Group Vice President - North St. Paul & San Diego Operations and
Director
Daniel M. Koch 46 Vice President - Worldwide Sales
Gerald C. Clemens 48 Vice President - Reliability Test Products
Kenneth R. Lee 54 President - Lawrence Operations
Keith E. Williams 56 President - Dallas Operations
John J. Pollock 40 Vice President - Corporate Marketing
Stephen P. Weisbrod 59 Vice President - Corporate Technology
Paul H. Askegaard 47 Treasurer
Venu Turlapaty 39 Vice President - Product Planning
</TABLE>
Mr. Levesque has served as President, Chief Executive Officer and
Chairman of the Company's Board of Directors since 1986. From 1973 to 1986, Mr.
Levesque served in various capacities and most recently as Executive Vice
President of Micro Component Technology, Inc., a manufacturer of integrated
circuit testers and test handlers. Mr. Levesque is also a director of TSI Inc.,
a publicly-held maker of measurement and instrumentation equipment, and serves
on its compensation committee.
Mr. Boehm has served as Chief Financial Officer, Secretary and as a
director of the Company since 1986. From December 1994 until July 1995, Mr.
Boehm had also assumed executive management responsibilities for the Company's
San Diego operations. Mr. Boehm is also the principal of Darnell L. Boehm &
Associates, a management consulting firm. Mr. Boehm is also a director of each
of Rochester Medical Corporation, a public company, Versa Companies, a
privately-held company and Alpnet, Inc., a public company. Mr. Boehm serves on
the audit and compensation committees of Rochester Medical Corporation and Versa
Companies, and serves on the audit committee of Alpnet, Inc.
Mr. Hemer has served as a director of the Company since 1986, and has
served as the Company's Group Vice President since August 1998. Prior to this
appointment, he served as the President of the Company's San Diego operations
since February 1997. From May 1, 1996 until February 1, 1997, Mr. Hemer served
as the Company's Chief Administrative Officer. Mr. Hemer was a partner in the
law firm of Oppenheimer Wolff & Donnelly LLP for more than 15 years before
joining the Company. Mr. Hemer is also a director of Versa Companies, a
privately-held company, and serves on its compensation and audit committees.
15
<PAGE>
Mr. Koch has served as the Company's Vice President - Worldwide Sales
since March 1991. From March 1990 to March 1991, Mr. Koch served as the Vice
President of Sales of Summation, Inc., a company involved with the testing of
integrated circuit boards. From December 1973 to March 1990, Mr. Koch served in
various sales positions and most recently as Vice President of Sales of Micro
Component Technology, Inc.
Mr. Clemens has served as the Company's Vice President - Reliability
Test Products since July 1995. From September 1993 to July 1995, Mr. Clemens
served as Vice President - Engineering. Mr. Clemens is also the principal of
Clemens Associates, a consulting firm. From August 1991 to September 1992, Mr.
Clemens was a Vice President at Vectorvision, Inc., a software company. From
June 1990 to April 1991, Mr. Clemens was a Vice President at Elke Corporation, a
software company.
Mr. Lee has served as President of the Lawrence operations since April
1997, and had served in executive management with that division as a consultant
since January 1996. Mr. Lee previously was a principal of Marlboro Associates, a
consulting practice. Mr. Lee was a co-founder of Aseco Corporation and served in
a number of capacities at Aseco Corporation from 1982 to 1994, most recently as
Vice President of Engineering. In January 2000, the Company announced plans to
close its facility in Lawrence, Massachusetts by approximately May 15, 2000. Mr.
Lee will leave the Company upon the closing of that facility.
Mr. Williams has served as the President of the Dallas operations since
April 1, 1998, when the Company completed its acquisition of the equipment
business of WEB. Mr. Williams co-founded WEB in 1982, and served as its
President and CEO from its inception until WEB was acquired by the Company.
Pursuant to a letter agreement dated April 1, 1998, the Company offered, and Mr.
Williams accepted, the position of President of the Dallas operations for a
minimum period of three years. Such letter also provides that Mr. Williams
cannot compete with the Company for the three-year period of the agreement.
Mr. Pollock has served as the Vice President - Corporate Marketing
since August 1998. He served previously as the General Manager of the Arden
Hills operations, and general manager of the North St. Paul operations. From
September 1996 to September 1997, Mr. Pollock was the Business Unit Manager of
the IC Automation products group. From September 1995 to September 1996, Mr.
Pollock was a product director within the Company's IC Automation products
group. From 1985 to 1995 Mr. Pollock was employed in various product engineering
and product marketing positions at Rosemount Aerospace Inc., a supplier of
measurement and instrumentation products to the aerospace industry.
Mr. Weisbrod has served as the Vice President - Corporate Technology
since March 1998. From 1994 to 1998, Mr. Weisbrod was Vice President for
systems, and a member of the board of directors, of Game Financial Corporation,
a provider of financial services to the gaming industry. From 1992 to 1994 Mr.
Weisbrod was President and Chief Operating Officer for Coda Music Technology, a
producer of technology-based music instruction systems.
Mr. Askegaard has served as the Company's Treasurer since February
1992. From October 1986 to February 1992, Mr. Askegaard served as the Company's
Corporate Controller.
Mr. Turlapaty has served as the Company's Vice President - Product
Planning since October 1999. From August 1997 to September 1999, Mr. Turlapaty
served as Director, Technology Planning for the Company. From July, 1994 to July
1997 he served as Engineering Manager for the Company's Reliability Test
Products Group. From March 1993 to June 1994 Mr. Turlapaty was Principal
Electrical Engineer and Project Manager in the Company's North St. Paul
operations.
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The information under the caption "Price Range of the Company's Common
Stock" on page 28 of the Company's 1999 Annual Report is incorporated herein by
reference. The prices reflected in the table presented in the 1999 Annual Report
do not include adjustments for retail mark-ups, mark-downs or commissions.
The Company did not have any unregistered sales of equity securities
during the fourth quarter of 1999.
ITEM 6. SELECTED FINANCIAL DATA.
The information under the caption "Selected Consolidated Financial
Data" on page 28 of the 1999 Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 8 through 15 of the
Company's 1999 Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information under the caption "Quantitative and Qualitative
Disclosure about Market Risk" on pages 14 through 15 of the Company's 1999
Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following Consolidated Financial Statements of the Company and the
Independent Auditor's Report thereon are incorporated herein by reference from
the pages indicated in the Company's 1999 Annual Report:
Report of Independent Accountants -- page 15.
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997 -- page 16.
Consolidated Balance Sheets as of December 31, 1999 and 1998 -- page
17.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997-- page 18.
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997 -- page 19.
Notes to Consolidated Financial Statements -- pages 20 to 27.
17
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information under the captions "Election of Directors --
Information About Nominees" and "Election of Directors -- Other Information
About Nominees" in the Company's 2000 Proxy Statement is incorporated herein by
reference.
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 2000 Proxy Statement is incorporated
herein by reference.
The information under the caption "Item 4A. Executive Officers of the
Registrant" on page 15 of this Annual Report on Form 10K is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the captions "Election of Directors --
Compensation of Directors" and "Executive Compensation and Other Benefits" in
the Company's 2000 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's 2000 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Certain Relationships and Related
Transactions" in the Company's 2000 Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. FINANCIAL STATEMENTS OF REGISTRANT.
The following Consolidated Financial Statements of the Company and the
Independent Auditor's Report thereon are incorporated herein by reference from
the pages indicated in the Company's 1999 Annual Report:
Report of Independent Accountants -- page 15.
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997 -- page 16.
18
<PAGE>
Consolidated Balance Sheets as of December 31, 1999 and 1998 --
page 17.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997-- page 18.
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997 -- page 19.
Notes to Consolidated Financial Statements -- pages 20 to 27.
(a) 2. FINANCIAL STATEMENT SCHEDULES OF REGISTRANT.
The following financial statement schedule is included herein and
should be read in conjunction with the financial statements referred to above:
Financial Statement Schedule:
II. Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial statements or
related notes.
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of Aetrium Incorporated
Our audits of the consolidated financial statements referred to in our report
dated January 31, 2000, appearing on page 15 of the 1999 Annual Report to
Shareholders of Aetrium Incorporated (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, such Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 31, 2000
19
<PAGE>
SCHEDULE II
AETRIUM INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
ADDITIONS
--------------------------------
BALANCE AT CHARGED TO
DESCRIPTION BEGINNING OF COSTS AND ACQUISITION DEDUCTIONS BALANCE AT
PERIOD EXPENSES RELATED (1) END OF PERIOD
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
1997 799,400 0 50,000 (589,800) 259,600
1998 259,600 545,000 50,000 (317,600) 537,000
1999 537,000 57,000 0 (75,000) 519,000
INVENTORY OBSOLESCENCE RESERVE:
1997 2,015,133 1,076,296 10,000 (1,116,329) 1,985,100
1998 1,985,100 3,290,200 0 (1,646,500) 3,628,800
1999 3,628,800 3,460,800 0 (3,600,200) 3,489,400
WARRANTY RESERVE:
1997 610,576 25,000 235,000 (308,376) 562,200
1998 562,200 661,000 120,000 (448,400) 894,800
1999 894,800 826,300 0 (899,700) 821,400
</TABLE>
(1) Reserve increases related to the inclusion of newly-acquired businesses.
(a) 3. EXHIBITS.
The exhibits to this Report are listed in the Exhibit Index attached
hereto.
A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who was a shareholder of the
Company as of March 27, 2000, upon receipt from any such person of a written
request for any such exhibit. Such request should be sent to Aetrium
Incorporated, 2350 Helen Street, North St. Paul, Minnesota 55109; Attn.:
Shareholder Relations.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Annual Report on
Form 10-K pursuant to Item 14(a)(3):
1. Form of Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.6 to the Company's Form 10-KSB for the
year ended December 31, 1993) (File No. 0-22166).
2. Form of Non-Statutory Stock Option Agreement (incorporated by
reference to Exhibit 10.7 to the Company's Form 10-KSB for the
year ended December 31, 1993) (File No. 0-22166).
3. 1993 Stock Incentive Plan, as amended (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on
Form 10-K for year ended December 31, 1997) (File No.
0-22166).
20
<PAGE>
4. Salary Savings Plan (incorporated by reference to Exhibit 10.3
to the Company's Registration Statement on Form SB-2) (File
No. 33-64962C).
5. Employee Stock Purchase Plan (incorporated by reference to
Exhibit 99.1 to the Company's Registration Statement on Form
S-8) (File No. 33-74616).
6. Employment Agreement dated April 1, 1986 between Joseph C.
Levesque and the Company (incorporated by reference to Exhibit
10.6 to the Company's Registration Statement on Form SB-2)
(File No. 33-64962C).
7. Letter Agreement dated April 1, 1998 between the Company and
Keith E. Williams. (incorporated by reference to Exhibit 10.18
to the Company Form 10-K for the year ended December 31, 1998
(file No. 0-22166)).
(b) REPORTS ON FORM 8-K.
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of 1999.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AETRIUM INCORPORATED
Date: March 27, 2000 By: /s/ Joseph C. Levesque
--------------------------------------
Joseph C. Levesque
Chief Executive Officer and President
(principal executive officer)
By: /s/ Darnell L. Boehm
--------------------------------------
Darnell L. Boehm
Chief Financial Officer and Secretary
(principal financial and accounting
officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 27, 2000 by the following persons on
behalf of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Joseph C. Levesque Chairman of the Board
- ----------------------------------
Joseph C. Levesque
/s/ Darnell L. Boehm Director
- ----------------------------------
Darnell L. Boehm
/s/ Terrence W. Glarner Director
- ----------------------------------
Terrence W. Glarner
/s/ Andrew J. Greenshields Director
- ----------------------------------
Andrew J. Greenshields
/s/ Douglas L. Hemer Director
- ----------------------------------
Douglas L. Hemer
/s/ Terrance J. Nagel Director
- ----------------------------------
Terrance J. Nagel
</TABLE>
22
<PAGE>
AETRIUM INCORPORATED
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ITEM NO. ITEM METHOD OF FILING
-------- ---- ----------------
<S> <C> <C>
3.1 The Company's Restated Articles of Incorporated by reference to Exhibit 3.1 to the
Incorporation, as amended. Company's Registration Statement on Form SB-2 (File
No. 33-64962C).
3.2 Articles of Amendment to the Company's Incorporated by reference to Exhibit 3.2 to the of
Articles Incorporation, as amended Company's Quarterly Report for the quarter ended
September 30, 1998 (File No. 0-22166).
3.3 The Company's Bylaws, as amended. Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form SB-2 (File
No. 33-64962C).
4.1 Specimen Form of the Company's Common Stock Incorporated by reference to Exhibit 4.1 to the
Certificate. Company's Registration Statement on Form SB-2 (File
No. 33-64962C).
10.1 1993 Stock Incentive Plan, as amended. Incorporated by reference to Exhibit 10.2 to the
Company's Annual Report on Form 10-K for year ended
December 31, 1997 (File No. 0-22166).
10.2 Salary Savings Plan. Incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form SB-2 (File
No. 33-64962C).
10.3 Form of Incentive Stock Option Agreement. Incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-KSB for the year
ended December 31, 1993 (File No. 0-22166).
10.4 Form of Non-Statutory Option Agreement. Incorporated by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-KSB for the year
ended December 31, 1993 (File No. 0-22166).
10.5 Employment Agreement dated April 1, 1986, Incorporated by reference to Exhibit 10.6 to the
between the Company and Joseph C. Levesque. Company's Registration Statement on Form SB-2 (File
No. 33-64962C).
10.6 Credit Agreement dated August 11, 1989, between Incorporated by reference to Exhibit 10.7 to the
Harris Bank and the Company. Company's Registration Statement on Form SB-2 (File
No. 33-64962C).
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
ITEM NO. ITEM METHOD OF FILING
-------- ---- ----------------
<S> <C> <C>
10.7 Lease Agreement, dated July 19, 1995, between Incorporated by reference to Exhibit 10.12 to the
KAMKO Investments and the Company Company's Registration Statement on Form SB-2 (File
No. 33-98040).
10.8 Amendment to Lease Agreement, dated September Incorporated by reference to Exhibit 10.13 to the
26, 1995, between KAMKO Investments and the Company's Registration Statement on Form SB-2
(File Company No. 33-98040).
10.9 Industrial Lease Agreement between Parken Incorporated by reference to Exhibit 10.14 to the
Investment Company No. One N.V. and Sym-Tek Company's Registration Statement on Form SB-2 (File
Systems, Inc., dated as of July 7, 1994 No. 33-98040).
10.10 First Amendment to Industrial Lease dated July Incorporated by reference to Exhibit 10.15 to the
7, 1994 by and between Parken Investment Co. Company's Registration Statement on Form SB-2 (File
No. One N.V. c/o CBS Investment Realty Inc. and No. 33-98040).
Aetrium Incorporated
10.11 Employee Stock Purchase Plan. Incorporated by reference to Exhibit 99.1 to the
Company's Registration Statement on Form S-8 (File
No. 33-74616).
10.12 Agreement of Sublease, dated January 16, 1990, Incorporated by reference to Exhibit 10.19 to the
by and between General Signal Technology Company's Annual Report on Form 10-KSB for year
Corporation and E.J. Systems, Inc. ended December 31, 1995 (File No. 0-22166).
10.13 Asset Purchase Agreement, dated as of March 20, Incorporated by reference to Exhibit 2.1 to the
1998, between Aetrium Incorporated and WEB Company's Current Report on Form 8-K dated April 15,
Technology, Inc. 1998 (File No. 0-22166).
10.14 Letter Agreement dated April 1, 1998 between Incorporated by reference to Exhibit 10.18 to the
Aetrium Incorporated and Keith E. Williams. Company's Annual Report on Form 10-K for the year
ended December 31, 1998 (File No. 0-22166).
10.15 Indenture dated June 25, 1998 between KAMKO Incorporated by reference to Exhibit 10.19 to the
Investments and the Company. Company's Annual Report on Form 10-K for the year
ended December 31, 1998 (File No. 0-22166).
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
ITEM NO. ITEM METHOD OF FILING
-------- ---- ----------------
<S> <C> <C>
10.16 Standard Industrial/Commercial Single-Tenant Filed herewith electronically.
Lease, dated September 18, 1998, between the
Company and W.H. Pomerado, LLC, including
addendum and material exhibits to lease.
10.17 Standard Lease Agreement, dated December 19, Filed herewith electronically.
1987, between Crow-Markison 22-27, Limited
Partnership and WEB Technology, Inc.,
including all supplements and amendments
thereto.
13.1 Excerpts from 1999 Annual Report to Filed herewith electronically.
Shareholders.
21.1 Subsidiaries of the Registrant. Incorporated by reference to Exhibit 21.1 to the
Company's Annual Report on Form 10-K for year ended
December 31, 1997 (File No. 0-22166).
23.1 Independent Auditors' Consent. Filed herewith electronically.
27.1 Financial Data Schedule. Filed herewith electronically.
</TABLE>
25
<PAGE>
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--NET
(Do not use this form for Multi-Tenant Property)
1. Basic Provisions ("Basic Provisions")
1.1. Parties: This Lease ("Lease"), dated for reference purposes only,
September 18, 1998, is made by and between W.H. POMERADO, LLC, a California
limited liability company ("Lessor"), and AETRIUM, INC., a Minnesota
corporation, San Diego Division ("Lessee"), (collectively the "Parties," or
individually a "Party").
1.2. Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 13000 Gregg Street, Poway, CA 92064 located in
the County of San Diego, State of California and generally described as
(describe briefly the nature of the property) Lot 89, an approximately 45,000 sf
concrete tilt-up manufacturing, distribution, office building with expansion
capability of 15,000 sf ("Premises"). (See Paragraph 2 for further provisions.)
1.3. Term: 10 years and 3 months ("Original Term") commencing See
AddendumP. 3 ("Commencement Date") and ending 123 months later ("Expiration
Date"). (See Paragraph 3 for further provisions.)
1.4. Early Possession: N/A ("Early Possession Date"). (See Paragraphs 3.2
and 3.3 for further provisions.)
1.5. Base Rent: $35,082.00 per month ("Base Rent"), payable on the first
day of each month commencing Commencement Date. (See Paragraph 4 for further
provisions.) |X| If this box is checked, there are provisions in this Lease for
the Base Rent to be adjusted.
1.6. Base Rent Paid Upon Execution: $ See AddendumP. 14 as Base Rent for
the period.
1.7. Security Deposit: $70,164.00 See Add'nP. 14 ("Security Deposit"). (See
Paragraph 5 for further provisions.)
1.8. Permitted Use: Office/warehouse/distribution use or any other
permitted use under applicable zoning or applicable law. (See Paragraph 6 for
further provisions.)
1.9. Insuring Party: Lessor is the "Insuring Party" unless otherwise stated
herein. (See Paragraph 8 for further provisions.)
1.10. Real Estate Brokers: The following real estate brokers (collectively,
the "Brokers") and brokerage relationships exist in this transaction and are
consented to by the Parties (check applicable boxes):
<PAGE>
CB Richard Ellis represents
|X| Lessor exclusively ("Lessor's Broker"); | | both Lessor and Lessee, and
Colliers Iliff Thorn represents
|X| Lessee exclusively ("Lessee's Broker"): | | both Lessee and Lessor.
(See Paragraph 15 for further provisions.)
1.11. Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by N/A("Guarantor"). (See Paragraph 37 for further provisions.)
1.12. Addenda. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 1 through 19 and Exhibits "1" through "6" all of which constitute a
part of this Lease.
2. Premises.
2.1. Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental, is an approximation which Lessor and
Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2. Condition. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, heating, and
loading doors, if any, in the Premises, other than those constructed by Lessee,
shall be in good operating condition on the Commencement Date. If a
non-compliance with said warranty exists as of the Commencement Date, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and
["extent of" - words not readable due to hole punched in page] such
non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor
written notice of a non-compliance with this warranty within thirty (30) days
after the Commencement Date, correction of that non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense.
2.3. Compliance with Covenants, Restrictions and Building Code. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to
be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within six (6)
months following the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2
<PAGE>
2.4. Acceptance of Premises. Lessee hereby acknowledges: (a) that it has
been advised by the Brokers to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has
made any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease.
2.5. Lessee Prior Owner/Occupant. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
3. Term.
3.1. Term. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2. Early Possession. If Lessee totally or partially occupies the Premises
prior to the Commencement Date, the obligation to pay Base Rent shall be abated
for the period of such early possession. All other terms of this Lease, however,
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall be in effect during such
period. Any such early possession shall not affect nor advance the Expiration
Date of the Original Term.
3.3. Delay In Possession. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is
specified, by the Commencement Date, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease, or
the obligations of Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not, except as otherwise provided herein, be obligated to pay
rent or perform any other obligation of Lessee under the terms of this Lease
until Lessor ["d________s" - word(s) not readable due to hole punched in page]
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days alter the Commencement Date. Lessee
may, at its option, by notice in writing to Lessor within ten (10) days
thereafter, cancel this Lease, in which event the Parties shall be discharged
from all obligations hereunder; provided, however, that if such written notice
by Lessee is not received by Lessor within said ten (10) day period, Lessee's
right to cancel this Lease shall terminate and be of no further force or effect.
Except as may be otherwise provided, and regardless of when the term actually
commences, if possession is not tendered to Lessee when required by this Lease
and Lessee does not terminate this Lease, as aforesaid, the period free of the
obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed
shall run from the date of delivery of possession and continue for a period
equal to what Lessee would otherwise have enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee. See
Addendum P. 3.3
3
<PAGE>
4. Rent.
4.1. Base Rent. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States without offset or deduction, on or before
the day on which it is due under the terms of this Lease, Base Rent and all
other rent and charges for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual number
of days of the calendar month involved. Payment of Base Rent and other charges
shall be made to Lessor at its address stated herein or to such other persons or
at such other addresses as Lessor may from time to time designate in writing to
Lessee.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the
Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful
performance of Lessee's obligations under this Lease. If Lessee fails to pay
Base Rent or other rent or charges due hereunder, or otherwise Defaults under
this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all
or any portion of said Security Deposit for the payment of any amount due Lessor
or to reimburse or compensate Lessor for any liability, cost, expense, loss or
damage (including attorneys' fees) which Lessor may suffer or incur by reason
thereof. If Lessor uses or applies all or any portion of said Security Deposit,
Lessee shall within ten (10) days after written request therefor deposit moneys
with Lessor sufficient to restore said Security Deposit to the full amount
required by this Lease. Any time the Base Rent increases during the term of this
Lease, Lessee shall, upon written request from Lessor, deposit additional moneys
with Lessor sufficient to maintain the same ratio between the Security Deposit
and the Base Rent as those amounts are specified in the Basic Provisions. Lessor
shall not be required to keep all or any part of the Security Deposit separate
from its general accounts. Lessor shall, at the expiration or earlier
termination of the term hereof and after Lessee has vacated the Premises, return
to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's
Interest herein), that portion of the Security Deposit not used or applied by
Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the
Security Deposit shall be considered to be held in trust, to bear interest or
other increment for its use, or to be prepayment for any moneys to be paid by
Lessee under this Lease.
6. Use.
6.1. Use. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties. Lessor
hereby agrees to not unreasonably withhold or delay its consent to any written
request by Lessee, Lessees assignees or subtenants, and by prospective assignees
and subtenants of the Lessee, its assignees and subtenants, for a modification
of said permitted purpose for which the premises may be used or occupied, so
long as the same will not impair the structural integrity of the ["improvements"
- - word not readable due to hole punched in page] on the Premises, the mechanical
or electrical systems therein, is not significantly more burdensome to the
Premises and the improvements, thereon, and is otherwise permissible pursuant to
this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within
five (5) business days give a written notification of same, which notice shall
include an explanation of Lessor's reasonable objections to the change in use.
4
<PAGE>
6.2. Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance" as used
in this Lease shall mean any product, substance, chemical, material or waste
whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph
6.3). "Reportable Use" shall mean (i) the installation or use of any above or
below ground storage tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority. Reportable Use shall
also include Lessee's being responsible for the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in the
normal course of Lessee's business permitted on the Premises, so long as such
use is not a Reportable Use and does not expose the Premises or neighboring
properties to any meaningful risk of contamination or damage or expose Lessor to
any liability therefor. In addition, Lessor may (but without any obligation to
do so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, the installation (and removal on or before Lease expiration or
earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance, or a condition involving or resulting from
same, has come to be located in, on, under or about the Premises, other than as
previously consented to by Lessor, Lessee shall immediately give written notice
of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any
statement, report, notice, registration, application, permit, business plan,
license, claim, action or proceeding given to, or received from, any
governmental authority or private party, or persons entering or occupying the
Premises, concerning the presence, spill, release, discharge of, or exposure to,
any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to all such documents as may be involved in any
Reportable Uses involving the Premises.
5
<PAGE>
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but
not be limited to, the effects of any contamination or injury to person,
["property" - word not readable due to hole punched in page] or the environment
created or suffered by Lessee, and the cost of investigation (including
consultant's and attorney's fees and testing), removal, remediation, restoration
and/or abatement thereof, or of any contamination therein involved, and shall
survive the expiration or earlier termination of this Lease. No termination,
cancellation or release agreement entered into by Lessor and Lessee shall
release Lessee from its obligations under this Lease with respect to Hazardous
Substances or storage tanks, unless specifically so agreed by Lessor in writing
at the time of such agreement.
6.3. Lessee's Compliance with Law. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "Applicable Law," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives covenants,
easements and restrictions of record, permits, the requirements of any
applicable fire insurance underwriter or rating bureau, and the recommendations
of Lessor's engineers and/or consultants, relating in any manner to the Premises
(including but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill or release of
any Hazardous Substance or storage tank), now in effect or which may hereafter
come into effect, and whether or not reflecting a change in policy from any
previously existing policy. Lessee shall, within five (5) days after receipt of
Lessor's written request, provide Lessor with copies of all documents and
information, including, but not limited to, permits, registrations, manifests,
applications, reports and certificates, evidencing Lessee's compliance with any
Applicable Law specified by Lessor, and shall immediately upon receipt, notify
Lessor in writing (with copies of any documents involved) of any threatened or
actual claim, notice, citation, warning, complaint or report pertaining to or
involving failure by Lessee or the Premises to comply with any Applicable Law.
6.4. Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the
case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by the
Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3),
and to employ experts and/or consultants in connection therewith and/or to
advise Lessor with respect to Lessee's activities, including but not limited to
the installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting ["same" -
word not readable due to hole punched in page] unless a Default or Breach of
this Lease, violation of Applicable Law, or a contamination, caused or
materially contributed to by Lessee is found ["to exist" - words not readable
due to hole punched in page] or be imminent, or unless the inspection is
requested or ordered by a governmental authority as the result of any such
existing or imminent violation or contamination. In any such case, Lessee shall
upon request reimburse Lessor or Lessor's Lender, as the case may be, for the
costs and expenses of such inspections.
6
<PAGE>
7. Maintenance; Repairs; Utility Installations; Trade Fixtures
and Alterations.
7.1. Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to
condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.), 7.2
(Lessor's obligations to repair), 9 (damage and destruction), and 14
(condemnation), Lessee shall, at Lessee's sole cost and expense and at all
times, keep the Premises and every part thereof in good order, condition and
repair ["structural and" - appear to be struck through] non-structural (whether
or not such portion of the Premises requiring repairs, or the means of repairing
the same, are reasonably or readily accessible to Lessee, and whether or not the
need for such repairs occurs as a result of Lessee's use, any prior use, the
elements or the age of such portion of the Premises), including, without
limiting the generality of the foregoing, all equipment or facilities serving
the Premises, such as plumbing, heating, air conditioning, ventilating,
electrical, lighting facilities, boilers, fired or unfired ["pressure" - word
not readable due to hole punched in page] vessels, fire sprinkler and/or
standpipe and hose or other automatic fire extinguishing system, including fire
alarm and/or smoke detection systems and equipment, fire hydrants, fixtures,
walls (interior ["and exterior), foundations," - appear to be struck through]
ceilings, roofs, floors, windows, doors, plate glass, skylights landscaping,
driveways, parking lots, fences, ["retaining walls," - appear to be struck
through] signs, sidewalks and parkways located in, on, about, or adjacent to the
Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled
or released in, on, under or about the Premises (including through the plumbing
or sanitary sewer system) and shall promptly, at Lessee's expense, take all
investigatory and/or remedial action reasonably recommended, whether or not
formally ordered or required, for the cleanup of any contamination of, and for
the maintenance, security and/or monitoring of the Premises, the elements
surrounding same, or neighboring properties, that was caused or materially
contributed to by Lessee, or pertaining to or involving any Hazardous Substance
and/or storage tank brought onto the Premises by or for Lessee or under its
control, Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair. If Lessee occupies the Premises for ["seven (7)" - struck
through, replaced by "eight (8)"] years or more, Lessor may require Lessee to
repaint the exterior of the buildings on the Premises as reasonably required,
but not more frequently than once every ["seven (7)" - struck through, replaced
by "eight (8)"] years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and maintain
contracts, with copies to Lessor, in customary form and substance for and with
contractors specializing and experienced in, the inspection, maintenance and
service of the following equipment and improvements, if any, located on the
Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler,
fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and
hose or other automatic fire extinguishing systems, including fire alarm and/or
smoke detection, (iv) landscaping and irrigation (v) root covering and drain
maintenance and (vi) asphalt and parking lot maintenance, See Addendum P. 8.
7
<PAGE>
7.2. Lessor's Obligations. Except for the warranties and agreements of
Lessor contained in Paragraphs 2.2 (relating to condition of the Premises) 2.3
(relating to compliance with covenants, restrictions and building code), 9
(relating to destruction of the Premises) and 14 (relating to condemnation of
the Premises), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises,
improvements located thereon, or the equipment therein, whether structural or
non-structural, all of which obligations are intended to be that of the Lessee
under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of
this Lease govern the respective obligations of the Parties as to maintenance
and repair of the Premises. Lessee and Lessor expressly waive the benefit of any
statute now or hereafter in effect to the extent it is inconsistent with the
terms of this Lease with respect to, or which affords Lessee the right to make
repairs at the expense of Lessor or to terminate this Lease by reason of any
needed repairs. See Addendum P. 20
7.3. Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility Installations" is used
in this Lease to refer to all carpeting, window coverings, air lines, power
panels, electrical distribution, security, fire protection systems,
communication systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about the Premises. The
term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be
removed without doing material damage to the Premises. The term "Alterations"
shall mean any modification of the improvements on the Premises from that which
are provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned
Alterations and/or Utility Installations" are defined as Alterations and/or
Utility Installations made by lessee that are not yet owned by Lessor as defined
in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent. ["Lessee" - word not readable due to hole punched in page] may,
however, make non-structural Utility Installations to the interior of the
Premises (excluding the roof), as long as they are not visible from the outside,
do not involve puncturing, relocating or removing the roof or any existing
walls, and the cumulative cost thereof during the term of this Lease as extended
does not exceed $25,000.
(b) Consent. Any Alterations or Utility Installations that Lessee shall
desire to make and which require the consent of the Lessor shall be presented to
Lessor in written form with proposed detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities, (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon, and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and in compliance with all Applicable Law.
Lessee shall promptly upon completion thereof furnish Lessor with as-built plans
and specifications therefor. Lessor may (but without obligation to do so)
condition its consent to any requested Alteration or Utility Installation that
costs $10,000 or more upon Lessee's providing Lessor with a lien and completion
bond in an amount equal to one and one-half times the estimated cost of such
Alteration or Utility Installation and/or upon Lessee's posting an additional
Security Deposit with Lessor under Paragraph 36 hereof.
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(c) Indemnification. Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense defend and protect itself, Lessor
and the Premises against the same and shall pay and satisfy any such adverse
judgment that may be rendered thereon before the enforcement thereof against the
Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor in an amount equal to one and one-half
times the amount of such contested lien claim or demand, indemnifying Lessor
against liability for the same, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorney's fees and costs in participating in
such action if Lessor shall decide it is to its best interest to do so.
7.4. Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal or become
the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations
and Utility Additions made to the Premises by Lessee shall be the property of
and owned by Lessee, but considered a part of the Premises. Lessor may, at any
time and at its option, elect in writing to Lessee to be the owner of all or any
specified part of the Lessee Owned Alterations and Utility Installations. Unless
otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned
Alterations and Utility Installations shall, at the expiration or earlier
termination of this Lease, become the property of Lessor and remain upon and be
surrendered by Lessee with the Premises.
(b) Removal. Unless otherwise agreed in writing, Lessor may require that
any or all Lessee Owned Alterations or Utility Installations be removed by the
expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the end
of the last day of the Lease term or any earlier termination date, with ["all
the" - words not readable due to hole punched in page] improvements, parts and
surfaces thereof clean and free of debris and in good operating order, condition
and state of repair, ordinary wear and ["tear" - word not readable due to hole
punched in page] accepted. "Ordinary wear and tear" shall not include any damage
or deterioration that would have been prevented by good maintenance practice or
by Lessee performing all of its obligations under this Lease. Except as
otherwise agreed or specified in writing by Lessor, the Premises, as
surrendered, shall include the Utility Installations. The obligation of Lessee
shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and
Alterations and/or Utility Installations, as well as the removal of any storage
tank installed by or for Lessee, and the removal, replacement, or remediation of
any soil, material or ground water contaminated by Lessee, all as may then be
required by Applicable Law and/or good service practice. Lessee's Trade Fixtures
shall remain the property of Lessee and shall be removed by Lessee subject to
its obligation to repair and restore the Premises per this Lease.
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8. Insurance; Indemnity.
8.1. Payment for Insurance. Regardless of whether the Lessor or Lessee is
the Insuring Party, Lessee shall pay for all insurance required under this
Paragraph 8 except to the extent of the cost attributable to liability insurance
carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy
periods commencing prior to or extending beyond the Lease term shall be prorated
to correspond to the Lease term. Payment shall be made by Lessee to Lessor
within ten (10) days following receipt of an invoice for any amount due.
8.2. Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force during the
term of this Lease a Commercial General Liability policy of insurance protecting
Lessee and Lessor (as an additional insured) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain
the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or
fumes from a hostile fire. The policy shall not contain any intra-insured
exclusions as between insured persons or organizations, but shall include
coverage for liability assumed under this Lease ["as an" - words not readable
due to hole punched in page] "insured contract" for the performance of Lessee's
indemnity obligations under this Lease. The limits of said insurance required by
this Lease or ["as carried" - words not readable due to hole punched in page] by
Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of
any obligation hereunder. All insurance to be carried by Lessee shall be primary
to and not contributory with any similar insurance carried by Lessor, whose
insurance shall be considered excess insurance only.
(b) Carried by Lessor. In the event Lessor is the Insuring Party, Lessor
shall also maintain liability insurance described in Paragraph 8.2(a), above, in
addition to, and not in lieu of, the insurance required to be maintained by
Lessee. Lessee shall not be named as an additional insured therein.
8.3. Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and to the holders of any mortgages, deeds of trust
or ground leases on the Premises ("Lender(s)"), insuring loss ["or damage" -
words not readable due to hole punched in page] to the Premises. The amount of
such insurance shall be equal to the full replacement cost of the Premises, as
the same shall exist from time to time, or the amount required by Lenders, but
in no event more than the commercially reasonable and available insurable value
thereof if, by reason of the unique nature or age of the improvements involved,
such latter amount is less than full replacement cost. If Lessor is the Insuring
Party, however, Lessee Owned Alterations and Utility Installations shall be
insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is
available and commercially appropriate, such policy or policies shall insure
against all risks of direct physical loss or damage (except the perils of flood
and/or earthquake unless required by a Lender), including coverage for any
additional costs resulting from debris removal and reasonable amounts of
coverage for the enforcement of any ordinance or law regulating the
reconstruction or replacement of any undamaged sections of the Premises required
to be demolished or removed by reason of the enforcement of any building,
zoning, safety or land use laws as the result of a covered cause of loss. Said
policy or policies shall also contain an agreed valuation provision in lieu of
any coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located. If
such insurance coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence, and Lessee shall be liable for such deductible
amount in the event of an Insured Loss, as defined in Paragraph 9.1(c).
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(b) Rental Value. The Insuring Party shall, in addition, obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and Lender(s), insuring the loss of the full rental
and other charges payable by Lessee to Lessor under this Lease for one (1) year
(including all real estate taxes, insurance costs, and any scheduled rental
increases). Said insurance shall provide that in the event the Lease is
terminated by reason of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next, twelve (12) month period. Lessee shall be
liable for any deductible amount in the event of such loss.
(c) Adjacent Premises. If the Premises are part of a larger building, or if
the Premises are part of a group of buildings owned by Lessor which are adjacent
to the Premises, the Lessee shall pay for any increase in the premiums for the
property insurance of such building or buildings if said increase is caused by
Lessee's acts, omissions, use or occupancy of the Premises.
(d) Tenant's Improvements. If the Lessor is the Insuring Party, the Lessor
shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease. If Lessee is the Insuring Party, the policy
carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations
and Utility Installations.
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8.4. Lessee's Property Insurance. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property, Lessee Owned Alterations and Utility
Installations in, on, or about the Premises similar in coverage to that carried
by the Insuring Party under Paragraph 8.3. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for the
replacement of personal property or the restoration of Lessee Owned Alterations
and Utility Installations. Lessee shall be the Insuring Party with respect to
the insurance required by this Paragraph 8.4 and shall provide Lessor with
written evidence that such insurance is in force.
8.5. Insurance Policies. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are ["held" -
word not readable due to hole punched in page], and maintaining during the
policy term a "General Policyholders Rating" of at least B+, V, or such other
rating as may be required by a Lender having a lien on the Premises, as set
forth in the most current issue of "Best's Insurance Guide." Lessee shall not do
or permit to be done anything which shall invalidate the insurance policies
referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall
cause to be delivered to Lessor certified copies of policies of such insurance
or certificates evidencing the existence and amounts of such insurance with the
insureds and loss payable clauses as required by this Lease. No such policy
shall be cancellable or subject to modification except after thirty (30) days
prior written notice to Lessor. Lessee shall at least thirty (30) days prior to
the expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and
maintain the insurance required to be carried by the Insuring Party under this
Paragraph 8, the other Party may, but shall not be required to, procure and
maintain the same, but at Lessee's expense.
8.6. Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor ("Waiving Party") each hereby release and relieve the other,
and waive their entire right to recover damages (whether in contract or in tort)
against the other, for loss of or damage to the Waiving Party's property arising
out of or incident to the perils required to be insured against under Paragraph
8. The effect of such releases and waivers of the right to recover damages shall
not be limited by the amount of insurance carried or required, or by any
deductibles applicable thereto.
8.7. Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, Its agents, contractors, employees or Invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding Involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought against
Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor
shall defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be so Indemnified.
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8.8. Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, Invitees, customers, or any ether
person in or about the Premises, whether such damage or Injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said injury or damage results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of income or profit therefrom,
9. Damage or Destruction.
9.1. Definitions.
(a) "Promises Partial Damage" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations ["and" - word
not readable due to hole punched in page] Utility Installations, the repair cost
of which damage or destruction is less than 50% of the then Replacement Cost of
the Premises immediately prior to such damage or destruction, excluding from
such calculation the value of the land and Lessee Owned Alterations and Utility
Installations.
(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility installations the
repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "Insured Loss" shall mean damage or destruction to improvements on
the Premises, other than Lessee Owned Alterations and Utility Installations,
which was caused by an event required to be covered by. The insurance described
in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits
involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
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(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2. Partial Damage - Insured Loss. If a Premises Partial Damage that is an
Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage
(but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the insurance
proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or the
insurance proceeds are not sufficient to effect such repair, the Insuring Party
shall promptly contribute the shortage in proceeds (except as to the deductible
which is Lessee's responsibility) as and when required to complete said repairs.
In the event, however, the shortage in proceeds was due to the fact that, by
reason of the unique nature of the improvements, full ["replacement" - word not
entirely readable due to hole punched in page] cost insurance coverage was not
commercially reasonable and available, Lessor shall have no obligation to pay
for the shortage in insurance ["proceeds" - word not entirely readable due to
hole punched in page] or to fully restore the unique aspects of the Premises
unless Lessee provides Lessor with the funds to cover same, or adequate
assurance thereof, within ten (10) days following receipt of written notice of
such shortage and request therefor. If Lessor receives said funds or adequate
assurance thereof within said ten (10) day period, the party responsible for
making the repairs shall complete them as soon as reasonably possible and this
Lease shall remain in full force and effect. If Lessor does not receive such
funds or assurance within said period, Lessor may nevertheless elect by written
notice to Lessee within ten (10) days thereafter to make such restoration and
repair as is commercially reasonable with Lessor paying any shortage in
proceeds, in which case this Lease shall remain in full force and effect. If in
such case Lessor does not so elect, then this Lease shall terminate sixty (60)
days following the occurrence of the damage or destruction. Unless otherwise
agreed, Lessee shall in no event have any right to reimbursement from Lessor for
any funds contributed by Lessee to repair any such damage or destruction.
Premises Partial Damage due to flood or earthquake shall be subject to Paragraph
9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance
coverage, but the net proceeds of any such insurance shall be made available for
the repairs if made by either Party.
9.3. Partial Damage - Uninsured Loss. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue In full force and effect, but subject to Lessor's
["rights" - word not readable due to hole punched in page] (under Paragraph 13),
Lessor may at Lessor's option, either: (i) repair such damage as soon as
reasonably possible at Lessor's expense, in which ["event" - word not readable
due to hole punched in page] this Lease shall continue in full force and effect,
or (ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the giving of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the repair of such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following Lessee's
said commitment. In such event this Lease shall continue in full force and
effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible and the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice of
termination.
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9.4. Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee, In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5. Damage Near End of Term. If at any time during the last six (6) months
of the term of this Lease there is damage for which the cost to repair exceeds
one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice ho Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("Exercise Period"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option during
said Exercise Period and provides Lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's
expense repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during said Exercise Period, then Lessor may at
Lessor's option terminate this Lease as of the expiration of said sixty (60) day
period following the occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within ton (10) days after the expiration
of the Exercise Period, notwithstanding any term or provision in the grant of
option to the contrary.
9.6. Abatement of Rent; Lessee's Remedies.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage-Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired, Except for abatement of Base Rent, Real Property Taxes, insurance
premiums, and other charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such repair or
restoration.
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(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and ["and meaningful" - words not entirely readable due to hole
punched in page] way, the repair or restoration of the Premises within ninety
(90) days after such obligation shall accrue, Lessee may, at any time prior to
["the commencement" - words not entirely readable due to hole punched in page]
of such repair or restoration, give written notice to Lessor and to any Lenders
of which Lessee has actual notice of Lessee's election to terminate this Lease
on a date not less than sixty (60) days following the giving of such notice. If
Lessee gives such notice to Lessor and such Lenders and such repair or
restoration is not commenced within thirty (30) days after receipt of such
notice, this Lease shall terminate as of the date specified in said notice. If
Lessor or a Lender commences the repair or restoration of the Premises within
thirty (30) days after receipt of such notice, this Lease shall continue in full
force and effect. "Commence" as used in this Paragraph shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs,
9.7. Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate
and remediate such Hazardous Substance Condition, if required, as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to investigate
and remediate such condition exceeds twelve (12) times the then monthly Base
Rent or $100,000, whichever is greater, give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition of Lessor's desire to terminate this Lease as of
the date sixty (60) days following the giving of such notice. In the event
Lessor elects to give such notice of Lessor's intention to terminate this Lease,
Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
investigation and remediation of such Hazardous Substance Condition totally at
Lessee's expense and without reimbursement from Lessor except to the extent of
an amount equal to twelve (12) limes the then monthly Base Rent or $100,000,
whichever is greater. Lessee shall provide Lessor with the funds required of
Lessee or satisfactory assurance thereof within thirty (30) days following
Lessee's said commitment. In such event this Lease shall continue in lull force
and effect, and Lessor shall proceed to make such investigation and remediation
as soon as reasonably possible and the required funds are available. If Lessee
does not give such notice and provide the required funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous Substance Condition
occurs for which Lessee is not legally responsible, there shall be abatement of
Lessee's obligations under this Lease to the same extent as provided in
Paragraph 9.6(a) for a period of not to exceed twelve (12) months.
9.8. Termination - Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit
as has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
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9.9. Waive Statutes. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1.
(a) Payment of Taxes. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises during the term of this
Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least
ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid. If any such taxes to be paid by Lessee shall cover any period of
time prior to or after the expiration or earlier termination of the term hereof,
Lessee's share of such taxes shall be equitably prorated to cover ["only the" -
words not readable due to hole punched in page] period of time within the tax
fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any
overpayment after such proration. If ["Lessee" - word not readable due to hole
punched in page] shall fail to pay any Real Property Taxes required by this
Lease to be paid by Lessee, Lessor shall have the right to pay the same, and
Lessee shall reimburse Lessor therefor upon demand. See Addendum P. 8
(b) Advance Payment. In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right at
Lessor's option, to estimate the current Real Property Taxes applicable to the
Premises, and to require such current year's Real Property Taxes to be paid in
advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the
installment due, at least twenty (20) days prior to the applicable delinquency
date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor
elects to require payment monthly in advance, the monthly payment shall be that
equal monthly amount which, over the number of months remaining before the month
in which the applicable tax installment would become delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated installment of taxes to be paid. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payment shall be adjusted as required to provide the fund needed to pay
the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee
under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Real Property Taxes as the same become due,
Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are
necessary to pay such obligations. All moneys paid to Lessor under this
Paragraph may be intermingled with other moneys of Lessor and shall not bear
interest. In the event of a Breach by Lessee in the performance of the
obligations of Lessee under this Lease, then any balance of funds paid to Lessor
under the provisions of this Paragraph may, subject to proration as provided in
Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security
Deposit under Paragraph 5.
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10.2. Definition of "Real Property Taxes." As used herein, the term "Real
Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest or Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "Real Property Taxes" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
["imposed" - word not readable due to hole punched in page] by reason of events
occurring, or changes in applicable law taking effect, during the term of this
Lease, including but not limited to a change in the ownership of the Premises or
in the improvements thereon, the execution of this Lease, or any modification,
amendment or transfer thereof, and whether or not contemplated by the Parties.
10.3. Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4. Personal Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee ["shall
use" - words not readable due to hole punched in page] shall use its Trade
Fixtures, furnishings, equipment and all other personal properly to be assessed
and billed separately from the real property of Lessor. If ["all of" - words not
readable due to hole punched in page] Lessee's said personal property shall be
assessed with Lessor's real property. Lessee shall pay Lessor the taxes
attributable to Lessee within ten (10) days after receipt of a written statement
setting forth the taxes applicable to Lessee's property or, at Lessor's option,
as provided in Paragraph 10.1(b).
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
premises, together with any taxes thereon. If any such services are not
separately metered to lessee, lessee shall pay a reasonable proportion, to be
determined by lessor, of all charges jointly metered with other premises.
12. Assignment and Subletting.
12.1. Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively "assignment")
or sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five
percent (25%) or more of the voting control of Lessee shall Constitute a change
in control for this purpose.
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(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of the execution
by Lessor of this Lease or at the time of the most recent assignment to which
Lessor has consented, or as it exists immediately prior to said transaction or
transactions constituting such reduction, at whichever time said Net Worth of
Lessee was or is greater, shall be considered an assignment of this Lease by
Lessee to which Lessor may reasonably withhold its consent. "Net Worth of
Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding
any guarantors) established under generally accepted accounting principles
consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent, ["which consent has not been
unreasonably withheld," - inserted] shall, at Lessor's option, be a Default
curable after notice per Paragraph 13.1(c), or a noncurable Breach without the
necessity of any notice and grace period. If Lessor elects to treat such
unconsented to assignment or subletting as a noncurable Breach, Lessor shall
have the right to either: (i) terminate this Lease, or (ii) upon thirty (30)
days written notice ("Lessor's Notice"), increase the monthly Base Rent to fair
market rental value or one hundred ten percent (110%) of the Base Rent then in
effect, whichever is greater. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and market value
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
(without the Lease being considered an encumbrance or any deduction for
depreciation or obsolescence, and considering the Premises at its highest and
best use and in good condition), or one hundred ten percent (110%) of the price
previously in effect, whichever is greater, (ii) any index-oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to require
that the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled during
the remainder of ["the Lease" - words not readable due to hole punched in page]
term shall be increased in the same ratio as the new market rental bears to the
Base Rent in effect immediately prior to the market value ["adjustment" - word
not readable due to hole punched in page].
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and injunctive relief.
12.2. Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting shall
not: (i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, or (iii) alter the primary liability of Lessee for
the payment of Base Rent and other sums due Lessor hereunder or for the
performance of any other obligations to be performed by Lessee under this Lease.
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(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 ["or ten percent (10%) of the current monthly Base Rent,
whichever is greater," - struck through] as reasonable consideration for
Lessor's considering and processing the request for consent. Lessee agrees to
provide Lessor with such other or additional information and/or documentation as
may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering Into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph 12,1(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased to an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
amount required to establish such Security Deposit a condition to Lessor's
consent to such transaction.
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(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment structure of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment structure for property similar to the Premises as then constituted.
[This entire Section 12.2(h) struck through]
12.3. Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
["any part" - words not readable due to hole punched in page] of the Premises
and shall be deemed included in all subleases under this Lease whether or not
expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor, nor by reason of the collection of
the rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or right to
inquire as to whether such Breach exists and notwithstanding any notice from or
claim from Lessee to the contrary, Lessee shall have no right or claim against
said sublessee, or, until the Breach has been cured, against Lessor, for any
such rents and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior Defaults
or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part of the
Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
["within" - word not readable due to hole punched in page] the grace period, if
any, specified in such notice. The sublessee shall have a right of reimbursement
and offset from and against Lessee for any ["such" - word not readable due to
hole punched in page]Defaults cured by the sublessee.
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13. Default; Breach; Remedies.
13.1. Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said Default. A "Default" is defined as a
failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A "Breach"
is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2
and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent or any other monetary payment
["required" - word not readable due to hole punched in page] to be made by
Lessee hereunder, whether to Lessor or to a third party, as and when due, the
failure by Lessee to provide Lessor with reasonable evidence of insurance or
surety bond required under this Lease, or the failure of Lessee to fulfill any
obligation under this Lease which endangers or threatens life or property, where
such failure continues for a period of three (3) days following written notice
thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure
by Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with Applicable Law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.
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(e) The occurrence of any of the following events: (i) The making by
lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. ss. 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to any applicable
law, such provision shall be of no force or effect, and not affect the validity
of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a
guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurance or security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the guarantors that existed at the time of execution of this Lease.
13.2. Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and ["expenses" - word not entirely readable due to hole punched in page] of any
such performance by Lessor shall be due and payable by Lessee to Lessor upon
invoice therefor. If any check given to Lessor by Lessee shall not be honored by
the bank upon which it is drawn, Lessor, at its option, may require all future
payments to be made under this Lease by Lessee to be made only by cashier's
check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph
13.1, with or without further notice or demand, and without limiting Lessor in
the exercise of any right or remedy which Lessor may have by reason of such
Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve therein the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under subparagraphs 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such
case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and
under the unlawful defamer statute shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful detainer
and a Breach of this Lease entitling Lessor to the remedies provided for in this
Lease and/or by said statute.
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(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination
of Lessee's right to possession shall not relieve Lessee from liability under
any indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3. Inducement Recapture In Event Of Breach. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
["giving" - word not readable due to hole punched in page] or paying by Lessor
to or for Lessee of any cash or other bonus, inducement or consideration for
Lessee's entering into this Lease, all of which concessions are hereinafter
referred to as "Inducement Provisions," shall be deemed conditioned upon
Lessee's full and faithful performance of all of the terms, covenants and
conditions of this Lease to be performed or observed by Lessee during the term
hereof as the same may be extended. Upon the occurrence of a Breach of this
Lease by Lessee, as defined in Paragraph 13.1, any such inducement Provision
shall automatically be deemed deleted from this Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement Provision
shall be immediately due and payable by Lessee to Lessor, and recoverable by
Lessor as additional rent due under this Lease, notwithstanding any subsequent
cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of
the Breach which initiated the operation of this Paragraph shall not be deemed a
waiver by Lessor of the provisions of this Paragraph unless specifically so
stated in writing by Lessor at the time of such acceptance.
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13.4. Late Charges. Lessee hereby acknowledges that late payment by Lessee
to lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within five (5) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee' Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5. Breach by Lessor. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation
["required" - word not readable due to hole punched in page] to be performed by
Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event
be less than thirty (30) days after receipt by Lessor, and by the holders of any
ground lease, mortgage or deed of trust covering the Premises whose name and
address shall have been furnished Lessee in writing for such purpose, of written
notice specifying wherein such obligation of Lessor has not been performed;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days after such notice are reasonably required for its
performance, then Lessor shall not be in breach of this Lease if performance is
commenced within such thirty (30) day period and thereafter diligently pursued
to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the land area
not occupied by any building, is taken by condemnation, Lessee may, at Lessee's
option, to be exercised in writing within ten (10) days after Lessor shall have
given Lessee written notice of such taking (or in the absence of such notice,
within ten (10) days after the condemning authority shall have taken possession)
terminate this Lease as of the date the condemning authority takes such
possession. If Lessee does not terminate this Lease in ["accordance" - word not
entirely readable due to hole punched in page] with the foregoing, this Lease
shall remain in full force and effect as to the portion of the Premises
remaining, except that the Base Rent shall be ["re_______" - word not readable
due to hole punched in page] in the same proportion as the rentable floor area
of the Premises taken bears to the total rentable floor area of the building
located on the Premises. No reduction of Base Rent shall occur if the only
portion of the Premises taken is land on which there is no building. Any award
for the taking of all or any part of the Premises under the power of eminent
domain or any payment made under threat of the exercise of such power shall be
the property of Lessor, whether such award shall be made as compensation for
diminution in value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
compensation separately awarded to Lessee for Lessee's relocation expenses
and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of its net
severance damages received, over and above the legal and other expenses incurred
by Lessor in the condemnation matter, repair any damage to the Premises caused
by such condemnation, except to the extent that Lessee has been reimbursed
therefor by the condemning authority. Lessee shall be responsible for the
payment of any amount in excess of such net severance damages required to
complete such repair.
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15. Broker's Fee.
15.1. The Brokers named in Paragraph 1,10 are the procuring causes of this
Lease.
15.2. Upon execution of this Lease by both Parties, Lessor shall pay to
said Brokers jointly, or in such separate shares as they may mutually designate
in writing, a fee as set forth in a separate written agreement between Lessor
and said Brokers (or in the event there is no separate written agreement between
Lessor and said Brokers, the sum of $_____________) for brokerage services
rendered by said Brokers to Lessor in this transaction.
15.3. Unless Lessor and Brokers have otherwise agreed in writing, Lessor
further agrees that: (a) if Lessee exercises any Option (as defined in Paragraph
39.1) or any Option subsequently granted which is substantially similar to an
Option granted to Lessee in this Lease, or (b) if Lessee acquires any rights to
the Premises or other premises described in this Lease which are substantially
similar to what Lessee would have acquired had an Option herein granted to
Lessee been exercised, or (c) if Lessee remains in possession of the Premises,
with the consent of Lessor, after the expiration of the term of this Lease after
having failed to exercise an Option, or (d) if said Brokers are the procuring
cause of any other lease or sale entered into between the Parties pertaining to
the Premises and/or any adjacent property in which Lessor has an interest, or
(e) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then as to any of said transactions, Lessor shall pay
said Brokers a fee in accordance with the schedule of said Brokers in effect at
the time of the execution of this Lease.
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15.4. Any buyer or transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a
third party beneficiary of the provisions of this Paragraph 15 to the extent of
its interest in any commission arising from this Lease and may enforce that
right directly against Lessor and its successors.
15.5. Lessee and Lessor each represent and warrant to the other that it has
had no dealings with any person, firm, broker or finder (other than the Brokers,
if any named in Paragraph 1.10) in connection with the negotiation of this Lease
and/or the consummation of the transaction contemplated hereby, and that no
broker or other person, firm or entity other than said named Brokers is entitled
to any commission or finder's fee in connection with said transaction. Lessee
and Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.
15.6. Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10. [Entire
Section 15 struck through.]
16. Tenancy Statement.
16.1. Each Party (as "Responding Party") shall within ten (10) days after
written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "Tenancy Statement" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2. If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event of
a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15, upon such transfer or assignment
and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as hereinabove defined.
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<PAGE>
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within thirty (30) days
following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or Other Agreements: Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.
23. Notices.
23.1. All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service) or
["may" - word not readable due to hole punched in page] be sent by regular,
certified or registered mail or U.S. Postal Service Express Mail, postage
prepaid, or by facsimile transmission, and shall be deemed sufficiently given if
served in a manner specified in this Paragraph 23. The addresses noted adjacent
to a Party's signature on this Lease shall be that Party's address for delivery
or mailing of notice purposes. Either Party may by written notice to the other
specify a different address for notice purposes, except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for the purpose of mailing or delivering notices to Lessee. A copy of
all notices required or permitted to be given to ["Lessor" struck through and
replaced by "a party"] hereunder shall be concurrently transmitted to such party
or parties at such addresses as ["Lessor" struck through and replaced by "such
party"] may from time to time hereafter designate by written notice to ["Lessee"
struck through and replaced by "the other party or parties hereunder".] ["See
Add'm P. 21" inserted]
23.2. Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received on
a Sunday or legal holiday, it shall be deemed received on the next business day.
28
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24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof or of any subsequent default or breach by Lessee of
the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any preceding Default or Breach by
Lessee of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted. Any payment given Lessor by Lessee may be accepted
by Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right to Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed ["by the"
- - words not readable due to hole punched in page] laws of the State in which the
Premises are located. Any litigation between the Parties hereto concerning this
Lease shall be initiated in the county in ["which" - word not readable due to
hole punched in page] the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1. Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
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<PAGE>
30.2. Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3. Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4. Self-Executing. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. Attorney's Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) or Broker in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorney's fees. Such fees may be awarded in the
same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term, "Prevailing Party"
shall include, without limitation, a Party or Broker who substantially obtains
or defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorney's fees award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices of
Default and consultations in connection therewith, whether or not a legal action
is subsequently commenced in connection with such Default or resulting Breach.
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32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an ["emergency"
- - word not readable due to hole punched in page] and otherwise at reasonable
times for the purpose of showing the same to prospective purchasers, lenders, or
lessees, and making such ["alterations" - word not readable due to hole punched
in page], repairs, improvements or additions to the Premises or to the building
of which they are a part, as Lessor may reasonably deem necessary. Lessor may at
any time place on or about the Premises or building any ordinary "For Sale"
signs and Lessor may at any time during the last one hundred twenty (120) days
of the term hereof place on or about the Premises any ordinary "For Lease"
signs. All such activities of Lessor shall be without abatement of rent or
liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the Premises, except that Lessee
may, with Lessor's prior written consent, install (but not on the roof) such
signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). ["Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business." - struck through]
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys'. engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a
condition to considering any such request by Lessee, require that Lessee deposit
with Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will
incur in considering and responding to Lessee's request. Except as otherwise
provided, any unused portion of said deposit shall be refunded to Lessee without
interest. Lessor's consent to any act, assignment of this Lease or subletting of
the Premises by Lessee shall not constitute an acknowledgement that no Default
or Breach by Lessee of this Lease exists, nor shall such consent be deemed a
waiver of any then existing Default or Breach, except as may be otherwise
specifically stated in writing by Lessor at the time of such consent.
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(b) All conditions to Lessor's consent. authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein ["any
particular" - words not readable due to hole punched in page] condition to
Lessor's consent shall not preclude the imposition by Lessor at the time of
consent of such further or other conditions as are ["then" - word not readable
due to hole punched in page] reasonable with reference to the particular matter
for which consent is being given.
37. Guarantor.
37.1. If there are to be any Guarantors of this Lease per Paragraph 1.11,
the form of the guaranty to be executed by each such Guarantor shall be in the
form most recently published by the American Industrial Real Estate Association,
and each said Guarantor shall have the same obligations as Lessee under this
Lease, including but not limited to the obligation to provide the Tenancy
Statement and information called for by Paragraph 16.
37.2. It shall constitute a Default of the Lessee under this Lease if any
such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a)
evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said Guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signature of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. Options.
39.1. Definition. As used in this Paragraph 39 the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right ["to purchase" - words not readable due to hole punched in
page] the Premises, or the right of first refusal to purchase the Premises, or
the right of first offer to purchase the Premises, or the right to ["purchase" -
word not readable due to hole punched in page] other property of Lessor, or the
right of first refusal to purchase other property of Lessor, or the right of
first offer to purchase other property of Lessor.
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39.2. Options Personal to Original Lessee. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
39.3. Multiple Options. In the event that Lessee has any Multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised,
39.4. Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option. notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
["commencing" - word not readable due to hole punched in page] with the giving
of any notice of Default under Paragraph 13.1 and continuing until the noticed
Default is cured, or (ii) during the period of time any monetary obligation due
Lessor from Lessee is unpaid (without regard to whether notice thereof is given
Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in
the event that Lessor has given to Lessee three (3) or more notices of Default
under Paragraph 13.1, whether or not the Defaults are cured, during the twelve
(12) month period immediately preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
tar a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of Default under Paragraph 13.1 during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease.
40. Multiple Buildings. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.
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41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not Include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights. dedications. maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease, ["together with interest at the rate provided under Paragraph 19" -
inserted].
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, ["Lessee" - word not entirely readable due to hole punched in page]
shall, within thirty (30) days after request by Lessor, deliver to Lessor
evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Offer. Preparation of this Lease by Lessor or Lessor's agent and submission
of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is
not intended to be binding until executed by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an Institutional, Insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION
TO YOUR ATTORNEY FOR HIS APPROVAL FURTHER EXPERTS SHOULD BE CONSULTED
TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE
OF ASBESTOS' STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION
OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR
EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES' THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO
THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE IF THE SUBJECT PROPERTY IS
LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE
WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
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<TABLE>
<S> <C>
Executed at El Cajon, California Executed at St. Paul, Minnesota
on ___________________________________ _______________________________
by LESSOR: by LESSEE:
W.H. Pomerado LLC Aetrium Incorporated
By Its Manager: Hamann Properties, Inc.
By:___________________________________ By:____________________________
Name Printed: Gregg Hamann Name Printed: Douglas Hemer
Title: Secretary Title: Group Vice President
By:___________________________________ By:____________________________
Name Printed:_________________________ Name Printed:__________________
Address: 475 W. Bradley Ave. Address: 2350 Helen Street
El Cajon, CA 92020 St. Paul, MN 55109
Tel #: 619-440-7424 Fax #: 619-440-8914 Tel. # 651-704-1810 Fax # 651-704-0339
San Diego: 619-623-5656
Net
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NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the most
current form: American Industrial Real Estate Association, 345 South Figueroa
Street, Suite M-1, Los Angeles, CA 90071, (213) 687-8777, Fax No. (213)
687-8616.
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ADDENDUM TO LEASE
This Addendum to Lease ("Addendum") is made by and between W.H. POMERADO
LLC, a California limited liability company ("LESSOR"), and AETRIUM
INCORPORATED., a Minnesota corporation ("LESSEE"), and is intended to supplement
that certain Standard Industrial/Commercial Single-Tenant Lease-Net between
LESSOR and LESSEE dated September 17, 1998 ("Lease") to which this Addendum is
annexed. If there is any inconsistency between this Addendum and the Lease, the
terms of this Addendum shall supersede and control. LESSOR and LESSEE agree as
follows:
1. Premises and Building Shell Description. The Premises shall be located
on the real property legally depicted in EXHIBIT "1" annexed to this Addendum.
The Building Shell, as defined in section 4 of this Addendum, shall be designed
and constructed in accordance with the general design elements shown on those
certain "Site Plan", "Floor Plan" and "Elevation drawings prepared by Kenneth D.
Smith & Associates, Inc., which LESSEE hereby approves ("Approved Drawings"); a
copy of the Approved Drawings is attached as EXHIBIT "2" to this Addendum. The
components of the Building Shell construction shall also conform to the
specifications attached as EXHIBIT "3" to this Addendum ("Specifications").
Following the execution of this Lease, LESSOR shall cause final plans and
specifications ("Working Drawings") for the Building Shell to be prepared and
submitted to LESSEE for its approval in accordance with the requirements of
subsection 1.2 of this Addendum and not later than November 15, 1998.
Notwithstanding any other provisions in this Lease, LESSOR shall be entitled to
make modifications to the Building Shell design and/or Specifications as
provided in subsection 1.2 of this Addendum.
1.1 Planned Size and Final Measurement. It is planned that the
Building Shell (as defined below) will contain approximately 45,000 rentable
square feet on the ground level of the Building Shell and the structural
elements for an approximately 15,000 rentable square foot mezzanine level as
more particularly described in section 4 of this Addendum. All square footage
measurements shall be from the roof "drip line" and shall otherwise be made in
accordance with the BOMA standards for industrial/commercial projects. Following
Substantial Completion (as defined below) of the Building Shell per field
measurement, LESSOR will, in good faith, certify the actual rentable square feet
of the Building Shell to establish the exact rentable square feet for all
purposes of the Lease.
1.2 Modifications. LESSEE agrees that LESSOR may make modifications to
the Building Shell design on account of government or lender requirements and
otherwise as reasonably determined by LESSOR; provided, however, any such
modifications shall not: (a) increase or decrease the rentable square feet of
the Building by more than 2%; (b) materially relocate the Premises from the area
shown in the Approved Drawings; (c) materially change the Specifications; (d)
reduce the number of planned parking spaces or significantly change ingress and
egress to the Building or (e) materially increase the cost or decrease the
utilization of Tenant Improvements.
2. Rent. "Rent" for the Premises shall be the sum of (a) the Base Rent
described in subsection 2.1 of this Addendum, subject to adjustment as provided
in subsections 1.1 and 2.2 of this Addendum, (b) the amount of Operating
Expenses payable by LESSEE as provided in section 8 of this Addendum, and (c)
any other amounts becoming payable by LESSEE under the Lease. The Rent shall be
payable on the first day of each month.
2.1 Base Rent. The monthly Base Rent set forth in Paragraph 1.5 of the
Lease for the first Lease Year (as defined below) of the Original Term
represents the full Base Rent payable beginning upon the Commencement Date
consisting of (a) an amount determined by multiplying the amount of $.52 per
rentable square foot by the estimated total 45,000 rentable square feet of the
Premises ("SF Rate Rent), and (b) adding to such amount, the sum of $11,682 per
month for the Allowance Amortization Charge as determined under subsection 2.3
of this Addendum. Such Base Rent shall be subject to adjustment as follows: (i)
if there is a variance in the rentable square footage of the Premises as
actually constructed, the Base Rent for the first Lease Year shall be adjusted
based on the actual rentable square feet within the Premises multiplied times
$.52 per rentable square foot; and/or (ii) if the full amount of the Tenant
Improvement Allowance is not disbursed, then the Base Rent shall be adjusted to
reflect a lower Allowance Amortization Charge as calculated under subsection 2.3
of this Addendum.
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2.2 Increase in SF Rate Rent. The SF Rate Rent shall be increased at
the beginning of the second Lease Year and at the beginning of each Lease Year
thereafter until the sixth Lease Year, in an amount equal to three percent (3%)
of the amount of the scheduled SF Rate Rent for the immediately preceding Lease
Year. At the beginning of the sixth Lease Year and at the beginning of each
Lease Year thereafter, the SF Rate Rent shall be increased in an amount equal to
three and one-half percent (3.5%) of the amount of the scheduled SF Base Rent
for the immediately preceding Lease Year.
2.3 Tenant Improvement Allowance Amortization. As more particularly
provided in section 4 of this Addendum, LESSOR will provide a Tenant Improvement
Allowance in the amount of up to $900,000.00 to pay for Tenant Improvement Costs
(as defined below) for Tenant Improvements requested by LESSEE. The term
"Allowance Amortization Charge" means an amount to be included in the Base Rent
calculated as follows: (a) from and after the Commencement Date, determine the
aggregate amount of the Allowance expended by LESSOR for Tenant Improvements;
(b) amortize eighty percent (80%) of the amount of the Allowance actually used
based on an economic return equivalent to eleven percent (11%) per annum to
derive a monthly payment sufficient to pay in full an amount equal to 80% of the
Allowance and such economic return over a period of time equal to one hundred
and twenty (120) months and the remaining twenty percent (20%) of the amount of
the Allowance actually used based on an economic return equivalent to eleven
percent (11%) per annum to derive a monthly payment sufficient to pay in full an
amount equal to 20% of the Allowance and such economic return over a period of
time equal to three hundred months; and (c) the resulting monthly payment shall
equal the Allowance Amortization Charge. If the amount of the Allowance
Amortization Charge is determined after the Commencement Date on account of a
delay in finalizing the Tenant Improvement Costs, then LESSEE shall pay LESSOR
the amount accruable from the Commencement Date to the end of the then current
month, adjusted for any Free Rent within fifteen (15) days after LESSOR's
billing for such accrued amounts, and shall thereafter pay the monthly Allowance
Amortization Charge with each payment of Base Rent.
2.4 Free Rent. Provided LESSEE is not in default under the terms of
the Lease, LESSOR hereby agrees to give LESSEE the first three months of the
term free of Base Rent. LESSEE shall still be obligated to pay the Operating
Expenses as provided in section 8 of this Addendum during such free Base Rent
period.
3. Effective Date/Term/Commencement Date. Notwithstanding any other
provision of the Lease, this Lease shall be effective upon execution by LESSOR
and LESSEE ("Effective Date") and shall constitute a legally binding contract
for LESSOR to deliver possession of the Premises in accordance with the
requirements of this Lease and for LESSEE to accept possession and pay the
rentals beginning on the Commencement Date. Notwithstanding that the Effective
Date of this Lease is the date of execution of this Lease, LESSEE's obligation
to commencement payment of the Rent payable under this Lease shall not commence
until the occurrence of the Commencement Date.
3.1 Commencement Date. Except as otherwise provided in subsection 4.5
of this Addendum, the Commencement Date of the Lease shall be the date of the
Substantial Completion (as defined below) of the Building Shell and the Tenant
Improvements; provided, however, the Commencement Date shall not be earlier than
July 31, 1999 nor later than November 30, 1999, except (a) with LESSEE's
consent, in its sole discretion, (b) on account of delays caused by LESSEE as
described in subsection 4.5 of this Addendum, or (c) for delays not the fault of
the LESSOR or LESSOR's contractor caused by fire, earthquake or other
unavoidable casualties or inclement weather conditions not reasonably
anticipatable, extraordinary governmental action other than usual permit and
inspection procedures, delays encountered in processing building permits and
other governmental approvals or inspections, delays encountered as a result of
the discovery of any unknown or concealed conditions affecting the Premises,
delays caused by general area wide labor or material shortages or labor disputes
(such as strikes or lock-outs), or any other causes not the fault of LESSOR or
LESSOR's Contractor, subcontractors, agents or employees. If the Substantial
Completion is not achieved by December 31, 1990 except for delays per this
section then LESSEE may elect to be released from all LEASE obligations and be
refunded the deposit.
3.2 Lease Term/"Lease Year" Defined. Unless otherwise provided, the
initial Term of the Lease ("Original Term") shall be a period of ten (10) years
and three (3) months beginning on the Commencement Date; provided, however, if
the Commencement Date occurs other than on the first day of a calendar month,
the Original Term shall be deemed extended for a period of time equal to the
number of days between the Commencement Date and the beginning of the first full
calendar month following the Commencement Date. The term "Lease Year" means each
consecutive period of twelve (12) months during the Lease Term, provided that
(a) if the "Commencement Date" is other than the first day of a calendar month,
then the first Lease Year shall be a period of twelve (12) months plus the
period between the Commencement Date and the first day of the first full
calendar month thereafter; and (b) the last Lease Year shall be a period of
three (3) months.
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3.3 LESSOR's Delay. In the event that the Commencement Date is delayed
beyond twelve (12) months from the execution of this Lease solely on account of
the Default of LESSOR or on account of the fault of LESSOR's Contractor in
failing to timely cause Substantial Completion of the Building Shell and Tenant
Improvements, LESSEE shall be entitled to a "Delay Credit" in the amount of the
lesser of (a) $30,000.00 per month, or any part thereof, or (b) the amount
actually paid to LESSEE's existing landlord in excess of the scheduled monthly
rent in effect at the end of the term of LESSEE's existing lease on account of
LESSEE's continued possession of its existing premises. Any Delay Credit shall
be applied to the Base Rent becoming due on the fourth month of the first Lease
Year and each month thereafter, until fully applied. Except for such Delay
Credit, LESSOR shall not otherwise have any liability to LESSEE whatsoever on
account of a delay in the Commencement Date caused by LESSOR or its Contractor.
4. Building Shell and Tenant Improvements. LESSOR, at its expense, shall
cause the construction of the Building Shell. The phrase "Building Shell" means
the improvements to be constructed as shown in the Approved Drawings, the
Specifications and the Approved Working Drawings, including (a) roofing, fascia,
exterior walls, doors and windows, (b) footings and concrete floors, (c) "shell"
fire sprinkler system in accordance with minimum code requirements, (d) conduits
and pipes for telephone, electricity, water, fire sprinklers and sewage brought
to "stub out" termination points in or above a perimeter wall of the Building,
(e) a main electrical termination panel for the Building, (f) paving and finish
of parking areas, entrance areas and walkways, (g) landscaping as shown on the
Approved Drawings and as otherwise reasonably determined by LESSOR, (h) site
improvements consisting of street, gutters, sidewalks, curbs, storm drains and
erosion control (construction period and permanent) as required to comply with
governmental requirements, and (i) structural elements, consisting of footings
and exterior wall reinforcement only for a future mezzanine level consisting of
approximately 15,000 rentable square feet ("Mezzanine Area").
4.1 Tenant Improvements Description. The costs of completing the
initial Tenant Improvements will be shared by LESSOR and LESSEE as described in
subsection 4.4 of this Addendum. The phrase "Tenant Improvements" means all
interior improvements which are not a part of the Building Shell, including (a)
partitions, walls, and doors, (b) all surface finishes, including wall
coverings, paint, floor coverings, suspended ceilings and other similar items,
(c) duct work, heat pumps, vents, diffusers, terminal boxes and accessories for
completion of heating, ventilation and air conditioning systems within the
Premises, (d) electrical distribution systems (including panels, subpanels,
wires and outlets), lighting fixtures, outlets, switches and other electrical
work to be installed in the Premises, (e) plumbing lines, fixtures and
accessories, (f) all fire and life safety control systems such as fire walls and
fire alarms (including piping, wiring and accessories) to be located in the
Premises, and fire sprinklers and lines attributable to the Tenant Improvements
and/or LESSEE's fixture, furnishing or equipment, beyond that included in
Exhibit 3, 5.3, (g) entrance door signage and directory listings, as authorized
by LESSOR, (h) improvements required for compliance with Title 24, and (i)
flooring, suspended ceilings, air conditioning and heating, walls and stairways
for a portion of the Mezzanine Area, if elected by LESSEE; provided, however,
LESSEE's trade fixtures, equipment and personal property (including telephone
systems, chairs, tables, furniture and other equipment used in LESSEE's
business) shall not be considered a part of the Tenant Improvements.
4.2 Design of Tenant Improvements. LESSEE shall furnish to LESSOR for
its approval, a space plan showing the configuration of the Improved Office
Space no later than November 1, 1998, which shall be the Approved Space Plan
following LESSOR's approval. LESSEE shall furnish to LESSOR, a complete set of
plans and specifications detailing all Tenant Improvements no later than
February 1, 1999 ("Tenant Improvement Plans"). Unless otherwise approved by
LESSOR, the Tenant Improvement Plans will be prepared by the Architect, who
shall also obtain permits for the plans. If LESSEE delays in providing the Space
Plan or the Tenant Improvement Plans, such delay shall not change the
Commencement Date of the Lease, which shall be the date the Premises would have
been available for occupancy, but for any such delay. The Tenant Improvement
Plans shall be subject to LESSOR's prior approval, which will not be
unreasonably withheld; provided, however, LESSOR shall have the absolute right
of disapproval, in its sole discretion, of any Tenant Improvements which (a)
alter or otherwise affect any structural component of the Building and(b) are
visible from the exterior of the Premises. LESSOR shall have fifteen (15) days
after receipt of the Tenant Improvement Plans in which to approve or disapprove
the Tenant Improvement Plans. If LESSOR does not disapprove the Tenant
Improvement Plans within such fifteen (15) day period, LESSOR shall be deemed to
have approved the Tenant Improvement Plans. If LESSOR reasonably disapproves the
Tenant Improvement Plans, LESSEE, at its expense, shall promptly cause the
Tenant Improvement Plans to be revised and resubmitted to LESSOR for its review
and approval within fifteen (15) days from notice of LESSOR's disapproval.
Following LESSOR's approval, LESSOR will have the Architect submit the Tenant
Improvement Plans ("Approved Tenant Improvement Plans") for government plan
checking and a building permit, if required, provided, LESSOR shall have the
right to approve any changes required by such governmental authorities. The
final Tenant Improvement Plans shall be subject to any changes required by
governmental authorities.
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4.2.1 "Improved Space" Defined. The term "Improved Space" means
portions of the rentable area of the Building Shell other than those to be used
for shipping, which are improved with suspended ceilings, air conditioning and
heating systems, finished flooring and walls other than the perimeter walls
forming the Building Shell.
4.3 Approved Contractor. Hamann Construction, a licensed general
contractor, will be the general contractor for construction of the Building
Shell and the Tenant Improvements. LESSOR and LESSEE hereby approve Hamann
Construction acting as the general contractor ("Contractor").
4.3.1 LESSEE's Subcontractors' Bids. LESSEE shall have the right
to approve, which approval shall not be unreasonably withheld, the subcontract
proposals ("Bids") for the Major Trades (as defined below) required for
construction of the Tenant Improvements. No later than thirty (30) days prior to
the commencement of construction, LESSOR shall cause Contractor to deliver to
LESSEE Bids for each Major Trade from no less than three (3) licensed
subcontractors together with a written notice specifying the Bids, which
Contractor recommends for acceptance. LESSEE shall have the right to reasonably
disapprove of the Bids selected by Contractor by giving LESSOR written notice of
any objection that LESSEE may have to one or more of the Bids within ten (10)
days from LESSEE's receipt of the Bids from Contractor; provided, however,
LESSEE shall not have the right to disapprove all Bids within a Major Trade.
LESSEE's notice of disapproval shall explain in detail the basis for the
disapproval of any Bid recommended by Contractor. Contractor shall have the
right to utilize any subcontractors submitting Bids for which LESSEE does not
timely give notice of its disapproval. The term "Major Trades" means portions of
the construction work consisting of the supply or installation of electrical,
heating and air conditioning, fire sprinkler system, framing, drywall, plumbing,
painting, floor coverings, suspended ceilings, glass, doors and ceramic tile.
4.4 Payment of Tenant Improvement Costs. The phrase "Tenant
Improvement Costs" means all direct and indirect costs of furnishing,
constructing and installing the Tenant Improvements, including (a) any costs
incurred by LESSOR for design and/or architectural services of the Architect in
preparing the Tenant Improvement Plans, (b) government permit costs applicable
to the Tenant Improvements, (c) amounts payable to Contractor for
overhead/profit, job site supervision, cleanup, trash and janitorial services as
shown in the Cost Breakdown Tenant Improvement which is annexed to this Addendum
as EXHIBIT "4", except that the 12% overhead and profit fee payable to
Contractor shall not apply to the costs of (i) the design of the Tenant
Improvements, or (ii) the building permit(s) for construction of the Tenant
Improvements, or (iii) "hard costs" exceeding the Tenant Improvement Allowance
but not exceeding $1,100,000 (d) the actual "hard costs" of construction of the
Tenant Improvements and (e) financing costs attributable to financing to pay the
LESSOR's Allowance, including, construction period interest from the initial
loan funding until the Commencement Date, loan points, fees and other costs
customarily incurred in connection with such financing; provided, however,
financing costs incurred after the Commencement Date shall not be included in
determining the Tenant Improvement Costs.
4.4.1 Estimate for Tenant Improvement Costs. Prior to the
commencement of construction, LESSOR shall cause Contractor to make a final
selection of the Bids for each Major Trade and LESSOR shall provide final
estimates of all other Tenant Improvement Costs ("Estimated Tenant Improvement
Costs"). LESSOR shall provide LESSEE written notice of such Estimated Tenant
Improvement Costs, which notice will include copies of the Bids for the Major
Trades.
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4.4.2 LESSOR's Allowance. LESSOR agrees to pay a maximum of
$900,000.00 for the Tenant Improvement Costs ("Allowance"). The Allowance shall
be applied solely to pay the cost of the Tenant Improvements, and under no
circumstances shall LESSEE be entitled to any payment on account of any unused
portion of the Allowance following completion of the Tenant Improvements and
payment of the Tenant Improvement Costs. The amount of the Allowance actually
expended for payment of Tenant Improvement Costs shall be the amount used to
determine the amount of the Allowance Amortization Charge under subsection 2.3
above. LESSOR shall pay its share of the Tenant Improvement Costs as
construction progresses in the same manner that LESSEE is required to pay its
Initial Contribution under subsection 4.4.3 of this Addendum.
4.4.3 LESSEE's Payment/Initial Contribution. Except for LESSOR's
Allowance, LESSEE shall be responsible for the payment of all Tenant Improvement
Costs. The amount of LESSEE's initial contribution will be determined based on
the Estimated Tenant Improvement Costs, and LESSEE shall pay to LESSOR, as
provided in this subsection, an amount equal to the difference between LESSOR's
Allowance and the Estimated Tenant Improvement Costs ("Initial Contribution").
LESSEE shall pay such Initial Contribution in installments, based on the
percentage of completion of the Tenant Improvements, as reasonably determined by
LESSOR, and each installment will be due and payable within 10 days of LESSOR's
delivery of an invoice to LESSEE. Such payments shall be paid to an
institutional fund control established by LESSOR for payment of the Tenant
Improvement Costs. The amount of each installment payment of the Initial
Contribution shall be calculated by multiplying the amount of LESSEE's Initial
Contribution by the percentage of progress as determined by LESSOR and then
multiplying that product by ninety percent (90%).
4.4.4 Final Reconciliation. Following completion of the
construction of the Tenant Improvements, LESSOR shall to deliver to LESSEE a
final accounting of the Tenant Improvement Costs. If additional amounts are due
from LESSEE on account of differences between the LESSEE's payments on Estimated
Tenant Improvement Costs and the actual costs incurred, LESSEE shall reimburse
LESSOR in the amount of such difference following completion of the construction
of the Tenant Improvements and within fifteen (15) days from receipt of a
written notice and accounting from LESSOR's accounting. If such final accounting
shows that the actual Tenant Improvement Costs are less than the LESSEE's
payment on Estimated Tenant Improvement Costs, then LESSEE shall be entitled to
a credit in the amount of any excess paid by LESSEE, which credit shall be
applied to the next payment of Base Rent then becoming due.
4.4.5 Costs Attributable to Changes. LESSEE will be responsible
for payment of any excess Tenant Improvement Costs resulting from any changes to
the Work requested by LESSEE or necessitated by government requirements,
following LESSOR's approval of the Tenant Improvement Plans. Any such changes
shall result in the recalculation of the Estimated Tenant Improvement Costs and
LESSEE's required payments under Section 4.4.3 of this Addendum.
4.4.6 Inspection of Records. LESSEE, or its designated
representative, shall have the right during the course of performance of the
construction of the Building Shell and the Tenant Improvements and in connection
with the final reconciliation of the Tenant Improvement Costs as provided in
subsection 4.4.4 of this Addendum to a reasonable review of books and records
maintained by LESSOR and Contractor relating to such costs. Such right of
inspection is exercisable on reasonable written notice to LESSOR and during the
regular business hours of LESSOR or Contractor, whichever is applicable.
4.5 Completion and Acceptance of Building Shell and Tenant
Improvements. The Commencement Date of the Lease shall not occur until
Substantial Completion (as defined in subsection 4.5.2 of this Addendum), except
if Substantial Completion is delayed on account of LESSEE's failure to timely
submit the Tenant Improvement Plans (or any revisions thereto), LESSEE's request
for special materials, finishes or installations (i.e. materials which are not
readily available or customarily and ordinarily used in similarly situated
construction work) not shown in the Tenant Improvement Plans as approved by
LESSOR, changes to the approved Tenant Improvement Plans requested by LESSEE,
LESSEE's failure to timely pay amounts required to be paid by LESSEE in
connection with such construction or other delays caused by LESSEE. If such
delays are encountered, the Commencement Date of this Lease shall occur prior to
Substantial Completion of the Tenant Improvements and as of the date such Tenant
Improvements would have been substantially completed but for such delays by
LESSEE. LESSEE and LESSOR shall conduct a walk-through inspection of the
Premises and prepare and sign a punch-list of all items needing additional work
by LESSOR, and LESSEE shall thereafter have an additional sixty (60) days in
which to identify to LESSOR any construction deficiencies or defects which were
not readily observable at the time of the preparation of the first punch-list,
whereupon any items so identified in no more than three (3) additional
punch-lists and agreed to by LESSOR following consultation with LESSEE, will be
added to the final punch-list. The punch-lists to be prepared by LESSEE shall
not include any damage to the Premises caused by LESSEE's move-in, which damage
shall be repaired or corrected by LESSEE, at its expense. If LESSEE fails to
submit the final punch-list to LESSOR within the sixty (60) day period
immediately following the Commencement Date, it shall be deemed that there are
no items needing additional work or repair. LESSOR's contractor shall complete
all reasonable punch-list items within thirty (30) days after the walk-through
inspection and within thirty (30) days following LESSOR's receipt of any
additional punch-lists, or as soon as practicable thereafter. Upon LESSOR or
LESSOR's contractor's indication to LESSEE of the completion of such punch-list
items, LESSEE shall acknowledge the completion of such items in writing to
LESSOR. If LESSEE fails either to so acknowledge the completion of such items
within seven (7) days of such stated completion or within such seven day period
to specify in writing to LESSOR in reasonable detail any such previously listed
punch-list items that remain uncompleted, all such items shall be deemed
approved by LESSEE.
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4.5.1 Construction/Substantial Completion. Promptly following the
approval of the Tenant Improvement Plans and conditioned upon LESSEE's timely
payment of the LESSEE's Initial Contribution, LESSOR shall cause Contractor to
cause the Substantial Completion of the Tenant Improvements in no event later
than the date determined in subsection 3.1 of this Addendum. Following the
Substantial Completion, LESSOR shall cause Contractor to correct all immaterial
defects and deficiencies to fully complete the Tenant Improvements as soon as
reasonably possible.
4.5.2 "Substantial Completion" Defined. The term "Substantial
Completion" means the date upon which LESSOR satisfies all of the following
requirements: (a) the construction of the Building Shell is substantially
completed in accordance with the Approved Working Drawings, as modified only by
any changes requested by LESSEE or as otherwise permitted by this Lease, subject
only to minor corrective work which does not affect or limit LESSEE's use of the
Premises; (b) the construction of the Tenant Improvements is substantially
completed in accordance with the Tenant Improvement Plans as modified only by
any changes requested by LESSEE or as otherwise permitted by this Lease, subject
only to minor corrective work which does not affect or limit LESSEE's use of the
Premises; (c) LESSOR has procured a certificate of occupancy (whether temporary
or permanent) or other applicable permit permitting LESSEE's immediate use and
occupancy of the Premises; and (d) LESSOR has given LESSEE written notice
stating that such Substantial Completion has occurred and that the Premises are
available for LESSEE's immediate possession and occupancy ("Notice of
Possession").
4.5.3 LESSOR's Enforcement of Contractor's Warranties. LESSOR has
obtained from Contractor the following warranties ("Contractor's Warranties"):
"CONTRACTOR unconditionally warrants all materials and equipment
furnished under this Contract will be new, unless otherwise specified and
approved in advance by LESSEE, and that all Work will be of good quality,
free from material faults and defects and in conformance with the Contract
Documents. CONTRACTOR, at its expense, shall repair or replace any Work
requiring replacement or repair within one (1) year from completion of the
Project, except with respect to the roof membrane only, which CONTRACTOR
will repair or replace within two (2) years as required to prevent water
penetration. In the event CONTRACTOR fails to timely perform its warranty
obligation, OWNER shall have the right to cause such repairs or
replacements and CONTRACTOR shall be liable for the reasonable costs of
such repairs or replacements. In the event of any action to enforce a
warranty claim, the prevailing party shall be entitled to recover its
reasonable attorney's fees and costs."
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Notwithstanding the limitation on LESSOR's warranty under Paragraph 2.2 of the
Lease or the time for enforcement of LESSOR's warranty has expired, to the
extent LESSOR has any claim under the Contractor's Warranties on account of any
defect or deficiency in the construction of the Premises, upon the written
request of LESSEE, LESSOR shall take such commercially reasonable action as
necessary to enforce any such warranties or claims for the benefit of LESSEE to
the extent LESSEE incurs or will incur any out-of-pocket expense or cost in the
performance of its obligations under this Lease for the repair or maintenance of
the Premises on account of any items covered by the Contractor's Warranties as a
result of any such defects or deficiencies, provided that LESSOR shall first be
entitled to recover its Legal Expenses (as defined below) prior to any
reimbursement to LESSEE of any such out-of-pocket expenses; provided, however,
if LESSOR determines, based on its good faith belief, that pursuit of such claim
against Contractor would not be commercially reasonable, then LESSOR shall have
the right to satisfy its obligations under this section by assigning to LESSEE
the right to enforce any such Contractor's Warranties, provided any such
assignment shall be effective only to the extent LESSEE incurs or will incur any
out-of-pocket expense or cost in the performance of its obligations under this
Lease for the repair or maintenance of the Premises on account of any items
covered by the Contractor's Warranties as a result of any such defects or
deficiencies, and LESSOR shall be entitled to receive any excess recovery after
deduction of LESSEE's Legal Expenses. The term "Legal Expenses" means reasonable
attorneys' fees and costs (including any expert witness fees), including
attorneys' fees and costs in connection with the enforcement of any award or
judgment or any appellate proceedings, which Legal Expenses are incurred by
LESSOR in the event LESSOR elects to enforce warranties or claims in any legal
proceedings against Contractor, or incurred by LESSEE, in the event LESSOR
assigns the right to LESSEE to enforce such warranties or claims directly
against Contractor.
4.5.4 Exclusion From Common Area Operating Expenses.
Notwithstanding any other provision, any costs of repairs or replacement of any
patent or latent defect or deficiency identified during the period the
applicable Contractor's Warranties remain in effect shall not be included in
calculating Common Area Operating Expenses.
5. LESSOR's Contingencies. LESSOR's obligations under the Lease are subject
to satisfaction of the following contingencies within one month following full
execution of the Lease: (a) LESSOR procures a commitment for a construction loan
and permanent loan on terms and conditions reasonably acceptable to LESSOR; (b)
LESSOR reasonably determines that the total cost of all governmental fees,
exactions and charges for development of the Building Shell and the Allowance of
LESSOR shall not exceed $50,000; and (c) LESSOR approves the disclosures in
LESSEE's Hazardous Materials Questionnaire described in section 11 of this
Addendum. LESSOR agrees to use its reasonable, best efforts to satisfy the
contingencies described in preceding clauses (a) and (b) within one month
following full execution of the Lease, and LESSOR shall have thirty (30) days
following the receipt of the Hazardous Materials Questionnaire to give LESSEE
notice of its approval or disapproval under preceding clause (c). LESSOR will
promptly give LESSEE notice as and when each contingency is satisfied. If LESSOR
does not give notice to LESSEE that all contingencies have been satisfied within
one month following full execution of the Lease, then either LESSOR or LESSEE
shall have the right to terminate the Lease by giving the other notice of such
decision. If the Lease is so terminated, LESSOR shall return the Security
Deposit to LESSEE and neither party will have any further obligations under the
Lease, except that the obligation of LESSEE to provide indemnification to LESSOR
as provided in section 6 of this Addendum shall survive such termination.
6. Access to Premises/Indemnification. LESSEE and its agents, employees and
design consultants shall be entitled to reasonable access to the property for
the purpose of carrying out the preparation of the Tenant Improvement Plans and
inspecting the progress of the construction of the Building Shell or the Tenant
Improvements. LESSEE's entitlement to access shall be conditioned upon LESSEE
giving LESSOR prior written notice of the date and time for such access, which
shall not be less than three (3) business days prior to the desired access date.
LESSEE agrees that it will pay for the cost or expense of any repairs or
replacements, including damage to landscaping, roads, irrigation systems,
utilities and other improvements, resulting from LESSEE's exercise of the access
rights provided in this section, and LESSEE shall indemnify, defend and hold
harmless LESSOR and Contractor from and against any loss, liability, claim,
expense (including reasonable attorneys' fees and court costs) or damage
resulting from LESSEE's exercise of such access rights, including, without
limitation, any claims arising from the activities of LESSEE or its agent,
employees or design consultants. LESSOR may require, upon reasonable notice to
LESSEE, that LESSEE provide evidence of adequate general liability insurance
coverage from an insurer acceptable to LESSOR and name LESSOR as an additional
insured under LESSEE's policy as a condition to LESSEE's exercise of such access
rights. LESSEE agrees not to interfere with the progress of the construction on
the property or otherwise interfere with any other activities of LESSOR or its
agents or contractors while present on the property.
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6.1 LESSEE's Fixturization. No later than thirty (30) days prior to
the expected date of Substantial Completion of the Building, LESSOR shall permit
LESSEE to enter upon the Premises for the purposes of permitting LESSEE to
commence installation of LESSEE's machinery and trade fixtures ("Fixturization
Period"). LESSEE agrees to carry out such work in such manner as will not
interfere with the Contractor's work. LESSOR shall not be responsible for
securing the Premises or liable for any loss or damage to any such machinery or
trade fixtures installed by LESSEE prior to the delivery of possession of the
Premises. LESSEE shall not be responsible for payment of any of the Rent during
the Fixturization Period, provided LESSEE shall be responsible for compliance
with all other terms and conditions of the Lease, including the provisions in
Paragraph 8.2 (a) of the Lease requiring LESSEE to maintain certain insurance.
7. No Restriction on LESSOR'S Remedies. In the event that LESSEE Defaults
under the Lease by failing or refusing to take possession of the Premises and
commence paying the rent, nothing in the Lease is intended to nor shall it be
applied to restrict any rights or remedies that LESSOR may have on account of
such Default, including, without limitation, LESSOR's entitlement to recover
consequential and incidental damages from LESSEE on account of such breach.
LESSEE acknowledges that it is aware that, based upon LESSEE's inducement in
entering into this Lease, LESSOR is entering into a contract to purchase the
land on which the Building is to be constructed and is purchasing such land,
LESSOR is procuring financing in connection with such acquisition and to pay for
the costs of construction of the Building Shell and the Allowance, LESSOR is
otherwise making a substantial investment of its own funds and creditworthiness
to acquire the land and develop the Building, and, in the event of such Default
by LESSEE, LESSOR will suffer substantial damages and losses, including lost
profits and the economic value of the loss of use of its invested funds and
credits in the real estate development project which is the subject of this
Lease.
8. LESSEE's Payment of Operating Expenses. Subject to subsection 8.1 below,
beginning on the Commencement Date, in addition to payment of the Base Rent,
LESSEE shall be responsible for payment of all "Operating Expenses" (as defined
below). The term "Operating Expenses" means the following expenses and costs of
the ownership and operation of the Premises: (a) amounts payable for maintenance
contracts required to be procured pursuant to Paragraph 7.1(b) of the Lease (but
not the cost of repairs or replacements payable by LESSEE), (b) insurance
required to be maintained by LESSOR or LESSEE under the Lease (exclusive of the
insurance maintained by LESSEE under Paragraph 8.4 of the Lease), (c) Real
Property Taxes, (d) a reasonable reserve for replacement of the roof and
heating/air conditioning units, (e) assessments and dues payable to any
association or other governing body established pursuant to any covenants,
conditions or restrictions affecting the Premises as of the date of the Lease,
(f) payment of Mello Roos Bond installments, (g) a fire sprinkler monitoring
contract if payable separate from the fire sprinkler maintenance contract
described in Paragraph 7.1(b) of the Lease, (h) the Administrative Fee described
in subsection 8.2 of this Addendum, and (i) the reasonable amount of other
ordinary and necessary expenses and costs of operation of the Premises, which
are customarily incurred in the operation of similarly situated real estate
projects; provided, however, the term "Operating Expenses" does not include (i)
the costs of repairs or maintenance required to be performed by LESSEE to the
extent such costs exceed the amount of any reserves accumulated from the
Operating Expense collections for the particular repair or maintenance item, or
(ii) any other items of expense or cost which the terms of the Lease expressly
require be paid or incurred by LESSEE, including all utility and trash charges
payable by LESSEE under Paragraph 11 of the Lease. Interest at the Wells Fargo
savings account rate on any unused portion of the above reserves shall accrue to
the reserve account and not to the LESSOR.
8.1 Method of Payment. LESSEE shall pay to LESSOR monthly, as
additional rent, an amount equal to 1/12 of the projected annual Operating
Expenses. Such amount shall be due and payable concurrently with the payment of
the applicable Base Rent. Prior to the beginning of each Lease Year, LESSOR will
provide LESSEE an annual estimated Operating Budget ("Estimated Operating
Budget") for each calendar year or partial year. Subject to LESSEE's payment to
LESSOR of the Operating Expenses as provided in this Addendum, LESSOR shall make
prompt payment of the Operating Expenses. Any excess or deficit from the
estimates shown in the Estimated Operating Budget will be credited or billed to
LESSEE within sixty (60) days following the end of the applicable calendar year,
and LESSOR shall concurrently furnish LESSEE with a detailed statement showing
the actual Operating Expenses incurred for such year. Any deficit will be
payable as additional rent within ten (10) days of receipt of a final Operating
Budget setting forth the actual expenditures for the applicable year and the
deficit. Any excess shall be credited against the next payments of Operating
Expenses due from LESSEE. A copy of the Estimated Operating Budget for the first
calendar year is attached to the Lease as EXHIBIT "5", provided that LESSEE
acknowledges that such budget represents only LESSOR's good faith estimate of
the such expenses and that actual expenses may vary. LESSEE further acknowledges
that the amounts and/or categories of expense will likely vary in future years
as the Premises ages. Promptly following LESSEE's request, LESSOR shall furnish
LESSEE with such additional information as LESSEE may reasonably request with
respect to such Operating Expenses.
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8.2 LESSOR'S Administrative Services. LESSOR agrees to provide certain
administrative services to assist LESSEE in the performance of LESSEE's
obligations under Paragraphs 7, 8.2, 8.3 and 10 of the Lease in consideration
for LESSEE's monthly payment of an administrative fee to LESSOR two percent (2%)
of the SF Rate Rent per month ("Administrative Fee"). Such Administrative Fee
shall be payable as a part of the Operating Expenses payable by LESSEE. LESSOR's
administrative services shall consist of the following: LESSOR shall procure, on
behalf of LESSEE, maintenance contracts required to be procured by LESSEE under
Paragraph 7.1(b) of the Lease, and shall otherwise procure bids and contract
proposals from contractors when necessary for LESSEE's performance of its
general maintenance and repair obligations under Paragraph 7.1(a) of the Lease.
Except with the prior written consent of LESSEE, major items of expense
exceeding $10,000.00 shall be competitively bid and LESSOR shall not submit any
contracts or proposals for any of such services to be performed by LESSOR or any
affiliate of LESSOR, except to the extent such affiliation is disclosed to
LESSEE and such contract is competitively priced. LESSOR shall not be liable for
any acts or omissions of any such contractors, nor for LESSEE's default in
failing to perform any obligation under the Lease, except to the extent of
LESSOR's failure to pay any Operating Expense from funds previously provided by
LESSEE for the payment of such Operating Expense.
9. Additional Insurance Provisions. In addition to the insurance to be
maintained by LESSEE pursuant to Paragraph 8.2(a) of the Lease, LESSOR shall
have the right, but not the obligation, to maintain, at LESSOR's sole cost and
expense, any additional general liability insurance that LESSOR may elect to
procure for the sole and exclusive benefit of LESSOR. LESSEE shall not be
obligated to reimburse LESSOR for the cost of any such additional liability
insurance and LESSEE shall not be named as an insured under any such additional
insurance nor shall the existence of such additional insurance effect any
obligations or liabilities of LESSEE under the Lease.
10. Option to Extend. Subject to the provisions of Paragraph 39 of the
Lease, LESSEE shall have the option to extend the Lease Term for one additional
term of five (5) years, which option is exercisable only by LESSEE giving LESSOR
written notice of the election to exercise such option no earlier than fifteen
(15) months and no later than nine (9) months before the expiration of the
Original Term. If LESSEE fails for any reason to timely give such Election
Notice, such option rights shall automatically terminate and be of no further
force or effect and LESSEE shall not have any other right to extend the Original
Term. LESSEE may withdraw a notice to elect to excercise the option up to nine
months before the end of the term of the Lease.
10.1 Remaining Lease Terms Remaining Lease Terms. Except as provided
in this subsection and in subsection 10.2 of this Addendum, if LESSEE elects to
extend the Original Term, all other terms and conditions of the Lease, including
annual Base Rent Adjustments of 3.5%, shall remain in effect during such
extended term. LESSEE shall have no further right to extend the term of the
Lease; and the Base Rent applicable during the option term shall be determined
in accordance with subsection 10.2 of this Addendum.
10.2 Adjustment to Base Rent. The Base Rent for the first Lease Year
of the extension period shall be an amount equal to the "fair rental value" of
the Premises as determined in the following manner:
(a) Within thirty (30) days from LESSEE's Election Notice, LESSOR and
LESSEE shall meet in an effort to negotiate, in good faith, the fair rental
value of the Premises for the first year of the option period. If LESSOR
and LESSEE have not agreed upon such fair rental value of the Premises at
least ninety (90) days prior to the beginning of the applicable option
period, the fair rental value shall be determined by appraisal, by one or
more appraisers ("Appraiser(s)"). The Appraisers shall have at least five
(5) years experience in the appraisal of commercial/industrial real
property in the area in which the Premises is located and shall be members
of professional organizations such as M.A.I. or equivalent.
(b) If LESSOR and LESSEE are not able to agree upon the fair rental
value of the Premises within the prescribed time period, then LESSOR and
LESSEE shall attempt to agree in good faith upon a single Appraiser not
later than seventy-five (75) days prior to the beginning of the applicable
option period. If LESSOR and LESSEE are unable to agree upon a single
Appraiser within such time period, then LESSOR and LESSEE shall each
appoint one Appraiser not later than sixty-five (65) days prior to the
beginning of the applicable option period. Within ten (10) days thereafter,
the two (2) appointed Appraisers shall appoint a third Appraiser. If either
LESSOR or LESSEE fails to appoint its Appraiser within the prescribed time
period, the single Appraiser appointed shall determined the fair rental
value of the Premises. If both parties fail to appoint Appraisers within
the prescribed time periods, then the first Appraiser thereafter selected
by a party shall determine the fair rental value of the Premises. Each
party shall bear the cost of its own Appraiser and the parties shall share
equally the cost of the single or third Appraiser, if applicable.
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(c) For the purposes of such appraisal, the term "fair rental value"
shall mean the price that a ready and willing tenant would pay, as of the
beginning of the applicable option period, as monthly Base Rent to a ready
and willing landlord of property comparable to the Premises if such
property were exposed for lease on the open market for a reasonable period
of time and taking into account all of the purposes for which such property
may be used. If a single Appraiser is chosen, then such Appraiser shall
determine the fair rental value of the Premises. Otherwise, the fair rental
value of the Premises shall be the arithmetic average of the two (2) of the
three (3) appraisals which are closest in amount, and the third appraisal
shall be disregarded. LESSOR and LESSEE shall instruct the Appraiser(s) to
complete the determination of the fair rental value not later than thirty
(30) days prior to the beginning of the applicable option period. If the
fair rental value is not determined prior to the beginning of the option
period, then LESSEE shall continue to pay to LESSOR the Base Rent
applicable to the Premises immediately prior to such extension, until the
fair rental value is determined. When the fair rental value of the Premises
is determined, LESSOR shall deliver notice thereof to LESSEE, and if the
fair rental value is higher, LESSEE shall pay to LESSOR, within ten (10)
days after receipt of such notice, the difference between the Base Rent
actually paid by LESSEE to LESSOR and the new Base Rent determined
hereunder.
(d) Notwithstanding any other provision of this Lease, in no event
shall the Base Rent for the first Lease Year of the extension term be less
than the Base Rent in effect for the last Lease Year of the Original Term
("Prior Base Rent"). If the fair rental value of the Premises determined
under this section is less than the Prior Base Rent, then the Base Rent for
the first Lease Year of the extension term shall equal the Prior Base Rent.
(e) The Base Rent determined for the first Lease Year shall be
adjusted at the beginning of the second Lease Year and at the beginning of
each Lease Year thereafter during the extension term. The Base Rent shall
be increased in an amount equal to three and one-half percent (3.5%) of the
amount of the scheduled Base Rent for the immediately preceding Lease Year.
(f) In the event the foregoing extension is exercised, LESSEE will
receive a Tenant Improvement retrofit allowance equal to two dollars
($2.00) per square foot of the Premises, which will be credited against
Base Rent due under the extension term in the first month after evidence of
money spent on the building is presented to LESSOR, until credited in full.
11. Hazardous Materials Questionnaire. Without limiting LESSEE's
obligations under Paragraph 6.2 of the Lease regarding compliance with
Applicable Laws concerning Hazardous Substances, LESSEE shall, within ten (10)
days from the execution, complete and deliver to LESSOR for its approval under
section 5 of this Addendum and, following such approval, filing with applicable
government authorities, a Hazardous Materials Questionnaire in the form as set
forth in EXHIBIT "6" annexed to this Addendum.
12. Additional Provisions Regarding Tenancy Statement. In addition to the
information required under Paragraph 16 of the Lease, LESSOR may also require
that LESSEE certify to the absence of any violations of any Hazardous Substance
Laws and require that LESSEE provide and certify to an updated Hazardous
Materials Questionnaire.
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13. Corporate Resolution. Within ten (10) days of Lease execution, LESSEE
shall provide LESSOR with a certified copy of a Corporate Resolution authorizing
the person(s) designated below to execute this Lease on the behalf of LESSEE and
thereupon become a binding contractual obligation of LESSEE.
14. Security Deposit. If LESSEE is not in default on or before the
Commencement Date of the Lease, then 1/2 of the security deposit under Paragraph
1.7 of the Lease will be applied to the Base Rent becoming due during the fourth
month of the first Lease Year.
15. Rent Adjustment Upon Assignment or Sublease. The provisions of this
section shall only apply during the Original Term of the Lease and shall not
apply during the option period Provided that LESSEE is not in Default under the
Lease, if LESSEE subleases or assigns the Premises, LESSEE shall pay to LESSOR,
as additional rental due under this Lease, at LESSOR's option, the following
amounts: (a) in the case of an assignment, LESSOR shall be entitled to receive
an amount equal to fifty percent (50%) of the total value of the consideration
received by LESSEE on account of such assignment, less an amount equal to any
real estate commissions payable by LESSEE on account of the assignment of this
Lease amortized over the duration of the Lease following the applicable
assignment, and the additional amount payable to LESSOR shall be paid within
five (5) days from the date(s) as and when LESSEE receives such consideration;
and (b) in the case of a sublease(s), an amount equal to fifty percent (50%) of
the Excess Rental payable by any subtenant on account of such sublease less the
costs of any real estate commissions payable by LESSEE amortized over the
duration of the sublease. The term "Excess Rental" means the rent or other
consideration received by LESSEE from the subtenant in excess of the amount of
Base Rent, additional rent and other charges payable by LESSEE under this Lease.
In no event shall this provision be construed or applied to reduce the Base Rent
or other charges payable by LESSEE under this Lease, nor modify, waive or
otherwise affect LESSOR's entitlement to increase the rentals payable under this
Lease pursuant to Paragraph 12.1(d) of the Lease in the event of an assignment
or subletting without the consent of LESSOR. For purposes of this Paragraph,
LESSEE will not be deemed to be in Default if all conditions of Default noticed
by LESSOR to LESSEE in connection with LESSEE's request for consent to the
applicable assignment or subletting are cured within the grace periods allowed
therefor under Paregraph 13.1 of the Lease.
16. Limited Right to Holdover. Notwithstanding Paragraph 26 of the Lease,
Lessee shall have the right to retain possession of the Premises for a maximum
six months after upon the expiration (but not the earlier termination) of this
Lease or any renewal or extension term, LESSEE shall have the right to holdover
and retain possession of the Premises for a maximum period of six (6) months
subject to LESSEE's compliance with each of the following requirements and
conditions: (a) At least one hundred twenty (120) days prior to the expiration
of the then-current term, LESSEE shall give written notice ("Holdover Notice")
to LESSOR of its election to holdover, which notice shall state the period of
the holdover, which shall not be less than three (3) months nor more than six
(6) months ("Holdover Period"); (b) LESSEE shall not be in Default or Breach of
the Lease either at the time of the giving of the Holdover Notice or at the time
of the commencement of the Holdover Period; (c) LESSEE shall pay as Base Rent
(i) for the first three months of the Holdover Period, an amount equal to 125%
of the Base Rent in effect for the month immediately preceding the Holdover
Period, and (ii) for the second three months, if applicable, an amount equal to
150% of the Base Rent in effect for the month immediately preceding the
beginning of the Holdover Period; and (d) LESSEE shall continue to comply with
all of the other terms, covenants and conditions of this Lease, including the
payment of any other rent, charges or fees payable during the Lease term. If
LESSEE complies with each of the above-described conditions, LESSEE's holdover
shall be deemed to be with the consent of LESSOR and the provisions of Paragraph
26 of the Lease shall not apply. Upon expiration of the Holdover Period stated
in the Holdover Notice, LESSEE shall have no further right to holdover or retain
possession of the Premises. If LESSEE does not timely give a Holdover Notice or
LESSEE otherwise fails to comply with each of the above-described requirements
and conditions, LESSEE shall have no right to retain possession of the Premises
or any part thereof beyond the expiration of this Lease, and the provisions of
Paragraph 26 of the Lease shall apply.
17. Additional Provisions Regarding Alteration Removal. Notwithstanding any
contrary provision in Paragraph 7.4(b) of the Lease, LESSEE may request in
writing, at the time of submitting any Alterations or Utility Installations for
LESSOR's consent, that LESSOR agree not to require the removal of any of such
LESSEE's Alterations or Utility Installations upon expiration of the Lease. If
LESSEE makes such request, LESSOR shall notify LESSEE at the time of giving such
consent whether or not LESSOR will require the removal of any of LESSEE's
Alterations or Utility Installations, and LESSOR's failure to so notify LESSEE
shall constitute a waiver of LESSOR's right to require LESSEE to remove such
Alterations or Utility Installations upon expiration of the Lease. If LESSOR
gives such notice that it will require such removal, then LESSEE shall be
obligated to remove such Alterations or Utility Installations upon expiration of
the Lease.
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18. Additional Provisions Regarding Hazardous Materials. Subject to the
limitations described in this section, LESSOR shall indemnify, defend and hold
harmless LESSEE from and against any action, demand or claim (including a claim
for reasonable attorneys' fees and court costs) constituting a Third Party Claim
(as defined below) which is based solely on any Hazardous Substance
contamination in, under or about the Premises (including groundwater) which
existed as of the Commencement Date of the Lease ("Preexisting Contamination"),
but only to the extent LESSEE incurs a loss, liability, claim and/or expense
exceeding the sum of $5,000.00. The phrase "Third Party Claim" means a lawsuit,
administrative action or other proceeding commenced and maintained by any
governmental agency or by any owner or occupant of adjacent land other than the
Premises o cause the remediation of any Preexisting Contamination. LESSEE shall
promptly give LESSOR notice of any such Third Party Claim. LESSOR's obligation
of indemnification includes the obligation to defend the Third Party Claims,
after LESSEE has first paid losses, liabilities, costs and/or expenses in excess
of $5,000.00 on account of such Third Party Claim. LESSEE shall reasonably
cooperate, without expense to LESSOR, with LESSOR in such defense. LESSOR's
indemnification obligation under this section does not (a) increase or expand
any obligation of LESSOR under Paragraph 9.7 of the Lease to cause the
remediation of any such Preexisting Contamination, (b) modify, waive or
otherwise change any of LESSOR's rights under Paragraph 9.7 of the Lease,
including the right to terminate the Lease, or (c) otherwise subject LESSOR to
any liability for losses of or damages to LESSEE resulting from the disruption
of LESSEE's business operation on the Premises on account of such Preexisting
Contamination and/or from any order or judgment resulting from such Third Party
Claim limiting or restricting the use or occupancy of the Premises, provided the
preceding provision does not affect LESSEE's entitlement to abatement of rent in
accordance with Paragraph 9.7 of the Lease.
19. No Binding Offer. LESSOR'S SUBMISSION OF THIS DOCUMENT FOR EXAMINATION,
NEGOTIATION AND/OR SIGNATURE BY LESSEE DOES NOT CONSTITUTE AN OFFER TO LEASE,
NOR A RESERVATION OF, NOR AN OPTION FOR THE LEASE OF THE PREMISES. THE DOCUMENT
SHALL NOT BE BINDING AND IN EFFECT AGAINST EITHER PARTY UNTIL AT LEAST ONE
COUNTERPART OF THIS LEASE IS FULLY EXECUTED AND DELIVERED BY LESSOR AND LESSEE.
20. LESSOR's Maintenance Obligations. Notwithstanding the provisions of
Subparagraphs 7.1 and 7.2 of the Lease, LESSOR, not LESSEE, shall be responsible
for the maintenance and repair of certain LESSOR Maintained Improvements. The
phrase "LESSOR Maintained Improvements", refers only to and is limited to the
structural elements of the Building Shell, being the structural portion of the
exterior Building Shell walls, foundations and structural roof (but not the
non-structural roof membrane, roof drainage system, gutters and downspouts,
which shall be maintained by LESSEE).
20.1 Limitations on LESSOR's Responsibility. LESSOR's obligation for
repair and maintenance of the LESSOR Maintained Improvements is limited to
maintaining the LESSOR Maintained Improvements in an operable condition and
sound structural condition, and LESSEE, not LESSOR, shall be responsible for any
painting or other resurfacing of the exterior surfaces of exterior or interior
walls or LESSOR Maintained Improvements in order to maintain such improvements
in a neat and attractive appearance. LESSOR shall not be in default of its
repair and maintenance obligation if LESSOR performs the required repairs or
maintenance within thirty (30) days after written notice from LESSEE of the need
for such repairs or maintenance. If, due to the nature of a particular repair or
maintenance obligation, more than thirty (30) days is reasonably required to
complete such repairs or maintenance, LESSOR shall not be in default so long as
LESSOR commences work within such thirty (30) day period and diligently
prosecutes the work to completion. Except as expressly provided in this section,
no abatement of rent and no liability of LESSOR shall result for any injury to
or interference with LESSEE's business from the making of or failure to make any
repairs or replacements, and LESSEE waives and releases its rights, if any, to
make repair at LESSOR's expense, under California Civil Code Sections 1941-42 or
any similar law, statute or ordinance in effect now or in the future; provided,
however, nothing in the preceding provisions shall limit LESSOR's liability for
the costs and expenses of such maintenance or repair obligations.
Notwithstanding the foregoing, if any such repair and or maintenance obligation
of LESSOR constitutes an emergency situation involving significant property
damage or personal injury, LESSOR shall make such repair as soon as commercially
reasonable following notice from LESSEE. If LESSOR cannot perform such repair or
maintenance obligation in time to mitigate any such significant property damage
or personal injury, LESSEE shall have the right to perform such maintenance and
repair and LESSOR shall reimburse LESSEE for the reasonable, out-of-pocket cost
thereof within thirty (30) days from the receipt of an invoice from LESSEE,
which invoice shall include backup information substantiating the expenses. In
the case of such emergency situations, the notice given to LESSOR may be made by
telephonic communication so long as LESSEE continues with its best efforts to
contact a responsible employee or agent of LESSOR or LESSOR's designated manager
until successful and LESSEE simultaneously sends a facsimile transmission to
LESSOR notifying LESSOR of the emergency. If LESSEE's ability to conduct its
business from the Premises is materially impaired as a result of LESSOR's
default in failing to timely perform its maintenance and repair obligations, the
Base Rent shall be abated in the same manner and to the same extent as provided
in Paragraph 9.6 of the Lease with respect to damage or destruction of the
Premises until LESSOR has cured any such default.
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20.2 Exclusions. The provisions of Paragraph 9 (damage and
destruction) and Paragraph 14 (condemnation) of the Lease shall control in the
event of any damage, destruction or condemnation of any of the LESSOR Maintained
Improvements. In addition, LESSOR shall have no responsibility to maintain or
repair such LESSOR Maintained Improvements in the following circumstances:
(a) repairs or replacements are necessitated by LESSEE's failure to
promptly perform its repair and maintenance obligations of other
improvements;
(b) repairs or replacements are necessitated by any intentional or
negligent act or omission of LESSEE, its employees, agents or contractors,
including misuse or abuse of the LESSOR Maintained Improvements;
(c) to the extent that LESSEE makes any modification or alteration of
any of the LESSOR Maintained Improvements, with or without the consent of
LESSOR, including, without limitation, penetrations of the roof or
structural elements, and LESSEE shall be deemed to have assumed full
responsibility for the repair and maintenance of any improvements so
modified, altered or added;
(d) repairs or replacements are necessitated by LESSEE exceeding the
designed load bearing capacities of the walls, foundations, roof structure,
floor slab or other structural elements;
(e) repairs or replacements of the Building Shell plumbing and sewer
lines resulting from normal blockages and not from any defect or deficiency
in such improvements; or
(f) repairs or replacement to the Building Shell electrical system
resulting from any unusual or intensive power demand requirements of
LESSEE, or on account of any power fluctuation or other malfunction
attributable to equipment or other electrical system improvements to be
maintained by LESSEE.
21. Additional Notice Procedures. In the event that any notice is given by
personal delivery, messenger or courier service, the date of delivery of such
notice shall be the date such notice is actually delivered to the recipient.
Notwithstanding any contrary provision in Paragraph 23 of the Lease, the
addresses of LESSOR and LESSEE for notice, unless otherwise changed by a written
notice, shall be as follows:
If to LESSOR: Hamann Consolidated, Inc.
Attn: Jeffrey C. Hamann, Pres.
475 W. Bradley Avenue
El Cajon, CA 92020
Fax No. (619) 440-8914
If to LESSEE: Aetrium Incorporated
Attn: Brent Conyers
10790 Roselle Street
San Diego, CA 92121
Fax No. (619) 623-5699
13
<PAGE>
With a Copy to: Aetrium Incorporated
Attn: Chief Executive Officer
2350 Helen Street
North St. Paul, MN 55109
Fax No. (612) 770-7975
IN WITNESS WHEREOF, LESSOR and LESSEE have executed this Addendum to Lease
to be effective as of the date set forth herein.
"LESSOR"
W.H. POMERADO LLC,
a California limited liability company
By: Hamann Properties, Inc.,
a California corporation,
Its Manager
By: ___________________________
Gregg Hamann, Secretary
"LESSEE"
AETRIUM INCORPORATED
a Minnesota corporation
By: __________________________________
Douglas Hemer, Group Vice President
14
<PAGE>
EXHIBITS
Exhibit "1" Legal Description
Exhibit "2" Building Plans
2.1 Site Plan
2.2 Floor Plan
2.3 Building Elevation
2.4 Rendering
Exhibit "3" Building Shell Specifications
Exhibit "4" Blank Tenant Improvement Specifications
Exhibit "5" 1998 Estimated Common Area Operating Expenses Budget
Exhibit "6" Hazardous Materials Questionnaire
15
<PAGE>
EXHIBIT "1"
Legal Description
Lot 89 of City of Poway Tract No. 85-04, Unit II, in the City of Poway,
State of California, according to map thereof No. 12572, filed inthe office of
the County Recorder of San Diego County, February 28, 1990, as Instrument No.
90-107515.
16
<PAGE>
EXHIBIT "3"
BUILDING SHELL SPECIFICATIONS
Concrete Tilt-up Shell Building for Aetrium, Inc.
September 19 , 1998
1 DESIGN, ENGINEERING, AND PERMITS:
.1 Drawings to be drawn, engineered and permitted by Kenneth D. Smith,
Architect. All architectural drawings, structural engineering, shell
plumbing drawings, shell electrical drawings, shell energy
calculations, landscaping drawings, and civil engineering are
included. Where the plans differ from these specifications, the
specifications shall control.
.2 Any and all additional space planning, interior design, energy
calculations,mechanical, electrical, or plumbing drawings required for
the tenant improvements will be the responsibility of the tenant.
Tenant shall be responsible for all warehouse racking design,
permitting and installation.
.3 Tenant shall be responsible for all Construction Costs associated with
the Tenant Improvements subject to the Tenant Improvement Allowance as
specified in Paragraph 4.1 of the Addendum to the Lease dated
September 17, 1998 .
.4 All shell building permits, third party inspections, special
inspections required by the City and all utility fees (including
SDG&E) are included. There will be additional permit and inspection
fees required for the tenant improvements which will be the
responsibility of the Tenant.
.5 The following Shell Building plans are hereby approved will be
initialed and attached to the Lease: 1) Site Plan 2) Floor Plan, 3)
Elevations and 4) Rendering.
.6 The Shell Architect will be responsible for all external ADA
compliance, PID approvals and POA approvals.
2 SITE WORK:
.1 Necessary construction staking and site survey is included.
.2 Grading and required soils reporting and testing are included.
Buildings to be designed in conformance with the existing soils
reports. Shell Contractor shall be responsible for site grading to
balance.
.3 We include all necessary shell building utility lines to and on the
site including primary and secondary electrical, telephone conduits,
fire hydrants and water mains per code requirements, fire services,
and storm drains. We include a gas service to the building provided
that tenant elects to install gas appliances, sufficient to induce
SDG&E to engineer and install requested service type at the time of
initial construction. Cable TV service is not included.
.4 One drive Aprons to be provided as shown on Site Plan.
.5 Dock area to be drained to the site storm drainage.
.6 Landscaping to include soils amendments, plant materials and automatic
sprinkler systems to City standards and of equal quality to Lot 73B.
.7 We include building numbers and all other code-required signage such
as handicap signs but exclude Tenant name/logo signage or lettering.
.8 One (1) trash enclosure sufficient to accommodate one three yard bin
and two (2) trash enclosures sufficient to accommodate two three yard
bins will be provided.
.9 Protective 4" concrete filled, steel bollards will be installed where
required by the City or the Utility companies.
.10 The Lot will not be fenced.
1
<PAGE>
.11 One 10' x 10' compressor enclosure will be supplied adjacent to the
building with two concrete sides, metsl roof and a chain link fence(
or equivalent to be determined) and gate on the front.
.12 One approximately 12' x 12' x 12" concrete pad for a nitrogen tank
will be supplied at a location to be specified by LESSEE.
.13 One Patio/ lunch area as generally depicted on the site plan (EXHIBIT
2.1)with concrete paving and screen walls.
3 CONCRETE WORK:
.1 The concrete slabs will be minimum 5 1/2" thick, 4,000 psi concrete,
reinforced with #3's at 18" on center. Concrete footings will be
engineered and constructed per industry standards. All concrete
sealers, sealing of slab joints and smooth dowels at control joints
are excluded.
.2 We exclude visqueen or other waterproofing in the slab areas. If
Lessee desires to install vapor sensitive floorings such as
vinyl-reinforced tiles, sheet vinyl or epoxy coatings, then
waterproofing, alternative concrete mixes, and/or vapor testing should
be considered. We do not recommend the storage of boxes or other
non-porous materials directly on the concrete slab.
.3 Concrete walls will be engineered and constructed with thicknesses and
concrete strengths per the industry standards. (i.e.: minimum 6 1/2"
wall thickness and minimum strengths of 3,000 psi). We exclude
texture.
.4 All parking and drive areas to be non-reinforced, 2,500 psi,
broom-finished concrete on native, 5 1/2" thick in car parking areas
and 7" thick in truck traffic areas.
.5 On site sidewalks to be 3 1/2" thick.
.6 Onsite curbs to be 6" x 6" extruded in areas of low traffic and
monolithic in areas subject to truck traffic.
.7 French drains and waterproofing at below grade walls are excluded.
4 ROOF:
.1 Roof to be panelized roof structure, 24' clear with 8" round metal
interior posts. Warehouse areas to be designed for 11 psf with 2x4
subpurlins and area over mezznanine to be disigned for 13 psf with 2x6
subpurlins. Additionally, roof will support 500 lbs of extra equipment
at any purlin.
.2 Roofing to be a four-ply built up roof with a two-year guarantee.
.3 We include 35 non-ventilated, curb-mounted, 4' x 8' Bristolite
fiberglass skylights, framing for 35 additional skylights, and 70 14"
rotary vents. Location of skylights and rotary vents will be
coordinated with the Space Planner and the Shell Architect .
.4 It has been our intention to provide parapets on all sides high enough
to hide standard mechanical equipment (30"); however, additional roof
screening if required by the City would be a tenant improvement item.
.5 Roof drains to be ABS plastic and interior mounted.
.6 Contractor will coordinate location and installation of
Tenant-provided factory curbs and roof jacks for HVAC units.
Contractor to include rough framing supports for the HVAC as part of
the Shell. The goal is to avoid any penetrations of the roof membrane
during Tenant Improvement Construction.
2
<PAGE>
5 MECHANICAL:
.1 ABS plastic underground plumbing to the building is included. We
include one backflow prevention device, 1 1/2" domestic water service,
at least one hose bib per building face and appropriate water line
grounds for the electrical system. Provided that locations are
supplied in a timely manner so that they can be installed before the
slab is poured, we include plumbing stub-ins for up to 30 plumbing
fixtures. Permit fees, gas piping, top out and finish plumbing for
said fixtures are excluded.
.2 Air conditioning and condensate (except for any code-required exhaust
of the electrical room) will be a part of the tenant improvement work.
.3 Shell building Fire Sprinklers are included to a density of .45/3000
with plugs for future tenant improvements (locations to be coordinated
with the space planner prior to City plan check submittal of the
Tenant Improvements drawings). We include fire service and fire
service fees, but exclude in-rack sprinklers, knox boxes or other
special locking mechanisms, fire extinguishers, supervisory alarm
panels and tenant improvement drops.
6 ELECTRICAL:
.1 Contractor to provide required switch gear, main disconnect, and
transformer to supply 3,000 amps of 480/277 3 phase, 4 wire power to
the building..
.2 Primary phone service for both buildings will be terminated in the
computer/phone rooms. Locations will be coordinated with the Space
Planner.
.3 We exclude all power distribution and lighting.
.4 The exterior of the building will be lit with 14 90 watt,
high-pressure sodium wallpacks mounted on the building.
.5 All other electrical will be part of the tenant improvements.
7 EXTERIOR FINISH:
.1 The exterior of building will be painted with two coats of Frazee
paint.
.2 Soffit areas will be finished with exterior gypsum ceiling board and
skim coat. We exclude Frye molding.
.3 Exterior doors to be 3' x 7' 1 3/4", 18 gauge, metal doors with
Schlage "L" series, lever-handled, mortise locks with tamper-resistant
butts and weather-stripping if necessary. We include three (3)
personnel doors at the concrete perimeter walls, two glass doors at
the cafeteria and glass double doors at the front entry.
.4 Overhead doors to be 26 gauge Porvene Roll-ups or equal as follows: 1)
Two 9' x 10' Dock High Doors and 2) Two (2) 12' x 14' Grade Doors.
.5 We include 2,500 square feet blue-reflective, medium-performance, LOF
or equal glass, with Kynar finished aluminum frames. We exclude
operable windows.
8 INTERIOR FINISH:
.1 All office and interior improvements are part of the tenant
improvement work.
.2 We exclude all appliances, equipment, equipment installation, and
associated electrical.
.3 We exclude draperies, blinds and other window treatments.
.4 We exclude all insulation.
3
<PAGE>
.5 Our price includes structural provisions for an approximately 15,000
square foot 125 psf future mezzanine including increased exterior wall
reinforcement and footings only.
4
<PAGE>
Triple Net Calculations for Pomerado Business Park, Lot 89 3/21/2000
AETRIUM
Leased SF 45,000
Total Bldg. SF 45,000
Percentage of Project 100.00%
<TABLE>
<S> <C> <C> <C> <C>
Annually Monthly Monthly
Description Annual /sf of bldg /sf of bldg NNN
Bonds $38,072.23 $0.8460 $0.0705 $3,172.69
LMD $2,760.62 $0.0613 $0.0051 $230.05
Property Taxes $22,384.89 $0.4974 $0.0415 $1,865.41
Owners Association $1,612.19 $0.0358 $0.0030 $134.35
Administrative Fee $5,292.00 $0.1176 $0.0098 $441.00
Insurance $2,160.00 $0.0480 $0.0040 $180.00
Utilities:
Electricity BY TENANT $0.0000 $0.0000 $0.00
Telephone $162.00 $0.0036 $0.0003 $13.50
Alarm - FIRE ONLY $450.00 $0.0100 $0.0008 $37.50
Landscape Water $0.00 $0.0000 $0.0000 $0.00
Security BY TENANT $0.0000 $0.0000 $0.00
HVAC Maint. $4,050.00 $0.0900 $0.0075 $337.50
Elevator Maint. & Reserve N/A $0.0000 $0.0000 $0.00
Landscape $3,375.00 $0.0750 $0.0063 $281.25
Roof Maint. & Reserve $3,375.00 $0.0750 $0.0063 $281.25
Painting Reserve $891.00 $0.0198 $0.0017 $74.25
Paving Maint. & Reserve $2,250.00 $0.0500 $0.0042 $187.50
TOTAL $86,834.93 $1.9297 $0.1608 $7.236.24
Per month for AETRIUM $7,236.24 $0.1608
</TABLE>
<PAGE>
Assumptions
Saleable Acreage 3.999
Net Acreage 3.276
Bonds $11,621.56 Annually
Landscape Maint. District $842.68 Annually
Prop Taxes 1.12% of Appraised Value $1,998,651
Owners Association $492.12 Annually
Monthly Rental rate $0.49
Monthly NNN Rent $22,050.00
Management Fee Percentage 2.00%
Management Fee $0.1176 Annually/sf
Insurance $0.0480 Annually/sf
Utilities:
Electricity BY TENANT Annually/sf
Telephone $0.0036 Annually/sf
Alarm $0.0100 Annually/sf
Landscape Water $0.0720 Annually/sf
Security BY TENANT Annually/sf
HVAC Maint. $0.0900 Annually/sf
Elevator Maint. & Reserve $0.0234 Annually/sf
Landscape $0.0750 Annually/sf
Roof Maint. & Reserve $0.0750 Annually/sf
Painting Reserve $0.0198 Annually/sf
Paving Maint. & Reserve $0.0500 Annually/sf
[Remaining Exhibits intentionally omitted]
<PAGE>
STANDARD LEASE AGREEMENT 13,430 square feet
Trammell Crow Company
Dallas Industrial 85-Mod NE Markison Road
Dallas, TX 75238
Code: 214211-24
Lease Agreement
THIS LEASE AGREEMENT, made and entered into by and between CROW-MARKISON
22-27, LIMITED PARTNERSHIP hereinafter referred as "Landlord", and WEB
TECHNOLOGY, INC. hereinafter referred to as "Tenant";
W I T N E S S E T H:
1. PREMISES AND TERM. In consideration of the obligation of Tenant to pay
rent as herein provided, and in consideration of the other terms, provisions and
covenants hereof, Landlord hereby demises and leases to Tenant, and Tenant
hereby takes from Landlord certain premises situated within the County of
Dallas, State of Texas, more particularly described on EXHIBIT "A" attached
hereto and incorporated herein by reference, together with all rights,
privileges, easements, appurtenances, and amenities belonging to or in any way
pertaining to the premises. If the premises consist of the entire leaseable area
of the building shown on EXHIBIT "A", then the premises include such entire
building with all land and improvements shown on EXHIBIT "A" (such entire
building, land and improvements being called the "Project").
TO HAVE AND TO HOLD the same for a term commencing on the "commencement
date" as hereinafter defined, and ending 60 months thereafter, provided,
however, that, in the event the "commencement date" is a date other than the
first day of a calendar month, said term shall extend for said number of months
in addition to the remainder of the calendar month following the "commencement
date".
A. The "commencement date" shall be ___________________________________.
Tenant acknowledges that it has inspected and accepts the premises, and
specifically the buildings and improvements comprising the same, in their
present condition as suitable for the purpose for which the premises are leased.
Taking of possession by Tenant shall be deemed conclusively to establish that
said buildings and other improvements are in good and satisfactory condition as
of when possession was taken. Tenant further acknowledges that no
representations as to the repair of the premises, nor promises to alter, remodel
or improve the premises have been made by Landlord, unless such are expressly
set forth in this lease. If this lease is executed before the premises become
vacant or otherwise available and ready for occupancy, or if any present tenant
or occupant of the premises holds over, and Landlord cannot acquire possession
of the premises prior to said "commencement date," Landlord shall not be deemed
to be in default hereunder, and Tenant agrees to accept possession of the
premises at such time as Landlord is able to tender the same, which date shall
thenceforth be deemed the "commencement date"; and Landlord hereby waives
payment of rent covering any period prior to the tendering of possession to
Tenant hereunder. After the commencement date Tenant shall, upon demand, execute
and deliver to Landlord a letter of acceptance of delivery of the premises.
1
<PAGE>
[Paragraph A Intentionally Deleted]
B. In the event this lease pertains to a building to be constructed, the
provisions of this subparagraph B shall apply in lieu of the provisions of
subparagraph A above and the "commencement date" shall be the date upon which
the buildings and other improvements erected and to be erected upon the premises
shall have been substantially completed in accordance with the plan and
specifications described on Exhibit "B" attached hereto and incorporated herein
by reference. Delays of any nature whatsoever attributable to the acts or
omissions of Tenant or its employees, agents or contractors, shall not be cause
for delay of the commencement date. Landlord shall notify Tenant in writing as
soon as Landlord deems said buildings and other improvements to be completed and
ready for occupancy as aforesaid. In the event that said buildings and other
improvements have not in fact been substantially completed as aforesaid, Tenant
shall notify Landlord in writing of its objections. Landlord shall have a
reasonable time after delivery of such notice in which to take such corrective
action as may be necessary, and shall notify Tenant in writing as soon as it
deems such corrective action has been completed so that said buildings and other
improvements are completed and ready for occupancy. Taking of possession by
Tenant shall be deemed conclusively to establish that said buildings and other
improvements have been completed in accordance with the plans and specifications
and that the premises are in good and satisfactory condition, as of when
possession was so taken. Tenant acknowledges that no representations as to the
repair of the premises have been made by Landlord, unless such are expressly set
forth in this lease. After such "commencement date" Tenant shall, upon demand,
execute and deliver to Landlord a letter of acceptance of delivery of the
premises. In the event of any dispute as to substantial completion or work
performed or required to be performed by Landlord, the certificate of Landlord's
architect or general contractor shall be conclusive,
2. BASE RENT AND SECURITY DEPOSIT.
A. Tenant agrees to pay to Landlord rent for the premises, in advance,
without demand, deduction or set off, for the entire term hereof at the rate of
See Special Provision 22a Dollars ($ *? ) per month. One such monthly
installment plus other monthly charges as set forth in paragraph 2C below shall
be due and payable on the date hereof and a like monthly installment shall be
due and payable on or before the first day of each calendar month succeeding the
commencement date recited above during the hereby demised term, except that the
rental payment for any fractional calendar month at the commencement or end of
the lease period shall be prorated.
B. In addition Tenant agrees to deposit with Landlord on the date hereof
the sum of Seven Thousand Five and 98/100 Dollars ($7,005.98), which sum shall
be held by Landlord, without obligation for interest, as security for the
performance of Tenant's covenants and obligations under this lease, it being
expressly understood and agreed that such deposit is not an advance rental
deposit or a measure of Landlord's damages in case of Tenant's default. Upon the
occurrence of any event of default by Tenant, Landlord may, from time to time,
without prejudice to any other remedy provided herein or provided by law, use
such fund to the extent necessary to make good any arrears of rent or other
payments due Landlord hereunder, and any other damage, injury, expense or
liability caused by such event of default; and Tenant shall pay to Landlord on
demand the amount so applied in order to restore the security deposit to its
original amount. Although the security deposit shall be deemed the property of
Landlord, any remaining balance of such deposit shall be returned by Landlord to
Tenant at such time after termination of this lease that all of Tenant's
obligations under this lease have been fulfilled. If, during the term of this
Lease, Landlord, in Landlord's sole opinion, judgment and discretion, deems
itself insecure as to the performance or prospect of performance by Tenant as to
any of Tenant's obligations pursuant to this Lease, Tenant shall be required to
provide Landlord with an additional security deposit, in an amount and form
acceptable to Landlord. [Last sentence intentionally deleted.]
2
<PAGE>
C. Tenant agrees to pay its proportionate share of (i) Taxes payable by
Landlord pursuant to Paragraph 3(A) below, (ii) common utilities pursuant to
Paragraph 8 below, and (iii) Landlord's costs of carrying fire and extended
coverage insurance on the Project improvements pursuant to Paragraph 9(A) below.
During each month of the term of this lease, Tenant shall make a monthly escrow
deposit with Landlord, equal to 1/12 of its proportionate share of all such
items which will be due and payable for that particular year. Tenant authorizes
Landlord to use the funds deposited with Landlord under this Paragraph 2(C) to
pay such costs. The initial monthly escrow payments are based upon Tenant's
proportionate share of the estimated amounts for the year in question, and the
monthly escrow payments are subject to increase or decrease as determined by
Landlord to reflect an accurate monthly escrow of Tenant's estimated
proportionate share of all such items. The escrow payment account of Tenant
shall be reconciled annually. If the Tenant's total escrow payments are less
than Tenant's actual proportionate share of all such items, Tenant shall pay to
Landlord upon demand the difference; if the total escrow payments of Tenant are
more than Tenant's actual proportionate share of all such items, Landlord shall
retain such excess and credit it to Tenant's next accruing escrow account
payments. Tenant's "proportionate share" shall be a fraction, the numerator of
which shall be the number of leaseable square feet of floor space in the
premises and the denominator of which shall be the number of leasable square
feet of the entire building. The amount of the initial monthly escrow payments
are as follows:
(1) Base Rent as set forth in Paragraph 2(A).......................... $*
(2) Initial Tax Escrow Payment........................................ $559.58
(3) Initial Insurance Escrow Payment.................................. $11.19
(4) Initial Utility charge, Electric: $44.77, Water: $22.38........... $67.15
(5) Other, Landscaping: $201.45, Maintenance: $11.19.................. $212.64
(6) Administrative fee of 10% of items (2) through (5)................ $n/a
Monthly Payment Total................................ $*
3. TAXES.
A. Landlord agrees to pay before they become delinquent all taxes,
assessments and governmental charges of any kind and nature whatsoever including
without limitation assessments due to deed restrictions and/or owner
associations (collectively referred to herein as "Taxes") which accrue against
the Project or any part thereof.
3
<PAGE>
B. If at any time during the term of this lease, the present method of
taxation shall be changed so that in lieu of the whole or any part of any taxes,
assessments or governmental charges levied, assessed or imposed on real estate
and the improvements thereon, there shall be levied, assessed or imposed on
Landlord a capital levy or other tax directly on the rents received therefrom
and/or a franchise tax, assessment, levy or charge measured by or based, in
whole or in part, upon such rents for the present or any future building or
buildings on the premises, then all such taxes, assessments, levies or charges,
or the part, thereof so measured or based, shall be deemed to be included within
the term "Taxes" for the purposes hereof.
C. The Landlord shall have the right to employ a tax consulting firm to
attempt to assure a fair tax burden on the building and grounds within the
applicable taxing jurisdiction. Tenant shall pay to Landlord upon demand from
time to time, as additional rent, the amount of Tenant's proportionate share of
the cost of such service.
D. Any payment to be made pursuant to this Paragraph 3 with respect to the
calendar year in which this lease commences or terminates shall be prorated.
4. LANDLORD'S REPAIRS. Landlord shall at his expense maintain only the
roof, foundation and the structural soundness of the exterior walls of the
building in good repair, reasonable wear and tear excepted. Tenant shall repair
and pay for any damage caused by negligence of Tenant, or Tenant's employees,
agents or invitees, or caused by Tenant's default hereunder. The term "walls" as
used herein shall not include windows, glass or plate glass, doors, special
store fronts or office entries. Tenant shall immediately give Landlord written
notice of defect or need for repairs, after which Landlord shall have reasonable
opportunity to repair same or cure such defect. Landlord's liability with
respect to any defects, repairs or maintenance for which Landlord is responsible
under any of the provisions of this lease shall be limited to the cost of such
repairs or maintenance or the curing of such defect.
5. TENANT'S REPAIRS.
A. Tenant shall at its own cost and expense keep and maintain all parts of
the premises (except those for which Landlord is expressly responsible under the
terms of this lease) in good condition, promptly making all necessary repairs
and replacements, including but not limited to, windows, glass and plate glass,
doors, any special office entry, interior walls and finish work, floors and
floor covering, downspouts, gutters, heating and air conditioning systems, dock
boards, truck doors, dock bumpers, paving, plumbing work and fixtures, termite
and pest extermination, regular removal of trash and debris, regular mowing of
any grass, trimming, weed removal and general landscape maintenance, including
rail spur areas, keeping the parking areas, driveways, alleys and the whole of
the premises in a clean and sanitary condition, and maintaining any spur track
servicing the premises (Tenant agrees to sign a joint maintenance agreement with
the railroad company servicing the premises, if requested by the railroad
company). Tenant shall at its own cost and expense repaint exterior overhead
doors, canopies, entries, handrails, gutters, and other exposed parts of the
building which reasonably require periodic repainting to prevent deterioration
or to maintain aesthetic standards.
4
<PAGE>
B. The cost of maintenance and repair of any common party wall, (any wall,
divider, partition or any other structure separating the premises from any
adjacent premises occupied by other tenants) shall be shared equally by Tenant
and the tenant occupying adjacent premises. Tenant shall not damage any party
wall or disturb the integrity and support provided by any party wall and shall,
at its sole cost and expense, promptly repair any damage or injury to any party
wall caused by Tenant or its employees, agent or invitees.
C. In the event the premises constitute a portion of a multiple occupancy
building, Tenant and its employees, customers and licensees shall have the
exclusive right to use the parking areas designated on Exhibit "C", attached
hereto, if any, as may be designated by Landlord in writing, [previous sentence
intentionally omitted] subject to such reasonable rules and regulations as
Landlord may from time to time prescribe and subject to rights of ingress and
egress of other tenants. Landlord shall not be responsible for enforcing
Tenant's exclusive parking rights against any third parties. Parking spaces have
been provided in accordance with applicable local building codes and Tenant
agrees not to use more spaces than so provided.
D. Further, Landlord reserves the right to perform the paving and landscape
maintenance, exterior painting and common sewage line plumbing which are
otherwise Tenant's obligations under subparagraph A above, and Tenant shall, in
lieu of the obligations set forth under subparagraph A above with respect to
such items, be liable for its proportionate share (as defined in subparagraph
21B) of the cost and expense of the care for the grounds around the building,
including but not limited to, the mowing of grass, care of shrubs, general
landscaping, maintenance of parking areas, driveways and alleys, exterior
repainting and common sewage line plumbing; provided, however, that Landlord
shall have the right to require Tenant to pay such other reasonable proportion
of said mowing, shrub care and general landscaping costs and security services
costs as may be determined by Landlord in its sole discretion; and further
provided that if Tenant or any other particular tenant of the building can be
clearly identified as being responsible for obstructions or stoppage of the
common sanitary sewage line, then Tenant, if Tenant is responsible, or such
other responsible tenant, shall pay the entire cost thereof, upon demand, as
additional rent. Tenant shall pay when due its share, determined as aforesaid,
of such costs and expenses along with the other tenants of the building to
Landlord upon demand, as additional rent, for the amount of its share as
aforesaid of such costs and expenses in the event Landlord elects to perform or
cause to be performed such work.
E. In the event the premises constitute a portion of a multiple occupancy
building, Landlord shall have the right to coordinate any repairs and other
maintenance of any rail tracks serving or to serve the building, and if Tenant
uses such rail tracks, Tenant shall reimburse Landlord from time to time upon
demand, as additional rent, for a share of the costs of such repairs and
maintenance and any other sums specified in any agreement to which Landlord is a
party respecting such tracks, such share to be a fraction, the numerator of
which is the space contained in the premises, and the denominator of which is
the entire space occupied by rail users in the building.
F. Tenant shall, at its own cost and expense, enter into a regularly
scheduled preventative maintenance/service contract with a maintenance
contractor for servicing all hot water, heating and air conditioning systems and
equipment within the premises. The maintenance contractor and the contract must
be approved by Landlord. The service contract must include all services
suggested by the equipment manufacturer within the operation/ maintenance manual
and must become effective (and a copy thereof delivered to Landlord) within
thirty (30) days of the date Tenant takes possession of the premises.
5
<PAGE>
6. ALTERATIONS. Tenant shall not make any alterations, additions or
improvements to the premises (including but not limited to roof and wall
penetrations) without the prior written consent of Landlord. Tenant may, without
the consent of Landlord, but at its own cost and expense and in a good
workmanlike manner erect such shelves, bins, machinery and trade fixtures as it
may deem advisable, without altering the basic character of the building or
improvements and without overloading or damaging such building or improvements,
and in each case complying with all applicable governmental laws, ordinances,
regulations and other requirements. All alterations, additions, improvements and
partitions erected by Tenant shall be and remain the property of Tenant during
the term of this lease and Tenant shall, unless Landlord otherwise elects as
hereinafter provided, remove all alterations, additions, improvements and
partitions erected by Tenant and restore the premises to their original
condition by the date of termination of this lease or upon earlier vacating of
the premises; provided, however, that if Landlord so elects prior to termination
of this lease or upon earlier vacating of the premises, such alterations,
additions, improvements and partitions shall become the property of Landlord as
of the date of termination of this lease or upon earlier vacating of the
premises and shall be delivered up to the Landlord with the premises. All
shelves, bins, machinery and trade fixtures installed by Tenant may be removed
by Tenant prior to the termination of this lease if Tenant so elects, and shall
be removed by the date of termination of this lease or upon earlier vacating of
the premises if required by Landlord; upon such removal Tenant shall restore the
premises to their original condition. All such removals and restoration shall be
accomplished in good workmanlike manner so as not to damage the primary
structure or structural qualities of the buildings and other improvements
situated on the premises.
7. SIGNS.
A. Tenant agrees to have signage program approved by Landlord in accordance
with Landlord's criteria and subject to Landlord's written approval prior to the
commencement date of this lease. The Tenant, upon vacation of the premises, or
the removal or alteration of its sign for any reason, shall be responsible for
the repair, painting, and/or replacement of the building facia surface to which
signs are attached. Landlord gives its approval for Tenant to apply exterior
signage to the premises that is similar in appearance to Tenant's current
exterior signage at 10520 Plano Road, Suite 104, Dallas, Texas.
B. Tenant shall not, without Landlord's prior written consent (i) make any
changes to or paint the store front; or (ii) install any exterior lights,
decorations or paintings; or (iii) erect or install any signs, windows or door
lettering, placards, decorations or advertising media of any type which can be
viewed from the exterior of the premises, excepting only dignified displays of
customary type for its display windows. All signs, decorations, advertising
media, blinds, draperies and other window treatment of bars or other security
installations visible from outside the premises shall conform in all respects to
the criteria established by Landlord for the Project from time to time in the
exercise of its sole discretion, and shall be subject to the prior written
approval of Landlord as to construction, method of attachment, size, shape,
height, lighting, color and general appearance. All signs shall be kept in good
condition and in proper operating order at all times. Landlord reserves the
right to designate a uniform type of sign for the Project to be installed by
Tenant (or, at Landlord's option, by Landlord), but in any event to be paid for
by Tenant.
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8. UTILITIES. Landlord agrees to provide at its cost water and electricity
service connections into the premises; but Tenant shall pay for all water, gas,
heat, light, power, telephone, sewer, sprinkler charges and other utilities and
services used on or from the premises, together with any taxes, penalties,
surcharges or the like pertaining thereto and any maintenance charges for
utilities and shall furnish all electric light bulbs and tubes. If any such
services are not separately metered to Tenant, Tenant shall pay a reasonable
proportion as determined by Landlord of all charges jointly metered with other
premises. Landlord shall in no event be liable for any interruption or failure
of utility services on the premises.
9. FIRE AND CASUALTY DAMAGE.
A. Landlord agrees to maintain insurance covering the building of which the
premises are a part in an amount not less than eighty percent (80%) (or such
greater percentage as may be necessary to comply with the provisions of any
co-insurance clauses of the policy) of the "replacement cost" thereof as such
coverage is defined in the Replacement Cost Endorsement to be attached thereto,
insuring against the perils of Fire, Lightning, Extended Coverage, Vandalism and
Malicious Mischief, extended by Special Extended Coverage Endorsement to insure
against all other Risks of Direct Physical Loss, such coverages and endorsements
to be as defined, provided and limited in the standard bureau forms prescribed
by the insurance regulatory authority for the State in which the premises are
situated for use by insurance companies admitted in such state for the writing
of such insurance on risks located within such state. Subject to the provisions
of subparagraphs 9B and 9D below, such insurance shall be for the sole benefit
of Landlord and under its sole control. Tenant agrees to pay, to Landlord, as
additional rental, Landlord's cost of maintaining such insurance on said
building (or, in the event the premises constitute a portion of a multiple
occupancy building, Tenant's full proportionate share (as defined in
subparagraph 21B) of such cost). Said payments shall be made to Landlord within
ten (10) days after presentation to Tenant of Landlord's statement setting forth
the amount due. Any payment to be made pursuant to this subparagraph A, with
respect to the year in which this lease commences or terminates shall bear the
same ratio to the payment which would be required to be made for the full year
as that part of such year covered by the term of this lease bears to a full
year.
B. If the buildings situated upon the premises should be damaged or
destroyed by fire, tornado or other casualty, Tenant shall give immediate
written notice thereof to Landlord.
C. If the buildings situated upon the premises should be totally destroyed
by fire, tornado or other casualty, or if they should be so damaged thereby that
rebuilding or repairs cannot in Landlord's estimation be completed within two
hundred (200) days after the date upon which Landlord is notified by Tenant of
such damage, this lease shall terminate and the rent shall be abated during the
unexpired portion of this lease, effective upon the date of the occurrence of
such damage.
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D. If the buildings situated upon the premises should be damaged by any
peril covered by the insurance to be provided by Landlord under subparagraph
9(A) above, but only to such extent that rebuilding or repairs can in Landlord's
estimation be completed within two hundred (200) days after the date upon which
Landlord is notified by Tenant of such damage, this lease shall not terminate,
and Landlord shall at its sole cost and expense thereupon proceed with
reasonable diligence to rebuild and repair such buildings to substantially the
condition in which they existed prior to such damage, except that Landlord shall
not be required to rebuild, repair or replace any part of the partitions,
fixtures, additions and other improvements which may have been placed in, or
about the premises by Tenant. and except that Tenant shall pay to Landlord upon
demand any amount by which Landlord's cost of such rebuilding, repair and/or
replacement exceeds net insurance proceeds paid to Landlord in connection with
such damage. [previous sentence intentionally omitted] If the premises are
untenantable in whole or in part following such damage, the rent payable
hereunder during the period in which they are untenantable shall be reduced to
such extent as may be fair and reasonable under all of the circumstances. In the
event that Landlord should fail to complete such repairs and rebuilding within
two hundred (200) days after the date upon which Landlord is notified by Tenant
of such damage, Tenant may at its option terminate this lease by delivering
written notice of termination to Landlord as Tenant's exclusive remedy,
whereupon all rights and obligations hereunder shall cease and terminate.
E. Notwithstanding anything herein to the contrary, in the event the holder
of any indebtedness secured by a mortgage or deed of trust covering the premises
requires that the insurance proceeds be applied to such indebtedness, then
Landlord shall have the right to terminate this lease by delivering written
notice of termination to Tenant within fifteen (15) days after such requirement
is made by any such holder, whereupon all rights and obligations hereunder shall
cease and terminate.
F. Anything in this lease to the contrary notwithstanding, Landlord and
Tenant hereby waive and release each other of and from any and all rights of
recovery, claim, action or cause of action, against each other, their agents,
officers and employees, for any loss or damage that may occur to the premises,
improvements to the building of which the premises are a part, or personal
property (building contents) within the building, by reason of fire or the
elements regardless of cause or origin, including negligence of Landlord or
Tenant and their agents, officers and employees, but only to the extent of the
insurance proceeds payable under the policies of insurance covering the
property. Because this subparagraph will preclude the assignment of any claim
mentioned in it by way of subrogation (or otherwise) to an insurance company (or
any other person), each party to this lease agrees immediately to give each
insurance company which has issued to it policies of fire and extended coverage
insurance, written notice of the terms of the mutual waivers contained in this
subparagraph, and to have the insurance policies property endorsed, if
necessary, to prevent the invalidation of the insurance coverages by reason of
the mutual waivers contained in this subparagraph.
10. LIABILITY. Landlord shall not be liable to Tenant or Tenant's
employees, agents, patrons or visitors, or to any other person whomsoever, for
any injury to person or damage to property on or about the premises, resulting
from and/or caused in part or whole by the negligence or misconduct of Tenant,
its agents, servants or employees of any other person entering upon the
premises, or caused by the buildings and improvements located on the premises
becoming out of repair, or caused by leakage of gas, oil, water or steam or by
electricity emanating from the premises, or due to any cause whatsoever, and
Tenant hereby covenants and agrees that it will at all times indemnify and hold
safe and harmless the property, the Landlord (including without limitation the
trustee and beneficiaries if Landlord is a trust), Landlord's agents and
employees from any loss, liability, claims, suits, costs, expenses, including
without limitation attorney's fees and damages, both real and alleged, arising
out of any such damage or injury; except injury to persons or damage to property
the sole cause of which is the negligence of Landlord or the failure of Landlord
to repair any part of the premises which Landlord is obligated to repair and
maintain hereunder within a reasonable time after the receipt of written notice
from Tenant of needed repairs. Tenant shall procure and maintain throughout the
term of this lease a policy or policies of insurance, at its sole cost and
expense, insuring both Landlord and Tenant against all claims, demands or
actions arising out of or in connection with: (i) the premises; (ii) the
condition of the premises; (iii) Tenant's operations in and maintenance and use
of the premises; and (iv) Tenant's liability assumed under this lease, the
limits of such policy or policies to be in the amount of not less than $500,000
per occurrence in respect of injury to persons (including death), and in the
amount of not less than $100,000 per occurrence in respect of property damage or
destruction, including loss of use thereof, All such policies shall be procured
by Tenant from reaponsible insurance companies satisfactory to Landlord.
Certified copies of such policies, together with receipt evidencing payment of
premiums therefor, shall be delivered to Landlord prior to the Commencement date
of this lease. Not less than fifteen (15) days prior to the expiration date of
any such policies, certified copies of the renewals thereof (bearing notations
evidencing the payment of renewal premiums shall be delivered to Landlord. Such
policies shall further provide that not less than thirty (30) days written
notice shall be given to Landlord before such policy may be cancelled or changed
to reduce insurance provided thereby.
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11. USE. The demised premises shall be used only for the purpose of
receiving, storing, shipping and selling (other than retail) products, materials
and merchandise made and/or distributed by Tenant and for such other lawful
purposes as may be incidental thereto. Outside storage, including without
limitation, trucks and other vehicles, is prohibited without Landlord's prior
written consent. Tenant shall at its own cost and expense obtain any and all
licenses and permits necessary for any such use. Tenant shall comply with all
governmental laws, ordinances and regulations applicable to the use of the
premises, and shall promptly comply with all governmental orders and directives
for the correction, prevention and abatement of nuisances in or upon, or
connected with, the premises, all at Tenant's sole expense. Tenant shall not
permit any objectionable or unpleasant odors, smoke, dust, gas, noise or
vibrations to emanate from the premises, nor take any other action which would
constitute a nuisance or would disturb or endanger any other tenants of the
building in which the premises are situated or unreasonably interfere with their
use of their respective premises. Without Landlord's prior written consent,
Tenant shall not receive, store or otherwise handle any product, material or
merchandise which is explosive or highly inflammable, Tenant will not permit the
premises to be used for any purpose or in any manner (including without
limitation any method of storage) which would render the insurance thereon void
or the insurance risk more hazardous or cause the State Board of Insurance or
other insurance authority to disallow any sprinkler credits. If any increase in
the fire and extended coverage insurance premiums paid by Landlord or other
Tenants for the building in which Tenant occupies space is caused by Tenant's
use and occupancy of the premises, or if Tenant vacates the premises and causes
an increase in such premiums, then Tenant shall pay as additional rental the
amount of such increase to Landlord.
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12. INSPECTION. Landlord and Landlord's agents and representatives shall
have the right to enter and inspect the premises at any reasonable time during
business hours, for the purpose of ascertaining the condition of the premises or
in order to make such repairs as may be required or permitted to made by
Landlord under the terms of this lease. During the period that is six (6) months
prior to the end of the term hereof, Landlord and Landlord's agents and
representatives shall have the right to enter the premises at any reasonable
time during business hours for the purpose of showing the premises and shall
give the right to erect on the premises a suitable sign indicating the premises
are available. Tenant shall give written notice to Landlord at least thirty (30)
days prior to vacating the premises and shall arrange to meet with Landlord for
a joint inspection of the premises prior to vacating. In the event of Tenant's
failure to give such notice or arrange such joint inspection, Landlord's
inspection at or after Tenant's vacating the premises shall be conclusively
deemed correct for purposes of determining Tenant's responsibility for repairs
and restoration.
13. ASSIGNMENT AND SUBLETTING.
A. Tenant shall not have the right to assign, sublet, transfer or encumber
this lease, or any interest therein, without the prior written consent of
Landlord. Any attempted assignment, subletting, transfer or encumbrance by
Tenant in violation of the terms and covenants of this Paragraph shall be void.
All cash or other proceeds of any assignment, such proceeds as exceed the
rentals called for hereunder in the case of a subletting and all cash or other
proceeds of any other transfer of Tenant's interest in ths lease shall be paid
to Landlord, whether such assignment, subletting or other transfer is consented
to by Landlord or not, unless Landlord agrees to the contrary in writing, and
Tenant hereby assigns all rights it might have or ever acquire in any such
proceeds to Landlord. Any assignment, subletting or other transfer of Tenant's
interest in this lease shall be for an amount equal to the then fair market
value of such interest. These covenants shall run with the land and shall bind
Tenant and Tenant's heirs, executors, administrators, personal representatives,
representatives in any bankruptcy proceeding, successors and assigns. Any
assignee, sublessee or transferee of Tenant's interest in this lease (all such
assignees, sublessees and transferees being hereinafter referred to as
"successors"), by assuming Tenant's obligations hereunder shall assume liability
to Landlord for all amounts paid to persons other than Landlord by such
successors in contravention of this Paragraph. No assignment, subletting or
other transfer, whether consented to by Landlord or not, shall relieve Tenant of
its liability hereunder. Upon the occurrence of an "event of default" as
hereinafter defined, if the premises or any part thereof are then assigned or
sublet, Landlord, in addition to any other remedies herein provided, or provided
by law, may at its option collect directly from such assignee or subtenant all
rents becoming due to Tenant under such assignment or sublease and apply such
rent against any sums due to Landlord from Tenant hereunder, and no such
collection shall be construed to constitute a novation or a release of Tenant
from the further performance of Tenant's obligations hereunder.
B. If this Lease is assigned to any person or entity pursuant to the
provisions of the Bankruptcy Code, 11 U.S.C. ss. 101 et. seq., (the "Bankruptcy
Code"), any and all monies or ther considerations payable or otherwise to be
delivered in connection with such assignment shall be paid or 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 and all monies or other considerations constituting
Landlord's property under the preceding sentence not paid or delivered to
Landlord shall be held in trust for the benefit of Landlord and be promptly paid
or delivered to Landlord.
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C. Any person or entity to which this lease is assigned pursuant to the
provisions of the Bankruptcy Code, 11 U.S.C.ss. et. seq., shall be deemed,
without further act or deed, to have assumed all of the obligations arising
under this Lease on and after the date of such assignment. Any such assignee
shall upon demand execute and deliver to Landlord an instrument of confirming
such assumption.
14. CONDEMNATION.
A. If the whole or any substantial part as determined by Landlord of the
premises should be taken for any public or quasi-public use under governmental
law, ordinance or regulation, or by right of eminent domain, or by private
purchase in lieu thereof and the taking would prevent or materially interfere
with the use of the premises for the purpose for which they are being used, as
determined by Landlord this lease shall terminate and the rent shall be abated
during the unexpired portion of this lease, effective when the physical taking
of said premises shall occur.
B. If part of the premises shall be taken for any public or quasi-public
use under any governmental law, ordinance or regulation, or by right of eminent
domain, or by private purchase in lieu thereof, and this lease is not terminated
as provided in the subparagraph above, this lease shall not terminate but the
rent payable hereunder during the unexpired portion of this lease shall be
reduced to such extent as may be fair and reasonable under all of the
circumstances.
C. All compensation awarded for any taking (or the proceeds of private sale
in lieu thereof) of the Project, or any part thereof, shall be the property of
Landlord and Tenant hereby assigns its interest in any such award to Landlord;
provided, however, Landlord shall have no interest in any award made to Tenant
for loss of business or for the taking of Tenant's fixtures and improvements if
a separate award for such items is made to Tenant.
15. HOLDING OVER. Tenant will, at the termination of this lease by lapse of
time or otherwise, yield up immediate possession to Landlord with all repairs
and maintenance required herein to be performed by Tenant completed. If Landlord
agrees in writing that Tenant may hold over after the expiration or termination
of this lease, unless the parties hereto otherwise agree in writing on the terms
of such holding over, the hold over tenancy shall be subject to termination by
Landlord at any time upon not less than five (5) days advance written notice, or
by Tenant at any time upon not less than thirty (30) days advance notice, and
all of the other terms and provisions of this lease shall be applicable during
that period, except that Tenant shall pay Landlord from time to time upon
demand, as rental for the period of any hold over, an amount equal to double the
rent in effect on the termination date, computed on a daily basis for each day
of the hold over period. No holding over by Tenant, whether with or without
consent of Landlord shall operate to extend this lease except as otherwise
expressly provided. The preceding provisions of this paragraph 14 shall not be
construed consent for Tenant to hold over.
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16. QUIET ENJOYMENT. Landlord covenants that it now has, or will acquire
before Tenant takes possession of the premises, good title to the premises, free
and clear of all liens and encumbrances, excepting only the lien for current
taxes not yet due, such mortgage or mortgages as are permitted by the terms of
this lease, zoning ordinances and other building and fire ordinances and
governmental regulations relating to the use of such property, and easements,
restrictions and other conditions of record. In the event this lease is a
sublease, then Tenant agrees to take the premises subject to the provisions of
the prior leases. Landlord represents and warrants that it has full rights and
authority to enter into this lease and that Tenant, upon paying the rental
herein set forth and performing its other covenants and agreements herein set
forth, shall peaceably and quietly have, hold and enjoy the premises for the
term hereof without hindrance or molestation from Landlord, subject to the terms
and provisions of this lease,
17. EVENTS OF DEFAULT. The following events shall be deemed to be events of
default by Tenant under this lease:
A. Tenant shall fail to pay any installment of the rent herein reserved
when due, or any other payment or reimbursement to Landlord required herein when
due, and such failure shall continue for a period of five (5) days from the date
such payment was due.
B. The Tenant or any guarantor of the Tenant's obligations hereunder shall
generally not pay its debts as they become due or shall admit in writing its
inability to pay its debts or shall make a general assignment for the benefit of
creditors; or the Tenant or any such guarantor shall commence any case,
proceeding or other action seeking to have an order for relief entered on its
behalf as a debtor or to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, liquidation, dissolution or composition
of it or its debts under any law relating to bankruptcy, insolvency,
reorganization or relief of debtors or seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all or of any
substantial part of its property; or the Tenant or any such guarantor shall take
any action to authorize or in contemplation of any of the actions set forth
above in this paragraph; or
C. Any case, proceeding or other action against the Tenant or any guarantor
of the Tenant's obligations hereunder shall be commenced seeking to have an
order for relief entered against it as debtor or to adjudicate it a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment, liquidation,
dissolution or composition of it or its debts under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors, or seeking
appointment of a receiver, trustee, custodian or other similar official for it
or for all or any substantial part of its property, and such case, proceeding or
other action (i) results in the entry of an order for relief against it which it
is not fully stayed within seven business days after the entry thereof or (ii)
shall remain undismissed for a period of 45 days.
D. A receiver or trustee shall be appointed for all or substantially all of
the assets of Tenant.
E. Tenant shall generally not pay its debts as such debts become due.
F. Tenant shall vacate all or a substantial portion of the premises,
whether or not Tenant is in default of the rental payments due under this lease.
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G. Tenant shall fail to discharge any lien placed upon the premises in
violation of Paragraph 20 hereof within twenty (20) days after any such lien or
encumbrance is filed against the premises.
H. Tenant shall fail to comply with any term, provision or covenant of this
lease (other than the foregoing in this Paragraph 17), and shall not cure such
failure within twenty (20) days after written notice thereof to Tenant.
I. Tenant shall fail to continuously operate its business at the Demised
Premises for the permitted use set forth in paragraph 11, whether or not Tenant
is in default of the rental payments due under this Lease,
18. REMEDIES.
A. Upon the occurrence of any of such events of default described in
Paragraph 17 hereof, Landlord shall have the option to pursue any one or more of
the following remedies without any notice or demand whatsoever;
(1) Terminate this lease, in which event Tenant shall immediately
surrender the premises to Landlord, and if Tenant fails so to do, Landlord
may, without prejudice to any other remedy which it may have for possession
or arrearages in rent, enter upon and take possession of the premises and
expel or remove Tenant and any other person who may be occupying such
premises or any part thereof, by force if necessary, without being liable
for prosecution or any claim of damages therefor.
(2) Enter upon and take possession of the premises and expel or remove
Tenant and any other person who maybe occupying such premises or any part
thereof, by force if necessary, without being liable for prosecution or any
claim for damages therefor, and relet the premises and receive the rent
therefor.
(3) Enter upon the premises, by force if necessary, without being
liable for prosecution or any claim for damages therefor, and do whatever
Tenant is obligated to do under the terms of this lease; and Tenant agrees
to reimburse Landlord on demand for any expenses which Landlord may incur
in thus effecting compliance with Tenant's obligations under this lease,
and Tenant further agrees that Landlord shall not be liable for any damages
resulting to the Tenant from such action, whether caused by the negligence
of Landlord or otherwise.
(4) Alter all locks and other security devices at the premises without
terminating this lease.
B. In the event Landlord may elect to regain possession of the
premises by a forcible detainer proceeding, Tenant hereby specifically
waives any statutory notice which may be required prior to such
proceeding, and agrees that Landlord's execution of this lease is, in part,
consideration for this waiver.
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C. In the event Tenant fails to pay any installment of rent hereunder as
and when such installment is due, to help defray the additional cost to Landlord
for processing such late payments Tenant shall pay to Landlord on demand a late
charge in an amount equal to five percent (5%) of such installment; and the
failure to pay such amount within ten (10) days after demand therefor shall be
an event of default hereunder. The provision for such late charge shall be in
addition to all of Landlord's other rights and remedies hereunder or at law and
shall not be construed as liquidated damages or as limiting Landlord's remedies
in any manner.
D. In the event Tenant's check, given to Landlord in payment, is returned
by the bank for non-payment, Tenant agrees to pay all expenses incurred by
Landlord as a result thereof.
E. Exercise by Landlord of any one or more remedies hereunder granted or
otherwise available shall not be deemed to be an acceptance of surrender of the
premises by Tenant, whether by agreement or by operation of law, it being
understood that such surrender can be effected only by the written agreement of
Landlord and Tenant. No such alteration of locks or other security devices and
no removal or other exercise of dominion by Landlord over the property of Tenant
or others at the premises shall be deemed unauthorized or constitute a
conversion, Tenant hereby consenting, after any event of default, to the
aforesaid exercise of dominion over Tenant's property within the premises. All
claims for damages by reason of such re-entry and/or repossession and/or
alteration of locks or other security devices are hereby waived, as are all
claims for damages by reason of any distress warrant, forcible detainer
proceedings, sequestration proceedings or other legal process. Tenant agrees
that any re-entry by Landlord may be pursuant to judgment obtained in forcible
detainer proceedings or other legal proceedings or without the necessity for any
legal proceedings, as Landlord may elect, and Landlord shall not be liable in
trespass or otherwise.
F. In the event Landlord elects to terminate the lease by reason of an
event of default, then notwithstanding such termination, Tenant shall be liable
for and shall pay to Landlord, at the address specified for notice to Landlord
herein, the sum of all rental and other indebtedness accrued to date of such
termination, plus, as damages, an amount equal to the greater of (i) [preceding
words intentionally omitted] the total rental hereunder for the remaining
portion of the lease term (had such term not been terminated by Landlord prior
to the date of expiration stated in Paragraph 1). and (ii) the then present
value of the then fair rental value of the premises for such period. [preceding
words intentionally omitted.]
G. In the event that Landlord elects to repossess the premises without
terminating the lease, or in the event Landlord elects to terminate the Lease,
then Tenant, at Landlord's option shall be liable for and shall pay to Landlord,
at the address specified for notice to Landlord herein, all rental and other
indebtedness accrued to the date of such repossession, plus rental required to
be paid by Tenant to Landlord during the remainder of the lease term until the
date of expiration of the term as stated in Paragraph 1 diminished by any net
sums thereafter received by Landlord through reletting the premises during said
period (after deducting expenses incurred by Landlord as provided in
subparagraph 18(G) below). In no event shall Tenant be entitled to any excess of
any rental obtained by reletting over and above the rental herein reserved.
Actions to collect amounts due by Tenant to Landlord under this subparagraph may
be brought from time to time, on one or more occasions, without the necessity of
Landlord's waiting until expiration of the lease term.
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H. In case of any event of default or breach by Tenant, or threatened or
anticipatory breach or default, Tenant shall also be liable for and shall pay to
Landlord, at the address specified for notice to Landlord herein, in addition to
any sum provided to be paid above, brokers' fees incurred by Landlord in
connection with reletting the whole or any part of the premises; the costs of
removing and storing Tenant's or other occupant's property; the costs of
repairing, altering, remodeling or otherwise putting the premises into condition
acceptable to a new tenant or tenants; and all reasonable expenses incurred by
Landlord in enforcing or defending Landlord's rights and/or remedies including
reasonable attorney's fees which shall be not less than fifteen percent (15%) of
all sums then owing by Tenant to Landlord whether suit is actually filed or not.
I. In the event of termination or repossession of the premises for an event
of default, Landlord shall not have any obligations to relet or to attempt to
relet the premises, or any portion thereof, or to collect rental after
reletting; and in the event of reletting, Landlord may relet the whole or any
portions of the premises for any period to any tenant and for any use and
purpose.
J. If Tenant should fail to make any payment or cure any default hereunder
within the time herein permitted, Landlord, without being under any obligation
to do so and without thereby waiving such default, may make such payment and/or
remedy such other default for the account of Tenant (and enter the premises for
such, purpose), and thereupon Tenant shall be obligated to, and hereby agrees,
to pay Landlord, upon demand, all costs, expenses and disbursements (including
reasonable attorney's fees) incurred by Landlord in taking such remedial action.
K. In the event of any default by Landlord, Tenant's exclusive remedy shall
be an actions for damages (Tenant hereby waiving the benefit of any laws
granting it a liens upon the property of Landlord and/or upon rent due
Landlord), but prior to any such action Tenant will give Landlord written notice
specifying such default with particularity, and Landlord shall thereupon have
thirty days in which to cure any such default. Unless and until Landlord fails
to so cure any default after such notice, Tenant shall not have any remedy or
cause of action by reason thereof. All obligations of Landlord hereunder will be
construed as covenants, not conditions; and all such obligations will be binding
upon Landlord only during the period of its possession of the premises and not
thereafter. The term "Landlord" shall mean only the owner, for the time being of
the premises, and in the event of the transfer by such owner of its interest in
the premises, such owner shall thereupon be released and discharged from all
covenants and obligations of the Landlord thereafter accruing, but such
covenants and obligations shall be binding during the lease term upon each new
owner for the duration of such owner's ownership. Notwithstanding any other
provisions hereof, Landlord shall not have any personal liability hereunder. In
the event of any breach or default by Landlord in any term or provision of this
lease, Tenant agrees to look solely to the equity or interest then owned by
Landlord in the premises; however, in no event, shall any deficiency judgment or
any money judgment of any kind be sought or obtained against any party Landlord.
15
<PAGE>
L. In the event that Landlord shall have taken possession of the premises
pursuant to the authority herein granted then Landlord shall have the right to
keep in place and use all of the furniture, fixtures and equipment at the
premises, including that which is owned by or leased to Tenant at all times
prior to any foreclosure thereon by Landlord or repossession thereof by any
lessor thereof or third party having a lien thereon. Landlord shall also have
the right to remove from such premises (without the necessity of obtaining a
distress warrant, writ of sequestration or other legal process) all or any
portions of such furniture, fixtures, equipment and other property located
thereon and to place same in storage at any premises within the County in which
the premises is located; and in such event, Tenant shall be liable to Landlord
for costs incurred by Landlord in connection with such removal and storage.
Landlord shall also have the right to relinquish possession of all or any
portion of such furniture, fixtures, equipment and other property to any person
("Claimant") claiming to be entitled to possession thereof who presents to
Landlord a copy of any instrument represented to Landlord by Claimant to have
been executed by Tenant (or any predecessor of Tenant) granting Claimant the
right under various circumstances to take possession of such furniture,
fixtures, equipment or other property, without the necessity on the part of
Landlord to inquire into the authenticity of said instrument's copy of Tenant's
or Tenant's Predecessor's signature thereon and without the necessity of
Landlord making any nature of investigation or inquiry as to the validity of the
factual or legal basis upon which Claimant purports to act; and Tenant agrees to
indemnify and hold Landlord harmless from all cost, expense, loss, damage and
liability incident to Landlord's relinquishment of possession of all or any
portion of such furniture, fixtures, equipment or other property to Claimant.
The rights of Landlord herein stated shall be in addition to any and all other
rights which Landlord has or may hereafter have at law or in equity; and Tenant
stipulates and agrees that the rights herein granted Landlord are commercially
reasonable.
M. Notwithstanding anything in this Lease to the contrary, all amounts
payable by Tenant to or on behalf of Landlord under this Lease, whether or not
expressly denominated as rent, shall constitute rent for the purposes of section
502(b)(7) of the Bankruptcy Code, 11 U.S.C.ss. 502(b)(7).
N. This is a contract under which applicable law excuses Landlord from
accepting performance from (or rendering performance to) any person or entity
other than Tenant within the meaning of sections 365(c) and 365(e)(2) of the
Bankruptcy Code, 11 U.S.C.ss.ss. 365(c), 365(e)(2).
O. If this Lease is assigned to any person or entity pursuant to the
provisions of the Bankruptcy Code, 11 U.S.C. ss. 101 et seq., (the "Bankruptcy
Code"), any and all monies or other considerations payable or otherwise to be
delivered in connection with such assignment shall be paid or 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 and all monies or considerations constituting
Landlord's property under the preceding sentence not paid or delivered to
Landlord shall be held in trust for the benefit of Landlord and be promptly paid
or delivered to Landlord.
P. Any person or entity to which this lease is assigned pursuant to the
provisions of the Bankruptcy Code, 11 U.S.C. ss. 101 et seq., shall be deemed,
without further act or deed, to have assumed all of the obligations arising
under this Lease on and after the date of such assignment. Any such assignee
shall upon demand execute and deliver to Landlord an instrument confirming such
assumption.
16
<PAGE>
19. MORTGAGES. Tenant accepts this lease subject and subordinate to any
mortgage(s) and/or deed(s) of trust now or at any time hereafter constituting a
lien or charge upon the premises or the improvements situated thereon, provided,
however, that if the mortgagee, trustee, or holder of any such mortgage or deed
of trust elects to have Tenant's interest in this lease superior to any such
instrument, then by notice to Tenant from such mortgagee, trustee or holder,
this lease shall be deemed superior to such lien, whether this lease was
executed before or after said mortgage or deed of trust. Tenant shall at any
time hereafter on demand execute any instruments, releases or other documents
which may be required by any mortgagee for the purpose of subjecting and
subordinating this lease to the lien of any such mortgage.
20. MECHANIC'S LIENS AND TENANT'S PERSONAL PROPERTY TAXES.
A. Tenant shall have no authority, express or implied, to create or place
any lien or encumbrance of any kind or nature whatsoever upon, or in any manner
to bind, the interest of Landlord or Tenant in the premises or to charge the
rentals payable hereunder for any claim in favor of any person dealing with
Tenant, including those who may furnish materials or perform labor for any
construction or repairs. Tenant covenants and agrees that it will pay or cause
to be paid all sums legally due and payable by it on account of any labor
performed or materials furnished in connection with any work performed on the
premises on which any lien is or can be validly and legally asserted against its
leasehold interest in the premises or the improvements thereon and that it will
save and hold Landlord harmless from any and all loss, cost or expense based on
or arising out of asserted claims or liens against the leasehold estate or
against the right, title and interest of the Landlord in the premises or under
the terms of this lease. Tenant agrees to give Landlord immediate written notice
of the placing of any lien or encumbrance against the premises.
B. Tenant shall be liable for all taxes levied or assessed against personal
property, furniture or fixtures placed by Tenant in the premises. If any such
taxes for which Tenant is liable are levied or assessed against Landlord or
Landlord's property and if Landlord elects to pay the same or if the assessed
value of Landlord's property is increased by inclusion of personal property,
furniture or fixtures placed by Tenant in the premises, and Landlord elects to
pay the taxes based on such increase, Tenant shall pay to Landlord upon demand
that part of such taxes.
21. MISCELLANEOUS
A. Words of any gender used in this lease shall be held and construed to
include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires.
B. In the event the premises constitute a portion of a multiple occupancy
building, Tenant's "proportionate share", as used in this lease, shall mean a
fraction, the numerator of which is the space contained in the premises and the
denominator of which is the entire space contained in the building.
17
<PAGE>
C. The terms, provisions and covenants and conditions contained in this
lease shall apply to, inure to the benefit of, and be binding upon, the parties
hereto and upon their respective heirs, legal representatives, successors and
permitted assigns, except as otherwise herein expressly provided. Landlord shall
have the right to transfer and assigns, in whole or in part, its rights and
obligations in the building and property that are the subject of this lease.
Each party agrees to furnish to the other, promptly upon demand, a corporate
resolution, proof of due authorization by partners, or other appropriate
documentation evidencing the due authorization of such party to enter this
lease.
D. The captions inserted in this lease are for convenience only and in no
way define, limit or otherwise describe the scope or intent of this lease, or
any provision hereof, or in any way affect the interpretation of this lease.
E. Tenant agrees from time to time within ten (10) days after request of
Landlord, to deliver to Landlord, or Landlord's designee, a Certificate of
Occupancy and an estoppel certificate stating that this lease is in full force
and effect, the date to which rent has been paid, the unexpired term of this
lease and such other matters pertaining to this lease as may be requested by
Landlord. It is understood and agreed that Tenant's obligation to furnish such
estoppel certificates in a timely fashion is a material inducement for
Landlord's execution of this lease.
F. This lease may not be altered, changed or amended except by an
instrument in writing signed by both parties hereto.
G. This Lease constitutes the entire understanding and agreement of the
Landlord and Tenant with respect to the subject matter of this Lease, and
contains all of the covenants and agreements of Landlord and Tenant with respect
thereto. Landlord and Tenant each acknowledge that no representations,
inducements, promises or agreements, oral or written, have been made by Landlord
or Tenant, or anyone acting on behalf of Landlord or Tenant, which are not
contained herein, and any prior agreements, promises, negotiations, or
representations not expressly set forth in this Lease are of no force or effect.
H. All obligations of Tenant hereunder not fully performed as of the
expiration or earlier termination of the term of this lease shall survive the
expiration or earlier termination of the term hereof, including without
limitation all payment obligations with respect to taxes and insurance and all
obligations concerning the condition of the premises. Upon the expiration or
earlier termination of the term hereof, and prior to Tenant vacating the
premises, Tenant shall pay to Landlord any amount reasonably estimated by
Landlord as necessary to put the premises, including without limitation all
heating and air conditioning systems and equipment therein, in good condition
and repair. Tenant shall also, prior to vacating the premises, pay to Landlord
the amount, as estimated by Landlord, of Tenant's obligation hereunder for real
estate taxes and insurance premiums for the year in which the lease expires or
terminates. All such amounts shall be used and held by Landlord for payment of
such obligations of Tenant hereunder, with Tenant being liable for any
additional costs therefor upon demand by Landlord, or with any excess to be
returned to Tenant after all such obligations have been determined and satisfied
as the case may be. Any security deposit held by Landlord shall be credited
against the amount payable by Tenant under this Paragraph 21(H).
18
<PAGE>
I. If any clause or provision of this lease is illegal, invalid or
unenforceable under present or future laws effective during the term of this
lease, then and in that event, it is the intention of the parties hereto that
the remainder of this lease shall not be affected thereby, and it is also the
intention of the parties to this lease that in lieu of each clause or provision
of this lease that is illegal, invalid or unenforceable, there be added as a
part of this lease contract a clause or provision as similar in terms to such
illegal, invalid or unenforceable clause or provisions as may be possible and be
legal, valid and enforceable.
J. Because the premises are on the open market and are presently being
shown, this lease shall be treated as an offer with the premises being subject
to prior lease and such offer subject to withdrawal or non-acceptance by
Landlord or to other use of the premises without notice, and this lease shall
not be valid or binding unless and until accepted by Landlord in writing and a
fully executed copy delivered to both parties hereto.
K. All references in this lease to "the date hereof" or similar references
shall be deemed to refer to the last date, in point of the, on which all parties
hereto have executed this lease.
L. Tenant represents and warrants that it has dealt with no broker, agent
or other person, in connection with this transaction, or that no broker, agent
or other person brought about this transaction, other Phil Collins Realtors, and
Tenant agrees to indemnify and hold Landlord harmless from and against any
claims by any other broker, agent or other person claiming a commission or other
form of compensation by virtue of having dealt with Tenant with regard to this
leasing transaction.
M. If and when included within the term "Landlord", as used in this
instrument, there are more than one person, firm or corporations, all shall
jointly arrange among themselves for their joint execution of such a notice
specifying some individual at some specific address for the receipt of notices
and payments to Landlord; if and when included within the term "Tenant", as used
in this instrument, there are more than one person, firm or corporation, all
shall jointly arrange among themselves for their joint execution of such a
notice specifying some individual at some specific address within the
continental United States for the receipt of notices and payments to Tenant. All
parties included within the terms "Landlord" and "Tenant", respectively shall be
bound by notices given in accordance with the provisions of Paragraph 23 hereof
to the same effect as if each had received such notice.
22. ADDITIONAL PROVISIONS.
See Special Provisions
23. NOTICES. Each provision of this instrument or of any applicable
governmental laws, ordinances, regulations and other requirements with reference
to the sending, mailing or delivery of any notice or the making of any payment
by Landlord to Tenant or with reference to the sending, mailing or delivery of
any notice or the making of any payment by Tenant to Landlord shall be deemed to
be complied with when and if the following steps are taken:
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<PAGE>
(a) All rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Landlord at the address for Landlord
hereinbelow set forth or at such other address as Landlord may specify from
time to time by written notice delivered in accordance herewith. Tenant's
obligation to pay rent and any other amounts to Landlord under the terms of
this lease shall not be deemed satisfied until such rent and other amounts
have been actually received by Landlord.
(b) All payments required to be made by Landlord to Tenant hereunder
shall be payable to Tenant at the address hereinbelow set forth, or at such
other address within the continental United States as Tenant may specify
from time to time by written notice delivered in accordance herewith.
(c) Any notice or document required or permitted to be delivered
hereunder shall be deemed to be delivered whether actually received or not
when deposited in the United States Mail, postage prepaid, Certified or
Registered Mail, addressed to the parties hereto at the respective
addresses set out below, or at such other address as they have theretofore
specified by written notice delivered in accordance herewith:
LANDLORD: TENANT:
CROW-MARKISON 22-27 LIMITED PARTNERSHIP WEB TECHNOLOGY, INC.
3500 LTV Center ___________ Markison Road
2001 Ross Avenue Dallas, TX 75238
Dallas, TX 75201-2997
With notice to:
9696 Skillman, #250
Dallas, TX 75234
20
<PAGE>
24. LANDLORD'S LIEN. In addition to any statutory lien for rent in
Landlord's favor, Landlord shall have and Tenant hereby grants to Landlord a
continuing security interest for all rentals and other sums of money becoming
due hereunder from Tenant, upon all goods, wares, equipment, fixtures,
furniture, inventory, accounts, contract rights, chattel paper and other
personal property of Tenant situated on the premises subject to this Lease,
which is located at _____ Markison Road, and such property shall not be removed
therefrom without the consent of Landlord until all arrearages in rent well as
any and all other sums of money then due to Landlord hereunder shall first have
been paid and discharged. Products of collateral are also covered. In the event
of a default under this lease, Landlord shall have, in additions to any other
remedies provided herein or by law, all rights and remedies under the Uniform
Commercial Code, including without limitation the right to sell the property
described in this paragraph at public or private sale upon five (5) days notice
to Tenant. Tenant hereby agrees to execute such other instruments necessary or
desirable in Landlord's discretion to perfect the security interest hereby
created. Any statutory lien for rent is not hereby waived, the express
contractual lien herein granted being in addition and supplementary thereto.
Landlord and Tenant agree that this Lease and security agreement serves as a
financing statement and that a copy or photographic or other reproduction of
this portion of this Lease may be filed of record by Landlord and have the same
force and effect as the original. This security agreement and financing
statement also covers fixtures located at the premises subject to thus Lease and
legally described in Exhibit "A", attached hereto and incorporated herein by
this reference, and is to filed for record in the real estate records. The
record owner of this property is Trammell Crow Company. Tenant warrants that the
collateral subject to the security interest granted herein is not purchased or
used by Tenant for personal, family or household purposes.
EXECUTED BY LANDLORD, this ___ day of ____________, 19__.
Attest/Witness CROW-MARKISON 22-27, LIMITED
PARTNERSHIP
__________________________________ By_________________________________
Russell I. McArron, Jr.
Title:____________________________ Title: Managing General Partner
EXECUTED BY TENANT, this ___ day of ____________, 19__.
Attest/Witness WEB TECHNOLOGY, INC.
__________________________________ By_________________________________
Title:____________________________ Title:_____________________________
21
<PAGE>
SPECIAL PROVISIONS FOR
WEB TECHNOLOGY, INC.
22a. Base Rent. Tenant's base rental payment schedule (using the definition of
rental as described in 2A of the Lease) shall be as follows:
Months Monthly Base Rental
------ -------------------
1-12 $5,179.44
13-24 $5,649.44
25-36 $6,149.44
37-48 $6,649.44
49-60 $7,149.44
22b. Cap on Landscape Maintenance and General Maintenance. It is agreed and
understood that landscape maintenance and general maintenance only will not
exceed the following amounts throughout the primary term of this lease.
This cap on landscape maintenance and general maintenance will not be
granted for any renewal term.
Landscape Maintenance Monthly Landscape
Months Per Sq Ft. Per Year Maint. Charges
------ ------------------- --------------
1-12 $0.1800 $201.45
13-24 $0.1890 $211.52
25-36 $0.1985 $222.15
37-48 $0.2084 $233.23
49-60 $0.2188 $244.87
General Maintenance Monthly Maintenance
Months Per Sq Ft. Per Year Charges
------ ------------------- -------
1-12 $0.0100 $11.19
13-24 $0.0105 $11.75
25-36 $0.0110 $12.31
37-48 $0.0116 $12.98
49-60 $0.0122 $13.65
<PAGE>
22c. Renewal Option. Provided that Tenant is not in default of any of the terms,
covenants and conditions hereof, and this Lease has not been assigned or
the premises (or a part thereof) sublet, Tenant shall have the right and
option to extend the original term of this Lease for two (2) further terms
of thirty six (36) months. Such extension of the original term shall be on
the same terms, covenants and conditions as provided for in the original
term except for this paragraph and except that the Base Rent during the
extended term shall be at the fair market rental then in effect on
equivalent properties, of equivalent size, in equivalent areas (but in no
event less than the Base Rent specified in Paragraph 2a of this Lease nor
greater than one hundred thirty-five percent (135%) of the average of the
Base Rents specified in Paragraph 22a, above). Tenant shall deliver written
notice to Landlord of Tenant's intent to exercise the renewal option
granted herein not more than six (6) months nor less than four (4) months
prior to the expiration of the original term of this Lease. In the event
Tenant fails to deliver such written notice within the time period set
forth above, Tenant's right to extend the term hereof shall expire and be
of no further force and effect. In the event Landlord and Tenant fail to
agree in writing upon the fair market rental within thirty (30) days after
exercise by Tenant of this renewal option, Tenant's right hereunder to
extend the term shall become null and void.
22d. During the original term of this lease, provided that Tenant is not then in
default hereunder, Tenant shall have the first right and option to lease
the adjacent space to the south of Tenant's space in Northgate II, Building
24. Landlord shall, by written notice to Tenant, first offer to lease such
space to Tenant upon the same terms and conditions and at the same rental
rate as has been agreed to by Landlord and a third party. If within five
(5) days after Landlord `gives Tenant such written notice, Landlord does
not receive notice in writing that Tenant elects to lease all (and not
part) of such space within five (5) days, then Tenant's right to lease such
additional space shall terminate and expire and Tenant shall have no
further rights pursuant to this paragraph.
22e. Nondisturbance. Upon written request from Tenant, Landlord shall use best
efforts to obtain a Nondisturbance Agreement from the construction lender
for this project. Furthermore, Landlord agrees to use its reasonable best
efforts to obtain, upon separate written request from Tenant, a similar
Nondisturbance Agreement from the mortgage lender for this project.
22f. Exhibit B. This Lease is contingent upon the signature of Exhibit B by both
Tenant and Landlord.
END OF SPECIAL PROVISIONS
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION
BEING approximately 13,430 square feet out of an approximate 45,405 square foot
facility, commonly known as Northgate Phase II, Building 24 located on 24
Markison in Dallas, Texas, and situated on a tract of land described as follows:
BEING 5.798 acres of land in the H. HUSTEAD SURVEY, Abstract No. 587, being part
of City Block 8088, also being known as part of Block B/8088 of NORTHGATE
BUSINESS PARK -- PHASE II, an addition to the City of Dallas, Texas, according
to the Revised Map thereof recorded in Volume 84171, Page 3124 of the Deed
Records of Dallas County, Texas, and being more particularly described as
follows:
BEGINNING at the intersection of the Northeast line of Markison Road (56'
R.O.W.), and the Southeast R.O.W. line of Vista Park Road (56' R.O.W.) said
point also being the beginning of a curve to the right, having a central angle
of 50(degree)26'54", a radius of 202.00 feet, and tangent of 95.16 feet;
THENCE, Northeasterly along said curve to the right, an arc distance of 177.86
feet to a point of tangency, said point being in the Southeast R.O.W. line of
Vista Park Road (56' R.O.W.);
THENCE, N 89(degree)34'00" E, along said South R.O.W. line of Vista Park Road, a
distance of 532.38 feet, said point also being the beginning of a curve to the
right, having a central angle of 90(degree)02'05", a radius of 20.00 feet, and a
tangent of 20.01 feet;
THENCE, Southeasterly along said Southwest R.O.W. of Vista Park Road and said
curve to the right, an arc distance of 31.43 feet to a point of tangency;
THENCE, S 00(degree)23'55" E, along said West R.O.W. line of Vista Park Road, a
distance of 471.24 feet to a point, said point also being the beginning of a
curve to the right, having a central angle of 39(degree)31'0l", a radius of
202.00 feet, and a tangent of 72.56 feet;
THENCE, Southwesterly along said Southwest R.O.W. line of Vista Park Road and
said curve to the right an arc distance of 139.32 feet to a non-tangent point
for a corner;
THENCE, N 50(degree)52'54" W, along said Northeast R.O.W. line of Markison Road,
a distance of 858.05 feet to the POINT OF BEGINNING and CONTAINING 252,572.84
Square Feet or 5.798 Acres of Land.
<PAGE>
SUPPLEMENTAL LEASE AGREEMENT
(RENEWAL)
This Supplemental Lease Agreement made and entered into this 22nd day of April,
1993 by and between:
CROW-MARKISON 22-27 LIMITED PARTNERSHIP
2707 Stemmons Freeway, Suite 100
Dallas, Texas 75207
W/ Copy to: 9696 Skillman, Suite 250, Dallas, Texas 75243
and
WEB TECHNOLOGY, INC.
10501 Markison Road
Dallas, Texas 75238
(27,830 Square Feet)
This Supplemental Lease Agreement shall modify the original lease agreement
(which, together with any amendments or modifications, shall be known as the
"Lease") between CROW-MARKISON 22-27 (Landlord) and WEB TECHNOLOGY, INC.
(Tenant) dated December 19, 1987; in which certain real estate and premises
therein described and situated in the County of Dallas, and the State of Texas
were demised and leased by Landlord to Tenant.
It is the sole intent of this Supplemental Lease Agreement to modify the Lease
by the following terms and conditions:
1. SIZE:
The demised premises is hereby increased in size 14,400 rentable square
feet, from 13,430 rentable square feet to 27,830 rentable square feet as
cross hatched on Exhibit "A-1" to this Supplemental Lease Agreement.
Therefore the demised premises shall be changed to 27,830 square feet (see
Exhibit "A" attached).
2. TERM:
The term of the original Lease shall be renewed and extended for a further
term commencing on March 1, 1993 and ending April 30, 1997.
3. BASE RENTAL:
The base monthly rental as described in Paragraph 2C(1) shall be $5,260.08
per month until the commencement of the additional 14,400 square feet. The
additional 14,400 square feet space shall commence on May 17, 1993.
Therefore, the base monthly rental shall be increased to $9,760.08 per
month on May 17, 1993 and continue through April 30, 1997.
<PAGE>
4. INTERIOR IMPROVEMENTS:
Tenant accepts the Premises in its "As-Is" condition except that Landlord
at Landlord's expense shall re-carpet the offices referenced on Exhibit
"A-2", and repaint the office area also referenced on Exhibit "A-2". Tenant
at Tenant's expense will merge the electrical and gas services and pay for
any other improvements made on the Premises. All improvements shall be by
and in accordance with Trammell Crow Company standard specifications.
Landlord shall further give Tenant an allowance of $3,000.00 to go towards
Tenant's improvements. This will be paid direct to Landlord's general
contractor upon completion.
5. RIGHT OF FIRST REFUSAL:
If, during the renewal term of this Lease, the space consisting of
approximately 17,575 square feet which is outlined in red on Exhibit "A-3"
to this Lease (the "Additional Space") shall become available for lease,
after the current lease and renewals thereof of such space to Direct
Technology Corporation, and provided the Tenant has not been in default of
any of the terms, provisions and covenants of any Lease with Landlord, and
has not assigned this Lease or sublet the premises (or a part hereof), and
Tenant, in Landlord's opinion, demonstrates sufficient creditworthiness,
Tenant shall have the right of first refusal to lease the "Additional
Space". Such right shall operate as follows. When a third party becomes
seriously interested in the "Additional Space" Landlord shall first offer
in writing (all and not part of) such "Additional Space" to Tenant. If,
within five (5) days after Landlord gives Tenant such written notice,
Landlord does not receive notice in writing that Tenant elects to lease
(all and not part of) the "Additional Space" within five (5) days, then
Tenant's right to lease the "Additional Space" shall terminate and expire,
and Tenant shall have no further rights pursuant to this paragraph. It is
agreed and understood that the rental rate for the "Additional Space" shall
be no more than $4.70 per square foot excluding taxes, insurance and common
area maintenance, and leased on an "as-is" basis.
6. BROKER:
Tenant requested and agrees that this renewal and expansion is a direct
transaction and that no outside brokers fee is earned or due.
7. This Supplemental Lease Agreement is contingent on the successful
termination of Direct Technology Corporation on the 14,400 square foot
space.
<PAGE>
All other terms and conditions of the Lease shall remain in effect and
unchanged.
CROW MARKISON 22-27, LIMITED PARTNERSHIP
By: Trammell Crow Dallas Industrial, Inc. Agent
By:_____________________________________ Witness:__________________________
Title:__________________________________ Title:____________________________
WEB TECHNOLOGY, INC.
By:_____________________________________ Witness:__________________________
Title:__________________________________ Title:____________________________
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION
BEING approximately 27,830 square feet out of an approximate 45,405 square foot
facility, commonly known as Northgate Phase II, Building 24 located on Markison
in Dallas, Texas, and situated on a tract of land described as follows:
BEING 5.798 acres of land in the H. HUSTEAD SURVEY, Abstract No. 587, being part
of City Block 8088, also being known as part of Block B/8088 of NORTHGATE
BUSINESS PARK - PHASE II, an addition to the City of Dallas, Texas, according to
the Revised Map thereof recorded in Volume 84171, Page 3124 of the Deed Records
of Dallas County, Texas, and being more particularly described as follows:
BEGINNING at the intersection of the Northeast line of Markison Road (56'
R.O.W.), and the Southeast R.O.W. line of Vista Park Road (56' R.O.W.) said
point also being the beginning of a curve to the right, having a central angle
of 50(degree)26'54", a radius of 202.00 feet, and tangent of 95.16 feet;
THENCE, Northeasterly along said curve to the right, an arc distance of 177.86
feet to a point of tangency, said point being in the Southeast R.O.W. line of
Vista Park Road (56' R.O.W.);
THENCE, N 89(degree) 34'00" E, along said South R.O.W. line of Vista Park Road,
a distance of 532.38 feet, said point also being the beginning of a curve to the
right, having a central angle of 90(degree)02'05", a radius of 20.00 feet, and a
tangent of 20.01 feet;
THENCE, Southeasterly along said Southwest R.O.W. of Vista Park Road and said
curve to the right, an arc distance of 31.43 feet to a point of tangency;
THENCE, S 00(degree) 23'55" E, along said West R.O.W. line of Vista Park Road, a
distance of 471.24 feet to a point, said point also being the beginning of a
curve to the right, having a central angle of 39(degree)31'0l", a radius of
202.00 feet, and a tangent of 72.56 feet;
THENCE, Southwesterly along said Southwest R.O.W. line of Vista Park Road and
said curve to the right an arc distance of 139.32 feet to a non-tangent point
for a corner;
THENCE, N 500 52'54" W, along said Northeast R.O.W. line of Markison Road, a
distance of 858.05 feet to the POINT OF BEGINNING and CONTAINING 252,572.84
Square Feet or 5.798 Acres of Land.
<PAGE>
THIRD AMENDMENT TO LEASE
*STATE OF TEXAS
*KNOW ALL MEN BY THESE PRESENTS
*COUNTY OF DALLAS
THIS THIRD AMENDMENT TO LEASE AGREEMENT is made and entered into by and
between MARKISON VISTA JOINT VENTURE ("LANDLORD") and. AETRIUM - WEB TECHNOLOGY,
LP ("TENANT").
W I T N E S S E T H
WHEREAS, on or about December 19, 1987, Crow-Markison 22-27, Limited
Partnership and Web Technology, Inc. entered into that certain Lease Agreement
(the "Lease") pertaining to approximately 13,430 square feet of space (the
"Leased Premises") the Leased Premises being located at 10501 Markison Road,
Dallas, Texas; and
WHEREAS, on or about April 22, 1993 Crow-Markison 22-27 Limited Partnership
and Web Technology, Inc. entered into that First Amendment to Lease Agreement
whereby among other things, the Lease Term was extended and the Leased Premises
were increased to 27,830 square feet of space; and
WHEREAS, all rights, title, and interest in the property and said Lease
have been assigned to Markison Vista Joint Venture; and
WHEREAS, on or about December 5, 1996 Landlord and Web Technology, Inc.
entered into that Second Amendment to lease agreement whereby among other
things, the Lease Term was extended; and
WHEREAS, on or about April 1, 1998 Web Technology, Inc. assigned the Lease
to Aetrium - Web Technology, LP; and
WHEREAS, the parties hereto desire to amend the Lease upon the terms and
conditions set forth below:
NOW THEREFORE, For Ten and no/100 dollars ($10.00) in hand paid to each and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree to amend the Lease as follows:
1. The Lease term shall be extended so that the expiration date of the Lease
will be April 30, 2003.
2. The Base Rent as described in Paragraph 2C(1) shall be increased to
$12,756.00 per month. The rental increase to begin on May 1, 2000.
<PAGE>
3. Early Termination Election: Tenant may at Tenant's election terminate this
Lease prior to the expiration of the Lease term as set forth in Paragraph 1
on April 30, 2001 or April 30, 2002, ("Early Termination Date") upon the
terms and conditions set forth herein.
(i) Tenant shall give Landlord written notice of its election to terminate
this Lease at least six (6) months prior to the Early Termination Date
upon which termination shall become effective, and
(ii) No event of default by Tenant or no event that with notice or the
passage of time, or both, would constitute an event of default by
Tenant shall have occurred on or before the Early Termination Date.
(iii)Concurrent with the giving of notice under Paragraph 3(i) above,
Tenant shall pay to Landlord in cash the sum of $12,756.00 if
termination is April 30, 2001.
(iv) Concurrent with the giving of notice under Paragraph 3(i) above,
Tenant shall pay to Landlord in cash the amount of the unamortized
Tenant Improvement Allowance incurred by Landlord in connection with
this Lease using an interest factor of 12% per annum. By way of
example if the amount is $27,830.00 the unamortized amount at April
30, 2001 would be $19,637.00 and at April 30, 2002 would be
$10,404.00.
6. Landlord will provide Tenant with an allowance of up to $27,830.00 for
Tenant Improvements to be installed in the Leased Premises. All Tenant
Improvements are subject to the prior written consent of Landlord which
consent shall not be unreasonably withheld. Unless Landlord notifies Tenant
at the time the Tenant Improvements are submitted to Landlord that they are
to be removed at the termination of the Lease and restored to the existing
condition, then Tenant shall have no obligation to remove the Tenant
Improvements at the termination of the Lease. Upon the receipt of a
notarized Affidavit stating that payment has been made for all work and
materials and which includes (1) true and correct copies of releases from
all contractors and suppliers of work and materials and (2) other
construction costs, Landlord will pay to Tenant such amount within thirty
(30) days.
7. Right of First Refusal.
I. Landlord and Tenant acknowledge that 10515 Markison Road containing 17,575
square feet is immediately adjacent to the Premises (hereinafter referred to as
"Adjacent Premises").
II. In the event that the Adjacent Premises become available, Landlord shall
notify Tenant of the availability of the Adjacent Premises.
III. If Tenant within ten (10) business days after receipt of Landlord's notice
as set forth in Paragraph 7 II above, indicates, in writing, its agreement to
lease the Adjacent Premises, then the Adjacent Premises shall be included within
the Premises and leased to Tenant at the rent per square foot currently being
paid by Tenant and otherwise pursuant to the provisions of this lease without
any obligations on the part of the Landlord to make any alterations or repairs,
and to afford any rent abatement and without any contingency provisions.
However, the rent attributable to the Adjacent Premises shall be added to the
rent payable under this Lease. The parties shall immediately execute an
amendment to this lease stating the addition of the Adjacent Premises.
<PAGE>
IV. If the Tenant does not deliver a notice, in writing, within ten (10)
business days of receipt of Landlord's said notice, as set forth in Paragraph 7
II above, indicating its agreement to lease the Adjacent Premises, Landlord
thereafter shall have the right to lease the Adjacent Premises to any third
party or parties and there shall be no further obligation in the future to give
Tenant any notice to lease or Right of First Refusal.
8. Landlord hereby agrees to pay a real estate fee in the amount of $6,888.24
to The Staubach Company, payable upon Landlord's return delivery to Tenant
of fully executed originals of this Third Amendment to Lease. A further
real estate fee of $6,888.24 shall be payable to The Staubach Company on
April 30, 2001 and April 30, 2002 in the event Tenant does not elect to
terminate as provided for in this Amendment, it being the intention that
The Staubach will be paid a real estate fee only for each period that this
Amendment is in effect.
9. Except as modified herein, the Lease remains in full force and effect.
Executed this ___ day of December, 1999.
MARKISON VISTA JOINT VENTURE
BY:_____________________________________________
Roy H. Greenberg, Board Member
AETRIUM-WEB TECHNOLOGY, LLP
BY:_____________________________________________
ITS:____________________________________________
<PAGE>
SECOND AMENDMENT TO LEASE
*STATE OF TEXAS
*KNOW ALL MEN BY THESE PRESENTS
*COUNTY OF DALLAS
THIS SECOND AMENDMENT TO LEASE AGREEMENT is made and entered into by and
between MARKISON VISTA JOINT VENTURE ("LANDLORD") and WEB TECHNOLOGY, INC.
("TENANT").
W I T N E S S E T H
WHEREAS, on or about December 19, 1987, Crow-Markison 22-27, Limited
Partnership and Tenant entered into that certain Lease Agreement (the "Lease")
pertaining to approximately 13,430 square feet of space (the "Leased Premises")
the Leased Premises being located at 10501 Markison Road, Dallas, Texas; and
WHEREAS, on or about April 22, 1993 Crow-Markison 22-27 Limited Partnership
and Tenant entered into that First Amendment to Lease Agreement whereby among
other things, the Lease Term was extended and the Leased Premises were
increased; and
WHEREAS, all rights, title, and interest in the property and said Lease
have been assigned to Markison Vista Joint Venture; and
WHEREAS, the parties hereto desire to amend the Lease upon the terms and
conditions set forth below:
NOW THEREFORE, For Ten and no/l00 dollars ($10.00) in hand paid to each and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree to amend the Lease as follows:
1. The Lease term shall be extended so that the expiration date of the Lease
will be April 30, 2000.
2. The Base Rent as described in Paragraph 2C(1) shall be increased to
$11,596.00 per month. The rental increase to begin on May 1, 1997.
3. Early Termination Election: Tenant may at Tenant's election terminate this
Lease prior to the expiration of the Lease term as set forth in Paragraph 1
on April 30, 1999, ("Early Termination Date") upon the terms and conditions
set forth herein.
(i) Tenant shall give Landlord written notice of its election to terminate
this Lease at least six (6) months prior to the Early Termination Date
upon which termination shall become effective, and
<PAGE>
(ii) No event of default by Tenant or no event that with notice or the
passage of the, or both, would constitute an event of default by
Tenant shall have occurred on or before the Early Termination Date.
4. Landlord hereby agrees to pay a real estate fee in the amount of $12,523.68
to The Stauback Company, payable upon Landlord's return delivery to Tenant
of fully executed originals of this Second Amendment to Lease. If Tenant
has not delivered a written notice to terminate the Lease as of October 30,
1998, then Landlord will pay an additional real estate fee in the amount of
$6,261.84 to The Staubach Company, payable immediately.
5. Except as modified herein, the Lease remains in full force and effect.
Executed this ___ day of December, 1996.
MARKISON VISTA JOINT VENTURE
BY:________________________________
Roy H. Greenberg, Board Member
WEB TECHNOLOGY, INC.
BY:________________________________
ITS:_______________________________
<PAGE>
Exhibit 13.1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW:
The semiconductor capital equipment industry is often described as a cyclical
growth industry characterized by a long-term growth trend occasionally
interrupted by periods of significant declines in revenue. In early 1996,
elevated inventory levels for many high-volume integrated circuit ("IC")
components and resulting excess capacity in the industry led to lower revenue
for many equipment suppliers in 1996, including the company. This trend reversed
in 1997 as capacity utilization improved in general and actually became
constrained for some newer IC products, leading the company to experience strong
growth throughout that year.
In the first half of 1998, early optimism quickly led to uncertainty in the
industry. Many industry observers felt the Asian financial crisis that began in
late 1997 would be short-lived and would have little impact on the industry. The
company continued to experience high levels of requests for new equipment
quotations. In the second quarter of 1998, it became clear that the industry
outlook was weakening. There appeared to be an excess supply of many components
due to the capacity ramp in 1997. There was an apparent decline in IC
consumption in Asia related to the economic downturn in that region. Also, the
demand for ICs by personal computer manufacturers declined as many of them
reduced inventories by adopting "just in time" manufacturing techniques. These
factors had a negative impact on revenue, margins, and profitability for many IC
manufacturers and caused them to cancel or delay fab expansions and to quickly
slash capital spending. The company was directly impacted when it learned that
two significant equipment requirements with two separate customers were being
delayed and potentially would be cancelled. The company experienced a sudden
decline in equipment orders during this timeframe followed by declining revenue
each quarter through the end of the year.
In the first half of 1999, business conditions showed signs of improvement for
some portions of the industry. A notable exception was the Dynamic Random Access
Memory ("DRAM") market that continued to experience overcapacity and pricing
pressures. One of the company's largest customers, a DRAM manufacturer,
announced that it was exiting the merchant market for DRAM devices and would buy
minimal equipment in 1999. A second significant customer also indicated that
their requirements for Aetrium equipment for DRAM applications would be
significantly lower than previously forecasted levels. As a result, the
company's 1999 revenue related to DRAM applications were approximately $20
million lower than 1998 and 1997 levels.
In the second half of 1999, business conditions continued to improve for most IC
manufacturers with some plants adding capacity and ordering new equipment,
particularly for their new products. The company's revenue levels increased in
the second half of 1999 in all product areas except for DRAM applications which
remained weak due to reduced capital spending by the two significant customers
mentioned above.
In summary, as a result of the above factors, the company experienced strong
revenue in 1997 and slightly lower revenue levels in the first half of 1998,
followed by significantly declining revenue in the second half of 1998 and first
half of 1999. Revenue levels increased slowly in the second half of 1999 as
industry conditions improved. However, quarterly revenue levels at the end of
1999 remained approximately 50% below the peak periods in late 1997. In response
to the changing industry conditions, fluctuations in business activity, and
overall lower revenue levels described above, management made a number of
strategic decisions and implemented various cost control initiatives during 1998
and 1999. These actions included discontinuing certain products and
technologies, reducing workforce, and implementing other cost reductions that
are discussed in more detail below.
8 AETRIUM 1999
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
The following table sets forth certain statement of operations items as a
percentage of net sales for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 64.3 59.6 48.7
- --------------------------------------------------------------------------
Gross profit 35.7 40.4 51.3
- --------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 47.4 34.6 21.2
Research and development 26.4 20.4 15.5
Unusual charges 3.9 10.9 14.0
- --------------------------------------------------------------------------
Total operating expenses 77.7 65.9 50.7
- --------------------------------------------------------------------------
Income (loss) from operations (42.0) (25.5) .6
Other income, net 1.6 1.6 1.7
- --------------------------------------------------------------------------
Income (loss) before income taxes (40.4) (23.9) 2.3
Income tax benefit (provision) 16.2 8.1 (.5)
- --------------------------------------------------------------------------
Net income (loss) (24.2)% (15.8)% 1.8%
==========================================================================
</TABLE>
NET SALES:
The following table sets forth the various components of net sales by product
line as a percentage of total sales:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Test handlers 46% 48% 54%
IC Automation products 26 26 24
Reliability and environmental test products 12 12 10
Change kits and spare parts 16 14 12
- --------------------------------------------------------------------------
Total 100% 100% 100%
==========================================================================
</TABLE>
Net sales decreased 38% to $37.2 million in 1999, compared with $59.6 million in
1998 and $67.6 million in 1997. Equipment sales decreased in 1998 and again in
1999 as a result of the severe semiconductor equipment industry downturn that
began in 1998 and continued into 1999.
Sales of test handlers decreased 41% in 1999 compared with 1998. Sales of
non-memory test handlers increased in 1999 due to improving industry conditions
later in the year and increased demand for equipment that addresses new IC
applications. This increase was offset by a significant decrease in the sales of
memory test handlers. There continued to be excess capacity in the memory
segment of the industry throughout 1999, leading two large customers to
significantly reduce their capital equipment spending below 1998 and 1997
levels.
Sales of IC Automation products decreased 38% in 1999 due to the continuing poor
industry conditions and a decision on the part of a significant customer to exit
the business in mid-1998 as part of a litigation settlement with an unrelated
third party. Sales of IC Automation products decreased only slightly in 1998
from the 1997 levels as the loss of revenue from the customer exiting the
business in mid-1998 was mostly offset by the inclusion of the revenue of the IC
Automation product line acquired from WEB Technology, Inc. ("WEB") in April
1998.
Sales of reliability and environmental test products decreased 40% in 1999.
Sales of reliability test equipment manufactured in North St. Paul, Minn.
increased in 1999 as the company's new Model 1164 test system gained market
acceptance, particularly in applications related to copper interconnects. This
increase was offset by a significant decrease in the sales of environmental test
equipment produced in Lawrence, Mass. due to the generally poor industry
conditions and reduced sales to customers in defense-related businesses.
Sales of change kits and spare parts decreased approximately 23% in 1999. Most
of the decrease was attributable to excess capacity in the industry overall and
reduced spending by memory IC manufacturers. Sales of change kits and spare
parts in 1998 were comparable to 1997.
AETRIUM 1999 9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GROSS PROFIT:
Gross profit, as a percentage of net sales, was 35.7% in 1999, compared with
40.4% in 1998 and 51.3% in 1997. These results include unusual charges recorded
in 1999 and 1998 as follows:
- - In the second quarter of 1999, one of the company's largest customers, a
DRAM manufacturer, announced that they were exiting the merchant market for
DRAM devices and would buy minimal equipment in 1999. A second significant
customer also indicated that their equipment requirements for DRAM
applications would be significantly lower than previously forecasted
levels. In response to these events and considering the potential
obsolescence associated with upcoming transitions to new products,
inventories were analyzed and management determined that a $2.5 million
inventory charge to cost of goods sold was required to properly value
inventories at net realizeable value.
- - In the second quarter of 1998, the company recorded an unusual charge of
$3.7 million in cost of goods sold. Due to the sudden, significant decline
in business activity in the second quarter of 1998, the delayed and reduced
expansion plans on the part of two large customers, and the resulting
outlook for significantly lower revenue levels, management reviewed the
company's product portfolio and decided to discontinue marketing its
TMU-100 thermal management system and Model 900A pick-and-place test
handler products because forecasted revenue levels did not justify the
required marketing and support costs. Based on these decisions and a
revised revenue forecast reflecting a deteriorating industry outlook,
management determined that a $3.2 million inventory charge for excess and
obsolete inventory was necessary to properly value inventories at net
realizeable value. In addition, the company recorded a $0.5 million charge
to fulfill a customer warranty claim obligation committed to at that time.
- - The inventory writedowns in 1999 and 1998 were quantified through a
detailed analysis of inventories with consideration given to potential
future equipment and spares' sales, and the potential use of common parts
in other products.
Excluding the unusual charges described above, gross profit was 42.4% of net
sales in 1999, compared with 46.6% and 51.3% in 1998 and 1997, respectively. The
decrease in 1999 resulted primarily from under-absorbed manufacturing overhead
due to the significantly lower sales volume, particularly at the company's San
Diego, Calif. and Lawrence, Mass. facilities. The decrease in gross margin in
1998 compared with 1997 was primarily due to the inclusion of sales of the
product line acquired in the Advantek Handler Division acquisition in November
1997, which products had generally lower margins; the significant shift in the
sales mix to more pick-and-place test handlers, which tend to have lower margins
than gravity-feed test handlers; the costs associated with the production ramp
of new products; and under-absorbed manufacturing overhead due to lower volumes
at the North St. Paul and San Diego facilities during the final three quarters
of 1998. These factors were partially offset by cost containment efforts
implemented during the latter half of 1998, improved gross margins of
environmental test products, and the inclusion of relatively high-margin sales
of the IC Automation product line acquired from WEB on April 1, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses decreased 15% to $17.6 million in
1999, compared with $20.7 million in 1998 and $14.3 million in 1997. The
decrease in 1999 resulted from cost containment efforts including reduced
personnel costs due to workforce reductions and lower commissions on
significantly reduced revenue levels. These expense reductions were offset
somewhat in 1999 by the inclusion of a full year of operations of the Equipment
Division of WEB, which was acquired on April 1, 1998. Selling, general and
administrative expenses increased in 1998 primarily due to expenses to support
the sales and service activities of businesses acquired in 1997 and 1998 and
increases in amortization expense related to acquired intangible assets.
Amortization expense associated with acquisition-related intangible assets
totaled $1.8 million, $1.7 million, and $0.3 million in 1999, 1998, and 1997,
respectively.
RESEARCH AND DEVELOPMENT EXPENSES:
Research and development expenses were $9.8 million in 1999 compared with $12.2
million in 1998 and $10.5 million in 1997. The decrease in 1999 resulted from
cost
10 AETRIUM 1999
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
containment efforts implemented during the year, including a reduction in
research and development personnel. These expense reductions were offset
somewhat in 1999 by the inclusion of a full year of operations of the
Equipment Division of WEB, which was acquired in April 1998. The increase in
research and development expenses in 1998 was primarily attributable to the
inclusion of the operations acquired from Forward Systems Automation ("FSA")
and Advantek in 1997 and the Equipment Division of WEB in 1998. These factors
were partially offset by cost containment measures implemented in the second
and third quarters of 1998, including a reduction of engineering personnel.
UNUSUAL CHARGES:
In 1999, the company recorded unusual charges as follows (dollars in thousands):
<TABLE>
<S> <C>
Restructuring charges $ 352
Write-off intangible asset 1,155
Other (61)
- ---------------------------------------------------
Total $1,446
===================================================
</TABLE>
In order to reduce operating costs, the company implemented two workforce
reductions in 1999. These reductions included the terminations of 48 employees
resulting in estimated annual cost savings of approximately $1.8 million. The
restructuring charges were recorded in the periods when the affected employees
were identified, severance benefits were determined, and the affected employees
were notified and terminated. Accordingly, restructuring charges of $190,000 and
$162,000 were recorded in the first and second quarters of 1999, respectively.
The severance costs were paid prior to December 31, 1999.
At the time of the acquisition of the Equipment Division of WEB in April 1998,
WEB had a contractual relationship with a customer to develop and deliver
certain automation equipment. A value of $1.4 million was capitalized as an
intangible asset related to this customer relationship at the time of the
acquisition. In the fourth quarter of 1999, due to a change in its business
environment and a shift in its strategic business plan, the customer requested
that the company discontinue working on the project. Prior to December 31, 1999,
the company negotiated a termination of the contract with the customer and
determined that the project would not be resumed. As a result, management
determined that the intangible asset related to this customer relationship was
impaired and had no future economic value and the company wrote off the
remaining unamortized balance of $1,155,000 at December 31, 1999.
In the second quarter of 1998, the company recorded unusual charges related
primarily to a sudden, significant decline in business activity and management
actions taken in response to the weakening industry outlook at that time. The
unusual charges included the following (dollars in thousands):
<TABLE>
<S> <C>
Restructuring charge $ 547
Write-off purchased technology 2,080
Acquired in-process research & development 3,900
- --------------------------------------------------------
Total $6,527
=======================================================
</TABLE>
In order to bring operating costs more in line with lower anticipated revenue
levels, the company completed a workforce reduction in the second quarter of
1998, resulting in a charge of $547,000, including severance pay and related
costs. This action included the termination of 50 employees, resulting in
estimated annual cost savings of approximately $2.3 million. The workforce
reduction was planned, announced, and completed prior to June 30, 1998.
Substantially all of the $547,000 in costs was paid during 1998 and the balance
of the restructuring accrual remaining at December 31, 1998 was insignificant.
In connection with the decision to discontinue the TMU-100 thermal management
system and the Model 900A test handler products discussed previously, management
reviewed the capitalized technology related to these products and determined
that the technology was not usable in any other products and had no alternative
use. Therefore, the remaining unamortized balance of these intangibles amounting
to $2,080,000 was written off at June 30, 1998.
In connection with the acquisition of the Equipment Division of WEB, $3.9
million of the purchase price was allocated to in-process research and
development, which
AETRIUM 1999 11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
amount was expensed in the second quarter of 1998 as the underlying research
and development projects had not yet reached technological feasibility.
In 1997, the company recorded unusual charges of $9,459,351. This amount
represents in-process research and development related to the acquisitions of
FSA ($7,190,809) and the Handler Division of Advantek, Inc. ($2,268,542), which
was charged to operations as the underlying research and development projects
had not yet reached technological feasibility.
IN-PROCESS RESEARCH AND DEVELOPMENT:
On April 1, 1998, the company acquired certain assets and assumed certain
liabilities of WEB for a total purchase price of $23.6 million and accounted for
the acquisition as a purchase. The fair value of acquired intangible assets was
determined to be $20.7 million, which included developed technology, core
technology, a customer list, trained workforce, and in-process research and
development. Of this amount, $3.9 million, or approximately 17% of the total
purchase price, was allocated to in-process research and development and was
charged against income in 1998 because the underlying research and development
projects had not yet reached technological feasibility and had no alternative
future uses.
The most significant components of the acquired in-process research and
development were approximately $2.6 million associated with a new burn-in board
loader/unloader and approximately $0.8 million associated with a new
pick-and-place test handler, both products being under development at the date
of the acquisition. The burn-in board loader/unloader was to be used by
semiconductor manufacturers to automatically load untested ICs into a variety of
burn-in boards to reduce labor costs and reduce manual loading errors. In
addition to providing very high speed throughput, the most unique feature of the
new burn-in board loader/unloader was to improve efficiency and yields by
providing for the testing of ICs during the board-loading process as opposed to
the conventional approach of testing ICs before burn-in. The most complex design
steps to complete the product included developing a Windows NT operating system,
incorporating the test-during-load capability, providing both tray and tube
input capability, and incorporating multiple-head mechanisms to increase speed.
The pick-and-place test handler product was to be used by semiconductor
manufacturers to test ICs under high temperatures utilizing conductive thermal
conditioning and to sort the ICs in up to five categories. Complex design steps
to complete the product included the development of software to provide precise
temperature control during testing. Management estimated that the stage of
completion for the burn-in board loader/unloader and pick-and-place test handler
at the acquisition date, based upon estimates of cost and time to complete and
complexity factors involved, was 64% and 79%, respectively.
The development of the new burn-in board loader/unloader was completed in late
1998 and has been actively marketed in 1998 and 1999. Due to a lack of resources
resulting from expense reductions, the pick-and-place test handler development
was put on hold in early 1999. In mid-1999, management decided to go forward
exclusively with another technology solution and formally cancelled the
pick-and-place test handler development program. Management does not expect this
decision to have a significant impact on future operating results.
The value assigned to the acquired in-process research and development in the
WEB acquisition was determined based upon projected cash flows related to future
products expected to be derived once technological feasibility was achieved.
Projected cash flows recognized the contribution of core technology and other
supporting assets and were discounted to present value at a rate of 30%. The
projected net cash flows from such projects were based on management's estimates
of revenue, cost of sales, research and development costs, selling, general and
administrative costs, and income taxes resulting from such projects. These
estimates were based on expected trends in technology, historical margin and
expense levels of comparable products, and the nature and expected timing of
completion of acquired in-process research and development.
In 1997, the company acquired certain assets of the Handler Division of Advantek
Inc. and certain assets of FSA. In these acquisitions, identified intangible
assets consisted of developed and core technology, trained workforce, and
in-process research and development. Fair values assigned to in-process research
and development were $2.3 million for the Advantek acquisition and $7.2
12 AETRIUM 1999
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
million for the FSA acquisition. These amounts were charged against income in
1997 as the underlying research and development projects had not yet reached
technological feasibility and had no alternative future uses.
The company has used the acquired in-process research and development to
complete new products. With respect to FSA, the products are high-speed test
handlers for discrete components and small IC packages, such as micro small
outline packages. With respect to Advantek, the principal product line was a
dual site, tri-temperature, pick-and-place test handler for logic semiconductor
devices.
As of the date of acquisition, the company anticipated the initial products
developed from the in-process research and development related to FSA would be
introduced in the latter part of 1997 and in 1998. As of the date of
acquisition, the company anticipated the initial products developed from the
acquired in-process research and development related to Advantek would be
introduced in 1998. In the case of the FSA acquisition, products based upon the
acquired in-process research and development were introduced, but the revenue
from these products to date has been less than anticipated, due in large part to
the severe industry downturn in 1998 and 1999. The product that resulted from
the in-process research and development acquired in the Advantek acquisition was
actively marketed and sold in 1998 and 1999.
The value assigned to purchased in-process research and development in the
Advantek and FSA acquisitions was determined based upon projected cash flows
related to future products expected to be derived once technological feasibility
was achieved. These projections included costs to complete the development of
technology and the future revenue and costs which were expected to result from
commercialization of the products. Cash flows were discounted to present value
at a rate of 30% with respect to the in-process research and development
acquired in the Advantek acquisition and 25% with respect to FSA. The resulting
net cash flows from such projects were based on management's estimates of
revenue, cost of sales, research and development costs, selling, general and
administrative costs, and income taxes resulting from such projects. These
estimates were based on expected trends in technology, historical margin and
expense levels for comparable products, and the nature and expected timing of
completion of acquired in-process research and development. The extremely
difficult industry conditions experienced by semiconductor equipment suppliers
in 1998 and 1999 has had a significant impact on the revenue and cash flows for
products resulting from the in-process research and development projects
acquired in the FSA acquisition, and, to a lesser extent, the Advantek
acquisition. While management continues to believe that the products originating
from the acquired research and development projects in the FSA and Advantek
acquisitions are important and commercially viable, there is no assurance that
these products will achieve management's expectations. See Note 8 to the
accompanying consolidated financial statements.
OTHER INCOME, NET:
Other income, net, decreased 37% to $607,000 in 1999, compared with $964,000 in
1998 and $1.1 million in 1997. The decline is due to lower invested cash
balances primarily as a result of the $7.8 million used to acquire the Equipment
Division of WEB in April 1998, $4.2 million used in the Advantek acquisition in
late 1997, approximately $2.5 million used to repurchase company shares in 1998
and 1999, and cash used to fund operating losses in 1999.
INCOME TAXES:
The company recorded an income tax benefit of approximately $6.0 million in 1999
and $4.9 million in 1998 compared with income tax expense of approximately $0.3
million in 1997. The tax benefit in 1999 and 1998 resulted from the significant
operating losses reported for those years compared with a relatively modest
operating profit in 1997. In general, the company's effective income tax rate
compares favorably with federal and state statutory rates primarily due to
benefits associated with the company's foreign sales corporation, research tax
credits and the investment of excess funds in tax-exempt securities.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES:
Cash and short-term investments decreased by approximately $4.9 million in 1999
to $13.2 million. Operating activities used $4.0 million of cash in 1999
compared with positive cash flow from operations amounting to $2.6 million and
$4.4 million in 1998 and 1997, respectively. The company received income tax
refunds (net), of approximately $2.4 million in 1999. Inventories decreased
AETRIUM 1999 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
by $4.7 million in 1999 primarily due to inventory writedowns of $2.5 million
recorded in the second quarter and to significantly lower sales activity
related to memory test handler products. Capital expenditures for property
and equipment amounted to $0.5 million, $1.4 million, and $1.7 million in
1999, 1998 and 1997, respectively. Cash used to acquire businesses amounted
to approximately $7.8 million and $8.2 million in 1998 and 1997,
respectively. Approximately $3.7 million in cash has been used to repurchase
shares of the company's stock in the past three years, including $2.2 million
related to repurchases from certain shareholders of WEB pursuant to right of
first refusal agreements entered into with such shareholders.
The company believes its cash and short-term investments of $13.2 million at
December 31, 1999 and borrowings available under its credit facility will be
sufficient to meet capital expenditure and working capital needs for the
foreseeable future. The company may acquire other companies, product lines or
technologies that are complementary to the company's business and the company's
working capital needs may change as a result of such acquisitions.
SUBSEQUENT EVENT - RESTRUCTURING ACTIVITIES:
In January 2000, the company announced plans to restructure certain of its
operations as follows:
- - The company will be closing its Lawrence, Mass. facility. Management is
exploring the potential sale of certain assets associated with the Lawrence
operation, including its environmental test equipment product line. The
Thermal Forcing System product and the development activities associated
with the company's proprietary conductive thermal technology will be
transferred to the company's North St. Paul, Minn. facility. Management
expects that the Lawrence operations will cease by approximately March 31,
2000 and the facility will be vacated by May 15, 2000.
- - The company's two operations in Texas will be consolidated. Strategically
significant manufacturing and development activities being conducted at the
Grand Prairie facility will be transferred to the company's Dallas facility
where operations associated with its WEB Technology product line are
located. This transfer was substantially completed in mid-March and the
Grand Prairie facility is expected to be closed by March 31, 2000.
In connection with these restructuring activities, the company expects that it
will record unusual charges of approximately $2.5 to $3.0 million in the quarter
ended March 31, 2000, including costs associated with the termination of
approximately 60 employees.
BUSINESS RISKS AND UNCERTAINTIES:
A number of risks and uncertainties exist which could have an impact on the
company's future operating results. Any statements contained in this Annual
Report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, words such as "may,"
"will," "expect," "believe," "anticipate," "estimate" or "continue" or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of factors,
including the following: the company's dependence on the microelectronics market
and the capital expenditures of electronic component manufacturers; the ability
of the company to manage its growth and to integrate and assimilate recent and
future acquisitions; new product development cycles and market acceptance of new
products; potential fluctuations in the company's operating results based on
factors such as cancellation or rescheduling of orders, seasonal fluctuations in
business activity, and product announcements by the company or by competitors;
the impact of competition in the test handler, IC Automation, reliability test
equipment and environmental test equipment markets; the effect of customer
concentration and the loss of any significant customer on the company's sales;
and volatility of the company's stock price based on factors including
developments in the microelectronics industry and high technology industries
generally, as well as fluctuations in the company's quarterly operating results.
The company undertakes no obligation to update the information, including the
forward-looking statements, in this Annual Report.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK:
The company's exposure to market risk for changes in interest rates relates
primarily to the company's investment portfolio. The company places its
investments with
14 AETRIUM 1999
<PAGE>
high credit issuers and limits the amount of credit exposure to any one
issuer. The company has no investments denominated in foreign currencies and
therefore is not subject to foreign exchange risk. The company mitigates
default risk by investing in high credit quality securities and by
positioning its portfolio to respond appropriately to a significant reduction
in a credit rating of any investment issuer or guarantor. As of December 31,
1999, the company's portfolio consisted primarily of high quality taxable
instruments, including corporate notes and bonds, money market funds, and
bank repurchase agreements.
INFLATION:
The company does not believe that inflation has had a material effect on its
results of operations in recent years. However, no assurance can be given that
inflation will not adversely affect its business in the future.
YEAR 2000 DISCLOSURE:
Prior to January 1, 2000, the company's internal computer systems had been
upgraded and verified as necessary to ensure that they would handle dates and
process information accurately in the new millennium. After the millennium
change, the company did not experience any significant problems as a result of
year 2000 issues in its financial reporting, resource planning, or other
internal computing systems. The company also did not experience any significant
problems as a result of year 2000 issues with any of its vendors. In addition,
none of the company's customers have reported any year 2000 failures with any
product or software the company installed. Nevertheless, if unanticipated or
unremediated year 2000 problems arise, these failures or problems could disrupt
the company's normal business activities and operations. If a year 2000 problem
occurs with a supplier or customer, the company may have difficulty in
determining the cause of the problem. If any products or software sold by the
company fails, we could be liable to customers for damages and costs to the
extent that our vendors do not cover these liabilities.
Due to the complexity and pervasiveness of the year 2000 issue and, in
particular, the uncertainty regarding potential year 2000 issues that may arise
with third parties, no assurances can be given that there will not be material
adverse effects on the business or its results from operations.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Aetrium Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Aetrium Incorporated and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 of these statements in accordance with auditing standards generally
accepted in the United States which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 31, 2000
AETRIUM 1999 15
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 37,188,312 $ 59,618,971 $ 67,574,834
Cost of goods sold 23,909,624 35,541,356 32,916,692
- -------------------------------------------------------------------------------------------------
GROSS PROFIT 13,278,688 24,077,615 34,658,142
- -------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling, general and administrative 17,631,833 20,657,065 14,323,138
Research and development 9,828,375 12,169,846 10,492,301
Unusual charges 1,446,083 6,527,000 9,459,351
- -------------------------------------------------------------------------------------------------
Total operating expenses 28,906,291 39,353,911 34,274,790
- -------------------------------------------------------------------------------------------------
Income (Loss) from Operations (15,627,603) (15,276,296) 383,352
Other income, net 607,497 964,292 1,146,594
- -------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes (15,020,106) (14,312,004) 1,529,946
Income Tax Benefit (Provision) 6,007,000 4,862,000 (301,000)
- -------------------------------------------------------------------------------------------------
Net Income (Loss) $ (9,013,106) $ (9,450,004) $ 1,228,946
=================================================================================================
Net Income (Loss) Per Common Share:
Basic $ (.95) $ (1.00) $ .14
Diluted $ (.95) $ (1.00) $ .14
Weighted Average Common Shares Outstanding:
Basic 9,470,000 9,423,000 8,668,000
Diluted 9,470,000 9,423,000 8,923,000
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
16 AETRIUM 1999
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,184,286 $ 18,132,794
Accounts receivable, net of allowance for doubtful accounts of $519,000
and $537,000, respectively 8,380,693 7,190,424
Refundable income taxes - 3,182,172
Inventories 9,677,135 14,334,620
Deferred taxes 2,356,674 1,946,084
Other current assets 233,028 361,180
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 33,831,816 45,147,274
- ----------------------------------------------------------------------------------------------------------------------
Property and equipment:
Furniture and fixtures 1,775,582 1,948,547
Equipment 5,512,864 5,718,247
- ----------------------------------------------------------------------------------------------------------------------
Less accumulated depreciation and amortization (4,455,672) (3,903,049)
- ----------------------------------------------------------------------------------------------------------------------
Property and equipment, net 2,832,774 3,763,745
- ----------------------------------------------------------------------------------------------------------------------
Noncurrent deferred taxes 12,445,075 6,037,230
Intangible and other assets, net 14,494,061 17,495,332
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 63,603,726 $ 72,443,581
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,916,437 $ 721,361
Accrued compensation 1,567,173 1,545,553
Other accrued liabilities 2,689,964 3,391,626
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,173,574 5,658,540
- ----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; 30,000,000 shares authorized; 9,436,035
and 9,471,642 shares issued and outstanding, respectively 9,436 9,472
Additional paid-in capital 59,962,417 60,304,164
Retained earnings (accumulated deficit) (2,541,701) 6,471,405
- ----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 57,430,152 66,785,041
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 63,603,726 $ 72,443,581
======================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
AETRIUM 1999 17
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Retained Earnings Total
---------------------------- Additional (Accumulated Shareholders'
Shares Amount Paid-in Capital Deficit) Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE DEC. 31, 1996 8,449,420 $ 8,449 $ 43,279,344 $ 14,692,463 $ 57,980,256
Exercise of stock options 285,998 286 2,274,890 - 2,275,176
Surrender of common stock in
connection with exercise of stock options (134,678) (134) (2,697,355) - (2,697,489)
Common stock issued in connection with
the purchase of a business 186,000 186 2,499,654 - 2,499,840
Tax benefit related to exercise of stock options - - 1,205,272 - 1,205,272
Net income - - - 1,228,946 1,228,946
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DEC. 31, 1997 8,786,740 8,787 46,561,805 15,921,409 62,492,001
Exercise of stock options 57,383 57 406,082 - 406,139
Surrender of common stock in connection
with exercise of stock options (28,631) (28) (468,267) - (468,295)
Common stock issued in connection with
the purchase of a business 900,000 900 15,411,600 - 15,412,500
Repurchase of common stock (243,850) (244) (1,770,775) - (1,771,019)
Tax benefit related to exercise of stock options - - 163,719 - 163,719
Net loss - - - (9,450,004) (9,450,004)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DEC. 31, 1998 9,471,642 9,472 60,304,164 6,471,405 66,785,041
Exercise of stock options 69,192 69 481,033 - 481,102
Surrender of common stock in connection
with exercise of stock options (48,649) (49) (451,130) - (451,179)
Repurchase of common stock (56,150) (56) (430,003) - (430,059)
Tax benefit related to exercise of stock options - - 58,353 - 58,353
Net loss - - - (9,013,106) (9,013,106)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DEC. 31, 1999 9,436,035 $ 9,436 $ 59,962,417 $ (2,541,701) $ 57,430,152
===================================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18 AETRIUM 1999
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (9,013,106) $ (9,450,004) $ 1,228,946
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,331,906 3,078,486 1,183,792
Acquisition-related charges - 3,900,000 9,459,351
Write-off of intangibles 1,155,000 2,080,000 -
Deferred taxes (6,760,000) (2,249,000) (2,206,000)
Changes in assets and liabilities, net of effects
of acquired businesses:
Accounts receivable, net (1,190,269) 7,755,820 (4,393,864)
Refundable income taxes 3,182,172 (3,182,172) -
Inventories 4,657,485 4,382,566 (4,240,752)
Other current assets 128,152 253,525 (244,221)
Intangible and other assets (23,315) (114,204) 45,992
Trade accounts payable 1,195,076 (2,545,942) 1,169,205
Accrued compensation 21,620 (681,995) 723,014
Other accrued liabilities (701,662) (39,401) (462,943)
Income taxes payable (82) (570,790) 2,140,485
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (4,017,023) 2,616,889 4,403,005
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses and technology, net of cash acquired - (8,835,000) (9,167,763)
Purchase of property and equipment (531,349) (1,400,336) (1,720,537)
Sale of short-term investments - - 1,028,201
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (531,349) (10,235,336) (9,860,099)
- --------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock 100,546 127,936 785,780
Repurchases of common stock (500,682) (1,961,111) (1,208,093)
Principal payments on debt - - (1,292,395)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (400,136) (1,833,175) (1,714,708)
- --------------------------------------------------------------------------------------------------------------------
Decrease in Cash and Cash Equivalents (4,948,508) (9,451,622) (7,171,802)
Cash and Cash Equivalents at Beginning of Year 18,132,794 27,584,416 34,756,218
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 13,184,286 $ 18,132,794 $ 27,584,416
====================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
AETRIUM 1999 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS DESCRIPTION
The company specializes in the design, development, manufacturing and marketing
of a variety of electromechanical equipment used by the semiconductor and
electronic component industry to handle and test integrated circuits and other
electronic components.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
RISKS AND UNCERTAINTIES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. The company has been part of a
prolonged downturn in the semiconductor capital equipment industry. There are a
number of estimates in the financial statements which are predicated on the
company's assumption of a return to profitability. The realization of $14.8
million of deferred income taxes and $18.2 million of intangible assets and
goodwill are based in part or in whole on the continuation of profitable
operations. If this assessment by management would change, the recoverability of
these assets could be affected in future periods.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform with the current
year presentation.
CASH EQUIVALENTS:
Cash equivalents include highly liquid investments purchased with an original
maturity of less than three months.
INVENTORIES:
Inventories are valued at the lower of cost or market, with cost determined on a
first-in, first-out basis.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation and amortization are
generally computed for financial statement and tax purposes using accelerated
methods over the shorter of the estimated useful lives or the applicable lease
terms. Maintenance and repairs are charged to expense as incurred.
INTANGIBLES:
Goodwill, representing the excess of purchase price over the fair value of net
assets of acquired businesses, is amortized on a straight-line basis over 15
years. Costs associated with the purchase of product and patent rights and other
intangibles are capitalized and amortized on a straight-line basis over their
respective useful lives which generally range from two to ten years.
VALUATION OF LONG-LIVED ASSETS:
The company periodically assesses the potential impairment of its intangible and
other long-lived assets based on anticipated undiscounted cash flows.
REVENUE RECOGNITION AND COST OF REVENUE:
Revenue for product sales is generally recognized upon shipment, providing
contractual obligations are substantially complete, any post-delivery
obligations are inconsequential, and collection of the resulting receivable is
reasonably assured. Estimated warranty and other costs associated with revenue
are accrued when the related revenue is recorded.
RESEARCH AND DEVELOPMENT:
Expenditures for research and development are expensed as incurred.
INCOME TAXES:
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (FAS) No. 109, "Accounting for Income Taxes." Deferred tax
assets are recognized for deductible temporary differences and tax credit
carryforwards and deferred tax liabilities are recognized for taxable temporary
differences. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
NET INCOME (LOSS) PER COMMON SHARE:
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted-average number of common shares outstanding during each year.
Diluted net income (loss) per share is computed by dividing net income (loss) by
the weighted-average number of common shares and common stock equivalent shares
outstanding during each year. Common stock equivalents include stock options and
warrants using the treasury stock method. For periods in which the company
reports a net loss, common stock equivalents have been excluded from the
computations because they are antidilutive.
REPURCHASES OF COMMON STOCK:
The company accounts for repurchased shares as retirements. The par value of
repurchased shares is charged to the common stock account and the excess of the
purchase cost over par value is charged to additional paid-in capital.
RECENT ACCOUNTING PRONOUNCEMENTS:
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's views in applying generally accepted
accounting principles to selected revenue recognition issues, including
equipment sales contracts that contain customer acceptance provisions. A
substantial portion of the company's sales is subject to customer acceptance
provisions. Implementation of the guidance in SAB 101 was initially to be
required in the company's fiscal quarter ended March 31, 2000. However, on March
24, 2000, the SEC amended SAB 101 to delay its implementation for three months
in order to allow
20 AETRIUM 1999
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
companies more time to study and evaluate the guidance. Management is
currently evaluating the impact SAB 101 will have on the company's current
accounting policies. If management determines that the implementation of SAB
101 requires a change in the company's revenue recognition policy, the
company would likely record a charge for a cumulative effect of a change in
accounting principle, in accordance with SAB 101's implementation guidance.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard
establishes accounting and reporting standards for derivative instruments and
hedging activities. The company must adopt this standard no later than
January 1, 2001. Management believes the adoption of SFAS No. 133 will not
have a material effect on the company's financial statements.
NOTE 3: UNUSUAL CHARGES
COST OF GOODS SOLD:
In the second quarter of 1999, due to continuing excess capacity in the DRAM
portion of the industry, one of the company's largest customers, a DRAM
manufacturer, announced that they were exiting the merchant market for DRAM
devices and would buy minimal equipment in 1999. A second significant customer
also indicated that their equipment requirements for DRAM applications would be
significantly lower than previously forecasted levels. In response to these
events and considering the potential obsolescence associated with upcoming
transitions to new products, inventories were analyzed and management determined
that a $2.5 million inventory charge was required to properly value inventories
at net realizeable value.
In the second quarter of 1998, the company recorded an unusual charge of $3.7
million in cost of goods sold. Due to the sudden, significant decline in
business activity in the second quarter of 1998, the delayed and reduced
expansion plans on the part of two large customers, and the resulting outlook
for significantly lower revenue levels, management reviewed the company's
product portfolio and decided to discontinue marketing its TMU-100 thermal
management system and Model 900A pick-and-place test handler products because
forecasted revenue levels did not justify the required marketing and support
costs. Based on these decisions and a revised revenue forecast reflecting a
deteriorating industry outlook, management determined that a $3.2 million
inventory charge for excess and obsolete inventory was necessary to properly
value inventories at net realizeable value. In addition, the company recorded a
$0.5 million charge to fulfill a customer warranty claim obligation committed to
at that time.
The inventory writedowns in 1999 and 1998 were quantified through a detailed
analysis of inventories with consideration given to potential future equipment
and spares' sales, and the potential use of common parts in other products.
OPERATING EXPENSES:
In 1999, the company recorded unusual charges as follows (dollars in thousands):
<TABLE>
<S> <C>
Restructuring charge $ 352
Write-off intangible asset 1,155
Other (61)
- -------------------------------------------------------
Total $ 1,446
=======================================================
</TABLE>
In order to reduce operating costs, the company implemented two workforce
reductions in 1999. These reductions included the termination of 48 employees
resulting in estimated annual cost savings of approximately $1.8 million. The
restructuring charges were recorded in the periods when the affected employees
were identified, severance benefits were determined, and the affected employees
were notified and terminated. Accordingly, restructuring charges of $190,000 and
$162,000 were recorded in the first and second quarters of 1999, respectively.
The severance costs were paid prior to December 31, 1999.
At the time of the acquisition of the Equipment Division of WEB in April 1998,
WEB had a contractual relationship with a customer to develop and deliver
certain automation equipment. A value of $1.4 million was capitalized as an
intangible asset related to this customer relationship at the time of the
acquisition. In the fourth quarter of 1999, due to a change in its business
environment and a shift in its strategic business plan, the customer requested
that the company discontinue working on the project that was under contract with
them. Prior to December 31, 1999, the company negotiated a termination of the
contract with the customer and determined that the project would not be resumed.
As a result, management determined that the intangible asset related to this
customer relationship was impaired and had no future economic value and the
company wrote off the remaining unamortized balance of $1,155,000 at December
31, 1999.
In the second quarter of 1998, the company recorded unusual charges related
primarily to a sudden, significant decline in business activity and management
actions taken in response to the weakening industry outlook at that time. The
unusual charges included the following (dollars in thousands):
<TABLE>
<S> <C>
Restructuring charge $ 547
Write-off purchased technology 2,080
In-process research & development 3,900
- -----------------------------------------------
Total $6,527
===============================================
</TABLE>
In order to bring operating costs more in line with lower anticipated revenue
levels, the company completed a workforce reduction in the second quarter of
1998, resulting in a charge of $547,000 for severance pay and related costs.
This action included the termination of 50 employees, resulting in estimated
annual cost savings of approximately $2.3 million. The workforce reduction was
planned, announced, and completed prior to June 30, 1998. Substantially all of
the $547,000 in costs was paid during 1998 and the balance of the restructuring
accrual remaining at December 31, 1998 was insignificant.
AETRIUM 1999 21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the decision to discontinue the TMU-100 thermal management
system and the Model 900A test handler products discussed previously,
management reviewed the capitalized technology related to these products and
determined that the technology was not usable in any other products and had
no alternative use. Therefore, the remaining unamortized balance of these
intangibles amounting to $2,080,000 was written off at June 30, 1998.
In connection with the acquisition of the Equipment Division of WEB,
$3,900,000 of the purchase price was allocated to in-process research and
development, which amount was expensed in the second quarter of 1998 as the
underlying research and development projects had not yet reached
technological feasibility. See Note 8.
In 1997, the company recorded unusual charges of $9,459,351. This amount
represents in-process research and development related to the acquisitions of
FSA ($7,190,809) and the Handler Division of Advantek, Inc. ($2,268,542). See
Note 8.
NOTE 4: SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash payments for interest and income taxes were as follows:
<TABLE>
<CAPTION>
Year Ended Dec. 31, 1999 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid 13,884 12,104 18,314
Income taxes paid
(refunded), net (2,428,557) 1,140,894 114,453
=========================================================================
</TABLE>
During the years ended December 31, 1999, 1998 and 1997, employees surrendered
41,996 ($380,556 fair market value), 17,293 ($278,203 fair market value), and
73,636 ($1,489,396 fair market value) shares of Common Stock, respectively, as
payment for the exercise prices of stock options.
NOTE 5: INVENTORIES
A summary of the composition of inventories is as follows:
<TABLE>
<CAPTION>
December 31, 1999 1998
- -------------------------------------------------------------------
<S> <C> <C>
Purchased parts and
completed subassemblies $ 5,181,684 $ 7,292,168
Work-in-process 3,039,964 4,221,054
Finished goods, including
demonstration equipment 1,455,487 2,821,398
- -------------------------------------------------------------------
Total inventories $ 9,677,135 $14,334,620
</TABLE>
NOTE 6: INTANGIBLE AND OTHER ASSETS
Intangible and other assets are comprised of the following:
<TABLE>
<CAPTION>
December 31, 1999 1998
- ---------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 10,436,049 $ 10,436,049
Acquisition-related intangibles 7,719,593 9,507,597
- ---------------------------------------------------------------------
Other 165,228 162,284
- ---------------------------------------------------------------------
Total 18,320,870 20,105,930
Accumulated amortization (3,826,809) (2,610,598)
- ---------------------------------------------------------------------
Total intangible and other
assets, net $ 14,494,061 $ 17,495,332
=====================================================================
</TABLE>
Acquisition-related intangibles include identifiable assets capitalized in
connection with the acquisitions of businesses and product lines such as
developed technology, customer lists, and trained workforces. The value of
developed technology and customer lists are determined using discounted future
cash flow techniques, using assumptions applicable to the circumstances of each
situation. The value of trained workforces is determined based upon estimates of
replacement cost.
Intangibles are amortized on a straight-line basis over their respective
estimated useful lives, as follows: Goodwill - 15 years; Developed Technology -
2 to 8 years; Customer Lists - 10 years; Trained Workforces - 7 years.
As explained in Note 3, write-offs of intangible assets determined to have no
future economic value amounted to $1,155,000 and $2,080,000 in 1999 and 1998,
respectively. Amortization expense related to intangibles amounted to
$1,869,586, $1,671,260, and $337,842 for 1999, 1998 and 1997, respectively.
NOTE 7: OTHER ACCRUED LIABILITIES
Other accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
December 31, 1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
Accrued commissions $ 361,613 $ 386,940
Accrued warranty 821,440 894,811
Customer deposits 692,607 1,303,555
Other 814,304 806,320
- ------------------------------------------------------------------
Total other accrued liabilities $2,689,964 $3,391,626
==================================================================
</TABLE>
NOTE 8: ACQUISITIONS
WEB TECHNOLOGY:
On April 1, 1998, the company acquired substantially all of the assets and
assumed certain liabilities of the Equipment Division of WEB, a privately held
company. The Equipment Division specializes in the design, development,
manufacturing and marketing of automatic burn-in board loaders/unloaders and a
variety of other electromechanical equipment used by the semiconductor industry
to handle and test integrated circuits. The purchase price totaled $23,567,500
including $7,835,000 of cash, 900,000 shares of the company's common stock
valued at $15,412,500 and $320,000 of acquisition-related costs. The acquisition
was accounted for as a purchase and, accordingly, the net assets acquired were
recorded at their estimated fair values at the effective date of the
acquisition.
22 AETRIUM 1999
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair value of acquired intangibles, amounted to $20,698,423. Of
this amount, $3,900,000, or approximately 17% of the total purchase price, was
allocated to in-process research and development, which amount was charged
against operations in 1998 as the underlying research and development projects
had not yet reached technological feasibility.
Handler Division of Advantek Inc.:
Effective October 31, 1997, the company acquired certain assets and assumed
certain liabilities of the Handler Division of Advantek Inc. The Handler
Division's products included integrated circuit test handlers which utilize
"pick-and-place" technology. The purchase price totaled $4,565,298 including
$4,170,298 of cash and $395,000 of acquisition-related costs. The acquisition
was accounted for as a purchase and, accordingly, the net assets acquired
were recorded at their estimated fair values at the effective date of the
acquisition. The acquisition included $2,268,542 related to in-process
research and development, which was charged against income in 1997 as the
underlying research and development projects had not yet reached
technological feasibility.
FORWARD SYSTEMS AUTOMATION:
On April 1, 1997, the company acquired substantially all of the assets and
assumed certain liabilities of Forward Systems Automation Inc. ("FSA"), a
privately held manufacturer of equipment for the semiconductor and electronic
component industry. The purchase price totaled $9,132,869 including $4,000,000
of cash, 186,000 shares of the company's common stock valued at $2,499,840,
$250,000 of acquisition-related costs and $2,383,029 of assumed liabilities. The
acquisition was accounted for as a purchase and, accordingly, the net assets
acquired were recorded at their estimated fair values at the effective date of
the acquisition. The acquisition included $7,190,809 related to in-process
research and development, which was charged against income in 1997 as the
underlying research and development projects had not yet reached technological
feasibility.
The estimated fair values of the acquired assets described above were determined
using traditional valuation techniques such as estimating future discounted cash
flows and estimating replacement cost as appropriate in the circumstances. The
valuations incorporated management's best estimates for future revenue and
profitability from products in the process of development at the time of
acquisition. As is the case with all projections of future events, actual
results could differ. Additionally, the Securities and Exchange Commission could
challenge these valuations, including valuations of acquired in-process research
and development. If the assumptions or valuation methods used in determining
fair values were to be changed, the company's financial statements could be
affected because allocations to in-process research and development which have
been expensed could be reallocated to intangible assets which would result in
higher amortization expense in future periods.
PRO FORMA INFORMATION:
The company's consolidated financial statements include the results of the WEB
Equipment Division operations since April 1, 1998; the Advantek Handler Division
operations since October 31, 1997; and FSA operations since April 1, 1997. The
following table presents the consolidated results of operations of the company
on an unaudited pro forma basis as if the acquisitions had taken place at the
beginning of the respective year of acquisition and the immediately preceding
year (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended Dec. 31, 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Unaudited pro forma
Net Sales $ 62,613 $ 78,458
Net income (loss) (6,882) 5,762
Net income (loss) per diluted share $ (.71) $ .58
- -------------------------------------------------------------------
Reported net income (loss)
per diluted share before
acquisition-related charges $ (.75) $ .88
- -------------------------------------------------------------------
</TABLE>
The acquisition-related charges for in-process research and development are not
reflected in the pro forma results presented above. The unaudited pro forma
results of operations are for comparative purposes only and do not necessarily
reflect the results that would have occurred had the acquisitions occurred at
the beginning of the periods presented or the results which may occur in the
future.
NOTE 9: LONG-TERM DEBT AND CREDIT AGREEMENT
As of December 31, 1999, the company had no outstanding long-term debt. The
company has a line of credit with a bank which provides for borrowings up to the
lesser of $5,000,000, or 80% of eligible accounts receivable and 50% of eligible
inventory. The line of credit is secured by receivables, inventory and general
intangibles. There were no line of credit advances outstanding as of December
31, 1999 and 1998.
NOTE 10: LEASE OBLIGATIONS
The company leases two adjacent buildings in North St. Paul, Minn. from a
partnership controlled by certain shareholders of the company under two separate
lease agreements which each expire in 2006. None of the shareholders in the
partnership are either directors or officers of the company. The company leases
its Grand Prairie, Texas facility from a partnership controlled by a shareholder
who was also an officer of the company until he resigned in January 2000. The
company believes the terms of these leases are competitive with comparable local
properties. The company also leases certain equipment and other facilities under
various operating leases. Rent expense under all operating leases was as
follows:
<TABLE>
<CAPTION>
Year Ended Dec. 31, 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Paid to shareholders $ 583,776 $ 529,268 $ 336,927
Paid to others 943,163 803,672 631,069
- -------------------------------------------------------------------------------
Total rent expense $1,526,939 $1,332,940 $ 967,996
</TABLE>
AETRIUM 1999 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum annual lease payments under operating leases are as follows:
<TABLE>
<S> <C>
- -----------------------------------------
2000 $ 1,241,000
2001 1,222,000
2002 1,226,000
2003 1,037,000
2004 894,000
Thereafter 2,940,000
- -----------------------------------------
Total minimum lease payments $ 8,560,000
=========================================
</TABLE>
NOTE 11: COMMON STOCK
In connection with the April 1, 1998 acquisition of the Equipment Division of
WEB, the company entered into agreements with certain WEB shareholders whereby
the company received a right of first refusal on common shares issued to such
shareholders. In 1999 and 1998, respectively, the company repurchased 56,150
shares for $430,059 and 243,850 shares for $1,771,019 pursuant to such
agreements.
NOTE 12: STOCK OPTIONS
In 1993, the company's shareholders approved the adoption of the 1993 Stock
Incentive Plan ("the Plan"). Employees, officers, directors, consultants and
independent contractors providing services to the company are eligible to
receive awards under the Plan. The number of shares available for issuance under
the Plan is equal to 17.5% of the aggregate number of shares of common stock
outstanding less the total number of shares of common stock issuable upon the
exercise or conversion of any stock options, warrants or other stock rights. The
Plan is administered by the Compensation Committee of the Board of Directors and
provides for the granting of: (a) stock options; (b) stock appreciation rights;
(c) restricted stock; (d) performance awards; and (e) stock awards valued in
whole or in part by reference to or otherwise based upon the company's stock.
Options granted under the Plan may be incentive stock options or nonqualified
stock options. The Plan provides that the Compensation Committee may, at its
discretion, allow the exercise price of stock options to be paid, in whole or in
part, by tendering previously acquired shares that have been held by the option
holder for at least six months. The Plan will terminate on June 8, 2003.
The following table summarizes activity under the company's stock option plans:
<TABLE>
<CAPTION>
Outstanding Options
--------------------------------------------------------
Range of Weighted Average
Number of Shares Exercise Prices Exercise Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 999,182 $ 1.39 TO 18.81 9.59
Options granted 360,000 16.63 to 17.19 16.71
Options exercised (285,998) 1.39 to 10.25 7.96
Options canceled (22,840) 6.58 to 10.25 8.33
- -----------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 1,050,344 6.58 TO 18.81 12.50
Options granted 1,026,000 5.63 to 14.88 7.63
Options exercised (57,383) 6.58 to 10.25 7.08
Options canceled (572,897) 6.58 to 17.18 15.18
- -----------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 1,446,064 5.63 TO 18.81 8.15
Options granted 178,500 5.88 to 7.08 6.59
Options exercised (69,192) 6.63 to 8.34 6.96
Options canceled (84,536) 5.63 to 16.63 8.25
- -----------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 1,470,836 $ 5.63 TO 18.81 $ 8.01
- -----------------------------------------------------------------------------------------------------
OPTIONS EXERCISABLE AS OF DECEMBER 31, 1999 685,326 $ 5.63 TO 18.81 $ 9.61
=====================================================================================================
</TABLE>
The following table summarizes information related to stock options outstanding
at December 31, 1999, all of which are nonqualified options which become
exercisable over a four- to five-year period and generally expire five years
after the grant date:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------- ---------------------------------------
Number Weighted Number Weighted
Range of Oustanding Average Remaining Weighted Average Exercisable Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
- ----------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.63 to 7.08 1,018,000 3.9 years $ 6.51 251,458 $ 6.47
10.25 to 18.81 452,836 1.5 years 11.39 433,867 11.43
- ----------------------------------------------------------------------------- ---------------------------------------
$ 5.63 to 18.81 1,470,836 3.2 years $ 8.01 685,326 $ 9.61
============================================================================= =======================================
</TABLE>
24 AETRIUM 1999
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As required, the company adopted Statement of Financial Accounting Standards
("FAS") No. 123, "Accounting for Stock-Based Compensation" in 1996. As permitted
by FAS No. 123, the company applies APB Opinion No. 25 and related
interpretations in accounting for its stock option plan. Accordingly, no
compensation expense has been recorded for options granted under the Plan, as
the exercise price has been equal to the market price of the underlying stock on
the dates of grant. If the company had elected to recognize compensation expense
based on the fair value of the options at the grant date as prescribed by FAS
No. 123, net income (loss) and net income (loss) per share would have been as
reflected in the pro forma amounts indicated below (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Year Ended Dec. 31, 1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss):
As reported $ (9,013) $ (9,450) $ 1,229
Pro forma $ (9,938) $ (10,444) $ 389
Net income (loss) per
basic and diluted share:
As reported $ (.95) $ (1.00) $ .14
Pro forma $ (1.05) $ (1.11) $ .04
</TABLE>
The weighted-average fair value per option at the date of grant for options
granted in 1999, 1998, and 1997 was $2.76, $3.14, and $7.28, respectively. The
fair value of options was estimated using the Black-Scholes option-pricing model
with the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend level 0% 0% 0%
Expected stock price volatility 50% 49% 42%
Risk-free interest rate 5.5% 5.2% 6.2%
Expected life of options (years) 3.5 3.5 3.5
</TABLE>
During the years ended December 31, 1999, 1998 and 1997, in connection with
certain stock option exercises, employees surrendered 48,649 ($451,179 fair
market value), 28,631 ($468,295 fair market value), and 134,678 ($2,697,489 fair
market value) shares of common stock, respectively, as payment for the exercise
prices of such options and related withholding tax obligations.
The company recorded a tax benefit of $58,353, $163,719, and $1,205,272 for the
years ending December 31, 1999, 1998 and 1997, respectively, related to the
exercise of nonqualified stock options, which amounts have been credited to
Additional Paid-in Capital.
NOTE 13: EMPLOYEE SAVINGS 401(k) AND STOCK
PURCHASE PLANS
The company has a 401(k) employee savings plan which covers all employees who
are at least 21 years of age and have at least three months of service. Company
contributions to the plan were $231,377, $406,539, and $312,803 in 1999, 1998
and 1997, respectively.
The company has a nonqualified employee stock purchase plan. Full-time eligible
employees may purchase shares of common stock by contributing to the plan
through payroll deductions. Employee contributions to the plan are limited to
10% of each employee's base compensation. The plan purchases shares on the open
market at fair market value. At its discretion, the company may choose to
contribute to the plan. The company contributed $18,921, $12,828, and $10,444 to
the plan in 1999, 1998 and 1997, respectively.
AETRIUM 1999 25
<PAGE>
NOTE 14: INCOME TAXES
The provision (benefit) for income taxes is made up of the following components:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax provision (benefit):
Federal $ 711,000 $(2,797,000) $ 2,205,000
State 42,000 184,000 302,000
- -----------------------------------------------------------------------------------------------------------------
Total current provision (benefit) 753,000 (2,613,000) 2,507,000
- -----------------------------------------------------------------------------------------------------------------
Deferred tax provision (benefit):
Federal (6,384,000) (1,896,000) (1,941,000)
State (376,000) (353,000) (265,000)
- -----------------------------------------------------------------------------------------------------------------
Total deferred provision (benefit) (6,760,000) (2,249,000) (2,206,000)
- -----------------------------------------------------------------------------------------------------------------
Total provision (benefit) for income taxes $(6,007,000) $(4,862,000) $ 301,000
=================================================================================================================
</TABLE>
An analysis of the effective tax rate on earnings and a reconciliation from the
expected statutory rate are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes $(15,020,106) $(14,312,004) $ 1,529,946
Statutory federal tax rate 34% 34% 34%
Tax expense (benefit) computed at federal statutory rate $ (5,106,836) $ (4,866,081) $ 520,182
State taxes, net of federal benefit (220,440) (111,540) 24,420
Increase (decrease) in tax from:
Goodwill amortization 60,067 19,368 19,368
Foreign sales corporation benefit (93,626) - (204,000)
Tax-exempt interest income (33,154) (108,869) (313,480)
Business meals and entertainment 38,544 44,200 40,834
Tax credits (456,000) - -
Other, net (195,558) 160,922 213,676
- -----------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes $ (6,007,000) $ (4,862,000) $ 301,000
=================================================================================================================
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts receivable, principally due to allowances for returns
and doubtful accounts $ 159,410 $ 182,588 $ 88,271
Inventories, principally due to reserves for obsolescence and
additional costs inventoried for tax purposes pursuant to the
Tax Reform Act of 1986 1,271,503 955,270 341,352
Employee compensation and benefits accrued for financial
reporting purposes 105,825 92,142 135,496
Amortization of intangibles 6,635,959 6,593,709 5,595,033
Tax credits and net operating loss carryforwards 6,309,244 - -
Other, net 319,808 159,605 (425,838)
- -----------------------------------------------------------------------------------------------------------------
Net deferred tax asset $14,801,749 $ 7,983,314 $ 5,734,314
=================================================================================================================
</TABLE>
At December 31, 1999, the company has net deferred tax assets of $14.8 million.
Based on an assessment of the company's taxable earnings history and prospective
future taxable income as well as tax planning strategies available to
management, which could include the sale or disposal of assets to produce
current taxable income, management has determined that it is more likely than
not that its net deferred tax assets will be realized in future periods. The
company expects to become profitable during 2000. However, the company may
provide a valuation allowance for this asset in the future if it does not
generate sufficient taxable income as planned.
26 AETRIUM 1999
<PAGE>
NOTE 15: BUSINESS SEGMENT, GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION, AND
CONCENTRATION OF CREDIT RISK
The company views its operations and manages its business as one segment,
supplying electromechanical equipment to the semiconductor and electronic
component industry. Factors used to identify the company's single operating
segment include the organizational structure of the company and the financial
information used by executive management in making decisions about how to
allocate resources and assess performance. The following table sets forth the
various components of net sales by product line as a percentage of total
sales:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Test handlers 46% 48% 54%
IC Automation products 26 26 24
Reliability and environmental test products 12 12 10
Change kits and spare parts 16 14 12
- ------------------------------------------------------------------------------------------------
Total 100% 100% 100%
================================================================================================
</TABLE>
Foreign sales from the United States were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asia $11,445,000 $ 9,065,000 $11,990,000
Europe 1,916,000 4,933,000 7,720,000
Other 2,052,000 1,133,000 50,000
- ------------------------------------------------------------------------------------------------
Total $15,413,000 $15,131,000 $19,760,000
================================================================================================
</TABLE>
Sales to a single customer represented 10.7%, 19.7% and 10.1% of total net sales
in 1999, 1998, and 1997, respectively. Sales to a second customer represented
14.4% and 11.8% of total net sales in 1999 and 1997, respectively. Sales to a
third customer represented 11.5% of total net sales in 1998. Sales to a fourth
customer represented 18.2% and sales to a fifth customer represented 14.0% of
total net sales in 1997.
The company sells its products principally to manufacturers of integrated
circuits, other electronic components, and semiconductor equipment. Its accounts
receivable balance is concentrated with customers principally in one industry;
however, the company regularly monitors the creditworthiness of its customers
and credit losses have historically been minimal.
NOTE 16: SUBSEQUENT EVENT - RESTRUCTURING ACTIVITIES
In January 2000, the company announced plans to restructure certain of its
operations as follows:
The company will be closing its Lawrence, Mass. facility. Management is
exploring the potential sale of certain assets associated with the Lawrence
operation, including its environmental test equipment product line. The Thermal
Forcing System product and the development activities associated with the
company's proprietary conductive thermal technology will be transferred to the
company's North St. Paul facility. Management expects that operations will cease
at the Lawrence facility by March 31, 2000 and the facility will be vacated by
May 15, 2000.
The company's two operations in Texas will be consolidated. Strategically
significant manufacturing and development activities being conducted at the
Grand Prairie facility will be transferred to the company's Dallas facility
where operations associated with its WEB product line are located. This transfer
was substantially completed in mid-March and the Grand Prairie facility is
expected to be closed by March 31, 2000.
In connection with these restructuring activities, the company expects that
it will record unusual charges of approximately $2.5 to $3.0 million in the
quarter ended March 31, 2000, including costs associated with the termination
of approximately 60 employees.
AETRIUM 1999 27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
FIVE YEAR SUMMARY
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales $ 37,188 $59,619 $ 67,575 $ 58,387 $ 47,631
Income (loss) from operations (15,628)(1) (15,276)(2) 383(3) 12,376 4,359(4)
Net income (loss) (9,013)(1) (9,450)(2) 1,229(3) 9,242 3,356(4)
Net income (loss) per share:
Basic (.95)(1) (1.00)(2) .14(3) 1.10 .48(4)
Diluted (.95)(1) (1.00)(2) .14(3) 1.08 .46(4)
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
Balance sheet data:
Total assets $ 63,604 $72,444 $ 70,894 $61,718 $ 61,600
Long-term debt, less current portion - - - - -
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
1. INCLUDES UNUSUAL PRE-TAX CHARGES TOTALING $3.9 MILLION RELATED TO INVENTORY
RESERVES, RESTRUCTURING CHARGES, AND ASSET WRITE-OFFS. EXCLUDING THESE
CHARGES, THE LOSS FROM OPERATIONS, NET LOSS, AND NET LOSS PER BASIC AND
DILUTED SHARE WOULD HAVE BEEN $(11,682), $(6,644), AND $(.70),
RESPECTIVELY. SEE NOTE 3 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
2. INCLUDES UNUSUAL PRE-TAX CHARGES TOTALING $10.2 MILLION RELATED TO
INVENTORY RESERVES, RESTRUCTURING CHARGES, AND ASSET WRITE-OFFS. EXCLUDING
THESE CHARGES, THE LOSS FROM OPERATIONS, NET LOSS, AND NET LOSS PER BASIC
AND DILUTED SHARE WOULD HAVE BEEN $(5,053), $(2,510), AND $(.27),
RESPECTIVELY. SEE NOTE 3 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
3. INCLUDES UNUSUAL PRE-TAX CHARGES TOTALING $9.5 MILLION RELATED TO PURCHASED
IN-PROCESS RESEARCH AND DEVELOPMENT. EXCLUDING THESE CHARGES, INCOME FROM
OPERATIONS, NET INCOME, NET INCOME PER BASIC SHARE, AND NET INCOME PER
DILUTED SHARE WOULD HAVE BEEN $9,843, $7,851, $.91, AND $.88, RESPECTIVELY.
SEE NOTE 3 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
4. INCLUDES AN UNUSUAL PRE-TAX CHARGE OF $6.3 MILLION RELATED TO PURCHASED
IN-PROCESS RESEARCH AND DEVELOPMENT. EXCLUDING THIS CHARGE, INCOME FROM
OPERATIONS, NET INCOME, NET INCOME PER BASIC SHARE, AND NET INCOME PER
DILUTED SHARE WOULD HAVE BEEN $10,698, $7,792, $1.10, AND $1.06,
RESPECTIVELY.
QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 Net sales $ 8,057 $ 8,013 $ 10,106 $ 11,012
Gross profit 3,227 853(1) 4,353 4,846
Net income (loss) (2,294)(1) (3,503)(1) (1,522) (1,694)(1)
Net income (loss) per basic and diluted share (.24)(1) (.37)(1) (.16) (.18)(1)
- -------------------------------------------------------------------------------------------------
1998 Net sales $ 20,481 $ 16,108 $ 12,009 $ 11,021
Gross profit 10,283 3,956(1) 4,965 4,874
Net income (loss) 2,383 (7,770)(1) (2,216) (1,847)
Net income (loss) per basic and diluted share .27 (.80)(1) (.23) (.19)
- -------------------------------------------------------------------------------------------------
</TABLE>
1. THESE QUARTERLY RESULTS INCLUDE UNUSUAL CHARGES SUCH AS INVENTORY AND OTHER
ASSET WRITEDOWNS, RESTRUCTURING CHARGES, AND ACQUISITION-RELATED CHARGES
DISCUSSED ELSEWHERE IN THIS REPORT. SEE NOTE 3 TO THE CONSOLIDATED
FINANCIAL STATEMENTS.
PRICE RANGE OF THE COMPANY'S COMMON STOCK
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 High $ 12.44 $ 9.25 $ 10.88 $ 7.50
Low $ 5.50 $ 5.38 $ 6.25 $ 5.13
- --------------------------------------------------------------------------------------
1998 High $ 19.00 $ 17.50 $ 9.50 $ 11.50
Low $ 12.75 $ 7.25 $ 4.50 $ 3.63
- --------------------------------------------------------------------------------------
</TABLE>
The company's common stock is quoted on the Nasdaq National Market under the
symbol "ATRM." As of March 13, 2000, there were approximately 200 shareholders
of record. The company estimates that an additional 5,500 shareholders own stock
held for their accounts at brokerage firms and financial institutions.
DIVIDENDS
The company has never paid cash dividends on common stock. The company currently
intends to retain any earnings for use in its operations and does not anticipate
paying cash dividends in the foreseeable future.
28 AETRIUM 1999
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CORPORATE INFORMATION
CORPORATE MANAGEMENT
Joseph C. Levesque
Chairman, President and
Chief Executive Officer
Darnell L. Boehm
Chief Financial Officer and Secretary
Douglas L. Hemer
Group Vice President
Paul H. Askegaard
Treasurer
Daniel M. Koch
Vice President, Worldwide Sales
John J. Pollock
Vice President, Corporate Marketing
Venu Turlapaty
Vice President, Product Planning
Stephen P. Weisbrod
Vice President, Corporate Technology
BOARD OF DIRECTORS
Joseph C. Levesque
Chairman of the Board,
President and Chief Executive Officer,
Aetrium Incorporated
Darnell L. Boehm
Chief Financial Officer and Secretary,
Aetrium Incorporated
Douglas L. Hemer
Group Vice President,
Aetrium Incorporated
Terrence W. Glarner
President,
West Concord Ventures, Inc.
Andrew J. Greenshields
Founding Partner,
Pathfinder Venture Capital Funds
Terrance J. Nagel
President/CEO,
NOW Technologies, Inc.
DIVISION MANAGEMENT
Roger J. Hopkins
Vice President and General Manager
San Diego Operations
Timothy G. Foley
Vice President, Operations
North St. Paul Operations
Gerald C. Clemens
Vice President,
Reliability Test Products
Keith E. Williams
President,
Dallas Operations
INVESTOR INFORMATION
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Minneapolis, Minn.
LEGAL COUNSEL
Oppenheimer Wolff & Donnelly LLP
Minneapolis, Minn.
STOCK LISTING
NASDAQ symbol: ATRM
TRANSFER AGENT AND REGISTRAR
Harris Trust & Savings Bank
Chicago, Ill.
(312) 588-4131
PRINCIPAL MARKET MAKERS
Dain Rauscher Inc.
John G. Kinnard & Company
Needham & Company
R.J. Steichen & Company
Adams, Harkness & Hill, Inc.
ANNUAL MEETING
The annual meeting of shareholders of
Aetrium Incorporated will be held on
Tuesday, May 23, 2000 at 4:00 p.m. at Aetrium's Corporate Headquarters,
2350 Helen Street, North St. Paul, MN.
10-K REPORT
A copy of the company's Annual
Report on Form 10-K, as filed with the Securities and Exchange Commission, may
be obtained free of charge by writing to Investor Relations:
AETRIUM INCORPORATED
2350 Helen Street
North St. Paul, MN 55109 USA
Telephone: (651) 704-1800
Fax: (651) 704-0339
Web site: www.aetrium.com
E-mail: [email protected]
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Numbers 33-72656 and 33-74616) and on Form S-3
(File Number 333-49577) of our report dated January 31, 2000 relating to the
financial statements, which appears in the 1999 Annual Report to Shareholders of
Aetrium Incorporated, which is incorporated by reference in Aetrium
Incorporated's Annual Report on Form 10-K for the year ended December 31, 1999.
We also consent to incorporation by reference of our report dated January 31,
2000 relating to the financial statement schedule, which appears in such Annual
Report on Form 10-K.
/s/ Pricewaterhousecoopers LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
March 30, 1999
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