SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-22428
ZYTEC CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1465891
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7575 MARKET PLACE DRIVE, EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 941-1100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 28, 1997, the aggregate market value of the voting stock held by
nonaffiliates of the registrant, computed by reference to the average of the
high and low prices on such date as reported by the Nasdaq National Market was
$77,918,811.
As of February 28, 1997, there were outstanding 9,264,603 shares of the
registrant's common stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1996, are incorporated by reference into Part II and Part IV
hereof.
Portions of the registrant's definitive proxy statement for its 1997 Annual
Meeting of Shareholders, to be filed within 120 days after the end of the fiscal
year covered by this report, are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
PAGE
PART I
<TABLE>
<CAPTION>
<S> <C>
Item 1. Business 3
Power Conversion:
Industry and Market 3-6
Strategy 6-7
Products and Services 7-8
Operations 8-9
Sales, Marketing and Customers 9-10
Backlog 10
Competition 10-11
Research and Development 11
Intellectual Property Matters 11
Employees 12
Services and Logistics:
Industry Overview 12
Strategy 12
Products and Services 12-13
Employees 13
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 14
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and Management 15
Item 13. Certain Relationships and Related Transactions 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16
SIGNATURES 17-18
INDEX TO EXHIBITS 19-23
</TABLE>
PART I
ITEM 1. BUSINESS
Zytec Corporation ("Zytec" or the "Company") does business in two
segments: Power Conversion which provides power supply design, manufacture and
repair (approximately 90% of the Company's net sales) and Services and Logistics
which provides repair services and logistics for a variety of products primarily
for a significant customer (approximately 10% of net sales).
In the Power Conversion segment, the Company is a leading designer and
manufacturer of custom electronic power supplies for original equipment
manufacturers ("OEMs") in the communications, networking, computer and other
electronic equipment marketplaces. Recently, the Company has experienced
significant sales growth because it has been the sole-source provider of power
supplies to many of the OEMs that provide hardware for the internet and the data
communications market place. The Company also repairs power supplies and related
products. The Company's power supply components are sold in North America and
Europe, and its products are used worldwide. Zytec's principal OEM customers
include: Digital Equipment, Hewlett-Packard, IBM, Cabletron, Cisco Systems, Sun
Microsystems, Bay Networks, Dell, and Silicon Graphics. In 1996, the Company
manufactured and delivered over 900,000 power supplies representing over 173
different products. The Company's dedication to quality resulted in its winning
the Malcolm Baldrige National Quality Award in 1991.
The Services and Logistics segment of the business provides repair
services and logistics for a variety of products primarily for Hewlett-Packard.
These products include laser and inkjet printers, facsimile machines, computers,
monitors and other equipment.
POWER CONVERSION
INDUSTRY AND MARKET
INDUSTRY OVERVIEW
Power supplies perform many essential functions relating to the supply,
regulation, and distribution of electrical power within electronic equipment.
Electronic systems require a steady supply of electrical power at one or more
voltage levels. Power supplies convert alternating current (AC) from a primary
power source into the direct current (DC) required to power the electronic
system. In addition, power supplies provide different DC voltage levels required
by the different subsystems and components in the system and monitor and
regulate those voltages to protect the product and its components from surges.
Power supplies can also be designed to perform diagnostic functions that prevent
electronic equipment from being damaged by such equipment's own malfunction, as
well as provide power through use of a short-term battery back-up system when
the primary power source fails.
The dominant technology now used in power supplies is switching
technology. Before the development of switching power supplies, power supply
technology was fairly simple, and power supplies consisted of a transformer and
some related components to rectify and control power surges. As the complexity
of electronic equipment has increased, power supplies and their underlying
technology have become more advanced. Switching power supplies such as those
manufactured by Zytec have hundreds of components, provide advanced diagnostic
and power management functions, can be designed to provide battery back-up
power, and are smaller and more efficient than power supplies using simpler
technology.
SWITCHING POWER SUPPLIES
[GRAPHIC SHOWING FROM AC WALL POWER IN TO AC TO DC POWER SUPPLY TO A DISK
DRIVE OR MEMORY OR INTEGRATED CIRCUITS OR MOTORS OR MONITORS]
As a further enhancement of AC/DC power supplies utilizing switching
technology, a newer more flexible technology is emerging which the Company
refers to as "distributed power architecture" (DPA). Most electronic systems
have a number of subsystems, each of which may require a different operating
voltage or level of power. As a result, power supplies often have multiple
outputs that can provide all required system voltage levels. In such power
supplies, power is "distributed" throughout the system so that in addition to
the main AC/DC power supply, DC/DC converters located on or near the subsystem
or component being powered change the voltage of the DC to the specific level of
voltage needed. Distributed power permits greater flexibility to meet the power
supply requirements if components or subsystems are added or upgraded.
DISTRIBUTED POWER ARCHITECTURE
[GRAPHIC SHOWING FROM INPUT TO AC TO DC
FRONT END TO OUTPUT TO VARIOUS SUB SYSTEMS]
Micro-Tech Consultants forecasts that the US high density DC/DC converter
power supply market will grow from $309 million in 1996 to $500 million in 2000,
representing a projected average annual growth rate of approximately 12.8%.
Micro-Tech Consultants also forecasts that the entire US distributed power
architecture market will grow from $1,402 million in 1996 to $2,256 million in
2000 for an average annual growth rate of 12.6%.
MARKET OVERVIEW
Ninety percent of the Company's business is the manufacture of custom
power supplies. According to a market report from Micro-Tech Consultants, the
worldwide market for power supplies was estimated to be over $19.6 billion in
1995. This is forecasted to grow to $32.7 billion in 2000. The overall market
for power supplies can be defined several ways, as follows:
MERCHANT/CAPTIVE. Merchant power supply manufacturers design and
manufacture power supplies for others. Captive power supply manufacturers design
and manufacture power supplies for use within their own products. According to
Micro-Tech Consultants, the merchant segment of the market accounted for 51% of
the power supply units shipped in the United States in 1995 and is projected to
grow to 60% in the year 2000 as OEMs demand product options and features and
high quality levels that make power supplies increasingly difficult to design
and manufacture in-house.
POWER RANGE. The market is also segmented by power supply output range, as
follows:
<TABLE>
<CAPTION>
Typical % of Representative
Power Range Characteristics Market* End Users Applications
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LOW * Less than 150 Watts 21% * PC Companies * Personal Computers
* Lower Technology * Consumer Electronics * Consumer Electronics
* Higher Volume * Desk Top Printers
* Lower Margin
MID * 150-750 Watts 63% * Internetwork Companies * Routers, Hubs
* High Technology * Computer Companies * Workstations, Fault
* Moderate Volume * Medical Companies * Tolerant Computers
* Higher Margin * Blood Analyzers
HIGH * More than 750 Watts 16% * Computer Companies * Main-frame Computers
* High Technology * Industrial Companies * Industrial Process Control
* Lower Volume * Internetworking Companies * High-end Routers/Switches
* Higher Margin
</TABLE>
- ---------
* Based on a 1996 market report from Micro-Tech Consultants.
APPLICATION. The United States power supply market also is segmented into
different applications. Set forth below are the principal segments and the
corresponding compound annual revenue growth rate as forecasted by Micro-Tech
Consultants:
GROWTH RATE
APPLICATIONS 1995-2000
------------ ---------
Computer, Peripherals and Office Equipment*........... 14.0%
Communications*....................................... 18.3%
Military/Aerospace.................................... (9.6)%
Industrial ........................................... 7.6%
- ---------
* Zytec actively participates in the computers, peripherals, office equipment
and communications market segments.
CUSTOM/STANDARD. Custom power supplies are designed and packaged to meet
the form, fit, and functional requirements of an OEM's unique and specific
application. They are attractive to OEMs because they present maximum design
flexibility, provide the lowest cost, and allow the use of special features.
Standard, "off-the-shelf" power supplies are not design-specific but also do not
require substantial up-front engineering design costs. Once a product has
reached the stage of development where the OEM is confident that there will be a
market demand for the product, it is typically cost-effective to custom design a
unique power supply to meet that product's specific requirements. The OEM is
then able to utilize a moderately high-volume, customized solution at the lowest
cost per watt of power without paying for unnecessary features or capabilities.
Custom power supplies represented 63.0% of the United States market in 1995,
according to Micro-Tech Consultants.
Zytec pursues the custom power supply business because it capitalizes on
the Company's strengths in the area of sophisticated design, volume
manufacturing, and customer service. The effect, though, is that competition
among qualified design and manufacturing outsourcing companies providing these
customized solutions is keen. The competition causes downward pressure on gross
margins, which is only partially offset by lower selling and distribution costs.
Zytec believes a number of important trends affecting its customers will
continue to shape the power supply marketplace. The applications segments which
are growing rapidly, such as workstations and data communications hardware
(e.g., hubs, routers and file servers), need mid-range power. In addition, OEMs
face pressure from end users to improve the price and performance of products,
bring new products to market quickly, provide more product options and features,
reduce product size, and meet increasingly complex safety and regulatory agency
standards. The Company believes that these pressures will support the need for
and encourage a modest migration from captive manufacturers to
merchant-provided, custom-designed power supply manufacturers such as Zytec and
that market dynamics will maintain the vitality of the mid-range segment of the
market.
STRATEGY
Zytec's objective is to be the supplier of choice to a targeted group of
multinational OEM customers who require sophisticated power supply solutions and
who are likely to have substantial volume requirements. To achieve this
objective, Zytec's strategy is to differentiate itself through advanced
technology and design, shorter product development cycles and superior product
performance, quality, service and value. The Company's primary target market for
the last several years has been OEMs in the communications, networking, computer
and other electronic equipment marketplaces. These OEMs manufacture hubs,
routers, high availability file servers and disk arrays which typically have
complex technical needs, high product reliability standards, short product
development cycles and variable production needs. The Company implements this
strategy by combining the following key elements:
DELIVER HIGH-QUALITY PRODUCTS AND SERVICES
Zytec believes that quality and responsiveness to the customer's needs are
of critical importance in its efforts to compete successfully. Zytec's Minnesota
and Austrian operations are certified to ISO 9001, and the Company plans to
qualify each of its locations to applicable IS0 9000 standards as necessary to
meet customer requirements. Zytec actively involves all employees in
implementing techniques to measure, monitor and improve performance and provides
all employees with education and training, including courses in statistical
process control and related techniques. Also, employees participate in Zytec's
planning sessions and monitor adherence to their annual plans on a monthly
basis. Through its commitment to customer service and quality, the Company
believes it is able to provide superior value to its customers.
PROVIDE LEADING-EDGE ENGINEERING AND TIME TO MARKET
Zytec's target markets and customers are characterized by high growth
rates and continually evolving technology. As a result, Zytec's customers
typically require leading-edge technology designed in a relatively short period.
Zytec's initiatives to maintain leading-edge technology and reduce time to
market include collaborative research with the Power Electronics Center at
Virginia Polytechnic Institute; a series of in-house technical training
symposia; increased use of standard circuits; sharing of engineering concepts
between Austria and US; and computerized simulation of analog design
characteristics (begun in 1995). These initiatives have contributed to a
reduction of time to market of about 20% per year in 1994, 1995 and 1996. The
design engineering personnel located in Richardson, Texas, who perform system
engineering for Zytec's DPA products, participate in these process improvement
initiatives.
DEVELOP AND EXPAND COLLABORATIVE RELATIONSHIPS
Through the development and expansion of collaborative relationships with
its customers, Zytec attempts to satisfy their needs by offering a full range of
value added services, including design expertise, process development and
control, testing, inventory management, and rapid response to volume and design
changes. Some custom-designed projects are priced based on agreed-to gross
margins and allow for a sharing of the costs, risks and rewards of the
manufacturing process with the customer. These relationships also provide the
Company with valuable knowledge regarding the customer's products. The Company
focuses its efforts on customers with which it believes the opportunity exists
to develop long-term business collaborations.
LEVERAGE ADVANCED MANUFACTURING AND MANAGEMENT TECHNIQUES
Zytec's strategy focuses on the quality of all elements of the production
process, rather than merely the quality of the end product. To implement this
strategy, Zytec uses sophisticated design and manufacturing techniques (such as
computer integrated design and manufacture, computer aided design, and automated
testing and assembly of printed circuit boards), combined with advanced
management techniques, including just-in-time manufacturing, statistical process
control and total quality commitment. These techniques allow the Company to
decrease production costs by improving the efficiency of production processes.
EXPAND COMPLEMENTARY BUSINESSES
The Company believes that providing a wide range of services affords the
Company a competitive advantage, as it further addresses customer needs and
therefore increases the likelihood that the Company will make continuing sales
to its customers. For example, at a customer's request, the Company may build
assemblies by adding cables, harnesses, frames, and other components to its
power supply unit. In addition, Zytec offers power supply repair services for
Zytec-manufactured power supplies as well as power supplies manufactured by
others.
PRODUCTS AND SERVICES
In 1996, the Company manufactured and delivered over 900,000 power
supplies representing over 173 different products, including 33
customer-designed power supplies and 140 products designed by Zytec. Zytec also
provides related repair and support services to customers.
POWER SUPPLY PRODUCTS
A Zytec-designed power supply progresses through a five-phase cycle of
development that may last from 6 to 18 months, depending on the customer's
product introduction schedule and the design complexity. In Phase Zero and Phase
One of development, a team is assembled, the product specifications are refined
with varying degrees of customer involvement, and the product is conceptually
designed. In Phase Two, the detailed design analysis and layouts are completed
and documented, initial prototypes are manufactured and shipped to the customer,
and Zytec begins to track the product's actual cost against targeted cost. In
Phase Three, prototypes are tested extensively by Zytec and the customer, design
corrections are made, design documentation is released, and safety compliance
approvals are obtained. In Phase Four, production plans, processes, and
capabilities are established to support volume production, and customer service
standards are implemented. Phase Five is volume production.
<TABLE>
<CAPTION>
THE PRODUCT DEVELOPMENT CYCLE
TYPICAL TIME LINE MAJOR ACTIVITIES
<S> <C> <C>
Phase 0 Time of Award * Assign design team
* Establish project schedule
* Specification review
Phase 1 Week 1-8, * Design review
Depending upon complexity * Preliminary electrical and mechanical
design completed
* Cost targets compared to quote
Phase 2 Month 1-4 * Detailed design analysis
* CAD layouts
* Prototypes manufactured and delivered
* Documentation
* Costs reviewed
Phase 3 Month 5-18 * Testing and qualification
* Design corrective action
* Documentation release
* Customer design review
* Safety compliance approvals obtained
* Costs reviewed
* Product performance variation measured
Phase 4 Month 5-18 * Pre-production product manufactured and tested
* Production process capabilities determined
* Initial production started
* Design responsibility transferred to
manufacturing
* Customer service standards implemented
Phase 5 Month 6-18 * Volume production
</TABLE>
As customers demand shorter development times, the risk that all five
phases of development will not be completed successfully on schedule rises.
Early life project profitability may be reduced substantially if the Company has
not completed all phases of development before manufacturing start-up begins.
Zytec also manufactures power supplies based on designs supplied by the
customer. In customer-designed projects, Zytec manufactures a power supply that
the customer has designed, using suppliers agreed to between the customer and
Zytec.
In 1995, Zytec introduced and shipped the first substantial quantities of
its DPA converters. This technology, licensed from Digital Equipment Corporation
and subsequently Galaxy Power, Inc., offers higher efficiency in smaller size
than traditional switching power supplies. In early 1996, the Company
established a subsidiary in Dallas, Texas to lead the Company's design and
marketing efforts for this new technology.
REPAIR OF POWER SUPPLIES
In 1996, Zytec repaired over 1,100 different power supply models
originally manufactured by over 200 different companies in its Redwood Falls,
Minnesota location. Repair activities are also carried out in Kindberg, Austria.
Many of the Company's power supply customers use Zytec's repair services for
power supplies manufactured by the Company and by others.
OPERATIONS
QUALITY MANAGEMENT TECHNIQUES
A key element of Zytec's competitive strategy is delivering high-quality
products and services. Zytec's focus on this strategy led to its receipt of one
of three Malcolm Baldrige National Quality Awards given in 1991. The Company
also won the first Minnesota Quality Award in 1991, and has received over 30
superior service and quality awards from its customers, including IBM, Abbott
Laboratories, Stratus Computers, Tektronix and Sun Microsystems, since 1987.
Zytec's quality management techniques focus on all elements of the
production process, rather than merely the quality of the end product. To
implement this strategy, Zytec uses sophisticated design and manufacturing
techniques (such as computer integrated design and manufacture, computer aided
design, and automated testing and assembly of printed circuit boards), combined
with advanced management techniques, including just-in-time (JIT) manufacturing,
statistical process control (SPC), and total quality commitment (TQC). These
techniques allow the Company to decrease production costs by improving the
efficiency of production processes.
* JIT manufacturing increases efficiencies and shortens the
manufacturing cycle.
* SPC complements the JIT process and is a set of analytical and
problem solving techniques through which Company personnel can
continuously evaluate stages of production and administrative
processes.
* TQC is a management approach which involves all employees in
establishing overall and specific goals, tracking adherence to these
goals on a monthly, weekly or daily basis, and being responsible and
accountable for achieving the established objectives.
MANUFACTURING PROCESS
A typical power supply consists primarily of one or more printed circuit
boards, electronic components, transformers and other electromagnetic
components, and a sheet metal chassis. The production of the Company's power
supplies entails the assembly of structural hardware combined with sophisticated
automated assembly of circuit boards using automated surface mount and
pin-through-hole interconnection technology. Surface mount technology permits
reduction in board size by eliminating the need for holes in the printed circuit
boards, allowing components to be placed on both sides of a board.
Pin-through-hole assembly involves attaching electrical components to circuit
boards by means of pins or leads that are inserted into pre-drilled holes and
soldered to the electrical circuits on the boards.
In response to market demands for increased quality and reliability, design
complexity, and sophisticated technology, Zytec has automated many electronic
assembly and testing processes which were traditionally performed manually. In
addition, the demand for shorter manufacturing cycles has also led to increased
use of automated assembly and testing. The Company believes that the power
supply manufacturing industry has remained fragmented partly because it
traditionally has been a labor intensive, low investment industry; thus, it
believes that increased levels of automation will strengthen Zytec's competitive
position.
Many of the Company's customers increasingly require that their power
supplies meet or exceed established international safety and quality standards
as their operations expand internationally. In response to this need, Zytec
designs and manufactures power supplies in accordance with the certification
requirements of many international agencies, such as Underwriters Laboratories
Incorporated (UL) in the United States; the Canadian Standards Association (CSA)
in Canada; Technischer Uberwachungs-Verein (TUV) and Verband Deutscher
Electrotechniker (VDE), both in Germany; the British Approval Board for
Telecommunications (BABT) in the United Kingdom; and International
Electrotechnical Committee (IEC), a European standards organization. Both Zytec
Austria and Zytec US (Redwood Falls, Minnesota) are certified to ISO 9001, which
is a European model for quality assurance.
SUPPLIERS
Zytec typically uses a primary source of supply for each specific
component, but it has several sources for each kind of component. As with
customers, Zytec stresses early supplier involvement in design, the use of
quality methods such as SPC and TQC, and frequent feedback through monthly
statistical analysis of quality and delivery. Several major suppliers provide
"just in time" shipments of products to Zytec. No supplier provides more than
10% of the dollar value of material used by the Company on a consolidated basis.
In March 1996, an existing supplier of magnetic components (transformers,
coils and toroids) to Austria was acquired by the Company from the Hungarian
government by privatization. The acquisition gives the Company a source of very
high quality, low-cost custom components. This facility will be operated as a
wholly-owned subsidiary of the Austrian operation. It will provide the majority
of magnetic components used by Zytec Austria and has recently become a supplier
to US operations as well.
SALES, MARKETING AND CUSTOMERS
Zytec markets its custom products and services through an integrated sales
approach involving direct sales representatives and account managers, along with
active support from design engineering and production personnel. The Company's
products and repair services are sold worldwide through an eleven-member sales
organization. Eight sales personnel are responsible for North American power
supply sales. Two sales representatives are responsible for marketing the
Company's repair business in North America. One sales person, headquartered in
Vienna, Austria, is responsible for European power supply sales.
Because of the costs inherent in starting new customer relationships, the
Company focuses on retaining existing customers and targets a select few major
and emerging OEM industry leaders with which the opportunity exists to provide
products and services across a number of product families and through successive
product generations. The Company focuses its resources on market segments that
are (a) growing relatively fast and (b) have the potential for profit. Potential
customers are assigned to Company sales representatives who evaluate the
customer against the Company's customer selection criteria. For most end
products of a customer, or versions of such end products, the Company believes
it has established itself as a sole source provider of power supplies for the
product.
The typical sales process begins with a customer or a potential customer
making a request for quote (RFQ) from a number of power supply manufacturers.
Based on the nature of the RFQ, the Zytec sales representative may work with the
Company's design engineers on early stage design in an effort to determine the
product's likely specifications, cost and price range. Once this process is
completed, Zytec will submit its bid for the project. The requesting OEM will
review the RFQ responses it receives and make a "short list" of two or three
potential suppliers. Further refinements are made during a second round of
bidding, at which point one supplier is selected, usually within 60 days. If
Zytec's bid is selected, a Zytec account manager is assigned to manage order
placement, delivery scheduling and design change implementation for that
customer. On an ongoing basis, Zytec's engineering personnel provide technical
support to customers in the areas of product design changes, field performance
and testing.
Some customers prefer to use Zytec to produce customer-designed products
as an introduction to the Company and its full service design and manufacturing
capabilities. Zytec's collaborative relationships allow it to gain valuable
knowledge about an existing customer and its processes, which Zytec believes
gives it an advantage in obtaining future business from that customer.
Historically, the Company has had substantial recurring sales from existing
customers.
The Company's promotional activities include informational mailings to
customers and selected potential customers and the publication in industry
periodicals of articles written by Zytec personnel. In addition, the Company
participates regularly in industry-wide conferences and trade shows and sponsors
customer seminars.
The following chart profiles the percentage of Zytec's 1996 Power
Conversion revenues and typical customers in major market application segments:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRODUCT OR MARKET SERVED BY CUSTOMERS POWER CONVERSION REPRESENTATIVE CUSTOMERS
- ------------------------------------- REVENUES ------------------------
--------
<S> <C> <C>
POWER SUPPLIES:
Data communications 22 % Cabletron, Bay Networks, Cisco,
Ericsson
File servers 18 Digital Equipment,
Hewlett-Packard, Compaq, IBM, Dell
Computer peripherals 20 Digital Equipment,
-- Hewlett-Packard, IBM, 3M
Inter/Intranet 60
Workstations 15 Hewlett-Packard, Silicon Graphics,
Sun Microsystems
Mini/Fault tolerant computers 11 IBM, Unisys, Stratus
Test and measurement 10 Tektronix, Hewlett-Packard, Abbott
Laboratories
Repair, other 4
---
Total Power Conversion 100 %
===
</TABLE>
Although the Company seeks to diversify both its customer and market
application base, a small number of companies are responsible for a significant
portion of Zytec's net sales. At December 31, 1996, the Company had 22 power
supply product customers worldwide. During 1996, the Company had three power
supply customers with revenue exceeding $20 million, including Digital Equipment
Corporation ($37 million, or 16% of net sales), Cabletron ($25 million, or 11%
of net sales), and IBM ($23 million, or 10% of net sales), and a total of seven
customers with revenues exceeding $5 million. The Company expects to continue to
depend upon a limited number of customers for a substantial portion of its
revenues.
BACKLOG
Sales are made pursuant to purchase orders rather than long-term
contracts. Backlog consists of purchase orders on hand generally having delivery
dates scheduled within the next three months. Zytec's backlog was $54.2 million
and $52.3 million at December 31, 1996 and December 31, 1995, respectively. Due
to the increasing trend for OEMs to reduce their lead time for purchase orders,
and because customers may cancel or reschedule deliveries, the Company does not
consider backlog to be a reliable indicator of future financial results.
COMPETITION
The merchant power supply manufacturing industry is highly fragmented and
characterized by intense competition. According to Micro-Tech Consultants, there
were estimated to be about 300 power supply manufacturers in the United States
in 1996. Over 80% of the power supply companies in the world have annual
revenues less than $10 million. According to Micro-Tech Consultants, in 1995
Zytec was the 3rd largest power supply company in the United States and the 9th
largest power supply company in the world.
Zytec's competition includes companies located throughout the world, some
of which have advantages over the Company in terms of labor and component costs,
and which may offer products comparable in quality to those of Zytec. Certain of
the Company's competitors have greater resources and geographic presence than
Zytec. Zytec also views as competitive threats the potential that its customers
may decide to produce their own power supplies, and that OEMs with captive
manufacturing capabilities may compete in the merchant market. However, several
large OEMs have divested their captive power supply manufacturing operations,
including NCR, TRW and Digital Equipment Corporation. Management believes that
the principal bases of competition in Zytec's targeted market are manufacturing
technology, cycle time of design and manufacture, technical knowledge, quality,
and the availability of value added services. To remain competitive, Zytec must
compete favorably on the basis of value by providing technologically advanced
manufacturing services, improving quality and reliability levels, offering
flexible delivery schedules, and delivering finished products on a reliable
basis.
RESEARCH AND DEVELOPMENT
Zytec's research and development activities are principally directed to
the development of new custom power supply products to satisfy specific customer
needs. Additionally, the Company continues to develop its common circuit design
to assist in the development of future products for specific customers. Zytec's
research activities also include internally performed research and an
affiliation with the Virginia Polytechnic Institute Power Electronics Center.
Internal research efforts are focused on improving circuits and packaging in
order to reduce component cost, improve ease of manufacture, and accommodate
product size constraints, as well as analysis techniques, such as computer
simulations intended to reduce design cycle time.
Customers in the Company's target markets require product designs to be
completed quickly. A major challenge for Zytec is to reduce design time without
reducing quality of the design. In 1996, the Company's average time to design
and introduce a product into production improved by 20%, the same rate of
improvement achieved in 1994 and 1995. Most of the improvement comes from design
standardization and process improvements. In 1995, the Company began a project
to use computer simulation to speed the process of original design. The Company
expects to realize initial results from this project in late 1997.
Product development is performed by a group of 34 engineers located in
Minnesota, 3 in Texas, and 21 in Austria. The Company's total expenditures for
research and development were $9.5 million, $8.6 million and $8.1 million in
1996, 1995, and 1994, respectively. Of these amounts, 16.7%, 18.2%, and 30.2%,
respectively, were funded by customers in connection with new product designs.
Customer reimbursements of research and development expenditures are reported as
"other revenue" in the Company's financial statements. Other revenue as a
percentage of research and development expenditures is declining, due in part to
higher levels of research (which are not reimbursed by customers) and in part to
the trend toward lower funding per project.
INTELLECTUAL PROPERTY MATTERS
Zytec signed a licensing agreement in September 1992 with Digital
Equipment Corporation to complete the design and manufacture of a family of
DC/DC converters in the 150 watt to 300 watt range. In addition, Zytec signed a
license agreement with Ericsson Components AB (Ericsson), a multinational
telecommunications firm headquartered in Sweden, for Ericsson's power division
to market Zytec's DC/DC converters in the standard power supply marketplace
worldwide. The licensing agreement with Ericsson will expire December 31, 2002.
Zytec also signed a licensing agreement, in December 1994, with Galaxy
Power Inc., (Galaxy) Boston, Massachusetts, to develop a "next generation"
family of high density DC/DC converters. This agreement is a non-exclusive,
perpetual license to make, have made, use, market and sell certain high density
DC/DC product lines under Zytec's name and on a private label basis to Ericsson
for an up-front license fee plus engineering fees. Zytec also has a first right
to acquire a license from Galaxy for certain future products developed by
Galaxy. These products were introduced to the market place in 1996.
Zytec currently holds several patents, trademarks, and a service mark.
These items of intellectual property are not deemed of significant importance to
the Company's business. The Company believes that although the patents and other
proprietary information it holds and may obtain will be of value, they will not
determine the Company's success, which depends principally on its emphasis on
service and value.
EMPLOYEES
As of February 28, 1997, the Power Conversion segment had 1,482 full-time
employees in the following locations:
Minnesota 635 Austria 381
Colorado 187 Hungary 276
Texas 3
The Company also engaged other personnel on a part-time basis. None of the
Company's United States employees are members of a collective bargaining unit.
The employees of Zytec Austria are members of a national labor union, as are
most employees of Austrian companies. Management believes employee relations are
good.
SERVICES AND LOGISTICS
INDUSTRY OVERVIEW
OEMs must find ways to repair products which fail in the field. Often, the
process involves the logistics of arranging for return of products and, when
they have been repaired, arranging for delivery of products to their customers.
This function has traditionally been accomplished as part of the OEM's business.
In the 1980s and 1990s, as companies have focused their energies on core
competencies, electronics manufacturers have often outsourced many activities
that they do not consider essential to their business. In the case of Zytec's
Services and Logistics operation, the Company was retained by Hewlett-Packard
("HP") in 1992 to manage inbound logistics and outbound logistics for some of
its computer products and repair certain products. This business has grown
rapidly since 1992 as HP has transferred more products to Zytec. The original
products repaired were older computers, special purpose computers, monitors and
some power units. Since 1992, Zytec has taken over repair of laserjet and
deskjet printers, faxes, scanners and other products. It is this regular
transfer of products from HP to Zytec that has been responsible for the high
growth rates in the business. Through 1996, nearly all of the Services and
Logistics' sales were to HP. In 1997, Zytec plans to expand similar services to
other customers.
STRATEGY
Zytec's objective is to be a value added supplier to its customers for
repair services and logistics by specializing in process design improvement,
thus allowing the customers to achieve high quality service on products it sells
at a lower cost than the customers could otherwise enjoy. In addition, Zytec's
Services and Logistics operation has taken steps to broaden its business base to
include some aspects of network systems design and installation as well as
service.
It is Zytec's strategy to expand its Services and Logistics facilities
within the value chain of manufacturer distribution and repair. For this
purpose, Zytec has established a Foreign Trade Zone ("FTZ"), which allows
reduced or delayed customs duties on products returned from foreign locations
for repair or on component parts shipped to the United States and assembled in
the FTZ. The FTZ, together with existing repair processes, allows Zytec to
service both domestic and foreign products and, in combination with its process
design capability, to perform assembly or light manufacturing operations.
Another expansion of the value chain involves network services operations, which
plan to target configuration and installation of hardware, as well as provide
follow-on maintenance.
PRODUCTS AND SERVICES
INBOUND LOGISTICS
Zytec receives nearly all of the returned products for the
computer-related divisions of HP. The first step in Zytec's process is to
determine the nature of repair needed and the supplier to perform the repair.
Since HP uses a number of different suppliers for its components, repair of
those components may be accomplished by Zytec (about 48% of products returned)
or by some 277 other suppliers. Zytec's first task is to accomplish the
identification and redirecting of units in an efficient manner.
PRODUCT REPAIR
Zytec repairs approximately 3,500 products for HP. Zytec designs processes
for repairing both high volume and low volume products. Repair is accomplished
using parts specified and supplied by HP. Work teams from Zytec analyze and
design the processes for repairing the products.
OUTBOUND LOGISTICS
Zytec develops and maintains warehousing space for storage of defective
and repaired products. Some products are repaired and shipped back to the
original customer; some are repaired to equivalent-to-new (ETN) condition and
put in stock, and some products are scrapped for parts value. Ownership of all
products is retained by HP throughout these processes.
FOREIGN TRADE ZONE
The Company has recently completed development of a FTZ, which allows
repair and basic manufacture of parts arriving from foreign manufacturers
without immediate payment of duty. The FTZ also gives HP some cost advantages in
forwarding fees.
EMPLOYEES
As of February 28, 1997, the Company had 544 full-time employees in the
Services and Logistics segment located in Lincoln, California.
ITEM 2. PROPERTIES
The following table identifies the Company's facilities. Management
believes that the Company's facilities are adequate for the foreseeable future.
<TABLE>
<CAPTION>
APPROXIMATE OWNED VS.
FACILITY PRIMARY ACTIVITY SQUARE FOOTAGE LEASED
-------- ---------------- -------------- ------
<S> <C> <C> <C>
Power Conversion
- ----------------
Eden Prairie, MN Engineering, Administration 28,000 Leased
Redwood Falls, MN Manufacturing 101,000 Owned
Redwood Falls, MN Manufacturing 99,000 Leased
Broomfield, CO Manufacturing 73,000 Leased
Vienna, Austria Engineering, Administration 9,200 Leased
Kindberg, Austria Manufacturing 58,000 Leased
Tatabanya, Hungary Magnetics Manufacturing 62,000 Owned
Services and Logistics
- ----------------------
Lincoln, CA Repair, Logistics 210,000 Leased
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various legal proceedings
arising in the normal course of business, none of which is expected to result in
any significant loss to the Company or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Stockholders on October 9, 1996 to
approve the Zytec Corporation Employee Stock Purchase Plan. The votes of the
stockholders on this proposal were as follows:
In Favor Opposed Abstained Broker Non-Vote
-------- ------- --------- ---------------
5,071,469 68,581 33,610 -0-
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information regarding the market for the Company's Common Stock and
related stockholder matters is set forth under "Zytec Common Stock" on page 27
in the Company's Annual Report to Shareholders for the year ended December 31,
1996, and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data of the Company is set forth under "Selected
Financial Data" on page 10 in the Company's Annual Report to Shareholders for
the year ended December 31, 1996, and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is set forth under "Financial and Operations Review" on pages 11-15
in the Company's Annual Report to Shareholders for the year ended December 31,
1996, and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company as of December 31,
1996 and 1995, and for each of the three years in the period ended December 31,
1996, are set forth on pages 16-27 in the Company's Annual Report to
Shareholders for the year ended December 31, 1996, and are incorporated herein
by reference. Quarterly consolidated financial data is set forth under
"Quarterly Financial Information" on page 27 in the Company's Annual Report to
Shareholders for the year ended December 31, 1996, and is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the Company is
set forth under "Information Regarding Directors, Nominees and Executive
Officers" on pages 3-9 in the Company's definitive proxy statement for its 1997
Annual Meeting of Shareholders to be held April 28, 1997, and is incorporated
herein by reference.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 is set forth under "Principal Shareholders--Compliance with
Section 16(a)" on page 13 in the Company's definitive proxy statement for its
1997 Annual Meeting of Shareholders to be held April 28, 1997, and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of directors and executive officers of
the Company is set forth under "Information Regarding Directors, Nominees and
Executive Officers" on pages 7-10 in the Company's definitive proxy statement
for its 1997 Annual Meeting of Shareholders to be held April 28, 1997, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is set forth under "Principal Shareholders" on pages 12-13 in the
Company's definitive proxy statement for its 1997 Annual Meeting of Shareholders
to be held April 28, 1997, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
set forth under "Information Regarding Directors, Nominees and Executive
Officers" on pages 3-9 in the Company's definitive proxy statement for its 1997
Annual Meeting of Shareholders to be held April 28, 1997, and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
1. FINANCIAL STATEMENTS.
The following are incorporated herein by reference from pages
16-27 of the Company's Annual Report to Shareholders for the
year ended December 31, 1996:
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995, and 1994
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. FINANCIAL STATEMENT SCHEDULES.
The following are included herein on pages 24-25 and should be
read in conjunction with the consolidated financial statements
referred to above:
Report of Independent Accountants
Schedule II -- Valuation and Qualifying Accounts
All other schedules are inapplicable to the Registrant, or
equivalent information has been included in the consolidated
financial statements or the notes thereto, and have therefore
been excluded.
3. EXHIBITS.
See Index to Exhibits on pages 19-23 of this Report.
(b) REPORTS ON FORMS 8-K
The Company did not file any reports on Form 8-K during the three months
ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or Section 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.
Dated: March 17, 1997 ZYTEC CORPORATION
(Registrant)
By /s/ John B. Rogers
-------------------------------------
John B. Rogers
Treasurer and Vice President - Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Ronald D. Schmidt Chairman of the Board, President, March 17, 1997
- ----------------------------------- and Chief Executive Officer ------------------
Ronald D. Schmidt (Principal Executive Officer)
/s/ Ervin F. Kamm, Jr. President, Zytec Power Conversion and March 17, 1997
- ----------------------------------- Director ------------------
Ervin F. Kamm, Jr.
/s/ John M. Steel Vice President, Marketing and Sales March 13, 1997
- ----------------------------------- and Director ------------------
John M. Steel
/s/ Sherman Winthrop Secretary and Director March 12, 1997
- ----------------------------------- ------------------
Sherman Winthrop
/s/ Josef J. Matz Managing Director of Zytec GmbH March 17, 1997
- ----------------------------------- and Director ------------------
Josef J. Matz
/s/ John B. Rogers Treasurer and Vice President - Finance March 17, 1997
- ----------------------------------- (Principal Financial and Principal ------------------
John B. Rogers Accounting Officer)
/s/ Thomas J. Kent Vice President & General Manager, March 13, 1997
- ----------------------------------- Services and Logistics and Director ------------------
Thomas J. Kent
/s/ Lawrence J. Matthews Director March 12, 1997
- ----------------------------------- ------------------
Lawrence J. Matthews
/s/ Gary C. Flack Director March 12, 1997
- ----------------------------------- ------------------
Gary C. Flack
/s/ Dr. Fred C. Lee Director March 15, 1997
- ----------------------------------- ------------------
Dr. Fred C. Lee
/s/ James S. Womack Director March 14, 1997
- ----------------------------------- ------------------
James S. Womack
</TABLE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
--- ----------- ----------------
<S> <C> <C>
3.1 Articles of Incorporation of the Company, as Incorporated by reference to Exhibit
amended. 3.1 to the Company's Registration
Statement on Form S-1 (File No. 33-
68822).
3.2 Bylaws of the Company. Incorporated by reference to Exhibit
3.2 to the Company's Registration
Statement on Form S-1 (File No. 33-
68822).
10.1 Employee Incentive Stock Option Plan Incorporated by reference to Exhibit
("ISOP") and form of Employee Incentive 10.3 to the Company's Registration
Stock Option Agreement ("ISOP Agreement") Statement on Form S-1 (File No. 33-
adopted by the Company's Board of Directors 68822).
("Board") and approved by the Company's
shareholders on December 16, 1993.
10.2 ISOP and form of ISOP Agreement adopted Incorporated by reference to Exhibit
by the Board and approved by the 10.4 to the Company's Registration
Company's shareholders on September 24, Statement on Form S-1 (File No. 33-
1984. 68822).
10.3 ISOP and form of ISOP Agreement adopted Incorporated by reference to Exhibit
by the Board and approved by the Company's 10.5 to the Company's Registration
shareholders on October 25, 1985. Statement on Form S-1 (File No. 33-
68822).
10.4 ISOP and form of ISOP Agreement adopted Incorporated by reference to Exhibit
by the Board on February 6, 1987 and 10.6 to the Company's Registration
approved by the Company's shareholders on Statement on Form S-1 (File No. 33-
April 24, 1987. 68822).
10.5 ISOP and form of ISOP Agreement adopted Incorporated by reference to Exhibit
by the Board and approved by the 10.7 to the Company's Registration
Company's shareholders on January 29, Statement on Form S-1 (File No. 33-
1993. 68822).
10.6 ISOP and form of ISOP Agreement adopted Incorporated by reference to Exhibit
by the Board on February 16, 1996 and 10.6 to Form 10-K for the year ended
approved by the Company's shareholders on December 31, 1995 (File No. 0-22428).
April 29, 1996.
10.7 Employment Agreement by and between Incorporated by reference to Exhibit
Josef J. Matz and Zytec Austria dated 10.25 to the Company's Registration
September 30, 1991 documenting the Statement on Form S-1 (File No. 33-
appointment of Josef J. Matz as Managing 68822).
Director of Zytec G.m.b.H.
10.08 Loan agreement between City of Redwood Incorporated by reference to Exhibit
Falls, Minnesota and the Company dated 99.1 to Form 8-K filed on September
September 1, 1994. 29, 1994 (File No. 0-22428).
10.09 Indenture of Trust between City of Redwood Incorporated by reference to Exhibit
Falls, Minnesota and First Trust National 99.2 to Form 8-K filed on September
Association dated September 1, 1994. 29, 1994 (File No. 0-22428).
10.10 Credit Agreement dated as of May 30, 1996, Incorporated by reference to Exhibit
among the Company, the Lenders named 99.1 of Company Form S-3 (File No.
therein, and Harris Trust and Savings Bank, 333-05515) filed and on June 7, 1996
Individually and as Agent and also the First for the original Agreement. First
Amendment dated July 18, 1996, Second and Second Amendments are incorpor-
Amendment dated August 8, 1996, and Third ated by reference to Exhibits 10.1
Amendment dated December 23, 1996 to said and 10.2 on Form 10-Q for the
Credit Agreement. quarter ended June 30, 1996. Third
Amendment filed herewith.
10.11 Note and Warrant Purchase Agreement dated Filed herewith.
as of December 23, 1996 between the
Company and BMO Nesbitt Burns Capital
(U.S.), Inc.
10.12 Convertible Subordinated Promissory Note Filed herewith.
between the Company and BMO Nesbitt
Burns Capital (U.S.), Inc. in the amount of
$12,000,000 dated December 23, 1996.
10.13 Stock Purchase Warrant between the Company Filed herewith.
and BMO Nesbitt Burns Capital (U.S.), Inc.
dated December 23, 1996.
10.14 Registration Agreement between the Company Filed herewith.
and BMO Nesbitt Burns Capital (U.S.), Inc.
dated December 23, 1996.
10.15 Office/Warehouse Lease by and between Welsh Incorporated by reference to Exhibit
Construction Corporation and the Company dated 10.49 to the Company's Registration
May 31, 1984, as extended September 28, 1989, Statement on Form S-1 (File No. 33-
as first amended May 12, 1994 and as second 68822). The first amendment is
amended October 2, 1995 and as third amended incorporated by reference to Exhibit
October 31, 1995, regarding the leasing of 10.1 to Form 10-Q for the quarter ended
certain property located in Eden Prairie, July 3, 1994 (File No. 0-22428). The
Minnesota. second and third amendments are
incorporated by reference to Exhibit
10.22 on Form 10-K for the year ended
December 31, 1995 (File No. 0-22428).
10.16 Office/Warehouse Lease by and between Welsh Incorporated by reference to Exhibit
Construction Corporation and the Company dated 10.50 to the Company's Registration
April 4, 1985, as extended September 28, 1989, Statement on Form S-1 (File No. 33-68822).
and as amended May 12, 1994 and as second The first amendment is incorporated by
amended September 29, 1995, regarding the reference to Exhibit 10.2 to Form 10-Q for
leasing of certain property located in Eden the quarter ended July 3, 1994 (File No.
Prairie, Minnesota. 0-22428). The second amendment is
incorporated by reference to Exhibit 10.23
on Form 10-K for the year ended December
31, 1995 (File No. 0-22428).
10.17 Lease by and between CIT Group/Equipment Incorporated by reference to Exhibit
Financing Inc. and the Company dated April 10.3 to Form 10-Q for the quarter ended
20, 1994 regarding the lease of certain July 3, 1994 (File No. 0-22428).
equipment.
10.18 Agreement by and between Oates Business Incorporated by reference to Exhibit
Park and the Company dated May 1, 1995 10.26 to Form 10-K for the year ended
regarding the leasing of certain premises December 31, 1995. (File No. 0-22428).
and real property located in Lincoln,
California.
10.19 Agreement and Addendum by and between Buzz Filed herewith.
Oates Enterprise and the Company dated
September 15, 1995, as amended
December 8, 1995, and as second amended
March 8, 1996, and as third amended
May 14, 1996, and as fourth amended
November 8, 1996, regarding the leasing of
certain premises and real property located in
Lincoln, California.
10.20 Agreement and Addendum by and between Blue Sky Filed herewith.
Venture Partnership and the Company dated
June 17, 1996 regarding the leasing of certain
premises and real property located in Lincoln,
California.
10.21 Agreement by and between Superior Investments I, Incorporated by reference to Exhibit
Inc. and the Company dated January 22, 1996 10.27 to Form 10-K for the year ended
regarding the leasing of certain premises and December 31, 1995. (File No. 0-22428).
real property located in Broomfield, Colorado.
10.22 Lease by and between Banc One Leasing Incorporated by reference to Exhibit
Corporation and the Company dated March 7, 10.28 to Form 10-K for the year ended
1996 regarding the lease of certain equipment. December 31, 1995. (File No. 0-22428).
10.23 Form of Employee Disclosure and Assignment Incorporated by reference to Exhibit
Agreement executed by all employees of 10.51 to the Company's Registration
Company regarding the the disclosure and Statement on Form S-1 (File No. 33-
ownership of certain proprietary information 68822).
of the Company.
10.24 Employee Disclosure and Assignment Agreemen Incorporated by reference to Exhibit
executed by Ronald D. Schmidt dated April 13, 10.51 to the Company's Registration
1984 regarding the disclosure and ownership Statement on Form S-1 (File No. 33-
of certain proprietary information of the 68822).
Company.
10.25 Employee Disclosure and Assignment Incorporated by reference to Exhibit
Agreement executed by John B. Rogers dated 10.53 to the Company's Registration
December 23, 1985 regarding the disclosure Statement on Form S-1 (File No. 33-
and ownership of certain proprietary 68822).
information of the Company.
10.26 Employee Disclosure and Assignment Incorporated by reference to Exhibit
Agreement executed by John M. Steel dated 10.54 to the Company's Registration
April 13, 1984 regarding the disclosure Statement on Form S-1 (File No. 33-
and ownership of certain proprietary 68822).
information of the Company.
10.27 Employee Disclosure and Assignment Incorporated by reference to Exhibit
Agreement executed by Max R. Davis dated 10.33 to Form 10-K for the year ended
April 18, 1995 regarding the disclosure December 31, 1995. (File No. 0-22428).
and ownership of certain proprietary
information of the Company.
10.28 Employee Disclosure and Assignment Incorporated by reference to Exhibit
Agreement executed by N. Charles Wussow 10.56 to the Company's Registration
dated January 27, 1993 regarding the Statement on Form S-1 (File No. 33-
disclosure and ownership of certain 68822).
proprietary information of the Company.
10.29 Employee Disclosure and Assignment Filed herewith.
Agreement executed by Thomas J. Kent
dated June 21, 1994 regarding the
disclosure and ownership of certain
proprietary information of the Company.
10.30 Employee Disclosure and Assignment Filed herewith.
Agreement executed by Ervin F. Kamm, Jr.
dated January 24, 1997 regarding the
disclosure and ownership of certain
proprietary information of the Company.
10.31 Master Business Agreement Software License Incorporated by reference to Exhibit
and Hardware Purchase Agreement by and 10.63 to the Company's Registration
between Xerox Corporation and the Company Statement on Form S-1 (File No. 33-
dated June 21, 1984 regarding the licensing 68822).
of certain software and purchase of certain
hardware.
10.32 Rental Agreement by and between Schrack Incorporated by reference to Exhibit
Elektronik Aktiengesellschaft and 10.70 to the Company's Registration
IMMORENT-Weiko Grundverwertungsge- Statement on Form S-1 (File No. 33-
sellschaft m.b.H. dated March 14, 1985 68822).
(English translation) regarding the
leasing of certain real property located
in Kindberg, Austria.
10.33 Real Estate Lease Agreement by and between Incorporated by reference to Exhibit
IMMORENT - Weiko Grundverwertungsge- 10.71 to the Company's Registration
sellschaft m.b.H. and Schrack Elektronik Statement on Form S-1 (File No. 33-
Aktiengesellschaft dated December 16, 68822).
1984 (English translation) regarding the
leasing of certain real property located
in Kindberg, Austria.
10.34 Lease (Rental) Agreement by and between Incorporated by reference to Exhibit
Schrack Telecom AG and Schrack Power 10.72 to the Company's Registration
Supply Gesellschaft m.b.H. dated February Statement on Form S-1 (File No. 33-
19, 1991 (English translation) regarding 68822).
the leasing of certain property located
in Kindberg, Austria.
10.35 Sublease (Subrental) Agreement by and Incorporated by reference to Exhibit
between Schrack Power Supply Gesellschaft 10.73 to the Company's Registration
m.b.H. and Schrack Power Supply Gesellschaft Statement on Form S-1 (File No. 33-
m.b.H. dated February 14, 1991 (English 68822).
translation) regarding the leasing of
certain property located in Kindberg,
Austria.
10.36 Sublease (Subrental) Agreement by and Incorporated by reference to Exhibit
between Schrack Power Supply Gesellschaft 10.74 to the Company's Registration
m.b.H. and Schrack Telecom AG dated Statement on Form S-1 (File No. 33-
February 14, 1991 (English translation) 68822).
regarding the leasing of certain property
located in Kindberg, Austria.
11.1 Computation of net income per share. Filed herewith.
13 Annual Report to Shareholders (Only Filed herewith.
those portions expressly incorporated by
reference herein shall be deemed filed with
the Commission)
22 Subsidiaries of the Company. Filed herewith.
23.1 Consent of Coopers & Lybrand L.L.P. Filed herewith.
27.1 Financial Data Schedule Filed herewith.
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Zytec Corporation:
Our report on the consolidated financial statements of Zytec Corporation has
been incorporated by reference in this Form 10-K from page 27 of the 1996 Annual
Report to Shareholders of Zytec Corporation. In connection with our audits of
such financial statements, we have also audited the related financial statement
schedule listed in the index on page 16 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
-----------------------------------
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
February 18, 1997
<TABLE>
<CAPTION>
ZYTEC CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
COL. A COL B. COL. C COL. D COL. E COL F.
Additions
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COST AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994:
Inventory reserve $458 $991 $ 1(c) $967(a) $ 483
Allowance for doubtful accounts 1 18 1(c) 20
YEAR ENDED DECEMBER 31, 1995:
Inventory reserve 483 645 2(c) 580(a) 550
Allowance for doubtful accounts 20 11(b) 9
YEAR ENDED DECEMBER 31, 1996:
Inventory reserve 550 452 (6)(c) 482(a) 514
Allowance for doubtful accounts 9 46 (1)(c) 42(b) 12
- ----------------
</TABLE>
(a) Obsolete inventory written off.
(b) Uncollectible accounts written off, net of recovery of accounts previously
written off.
(c) Amounts charged to other accounts includes foreign currency translation
adjustments.
Exhibit 10.10
ZYTEC CORPORATION
THIRD AMENDMENT TO CREDIT AGREEMENT
Harris Trust and Savings Bank
Chicago, Illinois
Firstar Bank of Minnesota,
National Association
Bloomington, Minnesota
Ladies and Gentlemen:
Reference is hereby made to that certain Credit Agreement dated as of May
30, 1996, as amended through the Second Amendment thereto dated as of August 8,
1996 (as so amended, the "CREDIT AGREEMENT") among the undersigned, Zytec
Corporation, a Minnesota corporation (the "COMPANY"), you (the "LENDERS") and
Harris Trust and Savings Bank, as agent for the Lenders (the "AGENT"). All
defined terms used herein shall have the same meaning as in the Credit Agreement
unless otherwise defined herein.
The Company has requested that the Lenders amend certain Sections of the
Credit Agreement, and the Lenders are willing to do so under the terms and
conditions set forth in this Amendment.
1. AMENDMENTS.
Upon satisfaction of all of the conditions precedent set forth in Section 2
hereof, the Credit Agreement shall be amended as follows:
1.1. Section 4.1 of the Credit Agreement is hereby amended by inserting
the following new defined terms in proper alphabetical order:
"PURCHASE AGREEMENT" means the Note and Warrant Purchase
Agreement dated as of December 23, 1996 between BMO Nesbitt Burns
Capital (U.S.), Inc. and the Company.
"SUBORDINATED DEBT" means the $12,000,000 of the subordinated
debt of the Company issued pursuant to the Purchase Agreement.
1.2 Section 7.15 of the Credit Agreement is hereby amended by (A)
deleting the "." appearing at the end thereof and inserting in its place ";
and", and (B) inserting immediately thereafter new subsection (e) as
follows: deleting subsection (e) thereof and inserting in its place the
following:
(e) obligations of the Company to BMO Nesbitt Burns Capital
(U.S.), Inc. pursuant to the Purchase Agreement in an aggregate
principal amount outstanding not to exceed $12,000,000 (as reduced
by any repayments of principal thereof).
1.3 Section 7.17 of the Credit Agreement is hereby amended by (A)
deleting the "." appearing at the end thereof and inserting in its place ";
and" and (B) inserting immediately thereafter new subsection (f) as follows:
(f) investments which in the aggregate do not exceed $3,000,000
in any Subsidiary existing on the date hereof.
1.4 New Sections 7.29, 7.30 and 7.31 are hereby added to the Credit
Agreement immediately after Section 7.28 as follows:
SECTION 7.29. SENIOR DEBT. The Company shall not at any
time permit the ratio of (i) Indebtedness for Borrowed Money of the
Company and its Subsidiaries that is senior to the Subordinated Debt to
(ii) Net Worth (as calculated without the inclusion of the Subordinated
Debt or the obligations of Zytec GmbH) to be more than 0.8 to 1.0.
SECTION 7.30. LIMITATIONS ON VOLUNTARY PAYMENTS AND
MODIFICATIONS OF SUBORDINATED DEBT. The Company will not, and will not
permit any of its Subsidiaries to, (i) make (or give any notice for)
any principal payment or prepayment on or redemption or acquisition for
value of any Subordinated Debt, (ii) amend or modify, or permit the
amendment or modification of, any provision of any Subordinated Debt or
(iii) set-off any amounts against the Subordinated Debt.
SECTION 7.31. UNCOMMITTED LEASE OBLIGATIONS. The Company
(a) will not, nor will it permit any Subsidiary to, incur, assume,
create or have outstanding obligations or liabilities (whether accrued,
absolute, contingent or otherwise) for leases of real or personal
property that are not committed to use in connection with customer
contracts (the "Uncommitted Lease Obligations"), other than Uncommitted
Lease Obligations for which the annual lease payments will not at any
time exceed $5,000,000 and (b) use its best efforts to reduce its
Uncommitted Lease Obligations by entering into (i) customer contracts
which require that the customer assume the Company's Uncommitted Lease
Obligations in connection with work performed by the Company and (ii)
long-term customer contracts for work performed using the leased real
and personal property related to the Uncommitted Lease Obligations.
2. CONDITIONS PRECEDENT.
The effectiveness of this Amendment is subject to the satisfaction of all of
the following conditions precedent:
(a) The Company and each of the Lenders shall have executed this
Amendment.
(b) The Agent shall have received the favorable written opinion
of counsel for the Company in form and substance
satisfactory to the Lenders.
3. WAIVER.
The Company has requested that the Lenders waive compliance with Section 7.28 of
the Credit Agreement whereby the Company promises that within 90 days of May 30,
1996 it will request that the Agent deliver to the beneficiary of the Existing
Letter of Credit a Letter of Credit to replace the Existing Letter of Credit and
deliver to Firstar the Existing Letter of Credit marked "cancelled". The Lenders
hereby waive the Company's compliance with Section 7.28 of the Credit Agreement
provided that the Company complies with the provisions of Section 7.28 no later
than February 1, 1997.
4. REPRESENTATIONS.
In order to induce the Lenders to execute and deliver this Amendment, the
Company hereby represents to the Lenders that as of the date hereof, the
representations and warranties set forth in Section 5 of the Credit Agreement
are and shall be and remain true and correct (except that the representations
contained in Section 5.5 shall be deemed to refer to the most recent financial
statements of the Company delivered to the Lenders) and the Company is in full
compliance with all of the terms and conditions of the Credit Agreement and no
Default or Event of Default has occurred and is continuing under the Credit
Agreement or shall result after giving effect to this Amendment.
5. MISCELLANEOUS.
(a) Reference to this specific Amendment need not be made in any note,
document, letter, certificate, the Credit Agreement itself, the Notes or any
communication issued or made pursuant to or with respect to the Credit Agreement
or the Notes, any reference to the Credit Agreement being sufficient to refer to
the Credit Agreement as amended hereby.
(b) The Amendment may be executed in any number of counterparts, and by the
different parties on different counterparts, all of which taken together shall
constitute one and the same agreement. Any of the parties hereto may execute
this Amendment by signing any such counterpart and each of such counterparts
shall for all purposes be deemed to be an original. This Amendment shall be
governed by the Internal laws of the State of Illinois.
Upon acceptance hereof by the Agent and the Lenders in the manner
hereinafter set forth, this Amendment shall be a contract between us for the
purposes hereinabove set forth.
Dated as of this 23rd day of December, 1996.
ZYTEC CORPORATION
By /s/ John B. Rogers
---------------------------------------
Its Vice President Finance & Treasurer
----------------------------------
Accepted and agreed to as of the day and year last above written.
HARRIS TRUST AND SAVINGS BANK
individually and as Agent
By /s/ Catherine C. Ciolek
---------------------------------------
Its Vice President
----------------------------------
FIRSTAR BANK OF MINNESOTA, NATIONAL
ASSOCIATION
By /s/ Karen S. Paris
---------------------------------------
Its Vice President
----------------------------------
NOTE AND WARRANT PURCHASE AGREEMENT
DATED AS OF DECEMBER 23, 1996
BETWEEN ZYTEC CORPORATION
AND BMO NESBITT BURNS CAPITAL (U.S.), INC.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
PAGE
<S> <C> <C>
1. Authorization and Closing...........................................................1
1A. Authorization of the Note and the Warrant....................................1
1B. Purchase and Sale of the Note and the Warrant................................1
1C. The Closing..................................................................1
2. Conditions of the Purchaser's Obligation at the Closing.............................1
2A. Representations and Warranties; Covenants....................................1
2B. Registration Agreement.......................................................2
2C. Subordination and Intercreditor Agreement....................................2
2D. Sale of Note and Warrant to the Purchaser....................................2
2E. Securities Law Compliance....................................................2
2F. Opinion of the Company's Counsel.............................................2
2G. Closing Documents............................................................2
2H. Proceedings..................................................................3
2I. Waiver.......................................................................3
2J. Fees and Expenses............................................................3
3. Covenants...........................................................................3
3A. Financial Statements and Other Information...................................3
3B. Inspection of Property.......................................................5
3C. Note Restrictive Covenants...................................................6
3D. Note Affirmative Covenants...................................................7
3E. Compliance with Agreements...................................................8
3F. Use of Proceeds..............................................................8
3G. Current Public Information...................................................8
3H. Regulatory Compliance Cooperation............................................8
3I. Contingent Warrants..........................................................9
3J. Public Disclosures..........................................................10
4. Transfer of Restricted Securities..................................................10
4A. General Provisions..........................................................10
4B. Opinion Delivery............................................................10
4C. Rule 144A...................................................................10
4D. Legend Removal..............................................................10
5. Representations and Warranties of the Company......................................11
5A. Organization, Corporate Power and Licenses..................................11
5B. Capital Stock and Related Matters...........................................11
5C. Subsidiaries; Investments...................................................12
5D. Authorization; No Breach....................................................12
5E. Financial Statements........................................................13
5F. Absence of Undisclosed Liabilities..........................................13
5G. No Material Adverse Change..................................................14
5H. Absence of Certain Developments.............................................14
5I. Assets......................................................................15
5J. Tax Matters.................................................................15
5K. Contracts and Commitments...................................................16
5L. Intellectual Property Rights................................................18
5M. Litigation, etc.............................................................19
5N. Brokerage...................................................................19
5O. Governmental Consent, etc...................................................19
5P. Insurance...................................................................19
5Q. Employees...................................................................20
5R. ERISA.......................................................................20
5S. Compliance with Laws........................................................21
5T. Environmental and Safety Matters............................................22
5U. Affiliated Transactions.....................................................24
5V. Investment Company..........................................................24
5W. Solvency, etc...............................................................24
5Y. Disclosure..................................................................24
5Z. Reports with the Securities and Exchange Commission.........................25
6. Representations and Warranties of the Purchaser......................................25
6A. Organization and Qualification..............................................25
6B. Due Authorization...........................................................25
6C. Purchaser's Investment Representations......................................26
6D. Brokerage...................................................................26
6E. Accredited Investor.........................................................26
7. Definitions..........................................................................26
7A. Definitions.................................................................26
8. Miscellaneous........................................................................31
8A. Expenses....................................................................31
8B. Transaction Fee.............................................................31
8C. Remedies....................................................................31
8D. Survival of Representations and Warranties..................................32
8E. Successors and Assigns......................................................32
8F. Generally Accepted Accounting Principles....................................32
8G. Severability................................................................32
8H. Counterparts................................................................32
8I. Descriptive Headings; Interpretation........................................32
8J. Governing Law...............................................................32
8K. Notices.....................................................................33
8L. Consideration for Warrant...................................................34
8M. No Strict Construction......................................................34
8N. Indemnification.............................................................34
8O. Payment Set Aside...........................................................35
</TABLE>
Schedules and Exhibits
- ----------------------
List of Exhibits
List of Disclosure Schedules
ZYTEC CORPORATION
NOTE AND WARRANT PURCHASE AGREEMENT
-----------------------------------
THIS AGREEMENT is made as of December 23, 1996, between Zytec
Corporation, a Minnesota corporation (the "Company"), and BMO Nesbitt Burns
Capital (U.S.), Inc., a Delaware corporation (the "Purchaser"). Except as
otherwise indicated herein, capitalized terms used herein are defined in Section
6 hereof.
The parties hereto agree as follows:
Section 1. Authorization and Closing.
-------------------------
1A. Authorization of the Note and the Warrant. The Company shall
-----------------------------------------
authorize the issuance and sale to the Purchaser of (i) its 7 1/2% Convertible
Subordinated Promissory Note in the principal amount of $12,000,000 and
containing the terms and conditions and in the form set forth in Exhibit A
---------
attached hereto (the "Note") and (ii) the Warrant referred to in paragraph 3I
hereof. The Note is convertible into shares of the Company's Common Stock, no
par value (the "Common Stock") upon certain terms and conditions set forth
therein.
1B. Purchase and Sale of the Note and the Warrant. At the Closing,
---------------------------------------------
the Company shall sell to the Purchaser and, subject to the terms and conditions
set forth herein, the Purchaser shall purchase from the Company a Note in the
principal amount of $12,000,000 at a price equal to $11,999,000. In addition, at
the Closing, the Purchaser shall pay the Company $1,000 in consideration for the
issuance of the Warrant referred to in paragraph 3I hereof.
1C. The Closing. The closing of the purchase and sale of the Note
-----------
and the Warrant (the "Closing") shall take place at the offices of Kirkland &
Ellis in Chicago, Illinois, at 10:00 a.m. on December 23, 1996 (the "Closing
Date"), or at such other place or on such other date as may be mutually
agreeable to the Company and the Purchaser. At the Closing, the Company shall
deliver to the Purchaser instruments evidencing the Note and the Warrant to be
purchased by the Purchaser, payable to the order of the Purchaser or its nominee
or registered in the Purchaser's or its nominee's name, respectively, upon
payment of the purchase price thereof by a cashier's or certified check, or by
wire transfer of immediately available funds to the Company's account at Harris
Trust and Savings Bank, in the aggregate amount of $12,000,000.
Section 2. Conditions of the Purchaser's Obligation at the
-----------------------------------------------
Closing. The obligation of the Purchaser to purchase and pay for the Note and
the Warrant at the Closing is subject to the satisfaction as of the Closing of
the following conditions:
2A. Representations and Warranties; Covenants. The representations
-----------------------------------------
and warranties contained in Section 5 hereof shall be true and correct in all
material respects at and as of the Closing as though then made, except to the
extent of changes caused by the transactions expressly contemplated herein, and
the Company shall have performed in all material respects all of the covenants
required to be performed by it hereunder prior to the Closing.
2B. Registration Agreement. The Company, the Purchaser, Ronald D.
----------------------
Schmidt, Lawrence J. Matthews and John M. Steel shall have entered into a
registration agreement in form and substance as set forth in Exhibit C attached
---------
hereto (the "Registration Agreement"), and the Registration Agreement shall be
in full force and effect as of the Closing.
2C. Subordination and Intercreditor Agreement. The Company, the
-----------------------------------------
Purchaser and Harris Trust and Savings Bank shall have entered into a
subordination and intercreditor agreement in form and substance reasonably
acceptable to the Company, the Purchaser and the Bank (the "Subordination
Agreement"), and the Subordination Agreement shall be in full force and effect
as of the closing.
2D. Sale of Note and Warrant to the Purchaser. The Company shall
-----------------------------------------
have simultaneously sold to the Purchaser the Note and the Warrant to be
purchased by the Purchaser hereunder at the Closing and shall have received
payment therefor in full.
2E. Securities Law Compliance. The Company shall have made all
-------------------------
filings under all applicable federal and state securities laws necessary to
consummate the issuance of the Note and the Warrants pursuant to this Agreement
in compliance with such laws.
2F. Opinion of the Company's Counsel. The Purchaser shall have
--------------------------------
received from Winthrop & Weinstine, P.A., counsel for the Company, an opinion
with respect to the matters set forth in Exhibit D attached hereto, which shall
---------
be addressed to the Purchaser, dated the date of the Closing and in form and
substance satisfactory to the Purchaser.
2G. Closing Documents. The Company shall have delivered to each
-----------------
Purchaser all of the following documents:
(i) an Officer's Certificate, dated the date of the Closing,
stating that the conditions specified in Section 1 and paragraphs 2A
through 2E, inclusive, have been fully satisfied;
(ii) certified copies of the resolutions duly adopted by the
Company's board of directors authorizing the execution, delivery and
performance of this Agreement, the Registration Agreement and each of the
other agreements contemplated hereby, the issuance and sale of the Note,
the issuance of the Warrant, the reservation for issuance upon conversion
of the Note or exercise of the Warrant an aggregate of 877,193 shares of
Common Stock and the consummation of all other transactions contemplated by
this Agreement;
(iii) certified copies of the Company's Articles of
Incorporation and bylaws, each as in effect at the Closing;
(iv) copies of all third party and governmental consents,
approvals and filings required in connection with the consummation of the
transactions hereunder (including, without limitation, all blue sky law
filings and waivers of all preemptive rights and rights of first refusal);
and
(v) such other documents relating to the transactions
contemplated by this Agreement as the Purchaser or its special counsel may
reasonably request.
2H. Proceedings. All corporate and other proceedings taken or
-----------
required to be taken by the Company in connection with the transactions
contemplated hereby to be consummated at or prior to the Closing and all
documents incident thereto shall be satisfactory in form and substance to the
Purchaser and its special counsel.
2I. Waiver. Any condition specified in this Section 2 may be waived
------
if consented to by the Purchaser; provided that no such waiver shall be
effective unless it is set forth in a writing executed by the Purchaser.
2J. Fees and Expenses. At the Closing, the Company shall have (i)
-----------------
reimbursed the Purchaser for all actual out-of-pocket fees and expenses incurred
in connection with the transactions contemplated by this Agreement by the
Purchaser or any of its affiliates (including, without limitation, fees and
expenses of special counsel, accountants and other consultants and advisors not
associated with the Purchaser) (the "Fees and Expenses") and (ii) paid to
Nesbitt Burns Securities, Inc. a transaction fee in the amount of at least
$480,000 less the amount payable under (i) above, as provided in paragraph 7A
hereof.
Section 3. Covenants.
---------
3A. Financial Statements and Other Information. The Company shall
------------------------------------------
deliver to the Purchaser (so long as such Purchaser holds the Note or the
Warrant) and to each holder of at least 25% of the outstanding principal amount
of the Note and each holder of Warrants exercisable into at least 25% of the
Underlying Common Stock:
(i) as soon as available but in any event within 30 days after
the end of each monthly accounting period in each fiscal year, unaudited
consolidating and consolidated statements of income and cash flows of the
Company and its Subsidiaries set forth by operating division for such
monthly period and for the period from the beginning of the fiscal year to
the end of such month, and unaudited consolidating and consolidated balance
sheets of the Company and its Subsidiaries as of the end of such monthly
period, setting forth in each case comparisons to the Company's annual
business plan and to the corresponding period in the preceding fiscal year,
and all such statements shall be prepared in accordance with generally
accepted accounting principles, consistently applied and shall be certified
by the Company's chief financial officer;
(ii) accompanying the financial statements referred to in
subparagraph (i), an Officer's Certificate stating that there is no Event
of Default or Potential Event of Default in existence and that neither the
Company nor any of its Subsidiaries is in default under any of its other
material agreements or, if any Event of Default or Potential Event of
Default or any such default exists, specifying the nature and period of
existence thereof and what actions the Company and its Subsidiaries have
taken and propose to take with respect thereto;
(iii) within 90 days after the end of each fiscal year (or in the
case of (c) below, as soon as available, if later), consolidating and
consolidated statements of income and cash flows of the Company and its
Subsidiaries for such fiscal year, and consolidating and consolidated
balance sheets of the Company and its Subsidiaries as of the end of such
fiscal year, setting forth in each case comparisons to the Company's annual
business plan and to the preceding fiscal year, all prepared in accordance
with generally accepted accounting principles, consistently applied, and
accompanied by (a) with respect to the consolidated portions of such
statements, an opinion containing no exceptions or qualifications (except
for qualifications regarding specified contingent liabilities) of an
independent accounting firm of recognized national standing, (b) a
certificate from such accounting firm, addressed to the Company's board of
directors, stating that in the course of its examination nothing came to
its attention that caused it to believe that there was an Event of Default
or Potential Event of Default in existence or that there was any other
default by the Company or any Subsidiary in the fulfillment of or
compliance with any of the terms, covenants, provisions or conditions of
any other material agreement to which the Company or any Subsidiary is a
party or, if such accountants have reason to believe any Event of Default
or Potential Event of Default or other default by the Company or any
Subsidiary exists, a certificate specifying the nature and period of
existence thereof, and (c) a copy of such firm's annual management letter
to the board of directors;
(iv) promptly upon receipt thereof, any additional reports,
management letters or other detailed information concerning significant
aspects of the Company's operations or financial affairs given to the
Company by its independent accountants (and not otherwise contained in
other materials provided hereunder);
(v) prior to the beginning of each fiscal year, an annual
business plan prepared on a monthly basis by operating division for the
Company and its Subsidiaries for such fiscal year (displaying anticipated
statements of income and cash flows and balance sheets), and promptly upon
preparation thereof any other significant business plans prepared by the
Company and any revisions of such annual or other business plans;
(vi) promptly (but in any event within five business days) after
the discovery or receipt of notice of any Event of Default or Potential
Event of Default, any default under any other material agreement to which
it or any of its Subsidiaries is a party, any condition or event which has
resulted in or is reasonably likely to result in any material liability
under any federal, state or local statute or regulation relating to public
health and safety, worker health and safety or pollution or protection of
the environment or any other material adverse change, event or circumstance
affecting the Company or any Subsidiary (including, without limitation, the
filing of any material litigation against the Company or any Subsidiary or
the existence of any dispute with any Person which involves a reasonable
likelihood of such litigation being commenced), an Officer's Certificate
specifying the nature and period of existence thereof and what actions the
Company and its Subsidiaries have taken and propose to take with respect
thereto;
(vii) within ten days after transmission thereof, copies of all
financial statements, proxy statements, reports and any other general
written communications which the Company sends to its stockholders and
copies of all registration statements and all regular, special or periodic
reports which it files, or any of its officers or directors file with
respect to the Company, with the Securities and Exchange Commission or with
any securities exchange on which any of its securities are then listed, and
copies of all press releases and other statements made available generally
by the Company to the public concerning material developments in the
Company's and its Subsidiaries' businesses; and
(viii) with reasonable promptness, such other information and
financial data concerning the Company and its Subsidiaries as any Person
entitled to receive information under this paragraph 3A may reasonably
request.
Each of the financial statements referred to in subparagraph (i) and (iii) shall
be true and correct in all material respects as of the dates and for the periods
stated therein, subject in the case of the unaudited financial statements to
changes resulting from normal year-end adjustments for recurring accruals (none
of which would, alone or in the aggregate, be materially adverse to the
financial condition, operating results, assets, operations or business prospects
of the Company and its Subsidiaries taken as a whole). The Purchaser shall have
the right to reject such financial statements by providing notice to the
Company.
3B. Inspection of Property. The Company shall permit any
----------------------
representatives designated by the Purchaser (so long as the Purchaser holds the
Note or the Warrant) or any holder of at least 25% of the outstanding principal
amount of the Note or Warrants exercisable into at least 25% of the Underlying
Common Stock, upon reasonable notice and during normal business hours and at
such other times as any such holder may reasonably request, to (i) visit and
inspect any of the properties of the Company and its Subsidiaries, (ii) examine
the corporate and financial records of the Company and its Subsidiaries and make
copies thereof or extracts therefrom and (iii) discuss the affairs, finances and
accounts of any such corporations with the directors, officers, key employees
and independent accountants of the Company and its Subsidiaries. The
presentation of an executed copy of this Agreement by the Purchaser or any such
holder of the Note or the Warrant to the Company's independent accountants shall
constitute the Company's permission to its independent accountants to
participate in discussions with such Persons.
3C. Note Restrictive Covenants. So long as any payment obligation
--------------------------
under Note remains outstanding, the Company shall not:
(i) except for dividends payable in shares of Common Stock issued
upon the outstanding shares of Common Stock, directly or indirectly declare
or pay any dividends or make any distributions upon any of its capital
stock or other equity securities during any fiscal year in excess of (when
added to all amounts under (ii) below) an aggregate of 20% of the Company's
consolidated net income (determined in accordance with generally accepted
accounting principles, consistently applied) for the immediately preceding
fiscal year, provided that no such dividends or distributions may
-------------
be declared or paid if any Event of Default or Potential Event of Default
is then in existence or would be caused by such declaration or payment
thereof;
(ii) directly or indirectly redeem, purchase or otherwise
acquire, or permit any Subsidiary to redeem, purchase or otherwise acquire,
any of the Company's or any Subsidiary's capital stock or other equity
securities (including, without limitation, warrants, options and other
rights to acquire such capital stock or other equity securities) or
directly or indirectly redeem, purchase or make any payments with respect
to any stock appreciation rights, phantom stock plans or similar rights or
plans during any fiscal year in excess of (when added to all amounts under
(i) above) an aggregate of 20% of the Company's consolidated net income
(determined in accordance with generally accepted accounting principles,
consistently applied) for the immediately preceding fiscal year;
(iii) become subject to, or permit any of its Subsidiaries to
become subject to, (including, without limitation, by way of amendment to
or modification of) any agreement or instrument (other than the
Subordination Agreement) which by its terms would (under any circumstances)
restrict (a) the right of any Subsidiary (other than Zytec Gmbh) to make
loans or advances or pay dividends to, transfer property to, or repay any
Indebtedness owed to, the Company or another Subsidiary or (b) the
Company's right to perform the provisions of this Agreement, the Note or
the Registration Agreement (including, without limitation, provisions
relating to the payment of principal and interest on the Notes);
(iv) create, incur, assume or suffer to exist, or permit any
Subsidiary to create, incur, assume or suffer to exist at any time, any
Indebtedness senior in liquidation or payment of principal and interest to
the Note exceeding an aggregate principal amount equal to the outstanding
balance of the Company's shareholders equity on a consolidated basis (as
calculated without inclusion of the Note or the obligations of Zytec GmbH)
(the "Permitted Senior Indebtedness");
(v) create, incur, assume or suffer to exist, or permit any
Subsidiary to create, incur, assume or suffer to exist, any Liens other
than Permitted Liens;
(vi) prepay any interest on any Indebtedness or prepay any
principal on any Indebtedness other than Permitted Senior Indebtedness,
other than any prepayments which do not exceed an aggregate of $100,000 in
any twelve-month period;
(vii) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without limitation,
any reorganization into a limited liability company or into partnership or
other noncorporate form);
(viii) make any amendment to the Company's Articles of
Incorporation or bylaws, or file any resolution of the board of directors
with the Minnesota Secretary of State containing any provisions, which
would adversely affect or otherwise impair the rights or relative priority
of the holders of the Underlying Common Stock under this Agreement, the
Articles of Incorporation or the Company's bylaws;
(ix) enter into, amend, modify or supplement, or permit any
Subsidiary to enter into, amend, modify or supplement, any material
agreement, commitment, arrangement or transaction with any of its or any
Subsidiary's officers, directors, employees, stockholders or Affiliates or
with any individual related by blood or marriage to any such individual or
with any entity in which any such Person or individual owns a beneficial
interest, except for customary employment arrangements and benefit programs
on reasonable terms and except as otherwise expressly contemplated by this
Agreement;
(x) incur, assume, create or have outstanding obligations or
liabilities (whether accrued, absolute, contingent or otherwise) for leases
of real or personal property that are not used in connection with customer
contracts (the "Uncommitted Lease Obligations"), other than Uncommitted
Lease Obligations for which the annual lease payments will not at any time
exceed $5,000,000 in the aggregate;
(xi) establish or acquire any Subsidiaries; or
(xii) make investments in any Subsidiary or any other Person
(other than investments in Subsidiaries which, in the aggregate, do not
exceed $3,000,000).
3D. Note Affirmative Covenants. So long as any payment obligation
--------------------------
under Note remains outstanding, the Company shall:
(i) maintain Consolidated Tangible Net Worth equal to or
greater than $25 million;
(ii) maintain proper books of record and account which present
fairly in all material respects its financial condition and results of
operations and make provisions on its financial statements for all such
proper reserves as in each case are required in accordance with generally
accepted accounting principles, consistently applied; and
(iii) use its best efforts to reduce its Uncommitted Lease
Obligations by entering into (i) customer contracts which require the
customer to assume the Company's Uncommitted Lease Obligations in
connection with work performed by the Company and (ii) long-term customer
contracts for work performed using the leased real and personal property
related to the Uncommitted Lease Obligations.
3E. Compliance with Agreements. The Company shall perform and
--------------------------
observe (i) all of its obligations to the holder of the Note and all of its
obligations to each holder of the Underlying Common Stock set forth in the
Company's Articles of Incorporation and bylaws, (ii) all of its obligations to
the holder of the Warrant set forth therein and (iii) all of its obligations to
each holder of Registrable Securities set forth in the Registration Agreement.
3F. Use of Proceeds. The Company shall not, nor shall it permit any
---------------
Subsidiary to, use any proceeds from the sale of the Note hereunder, directly or
indirectly, for the purposes of purchasing or carrying any "margin securities"
within the meaning of Regulation G or T promulgated by the Board of Governors of
the Federal Reserve Board or for the purpose of arranging for the extension of
credit secured, directly or indirectly, in whole or in part by collateral that
includes any "margin securities."
3G. Current Public Information. The Company shall file all reports
--------------------------
required to be filed by it under the Securities Act and the Securities Exchange
Act and the rules and regulations adopted by the Securities and Exchange
Commission thereunder and shall take such further action as any holder or
holders of Restricted Securities may reasonably request, all to the extent
required to enable such holders to sell Restricted Securities pursuant to (i)
Rule 144 adopted by the Securities and Exchange Commission under the Securities
Act (as such rule may be amended from time to time) or any similar rule or
regulation hereafter adopted by the Securities and Exchange Commission or (ii) a
registration statement on Form S-3 or any similar registration form hereafter
adopted by the Securities and Exchange Commission. Upon request, the Company
shall deliver to any holder of Restricted Securities a written statement as to
whether it has complied with such requirements.
3H. Regulatory Compliance Cooperation. Before the Company redeems,
---------------------------------
purchases or otherwise acquires, directly or indirectly, or converts or takes
any action with respect to the voting rights of, any shares of any class of its
capital stock or any securities convertible into or exchangeable for any shares
of any class of its capital stock (other than a conversion of the Note or an
exercise of the Warrant), the Company shall give written notice of such pending
action to the Purchaser. Upon the written request of the Purchaser made within
10 days after its receipt of any such notice stating that after giving effect to
such action the Purchaser would have a Regulatory Problem, the Company shall
defer taking such action for such period (not to extend beyond 45 days after the
Purchaser's receipt of the Company's original notice) as such Purchaser requests
to permit it and its Affiliates to reduce the quantity of the Company's
securities they own in order to avoid the Regulatory Problem. In addition, the
Company shall not be a party to any merger, consolidation, recapitalization or
other transaction pursuant to which the Purchaser would be required to take any
voting securities, or any securities convertible into voting securities, which
might reasonably be expected to cause the Purchaser to have a Regulatory
Problem. For purposes of this paragraph, a Person shall be deemed to have a
"Regulatory Problem" when such Person and such Person's Affiliates would own,
control or have power over a greater quantity of securities of any kind issued
by the Company or any other entity than are permitted under any requirement of
any governmental authority. The Company shall grant to any subsequent holder of
Restricted Securities, upon such holder's request, the same rights granted to
the Purchaser pursuant to this paragraph.
3I. Contingent Warrants.
-------------------
(i) At the Closing, the Company shall issue to the Purchaser a Warrant
substantially in the form of Exhibit B hereto (the "Warrant") for the
---------
consideration set forth in paragraph 1B hereof. The Warrants shall provide that
upon:
(1) an Optional Repayment of the Note prior to the completion by the
Company of a Qualified Offering; or
(2) an Optional Repayment of the Note at a time after the completion of a
Qualified Offering when the Company has not authorized the issuance of
a separate class of non-voting common stock into which the Notes would
be convertible and which would be convertible (subject to regulatory
restrictions) on a share-for-share basis into the Company's voting
common stock;
the holders of the Notes shall have the right to acquire initially the same
number of shares of Common Stock into which the portion of such holder's Note
being repaid is convertible as of the date of the Optional Repayment. The
initial exercise price for each share of Common Stock under the Warrant shall be
equal to the Conversion Price under the Note as of the payment date, and the
Warrant shall be exercisable at any time thereafter and shall expire (unless
previously exercised) on the first to occur of (i) the Scheduled Repayment Date
or (ii) such time 30 days after the Purchaser has received notice that the
Company has (A) completed a Qualified Offering, if such Qualified Offering had
not been completed prior to the date of the Optional Repayment and (B)
authorized the issuance of a separate class of non-voting common stock into
which the Warrant would be exercisable and which would be convertible (subject
to regulatory restrictions) on a share-for-share basis into the Company's voting
common stock.
(ii) The terms "Conversion Price," "Optional Repayment," and
"Scheduled Repayment Date" have the meanings set forth in the Note.
3J. Public Disclosures. The Company shall not, nor shall it permit
------------------
any Subsidiary to, disclose the Purchaser's name or identity as an investor in
the Company in any press release or other public announcement or in any document
or material filed with any governmental entity, without the prior written
consent of the Purchaser, unless such disclosure is required by applicable law
or governmental regulations or by order of a court of competent jurisdiction, in
which case prior to making such disclosure the Company shall give written notice
to the Purchaser describing in reasonable detail the proposed content of such
disclosure and shall permit the Purchaser to review and comment upon the form
and substance of such disclosure.
Section 4. Transfer of Restricted Securities.
---------------------------------
4A. General Provisions. Restricted Securities are transferable only
------------------
pursuant to (i) public offerings registered under the Securities Act, (ii) Rule
144 or Rule 144A of the Securities and Exchange Commission (or any similar rule
or rules then in force) if such rule is available and (iii) subject to the
conditions specified in paragraph 4B below, any other legally available means of
transfer.
4B. Opinion Delivery. In connection with the transfer of any
----------------
Restricted Securities (other than a transfer described in paragraph 4A(i) or
(ii) above), the holder thereof shall deliver written notice to the Company
describing in reasonable detail the transfer or proposed transfer, together with
an opinion of Kirkland & Ellis or other counsel which (to the Company's
reasonable satisfaction) is knowledgeable in securities law matters to the
effect that such transfer of Restricted Securities may be effected without
registration of such Restricted Securities under the Securities Act. In
addition, if the holder of the Restricted Securities delivers to the Company an
opinion of Kirkland & Ellis or such other counsel (which opinion is reasonably
acceptable to the Company and its counsel) that no subsequent transfer of such
Restricted Securities shall require registration under the Securities Act, the
Company shall promptly upon such contemplated transfer deliver new certificates
for such Restricted Securities which do not bear the Securities Act legend set
forth in paragraph 7C. If the Company is not required to deliver new
certificates for such Restricted Securities not bearing such legend, the holder
thereof shall not transfer the same until the prospective transferee has
confirmed to the Company in writing its agreement to be bound by the conditions
contained in this paragraph and paragraph 7C.
4C. Rule 144A. Upon the request of the Purchaser, the Company shall
---------
promptly supply to such Purchaser or its prospective transferees all information
(if any) regarding the Company required to be delivered in connection with a
transfer pursuant to Rule 144A of the Securities and Exchange Commission.
4D. Legend Removal. If any Restricted Securities become eligible for
--------------
sale pursuant to Rule 144(k), the Company shall, upon the request of the holder
of such Restricted Securities, remove the legend set forth in paragraph 7C from
the certificates for such Restricted Securities.
Section 5. Representations and Warranties of the Company. As a
---------------------------------------------
material inducement to the Purchasers to enter into this Agreement and purchase
the Note and the Warrant hereunder, the Company hereby represents and warrants
that:
5A. Organization, Corporate Power and Licenses. The Company is a
------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of Minnesota and is qualified to do business in every jurisdiction in which the
failure to so qualify has had or would reasonably be expected to have a material
adverse effect on the financial condition, operating results, assets or business
prospects of the Company and its Subsidiaries taken as a whole. The Company
possesses all requisite corporate power and authority and all material licenses,
permits and authorizations necessary to own and operate its properties, to carry
on its businesses as now conducted and presently proposed to be conducted and to
carry out the transactions contemplated by this Agreement. The copies of the
Company's charter documents and bylaws which have been furnished to the
Purchaser's special counsel reflect all amendments made thereto at any time
prior to the date of this Agreement and are correct and complete.
5B. Capital Stock and Related Matters.
---------------------------------
(i) As of the Closing and immediately thereafter, the authorized
capital stock of the Company shall consist of 25,000,000 shares of Common Stock,
of which 9,165,604 shares shall be issued and outstanding and 877,193 shares
shall be reserved for issuance upon conversion of the Note or exercise of the
Warrant. As of the Closing, neither the Company nor any Subsidiary shall have
outstanding any stock or securities convertible or exchangeable for any shares
of its capital stock or containing any profit participation features, nor shall
it have outstanding any rights or options to subscribe for or to purchase its
capital stock or any stock or securities convertible into or exchangeable for
its capital stock or any stock appreciation rights or phantom stock plans,
except for the Note and the Warrant and except as set forth on the attached
"Capitalization Schedule." The Capitalization Schedule accurately sets forth the
following information with respect to all outstanding options and rights to
acquire the Company's capital stock: the holder, the number of shares covered,
the exercise price and the expiration date. As of the Closing, neither the
Company nor any Subsidiary shall be subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of its
capital stock or any warrants, options or other rights to acquire its capital
stock, except as set forth on the Capitalization Schedule. As of the Closing,
all of the outstanding shares of the Company's capital stock shall be validly
issued, fully paid and nonassessable.
(ii) There are no statutory or, to the best of the Company's
knowledge, contractual stockholders preemptive rights or rights of refusal with
respect to the issuance of the Note or the Warrant hereunder or the issuance of
the Common Stock upon conversion of the Note or upon exercise of the Warrant.
The Company has not violated any applicable federal or state securities laws in
connection with the offer, sale or issuance of any of its capital stock, and the
offer, sale and issuance of the Note or the Warrant hereunder do not require
registration under the Securities Act or any applicable state securities laws.
To the best of the Company's knowledge, there are no agreements between the
Company's stockholders with respect to the voting or transfer of the Company's
capital stock or with respect to any other aspect of the Company's affairs.
5C. Subsidiaries; Investments. The attached "Subsidiary Schedule"
-------------------------
correctly sets forth the name of each Subsidiary, the jurisdiction of its
incorporation and the Persons owning the outstanding capital stock of such
Subsidiary. Each Subsidiary is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, possesses all
requisite corporate power and authority and all material licenses, permits and
authorizations necessary to own its properties and to carry on its businesses as
now being conducted and as presently proposed to be conducted and is qualified
to do business in every jurisdiction in which the failure to so qualify has had
or would reasonably be expected to have a material adverse effect on the
financial condition, operating results, assets or business prospects of the
Company and its Subsidiaries taken as a whole. All of the outstanding shares of
capital stock of each Subsidiary are validly issued, full paid and non
assessable, and all such shares are owned by the Company or another Subsidiary
free and clear of any Lien and not subject to any option or right to purchase
any such shares. Except as set forth on the Subsidiary Schedule, neither the
Company nor any Subsidiary owns or holds the right to acquire any shares of
stock or any other security or interest in any other Person.
5D. Authorization; No Breach. The execution, delivery and
------------------------
performance of this Agreement, the Note, the Registration Agreement, the Warrant
and all other agreements and instruments contemplated hereby to which the
Company is a party, have been duly authorized by the Company. This Agreement,
the Registration Agreement, the Note, the Warrant, the Articles of Incorporation
and all other agreements and instruments contemplated hereby to which the
Company is a party each constitutes a valid and binding obligation of the
Company, enforceable in accordance with its terms. Except as set forth on the
attached "Restrictions Schedule," the execution and delivery by the Company of
this Agreement, the Note, the Registration Agreement, the Warrant and all other
agreements and instruments contemplated hereby to which the Company is a party,
the offering, sale and issuance of the Note and the Warrant hereunder, the
issuance of the Common Stock upon conversion of the Note, the issuance of Common
Stock upon exercise of the Warrant, and the fulfillment of and compliance with
the respective terms hereof and thereof by the Company, do not and shall not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under, (iii) result in the creation of any lien,
security interest, charge or encumbrance upon the Company's or any Subsidiary's
capital stock or assets pursuant to, (iv) give any third party the right to
modify, terminate or accelerate any obligation under, (v) result in a violation
of, or (vi) require any authorization, consent, approval, exemption or other
action by or notice or declaration to, or filing with, any court or
administrative or governmental body or agency pursuant to, the charter or bylaws
of the Company or any Subsidiary, or any law, statute, rule or regulation to
which the Company or any Subsidiary is subject (including, without limitation,
any usury laws applicable to the Note), or any material agreement, instrument,
order, judgment or decree to which the Company or any Subsidiary is subject.
Except as set forth on the Restrictions Schedule, none of the Subsidiaries are
subject to any restrictions upon making loans or advances or paying dividends
to, transferring property to, or repaying any Indebtedness owed to, the Company
or another Subsidiary.
5E. Financial Statements. The following financial statements have
--------------------
been delivered to the Purchaser by the Company or are attached hereto, as set
forth on the attached "Financial Statements Schedule";
(i) the audited consolidated balance sheets of the Company and
its Subsidiaries as of December 31, 1994 and 1995, and the related
statements of income and cash flows (or the equivalent) for the respective
twelve-month periods then ended; and
(ii) the unaudited consolidated balance sheet of the Company and
its Subsidiaries as of September 29, 1996 (the "September Balance Sheet")
and the related statements of income and cash flows (or the equivalent) for
the period then ended; and
(iii) the unaudited consolidated balance sheet of the Company and
its Subsidiaries as of November 24, 1996 and the related statement of
income (or the equivalent for the eleven-month period then ended.
Each of the foregoing financial statements (including in all cases the notes
thereto, if any) is accurate and complete in all material respects, is
consistent with the books and records of the Company (which, in turn, are
accurate and complete in all material respects) and has been prepared in
accordance with generally accepted accounting principles, consistently applied,
subject in the case of the unaudited financial statements to the absence of
footnote disclosure and changes resulting from normal year-end adjustments for
recurring accruals (none of which would, alone or in the aggregate, be
materially adverse to the financial condition, operating results, assets,
operations or business prospects of the Company and its Subsidiaries taken as a
whole).
5F. Absence of Undisclosed Liabilities. Except as set forth on the
----------------------------------
attached "Liabilities Schedule," to the Company's knowledge, the Company and its
Subsidiaries do not have any material obligation or liability (whether accrued,
absolute, contingent, unliquidated or otherwise, whether due or to become due
and regardless of when asserted) arising out of transactions entered into at or
prior to the Closing, or any action or inaction at or prior to the Closing, or
any state of facts existing at or prior to the Closing other than: (i)
liabilities set forth on the September Balance Sheet (including any notes
thereto), (ii) liabilities and obligations which have arisen after the date of
the September Balance Sheet in the ordinary course of business (none of which is
a liability resulting from breach of contract, breach of warranty, tort,
infringement, claim or lawsuit) and (iii) other liabilities and obligations
expressly disclosed in the other Schedules to this Agreement.
5G. No Material Adverse Change. Since the date of the September
--------------------------
Balance Sheet, there has been no material adverse change in the financial
condition, operating results, assets, operations, business prospects, employee
relations or customer or supplier relations of the Company and its Subsidiaries
taken as a whole.
5H. Absence of Certain Developments.
-------------------------------
(i) Except as expressly contemplated by this Agreement or as set forth
on the attached "Developments Schedule," since the date of the September Balance
Sheet, neither the Company nor any Subsidiary have
(a) issued any notes, bonds or other debt securities or any
capital stock or other equity securities or any securities convertible,
exchangeable or exercisable into any capital stock or other equity
securities;
(b) borrowed any amount or incurred or become subject to any
liabilities, except (i) current liabilities incurred in the ordinary course
of business and liabilities under contracts entered into in the ordinary
course of business and (ii) amounts borrowed under the revolving credit
line with Harris Trust and Savings Bank;
(c) discharged or satisfied any Lien or paid any obligation or
liability, other than current liabilities paid in the ordinary course of
business;
(d) declared or made any payment or distribution of cash or other
property to its stockholders with respect to its capital stock or other
equity securities or purchased or redeemed any shares of its capital stock
or other equity securities (including, without limitation, any warrants,
options or other rights to acquire its capital stock or other equity
securities);
(e) mortgaged or pledged any of its properties or assets or
subjected them to any Lien, except Liens for current property taxes not yet
due and payable;
(f) sold, assigned or transferred any of its material tangible
assets, except in the ordinary course of business, or canceled any debts or
claims;
(g) sold, assigned or transferred any patents or patent
applications, trademarks, service marks, trade names, corporate names,
copyrights or copyright registrations, trade secrets or other intangible
assets, or disclosed any proprietary confidential information to any
Person;
(h) suffered any extraordinary losses or waived any rights of
value, whether or not in the ordinary course of business or consistent with
past practice;
(i) made capital expenditures or commitments therefor that
aggregate in excess of $2,000,000;
(j) made any loans or advances to, guarantees for the benefit
of, or any Investments in, any Persons in excess of $250,000 in the
aggregate;
(k) suffered any damage, destruction or casualty loss exceeding
in the aggregate $500,000, whether or not covered by insurance;
(l) made any Investment in or taken steps to incorporate any
Subsidiary; or
(m) entered into any other transaction other than in the
ordinary course of business.
(ii) Neither the Company nor any Subsidiary has at any time made any
payments for political contributions or made any bribes, kickback payments or
other illegal payments.
5I. Assets. Except as set forth on the attached "Assets Schedule,"
------
the Company and each Subsidiary have good and marketable title to, or a valid
leasehold interest in, the properties and assets used by them, located on their
premises or shown on the September Balance Sheet or acquired thereafter, free
and clear of all Liens, except for properties and assets disposed of in the
ordinary course of business since the date of the September Balance Sheet and
except for Liens disclosed on the September Balance Sheet (including any notes
thereto) and Liens for current property taxes not yet due and payable. Except as
described on the Assets Schedule, the Company's and each Subsidiary's buildings,
equipment and other tangible assets are in good operating condition in all
material respects and are fit for use in the ordinary course of business. Except
as set forth on the attached "Assets Schedule," the Company and each Subsidiary
own, or have a valid leasehold interest in, all assets necessary for the conduct
of their respective businesses as presently conducted and as presently proposed
to be conducted.
5J. Tax Matters.
-----------
(i) Except as set forth on the attached "Taxes Schedule": the Company
and each Subsidiary have filed all material Tax Returns which they are required
to file under applicable laws and regulations; all such Tax Returns are true,
correct and complete in all material respects. The Company has paid or made
provision for the payment of all Taxes that are due or claimed to be due from it
by any authority. There are no Liens for Taxes upon any assets, tangible or
intangible, of the Company (or any Subsidiary). The reserves for Taxes reflected
on the September Balance Sheet are sufficient for payment of all unpaid Taxes
(whether or not currently disputed) incurred with respect to the periods ended
prior to such date. Except as set forth on the Taxes Schedule, there are no
pending claims or disputes relating to, or claims for, Taxes of the Company (or
any Subsidiary). The Company has not granted any extension of the period of
limitation applicable to any claim for Taxes.
(ii) "Tax" or "Taxes" means federal, state, county, local, foreign or
other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and interest attributable
thereto) whether disputed or not. "Tax Return" means any return, information
report or filing with respect to Taxes, including any schedules attached thereto
and including any amendment thereof.
5K. Contracts and Commitments.
-------------------------
(i) Except as expressly contemplated by this Agreement or as set forth
on the attached "Contracts Schedule" or the attached "Employee Benefits
Schedule," neither the Company nor any Subsidiary is a party to or bound by any
written or oral:
(a) pension, profit sharing, stock option, employee stock
purchase or other plan or arrangement providing for deferred or other
compensation to employees or any other employee benefit plan or
arrangement, or any collective bargaining agreement or any other contract
with any labor union, or severance agreements, programs, policies or
arrangements;
(b) contract for the employment of any officer, individual
employee or other Person on a full-time, part-time, consulting or other
basis providing annual compensation in excess of $250,000 or contract
relating to loans to officers, directors or Affiliates;
(c) contract under which the Company or Subsidiary has advanced
or loaned any other Person amounts in the aggregate exceeding $250,000;
(d) agreement or indenture relating to borrowed money or other
Indebtedness or the mortgaging, pledging or otherwise placing a Lien on any
material asset or material group of assets of the Company and its
Subsidiaries;
(e) guarantee of any obligation in excess of $100,000;
(f) lease or agreement under which the Company or any Subsidiary
is lessee of or holds or operates any property, real or personal, owned by
any other party, except for any lease of personal property under which the
aggregate annual rental payments do not exceed $100,000;
(g) lease or agreement under which the Company or any Subsidiary
is lessor of or permits any third party to hold or operate any material
property, real or personal, owned or controlled by the Company or any
Subsidiary;
(h) contract or group of related contracts with the same party or
group of affiliated parties the performance of which involves consideration
in excess of $5,000,000;
(i) assignment, license, indemnification or agreement with
respect to any material intangible property (including, without limitation,
any Intellectual Property);
(j) warranty agreement with respect to its services rendered or
its products sold or leased pursuant to which it has incurred during either
of the last two calendar years, or expects to incur in any future calendar
year, expenses in excess of $100,000;
(k) agreement under which it has granted any Person any
registration rights (including, without limitation, demand and piggyback
registration rights);
(l) sales, distribution or franchise agreement;
(m) agreement with a term of more than six months which is not
terminable by the Company or any Subsidiary upon less than 30 days notice
without a penalty in excess of $200,000, except as otherwise disclosed on
the Contract Schedule;
(n) contract or agreement prohibiting it from freely engaging in
any business or competing anywhere in the world; or
(o) any other agreement which is material to its operations and
business prospects or involves a consideration in excess of $250,000
annually.
(ii) All of the contracts, agreements and instruments set forth on the
Contracts Schedule are valid, binding and enforceable in accordance with their
respective terms. The Company and each Subsidiary have performed all material
obligations required to be performed by them and are not in default under or in
breach of nor in receipt of any claim of default or breach under any material
contract, agreement or instrument to which the Company or any Subsidiary is
subject; no event has occurred which with the passage of time or the giving of
notice or both would result in a default, breach or event of noncompliance by
the Company or any Subsidiary under any material contract, agreement or
instrument to which the Company or any Subsidiary is subject; neither the
Company nor any Subsidiary has any present expectation or intention of not fully
performing all such obligations; neither the Company nor any Subsidiary has
knowledge of any breach or anticipated breach by the other parties to any
material contract, agreement, instrument or commitment to which it is a party;
and neither the Company nor any Subsidiary is a party to any materially adverse
contract or commitment.
(ii) The Purchaser's special counsel has been supplied with a true and
correct copy of each of the written instruments, plans, contracts and agreements
and an accurate description of each of the oral arrangements, contracts and
agreements which are referred to on the Contracts Schedule and requested by the
Purchaser or the Purchaser's special counsel, together with all amend ments,
waivers or other changes thereto.
5L. Intellectual Property Rights.
----------------------------
(i) The attached "Intellectual Property Schedule" contains a complete
and accurate list of all (a) patented or registered Intellectual Property Rights
owned or used by the Company or any Subsidiary, (b) pending patent applications
and applications for registrations of other Intellectual Property Rights owned
or filed by the Company or any Subsidiary, (c) unregistered trade names and
corporate names owned or used by the Company or any Subsidiary and (d)
unregistered trademarks, service marks, material copyrights, mask works and
computer software owned or used by the Company or any Subsidiary. The
Intellectual Property Schedule also contains a complete and accurate list of all
licenses and other rights granted by the Company or any Subsidiary to any third
party with respect to any Intellectual Property Rights and all licenses and
other rights granted by any third party to the Company or any Subsidiary with
respect to any Intellectual Property Rights, in each case identifying the
subject Intellectual Property Rights. Except as set forth on the Intellectual
Property Schedule, the Company or one of its Subsidiaries owns all right, title
and interest in and to, or has the right to use pursuant to a valid license, all
Intellectual Property Rights necessary for the operation of the businesses of
the Company and its Subsidiaries as presently conducted and as presently
proposed to be conducted, free and clear of all Liens. Except as set forth on
the Intellectual Property Schedule, the loss or expiration of any Intellectual
Property Right or related group of Intellectual Property Rights owned or used by
the Company or any Subsidiary would not reasonably be expected to have a
material adverse effect on the conduct of the Company's and its Subsidiaries'
respective businesses, and no such loss or expiration is threatened, pending or
reasonably foreseeable. The Company and its Subsidiaries have taken all
reasonably necessary and desirable actions to maintain and protect the
Intellectual Property Rights which they own.
(ii) Except as set forth on the Intellectual Property Schedule, (a)
the Company and its Subsidiaries own all right, title and interest in and to, or
have a valid and enforceable license to use, all of the Intellectual Property
Rights listed on such schedule, free and clear of all Liens, (b) there have been
no claims made or threatened against the Company or any Subsidiary contesting
the validity, use, enforceability or ownership of any of the Intellectual
Property Rights, and to the best of the Company's knowledge, there are no valid
grounds for the same, (c) neither the Company nor any Subsidiary has received
any notices of, and neither the Company nor any Subsidiary is aware of any facts
which indicate a likelihood of, any infringement or misappropriation by, or
conflict with, any third party with respect to such Intellectual Property Rights
(including, without limitation, any demand or request that the Company or any
Subsidiary license any rights from a third party), (d) neither the Company nor
any Subsidiary has infringed, misappropriated or conflicted with any
Intellectual Property Rights of other Persons, and neither the Company nor any
Subsidiary is aware of any infringement, misappropriation or conflict which will
result from the continued operation of their businesses as currently conducted
or as currently proposed to be conducted and (e) to the best of the Company's
knowledge, the Intellectual Property Rights owned by or licensed to the Company
or any Subsidiary have not been infringed, misappropriated or conflicted with by
other Persons. Except as set forth in the Intellectual Property Schedule, the
transactions contemplated by this Agreement shall have no material adverse
effect on the Company's or any Subsidiary's right, title and interest in and to
the Intellectual Property Rights.
5M. Litigation, etc. Except as set forth on the attached "Litigation
---------------
Schedule," there are no actions, suits, proceedings, orders, investigations or
claims pending or, to the best of the Company's knowledge, threatened against or
affecting the Company or any Subsidiary (or to the best of the Company's
knowledge, pending or threatened against or affecting any of the officers,
directors or employees of the Company and its Subsidiaries with respect to their
businesses or proposed business activities) at law or in equity, or before or by
any governmental department, commission, board, bureau, agency or
instrumentality (including, without limitation, any actions, suit, proceedings
or investigations with respect to the transactions contemplated by this
Agreement); neither the Company nor any Subsidiary is subject to any arbitration
proceedings under collective bargaining agreements or otherwise or, to the best
of the Company's knowledge, any governmental investigations or inquiries,
(including, without limitation, inquiries as to the qualification to hold or
receive any license or permit); and, to the best of the Company's knowledge,
there is no valid basis for any of the foregoing. Neither the Company nor any
Subsidiary is subject to any judgment, order or decree of any court or other
governmental agency.
5N. Brokerage. Except as set forth on the attached "Brokerage
---------
Schedule" or as provided in Section 2L above, there are no claims for brokerage
commissions, finders' fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement binding upon the Company or any Subsidiary. The Company shall pay, and
hold the Purchaser harmless against, any liability, loss or expense (including,
without limitation, reasonable attorneys' fees and out-of-pocket expenses)
arising in connection with any such claim.
5O. Governmental Consent, etc. No permit, consent, approval or
-------------------------
authorization of, or declaration to or filing with, any governmental authority
is required in connection with the execution, delivery and performance by the
Company of this Agreement or the other agreements contemplated hereby, or the
consummation by the Company of any other transactions contemplated hereby or
thereby, except as expressly contemplated herein or in the exhibits hereto.
5P. Insurance. The insurance coverage of the Company and its
---------
Subsidiaries is customary for corporations of similar size engaged in similar
lines of business. Neither the Company nor any Subsidiary is in material default
with respect to its obligations under any insurance policy maintained by it,
each such policy is in full force and effect and neither the Company nor any
Subsidiary has been denied insurance coverage. The Company and its Subsidiaries
do not have any material self-insurance or co-insurance programs, and the
reserves set forth on the September Balance Sheet are adequate to cover all
anticipated liabilities with respect to any such self-insurance or co-insurance
programs.
5Q. Employees. Except as set forth on the attached "Employees
---------
Schedule," the Company is not aware that any executive or key employee of the
Company or any Subsidiary or any group of employees of the Company or any
Subsidiary has any plans to terminate employment with the Company or any
Subsidiary. The Company and each Subsidiary have complied in all material
respects with all laws relating to the employment of labor (including, without
limitation, provisions thereof relating to wages, hours, equal opportunity,
collective bargaining and the payment of social security and other taxes), and
the Company is not aware that it or any Subsidiary has any material labor
relations problems (including, without limitation, any union organization
activities, threatened or actual strikes or work stoppages or material
grievances). Neither the Company, its Subsidiaries nor, to the best of the
Company's knowledge after due inquiry, any of their key employees is subject to
any noncompete, nondisclosure, confidentiality, employment, consulting or
similar agreements relating to, affecting or in conflict in any material respect
with the present or proposed business activities of the Company and its
Subsidiaries, except for agreements between the Company and its present and
former employees.
5R. ERISA.
-----
(i) Multiemployer Plans. The Company does not have any obligation
-------------------
to contribute to (or any other liability, including current or potential
withdrawal liability, with respect to) any "multiemployer plan" (as defined in
Section 3(37) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")).
(ii) Retiree Welfare Plans. The Company does not maintain or have
---------------------
any obligation to contribute to (or any other liability with respect to) any
plan or arrangement whether or not terminated, which provides medical, health,
life insurance or other welfare-type benefits for current or future retired or
terminated employees (except for limited continued medical benefit coverage
required to be provided under Section 4980B of the IRC or as required under
applicable state law).
(iii) Defined Benefit Plans. The Company does not maintain,
---------------------
contribute to or have any liability under (or with respect to) any employee plan
which is a tax-qualified "defined benefit plan" (as defined in Section 3(35) of
ERISA), whether or not terminated.
(iv) Defined Contribution Plans. The Company does not maintain,
--------------------------
contribute to or have any liability under (or with respect to) any employee plan
which is a tax-qualified "defined contribution plan" (as defined in Section
3(34) of ERISA), whether or not terminated, other than the 401K Plan (the
"Profit Sharing Plan").
(v) Other Plans. Except as set forth in the "Employee Benefits
-----------
Schedule", the Company does not maintain, contribute to or have any liability
under (or with respect to) any plan or arrangement providing benefits to current
or former employees, including any bonus plan, plan for deferred compensation,
employee health or other welfare benefit plan or other arrangement, whether or
not terminated. Such plans and other arrangements are referred to as the "Other
Plans."
(vi) The Company. For purposes of this paragraph 5R, the term
-----------
"Company" includes all organizations under common control with the Company
pursuant to Section 414(b) or (c) of the IRC.
(vii) Payments and Accruals. With respect to the Profit Sharing Plan
---------------------
and the Other Plans (the "Plans"), all required or recommended (in accordance
with historical practices) payments, premiums, contributions, reimbursements or
accruals for all periods (or partial periods) ending prior to or as of September
29, 1996, have been made or properly accrued on the September Balance Sheet.
None of the Plans has any material unfunded liabilities which are not reflected
on the Latest Balance Sheet.
(viii) Compliance. The Plans and all related trusts, insurance
----------
contracts and funds have been maintained, funded and administered in compliance
in all material respects with the applicable provisions of ERISA, the IRC and
other applicable laws. Neither the Company nor any trustee or administrator of
any Plan has engaged in any transaction with respect to the Plans which could
subject the Company or any trustee or administrator or the Plans, or any party
dealing with any such Plan, nor do the transactions contemplated by this
Agreement constitute transactions which could subject any such party, to either
a civil penalty assessed pursuant to Section 502(i) of ERISA or the tax or
penalty on prohibited transactions imposed by Section 4975 of the IRC. No
actions, suits or claims with respect to the assets of the Plans (other than
routine claims for benefits) are pending or threatened which could result in or
subject the Company to any liability, and there are no circumstances which could
give rise to or be expected to give rise to any such actions, suits or claims.
(ix) Tax Qualification. A favorable determination letter from the
-----------------
IRS has been received by the Company with respect to the Profit Sharing Plan as
amended to comply with the IRS as in effect up to the Tax Reform Act of 1986
stating that it is a qualified plan under Section 401(a) of the IRC and there
are no circumstances which would cause the Profit Sharing Plan to lose such
qualified status.
5S. Compliance with Laws. Except as set forth on the attached
--------------------
"Compliance Schedule," neither the Company nor any Subsidiary has violated any
law or any governmental regulation or requirement which violation has had or
would reasonably be expected to have a material adverse effect upon the
financial condition, operating results, assets, operations or business prospects
of the Company and its Subsidiaries taken as a whole, and neither the Company
nor any Subsidiary has received notice of any such violation.
5T. Environmental and Safety Matters.
--------------------------------
For purposes of this Agreement, the term "Environmental and Safety
Requirements" shall mean all federal, state, local and foreign statutes,
regulations, ordinances and other provisions having the force or effect of law,
all judicial and administrative orders and determinations, all contractual
obligations and all common law, in each case concerning public health and
safety, worker health and safety and pollution or protection of the environment
(including, without limitation, all those relating to the presence, use,
production, generation, handling, transport, treatment, storage, disposal,
distribution, labeling, testing, processing, discharge, Release, threatened
Release, control or cleanup of any hazardous or otherwise regulated materials,
substances or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyls, noise or radiation); "Release" shall have the meaning
set forth in CERCLA (as defined below); and "Environmental Lien" shall mean any
Lien, whether recorded or unrecorded, in favor of any governmental entity,
relating to any liability of the Company or any Subsidiary arising under any
Environmental and Safety Requirements.
(i) The Company and its Subsidiaries have complied with and are
currently in compliance with all Environmental and Safety Requirements, and
neither the Company nor its Subsidiaries have received any oral or written
notice, report or information regarding any liabilities (whether accrued,
absolute, contingent, unliquidated or otherwise) or any corrective,
investigatory or remedial obligations arising under Environmental and Safety
Requirements which relate to the Company or its Subsidiaries or any of their
properties or facilities, except for any such noncompliance, liability or
obligation which has not had or would not reasonably be expected to have a
material adverse effect on the financial condition, operating results, assets,
operations or business prospects of the Company and its Subsidiaries taken as a
whole.
(ii) Without limiting the generality of the foregoing, the Company and
its Subsidiaries have obtained and complied with, and are currently in
compliance with, all permits, licenses and other authorizations that may be
required pursuant to any Environmental and Safety Requirements for the occupancy
of their properties or facilities or the operation of their businesses, except
for any such failure to obtain or comply which has not had or would not
reasonably be expected to have a material adverse effect on the financial
condition, operating results, assets, operations or business prospects of the
Company and its Subsidiaries taken as a whole. A list of all such permits,
licenses and other authorizations which are material to the Company and its
Subsidiaries is set forth on the attached Environmental Schedule.
(iii) Neither this Agreement nor the consummation of the transactions
contemplated by this Agreement shall impose any obligations on the Company and
its Subsidiaries or otherwise for site investigation or cleanup, or notification
to or consent of any government agencies or third parties under any
Environmental and Safety Requirements (including, without limitation, any so
called "transaction-triggered" or "responsible property transfer" laws and
regulations).
(iv) None of the following exists at any property or facility owned,
occupied or operated by the Company or any of its Subsidiaries:
(a) underground storage tanks or surface impoundments;
(b) asbestos-containing materials in any form or condition; or
(c) materials or equipment containing polychlorinated
biphenyls.
(v) Neither the Company nor any of its Subsidiaries has treated,
stored, disposed of, arranged for or permitted the disposal of, transported,
handled or Released any substance (including, without limitation, any hazardous
substance) or owned, occupied or operated any facility or property, so as to
give rise to liabilities of the Company or its Subsidiaries for response costs,
natural resource damages or attorneys fees pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as
amended, or any other Environmental and Safety Requirements.
(vi) Without limiting the generality of the foregoing, to the best of
the Company's knowledge there are no facts, events or conditions relating to the
past or present properties, facilities or operations of the Company or its
Subsidiaries which prevent, hinder or limit continued compliance with
Environmental and Safety Requirements, give rise to any corrective,
investigatory or remedial obligations pursuant to Environmental and Safety
Requirements or give rise to any other liabilities (whether accrued, absolute,
contingent, unliquidated or otherwise) pursuant to Environmental and Safety
Requirements (including, without limitation, those liabilities relating to
onsite or offsite Releases or threatened Releases of hazardous materials,
substances or wastes, personal injury, property damage or natural resources
damage, except for any such noncompliance, obligation or liability which has not
had or would not reasonably be expected to have a material adverse effect on the
financial condition, operating results, assets, operations or business prospects
of the Company and its Subsidiaries taken as a whole.
(vii) Neither the Company nor any of its Subsidiaries has, either
expressly or by operation of law, assumed or undertaken any material liability
or corrective, investigatory or remedial obligation of any other Person relating
to any Environmental and Safety Requirements.
(viii) No Environmental Lien has attached to any property owned,
leased or operated by the Company or any of its Subsidiaries.
5U. Affiliated Transactions. Except as set forth on the attached
-----------------------
"Affiliated Transactions Schedule," to the best of the Company's knowledge, no
officer, director, executive employee or Affiliate of the Company or any
Subsidiary or any individual related by blood, marriage or adoption to any such
individual or any entity which is controlled by any such Person or individual,
is a party to any agreement, contract, commitment or transaction with the
Company or any Subsidiary or has any material interest in any material property
used by the Company or any Subsidiary.
5V. Investment Company. Neither the Company nor any of its
------------------
Subsidiaries is an "investment company" as defined under the Investment Company
Act of 1940.
5W. Solvency, etc. The Company is solvent as of the date of this
--------------
Agreement and shall not become insolvent as a result of the consummation of the
transactions contemplated by this Agreement. The Company is, and after giving
effect to the transactions contemplated by this Agreement shall be, able to pay
its debts as they become due, and the Company's property now has, and after
giving effect to the transactions contemplated hereby shall have, a fair salable
value (determined on a going concern basis) greater than the amounts required to
pay its debts (including a reasonable estimate of the amount of all contingent
liabilities). The Company has adequate capital to carry on its business, and
after giving effect to the transactions contemplated by this Agreement, the
Company shall have adequate capital to conduct its business. No transfer of
property is being made and no obligation is being incurred in connection with
the transactions contemplated by this Agreement with the intent to hinder, delay
or defraud either present or future creditors of the Company.
5X. Margin Securities. Neither the Company nor any of its
-----------------
Subsidiaries is engaged in the business of extending credit for the purpose of
buying or carrying "margin securities" within the meaning of Regulations G, T, U
or X promulgated by the Board of Governors of the Federal Reserve Board, and no
part of the proceeds realized from the sale of the Note shall be used to buy or
carry any such margin securities or used in violation of Regulations G, T, U or
X.
5Y. Disclosure. To the Company's knowledge, neither this Agreement
----------
nor any of the exhibits, schedules, attachments, written statements, documents,
certificates or other items prepared or supplied to the Purchaser by or on
behalf of the Company with respect to the transactions contemplated hereby
contain any untrue statement of a material fact or omit a material fact
necessary to make each statement contained herein or therein not misleading;
provided that with respect to the financial projections furnished to the
Purchaser by the Company, the Company represents and warrants only that such
projections were based upon assumptions reasonably believed by the Company to be
reasonable and fair as of the date the projections were prepared in the context
of the Company's history and current and reasonably foreseeable business
conditions. There is no fact which the Company has not disclosed to the
Purchaser in writing and of which any of its officers, directors or executive
employees is aware (other than general economic conditions) and which has had or
would reasonably be expected to have a material adverse effect upon the existing
or expected financial condition, operating results, assets, customer or supplier
relations, employee relations or business prospects of the Company and its
Subsidiaries taken as a whole.
5Z. Reports with the Securities and Exchange Commission. The Company
---------------------------------------------------
has furnished the Purchaser with complete and accurate copies of its annual
report on Form 10-K for its two most recent fiscal years, all other reports or
documents required to be filed by the Company pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act since the filing of the most recent annual report
on Form 10-K and its most recent annual report to its stockholders. Such reports
and filings do not contain any material false statements or any misstatement of
any material fact and do not omit to state any fact necessary to make the
statements set forth therein not misleading. The Company has made all filings
with the Securities and Exchange Commission which it is required to make, and
the Company has not received any request from the Securities and Exchange
Commission to file any amendment or supplement to any of the reports described
in this paragraph.
Section 6. Representations and Warranties of the Purchaser. As a
-----------------------------------------------
material inducement to the Company to enter into this Agreement and sell the
Note and Warrant hereunder, the Purchaser hereby represents to the Company as
follows:
6A. Organization and Qualification. The Purchaser is a corporation
------------------------------
or other entity duly organized, validly existing and (where applicable) in good
standing under the Laws of the jurisdiction of its formation and has the power
to own its property and to carry on its business as now being conducted. The
Purchaser is duly qualified to do business and (where applicable) in good
standing in every jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, except where the
failure to so qualify would not prevent consummation of the transactions
contemplated hereby or have a material adverse effect on the Purchaser's ability
to perform its obligations hereunder.
6B. Due Authorization. The execution, delivery and performance of
-----------------
this Agreement and all other agreements and instruments contemplated hereby to
which the Purchaser is a party, have been duly authorized by the Purchaser. This
Agreement and all other agreements and instruments contemplated hereby to which
the Purchaser is a party each constitutes a valid and binding obligation of the
Purchaser, enforceable in accordance with its terms. The execution and delivery
of this Agreement and all other agreements and instruments contemplated hereby
to which the Purchaser is a party and the fulfillment of and compliance with the
respective terms hereof and thereof by the Purchaser, do not and shall not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under, or (iii) require any authorization, consent,
approval exemption or other action by or notice or declaration to, or filing
with, any court or administrative or governmental body or agency pursuant to,
the organization documents of the Purchaser, or any law, statute, rule or agency
pursuant to, the organizational documents of the Purchaser, or any law, statute,
rule or regulation to which the Purchaser is subject, or any material agreement,
instrument, order, judgment or decree to which the Purchaser is subject, except
for filings after the Closing which may be required under Section 13(d) of the
Securities Exchange Act.
6C. Purchaser's Investment Representations. The Purchaser hereby
--------------------------------------
represents that it is acquiring the Restricted Securities purchased hereunder or
acquired pursuant hereto for its own account with the present intention of
holding such securities for purposes of investment, and that it has no intention
of selling such securities in a public distribution in violation of the federal
securities laws or any applicable state securities laws; provided that nothing
contained herein shall prevent any Purchaser and subsequent holders of
Restricted Securities from transferring such securities in compliance with the
provisions of Section 4 hereof. Each certificate or instrument representing
Restricted Securities shall be imprinted with a legend in substantially the
following form:
"The securities represented by this certificate were originally issued on
December 23, 1996, and have not been registered under the Securities Act of
1933, as amended. The transfer of the securities represented by this
certificate is subject to the conditions specified in the Purchase
Agreement, dated as of December 23, 1996 and as amended and modified from
time to time, between the issuer (the "Company") and certain investors, and
the Company reserves the right to refuse the transfer of such securities
until such conditions have been fulfilled with respect to such transfer. A
copy of such conditions shall be furnished by the Company to the holder
hereof upon written request and without charge."
6D. Brokerage. Except as set forth in Section 2L above, there are no
---------
claims for brokerage commissions, finders' fees or similar compensation in
connection with the transactions contemplated by this Agreement and based on any
arrangement or agreement binding upon the Purchaser. The Purchaser shall pay,
and hold the Company harmless against, any liability, loss or expense (including
without limitation reasonable attorneys' fees and out-of-pocket expenses)
arising in connection with any such claim.
6E. Accredited Investor. The Purchaser is an "accredited investor"
-------------------
within the meaning of Rule 501 promulgated under the Securities Act.
Section 7. Definitions.
-----------
7A. Definitions. For the purposes of this Agreement, the following
-----------
terms have the meanings set forth below:
"Affiliate" of any particular Person means any other Person
---------
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person whether through the ownership of
voting securities, contract or otherwise.
"Consolidated Tangible Net Worth" means, as of any date of
-------------------------------
determination, the Company's shareholders' equity less goodwill and other
intangible assets, calculated on a consolidated basis in accordance with
generally accepted accounting principles, consistently applied.
"Event of Default" has the meaning set forth in the Note.
----------------
"Indebtedness" means at a particular time, without duplication, (i)
------------
any indebtedness for borrowed money or issued in substitution for or exchange of
indebtedness for borrowed money, (ii) any indebtedness evidenced by any note,
bond, debenture or other debt security, (iii) any indebtedness for the deferred
purchase price of property or services with respect to which a Person is liable,
contingently or otherwise, as obligor or otherwise (other than trade payables
and other current liabilities incurred in the ordinary course of business which
are not more than six months past due), (iv) any commitment by which a Person
assures a creditor against loss (including, without limitation, contingent
reimbursement obligations with respect to letters of credit), (v) any
indebtedness guaranteed in any manner by a Person (including, without
limitation, guarantees in the form of an agreement to repurchase or reimburse),
(vi) any obligations under capitalized leases with respect to which a Person is
liable, contingently or otherwise, as obligor, guarantor or otherwise, or with
respect to which obligations a Person assures a creditor against loss, (vii) any
indebtedness secured by a Lien on a Person's assets and (viii) any unsatisfied
obligation for "withdrawal liability" to a "multiemployer plan" as such terms
are defined under ERISA.
"Intellectual Property Rights" means all of the following owned by,
----------------------------
issued to or licensed to the Company: (i) patents, patent applications, patent
disclosures and inventions, (ii) trademarks, service marks, trade dress, trade
names, logos and corporate names and registrations and applications for
registration thereof together with all of the goodwill associated therewith,
(iii) copyrights (registered or unregistered) and copyrightable works and
registrations and applications for registration thereof, (iv) mask works and
registrations and applications for registration thereof, (v) computer software,
data, data bases and documentation thereof, (vi) trade secrets and other
confidential information (including, without limitation, ideas, formulas,
compositions, inventions (whether patentable or unpatentable and whether or not
reduced to practice), know-how, manufacturing and production processes and
techniques, research and development information, drawings, specifications,
designs, plans, proposals, technical data, copyrightable works, financial and
marketing plans and customer and supplier lists and information), (vii) other
intellectual property rights and (viii) copies and tangible embodiments thereof
(in whatever form or medium).
"Investment" as applied to any Person means (i) any direct or indirect
----------
purchase or other acquisition by such Person of any notes, obligations,
instruments, stock, securities or ownership interest (including partnership
interests and joint venture interests) of any other Person and (ii) any capital
contribution by such Person to any other Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and any
---
reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"IRS" means the United States Internal Revenue Service.
---
"Liens" means any mortgage, pledge, security interest, encumbrance,
-----
lien or charge of any kind (including, without limitation, any conditional sale
or other title retention agreement or lease in the nature thereof), any sale of
receivables with recourse against the Company, any Subsidiary or any Affiliate,
any filing or agreement to file a financing statement as debtor under the
Uniform Commercial Code or any similar statute other than to reflect ownership
by a third party of property leased to the Company or any Subsidiaries under a
lease which is not in the nature of a conditional sale or title retention
agreement, or any subordination arrangement in favor of another Person (other
than any subordination arising in the ordinary course of business).
"Officer's Certificate" means a certificate signed by the Company's
---------------------
president or its chief financial officer, stating that (i) the officer signing
such certificate has made or has caused to be made such investigations as are
reasonably necessary in order to permit him to verify the accuracy of the
information set forth in such certificate and (ii) to the best of such officer's
knowledge, such certificate does not misstate any material fact and does not
omit to state any fact necessary to make the certificate not misleading.
"Permitted Senior Indebtedness" has the meaning set forth in paragraph
-----------------------------
3C.
"Permitted Liens" means:
---------------
(i) tax liens with respect to taxes not yet due and payable or
which are being contested in good faith by appropriate proceedings and for
which appropriate reserves have been established in accordance with
generally accepted accounting principles, consistently applied;
(ii) deposits or pledges made in connection with, or to secure
payment of, utilities or similar services, workers' compensation,
unemployment insurance, old age pensions or other social security
obligations;
(iii) purchase money security interests in any property acquired
by the Company or any Subsidiary which secure Indebtedness which does not,
in total, exceed the lesser of $6,000,000 or the aggregate original
purchase price of the property;
(iv) interests or title of a lessor under any lease permitted
by this Agreement;
(v) mechanics', materialmen's or contractors' liens or
encumbrances or any similar lien or restriction created by statute;
(vi) liens in favor of Harris Trust and Savings Bank, as agent,
in the property of the Company and its Subsidiaries (the "Harris Liens")
that are granted at the same time as liens granted to the Purchaser in the
same property which are junior in priority to the Harris Liens;
(vii) easements, rights-of-way, restrictions and other similar
charges and encumbrances not interfering with the ordinary conduct of the
business of the Company and its Subsidiaries or detracting from the value
of the assets of the Company and its Subsidiaries; and
(viii) liens outstanding on the date hereof which secure
Indebtedness and which are described in the schedules to this Agreement.
"Person" means an individual, a partnership, a corporation, a limited
------
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Potential Event of Default" means any event or occurrence which with
--------------------------
the passage of time or the giving of notice or both would constitute an Event of
Default.
"Qualified Offering" means an offering by the Company of Common Stock
------------------
registered with the Securities and Exchange Commission under the Securities Act
subsequent to the date of this Agreement with an aggregate offering value of
greater than $20 million and an offering price per share of at least (a) 127.5%
of the Conversion Price after December 23, 1996, but prior to December 24, 1997;
(b) 165% of the Conversion Price after December 23, 1997, but prior to December
24, 1998; or (c) 215% of the Conversion Price after December 23, 1998.
"Restricted Securities" means (i) the Note issued hereunder, (ii) the
---------------------
Warrant issued hereunder, (iii) the Common Stock issued upon conversion of Note
or upon exercise of the Warrant and (iv) any securities issued with respect to
the securities referred to in clauses (i), (ii) or (iii) above by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular Restricted Securities, such securities shall cease to be Restricted
Securities when they have (a) been effectively registered under the Securities
Act and disposed of in accordance with the registration statement covering them,
(b) been distributed to the public through a broker, dealer or market maker
pursuant to Rule 144 (or any similar provision then in force) under the
Securities Act or become eligible for sale pursuant to Rule 144(k) (or any
similar provision then in force) under the Securities Act or (c) been otherwise
transferred and new certificates for them not bearing the Securities Act legend
set forth in paragraph 7D have been delivered by the Company in accordance with
paragraph 4B. Whenever any particular securities cease to be Restricted
Securities, the holder thereof shall be entitled to receive from the Company,
without expense, new securities of like tenor not bearing a Securities Act
legend of the character set forth in paragraph 7D.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
similar federal law then in force.
"Securities and Exchange Commission" includes any governmental body or
----------------------------------
agency succeeding to the functions thereof.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
-----------------------
as amended, or any similar federal law then in force.
"Subsidiary" means, with respect to any Person, any corporation,
----------
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association other business entity, a majority of
the partnership or other similar ownership interest thereof is at the time owned
or controlled, directly or indirectly, by any Person or one or more Subsidiaries
of that Person or a combination thereof. For purposes hereof, a Person or
Persons shall be deemed to have a majority ownership interest in a limited
liability company, partnership, association or other business entity if such
Person or Persons shall be allocated a majority of limited liability company,
partnership, association or other business entity gains or losses or shall be or
control any managing director or general partner of such limited liability
company, partnership, association or other business entity.
"Treasury Regulations" means the United States Treasury Regulations
--------------------
promulgated under the IRC, and any reference to any particular Treasury
Regulation section shall be interpreted to include any final or temporary
revision of or successor to that section regardless of how numbered or
classified.
"Underlying Common Stock" means (i) the Common Stock issued or
-----------------------
issuable upon conversion of the Note or upon exercise of the Warrant and (ii)
any Common Stock issued or issuable with respect to the securities referred to
in clause (i) above by way of stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization. For purposes of this Agreement, any Person who holds the Note or
Warrant shall be deemed to be the holder of the Underlying Common Stock
obtainable upon conversion of the Note or exercise of the Warrant in connection
with the transfer thereof or otherwise regardless of any restriction or
limitation on the conversion of the Note or exercise of the Warrant, such
Underlying Common Stock shall be deemed to be in existence, and such Person
shall be entitled to exercise the rights of a holder of Underlying Common Stock
hereunder. As to any particular shares of Underlying Common Stock, such shares
shall cease to be Underlying Common Stock when they have been (a) effectively
registered under the Securities Act and disposed of in accordance with the
registration statement covering them, (b) distributed to the public through a
broker, dealer or market maker pursuant to Rule 144 under the Securities Act (or
any similar provision then in force) or (c) repurchased by the Company or any
Subsidiary.
"Wholly-Owned Subsidiary" means, with respect to any Person, a
-----------------------
Subsidiary of which all of the outstanding capital stock or other ownership
interests are owned by such Person or another Wholly-Owned Subsidiary of such
Person.
Section 8. Miscellaneous.
-------------
8A. Expenses. The Company shall pay, and hold the Purchaser and all
--------
holders of the Note, the Warrant and Underlying Common Stock harmless against
liability for the payment of, (i) the fees and expenses of their special counsel
arising in connection with the negotiation and execution of this Agreement and
the consummation of the transactions contemplated by this Agreement which shall
be payable at the Closing, (ii) the fees and expenses incurred with respect to
any amendments or waivers (whether or not the same become effective) under or in
respect of this Agreement, the Note, the Warrant, the Registration Agreement,
the Articles of Incorporation and all other agreements and instruments
contemplated hereby, (iii) stamp and other taxes which may be payable in respect
of the execution and delivery of this Agreement or the issuance, delivery or
acquisition of any Notes or any shares of Common Stock issuable upon conversion
of Note or exercise of the Warrant, (iv) the fees and expenses incurred with
respect to the enforcement of the rights granted under this Agreement, the Note,
the Warrant, the Registration Agreement, the Articles of Incorporation and all
other agreements and instruments contemplated hereby and (v) the reasonable fees
and expenses incurred by each such Person in any filing with any governmental
agency with respect to its investment in the Company or in any other filing with
any governmental agency with respect to the Company which mentions such Person;
provided, however, that the Company shall not be required to pay the fees and
expenses incurred by any such Person in obtaining the authorization, consent or
approval of any governmental agency with respect to its investment in the
Company.
8B. Transaction Fee. The Company shall pay to Nesbitt Burns
---------------
Securities, Inc. a transaction fee in the amount of $480,000 less the amount
payable under 7A(i) above, which shall be payable by a cashiers or certified
check or by wire transfer of immediate funds at the Closing.
8C. Remedies. Each holder of the Note and the Underlying Common
--------
Stock shall have all rights and remedies set forth in this Agreement, the Note
and all rights and remedies which such holders have been granted at any time
under any other agreement or contract and all of the rights which such holders
have under any law. Any Person having any rights under any provision of this
Agreement shall be entitled to enforce such rights specifically, to recover
damages by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law.
8D. Consent to Amendments. Except as otherwise expressly provided
---------------------
herein, the provisions of this Agreement may be amended and the Company may take
any action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holder of the Note; provided that if the Note is no longer outstanding, the
provisions of this Agreement may be amended and the Company may take any action
herein prohibited, only if the Company has obtained the written consent of the
holders of a majority of the Underlying Common Stock. No other course of dealing
between the Company and the holder of any Note, Warrant or Underlying Common
Stock or any delay in exercising any rights hereunder or under the Note or the
Articles of Incorporation shall operate as a waiver of any rights of any such
holders. For purposes of this Agreement, Notes or Underlying Common Stock held
by the Company or any Subsidiaries shall not be deemed to be outstanding.
8E. Survival of Representations and Warranties. All representations
------------------------------------------
and warranties contained herein or made in writing by any party in connection
herewith shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, regardless of any
investigation made by the Purchaser or on its behalf.
8F. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto whether so expressed or
not. In addition, and whether or not any express assignment has been made, the
provisions of this Agreement which are for the Purchaser's benefit as a
purchaser or holder of Notes, the Warrants or Underlying Common Stock are also
for the benefit of, and enforceable by, any subsequent holder of such Notes,
such Warrants or such Underlying Common Stock.
8G. Generally Accepted Accounting Principles. Where any accounting
----------------------------------------
determination or calculation is required to be made under this Agreement or the
exhibits hereto, such determination or calculation (unless otherwise provided)
shall be made in accordance with generally accepted accounting principles,
consistently applied, except that if because of a change in generally accepted
accounting principles the Company would have to alter a previously utilized
accounting method or policy in order to remain in compliance with generally
accepted accounting principles, such determination or calculation shall continue
to be made in accordance with the Company's previous accounting methods and
policies.
8H. Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
8I. Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
8J. Descriptive Headings; Interpretation. The descriptive headings
------------------------------------
of this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement. The use of the word "including" in this
Agreement shall be by way of example rather than by limitation.
8K. GOVERNING LAW. THE CORPORATE LAW OF THE STATE OF MINNESOTA SHALL
-------------
GOVERN ALL ISSUES AND QUESTIONS CONCERNING THE RELATIVE RIGHTS AND OBLIGATIONS
OF THE COMPANY AND ITS STOCKHOLDERS. ALL ISSUES AND QUESTIONS CONCERNING THE
CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND THE
EXHIBITS AND SCHEDULES HERETO SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO ANY CHOICE OF
LAW OR CONFLICT OF LAW RULES OR PROVISIONS (WHETHER OF THE STATE OF MINNESOTA OR
ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF MINNESOTA.
8L. Notices. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, sent to the recipient by reputable overnight courier service
(charges prepaid) or mailed to the recipient by certified or registered mail,
return receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to the Purchaser and to the Company at the
addresses indicated below:
If to the Company:
Zytec Corporation
7575 Market Place Drive
Eden Prairie, MN 55344
Attention: Ronald D. Schmidt
with a copy to:
Winthrop & Weinstine, P.A.
3200 Minnesota World Trade Center
30 East Seventh Street
St. Paul, MN 55101
Attention: Sherman Winthrop
If to the Purchaser:
BMO Nesbitt Burns Equity Partners, Inc.
111 West Monroe Street
20th Floor
Chicago, IL 60603
Attention: Managing Director
with copy to:
Kirkland & Ellis
200 E. Randolph Drive
Chicago, IL 60601
Attention: Edward T. Swan
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
8M. Consideration for Warrant. The Purchaser and the Company
-------------------------
acknowledge and agree that the fair market value of the Note issued hereunder is
$11,999,000 and the fair market value of the Warrant issued hereunder is $1,000
and that, for all purposes (including tax and accounting), the consideration for
the issuance of the Warrant referred to in paragraph 3I shall be allocated as
set forth in paragraph 1B hereof. The Purchaser and the Company shall file their
respective federal, state and local tax returns in a manner which is consistent
with such valuation and allocation and shall not take any contrary position with
any taxing authority.
8N. No Strict Construction. The parties hereto have participated
----------------------
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement.
8O. Indemnification.
---------------
(i) General. In consideration of the Purchaser's execution and
-------
delivery of this Agreement and acquiring the Note and the Warrant hereunder and
in addition to all of the Company's other obligations under this Agreement, the
Company shall defend, protect, indemnify and hold harmless the Purchaser and
each other holder of the Note or the Warrant and all of their officers,
directors, employees and agents (including, without limitation, those retained
in connection with the transactions contemplated by this Agreement)
(collectively, the "Indemnitees") from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages, and expenses in connection therewith (irrespective of whether any such
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys' fees and disbursements (the
"Indemnified Liabilities"), incurred by the Indemnitees or any of them as a
result of, or arising out of, or relating to (a) any transaction financed or to
be financed in whole or in part, directly or indirectly, with the proceeds of
the issuance of the Note and the Warrant or (b) the execution, delivery,
performance or enforcement of this Agreement and any other instrument, document
or agreement executed pursuant hereto by any of the Indemnitees. To the extent
that the foregoing undertaking by the Company may be unenforceable for any
reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law.
(ii) Environmental Liabilities. Without limiting the generality of
-------------------------
the indemnity set out in paragraph 7P(i) above, the Company shall defend,
protect, indemnify and hold harmless the Purchaser and all other Indemnitees
from and against any and all actions, causes of action, suits, losses,
liabilities, damages, injuries, penalties, fees, costs, expenses and claims of
any and every kind whatsoever paid, incurred or suffered by, or asserted
against, the Purchaser or any other Indemnitee for, with respect to, or as a
direct or indirect result of, the past, present or future environmental
condition of any property owned, operated or used by the Company, any
Subsidiary, their predecessors or successors or of any offsite treatment,
storage or disposal location associated therewith, including, without
limitation, the presence on or under, or the escape, seepage, leakage, spillage,
discharge, emission, release, or threatened release into, onto or from, any such
property or location of any toxic, chemical or hazardous substance, material or
waste (including, without limitation, any losses, liabilities, damages,
injuries, penalties, fees, costs, expenses or claims asserted or arising under
the Comprehensive Environmental Response, Compensation and Liability Act, any
so-called "Superfund" or "Superlien" law, or any other federal, state, local or
foreign statute, law, ordinance, code, rule, regulation, order or decree
regulating, relating to or imposing liability or standards on conduct
concerning, any toxic, chemical or hazardous substance, material or waste),
regardless of whether caused by, or within the control of, the Company or any
Subsidiary.
(iii) Purchaser's Indemnification. The Purchaser shall indemnify and
---------------------------
hold the Company harmless against and from any and all claims, suits, actions,
damages, costs, judgements or other expenses sustained or incurred by the
Company as a result of a breach by the Purchaser of representations and
warranties made by the Purchaser in connection with the transactions
contemplated by this Agreement.
8P. Payment Set Aside. To the extent that the Company makes a
-----------------
payment or payments to the Purchaser hereunder or under the Note or the
Purchaser enforces its rights or exercises its right of setoff hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
setoff or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other Person under any law (including, without limitation, any
bankruptcy law, state or federal law, common law or equitable cause of action),
then to the extent of any such restoration the obligation or part thereof
originally intended to be satisfied shall be revived and continued in full force
and effect as if such payment had not been made or such enforcement or setoff
had not occurred.
* * * *
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
ZYTEC CORPORATION
By _____________________________________________
Its ____________________________________________
BMO NESBITT BURNS CAPITAL (U.S.), INC.
By _____________________________________________
Its ____________________________________________
LIST OF EXHIBITS
----------------
Exhibit A - Form of Note
Exhibit B - Form of Warrant
Exhibit C - Form of Registration Agreement
Exhibit D - Form of Opinion of Counsel
LIST OF DISCLOSURE SCHEDULES
----------------------------
Capitalization Schedule
Subsidiary Schedule
Restrictions Schedule
Financial Statements Schedule
Liabilities Schedule
Developments Schedule
Assets Schedule
Taxes Schedule
Contracts Schedule
Intellectual Property Schedule
Litigation Schedule
Brokerage Schedule
Employees Schedule
Employee Benefits Schedule
Compliance Schedule
Environmental Schedule
Affiliated Transactions Schedule
The security represented by this instrument was originally issued on
December 23, 1996, and has not been registered under the Securities Act of
1933, as amended. The transfer of such security is subject to the
conditions specified in the Note and Warrant Purchase Agreement, dated as
of December 23, 1996, as amended and modified from time to time, between
the issuer (the "Company") and BMO Nesbitt Burns Capital (U.S.), Inc., and
the Company reserves the right to refuse the transfer of such security
until such conditions have been fulfilled with respect to such transfer.
Upon written request, a copy of such conditions shall be furnished by the
Company to the holder hereof without charge.
This instrument is subject to the terms of a Subordination and
Intercreditor Agreement dated as of December 23, 1996, in favor of Harris
Trust and Savings Bank, as agent, which agreement (as amended in accordance
with its terms) is incorporated herein by reference. Notwithstanding any
statement to the contrary contained in this instrument, no payment on
account of the obligations hereunder, whether of principal, interest or
otherwise, shall be made, paid, received or accepted except in accordance
with the express terms of the Subordination and Intercreditor Agreement.
ZYTEC CORPORATION
CONVERTIBLE SUBORDINATED
PROMISSORY NOTE
-------------------
December 23, 1996 $12,000,000
Zytec Corporation, a Minnesota corporation (the "Company"), hereby
promises to pay to the order of BMO Nesbitt Burns Capital (U.S.), Inc., a
Delaware corporation (the "Purchaser") the principal amount of $12,000,000
together with interest thereon calculated from the date hereof in accordance
with the provisions of this Note.
This Note was issued pursuant to a Note and Warrant Purchase
Agreement, dated as of December 23, 1996 (as amended and modified from time to
time, the "Purchase Agreement"), between the Company and the Purchaser, and this
Note is the "Note" referred to in the Purchase Agreement. The Purchase Agreement
contains terms governing the rights of the holder of this Note, and all
provisions of the Purchase Agreement are hereby incorporated herein in full by
reference. Except as defined in paragraph 8 hereof or unless otherwise indicated
herein, capitalized terms used in this Note have the same meanings set forth in
the Purchase Agreement.
1. Payment of Interest. Except as otherwise expressly provided in
-------------------
paragraph 3(b) hereof, interest shall accrue at the rate of seven and one-half
percent (7 1/2%) per annum (computed on the basis of a 360-day year and the
actual number of days elapsed in any year) on the unpaid principal amount of
this Note outstanding from time to time, or (if less) at the highest rate then
permitted under applicable law. The Company shall pay to the holder of this Note
all accrued interest on the last day of each December, March, June and
September, beginning March 31, 1997. Unless prohibited under applicable law, any
accrued interest which is not paid on the date on which it is due and payable
shall bear interest at the same rate at which interest is then accruing on the
principal amount of this Note until such interest is paid. Any accrued interest
which for any reason has not theretofore been paid shall be paid in full on the
date on which the final principal payment on this Note is made. Interest shall
accrue on any principal payment due under this Note and, to the extent permitted
by applicable law, on any interest which has not been paid on the date on which
it is due and payable until such time as payment therefor is actually delivered
to the holder of this Note.
2. Payment of Principal.
--------------------
(a) Scheduled Repayment. The Company shall repay the principal
-------------------
amount of $12,000,000 (or such lesser principal amount then outstanding) to the
holder of this Note on December 23, 2001 (the "Scheduled Repayment Date"),
together with all accrued and unpaid interest on the Note.
(b) Optional Repayments.
-------------------
(i) Subject to subparagraphs (b)(ii) and (iii) below, the Company may,
at any time and from time to time repay all or any portion (in whole number
multiples of $1,000,000 only) of the outstanding principal amount of the Note;
provided that (A) such repayment is not prohibited by the provisions of the
Subordination Agreement and (B) the Company has paid all interest on the Note
accrued through the immediately preceding scheduled interest payment date. In
connection with each repayment of principal hereunder, the Company shall also
pay all accrued and unpaid interest on the principal amount of the Notes being
repaid.
(ii) The Company shall send written notice of its election to make a
repayment on the Note to the holder of the Note by registered or certified mail,
return receipt requested, at least 30 days prior to the date of repayment. At
least ten days prior to the date of repayment, the Company shall deliver to the
holder of the Note in person or by registered or certified mail, return receipt
requested, a cashier's or certified check for the full amount which the Company
intends to repay on the Note plus interest accrued on the outstanding principal
amount of the Note through the date of repayment specified in the Company's
notice. Any repayment of the Note shall not be deemed to have been effected
until ten days after the holder of the Note has received a check from the
Company in the amount of such repayment. If the holder of the Note elects to
convert all or a portion of the principal amount of the Note rather than receive
such repayment, the holder shall deliver to the Company in person or by
registered or certified mail, return receipt requested, the Note on or prior to
the date of repayment together with the check received from the Company, if any,
and such conversion shall be effected in accordance with the terms of paragraph
4 hereof.
(iii) In the event the Company exercises its right to repay any
portion of this Note in accordance with subparagraph (b)(i) above prior to the
consummation of a Qualified Offering, the Company shall be obligated to pay the
holder of the Note a prepayment premium of 2% per annum of the principal amount
being repaid by the Company from the date of repayment through the Scheduled
Repayment Date.
(c) Mandatory Repayment.
-------------------
(i) If a Change in Ownership has occurred or the Company obtains
knowledge that a Change in Ownership is to occur, the Company shall give prompt
written notice of such Change in Ownership describing in reasonable detail the
definitive terms and date of consummation thereof to the holder of this Note,
but in any event such notice shall not be given later than five days after the
occurrence of such Change in Ownership. The holder of this Note may require the
Company to repay all or any portion of the outstanding principal amount of this
Note, together with (i) all accrued and unpaid interest on the Note and (ii) the
Conversion Fair Value thereof by giving written notice to the Company of such
election prior to the later of (a) 21 days after receipt of the Company's notice
and (b) five days prior to the consummation of the Change in Ownership (the
"Expiration Date"). Upon receipt of such election, the Company shall be
obligated to repay the portion of the Note specified therein on the later of (a)
the occurrence of the Change in Ownership or (b) five days after the Company's
receipt of such election(s). If in any case a proposed Change in Ownership does
not occur or if the holder of this Note elects to rescind a request for
repayment within five days after receipt of notice of the Conversion Fair Value,
all requests for repayment in connection therewith shall be automatically
rescinded. The term "Change in Ownership" means any sale or issuance or series
-------------------
of sales and/or issuances of Common Stock by the Corporation or any holders
thereof which results in any Person or group of affiliated Persons (other than
Ronald D. Schmidt, Lawrence J. Matthews and John M. Steel) owning more than 50%
of the Common Stock outstanding at the time of such sale or issuance or series
of sales and/or issuances.
(ii) If a Fundamental Change is proposed to occur, the Company shall
give written notice of such Fundamental Change describing in reasonable detail
the definitive terms and date of consummation thereof to the not more than 45
days nor less than 20 days prior to the consummation thereof. The holder of this
Note may require the Company to repay all or any portion of this Note, together
with (i) all accrued and unpaid interest on the Note and (ii) the Conversion
Fair Value thereof by giving written notice to the Corporation of such election
prior to the later of (a) ten days prior to the consummation of the Fundamental
Change or (b) ten days after receipt of notice from the Company. Upon receipt of
such election, the Company shall be obligated to repay the principal amount of
the Note specified therein upon the consummation of such Fundamental Change. If
any proposed Fundamental Change does not occur or if the holder of this Note
elects to rescind the request for repayment within five days after receipt of
notice of the Conversion Fair Value, all requests for repayment in connection
therewith shall be automatically rescinded. The term "Fundamental Change"
----------- ------
means (a) a sale or transfer of more than 30% of the assets of the Company and
its Subsidiaries on a consolidated basis (measured by either book value in
accordance with generally accepted accounting principles consistently applied or
fair market value determined in the reasonable good faith judgment of the
Company's board of directors) in any transaction or series of transactions
(other than sales in the ordinary course of business), (b) any merger or
consolidation to which the Company is a party, except for a merger in which the
Company is the surviving corporation and, after giving effect to such merger, no
Person or group of affiliated Persons (other than Ronald D. Schmidt, Lawrence J.
Matthews and John M. Steel) shall own more than 50% of the Common Stock
outstanding at the time of such merger and (c) any transaction or occurrence a
result of which the Common Stock is no longer (A) registered pursuant to the
Securities Act of 1934 or (B) quoted in the NASDAQ System.
(iii) Repayments made pursuant to this subparagraph (c) shall not
relieve the Company of its obligation to repay any remaining outstanding
principal amount on the Scheduled Repayment Date.
(iv) For purposes of this subparagraph (c), "Conversion Fair Value"
---------------------
means the fair value of the conversion rights under this Note (or a portion
thereof) determined jointly by the Company and the holder of this Note. If such
parties are unable to reach agreement within a reasonable period of time, such
fair value shall be determined by an appraiser jointly selected by the Company
and the holder of this Note. The determination of such appraiser shall be final
and binding upon the parties, and the fees and expenses of such appraiser shall
be borne by the Company.
(d) Offset. Prior to any prepayment on this Note, the holder of this
------
Note shall have the right (exercisable by notifying the Company at least five
days prior to the payment date) to reduce the principal amount to be paid by the
Company at such time by an amount not exceeding the principal amount of this
Note which has previously been converted by such holder into shares of
Conversion Stock and which has not previously been applied to any such
reduction, except that this right may not be exercised by such holder in
connection with a prepayment by the Company of all the principal amount of this
Note.
(e) Conversion. Notwithstanding any provision contained in this
----------
paragraph 2, the holder of this Note may convert all or any portion of the
outstanding principal amount of this Note until such time as such amount has
been deemed to have been paid.
3. Events of Default.
-----------------
(a) Definition. For purposes of this Note, an Event of Default shall
----------
be deemed to have occurred if
(i) the Company fails to pay when due and payable (whether at
maturity or otherwise) the full amount of interest then accrued on this Note or
the full amount of the scheduled principal payment on this Note, and in the
event of unpaid interest such failure to pay is not cured within five days after
the occurrence thereof;
(ii) the Company fails to perform or observe any other provision
contained in this Note or in the Purchase Agreement, and such failure is not
cured within 15 days after written notice from the Purchaser to the Company of
the occurrence thereof;
(iii) any representation, warranty or information contained in
the Purchase Agreement or required to be furnished to the holder of this Note
pursuant to the Purchase Agreement, or any writing required to be furnished by
the Company to the holder of this Note, is false or misleading in any material
respect on the date made or furnished;
(iv) the Company or any Subsidiary makes an assignment for the
benefit of creditors or admits in writing its inability to pay its debts
generally as they become due; or an order, judgment or decree is entered
adjudicating the Company or any Subsidiary bankrupt or insolvent; or any order
for relief with respect to the Company or any Subsidiary is entered under the
Federal Bankruptcy Code; or the Company or any Subsidiary petitions or applies
to any tribunal for the appointment of a custodian, trustee, receiver or
liquidator of the Company or any Subsidiary, or of any substantial part of the
assets of the Company or any Subsidiary, or commences any proceeding (other than
a proceeding for the voluntary liquidation and dissolution of any Subsidiary)
relating to the Company or any Subsidiary under any bankruptcy reorganization,
arrangement, insolvency, readjustment of debt, dissolution or liquidation law of
any jurisdiction; or any such petition or application is filed, or any such
proceeding is commenced, against the Company or any Subsidiary and either (A)
the Company or any such Subsidiary by any act indicates its approval thereof,
consent thereto or acquiescence therein or (B) such petition, application or
proceeding is not dismissed within 60 days;
(v) a judgment in excess of $2,000,000 is rendered against the
Company or any Subsidiary and, within 60 days after entry thereof, such judgment
is not discharged in full or execution thereof stayed pending appeal, or within
60 days after the expiration of any such stay, such judgment is not discharged
in full; or
(vi) the Company or any Subsidiary defaults in the performance of
any obligation if the effect of such default is to cause an amount exceeding
$2,000,000 to become due prior to its stated maturity or to permit the holder or
holders of such obligation to cause an amount exceeding $2,000,000 to become due
prior to its stated maturity.
The foregoing shall constitute Events of Default whatever the reason
or cause for any such Event of Default and whether it is voluntary or
involuntary or is effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body.
(b) Consequences of Events of Default.
---------------------------------
(i) If any Event of Default has occurred and is continuing, the
interest rate on the Note shall increase immediately by an increment of one
percentage point to the extent permitted by law. Thereafter, until such time as
no Events of Default exist, the interest rate shall increase automatically at
the end of each succeeding 60-day period by an additional increment of one
percentage point to the extent permitted by law (but in no event shall the
interest rate exceed 11 1/2%). Any increase of the interest rate resulting from
the operation of this subparagraph shall terminate as of the close of business
on the date on which no Events of Default exist (subject to subsequent increases
pursuant to this subparagraph).
(ii) If an Event of Default of the type described in subparagraph
3(a)(iv) has occurred, the aggregate principal amount of this Note (together
with all accrued interest thereon and all other amounts due and payable with
respect thereto) shall become immediately due and payable without any action on
the part of the holder of this Note, and the Company shall immediately pay to
the holder of this Note all amounts due and payable with respect to this Note.
(iii) If any Event of Default (other than under subparagraph
3(a)(iv)) has occurred and is continuing, the holder of this Note may declare
all or any portion of the outstanding principal amount of this Note (together
with all accrued interest thereon and all other amounts due and payable with
respect thereto) to be immediately due and payable. If any holder of this Note
demands immediate payment of all or any portion of this Note, the Company shall
immediately pay to such holder all amounts due and payable with respect to this
Note.
(iv) The holder of this Note shall also have any other rights
which such holder may have been afforded under any contract or agreement at any
time and any other rights which such holder may have pursuant to applicable law.
(v) The Company hereby waives diligence, presentment, protest and
demand and notice of protest and demand, dishonor and nonpayment of this Note,
and expressly agrees that this Note, or any payment hereunder, may be extended
from time to time and that the holder hereof may accept security for this Note
or release security for this Note, all without in any way affecting the
liability of the Company hereunder.
4. Conversion.
----------
(a) Conversion Procedure.
--------------------
(i) Upon the occurrence (or the expected occurrence as described
in (iii) below) of any Conversion Event, the holder of this Note shall be
entitled to convert all or any portion of the outstanding principal amount of
this Note into a number of shares of Conversion Stock computed by dividing the
principal amount designated by such holder to be converted by the Conversion
Price then in effect; provided that all of such shares of Conversion Stock are
(or are expected to be) distributed, disposed of, sold or canceled in connection
with such Conversion Event.
(ii) For purposes of this paragraph 4A, a "Conversion Event"
shall mean (a) any public offering or public sale of securities of the Company
(including a public offering registered under the Securities Act of 1933 and a
public sale pursuant to Rule 144 of the Securities and Exchange Commission or
any similar rule then in force), (b) any sale or transfer of securities of the
Company to a Person or group of Persons (within the meaning of the Securities
Exchange Act of 1934, as amended (the "1934 Act")) if, after such sale or
transfer, such Person or group of Persons in the aggregate would own or control
securities of the Company which possess in the aggregate the ordinary voting
power to elect a majority of the Company's directors (provided that such sale
has been approved by the Company's Board of Directors or a committee thereof),
(c) any sale or transfer of securities of the Company to a Person or group of
Persons (within the meaning of the 1934 Act) if, after such sale or transfer,
such Person or group of Persons in the aggregate would own or control securities
of the Company (excluding any Conversion Stock being disposed of in connection
with such Conversion Event) which possess in the aggregate the ordinary voting
power to elect a majority of the Company's directors, (d) any sale or transfer
of securities of the Company to a Person or group of Persons (within the meaning
of the 1934 Act) if, after such sale or transfer, such Person or group of
Persons would not, in the aggregate, own, control or have the right to acquire
more than two percent (2%) of the outstanding securities of any class of voting
securities of the Company, (e) a merger, consolidation or similar transaction
involving the Company if, after such transaction, a Person or group of Persons
(within the meaning of the 1934 Act) in the aggregate would own or control
securities which possess in the aggregate the ordinary voting power to elect a
majority of the surviving corporation's directors (provided that the transaction
has been approved by the Company's Board of Directors or a committee thereof)
and (f) any liquidation, dissolution or winding up of the Company.
(iii) The holder of this Note shall be entitled to convert all or
any portion of the outstanding principal amount of this Note in connection with
any Conversion Event if such holder reasonably believes that such Conversion
Event shall be consummated, and a written request for conversion from the holder
of this Note to the Company stating such holder's reasonable belief that a
Conversion Event shall occur shall be conclusive and shall require the Company
to effect such conversion in a timely manner so as to enable each such holder to
participate in such Conversion Event. If any portion of the outstanding
principal amount of this Note is converted into shares of Conversion Stock in
connection with a Conversion Event and such shares of Conversion Stock are not
actually distributed, disposed of, sold or canceled pursuant to such Conversion
Event, such shares of Conversion Stock shall be promptly converted back into the
principal amount of this Note so converted.
(iv) Except as otherwise expressly provided herein, each
conversion of this Note shall be deemed to have been effected as of the close of
business on the date on which this Note has been surrendered for conversion at
the principal office of the Company. At such time as such conversion has been
effected, the rights of the holder of this Note as such holder to the extent of
the conversion shall cease, and the Person or Persons in whose name or names any
certificate or certificates for shares of Conversion Stock are to be issued upon
such conversion shall be deemed to have become the holder or holders of record
of the shares of Conversion Stock represented thereby.
(v) As soon as possible after a conversion has been effected (but
in any event within five business days in the case of clause (A) below), the
Company shall deliver to the converting holder:
(A) a certificate or certificates representing the number of
shares of Conversion Stock (excluding any fractional share) issuable by
reason of such conversion in such name or names and such denomination or
denominations as the converting holder has specified;
(B) payment in an amount equal to the sum of all accrued interest
with respect to the principal amount converted, which has not been paid
prior thereto, plus the amount payable under subparagraph (vi) below; and
(C) a new Note representing any portion of the principal amount
which was represented by the Note surrendered to the Company in connection
with such conversion but which was not converted; provided that, if the
shares of Conversion Stock so issued are converted back into principal of
this Note pursuant to (iii) above, the converting holder shall return all
certificates, payments and Notes delivered pursuant to (A), (B) and (C)
above to the Company, and the Company shall promptly deliver to the
converting holder the Note surrendered for conversion.
(vi) If any fractional share of Conversion Stock would, except
for the provisions hereof, be deliverable upon conversion of this Note, the
Company, in lieu of delivering such fractional share, shall pay an amount equal
to the Market Price of such fractional share as of the date of such conversion.
(vii) The issuance of certificates for shares of Conversion Stock
upon conversion of this Note shall be made without charge to the holder hereof
for any issuance tax in respect thereof or other cost incurred by the Company in
connection with such conversion and the related issuance of shares of Conversion
Stock. Upon conversion of this Note, the Company shall take all such actions as
are necessary in order to insure that the Conversion Stock issuable with respect
to such conversion shall be validly issued, fully paid and nonassessable.
(viii) The Company shall not close its books against the transfer
of Conversion Stock issued or issuable upon conversion of this Note in any
manner which interferes with the timely conversion of this Note. The Company
shall assist and cooperate with any holder of this Note required to make any
governmental filings or obtain any governmental approval prior to or in
connection with the conversion of this Note (including, without limitation,
making any filings required to be made by the Company).
(ix) The Company shall at all times reserve and keep available
out of its authorized but unissued shares of Conversion Stock, solely for the
purpose of issuance upon the conversion of the Note, such number of shares of
Conversion Stock issuable upon the conversion of all outstanding Notes. All
shares of Conversion Stock which are so issuable shall, when issued, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges. The Company shall take all such actions as may be necessary to assure
that all such shares of Conversion Stock may be so issued without violation of
any applicable law or governmental regulation or any requirements of any
domestic securities exchange upon which shares of Conversion Stock may be listed
(except for official notice of issuance which shall be immediately delivered by
the Company upon each such issuance).
(b) Conversion Price.
----------------
(i) The initial Conversion Price shall be $13.68. In order to
prevent dilution of the conversion rights granted under the Notes, the
Conversion Price shall be subject to adjustment from time to time pursuant to
this paragraph 4(b).
(ii) If and whenever on or after the original date of issuance of
this Note the Company issues or sells, or in accordance with paragraph 4(c) is
deemed to have issued or sold, any shares of Common Stock for a consideration
per share less than the Conversion Price in effect immediately prior to such
time, then immediately upon such issue or sale the Conversion Price shall be
reduced to the Conversion Price determined by dividing (A) an amount equal to
the sum of (x) the product derived by multiplying the Conversion Price in effect
immediately prior to such issue or sale by the number of shares of Common Stock
Deemed Outstanding immediately prior to such issue or sale, plus (y) the
consideration, if any, received by the Company upon such issue on sale, by (B)
the number of shares of Common Stock Deemed Outstanding immediately after such
issue or sale.
(c) Effect on Conversion Price of Certain Events. For purposes of
--------------------------------------------
determining the adjusted Conversion Price under paragraph 4(b), the following
shall be applicable:
(i) Issuance of Rights or Options. If the Company in any
-----------------------------
manner grants or sells any Options and the price per share for which Common
Stock is issuable upon the exercise of such Options, or upon conversion or
exchange of any Convertible Securities issuable upon exercise of such Options,
is less than the Conversion Price in effect immediately prior to the time of the
granting or sale of such Options, then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options, or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options, shall be deemed to be outstanding and to have
been issued and sold by the Company at the time of the granting or sale of such
Option for such price per share. For purposes of this paragraph, the "price per
share for which Common Stock is issuable upon exercise of such Options or upon
conversion or exchange of such Convertible Securities" is determined by dividing
(A) the total amount, if any, received or receivable by the Company as
consideration for the granting or sale of such Options, plus the minimum
aggregate amount of additional consideration payable to the Company upon the
exercise of all such Options, plus in the case of such Options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the issuance or sale of such
Convertible Securities and the conversion or exchange thereof, by (B) the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options. No adjustment of the Conversion
Price shall be made upon the actual issuance of such Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange of such Convertible
Securities. Notwithstanding the foregoing, no adjustment of the Conversion Price
shall be made pursuant to paragraph 4(b) as a result of (w) the granting of
stock options under qualified stock options plans approved by the Board of
Directors of the Company, at exercise prices not less than the fair market value
of the Common Stock at the date of grant, (x) the actual issuance of Common
Stock upon the exercise of such stock options, (y) the issuance of Common Stock
pursuant to the Company's Employee Stock Purchase Plan or (z) the issuance of
Common Stock to non-employee directors pursuant to the Company's director stock
grant program.
(ii) Issuance of Convertible Securities. If the Company in any
----------------------------------
manner issues or sells any Convertible Securities and the price per share for
which Common Stock is issuable upon conversion or exchange thereof is less than
the Conversion Price in effect immediately prior to the time of such issue or
sale, then the maximum number of shares of Common Stock issuable upon conversion
or exchange of all such Convertible Securities shall be deemed to be outstanding
and to have been issued and sold by the Company at the time of the issuance or
sale of such Convertible Securities for such price per share. For the purposes
of this paragraph, the "price per share for which Common Stock is issuable upon
conversion or exchange thereof" is determined by dividing (A) the total amount
received or receivable by the Company as consideration for the issue or sale of
such Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange
thereof, by (B) the total maximum number of shares of Common Stock issuable upon
the conversion or exchange of all such Convertible Securities. No adjustment of
the Conversion Price shall be made upon the actual issue of such Common Stock
upon conversion or exchange of such Convertible Securities, and if any such
issue or sale of such Convertible Securities is made upon exercise of any
Options for which adjustments of the Conversion Price had been or are to be made
pursuant to other provisions of this paragraph 4(c), no further adjustment of
the Conversion Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the
-----------------------------------------
purchase price provided for in any Option, the additional consideration (if any)
payable upon the issue, conversion or exchange of any Convertible Security, or
the rate at which any Convertible Security is convertible into or exchangeable
for Common Stock changes at any time, the Conversion Price in effect at the time
of such change shall be adjusted immediately to the Conversion Price which would
have been in effect at such time had such Option or Convertible Security
originally provided for such changed purchase price, additional consideration or
changed conversion rate, as the case may be, at the time initially granted,
issued or sold. For purposes of this paragraph 4(c), if the terms of any Option
or Convertible Security which was outstanding as of the date of issuance of this
Note are changed in the manner described in the immediately preceding sentence,
then such Option or Convertible Security and the Common Stock deemed issuable
upon exercise, conversion or exchange thereof shall be deemed to have been
issued as of the date of such change; provided that no such change shall at any
time cause the Conversion Price hereunder to be increased.
(iv) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. Upon the expiration of any Option or the termination of any right to
- ----------
convert or exchange any Convertible Securities without the exercise of such
Option or right, the Conversion Price then in effect hereunder shall be adjusted
immediately to the Conversion Price which would have been in effect at the time
of such expiration or termination had such Option or Convertible Securities, to
the extent outstanding immediately prior to such expiration or termination,
never been issued. For purposes of this paragraph 4(c), the expiration or
termination of any Option or Convertible Security which was outstanding as of
the date of issuance of this Note shall not cause the Conversion Price hereunder
to be adjusted unless, and only to the extent that, a change in the terms of
such Option or Convertible Security caused it to be deemed to have been issued
after the date of issuance of this Note.
(v) Calculation of Consideration Received. If any Common
-------------------------------------
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor shall be
deemed to be the net amount received by the Company therefor. In case any Common
Stock, Options or Convertible Securities are issued or sold for a consideration
other than cash, the amount of the consideration other than cash received by the
Company shall be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of consideration
received by the Company shall be the Market Price thereof as of the date of
receipt. In case any Common Stock, Options or Convertible Securities are issued
to the owners of the non-surviving entity in connection with any merger in which
the Company is the surviving entity, the amount of consideration therefor shall
be deemed to be the fair value of such portion of the net assets and business of
the non-surviving entity as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be. The fair value of any consideration
other than cash and securities shall be determined jointly by the Company and
the holders of a majority of the outstanding principal amount of the Notes. If
such parties are unable to reach agreement within a reasonable period of time,
such fair value shall be determined by an appraiser jointly selected by the
Company and the holders of a majority of the outstanding principal amount of the
Notes. The determination of such appraiser shall be final and binding upon the
parties, and the fees and expenses of such appraiser shall be borne by the
Company.
(vi) Integrated Transactions. In case any Option is issued in
-----------------------
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options shall be deemed to
have been issued without consideration.
(vii) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time does not include shares owned or held by or for
the account of the Company or any Subsidiary, and the disposition of any shares
so owned or held shall be considered an issue or sale of Common Stock.
(viii) Record Date. If the Company takes a record of the holders
-----------
of Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible Securities
or (B) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
(d) Subdivision or Combination of Common Stock. If the Company at
------------------------------------------
any time subdivides (by any stock split, stock dividend or otherwise) one or
more classes of its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
shall be proportionately reduced, and if the Company at any time combines (by
reverse stock split or otherwise) one or more classes of its outstanding shares
of Common Stock into a smaller number of shares, the Conversion Price in effect
immediately prior to such combination shall be proportionately increased.
(e) Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
Any recapitalization, reorganization, reclassification, consolidation, merger,
sale of all or substantially all of the Company's assets or other transaction,
which in each case is effected in such a manner that holders of Common Stock are
entitled to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock is referred
to herein as an "Organic Change." Prior to the consummation of any Organic
Change, the Company shall make lawful and adequate provision (in form and
substance satisfactory to the holder of this Note) to insure that the holder of
this Note shall thereafter have the right to acquire and receive, in lieu of or
addition to (as the case may be) shares of Conversion Stock immediately
theretofore acquirable and receivable upon the conversion of such holder's Note,
such shares of stock, securities or assets as may be issued or payable with
respect to or in exchange for the number of shares of Conversion Stock
immediately theretofore acquirable and receivable upon conversion of such
holder's Note had such Organic Change not taken place. In any such case,
appropriate provision (in form and substance satisfactory to the holders of a
majority of the outstanding principal amount of this Note) shall be made with
respect to such holder's rights and interests to insure that the provisions of
this paragraph 4 and paragraphs 5 and 6 shall thereafter be applicable in
relation to any shares of stock, securities or assets thereafter deliverable
upon the conversion of this Note. The Company shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor entity (if other than the Company) resulting from consolidation or
merger or the entity purchasing such assets assumes by written instrument (in
form reasonably satisfactory to the holders of a majority of the outstanding
principal amount of this Note), the obligation to deliver to each such holder
such shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to acquire.
(f) Certain Events. If any event occurs of the type contemplated by
--------------
the provisions of this paragraph 4 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company's board of directors shall make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holder of this Note;
provided that no such adjustment shall increase the Conversion Price as
otherwise determined pursuant to this paragraph 4 or decrease the number of
shares of Conversion Stock issuable upon conversion of the Note.
(g) Notices.
-------
(i) Immediately upon any adjustment of the Conversion Price, the
Company shall send written notice thereof to the holder of this Note, setting
forth in reasonable detail and certifying the calculation of such adjustment.
(ii) The Company shall send written notice to the holder of this
Note at least 20 days prior to the date on which the Company closes its books or
takes a record (A) with respect to any dividend or distribution upon the Common
Stock, (B) with respect to any pro rata subscription offer to holders of Common
Stock or (C) for determining rights to vote with respect to any Organic Change,
dissolution or liquidation.
(iii) The Company shall also give at least 20 days prior written
notice of the date on which any Organic Change, dissolution or liquidation shall
take place.
5. Liquidating Dividends. If the Company declares a dividend upon
---------------------
the Common Stock payable otherwise than in cash out of earnings or earned
surplus (determined in accordance with generally accepted accounting principles,
consistently applied) except for a stock dividend payable in shares of Common
Stock (a "Liquidating Dividend"), then the Company shall pay to the holder of
this Note at the time of payment thereof the Liquidating Dividend which would
have been paid to the holder of this Note on the Conversion Stock had this Note
been fully converted immediately prior to the date on which a record is taken
for such Liquidating Dividend, or, if no record is taken, the date as of which
the record holders of Common Stock entitled to such dividends are to be
determined; provided that if the Liquidating Dividends consist of voting
securities, the Company shall make available to the holder of this Note, at such
holder's request, Liquidating Dividends consisting of non-voting securities
which are otherwise identical to the Liquidating Dividends consisting of voting
securities and which non-voting securities are convertible into such voting
securities on a share-for-share basis.
6. Purchase Rights. If at any time the Company grants, issues or
---------------
sells any Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase Rights"), then the holder of this Note shall be
entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such holder could have acquired if such holder
had held the number of shares of Conversion Stock acquirable upon conversion of
such holder's Note immediately before the date on which a record is taken for
the grant, issuance or sale of such Purchase Rights, or, if no such record is
taken, the date as of which the record holders of Common Stock are to be
determined for the grant, issue or sale of such Purchase Rights; provided that
if the Purchase Rights involve voting securities, the Company shall make
available to the holder of this Note, at such holder's request, Purchase Rights
involving non-voting securities which are otherwise identical to the Purchase
Rights involving voting securities and which non-voting securities are
convertible into such voting securities on a share-for-share basis.
7. Amendment and Waiver. Except as otherwise expressly provided
--------------------
herein, the provisions of this Note may be amended and the Company may take any
action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holders of a majority of the outstanding principal amount of this Note.
8. Definitions. For purposes of this Note, the following
-----------
capitalized terms have the following meaning.
"Common Stock" means any class of the Company's Common Stock and any
------------
capital stock of any class of the Company hereafter authorized which is not
limited to a fixed sum or percentage of par or stated value in respect to the
rights of the holders thereof to participate in dividends or in the distribution
of assets upon any liquidation, dissolution or winding up of the Company.
"Common Stock Deemed Outstanding" means, at any given time, the number
-------------------------------
of shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to paragraphs 4(c)(i)
and 4(c)(ii) hereof, regardless of whether or not the Options and Convertible
Securities are actually exercisable at such time, but excluding any shares of
Common Stock issuable upon conversion of the Notes.
"Convertible Securities" means any stock or securities (directly or
----------------------
indirectly) convertible into or exchangeable for Common Stock.
"Conversion Stock" means shares of the Company's authorized but
----------------
unissued Common Stock; provided that if there is a change such that the
securities issuable upon conversion of the Note are issued by an entity other
than the Company or there is a change in the class of securities so issuable,
then the term "Conversion Stock" shall mean one share of the security issuable
upon conversion of this Note if such security is issuable in shares, or shall
mean the smallest unit in which such security is issuable if such security is
not issuable in shares.
"Market Price" of any security means the average of the closing prices
------------
of such security's sales on all domestic securities exchanges on which such
security may at the time be listed, or, if there has been no sales on any such
exchange on any day, the average of the highest bid and lowest asked prices on
all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the representative bid and asked prices quoted in
the NASDAQ System as of 4:00 P.M., New York time, or, if on any day such
security is not quoted in the NASDAQ System, the average of the highest bid and
lowest asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization, in each such case averaged over a period of 21 days
consisting of the day as of which "Market Price" is being determined and the 20
consecutive business days prior to such day. If at any time such security is not
listed on any securities exchange or quoted in the NASDAQ System or the
over-the-counter market, the "Market Price" shall be the fair value thereof
determined jointly by the Company and the holder of this Note. If such parties
are unable to reach agreement within a reasonable period of time, such fair
value shall be determined by an appraiser jointly selected by the Company and
the holder of this Note. The determination of such appraiser shall be final and
binding upon the parties, and the fees and expenses of such appraiser shall be
borne by the Company.
"Options" means any rights or options to subscribe for or purchase
-------
Common Stock or Convertible Securities.
"Person" means an individual, a partnership, a corporation, a limited
------
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Subordination Agreement" means the Subordination and Intercreditor
-----------------------
Agreement dated as of the date hereof, between the Company, Harris Trust and
Savings Bank and the Purchaser.
"Subsidiary" means, with respect to any Person, any corporation,
----------
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or losses or
shall be or control any managing director or general partner of such limited
liability company, partnership, association or other business entity.
9. Cancellation. After all principal and accrued interest at any
------------
time owed on this Note has been paid in full, this Note shall be surrendered to
the Company for cancellation and shall not be reissued.
10. Payments. All payments to be made to the holder of this Note
--------
shall be made in the lawful money of the United States of America in immediately
available funds.
11. Place of Payment. Payments of principal and interest shall be
----------------
delivered to BMO Nesbitt Capital (U.S.), Inc. at the following address:
BMO Nesbitt Burns Equity Partners, Inc.
111 West Monroe
20th Floor East
Chicago, Illinois 60603
Attention: Managing Director
or to such other address or to the attention of such other person as specified
by prior written notice to the Company.
12. Business Days. If any payment is due, or any time period for
-------------
giving notice or taking action expires, on a day which is a Saturday, Sunday or
legal holiday in the State of Minnesota or the State of Illinois, the payment
shall be due and payable on, and the time period shall automatically be extended
to, the next business day immediately following such Saturday, Sunday or legal
holiday, and interest shall continue to accrue at the required rate hereunder
until any such payment is made.
13. Usury Laws. It is the intention of the Company and the holder of
----------
this Note to conform strictly to all applicable usury laws now or hereafter in
force, and any interest payable under this Note shall be subject to reduction to
the amount not in excess of the maximum legal amount allowed under the
applicable usury laws as now or hereafter construed by the courts having
jurisdiction over such matters. If the maturity of this Note is accelerated by
reason of an election by the holder hereof resulting from an Event of Default,
voluntary prepayment by the Company or otherwise, then earned interest may never
include more than the maximum amount permitted by law, computed from the date
hereof until payment, and any interest in excess of the maximum amount permitted
by law shall be canceled automatically and, if theretofore paid, shall at the
option of the holder hereof either be rebated to the Company or credited on the
principal amount of this Note, or if this Note has been paid, then the excess
shall be rebated to the Company. The aggregate of all interest (whether
designated as interest, service charges, points or otherwise) contracted for,
chargeable, or receivable under this Note shall under no circumstances exceed
the maximum legal rate upon the unpaid principal balance of this Note remaining
unpaid from time to time. If such interest does exceed the maximum legal rate,
it shall be deemed a mistake and such excess shall be canceled automatically
and, if theretofore paid, rebated to the Company or credited on the principal
amount of this Note, or if this Note has been repaid, then such excess shall be
rebated to the Company.
14. Governing Law. All questions concerning the construction,
-------------
validity, enforcement and interpretation of this Note shall be governed by the
internal law of the State of Minnesota without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of Minnesota or
any other jurisdictions) that would cause the application of the laws of any
jurisdiction other than the State of Minnesota.
IN WITNESS WHEREOF, the Company has executed and delivered this Note
on December __, 1996.
ZYTEC CORPORATION
Attest By ________________________________
_________________________ Its _______________________________
The security represented by this certificate was originally issued on
December 23, 1996, and has not been registered under the Securities
Act of 1933, as amended. The transfer of such security is subject to
the conditions specified in the Purchase Agreement, dated as of
December 23, 1996 (as amended and modified from time to time), between
the issuer hereof (the "Company") and the initial holder hereof, and
the Company reserves the right to refuse the transfer of such security
until such conditions have been fulfilled with respect to such
transfer. Upon written request, a copy of such conditions shall be
furnished by the Company to the holder hereof without charge.
ZYTEC CORPORATION
STOCK PURCHASE WARRANT
----------------------
Date of Issuance: December 23, 1996 Certificate No. W-1
This Warrant is being issued simultaneously with the issuance of the
Company's 7 1/2% Convertible Subordinated Promissory Note in the principal
amount of $12,000,000 (the "Note") pursuant to the Note and Warrant Purchase
Agreement dated as of December 23, 1996 (the "Purchase Agreement"), between
Zytec Corporation, a Minnesota corporation (the "Company"), and BMO Nesbitt
Burns Capital (U.S.), Inc., a Delaware corporation (the "Purchaser").
For value received, the Company hereby grants to the Purchaser or its
registered assigns (the "Registered Holder") the right to purchase from the
Company after an Optional Repayment of any portion of the principal amount of
the Note a number of shares of the Company's Warrant Stock equal to the
aggregate number of shares of Warrant Stock into which the Repaid Notes were
convertible as of the date of the Optional Repayment thereof at a price per
share equal to $13.68 (such price as adjusted and readjusted from time to time
in accordance with Section 2 hereof, the "Exercise Price").
Certain capitalized terms used herein are defined in Section 5 hereof.
The amount and kind of securities obtainable pursuant to the rights granted
hereunder and the purchase price for such securities are subject to adjustment
pursuant to the provisions contained in this Warrant.
For income tax purposes, the value of this Warrant as of the date
hereof is $1,000.
This Warrant is subject to the following provisions:
Section 1. Exercise of Warrant.
-------------------
1A. (i) Exercise Period. Upon the occurrence of an Exercise
---------------
Event, the Registered Holder may exercise, in whole or in part (but not as to a
fractional share of Warrant Stock), the purchase rights represented by this
Warrant provided that all of such shares of Warrant Stock are (or are expected
to be) distributed, disposed of, sold or canceled in connection with such
Exercise Event at any time on and after:
(1) an Optional Repayment of the portion of the Note to which such
rights relate prior to the completion by the Company of a
Qualified Offering; or
(2) an Optional Repayment of the portion of Note to which such rights
relate at a time after the completion of a Qualified Offering if
the Company has not authorized the issuance of a separate class
of non-voting common stock into which the Note would be
convertible and which would be convertible (subject to regulatory
restrictions) on a share-for-share basis into the Company's
voting common stock;
to and including the earlier of (A) the Scheduled Repayment Date or (B) the date
30 days after the holder of the Warrant has received notice that the Company has
(x) completed a Qualified Offering, if such Qualified Offering had not been
completed prior to the date of the Optional Repayment and (y) authorized the
issuance of a separate class of non-voting common stock into which the Note
would be convertible and which would be convertible (subject to regulatory
restrictions) on a share-for-share basis into the Company's voting common stock
(the "Exercise Period"). The Company shall give the Registered Holder written
notice of the expiration of the Exercise Period at least 30 days but not more
than 90 days prior to the end of the Exercise Period.
(ii) Exercise Event. For purposes of this paragraph 1A, an
--------------
Exercise Event" shall mean (a) any public offering or public sale of securities
of the Company (including a public offering registered under the Securities Act
of 1933 and a public sale pursuant to Rule 144 of the Securities and Exchange
Commission or any similar rule then in force), (b) any sale or transfer of
securities of the Company to a Person or group of Persons (within the meaning of
the Securities Exchange Act of 1934, as amended (the "1934 Act")) if, after such
sale or transfer, such Person or group of Persons in the aggregate would own or
control securities of the Company which possess in the aggregate the ordinary
voting power to elect a majority of the Company's directors (provided that such
sale has been approved by the Company's Board of Directors or a committee
thereof), (c) any sale or transfer of securities of the Company to a Person or
group of Persons (within the meaning of the 1934 Act) if, after such sale or
transfer, such Person or group of Persons in the aggregate would own or control
securities of the Company (excluding any Warrant Stock being disposed of in
connection with such Exercise Event) which possess in the aggregate the ordinary
voting power to elect a majority of the Company's directors, (d) any sale or
transfer of securities of the Company to a Person or group of Persons (within
the meaning of the 1934 Act) if, after such sale or transfer, such Person or
group of Persons would not, in the aggregate, own, control or have the right to
acquire more than two percent (2%) of the outstanding securities of any class of
voting securities of the Company, (e) a merger, consolidation or similar
transaction involving the Company if, after such transaction, a Person or group
of Persons (within the meaning of the 1934 Act) in the aggregate would own or
control securities which possess in the aggregate the ordinary voting power to
elect a majority of the surviving corporation's directors (provided that the
transaction has been approved by the Company's Board of Directors or a committee
thereof) and (f) any liquidation, dissolution or winding up of the Company.
(iii) The Registered Holder shall be entitled to exercise all or
any portion of the Warrant in connection with any Exercise Event if such holder
reasonably believes that such Exercise Event shall be consummated, and a written
request for exercise from the Registered Holder to the Company stating such
holder's reasonable belief that an Exercise Event shall occur shall be
conclusive and shall require the Company to effect such exercise in a timely
manner so as to enable such holder to participate in such Exercise Event. If any
portion of the Warrant is exercised for shares of Warrant Stock in connection
with an Exercise Event and such shares of Warrant Stock are not actually
distributed, disposed of, sold or canceled pursuant to such Exercise Event, such
shares of Warrant Stock shall be promptly converted back into the portion of the
Warrant so exercised.
1B. Exercise Procedure.
------------------
(i) This Warrant shall be deemed to have been exercised when the
Company has received all of the following items (the "Exercise Time"):
(a) a completed Exercise Agreement, as described in paragraph 1C
below, executed by the Person exercising all or part of the purchase rights
represented by this Warrant (the "Purchaser");
(b) this Warrant;
(c) if this Warrant is not registered in the name of the Purchaser,
an Assignment or Assignments in the form set forth in Exhibit II hereto
----------
evidencing the assignment of this Warrant to the Purchaser, in which case
the Registered Holder shall have complied with the provisions set forth in
Section 7 hereof; and
(d) either (1) a check payable to the Company in an amount equal to
the product of the Exercise Price multiplied by the number of shares of
Warrant Stock being purchased upon such exercise (the "Aggregate Exercise
Price") or (2) a written notice to the Company that the Purchaser is
exercising the Warrant (or a portion thereof) by authorizing the Company to
withhold from issuance a number of shares of Warrant Stock issuable upon
such exercise of the Warrant which when multiplied by the Market Price of
the Common Stock is equal to the Aggregate Exercise Price (and such
withheld shares shall no longer be issuable under this Warrant).
(ii) Certificates for shares of Warrant Stock purchased upon exercise
of this Warrant shall be delivered by the Company to the Purchaser within five
business days after the date of the Exercise Time. Unless this Warrant has
expired or all of the purchase rights represented hereby have been exercised,
the Company shall prepare a new Warrant, substantially identical hereto,
representing the rights formerly represented by this Warrant which have not
expired or been exercised and shall, within such five-day period, deliver such
new Warrant to the Person designated for delivery in the Exercise Agreement.
(iii) The Warrant Stock issuable upon the exercise of this Warrant
shall be deemed to have been issued to the Purchaser at the Exercise Time, and
the Purchaser shall be deemed for all purposes to have become the record holder
of such Warrant Stock at the Exercise Time.
(iv) The issuance of certificates for shares of Warrant Stock upon
exercise of this Warrant shall be made without charge to the Registered Holder
or the Purchaser for any issuance tax in respect thereof or other cost incurred
by the Company in connection with such exercise and the related issuance of
shares of Warrant Stock. Each share of Warrant Stock issuable upon exercise of
this Warrant shall, upon payment of the Exercise Price therefor, be fully paid
and nonassessable and free from all liens and charges with respect to the
issuance thereof.
(v) The Company shall not close its books against the transfer of this
Warrant or of any share of Warrant Stock issued or issuable upon the exercise of
this Warrant in any manner which interferes with the timely exercise of this
Warrant. The Company shall from time to time take all such action as may be
necessary to assure that the par value per share of the unissued Warrant Stock
acquirable upon exercise of this Warrant is at all times equal to or less than
the Exercise Price then in effect.
(vi) The Company shall assist and cooperate with any Registered Holder
or Purchaser required to make any governmental filings or obtain any
governmental approvals prior to or in connection with any exercise of this
Warrant (including, without limitation, making any filings required to be made
by the Company).
(vii) Notwithstanding any other provision hereof, if an exercise of
any portion of this Warrant is to be made in connection with a registered public
offering or the sale of the Company, the exercise of any portion of this Warrant
may, at the election of the holder hereof, be conditioned upon the consummation
of the public offering or sale of the Company in which case such exercise shall
not be deemed to be effective until the consummation of such transaction.
(viii) The Company shall at all times reserve and keep available
out of its authorized but unissued shares of Warrant Stock solely for the
purpose of issuance upon the exercise of the Warrants, such number of shares of
Warrant Stock issuable upon the exercise of all outstanding Warrants. All shares
of Warrant Stock which are so issuable shall, when issued, be duly and validly
issued, fully paid and nonassessable and free from all taxes, liens and charges.
The Company shall take all such actions as may be necessary to assure that all
such shares of Warrant Stock may be so issued without violation of any
applicable law or governmental regulation or any requirements of any domestic
securities exchange upon which shares of Common Stock may be listed (except for
official notice of issuance which shall be immediately delivered by the Company
upon each such issuance). The Company shall not take any action which would
cause the number of authorized but unissued shares of Warrant Stock to be less
than the number of such shares required to be reserved hereunder for issuance
upon exercise of the Warrant.
1C. Exercise Agreement. Upon any exercise of this Warrant, the
------------------
Exercise Agreement shall be substantially in the form set forth in Exhibit I
---------
hereto, except that if the shares of Warrant Stock are not to be issued in the
name of the Person in whose name this Warrant is registered, the Exercise
Agreement shall also state the name of the Person to whom the certificates for
the shares of Warrant Stock are to be issued, and if the number of shares of
Warrant Stock to be issued does not include all the shares of Warrant Stock
purchasable hereunder, it shall also state the name of the Person to whom a new
Warrant for the unexercised portion of the rights hereunder is to be delivered.
Such Exercise Agreement shall be dated the actual date of execution thereof.
1D. Fractional Shares. If a fractional share of Warrant Stock would,
-----------------
but for the provisions of paragraph 1A, be issuable upon exercise of the rights
represented by this Warrant, the Company shall, within five business days after
the date of the Exercise Time, deliver to the Purchaser a check payable to the
Purchaser in lieu of such fractional share in an amount equal to the difference
between the Market Price of such fractional share as of the date of the Exercise
Time and the Exercise Price of such fractional share.
Section 2. Adjustment of Exercise Price and Number of Shares. In
-------------------------------------------------
order to prevent dilution of the rights granted under this Warrant, the Exercise
Price shall be subject to adjustment from time to time as provided in this
Section 2, and the number of shares of Warrant Stock obtainable upon exercise of
this Warrant shall be subject to adjustment from time to time as provided in
this Section 2.
2A. Adjustment of Exercise Price and Number of Shares upon Issuance of
------------------------------------------------------------------
Common Stock.
- -------------
(i) If and whenever on or after the Date of Issuance of this Warrant
the Company issues or sells, or in accordance with paragraph 2B is deemed to
have issued or sold, any shares of Common Stock for a consideration per share
less than the Exercise Price in effect immediately prior to such time, then
immediately upon such issue or sale the Exercise Price shall be reduced to the
Exercise Price determined by dividing:
(A) the sum of (x) the product derived by multiplying the Exercise Price
in effect immediately prior to such issue or sale times the number of
shares of Common Stock Deemed Outstanding immediately prior to such
issue or sale, plus (y) the consideration, if any, received by the
Company upon such issue or sale, by
(B) the number of shares of Common Stock Deemed Outstanding immediately
after such issue or sale.
Upon each such adjustment of the Exercise Price hereunder, the number of shares
of Warrant Stock acquirable upon exercise of this Warrant shall be adjusted to
the number of shares determined by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of shares of Warrant Stock
acquirable upon exercise of this Warrant immediately prior to such adjustment
and dividing the product thereof by the Exercise Price resulting from such
adjustment.
2B. Effect on Exercise Price of Certain Events. For purposes of
------------------------------------------
determining the adjusted Exercise Price under paragraph 2A, the following shall
be applicable:
(i) Issuance of Rights or Options. If the Company in any manner
-----------------------------
grants or sells any Options and the price per share for which Common Stock is
issuable upon the exercise of such Options, or upon conversion or exchange of
any Convertible Securities issuable upon exercise of such Options, is less than
the Exercise Price in effect immediately prior to the time of the granting or
sale of such Options, then the total maximum number of shares of Common Stock
issuable upon the exercise of such Options, or upon conversion or exchange of
the total maximum amount of such Convertible Securities issuable upon the
exercise of such Options, shall be deemed to be outstanding and to have been
issued and sold by the Company at such time for such price per share. For
purposes of this paragraph, the "price per share for which Common Stock is
issuable upon exercise of such Options or upon conversion or exchange of such
Convertible Securities" is determined by dividing (A) the total amount, if any,
received or receivable by the Company as consideration for the granting or sale
of such Options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of all such Options, plus in the case
of such Options which relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable to the Company upon the
issuance or sale of such Convertible Securities and the conversion or exchange
thereof, by (B) the total maximum number of shares of Common Stock issuable upon
exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options. No further
adjustment of the Exercise Price shall be made upon the actual issuance of such
Common Stock or of such Convertible Securities upon the exercise of such Options
or upon the actual issuance of such Common Stock upon conversion or exchange of
such Convertible Securities. Notwithstanding the foregoing, no adjustment of the
Exercise Price shall be made pursuant to this Section 2 as a result of (w) the
granting of stock options under qualified stock options plans approved by the
Board of Directors of the Company, at exercise prices not less than the fair
market value of the Common Stock at the date of grant, (x) the issuance of
Common Stock upon the exercise of such stock options, or (y) the issuance of
Common Stock pursuant to the Company's Employee Stock Purchase Plan or (z) the
issuance of Common Stock to non-employee directors pursuant to the Company's
director stock grant program.
(ii) Issuance of Convertible Securities. If the Company in any
----------------------------------
manner issues or sells any Convertible Securities and the price per share for
which Common Stock is issuable upon conversion or exchange thereof is less than
the Exercise Price in effect immediately prior to the time of such issue or
sale, then the maximum number of shares of Common Stock issuable upon conversion
or exchange of such Convertible Securities shall be deemed to be outstanding and
to have been issued and sold by the Company at such time for such price per
share. For the purposes of this paragraph, the "price per share for which Common
Stock is issuable upon conversion or exchange thereof" is determined by dividing
(A) the total amount received or receivable by the Company as consideration for
the issue or sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to the Company upon the
conversion or exchange thereof, by (B) the total maximum number of shares of
Common Stock issuable upon the conversion or exchange of all such Convertible
Securities. No further adjustment of the Exercise Price shall be made upon the
actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustments of the
Exercise Price had been or are to be made pursuant to other provisions of this
paragraph 2B, no further adjustment of the Exercise Price shall be made by
reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the purchase
-----------------------------------------
price provided for in any Options, the additional consideration, if any, payable
upon the issue, conversion or exchange of any Convertible Securities, or the
rate at which any Convertible Securities are convertible into or exchangeable
for Common Stock changes at any time, the Exercise Price in effect at the time
of such change shall be adjusted immediately to the Exercise Price which would
have been in effect at such time had such Options or Convertible Securities
still outstanding provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold and the number of shares of Non-Voting Common
issuable hereunder shall be correspondingly adjusted; provided that if such
adjustment would result in an increase of the Exercise Price then in effect,
such adjustment shall not be effective until 30 days after written notice
thereof has been given by the Company to all holders of the Warrants. For
purposes of this paragraph 2B, if the terms of any Option or Convertible
Security which was outstanding as of the date of issuance of this Warrant are
changed in the manner described in the immediately preceding sentence, then such
Option or Convertible Security and the Common Stock deemed issuable upon
exercise, conversion or exchange thereof shall be deemed to have been issued as
of the date of such change; provided that no such change shall at any time cause
the Exercise Price hereunder to be increased.
(iv) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. Upon the expiration of any Option or the termination of any right
- - ----------
to convert or exchange any Convertible Securities without the exercise of such
Option or right, the Exercise Price then in effect and the number of shares of
Warrant Stock acquirable hereunder shall be adjusted immediately to the Exercise
Price and the number of shares which would have been in effect at the time of
such expiration or termination had such Option or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination, never
been issued; provided that if such expiration or termination would result in an
increase in the Exercise Price then in effect, such increase shall not be
effective until 30 days after written notice thereof has been given to all
holders of the Warrants. For purposes of this paragraph 2B, the expiration or
termination of any Option or Convertible Security which was outstanding as of
the date of issuance of this Warrant shall not cause the Exercise Price
hereunder to be adjusted unless, and only to the extent that, a change in the
terms of such Option or Convertible Security caused it to be deemed to have been
issued after the date of issuance of this Warrant.
(v) Calculation of Consideration Received. If any Common Stock,
-------------------------------------
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor shall be deemed to
be the net amount received by the Company therefor. In case any Common Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, the amount of the consideration other than cash received by the
Company shall be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of consideration
received by the Company shall be the Market Price thereof as of the date of
receipt. In case any Common Stock, Options or Convertible Securities are issued
to the owners of the non-surviving entity in connection with any merger in which
the Company is the surviving entity the amount of consideration therefor shall
be deemed to be the fair value of such portion of the net assets and business of
the non-surviving entity as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be. The fair value of any consideration
other than cash or securities shall be determined jointly by the Company and the
Registered Holders of Warrants representing a majority of the shares of Warrant
Stock obtainable upon exercise of such Warrants. If such parties are unable to
reach agreement within a reasonable period of time, such fair value shall be
determined by an appraiser jointly selected by the Company and the Registered
Holders of Warrants representing a majority of the shares of Warrant Stock
obtainable upon exercise of such Warrants. The determination of such appraiser
shall be final and binding on the Company and the Registered Holders of the
Warrants, and the fees and expenses of such appraiser shall be paid by the
Company.
(vi) Integrated Transactions. In case any Option is issued in
-----------------------
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options shall be deemed to
have been issued without consideration.
(vii) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time does not include shares owned or held by or for
the account of the Company or any Subsidiary, and the disposition of any shares
so owned or held shall be considered an issue or sale of Common Stock.
(viii) Record Date. If the Company takes a record of the holders of
-----------
Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible Securities
or (B) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
2C. Subdivision or Combination of Common Stock. If the Company at
------------------------------------------
any time subdivides (by any stock split, stock dividend or otherwise) one or
more classes of its outstanding shares of Common Stock into a greater number of
shares, the Exercise Price in effect immediately prior to such subdivision shall
be proportionately reduced and the number of shares of Warrant Stock obtainable
upon exercise of this Warrant shall be proportionately increased. If the Company
at any time combines (by reverse stock split or otherwise) one or more classes
of its outstanding shares of Common Stock into a smaller number of shares, the
Exercise Price in effect immediately prior to such combination shall be
proportionately increased and the number of shares of Warrant Stock obtainable
upon exercise of this Warrant shall be proportionately decreased.
2D. Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
Any recapitalization, reorganization, reclassification, consolidation, merger,
sale of all or substantially all of the Company's assets or other transaction,
which in each case is effected in such a way that the holders of Common Stock
are entitled to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock is referred
to herein as an "Organic Change." Prior to the consummation of any Organic
Change, the Company shall make appropriate provision (in form and substance
satisfactory to the Registered Holders of the Warrants representing a majority
of the Warrant Stock obtainable upon exercise of all Warrants then outstanding)
to insure that each of the Registered Holders of the Warrants shall thereafter
have the right to acquire and receive, in lieu of or addition to (as the case
may be) the shares of Warrant Stock immediately theretofore acquirable and
receivable upon the exercise of such holder's Warrant, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for the number of shares of Warrant Stock immediately theretofore acquirable and
receivable upon exercise of such holder's Warrant had such Organic Change not
taken place. In any such case, the Company shall make appropriate provision (in
form and substance satisfactory to the Registered Holders of the Warrants
representing a majority of the Warrant Stock obtainable upon exercise of all
Warrants then outstanding) with respect to such holders' rights and interests to
insure that the provisions of this Section 2 and Sections 3 and 4 hereof shall
thereafter be applicable to the Warrants. The Company shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor entity (if other than the Company) resulting from consolidation or
merger or the entity purchasing such assets assumes by written instrument (in
form and substance satisfactory to the Registered Holders of Warrants
representing a majority of the Warrant Stock obtainable upon exercise of all of
the Warrants then outstanding), the obligation to deliver to each such holder
such shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to acquire.
2E. Certain Events. If any event occurs of the type contemplated by
--------------
the provisions of this Section 2 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company's board of directors shall make an appropriate adjustment in the
Exercise Price and the number of shares of Warrant Stock obtainable upon
exercise of this Warrant so as to protect the rights of the holders of the
Warrants; provided that no such adjustment shall increase the Exercise Price or
decrease the number of shares of Warrant Stock obtainable as otherwise
determined pursuant to this Section 2.
2F. Notices.
-------
(i) Immediately upon any adjustment of the Exercise Price, the Company
shall give written notice thereof to the Registered Holder, setting forth in
reasonable detail and certifying the calculation of such adjustment.
(ii) The Company shall give written notice to the Registered Holder at
least 20 days prior to the date on which the Company closes its books or takes a
record (A) with respect to any dividend or distribution upon the Common Stock,
(B) with respect to any pro rata subscription offer to holders of Common Stock
or (C) for determining rights to vote with respect to any Organic Change,
dissolution or liquidation.
(iii) The Company shall also give written notice to the Registered
Holders at least 20 days prior to the date on which any Organic Change,
dissolution or liquidation shall take place.
Section 3. Liquidating Dividends. If at any time on or after the
---------------------
date this Warrant becomes exercisable the Company declares or pays a dividend
upon the Common Stock payable otherwise than in cash out of earnings or earned
surplus (determined in accordance with generally accepted accounting principles,
consistently applied) except for a stock dividend payable in shares of Common
Stock (a "Liquidating Dividend"), then the Company shall pay to the Registered
Holder of this Warrant at the time of payment thereof the Liquidating Dividend
which would have been paid to such Registered Holder on the Warrant Stock had
this Warrant been fully exercised immediately prior to the date on which a
record is taken for such Liquidating Dividend, or, if no record is taken, the
date as of which the record holders of Common Stock entitled to such dividends
are to be determined; provided that if the Liquidating Dividends consist of
voting securities, the Company shall make available to the Registered Holder of
this Warrant, at such holder's request, Liquidating Dividends consisting of
non-voting securities (except as otherwise required by law) which are otherwise
identical to the Liquidating Dividends consisting of voting securities and which
non-voting securities are convertible into such voting securities on a
share-for-share basis.
Section 4. Purchase Rights. If at any time on or after the date this
---------------
Warrant becomes exercisable the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of Common Stock (the
"Purchase Rights"), then the Registered Holder of this Warrant shall be entitled
to acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such holder could have acquired if such holder had held
the number of shares of Warrant Stock acquirable upon complete exercise of this
Warrant immediately before the date on which a record is taken for the grant,
issuance or sale of such Purchase Rights, or, if no such record is taken, the
date as of which the record holders of Common Stock are to be determined for the
grant, issue or sale of such Purchase Rights; provided that if the Purchase
Rights involve voting securities, the Company shall make available to the
Registered Holder of this Warrant, at such holder's request, Purchase Rights
involving non-voting securities (except as otherwise required by law) which are
otherwise identical to the Purchase Rights involving voting securities and which
non-voting securities are convertible or exchangeable into such voting
securities on a share-for-share basis.
Section 5. Definitions. The following terms have meanings set forth
-----------
below:
"Common Stock" means, collectively, the Company's Common Stock and any
------------
capital stock of any class of the Company hereafter authorized which is not
limited to a fixed sum or percentage of par or stated value in respect to the
rights of the holders thereof to participate in dividends or in the distribution
of assets upon any liquidation, dissolution or winding up of the Company.
"Common Stock Deemed Outstanding" means, at any given time, the number
-------------------------------
of shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to paragraphs 2B(i) and
2B(ii) hereof regardless of whether the Options or Convertible Securities are
actually exercisable at such time, but excluding any shares of Common Stock
issuable upon exercise of the Warrants; provided that the number of shares of
Common Stock Deemed Outstanding as of any date shall always be equal to the
number of shares of Common Stock Deemed Outstanding determined as of such date
pursuant to the Note.
"Convertible Securities" means any stock or securities (directly or
----------------------
indirectly) convertible into or exchangeable for Common Stock.
"Market Price" means as to any security the average of the closing
------------
prices of such security's sales on all domestic securities exchanges on which
such security may at the time be listed, or, if there have been no sales on any
such exchange on any day, the average of the highest bid and lowest asked prices
on all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the representative bid and asked prices quoted in
the NASDAQ System as of 4:00 P.M., New York time, on such day, or, if on any day
such security is not quoted in the NASDAQ System, the average of the highest bid
and lowest asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization, in each such case averaged over a period of 21 days
consisting of the day as of which "Market Price" is being determined and the 20
consecutive business days prior to such day; provided that if such security is
listed on any domestic securities exchange the term "business days" as used in
this sentence means business days on which such exchange is open for trading. If
at any time such security is not listed on any domestic securities exchange or
quoted in the NASDAQ System or the domestic over-the-counter market, the "Market
Price" shall be the fair value thereof determined jointly by the Company and the
Registered Holders of Warrants representing a majority of the Warrant Stock
purchasable upon exercise of all the Warrants then outstanding; provided that if
such parties are unable to reach agreement within a reasonable period of time,
such fair value shall be determined by an appraiser jointly selected by the
Company and the Registered Holders of Warrants representing a majority of the
Warrant Stock purchasable upon exercise of all the Warrants then outstanding.
The determination of such appraiser shall be final and binding on the Company
and the Registered Holders of the Warrants, and the fees and expenses of such
appraiser shall be paid by the Company.
"Optional Repayment" means a repayment of all or any portion of the
------------------
Notes pursuant to Section 2(b) of the Note.
"Options" means any rights or options to subscribe for or purchase
-------
Common Stock or Convertible Securities.
"Person" means an individual, a partnership, a joint venture, a
------
corporation, a limited liability company, a trust, an unincorporated
organization and a government or any department or agency thereof.
"Qualified Offering" means an offering by the Company of Common Stock
------------------
registered with the Securities and Exchange Commission under the Securities Act
subsequent to the date of this Warrant with an aggregate value of greater than
$20 million at or above an offering price of (a) 127.5% of the Exercise Price
after December 23, 1996 but prior to December 24, 1997; (b) 165% of the Exercise
Price after December 23, 1997, but prior to December 24, 1998; or (c) 215% of
the Exercise Price after December 23, 1998.
"Repaid Notes" means the aggregate principal amount of the Note repaid
------------
by the Company pursuant to any Optional Redemption.
"Repayment Date" and "Scheduled Repayment Date" shall have the
-------------- ------------------------
meanings set forth in the Note payable to the Investor.
"Warrant Stock" means shares of the Company's Common Stock; provided
-------------
that if there is a change such that the securities issuable upon exercise of the
Warrant or conversion of the Note are issued by an entity other than the Company
or there is a change in the type or class of securities so issuable, then the
term "Warrant Stock" shall mean one share of the security issuable upon exercise
of the Warrant or conversion of the Note if such security is issuable in shares,
or shall mean the smallest unit in which such security is issuable if such
security is not issuable in shares.
Other capitalized terms used in this Warrant but not defined herein
shall have the meanings set forth in the Purchase Agreement.
Section 6. No Voting Rights; Limitations of Liability. This Warrant
------------------------------------------
shall not entitle the holder hereof to any voting rights or other rights as a
stockholder of the Company. No provision hereof, in the absence of affirmative
action by the Registered Holder to purchase Warrant Stock, and no enumeration
herein of the rights or privileges of the Registered Holder shall give rise to
any liability of such holder for the Exercise Price of Warrant Stock acquirable
by exercise hereof or as a stockholder of the Company.
Section 7. Warrant Transferable. Subject to the transfer conditions
--------------------
referred to in the legend endorsed hereon, this Warrant and all rights hereunder
are transferable, in whole or in part, without charge to the Registered Holder,
upon surrender of this Warrant with a properly executed Assignment (in the form
of Exhibit II hereto) at the principal office of the Company.
----------
Section 8. Warrant Exchangeable for Different Denominations. This
------------------------------------------------
Warrant is exchangeable, upon the surrender hereof by the Registered Holder at
the principal office of the Company, for new Warrants of like tenor representing
in the aggregate the purchase rights hereunder, and each of such new Warrants
shall represent such portion of such rights as is designated by the Registered
Holder at the time of such surrender; provided that, as long as any shares of
Warrant Stock remain outstanding, this Warrant shall only be exchangeable in
connection with the exchange of the certificate representing such shares of
Warrant Stock pursuant to the Company's Articles of Incorporation. The date the
Company initially issues this Warrant shall be deemed to be the "Date of
Issuance" hereof regardless of the number of times new certificates representing
the unexpired and unexercised rights formerly represented by this Warrant shall
be issued. All Warrants representing portions of the rights hereunder are
referred to herein as the "Warrants."
Section 9. Replacement. Upon receipt of evidence reasonably
-----------
satisfactory to the Company (an affidavit of the Registered Holder shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing this Warrant, and in the case of any such loss, theft
or destruction, upon receipt of indemnity reasonably satisfactory to the Company
(provided that if the holder is a financial institution or other institutional
investor its own agreement shall be satisfactory), or, in the case of any such
mutilation upon surrender of such certificate, the Company shall (at its
expense) execute and deliver in lieu of such certificate a new certificate of
like kind representing the same rights represented by such lost, stolen,
destroyed or mutilated certificate and dated the date of such lost, stolen,
destroyed or mutilated certificate.
Section 10. Notices. Except as otherwise expressly provided herein,
-------
all notices referred to in this Warrant shall be in writing and shall be
delivered or sent by registered or certified mail, return receipt requested,
postage prepaid and shall be deemed to have been given when so delivered or
deposited in the U.S. Mail (i) to the Company, at its principal executive
offices and (ii) to the Registered Holder of this Warrant, at such holder's
address as it appears in the records of the Company (unless otherwise indicated
by any such holder).
Section 11. Amendment and Waiver. Except as otherwise provided
--------------------
herein, the provisions of the Warrants may be amended and the Company may take
any action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
Registered Holders of Warrants representing a majority of the shares of Warrant
Stock obtainable upon exercise of the Warrants; provided that no such action may
change the Exercise Price of the Warrants or the number of shares or class of
stock obtainable upon exercise of each Warrant without the written consent of
the Registered Holders of Warrants representing a majority of the shares of
Warrant Stock obtainable upon exercise of the Warrants.
Section 12. Descriptive Headings; Governing Law. The descriptive
-----------------------------------
headings of the several Sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. All questions
concerning the construction, validity, enforcement and interpretation of this
Warrant shall be governed by the internal law of the State of Minnesota, without
giving effect to any choice of law or conflict of law provision or rule (whether
of the State of Minnesota or any other jurisdictions) that would cause the
application of the laws of any jurisdictions other than the State of Minnesota.
* * * *
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
and attested by its duly authorized officers under its corporate seal and to be
dated the Date of Issuance hereof.
ZYTEC CORPORATION
By_____________________________
Its____________________________
[Corporate Seal]
Attest:
- -----------------------------
Secretary
EXHIBIT I
EXERCISE AGREEMENT
------------------
To: Dated:
The undersigned, pursuant to the provisions set forth in the attached
Warrant (Certificate No. W-____), hereby agrees to subscribe for the purchase of
______ shares of the Warrant Stock covered by such Warrant and makes payment
herewith in full therefor at the price per share provided by such Warrant.
Signature __________________________
Address ____________________________
EXHIBIT II
ASSIGNMENT
----------
FOR VALUE RECEIVED, _____________________________ hereby sells,
assigns and transfers all of the rights of the undersigned under the attached
Warrant (Certificate No. W-_____) with respect to the number of shares of the
Warrant Stock covered thereby set forth below, unto:
Names of Assignee Address No. of Shares
- ----------------- ------- -------------
Dated: Signature _________________________
_________________________
Witness _________________________
ZYTEC CORPORATION
REGISTRATION AGREEMENT
----------------------
THIS AGREEMENT is made as of December 23, 1996, between Zytec
Corporation, a Minnesota corporation (the "Company"), BMO Nesbitt Burns Capital
-------
(U.S.), Inc., a Delaware corporation (the "Investor"), and each of the other
--------
individuals and entities set forth under the heading of "Management
Stockholders" on the attached "Schedule of Management Stockholders"
-----------------------------------
(collectively, the "Management Stockholders").
-----------------------
The Company and the Investor are parties to a Note and Warrant
Purchase Agreement of even date herewith (the "Purchase Agreement"). In order
------------------
to induce Investor to enter into the Purchase Agreement, the Company has agreed
to provide the registration rights set forth in this Agreement. The execution
and delivery of this Agreement is a condition to the Closing under the Purchase
Agreement. Unless otherwise provided in this Agreement, capitalized terms shall
have the meanings set forth in Section 8 hereof.
---------
The parties hereto agree as follows:
1. Demand Registrations.
--------------------
(a) Requests for Registration. Subject to subsections (c) and (d)
-------------------------
below, the holders of a majority of the Investor Registrable Securities may
request registration under the Securities Act of all or any portion of their
Registrable Securities on any registration form available to the Company;
provided that the aggregate offering value of the Registrable Securities
requested to be registered in any Demand Registration must equal at least
$5,000,000. All registrations requested pursuant to this Section 1(a) are
------------
referred to herein as "Demand Registrations". Each request for a Demand
--------------------
Registration shall specify the approximate number of Registrable Securities
requested to be registered and the anticipated per share price range for such
offering. Within ten days after receipt of any such request, the Company shall
give written notice of such requested registration to all other holders of
Registrable Securities and, subject to Section 1(c) below, shall include in such
------------
registration all Registrable Securities with respect to which the Company has
received written requests for inclusion therein within 15 days after the receipt
of the Company's notice. All Demand Registrations shall be underwritten
registrations.
(b) Registration Expenses. The holders of a majority of the Investor
---------------------
Registrable Securities shall be entitled to request two registrations in which
the Company shall pay all Registration Expenses. Such registration shall be on
Form S-3 or any successor form, if permitted, or such appropriate registration
form as shall be selected by the Company; provided that if the managing
underwriters advise the Company that in their opinion a different registration
form is required, the Company shall use such registration form chosen by the
managing underwriters. A registration shall not count as one of the permitted
Demand Registrations until it has become effective and a registration shall not
count as one of the permitted Demand Registrations unless the holders of
Investor Registrable Securities are able to register and sell at least 90% of
the Registrable Securities requested to be included in such registration;
provided that in any event the Company shall pay all Registration Expenses in
connection with any registration initiated as a Demand Registration whether or
not it has become effective and whether or not such registration has counted as
one of the permitted Demand Registrations, unless such registration has not
become effective because the holders of a majority of the Investor Registrable
Securities have withdrawn the registration for reasons attributable only to the
holders of such Investor Registrable Securities.
(c) Priority on Demand Registrations. The Company shall not include
--------------------------------
in any Demand Registration any securities which are not Registrable Securities
without the prior written consent of the holders of a majority of the Investor
Registrable Securities included in such registration. If a Demand Registration
is an underwritten offering involving (i) a directed placement to less than 50
Accredited Investors, (ii) the registration of all of the Registrable Securities
then held by the Investor or (iii) the final Demand Registration available to
the holders of the Investor Registrable Securities, and the managing
underwriters advise the Company in writing that in their opinion the number of
Registrable Securities and, if permitted hereunder, other securities requested
to be included in such offering exceeds the number of Registrable Securities and
other securities, if any, which can be sold in an orderly manner in such
offering within a price range acceptable to the holders of a majority of the
Investor Registrable Securities initially requesting registration, the Company
shall include in such registration (x) first, the Investor Registrable
Securities requested to be included in such registration, (y) second, the
Management Registrable Securities requested to be included in such registration,
pro rata among the holders of such Management Registrable Securities on the
basis of the number of shares owned by such holder (unless otherwise agreed to
by such holders) and (z) third, other securities requested to be included in
such registration. If a Demand Registration is an underwritten offering not
involving clauses (i), (ii) or (iii) above and the managing underwriters advise
the Company in writing that in their opinion the number of Registrable
Securities and, if permitted hereunder, other securities requested to be
included in such offering exceeds the number of Registrable Securities and other
securities, if any, which can be sold in an orderly manner in such offering
within a price range acceptable to the holders of a majority of the Investor
Registrable Securities initially requesting registration, the Company shall
include in such registration (x) first, the Registrable Securities requested to
be included in such registration, pro rata (based upon the number of Registrable
Securities requested to be registered) among the holders of the Investor
Registrable Securities as a group and the holders of the Management Registrable
Securities as a group (with the Management Registrable Securities included in
such registration selected pro rata among the holders of the Management
Registrable Securities requesting to be included in such registration on the
basis of the number of shares owned by each such holder, unless otherwise agreed
to by such holders); provided that the holders of Investor Registrable
Securities shall not be reduced to less than 50% of such offering and (y)
second, other securities requested to be included in such registration.
(d) Restrictions on Demand Registrations. The Company shall not be
------------------------------------
obligated to effect any Demand Registration within 270 days after the effective
date of a previous Demand Registration or a previous registration in which the
holders of Registrable Securities were given piggyback rights pursuant to
Section 2.
- - ---------
(e) Selection of Underwriters. The Company shall have the right to
-------------------------
select the investment banker(s) and manager(s) to administer any offering,
subject to the approval of the holders of a majority of the Investor Registrable
Securities included in any Demand Registration which shall not be unreasonably
withheld.
(f) Other Registration Rights. Except as provided in this Agreement,
-------------------------
the Company shall not grant to any Persons the right to request the Company to
register any equity securities of the Company, or any securities convertible or
exchangeable into or exercisable for such securities, without the prior written
consent of the holders of a majority of the Investor Registrable Securities;
provided that the Company may grant rights to other Persons to (i) participate
in Piggyback Registrations so long as such rights are subordinate to the rights
of the holders of Investor Registrable Securities with respect to such Piggyback
Registrations as set forth in Sections 2(c) and 2(d) hereof and (ii) request
------------- ----
registrations so long as the holders of Investor Registrable Securities are
entitled to participate in any such registrations with such Persons pro rata on
the basis of the number of shares owned by each such holder.
2. Piggyback Registrations.
-----------------------
(a) Right to Piggyback. Whenever the Company proposes to register
------------------
any of its securities under the Securities Act (other than pursuant to a Demand
Registration) and the registration form to be used may be used for the
registration of Registrable Securities (a "Piggyback Registration"), the Company
----------------------
shall give prompt written notice (in any event within three business days after
its receipt of notice of any exercise of demand registration rights other than
under this Agreement) to all holders of Investor Registrable Securities of its
intention to effect such a registra tion and shall include in such registration
all Investor Registrable Securities with respect to which the Company has
received written requests for inclusion therein within 15 days after the receipt
of the Company's notice.
(b) Piggyback Expenses. The Registration Expenses of the holders of
------------------
Investor Registrable Securities shall be paid by the Company in all Piggyback
Registrations.
(c) Priority on Primary Registrations. If a Piggyback Registration
---------------------------------
is an underwritten primary registration on behalf of the Company, and the
managing underwriters advise the Company in writing (with a copy to each party
requesting registration of Investor Registerable Securities) that in their
opinion the number of securities requested to be included in such registration
exceeds the number which can be sold in such offering without adversely
affecting the marketability of the offering, the Company shall include in such
registration (i) first, the securities the Company proposes to sell, (ii)
second, the Investor Registrable Securities requested to be included in such
registration, pro rata among the holders of such Investor Registrable Securities
on the basis of the number of shares owned by each such holder, and (iii) third,
other securities requested to be included in such registration.
(d) Priority on Secondary Registrations. If a Piggyback Registration
-----------------------------------
is an underwritten secondary registration on behalf of holders of the Company's
securities, and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering without
adversely affecting the marketability of the offering, the Company shall include
in such registration (i) first, the securities requested to be included therein
by the holders requesting such registration and the holders of the Investor
Registrable Securities requested to be included in such registration, pro rata
among the holders of such securities on the basis of the number of shares owned
by each such holder, and (ii) second, other securities requested to be included
in such registration.
(e) Selection of Underwriters. If any Piggyback Registration is an
-------------------------
underwritten offering, the Company shall select the investment banker(s) and
manager(s) for the offering.
(f) Other Registrations. If the Company has previously filed a
-------------------
registration statement with respect to Registrable Securities pursuant to
Section 1 or pursuant to this Section 2, and if such previous registration has
- - --------- ---------
not been withdrawn or abandoned, the Company shall not file or cause to be
effected any other registration of any of its equity securities or securities
convertible or exchangeable into or exercisable for its equity securities under
the Securities Act, whether on its own behalf or at the request of any holder or
holders of such securities, until a period of at least 120 days has elapsed from
the effective date of such previous registration.
3. Holdback Agreements.
-------------------
(a) Each holder of Registrable Securities shall not effect any public
sale or distribution (including sales pursuant to Rule 144) of equity securities
of the Company, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and the 90-day
period beginning on the effective date of any underwritten Demand Registration
or any underwritten Piggyback Registration in which Registrable Securities are
included (except as part of such underwritten registration), unless the
underwriters managing the registered public offering otherwise agree.
(b) The Company (i) shall not effect any public sale or distribution
of its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
90-day period beginning on the effective date of any underwritten Demand
Registration or any underwritten Piggyback Registration (except as part of such
underwritten registration), unless the underwriters managing the registered
public offering otherwise agree, and (ii) shall cause each holder of at least 5%
(on a fully-diluted basis) of its Common Stock, or any securities convertible
into or exchangeable or exercisable for Common Stock, purchased from the Company
at any time after the date of this Agreement (other than in a registered public
offering) to agree not to effect any public sale or distribution (including
sales pursuant to Rule 144) of any such securities during such period (except as
part of such underwritten registration, if otherwise permitted), unless the
underwriters managing the registered public offering otherwise agree.
4. Registration Procedures. Whenever the holders of Registrable
-----------------------
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company shall use its best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof (including the registration of the Note
or the Warrant held by a holder of Registrable Securities requesting
registration as to which the Company has received reasonable assurances that
only Registrable Securities shall be distributed to the public), and pursuant
thereto the Company shall as expeditiously as possible:
(a) prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and use its
best efforts to cause such registration statement to become effective (provided
that before filing a registration statement or prospectus or any amendments or
supplements thereto, the Company shall furnish to the counsel selected by the
holders of a majority of the Registrable Securities covered by such registration
statement copies of all such documents proposed to be filed, which documents
shall be subject to the review and comment of such counsel);
(b) notify each holder of Registrable Securities of the effectiveness
of each registration statement filed hereunder and prepare and file with the
Securities and Exchange Commission such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for a period of not less
than 120 days (subject to extension pursuant to Section 7) and comply with the
---------
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof set
forth in such registration statement;
(c) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller reasonably requests and do any and all other acts and things which
may be reasonably necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller (provided that the Company shall not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this subsection, (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction);
(e) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company shall
prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not contain an untrue statement of a material fact or omit to state any
fact necessary to make the statements therein not misleading;
(f) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on the NASD automated quotation
system and, if listed on the NASD automated quotation system, use its best
efforts to secure designation of all such Registrable Securities covered by such
registra tion statement as a NASDAQ "national market system security" within the
meaning of Rule 11Aa2-1 of the Securities and Exchange Commission or, failing
that, to secure NASDAQ authorization for such Registrable Securities and,
without limiting the generality of the foregoing, to arrange for at least two
market makers to register as such with respect to such Registrable Securities
with the NASD;
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
a majority of the Registrable Securities being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities (including, without limitation, effecting a stock split
or a combination of shares);
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants to supply all
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement;
(j) otherwise use its best efforts to comply with all applicable rules
and regulations of the Securities and Exchange Commission, and make available to
its security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months beginning with the first day of
the Company's first full calendar quarter after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder;
(k) permit any holder of Registrable Securities which holder, in its
sole and exclusive judgment, might be deemed to be an underwriter or a
controlling person of the Company, to participate in the preparation of such
registration or comparable statement and to require the insertion therein of
material, furnished to the Company in writing, which in the reasonable judgment
of such holder and its counsel should be included;
(l) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any common stock included in such registration statement for sale in any
jurisdiction, the Company shall use its best efforts promptly to obtain the
withdrawal of such order;
(m) use its best efforts to cause such Registrable Securities covered
by such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the sellers
thereof to consummate the disposition of such Registrable Securities;
(n) obtain one or more cold comfort letters, dated the effective date
of such registration statement (and if such registration includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement), signed by the Company's independent public accountants
in customary form and covering such matters of the type customarily covered by
cold comfort letters as the holders of a majority of the Registrable Securities
being sold reasonably request (provided that such Registrable Securities
constitute at least 10% of the securities covered by such registration
statement); and
(o) provide a legal opinion of the Company's outside counsel, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, dated the date of the closing under
the underwriting agreement), with respect to the registration statement, each
amendment and supplement thereto, the prospectus included therein (including the
preliminary prospectus) and such other documents relating thereto in customary
form and covering such matters of the type customarily covered by legal opinions
of such nature.
5. Registration Expenses.
---------------------
(a) All expenses incident to the Company's performance of or
compliance with this Agreement, including without limitation all registration
and filing fees, fees and expenses of compliance with securities or blue sky
laws, printing expenses, messenger and delivery expenses, fees and disbursements
of custodians, and fees and disbursements of counsel for the Company and all
independent certified public accountants, underwriters (excluding discounts and
commissions) and other Persons retained by the Company (all such expenses being
herein called "Registration Expenses"), shall be borne as provided in this
---------------------
Agreement, except that the Company shall, in any event, pay its internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit or quarterly review, the expense of any liability insurance and
the expenses and fees for listing the securities to be registered on each
securities exchange on which similar securities issued by the Company are then
listed or on the NASD automated quotation system.
(b) In connection with any Demand Registration and any Piggyback
Registration, each holder of Registrable Securities included in such
registration shall pay the fees and disbursements of its counsel and any
underwriting discounts or commission relating to such holder's Registerable
Securities.
(c) To the extent Registration Expenses are not required to be paid by
the Company, each holder of securities included in any registration hereunder
shall pay those Registration Expenses allocable to the registration of such
holder's securities so included, and any Registration Expenses not so allocable
shall be borne by all sellers of securities included in such registration in
proportion to the aggregate selling price of the securities to be so registered.
6. Indemnification.
---------------
(a) Indemnification Obligation of the Company. The Company agrees to
-----------------------------------------
indemnify, to the extent permitted by law, each holder of Registrable
Securities, its officers and directors and each Person who controls such holder
(within the meaning of the Securities Act) against all losses, claims, damages,
liabilities and expenses caused by any untrue or alleged untrue statement of
material fact contained in any registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, except insofar as the same are
caused by or contained in any information furnished in writing to the Company by
such holder expressly for use therein or by such holder's failure to deliver a
copy of the registration statement or prospectus or any amendments or
supplements thereto after the Company has furnished such holder with a
sufficient number of copies of the same. In connection with an underwritten
offering, the Company shall indemnify such underwriters, their officers and
directors and each Person who controls such underwriters (within the meaning of
the Securities Act) to the same extent as provided above with respect to the
indemnification of the holders of Registrable Securities.
(b) Indemnification of the Company. In connection with any
------------------------------
registration statement in which a holder of Registrable Securities is
participating, each such holder shall furnish to the Company in writing such
information and affidavits as the Company reasonably requests for use in
connection with any such registration statement or prospectus and, to the extent
permitted by law, shall indemnify the Company, its directors and officers and
each Person who controls the Company (within the meaning of the Securities Act)
against any losses, claims, damages, liabilities and expenses resulting from any
untrue or alleged untrue statement of material fact contained in the
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, but only to the extent that such untrue statement or omission is
contained in any information or affidavit so furnished in writing by such
holder; provided that the obligation to indemnify shall be individual, not joint
and several, for each holder and shall be limited to the net amount of proceeds
received by such holder from the sale of Registrable Securities pursuant to such
registration statement.
(c) Indemnification Procedures. Any Person entitled to
--------------------------
indemnification hereunder shall (i) give prompt written notice to the
indemnifying party of any claim with respect to which it seeks indemnification
(provided that the failure to give prompt notice shall not impair any Person's
right to indemnification hereunder to the extent such failure has not prejudiced
the indemnifying party) and (ii) unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist with respect to such claim, permit such indemnifying party to
assume the defense of such claim with counsel reasonably satisfactory to the
indemnified party. If such defense is assumed, the indemnifying party shall not
be subject to any liability for any settlement made by the indemnified party
without its consent (but such consent shall not be unreasonably withheld). An
indemnifying party who is not entitled to, or elects not to, assume the defense
of a claim shall not be obligated to pay the fees and expenses of more than one
counsel for all parties indemnified by such indemnifying party with respect to
such claim, unless in the reasonable judgment of any indemnified party a
conflict of interest may exist between such indemnified party and any other of
such indemnified parties with respect to such claim.
(d) Other Indemnification Provisions. The indemnification provided
--------------------------------
for under this Agreement shall remain in full force and effect regardless of any
investigation made by or on behalf of the indemnified party or any officer,
director or controlling Person of such indemnified party and shall survive the
transfer of securities. The Company also agrees to make such provisions, as are
reasonably requested by any indemnified party, for contribution to such party in
the event the Company's indemnification is unavailable for any reason.
7. Participation in Underwritten Registrations. No Person may
-------------------------------------------
participate in any registration hereunder which is underwritten unless such
Person (i) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements (including, without limitation, pursuant to the
terms of any over-allotment or "green shoe" option requested by the managing
underwriter(s), provided that no holder of Registrable Securities will be
required to sell more than the number of Registrable Securities that such holder
has requested the Company to include in any registration) and (ii) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements. Each Person that is participating in any registration
hereunder agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 4(e) above, such
------------
Person will forthwith discontinue the disposition of its Registrable Securities
pursuant to the registration statement until such Person's receipt of the copies
of a supplemented or amended prospectus as contemplated by such Section 4(e).
------------
In the event the Company shall give any such notice, the applicable time period
mentioned in Section 4(b) during which a Registration Statement is to remain
------------
effective shall be extended by the number of days during the period from and
including the date of the giving of such notice pursuant to this Section 7 to
---------
and including the date when each seller of a Registrable Security covered by
such registration statement shall have received the copies of the supplemented
or amended prospectus contemplated by Section 4(e).
------------
8. Definitions.
-----------
"Accredited Investor" has the meaning set forth in 17 CFR 230.501(a)
-------------------
(Rule 501(a) promulgated by the Securities and Exchange Commission under the
Securities Act).
"Investor Registrable Securities" means (i) any Common Stock issued
-------------------------------
upon conversion of the Note or the exercise of the Warrant issued pursuant to
the Purchase Agreement and (ii) any other Common Stock issued or issuable with
respect to the securities referred to in clause (i) above by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. For purposes of
this Agreement, a Person shall be deemed to be a holder of Investor Registrable
Securities, and the Investor Registrable Securities shall be deemed to be in
existence, whenever such Person has the right to acquire directly or indirectly
such Investor Registrable Securities (upon conversion or exercise in connection
with a transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such acquisition
has actually been effected, and such Person shall be entitled to exercise the
rights of a holder of Investor Registrable Securities hereunder.
"Management Registrable Securities" means (i) any shares of Common
---------------------------------
Stock held by any Management Stockholder as of the date hereof and (ii) any
other Common Stock issued or issuable with respect to the securities referred to
in clause (i) above by way of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization.
"Person" means an individual, a partnership, a joint venture, a
------
corporation, a trust, an unincorporated organization and a government or any
department of agency thereof.
"Registrable Securities" means (i) the Investor Registrable Securities
----------------------
and (ii) the Management Registrable Securities. As to any particular Registrable
Securities, such securities shall cease to be Registrable Securities when they
have been distributed to the public pursuant to an offering registered under the
Securities Act or sold to the public through a broker, dealer or market maker in
compliance with Rule 144 under the Securities Act (or any similar rule then in
force) or repurchased by the Company or any Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
similar federal law then in force.
"Securities and Exchange Commission" includes any governmental body or
----------------------------------
agency succeeding to the functions thereof.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
-----------------------
as amended, or any similar federal law then in force.
Unless otherwise stated, other capitalized terms contained in this
Agreement have the meanings set forth in the Purchase Agreement.
9. Miscellaneous.
-------------
(a) No Inconsistent Agreements. The Company shall not hereafter
--------------------------
enter into any agreement with respect to its securities which is inconsistent
with or violates the rights granted to the holders of Registrable Securities in
this Agreement.
(b) Adjustments Affecting Registrable Securities. The Company shall
--------------------------------------------
not take any action, or permit any change to occur, with respect to its
securities which would materially adversely affect the ability of the holders of
Registrable Securities to include such Registrable Securities in a registration
undertaken pursuant to this Agreement or which would materially adversely affect
the marketability of such Registrable Securities in any such registration
(including, without limitation, effecting a stock split or a combination of
shares).
(c) Remedies. Any Person having rights under any provision of this
--------
Agreement shall be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement.
(d) Amendments and Waivers. Except as otherwise provided herein, the
----------------------
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and holders of a majority of the Registrable
Securities. The failure of any party to enforce any of the provisions of this
Agreement shall in no way be construed as a waiver of such provisions and shall
not affect the right of such party thereafter to enforce each and every
provision in accordance with its terms.
(e) Successors and Assigns. All covenants and agreements in this
----------------------
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of and be enforceable by the respective successors and assigns of
the parties hereto whether so expressed or not. In addition, and whether or not
any express assignment has been made, the provisions of this Agreement which are
for the benefit of purchasers or holders of Registrable Securities are also for
the benefit of, and enforceable by, any subsequent holder of Registrable
Securities, subject to the provisions respecting the minimum numbers or
percentages of shares of Registrable Securities required in order to be entitled
to certain rights, or take certain actions, contained herein.
(f) Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or the effectiveness or validity of any provision in any
other jurisdiction, and this Agreement shall be reformed, construed and enforce
in such jurisdiction as if such invalid, illegal or unenforceable provision had
never been contained herein.
(g) Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
(h) Descriptive Headings. The descriptive headings of this Agreement
--------------------
are inserted for convenience only and do not constitute a part of this
Agreement.
(i) GOVERNING LAW. ALL ISSUES AND QUESTIONS CONCERNING THE
-------------
CONSTRUCTION, VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT AND THE
EXHIBITS AND SCHEDULES HERETO SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO ANY CHOICE OF
LAW OR CONFLICT OF LAW RULES OR PROVISIONS (WHETHER OF THE STATE OF MINNESOTA OR
ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF MINNESOTA.
(j) Notices. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, sent to the recipient by reputable overnight courier service
(charges prepaid) or mailed to the recipient by certified or registered mail,
return receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to the parties at the addresses indicated below:
If to the Company:
Zytec Corporation
7575 Market Place Drive
Eden Prairie, MN 55344
Attention: Ronald D. Schmidt
with a copy to:
Winthrop & Weinstine, P.A.
3200 Minnesota World Trade Center
St. Paul, MN 55101
Attention: Sherman Winthrop
If to the Investor:
BMO Nesbitt Burns Capital (U.S.), Inc.
111 West Monroe Street
20th Floor
Chicago, IL 60603
Attention: Managing Director
with copy to:
Kirkland & Ellis
200 E. Randolph Drive
Chicago, IL 60601
Attention: Edward T. Swan
If to the Management Stockholders:
To the address indicated on the attached
Schedule of Management Stockholders
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
* * * * *
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Agreement on the date first written above.
ZYTEC CORPORATION
By _______________________________________________
Its ______________________________________________
BMO NESBITT BURNS CAPITAL (U.S.), INC.
By _______________________________________________
Its ______________________________________________
[CONTINUATION OF SIGNATURE PAGE TO REGISTRATION AGREEMENT]
--------------------------------------------------
Ronald D. Schmidt
--------------------------------------------------
Lawrence J. Matthews
--------------------------------------------------
John M. Steel
[CONTINUATION OF SIGNATURE PAGE TO REGISTRATION AGREEMENT]
SCHMIDT FAMILY LIMITED PARTNERSHIP
By _______________________________________________
Its ______________________________________________
--------------------------------------------------
Alice M. Schmidt
--------------------------------------------------
Gail M. Steel
SCHEDULE OF MANAGEMENT STOCKHOLDERS
-----------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT STOCKHOLDER NUMBER OF REGISTRABLE SECURITIES
- --------------------------------------------------------------------------------
Ronald D. Schmidt 543,050
10407 Fawns Way
Eden Prairie, MN 55347-5117
- --------------------------------------------------------------------------------
Schmidt Family Limited Partnership 400,000
10407 Fawns Way
Eden Prairie, MN 55347-5117
- --------------------------------------------------------------------------------
Alice M. Schmidt 2,200
10407 Fawns Way
Eden Prairie, MN 55347-5117
- --------------------------------------------------------------------------------
Lawrence J. Matthews 870,620
7601 Fifth Avenue South
Richfield, MN 55423
- --------------------------------------------------------------------------------
John M. Steel 644,952
9986 Oak Shore Drive
Lakeville, MN 55044
- --------------------------------------------------------------------------------
Gail M. Steel 200,000
9986 Oak Shore Drive
Lakeville, MN 55044
- --------------------------------------------------------------------------------
Exhibit 10.19
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference
purposes only, September 15, 1995, is made by and between BUZZ OATES
ENTERPRISES, II ("LESSOR") and ZYTEC CORPORATION, A Minnesota
Corporation ("LESSEE"), (collectively the "PARTIES," or individually a
"PARTY").
1.2(a) PREMISES: That certain portion of the Building,
including all improvements therein or to be provided by Lessor under
the terms of this Lease, commonly known by the street address of 1601
Aviation Blvd., located in the City of Lincoln, County of Placer,
State of California, with zip code 95648, as outlined on Exhibit A
attached hereto ("PREMISES"). The "BUILDING" is that certain building
containing the Premises and generally described as (describe briefly
the nature of the Building): an approximate 100,000 square feet being a
portion of an approximate 100,000 square foot tilt up building situated
on 4.6 acres. In addition to Lessee's rights to use and occupy the
Premises as hereinafter specified, Lessee shall have non-exclusive
rights to the Common Areas (as defined in Paragraph 2.7 below) as
hereinafter specified, but shall not have any rights to the roof,
exterior walls or utility raceways of the Building or to any other
buildings in the Industrial Center. The Premises, the Building, the
Common Areas, the land upon which they are located, along with all
other buildings and improvements thereon, are herein collectively
referred to as the "INDUSTRIAL CENTER." (Also see Paragraph 2.)
1.2(b) PARKING: 200 unreserved vehicle parking spaces
("UNRESERVED PARKING SPACES"); and ________
reserved vehicle parking spaces ("RESERVED PARKING SPACES"). (Also see
Paragraph 2.6.)
1.3 TERM: five (5) years and zero (0) months ("ORIGINAL TERM")
commencing March 1, 1996 ("COMMENCEMENT DATE") and ending February 29,
2001 ("EXPIRATION DATE"). (Also see Paragraph 3.)
1.4 EARLY POSSESSION: February 1, 1996 ("EARLY POSSESSION
DATE"). (Also see Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $23,000.00 per month ("BASE RENT"), payable on
the first day of each month commencing March 1, 1996 (Also see
Paragraph 4.)
[x] If this box is checked, this Lease provides for the
Base Rent to be adjusted per Addendum 4.1, attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $23,000.00 as Base Rent
for the period first month's rent.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: one
hundred percent (100%) ("LESSEE'S SHARE") as determined by
[x] prorata square footage of the Premises as compared to the total
square footage of the Building or [ ] other criteria as described in
Addendum ___.
1.7 SECURITY DEPOSIT: $23,000.00 ("SECURITY DEPOSIT"). (Also
see Paragraph 5.) SEE ADDENDUM
1.8 PERMITTED USE: manufacturing, storage, repair and
distribution of computer components ("PERMITTED USE"). (Also see
Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY." (Also see
Paragraph 8.)
1.10(a) REAL ESTATE BROKERS. The following real estate
broker(s) (collectively, the "BROKERS") and brokerage relationships
exist in this transaction and are consented to by the Parties (check
applicable boxes):
[ ] ______ represents Lessor exclusively ("LESSOR'S BROKER");
[ ] ______ represents Lessee exclusively ("LESSEE'S BROKER"); or
[x] BUZZ OATES REAL ESTATE represents both Lessor and Lessee ("DUAL
AGENCY"). (Also see Paragraph 15.)
1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease
by both Parties, Lessor shall pay to said Broker(s) jointly, or in such
separate shares as they may mutually designate in writing, a fee as set
forth in a separate written agreement between Lessor and said Broker(s)
(or in the event there is no separate written agreement between Lessor
and said Broker(s), the sum of $ per separate agreement) for brokerage
services rendered by said Broker(s) in connection with this
transaction.
1.11 GUARANTOR. The obligations of the Lessee under this Lease
are to be guaranteed by ZYTEC CORPORATION, A Minnesota Corporation
("GUARANTOR"). (Also see Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or
Addenda consisting of Paragraphs 3.2 through 65, and Exhibits A
through E, all of which constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon
all of the terms, covenants and conditions set forth in this Lease.
Unless otherwise provided herein, any statement of square footage set
forth in this Lease, or that may have been used in calculating rental
and/or Common Area Operating Expenses, is an approximation which Lessor
and Lessee agree is reasonable and the rental and Lessee's Share (as
defined in Paragraph 1.6(b)) based thereon is not subject to revision
whether or not the actual square footage is more or less. SEE ADDENDUM
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 ROOF, plumbing, electrical systems, fire
sprinkler system, lighting, air conditioning and heating systems and
loading doors, if any, in the Premises, other than those constructed by
Lessee, shall be in good operating condition on the Commencement Date.
If a non-compliance with said warranty exists as of the Commencement
Date, Lessor shall, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same
at Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within three hundred sixty five (365)
days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE.
Lessor warrants that any improvements (other than those constructed by
Lessee or at Lessee's direction) on or in the Premises which have been
constructed or installed by Lessor or with Lessor's consent or at
Lessor's direction shall comply with all applicable covenants or
restrictions of record and applicable building codes, regulations and
ordinances in effect on the Commencement Date. Lessor further warrants
to Lessee that Lessor has no knowledge of any claim having been made by
any governmental agency that a violation or violations of applicable
building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply
to any Alterations or Utility Installations (defined in Paragraph
7.3(a)) made or to be made by Lessee. If the Premises do not comply
with said warranties, Lessor shall, except as otherwise provided in
this Lease, promptly after receipt of written notice from Lessee given
within six (6) months following the Commencement Date and setting forth
with specificity the nature and extent of such non-compliance, take
such action, at Lessor's expense, as may be reasonable or appropriate
to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under
Applicable Laws (as defined in Paragraph 2.4).
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a)
that it has been advised by the Broker(s) to satisfy itself with
respect to the condition of the Premises (including but not limited to
the electrical and fire sprinkler systems, security, environmental
aspects, seismic and earthquake requirements, and compliance with the
Americans with Disabilities Act and applicable zoning, municipal,
county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "APPLICABLE LAWS")
and the present and future suitability of the Premises for Lessee's
intended use; (b) that Lessee has made such investigation as it deems
necessary with reference to such matters, is satisfied with reference
thereto, and assumes all responsibility therefore as the same relate to
Lessee's occupancy of the Premises and/or the terms of this Lease; and
(c) that neither Lessor, nor any of Lessor's agents, has made any oral
or written representations or warranties with respect to said matters
other than as set forth in this Lease.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by
Lessor in this Paragraph 2 shall be of no force or effect if
immediately prior to the date set forth in Paragraph 1.1 Lessee was the
owner or occupant of the Premises. In such event, Lessee shall, at
Lessee's sole cost and expense, correct any non-compliance of the
Premises with said warranties.
2.6 VEHICLE PARKING. Lessee shall be entitled to use the
number of Unreserved Parking Spaces and Reserved Parking Spaces
specified in Paragraph 1.2(b) on those portions of the Common Areas
designated from time to time by Lessor for parking. Lessee shall not
use more parking spaces than said number. Said parking spaces shall be
used for parking by vehicles no larger than full-size passenger
automobiles or pick-up trucks, herein called "PERMITTED SIZE VEHICLES."
Vehicles other than Permitted Size Vehicles shall be parked and loaded
or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles
that belong to or are controlled by Lessee or Lessee's employees,
suppliers, shippers, customers, contractors or invitees to be loaded,
unloaded, or parked in areas other than those designated by Lessor for
such activities.
(b) If Lessee permits or allows any of the prohibited
activities described in this Paragraph 2.6, then Lessor shall have the
right, without notice, in addition to such other rights and remedies
that it may have, to remove or tow away the vehicle involved and charge
the cost to Lessee, which cost shall be immediately payable upon demand
by Lessor.
(c) Lessor shall at the Commencement Date of this
Lease, provide the parking facilities required by Applicable Law.
2.7 COMMON AREAS - DEFINITION. The term "COMMON AREAS" is
defined as all areas and facilities outside the Premises and within the
exterior boundary line of the Industrial Center and interior utility
raceways within the Premises that are provided and designated by the
Lessor from time to time for the general non-exclusive use of Lessor,
Lessee and other lessees of the Industrial Center and their respective
employees, suppliers, shippers, customers, contractors and invitees,
including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped
areas.
2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to
Lessee, for the benefit of Lessee and its employees, suppliers,
shippers, contractors, customers and invitees, during the term of this
Lease, the non-exclusive right to use, in common with others entitled
to such use, the Common Areas as they exist from time to time, subject
to any rights, powers, and privileges reserved by Lessor under the
terms hereof or under the terms of any rules and regulations
Initials:_____
_____
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be
deemed to include the right to store any property, temporarily or
permanently, in the Common Areas. Any such storage shall be permitted
only by the prior written consent of Lessor or Lessor's designated
agent, which consent may be revoked at any time. In the event that any
unauthorized storage shall occur then Lessor shall have the right,
without notice, in addition to such other rights and remedies that it
may have, to remove the property and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to
time, to establish, modify, amend and enforce reasonable Rules and
Regulations with respect thereto in accordance with Paragraph 40.
Lessee agrees to abide by and conform to all such Rules and
Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor
shall not be responsible to Lessee for the non-compliance with said
rules and regulations by other lessees of the Industrial Center.
2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in
Lessor's sole discretion, from time to time:
(a) To make changes to the Common Areas, including,
without limitation, changes in the location, size, shape and number of
driveways, entrances, parking spaces, parking areas, loading and
unloading areas, ingress, egress, direction of traffic, landscaped
areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises
remains available;
(c) To designate other land outside the boundaries of
the Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to
the Common Areas;
(e) To use the Common Areas while engaged in making
additional improvements, repairs or alterations to the Industrial
Center, or any portion thereof; and
(f) To do and perform such other acts and make such
other changes in, to or with respect to the Common Areas and Industrial
Center as Lessor may, in the exercise of sound business judgment, deem
to be appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original
Term of this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If an Early Possession Date is specified
in Paragraph 1.4 and if Lessee totally or partially occupies the
Premises after the Early Possession Date but prior to the Commencement
Date, the obligation to pay Base Rent shall be abated for the period of
such early occupancy. All other terms of this Lease, however,
(including but not limited to the obligations to pay Lessee's Share of
Common Area Operating Expenses and to carry the insurance required by
Paragraph 8) shall be in effect including such period. Any such early
possession shall not affect nor advance the Expiration Date of the
Original Term.
SEE ADDENDUM
4. RENT.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or
charges, as the same may be adjusted from time to time, to Lessor in
lawful money of the United States, without offset or deduction, on or
before the day on which it is due under the terms of this Lease. Base
Rent and all other rent and charges for any period during the term
hereof which is for less than one full month shall be prorated based
upon the actual number of days of the month involved. Payment of Base
Rent and other charges shall be made to Lessor at its address stated
herein or to such other persons or at such other addresses as Lessor
may from time to time designate in writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor
during the term hereof, in addition to the Base Rent, Lessee's Share
(as specified in Paragraph 1.6(b)) of all Common Area Operating
Expenses, as hereinafter defined, during each calendar year of the term
of this Lease, in accordance with the following provisions:
(a) "COMMON AREA OPERATING EXPENSES" are defined, for
purposes of this Lease, as all costs incurred by Lessor relating to the
ownership and operation of the Industrial Center, including, but not
limited to, the following:
(i) The operation, repair and maintenance,
in neat, clean, good order and condition, of the following:
(aa) The Common Areas, including
parking areas, loading and unloading areas, trash areas, roadways,
sidewalks, walkways, parkways, driveways, landscaped areas, striping,
bumpers, irrigation systems, Common Area lighting facilities, fences
and gates, elevators and roof.
(bb) Exterior signs and any tenant
directories.
(cc) Fire detection and sprinkler
systems.
(ii) The cost of water, gas, electricity and
telephone to service the Common Areas.
(iii) Trash disposal, property management
and security services and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and
repair of Common Areas.
(v) Real Property Taxes (as defined in
Paragraph 10.2) to be paid by Lessor for the Building and the Common
Areas under Paragraph 10 hereof.
(vi) The cost of the premiums for the
insurance policies maintained by Lessor under Paragraph 8 hereof.
(viii) Any other services to be provided by
Lessor that are stated elsewhere in this Lease to be a Common Area
Operating Expense.
(b) Any Common Area Operating Expenses and Real
Property Taxes that are specifically attributable to the Building or to
any other building in the Industrial Center or to the operation, repair
and maintenance thereof, shall be allocated entirely to the Building or
to such other building. However, any Common Area Operating Expenses and
Real Property Taxes that are not specifically attributable to the
Building or to any other building or to the operation, repair and
maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Industrial Center.
(c) The infusion of the improvements, facilities and
services set forth in Subparagraph 4.2(a) shall not be deemed to impose
an obligation upon Lessor to either have said improvements or
facilities or to provide those services unless the Industrial Center
already has the same, Lessor already provides the services, or Lessor
has agreed elsewhere in this Lease to provide the same or some of them.
(d) Lessee's Share of Common Area operating Expenses
shall be payable by Lessee within ten (10) days after a reasonably
detailed statement of actual expenses is presented to Lessee by Lessor.
At Lessor's option, however, an amount may be estimated by Lessor from
time to time of Lessee's Share of annual Common Area Operating Expenses
and the same shall be payable monthly or quarterly, as Lessor shall
designate, during each 12-month period of the Lease term, on the same
day as the Base Rent is due hereunder. Lessor shall deliver to Lessee
within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual
Common Area Operating Expenses incurred during the preceding year. If
Lessee's payments under this Paragraph 4.2(d) during said preceding
year exceed Lessee's Share as indicated on said statement, Lessor shall
be credited the amount of such overpayment against Lessee's Share of
Common Area Operating Expenses next becoming due. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year were less than
Lessee's Share as indicated on said statement, Lessee shall pay to
Lessor the amount of the deficiency within ten (10) days after delivery
by Lessor to Lessee of said statement. SEE ADDENDUM 4.2E
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's
execution hereof the Security Deposit set forth in Paragraph 1.7 as
security for Lessee's faithful performance of Lessee's obligations
under this Lease. If Lessee fails to pay Base Rent or other rent or
charges due hereunder, or otherwise Defaults under this Lease (as
defined in Paragraph 13.1 ), Lessor may use, apply or retain all or any
portion 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 therefore deposit monies with Lessor sufficient
to restore said Security Deposit to the full amount required by this
Lease. Any time the Base Rent increases during the term of this Lease,
Lessee shall, upon written request from Lessor, deposit additional
monies with Lessor as an addition to the Security Deposit so that the
total amount of the Security Deposit shall at all times bear the same
proportion to the then current Base Rent as the initial Security
Deposit bears to the initial Base Rent set forth in Paragraph 1.5.
Lessor shall not be required to keep all or any part of the Security
Deposit separate from its general accounts. Lessor shall, at the
expiration or earlier termination of the term hereof and after Lessee
has vacated the Premises, return to Lessee (or, at Lessor's option, to
the last assignee, if any, of Lessee's interest herein), that portion
of the Security Deposit not used or applied by Lessor. Unless otherwise
expressly agreed in writing by Lessor, no part of the Security Deposit
shall be considered to be held in trust, to bear interest or other
increment for its use, or to be prepayment for any monies to be paid by
Lessee under this Lease.
6. USE.
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for
the Permitted Use set forth in Paragraph 1.8, or any other legal use
which is reasonably comparable thereto, and for no other purpose.
Lessee shall not use or permit the use of the Premises in a manner that
is unlawful, creates waste or a nuisance, or that disturbs owners
and/or occupants of, or causes damage to the Premises or neighboring
premises or properties.
Initials:_____
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(b) Lessor hereby agrees to not unreasonably withhold
or delay its consent to any written request by Lessee, Lessee's
assignees or subtenants, and by prospective assignees and subtenants of
Lessee, its assignees and subtenants, for a modification of said
Permitted Use, so long as the same will not impair the structural
integrity of the improvements on the Premises or in the Building or the
mechanical or electrical systems therein, does not conflict with uses
by other lessees, is not significantly more burdensome to the Premises
or the Building and the improvements thereon, and is otherwise
permissible pursuant to this Paragraph 6. If Lessor elects to withhold
such consent, Lessor shall within five (5) business days after such
request give a written notification of same, which notice shall include
an explanation of Lessor's reasonable objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term
"HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product,
substance, chemical, material or waste whose presence, nature, quantity
and/or intensity of existence, use, manufacture, disposal,
transportation, spill, release or effect, either by itself or in
combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or
welfare, the environment, or the Premises; (ii) regulated or monitored
by any governmental authority; or (iii) a basis for potential liability
of Lessor to any governmental agency or third party under any
applicable statute or common law theory. Hazardous Substance shall
include, but not be limited to, hydrocarbons, petroleum, gasoline,
crude oil or any products or by-products thereof. Lessee shall not
engage in any activity in or about the Premises which constitutes a
Reportable Use (as hereinafter defined) of Hazardous Substances without
the express prior written consent of Lessor and compliance in a timely
manner (at Lessee's sole cost and expense) with all Applicable
Requirements (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean
(i) the installation or use of any above or below ground storage tank,
(ii) the generation, possession, storage, use, transportation, or
disposal of a Hazardous Substance that requires a permit from, or with
respect to which a report, notice, registration or business plan is
required to be filed with, any governmental authority, and (iii) the
presence in, on or about the Premises of a Hazardous Substance with
respect to which any Applicable Laws require that a notice be given to
persons entering or occupying the Premises or neighboring properties.
Notwithstanding the foregoing, Lessee may, without Lessor's prior
consent, but upon notice to Lessor and in compliance with all
Applicable Requirements, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of the
Permitted Use, so long as such use is not a Reportable Use and does not
expose the Premises or neighboring properties to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In
addition, Lessor may (but without any obligation to do so) condition
its consent to any Reportable Use of any Hazardous Substance by Lessee
upon Lessee's giving Lessor such additional assurances as Lessor, in
its reasonable discretion deems necessary to protect itself, the
public, the Premises and the environment against damage, contamination
or injury and/or liability therefor, including but not limited to the
installation (and, at Lessor's option, removal on or before Lease
expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasement) 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 has come to be
located in, on, under or about the Premises or the Building, other than
as previously consented to by Lessor, Lessee shall immediately give
Lessor written notice thereof, together with a copy of any statement,
report, notice, registration, application, permit, business plan,
license, claim, action, or proceeding given to, or received from, any
governmental authority or private party concerning the presence, spill,
release, discharge of, or exposure to, such Hazardous Substance
including but not limited to all such documents as may be involved in
any Reportable Use involving the Premises. Lessee shall not cause or
permit any Hazardous Substance to be spilled or released in, on, under
or about the Premises (including, without limitation, through the
plumbing or sanitary sewer system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect,
defend and hold Lessor, its agents, employees, lenders and ground
lessor, if any, and the Premises, harmless from and against any and all
damages, liabilities, judgments, costs, claims, liens, expenses,
penalties, loss of permits and attorneys' and consultants' fees arising
out of or involving any Hazardous Substance brought onto the Premises
by or for Lessee or by anyone under Lessee's control. Lessee's
obligations under this Paragraph 6.2(c) shall include, but not be
limited to, the effects of any contamination or injury to parson,
property or the environment created or suffered by Lessee, and the cost
of investigation (including consultants' and attorneys' fees and
testing), removal, remediation, restoration and/or abatement thereof,
or of any contamination therein involved, and shall survive the
expiration or earlier termination of this Lease. No termination,
cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect
to Hazardous Substances, unless specifically so agreed by Lessor in
writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at
Lessee's sole cost and expense, fully, diligently and in a timely
manner, comply with all "APPLICABLE REQUIREMENTS," which term is used
in this Lease to mean all laws, rules, regulations, ordinances,
directives, covenants, easements and restrictions of record, permits,
the requirements of any applicable fire insurance underwriter or rating
bureau, and the REASONABLE 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),
now in effect or which may hereafter come into effect. Lessee shall,
within five (5) days after receipt of Lessor's written request, provide
Lessor with copies of all documents and information, including but not
limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable
Requirements specified by Lessor, and shall immediately upon receipt,
notify Lessor in writing (with copies of any documents involved) of any
threatened or actual claim, notice, citation, warning, complaint or
report pertaining to or involving failure by Lessee or the Premises to
comply with any Applicable Requirements. SEE ADDENDUM 6.3A
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents,
employees, contractors and designated representatives, and the holders
of any mortgages, deeds of trust or ground leases on the Premises
("LENDERS") shall have the right to enter the Premises at any time in
the case of an emergency, and otherwise at reasonable times, for the
purpose of inspecting the condition of the Premises and for verifying
compliance by Lessee with this Lease and all Applicable Requirements
(as defined in Paragraph 6.3), and Lessor shall be entitled to employ
experts and/or consultants in connection therewith to advise Lessor
with respect to Lessee's activities, including but not limited to
Lessee's installation, operation, use, monitoring, maintenance, or
removal of any Hazardous Substance on or from the Premises. The costs
and expenses of any such inspections shall be paid by the party
requesting same, unless a Default or Breach of this Lease by Lessee or
a violation of Applicable Requirements or a contamination, caused or
materially contributed to by Lessee, is found to exist or to be
imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent
violation or contamination. In such case, Lessee shall upon request
reimburse Lessor or Lessor's Lender, as the case may be, for the costs
and expenses of such inspections.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES END
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building
Code), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole cost and expense and at
all times, keep the Premises and every part thereof in good order,
condition and repair (whether or not such portion of the Premises
requiring repair, or the means of repairing the same, are reasonably or
readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements
or the age of such portion of the Premises), including, without
limiting the generality of the foregoing, all equipment or facilities
specifically serving the Premises, such as plumbing, heating, air
conditioning, ventilating, electrical, lighting facilities, boilers,
fired or unfired pressure vessels, fire hose connections if within the
Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors, plate glass, and skylights,
but excluding any items which are the responsibility of Lessor pursuant
to Paragraph 7.2 below. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance
practices. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition and
state of repair.
(b) Lessee shall, at Lessee's sole cost and expense,
procure and maintain a contract, with copies to Lessor, in customary
form and substance for and with a contractor specializing and
experienced in the inspection, maintenance and service of the heating,
air conditioning and ventilation system for the Premises. However,
Lessor reserves the right, upon notice to Lessee, to procure and
maintain the contract for the heating, air conditioning and ventilating
systems, and if Lessor so elects, Lessee shall reimburse Lessor, upon
demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations
under this Paragraph 7.1, Lessor may enter upon the Premises after ten
(10) days' prior written notice to Lessee (except in the case of an
emergency, in which case no notice shall be required), perform such
obligations on Lessee's behalf, and put the Premises in good order,
condition and repair, in accordance with Paragraph 13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of
Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants,
Restrictions and Building Code), 4.2 (Common Area Operating Expenses),
6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14
(Condemnation), Lessor, subject to reimbursement pursuant to Paragraph
4.2, shall keep in good order, condition and repair the foundations,
exterior walls, structural condition of interior bearing walls,
exterior reef, fire sprinkler and/or standpipe and hose (if located in
the Common Areas) or other automatic fire extinguishing system
including fire alarm and/or smoke detection system and equipment, fire
hydrants, parking lots, walkways, parkways, driveways, landscaping,
fences, signs and utility systems serving the Common Areas and all
parts thereof, as well as providing the services for which there is a
Common Area Operating Expanse pursuant to Paragraph 4.2. Lessor shall
not be obligated to paint the exterior or interior surfaces of exterior
walls nor shall Lessor be obligated to maintain, repair or replace
windows, doors or plate glass of the Premises. Lessee expressly waives
the benefit of any statute now or hereafter in effect which would
otherwise afford Lessee the right to make repairs at Lessor's expanse
or to terminate this Lease because of Lessor's failure to keep the
Building, Industrial Center or Common Areas in good order, condition
and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" is used in this Lease to refer to all air lines, power
panels, electrical distribution, security, fire protection systems,
communications systems, lighting fixtures, heating, ventilating and air
conditioning equipment, plumbing, and fencing in, on or about the
Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and
equipment which can be removed without doing material damage to the
Premises. The term "ALTERATIONS" shall mean any modification of the
improvements on the Premises which are provided by Lessor under the
terms of this Lease, other than Utility Installations or Trade
Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are
defined as Alterations and/or Utility Installations made by Lessee that
are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall
not make nor cause to be made any Alterations or Utility Installations
in, on, under or about the Premises without Lessor's prior written
consent. Lessee may, however, make non-structural Utility Installations
to the interior of the Premises (excluding the roof) without Lessor's
consent but upon notice to Lessor, so long as they are not visible from
the outside of the Premises, do not involve puncturing, relocating or
removing the roof or any existing walls, or changing or interfering
with the fire sprinkler or fire detection systems and the cumulative
cost thereof during the term of this Lease as extended does not exceed
$10,000.00.
Initials:_____
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(b) CONSENT. Any Alterations or Utility Installations
that Lessee shall desire to make and which require the consent of the
Lessor shall be presented to Lessor in written form with detailed
plans. All consents given by Lessor, whether by virtue of Paragraph
7.3(a) or by subsequent specific consent, shall be deemed conditioned
upon: (i) Lessee's acquiring all applicable permits required by
governmental authorities; (ii) the furnishing of copies of such permits
together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work
thereon; and (iii) the compliance by Lessee with all conditions of said
permits in a prompt and expeditious manner. Any Alterations or Utility
Installations by Lessee during the term of this Lease shall be done in
a good and workmanlike manner, with good and sufficient materials, and
be in compliance with all Applicable Requirements. Lessee shall
promptly upon completion thereof furnish Lessor with as-built plans and
specifications therefor. Lessor may, (but without obligation to do so)
condition its consent to any requested Alteration or Utility
Installation that costs $10,000.00 or more upon Lessee's providing
Lessor with a lien and completion bond in an amount equal to one and
one-haft times the estimated cost of such Alteration or Utility
Installation.
(c) LIEN PROTECTION. Lessee shall pay when due all
claims for labor or materials furnished or alleged to have been
furnished to or for Lessee at __________ or for use on the Premises,
which claims are or may be secured by any mechanic's or materialmen's
lien against the Premises or any interest therein. Lessee shall give
Lessor not less than 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
attorneys' fees and costs in participating in such action if Lessor
shall decide it is to its best interest to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require
their removal and to cause Lessee to become the owner thereof as
hereinafter provided in this Paragraph 7.4, all Alterations and Utility
Installations made to the Premises by Lessee shall be the property of
and owned by Lessee, but considered a part of the Premises. Lessor may,
at any time and at its option, elect in writing to Lessee to be the
owner of all or any specified part of the Lessee-Owned Alterations and
Utility 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 the Premises and be surrendered
with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing,
Lessor may require that any or all Lessee-owned Alterations or Utility
Installations be removed by the expiration or earlier termination of
this Lease, notwithstanding that their installation may have been
consented to by Lessor. Lessor may require the removal at any time of
all or any part of any Alterations or Utility Installations made
without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the
Premises by the end of the last day of the Lease term or any earlier
termination date, clean and free of debris and in good operating order,
condition and state of repair, ordinary wear and tear excepted.
Ordinary wear and tear shall not include any damage or deterioration
that would have been prevented by good maintenance practice or by
Lessee performing all of its obligations under this Lease. Except as
otherwise agreed or specified herein, the Premises, as surrendered,
shall include the Alterations and Utility Installations. The obligation
of Lessee shall include the repair of any damage occasioned by the
installation, maintenance or removal of Lessee's Trade Fixtures,
furnishings, equipment, and Lessee-Owned Alterations and Utility
Installations, as well as the removal of any storage tank installed by
or for Lessee, and the removal, replacement, or remediation of any
soil, material or ground water contaminated by Lessee, all as may then
be required by Applicable Requirements and/or good practice. Lessee's
Trade Fixtures shall remain the property of Lessee and shall be removed
by Lessee subject to its obligation to repair and restore the Premises
per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUMS. The cost of the premium for the
insurance policies maintained by Lessor under this Paragraph 8 shall be
a Common Area Operating Expanse pursuant to Paragraph 4.2 hereof.
Premiums for policy periods commencing prior to, or extending beyond,
the term of this Lease shall be pro-rated to coincide with the
corresponding Commencement Date or Expiration Date.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep
in force during the term of this Lease a Commercial General Liability
policy of insurance protecting Lessee, Lessor and any Lender(s) whose
names have been provided to Lessee in writing (as 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" endorsement for
damage caused by heat, smoke or fumes from a hostile fire. The policy
shall not contain any intra-insured exclusions as between insured
persons or organizations, but shall include coverage for liability
assumed under this Lease as an "INSURED CONTRACT" for the performance
of Lessee's indemnity obligations under this Lease. The limits of said
insurance required by this Lease or as carried by Lessee shall not,
however, limit the liability of Lessee nor relieve Lessee of any
obligation hereunder. All insurance to be carried by Lessee shall be
primary to and not contributory with any similar insurance carried by
Lessor, whose insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain
liability insurance described in Paragraph 8.2(a) above, in addition to
and not in lieu of, the insurance required to be maintained by Lessee.
Lessee shall not be named as an additional insured herein. SEE ADDENDUM
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL
VALUE.
(a) BUILDING END IMPROVEMENTS. Lessor shall obtain
and keep in force during the term of this Lease a policy or policies in
the name of Lessor, with loss payable to Lessor and to any Lender(s),
insuring against loss or damage to the Premises. Such insurance shall
be for full replacement cost, as the same shall exist from time to
time, or the amount required by any Lender(s), but in no event more
than the commercially reasonable and available insurable value thereof
if, by reason of the unique nature or age of the improvements involved,
such latter amount is less than full replacement cost. Lessee-Owned
Alterations and Utility Installations, Trade Fixtures and Lessee's
personal property shall be insured by Lessee pursuant to Paragraph 8.4.
If the coverage is available and commercially appropriate, Lessor's
policy or policies shall insure against all risks of direct physical
loss or damage (except the perils of flood and/or earthquake unless
required by a Lender), including coverage for any additional costs
resulting from debris removal and reasonable amounts of coverage for
the enforcement of any ordinance or law regulating the reconstruction
or replacement of any undamaged sections of the Building required to be
demolished or removed by reason of the enforcement of any building,
zoning, safety or land use laws as the result of a covered loss, but
not including plate glass insurance. Said policy or policies shall also
contain an agreed valuation provision in lieu of any co-insurance
clause, waiver of subrogation, and inflation guard protection causing
an increase in the annual property insurance coverage amount by a
factor of not less than the adjusted U.S. Department of Labor Consumer
Price Index for All Urban Consumers for the city nearest to where the
Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep
in force during the term of this Lease a policy or policies in the name
of Lessor, with loss payable to Lessor and any Lender(s), insuring the
loss of the full rental and other charges payable by all lessees of the
Building to Lessor for one year (including all Real Property Taxes,
insurance costs, all Common Area operating Expenses and any scheduled
rental increases). Said insurance may provide that in the event the
Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the
completion of repairs or replacement of the Premises, to provide for
one full year's loss of rental revenues from the date of any such loss.
Said insurance shall contain an agreed valuation provision in lieu of
any co-insurance clause, and the amount of coverage shall be adjusted
annually to reflect the projected rental income, Real Property Taxes,
insurance premium costs and other expenses, if any, otherwise payable,
for the next 12-month period. Common Area Operating Expenses shall
include any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any
increase in the premiums for the property insurance of the Building and
for the Common Areas or other buildings in the Industrial Center if
said increase is caused by Lessee's acts, omissions, use or occupancy
of the Premises.
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the
Insuring Party, Lessor shall not be required to insure Lessee-Owned
Alterations and Utility Installations unless the item in question has
become the property of Lessor under the terms of this Lease. SEE
ADDENDUM
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 carded,
maintain insurance coverage on all of Lessee's personal property, Trade
Fixtures and Lessee-Owned Alterations and Utility Installations in, on,
or about the Premises similar in coverage to that carried by Lessor as
the Insuring Party under Paragraph 8.3(a). Such insurance shall be full
replacement cost coverage with a deductible not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by
Lessee for the replacement of personal property and the restoration of
Trade Fixtures and Lessee-Owned Alterations and Utility Installations.
Upon request from Lessor, Lessee shall provide Lessor with written
evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be
in companies duly licensed to transact business in the state where the
Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least B+, V, or such other rating as may be
required by a Lender, as set forth in the most current issue of "Best's
Insurance Guide." Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies referred to in this
Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven
(7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the
existence and amounts of, the insurance required under Paragraph 8.2(a)
and 8.4. No such policy shall be cancelable or subject to modification
except after thirty (30) days' prior written notice to Lessor. Lessee
shall at least thirty (30) days prior to the expiration of such
policies and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights
or remedies, Lessee and Lessor each hereby release and relieve the
other, and waive their entire right to recover damages (whether in
contract or in tort) against the other, for loss or damage to their
property arising out of or incident to the perils required to be
insured against under Paragraph 8. The effect of such releases and
waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles
applicable thereto. Lessor and Lessee agree to have their respective
insurance companies issuing property damage insurance waive any right
to subrogation that such companies may have against Lessor or Lessee,
as the case may be, so long as the insurance is not invalidated
thereby.
Initials:_____
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8.7 INDEMNITY. Except for Lessor's negligence and/or breach of
express warranties, Lessee shall indemnify, protect, defend and hold
harmless the Premises, Lessor and its agents, Lessor's master or ground
lessor, partners and Lenders from and against any and all claims, loss
of rents and/or damages, costs, liens, judgments, penalties, loss of
permits, attorneys' and consultants' fees, expenses and/or liabilities
arising out of, involving, or in connection with, 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. 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. SEE ADDENDUM
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be
liable for injury or damage to the person or goods, wares, merchandise
or other property of Lessee, Lessee's employees, contractors, invitees,
customers, or any other person in or about the Premises, whether such
damage or injury is caused by or results from fire, steam, electricity,
gas, water or rain, or from the breakage, leakage, obstruction or other
defects of pipes, fire sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures, or from any other cause, whether
said injury or damage results from conditions arising upon the Premises
or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause
of such damage or injury or the means of repairing the same is
accessible or not. Lessor shall not be liable for any damages arising
from any act or neglect of any other lessee of Lessor nor from the
failure by Lessor to enforce the provisions of any other lease in the
Industrial Center. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to
Lessee's business or for any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and
Utility Installations, the repair cost of which damage or destruction
is less than fifty percent (50%) of the then Replacement Cost (as
defined in Paragraph 9.1 (d)) of the Premises (excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures) immediately
prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and
Utility Installations, the repair cost of which damage or destruction
is fifty percent (50%) or more of the than Replacement Cost of the
Premises (excluding Lessee-Owned Alterations and Utility Installations
and Trade Fixtures) immediately prior to such damage or destruction. In
addition, damage or destruction to the Building, other than
Lessee-Owned Alterations and Utility Installations and Trade Fixtures
of any lessees of the Building, the cost of which damage or destruction
is fifty percent (50%) or more of the then Replacement Cost (excluding
Lessee-Owned Alterations and Utility Installations and Trade Fixtures
of any lessees of the Building) of the Building shall, at the option of
Lessor, be deemed to be Premises Total Destruction.
(c) "INSURED LOSS" shall mean damage or destruction
to the Premises, other than Lessee-Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required
to be covered by the insurance described in Paragraph 8.3(a)
irrespective of any deductible amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair
or rebuild the improvements owned by Lessor at the time of the
occurrence to their condition existing immediately prior thereto,
including demolition, debris removal and upgrading required by the
operation of applicable building codes, ordinances or laws, and without
deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the
occurrence or discovery of a condition involving the presence of, or a
contamination by, a Hazardous Substance as defined in Paragraph 6.2(a),
in, on, or under the Premises.
9.2 PREMISES PARTIAL DAMAGE - INSURED LOSS. If Premises
Partial Damage that is an Insured Loss occurs, 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. In the event, however, that there is a shortage of insurance
proceeds and such shortage is due to the fact that, by reason of the
unique nature of the improvements in the Premises, full replacement
cost insurance coverage was not commercially reasonable and available,
Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless
Lessee provides Lessor with the funds to cover same, or adequate
assurance thereof, within ten (10) days following receipt of written
notice of such shortage and request therefor. If Lessor receives said
funds or adequate assurance thereof within said ten (10) day period,
Lessor shall complete them as soon as reasonably possible and this
Lease shall remain in full force and effect. If Lessor does not receive
such funds or assurance within said period, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to
make such restoration and repair as is commercially reasonable with
Lessor paying any shortage in proceeds, in which case this Lease shall
remain in full force and effect. If Lessor does not receive such funds
or assurance within such ten (10) day period. 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 it made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If Premises Partial
Damage that is not an Insured (as provided in a standard commercial all
risk policy) Loss occurs, unless caused by a negligent or willful act
of Lessee (in which event Lessee shall make the repairs at Lessee's
expanse and this Lease shall continue in full force and effect), Lessor
may at Lessor's option, either (i) repair such damage as soon as
reasonably possible at Lessor's expense, in which event this Lease
shall continue in full force and effect, or (ii) give written notice to
Lessee within thirty (30) days after receipt by Lessor 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 date of such notice.
In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days
after the receipt of such notice to give written notice to Lessor of
Lessee's commitment to pay for the repair of such damage totally at
Lessee's expanse and without reimbursement from Lessor. Lessee shall
provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following such commitment from Lessee.
In such event this Lease shall continue in full force and effect, and
Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not
give such notice and provide the funds or assurance thereof within the
times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision
hereof, if Premises Total Destruction occurs (including any destruction
required by any authorized public authority), this Lease shall
terminate sixty (60) days following the date of such Premises Total
Destruction, whether or not the damage or destruction is an Insured
Loss or was caused by a negligent or willful act of Lessee. In the
event, however, that the damage or destruction was caused by Lessee,
Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last
six (6) months of the term of this Lease there is damage for which the
cost to repair exceeds one month's Base Rent, whether or not an Insured
Loss, Lessor may, at Lessor's option, terminate this Lease effective
sixty (60) days following the date of occurrence of such damage by
giving written notice to Lessee of Lessor's election to do so within
thirty (30) days after the date of occurrence of such damage. Provided,
however, if Lessee at that time has an exercisable option to extend
this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any
shortage in insurance proceeds (or adequate assurance thereof) needed
to make the repairs on or before the earlier of (i) the date which is
ten (10) days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date
upon which such option expires. If Lessee duly exercises such option
during such period and provides Lessor with funds (or adequate
assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably
possible and this Lease shall continue in full force and effect. If
Lessee fails to exercise such option and provide such funds or
assurance during such period, then this Lease shall terminate as of the
date set forth in the first sentence of this Paragraph 9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or
(ii) Hazardous Substance Condition for Which Lessee is not legally
responsible, the Base Rent, Common Area Operating Expenses and other
charges, if any, payable by Lessee hereunder for the period during
which such damage or condition, its repair, remediation or restoration
continues, shall be abated in proportion to the degree to which
Lessee's use of the Premises is impaired, but not in excess of proceeds
from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other
charges, if any, as aforesaid, all other obligations of Lessee
hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such damage,
destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore
the Premises under the provisions of this Paragraph 9 and shall not
commence, in a substantial and meaningful way, the repair or
restoration of the Premises within ninety (90) days after such
obligation shall accrue, Lessee may, at any time prior to the
commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's
election to terminate this Lease on a date not less than sixty (60)
days following the giving of such notice. If Lessee gives such notice
to Lessor and such Lenders and such repair or restoration is not
commenced within thirty (30) days after receipt of such notice, this
Lease shall terminate as of the date specified in said notice. If
Lessor or a Lender commences the repair or restoration of the Premises
within thirty (30) days after the receipt of such notice, this Lease
shall continue in full force and effect. "COMMENCE" as used in this
Paragraph 9.6 shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work
on the Premises, whichever occurs first.
Initials:______
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9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this
Lease pursuant to this Paragraph 9, Lessor shall return to Lessee any
advance payment made by Lessee to Lessor and so much of Lessee's
Security Deposit as has not been, or is not then required to be, used
by Lessor under the terms of this Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms
of this Lease shall govern the effect of any damage to or destruction
of the Premises and the Building with respect to the termination of
this Lease and hereby waive the provisions of any present or future
statute to the extent it is inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property
Taxes, as defined in Paragraph 10.2, applicable to the Industrial
Center, and except as otherwise provided in Paragraph 10.3, any such
amounts shall be included in the calculation of Common Area Operating
Expenses in accordance with the provisions of Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITION. As used herein, the term
"REAL PROPERTY TAXES" shall include any form of real estate tax or
assessment, general, special, ordinary or extraordinary, and any
license fee, commercial rental tax, improvement bond or bonds, levy or
tax (other than inheritance, personal income or estate taxes) imposed
upon the Industrial Center by any authority having the direct or
indirect power to tax, including any city, state or federal government,
or any school, agricultural, sanitary, fire, street, drainage, or other
improvement district thereof, levied against any legal or equitable
interest of Lessor in the Industrial Center or any portion thereof,
Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "REAL PROPERTY TAXES" shall
also include any tax, fee, levy, assessment or charge, or any increase
therein, imposed by reason of events occurring, or changes in
Applicable Law taking effect, during the term of this Lease, including
but not limited to a change in the ownership of the Industrial Center
or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not
contemplated by the Parties. In calculating Real Property Taxes for any
calendar year, the Real Property Taxes for any real estate tax year
shall be included in the calculation of Real Property Taxes for such
calendar year based upon the number of days which such calendar year
and tax year have in common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses
shall not include Real Property Taxes specified in the tax assessor's
records and work sheets as being caused by additional improvements
placed upon the Industrial Center by other lessees or by Lessor for the
exclusive enjoyment of such other lessees. Notwithstanding Paragraph
10.1 hereof, Lessee shall, however, pay to Lessor at the time Common
Area Operating Expenses are payable under Paragraph 4.2, the entirety
of any increase in Real Property Taxes if assessed solely by reason of
Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately
assessed, Real Property Taxes allocated to the Building shall be an
equitable proportion of the Real Property Taxes for all of the land and
improvements included within the tax parcel assessed, such proportion
to be determined by Lessor from the respective valuations assigned in
the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in
good faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to
delinquency all taxes assessed against and levied upon Lessee-Owned
Alterations and Utility Installations, Trade Fixtures, furnishings,
equipment and all personal property of Lessee contained in the Premises
or stored within the Industrial Center. When possible, Lessee shall
cause its Lessee-Owned Alterations and Utility Installations, Trade
Fixtures, furnishings, equipment and all other personal property to be
assessed and billed separately from the real property of Lessor. If any
of Lessee's said property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee's
property within ten (10) days after receipt of a written statement
setting forth the taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity,
telephone, security, gas and cleaning of the Premises, together with
any taxes thereon. If any such utilities or services are not separately
metered to the Premises or separately billed to the Premises, Lessee
shall pay to Lessor a reasonable proportion to be determined by Lessor
of all such charges jointly metered or billed with other premises in
the Building, in the manner and within the time periods set forth in
Paragraph 4.2(d).
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of
law assign, transfer, mortgage or otherwise transfer or encumber
(collectively, "assign") or sublet all or any part of Lessee's interest
in this Lease or in the Premises without Lessor's prior written consent
given under and subject to the terms of Paragraph 36.
(b) A change in the control of Lessee shall
constitute an assignment requiring Lessor's consent. The transfer, on a
cumulative basis, of twenty-five percent (25%) or more of the voting
control of Lessee shall constitute a change in control for this
purpose.
(c) The involvement of Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale,
acquisition, financing, refinancing, transfer, leveraged buy-out or
otherwise), whether or not a formal assignment or hypothecation of this
Lease or Lessee's assets occurs, which results or will result in a
reduction of the Net Worth of Lessee, as hereinafter defined, by an
amount equal to or greater than twenty-five percent (25%) of such Net
Worth of Lessee as it was represented to Lessor at the time of full
execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately
prior to said transaction or transactions constituting such reduction,
at whichever time said Net Worth of Lessee was or is greater, shall be
considered an assignment of this Lease by Lessee to which Lessor may
reasonably withheld its consent. "NET WORTH OF LESSEE" for purposes of
this Lease shall be the net worth of Lessee (excluding any Guarantors)
established under generally accepted accounting principles consistently
applied.
(d) An assignment or subletting of Lessee's interest
in this Lease without Lessor's specific prior written consent shall, at
Lessor's option, be a Default curable after notice per Paragraph 13.1,
or a non-curable Breach without the necessity of any notice and grace
period. If Lessor elects to treat such unconsented to assignment or
subletting as a non-curable Breach, Lessor shall have the right to
either: (i) terminate this Lease, or (ii) upon thirty (30) days'
written notice ("LESSOR'S NOTICE"), increase the monthly Base Rent for
the Premises to the greeter of the then fair market rental value of the
Premises, as reasonably determined by Lessor, or one hundred ten
percent (110%) of the Base Rent then in effect. Pending determination
of the new fair market rental value, if disputed by Lessee, Lessee
shall pay the amount set forth in Lessor's Notice, with any overpayment
credited against the next installment(s) of Base Rent coming due, and
any underpayment for the period retroactively to the effective date of
the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and rental adjustment,
(i) the purchase price of any option to purchase the Premises held by
Lessee shall be subject to similar adjustment to the then fair market
value as reasonably determined by Lessor (without the Lease being
considered an encumbrance or any deduction for depreciation or
obsolescence, and considering the Premises at its highest and bast use
and in good condition) or one hundred ten percent (110%) of the price
previously in effect, (ii) any index-oriented rental or price
adjustment formulas contained in this Lease shall be adjusted to
require that the base index be determined with reference to the index
applicable to the time of such adjustment, and (iii) any fixed rental
adjustments scheduled during the remainder of the Lease term shall be
increased in the same ratio as the new rental hears to the Base Rent in
effect immediately prior to the adjustment specified in Lessor's
Notice.
(e) Lessee's remedy for any breach of this Paragraph
12.1 by Lessor shall be limited to compensatory damages and/or
injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND
SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not (i) be effective without the express written
assumption by such assignee or sublessee of the obligations of Lessee
under this Lease, (ii) release Lessee of any obligations hereunder, nor
(iii) alter the primary liability of Lessee for the payment of Base
Rent and other sums due Lessor hereunder or for the performance of any
other obligations to he performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of
Lessee's obligations from any person other than Lessee pending approval
or disapproval of an assignment. Neither a delay in the approval or
disapproval of such assignment nor the acceptance of any rent for
performance shall constitute a waiver or estoppel of Lessor's right to
exercise its remedies for the Default or Breach by Lessee of any of the
terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or
subletting shall not constitute a consent to any subsequent assignment
or subletting by Lessee or to any subsequent or successive assignment
or subletting by the assignee or sublessee. However, Lessor may consent
to subsequent subletting and assignments of the sublease or any
amendments or modifications thereto without notifying Lessee or anyone
else liable under this Lease or the sublease and without obtaining
their consent, and such action shall not relieve such persons from
liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's
obligation under this Lease. Lessor may proceed directly against
Lessee, any Guarantors or anyone else responsible for the performance
of the Lessee's obligations under this Lease, including any sublessee,
without first exhausting Lessor's remedies against any other person or
entity responsible therefor to Lessor, or any security held by Lessor.
(f) Any assignee of, or sublessee under, this Lease
shall, by reason of accepting such assignment or entering into such
sublease, he 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 he 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.
Initials:_____
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12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING.
The following terms and conditions shall apply to any subletting by
Lessee of all or any part of the Premises and shall be deemed included
in all subleases under this Lease whether or not expressly incorporated
therein:
(a) Lessee hereby assigns and transfers to Lessor all
of Lessee's interest in all 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
the foregoing provision or any other assignment of such sublease to
Lessor, nor by reason of the collection of the rents from a sublessee,
be deemed liable to the sublessee for any failure of Lessee to perform
and comply with any of Lessee's obligations to such sublessee under
such Sublease. Lessee hereby irrevocably authorizes and directs any
such sublessee, upon receipt of a written notice from Lessor stating
that a Breech exists in the performance of Lessee's obligations under
this Lease, to pay to Lessor the rents and other charges due and to
become due under the sublease. Sublessee shall rely upon any such
statement and request from Lessor and shall pay such rents and other
charges to Lessor without any obligation or right to inquire as to
whether such Breach exists and notwithstanding any notice from or claim
from Lessee to the contrary. Lessee shall have no right or claim
against such sublessee, or, until the Breach has been cured, against
Lessor, for any such rents and other charges so paid by said sublessee
to Lessor.
(b) In the event of a Breach by Lessee in the
performance of its obligations under this Lease, Lessor, at its option
and without any obligation to do so, may require any sublessee to
attorn to Lessor, in which event Lessor shall undertake the obligations
of the sublessor under such sublease from the time of the exercise of
said option to the expiration of such sublease; provided, however,
Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor or for any other prior
defaults or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the
sublessor under a sublease shall also require the consent of Lessor
herein.
(d) No sublessee under a sublease approved by Lessor
shall further assign or sublet all or any part of the Premises without
Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of
Default or Breach by Lessee to the sublessee, who shall have the right
to cure the Default of Lessee within the grace period, if any,
specified in such notice. The sublessee shall have a right of
reimbursement and offset from and against Lessee for any such Defaults
cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an
attorney is consulted by Lessor in connection with a Lessee Default or
Breach (as hereinafter defined}, $350.00 is a reasonable minimum sum
per such occurrence for legal services and costs in the preparation and
service of a notice of Default, and that Lessor may include the cost of
such services and costs in said notice as rent due and payable to cure
said default. A "DEFAULT" by Lessee is defined as a failure by Lessee
to observe, comply with or perform any of the terms, covenants,
conditions or roles applicable to Lessee under this Lease. A "BREACH"
by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is
specified herein, the failure by Lessee to cure such Default prior to
the expiration of the applicable grace period, and shall entitle Lessor
to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(b) Except as expressly otherwise provided in this
Lease, the failure by Lessee to make any payment of Base Rent, Lessee's
Share of Common Area Operating Expenses, or any other monetary payment
required to be made by Lessee hereunder as and when due, the failure by
Lessee to provide Lessor with reasonable evidence of insurance or
surety bond required under this Lease, or 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) BUSINESS days following written notice thereof by or on behalf of
Lessor to Lessee.
(c) Except as expressly otherwise provided in this
Lease, the failure by Lessee to provide Lessor with reasonable written
evidence (in duly executed original form, if applicable) of (i)
compliance with Applicable Requirements per Paragraph 6.3, (ii) the
inspection, maintenance and service contracts required under Paragraph
7.1 (b), (iii) the rescission of an unauthorized assignment or
subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs
16 or 37, (v) the subordination or non-subordination of this Lease per
Paragraph 30, (vi) the guaranty of the performance of Lessee's
obligations under this Lease if required under Paragraphs 1.11 and 37,
(vii) the execution of any document requested under Paragraph 42
(easements), or (viii) any other documentation or information which
Lessor may reasonably require of Lessee under the terms of this lease,
where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants,
conditions or provisions of this Lease, or of the rules adopted under
Paragraph 40 hereof that are to be observed, complied with or performed
by Lessee, other than those described in Subparagraphs 13.1 (a), (b) or
(c), above, where such Default continues for a period of thirty (30)
days after written notice thereof by or on behalf of Lessor to Lessee;
provided, however, that if the nature of Lessee's Default is such that
more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events:
(i) the making by Lessee of any general arrangement or assignment for
the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined
in 11 U.S. Code Section 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 13.1 (e)
is contrary to any applicable law, such provision shall be of no force
or effect, and shall not affect the validity of the remaining
provisions.
(g) If the performance of Lessee's obligations under
this Lease is guaranteed: (i) the death of a Guarantor, (ii) the
termination of a Guarantor's liability with respect to this Lease other
than in accordance with the terms of such guaranty, (iii) a Guarantor's
becoming insolvent or the subject of a bankruptcy filing, (iv) a
Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach
of its guaranty obligation on an anticipatory breach basis, and
Lessee's failure, within sixty (60) days following written notice by or
on behalf of Lessor to Lessee of any such event, to provide Lessor with
written alternative assurances of security, which, when coupled with
the then existing resources of Lessee, equals or exceeds the combined
financial resources of Lessee and the Guarantors that existed at the
time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty
or obligation of Lessee under this Lease, within ten (10) days after
written notice to Lessee (or in case of an emergency, without notice),
Lessor may at its option (but without obligation to do so), perform
such duty or obligation on Lessees behalf, including but not limited to
the obtaining of reasonably required bends, insurance policies, or
governmental licenses, permits or approvals. The costs and expenses of
any such performance by Lessor shall be due and payable by Lessee to
Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its
own option, may require all future payments to be made under this Lease
by Lessee to be made only by cashier's check. In the event of a Breach
of this Lease by Lessee (as defined in Paragraph 13.1), with or without
further notice or demand, and without limiting Lessor in the exercise
of any right or remedy which Lessor may have by reason of such Breach,
Lessor may:
(a) Terminate Lessee's right to possession of the
Premises by any lawful means, in which case this Lease and the term
hereof shall terminate and Lessee shall immediately surrender
possession of the Premises to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the worth at the time of the award
of the unpaid rent which had been earned at the time of termination;
(ii) the worth at the time of award of the amount by which the unpaid
rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of
award of the amount by which the unpaid rent for the balance of the
term after the time of award exceeds the amount of such rental loss
that the Lessee proves could be reasonably avoided; and (iv) any other
amount necessary to compensate Lessor for all the detriment proximately
caused by the Lessee's failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to
result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees,
and that portion of any leasing commission paid by Lessor in connection
with this Lease applicable to the unexpired term of this Lease. The
worth at the time of award of the amount referred to in provision (iii)
of the immediately preceding sentence shall be computed by discounting
such amount at the discount rate of the Federal Reserve Bank of San
Francisco or the Federal Reserve Bank District in which the Premises
are located at the time of award plus one percent (1%). Efforts by
Lessor to mitigate damages caused by Lessee's Default or Breach of this
Lease shall not waive Lessor's right to recover damages under this
Paragraph 13.2. If termination of this Lease is obtained through the
provisional remedy of unlawful detainer, Lessor shall have the right to
recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a
notice and grace period required under Subparagraph 13.1 (b), (c) or
(d) was not previously given, a notice to pay rent or quit, or to
perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also
constitute the applicable notice for grace period purposes required by
Subparagraph 13.1 (b),(c) or (d). In such case, the applicable grace
period under the unlawful detainer statue shall run concurrently after
the one such statutory notice, and the failure of Lessee to cure the
Default within the greater of the two (2) such grace periods shall
constitute both an unlawful detainer and a Breach of this Lease
entitling Lessor to the remedies provided for in this Lease and/or by
said statute.
(b) Continue the Lease and Lessee's right to
possession in effect (in California under California Civil Code Section
1951.4) after Lessee's Breach and recover the rent as it becomes due,
provided Lessee has the right to sublet or sign, subject only to
reasonable limitations. Lessor and Lessee agree that the limitations on
assignment and subletting in this Lease are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver to protect the Lessor's interest under this
Lease, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter
available to Lessor under the laws or judicial decisions of the state
wherein the Premises are located.
(d) The expiration or termination of this Lease
and/or the termination of Lessee's right to possession shall not
relieve Lessee from liability under any indemnity provisions of this
Lease as to matters occurring or accruing during the term hereof or by
reason of Lessee's occupancy of the Premises.
Initials:_____
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13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by
Lessor for tree or abated rent or other charges applicable to the
Premises, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering
into this Lease, all of which concessions are hereinafter referred to
as "INDUCEMENT PROVISIONS" shall be deemed conditioned upon Lessee's
full and faithful performance of all of the terms, covenants and
conditions of this Lease to be performed or observed by Lessee during
the term hereof as the same may be extended. Upon the occurrence of a
Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provision shall automatically be deemed deleted from this
Lease and of no further force or effect, and any rent, other charge,
bonus, inducement or consideration theretofore abated, given or paid by
Lessor under such an Inducement Provision shall be immediately due and
payable by Lessee to Lessor, and recoverable by Lessor, as additional
rent due under this Lease, notwithstanding any subsequent cure of said
Breach by Lessee. The acceptance by Lessor of rent or the sure of the
Breach which initiated the operation of this Paragraph 13.3 shall not
be deemed a waiver by Lessor of the provisions of this Paragraph 13.3
unless specifically so stated in written by Lessor at the time of such
acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late
payment by Lessee to Lessor of rent and other sums due hereunder will
cause Lessor to incur costs not contemplated by this Lease, the exact
amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges. and
late charges which may be imposed upon Lessor by the terms of any
ground lease, mortgage or deed of trust covering the Premises.
Accordingly, if any installment of rent or other sum due from Lessee
shall not be received by Lessor or Lessor's designee within ten (10)
days after such amount shall be due, then, without any requirement for
notice to Lessee, Lessee shall pay to Lessor a late charge equal to 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's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies
granted hereunder. In the event that a late charge is payable
hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any
other provision of this Lease to the contrary, Base Rent shall, at
Lessor's option, become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an
obligation required to be performed by Lessor. For purposes of this
Paragraph 13.5, a reasonable time shall in no event be less than
fourteen (14) days after receipt by Lessor, and by any Lender(s) whose
name and address shall have been furnished to Lessee in writing for
such purpose, of written notice specifying wherein such obligation of
Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more then 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 (ell of which are herein called "condemnation"),
this Lease shall terminate as to the part so taken as of the date the
condemning authority takes title or possession, whichever first occurs.
If more than ten percent (10%) of the floor area of the Premises, or
more than twenty-five percent (25%) of the portion of the Common Areas
designated for Lessee's parking, is taken by condemnation, Lessee may,
at Lessee's option, to be exercised in writing within THIRTY (30) days
after Lessor shall have given Lessee written notice of such taking (or
in the absence of such notice, within ten (10) days after the
condemning authority shall have taken possession) terminate this Lease
as of the date the condemning authority takes such possession. If
Lessee does not terminate this Lease in accordance with the foregoing,
this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in
the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises. No reduction of
Base Rent shall occur if the condemnation does not apply to any portion
of the Premises. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under
threat of the exercise of such power shall be the property of Lessor,
whether such award shall be made as compensation for diminution of
value of the leasehold or for the taking of the fee, or as severance
damages; provided, however, that Lessee shall be entitled to any
compensation, separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this
Lease is not terminated by reason of such condemnation, Lessor shall to
the extent of its net severance damages received, over and above
Lessee's Share of the legal and other expenses incurred by Lessor in
the condemnation matter, repair any damage to the Premises caused by
such condemnation authority. Lessee shall be responsible for the
payment of any amount in excess of such net severance damages required
to complete such repair.
15. BROKERS' FEES.
15.1 PROCURING CAUSE. The Broker(s) named in Paragraph 1.10
is/are the procuring cause of this Lease.
15.2 ADDITIONAL TERMS. Unless Lessor and Broker(s) have
otherwise agreed in writing, Lessor agrees that: (a) if Lessee
exercises any Option (as defined in Paragraph 39.1 ) granted under this
Lease or any Option subsequently granted, or (b) if Lessee acquires any
rights to the Premises or other premises in which Lessor has an
interest, 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) it 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 Broker(s) a fee in
accordance with the schedule of said Broker(s) in effect at the time of
the execution of this Lease.
15.3 ASSUMPTION OF OBLIGATIONS. 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 an intended
third party beneficiary of the provisions of Paragraph 1.10 and 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.
15.4 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each
represent and warrant to the other that it has had no dealings with any
person, firm, broker or finder other than as named in Paragraph 1.10(a)
in connection with the negotiation of this Lease and/or the
consummation of the transaction contemplated hereby, and that no broker
or other person, firm or entity other than said named Broker(s) is
entitled to any commission or finder's fee in connection with said
transaction. Lessee and Lessor do each hereby agree to indemnify,
protect, defend and hold the other harmless from and against liability
for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or
actions of the indemnifying Party, including any costs, expenses,
and/or attorneys' fees reasonably incurred with respect thereto.
16. TENANCY AND FINANCIAL STATEMENTS.
16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY")
shall within ten (10) days after written notice from the other Party
(the "REQUESTING PARTY") execute, acknowledge and deliver to the
Requesting Party a statement in writing in a form similar to the then
most current "TENANCY STATEMENT" form published by the American
Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the
Requesting Party.
16.2 FINANCIAL STATEMENT. If Lessor desires to finance,
refinance, or sell the Premises or the Building, or any part thereof,
Lessee and all Guarantors shall deliver to any potential lender or
purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or
purchaser, including but not limited to Lessee's financial statements
for the past three (3) years. All such financial statements shall be
received by Lessor and such lender or purchaser in confidence and shall
be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the
Premises. In the event of a transfer of Lessor's title or interest in
the Premises or in this Lease, Lessor shall deliver to the transferee
or assignee (in cash or by credit) any unused Security Deposit held by
Lessor at the time of such transfer or assignment. Except as provided
in Paragraph 15.3, upon such transfer or assignment and delivery of the
Security Deposit, as aforesaid, the prior Lessor shall be relieved of
all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor. Subject to the
foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as
hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect
the validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten
(10) days following the date on which it was due, shall bear interest
from the date due at the prime rate charged by the largest state
chartered bank in the state in which the Premises are located plus four
percent (4%) per annum, but not exceeding the maximum rate allowed by
law, in addition to the potential late charge provided for in Paragraph
13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the
performance of all obligations to be performed or observed by the
Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under
the terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease
contains all agreements between the Parties with respect to any matter
mentioned herein, and no other prior or contemporaneous agreement or
understanding shall be effective. Lessor and Lessee each represents and
warrants to the Brokers that it has made, and is relying solely upon,
its own investigation as to the nature, quality, character and
financial responsibility of the other Party to this Lease and as to the
nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or
breach hereof by either Party. Each Broker shall be an intended third
party beneficiary of the provisions of this Paragraph 22.
Initials:_____
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23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by
this Lease shall be in writing and may be delivered in person (by hand
or by messenger or courier service) or may be sent by regular,
certified or registered mail or U.S. Postal Service Express Mail, with
postage prepaid, or by facsimile transmission during normal business
hours, and shall be deemed sufficiently given if served in a manner
specified in this Paragraph 23. The addresses noted adjacent to a
Party's signature on this Lease shall be that Party's address for
delivery or mailing of notice purposes. Either Party may by written
notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the
Premises shall constitute Lessee's address for the purpose of mailing
or delivering notices to Lessee. A copy of all notices required or
permitted to be given to Lessor hereunder shall be concurrently
transmitted to such party or parties at such addresses as Lessor may
from time to time hereafter designate by written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or
certified mail, return receipt requested, shall he 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 FORTY-EIGHT (48) hours after
delivery of the same to the United States Postal Service or courier, If
any notice is transmitted by facsimile transmission or similar means,
the same shall be deemed served or delivered upon telephone or
facsimile confirmation of receipt of the transmission thereof, provided
a copy is also delivered via delivery or mall. If notice is received on
a Saturday or a Sunday or a legal holiday, it shall be deemed received
on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any
other term, covenant or condition hereof, or of any subsequent Default
or Breach by Lessee of the same or any other term, covenant or
condition hereof. Lessor's consent to, or approval of, any such act
shall not be deemed to render unnecessary the obtaining of Lessor's
consent to, or approval of, any subsequent or similar act by Lessee, or
be construed as the basis of an estoppel to enforce the provision or
provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any Default or
Breach by Lessee of any provision hereof. Any payment given Lessor by
Lessee may be accepted by Lessor on account of 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.
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 laws of the State in which the Premises are located.
Any litigation between the Parties hereto concerning this Lease shall
be initiated in the county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby
shall be subject and subordinate to any ground lease, mortgage, deed of
trust, or other hypothecation or security device (collectively,
"SECURITY DEVICE"), now or hereafter placed by Lessor upon the real
property of which the Premises are a part, to any and all advances made
on the security thereof, and to all renewals, modifications,
consolidations, replacements and extensions thereof. Lessee agrees that
the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor
under this Lease, but that in the event of Lessor's default with
respect to any such obligation, Lessee will give any Lender whose name
and address have been furnished Lessee in writing for such purpose
notice of Lessor's default pursuant to Paragraph 13.5. If any Lender
shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written
notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of
the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party
who acquires ownership of the Premises by reason of a foreclosure of a
Security Device, and that in the event of such foreclosure, such new
owner shall not: (i) be liable for any act or omission of any prior
lessor or with respect to events occurring prior to acquisition of
ownership, (ii) be subject to any offsets or defenses which Lessee
might have against any prior lessor, or (iii) be bound by prepayment of
more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered
into by Lessor after the execution of this lease, Lessee's
subordination of this Lease shall be subject to receiving assurance (a
"non-disturbance agreement") from the Lender that Lessee's possession
and this Lease, including any options to extend the term hereof, will
not be disturbed so long as Lessee is not in Breach hereof and attorns
to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this
Paragraph 30 shall be effective without the execution of any further
documents; provided, however, that upon written request from Lessor or
a Lender in connection with a sale, financing or refinancing of
Premises, Lessee and Lessor shall execute such further writings as may
be reasonably required to separately document any such subordination or
non-subordination, attornment and/or non-disturbance agreement as is
provided for herein.
31. ATTORNEYS' FEE. If any Party or Broker brings an action or
proceeding to enforce the terms hereof or declare rights hereunder, the
Prevailing Party (as hereafter defined) in any such proceeding, action,
or appeal thereon, shall be entitled to reasonable attorneys' fees.
Such fees may be awarded in the same suit or recovered in a separate
suit, whether or not such action or proceeding is pursued to decision
or judgment. The term "PREVAILING PARTY" shall include, without
limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or
defense. The attorneys' fee award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse
all attorneys' fees reasonably incurred. Lessor shall be entitled to
attorneys' fees, costs and expenses incurred in preparation and service
of notices of Default and consultations in connection therewith,
whether or not a legal action is subsequently commenced in connection
with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's
agents shall have the right to enter the Premises at any time, in the
case of an emergency, and otherwise at reasonable times for the purpose
of showing the same to prospective purchasers, lenders, or lessees, and
making such alterations, repairs, improvements or additions to the
Premises or to the Building, as Lessor may reasonably deem necessary.
Lessor may at any time place on or about the Premises or Building any
ordinary "For Sale" signs and Lessor may at any time during the last
one hundred eighty (180) days of the term hereof place on or about the
Premises any ordinary "For Lease" signs. All such activities of Lessor
shall be without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted,
either voluntarily or involuntarily, any auction upon the Premises
without first having obtained Lessor's prior written consent.
Notwithstanding anything to the contrary in this Lease, Lessor shall
not be obligated to exercise any standard of reasonableness in
determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the
Premises or the Building, except that Lessee may, with Lessor's prior
written consent, install (but not on the roof) such signs as are
reasonably required to advertise Lessee's own business so long as such
signs are in a location designated by Lessor and comply with Applicable
Requirements and the signage criteria established for the Industrial
Center by Lessor. The installation of any sign on the Premises by or
for Lessee shall be subject to the provisions of Paragraph 7
(Maintenance, Repairs, Utility Installations, Trade Fixtures and
Alterations). Unless otherwise expressly agreed herein, Lessor reserves
all rights to the use of the roof of the Building, and the right to
install advertising signs on the Building, including the roof, which do
not unreasonably interfere with the conduct of Lessee's business;
Lessor shall be entitled to all revenues from such advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in
writing by Lessor, the voluntary or other surrender of this Lease by
Lessee, the mutual termination or cancellation hereof, or a termination
hereof by Lessor for Breach by Lessee, shall automatically terminate
any sublease or lessor 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 lessor interest, shall constitute
Lessor's election to have such event constitute the termination of such
interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as
otherwise provided herein, wherever in this Lease the consent of a
Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual
reasonable costs and expenses (including but not limited to
architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee
for any Lessor consent pertaining to this Lease or the Premises,
including but not limited to consents to an assignment a subletting or
the presence or use of a Hazardous Substance, shall be paid by Lessee
to Lessor upon receipt of an invoice and supporting documentation
therefor. in addition to the deposit described in Paragraph 12.2(e),
Lessor may, as a condition to considering any such request by Lessee,
require that Lessee deposit with Lessor an amount of money (in addition
to the Security
Initials:_____
_____
Deposit held under Paragraph 5) reasonably calculated by Lessor to
represent the cost Lessor will incur in considering and responding to
Lessee's request. Any unused portion of said deposit shall be refunded
to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute
an acknowledgment that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing
Default or Breach, except as may be otherwise specifically stated in
writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by
this Lease are acknowledged by Lessee as being reasonable. The failure
to specify herein any particular condition to Lessor's consent shall
not preclude the impositions by Lessor at the time of consent of such
further or other conditions as are then reasonable with reference to
the particular matter for which consent is being given.
37. GUARANTOR
37.1 FORM OF GUARANTY. If there are to be any Guarantors of
this Lease per Paragraph 1.11, the form of the guaranty to be executed
by each such Guarantor shall be in the form most recently published by
the American Industrial Real Estate Association, and each such
Guarantor shall have the same obligations as Lessee under this lease,
including but not limited to the obligation to provide the Tenancy
Statement and information required in Paragraph 16.
37.2 ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute
a Default of the Lessee under this Lease if any such Guarantor fails or
refuses, upon reasonable request by Lessor to give: (a) evidence of the
due execution of the guaranty called for by this Lease, including the
authority of the Guarantor (and of the party signing on Guarantor's
behalf) to obligate such Guarantor on said guaranty, and resolution of
its board of directors authorizing the making of such guaranty,
together with a certificate of incumbency showing the signatures of the
persons authorized to sign on its behalf, (b) current financial
statements of Guarantor as may from time to time be requested by
Lessor, (c) a Tenancy Statement, or (d) written confirmation that the
guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the
Premises and the performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this
Lease, Lessee shall have quiet possession of the Premises for the
entire term hereof subject to all of the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the word "OPTION" has
the following meaning: (a) the right to extend the term of this Lease
or to renew this Lease or to extend or renew any lease that Lessee has
on other property of Lessor; (b) the right of first refusal to lease
the Premises or the right of first offer to lease the Premises or the
right of first refusal to lease other property of Lessor or the right
of first offer to lease other property of Lessor; (c) the right to
purchase the Premises, or the right of first refusal to purchase the
Premises, or the right of first offer to purchase the Premises, or the
right to purchase other property of Lessor, or the right of first
refusal to purchase other property of Lessor, or the right of first
offer to purchase other property of Lessor.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any
multiple Options to extend or renew this Lease, a later option cannot
be exercised unless the prior Options to extend or renew this Lease
have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary:
(i) during the period commencing with the giving of any notice of
Default under Paragraph 13.1 and continuing until the noticed Default
is cured, or (ii) during the period of time any monetary obligation due
Lessor from Lessee is unpaid (but regard to whether notice thereof is
given Lessee), or (iii) during the time Lessee is in Breach of this
Lease, or
(b) The period of time within which an Option may be
exercised shall not be extended or enlarged by reason of Lessee's
inability to exercise an Option because of the provisions of Paragraph
39.4(a)
(c) All rights of Lessee under the provisions of an
option shall terminate and be of no further force or effect,
notwithstanding Lessee's due and timely exercise of the Option, if,
after such exercise and during the term of this Lease, (i) Lessee fails
to pay to Lessor a monetary obligation of Lessee for a period of thirty
(30) days after such obligation becomes due (without any necessity of
Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph
13.1 during any twelve (12) month period, whether or not the Defaults
are cured, or (iii) if Lessee commits a Breach of this Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and
keep and observe all reasonable rules and regulations ("Rules and
Regulations") which Lessor may make from time to time for the
management, safety, care, and cleanliness of the grounds, the parking
and unloading of vehicles and the preservation of good order, as well
as for the convenience of other occupants or tenants of the Building
and the Industrial Center and their invitees.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental
payable to Lessor hereunder does not include the cost of guard service
or other security measures, and that Lessor shall have no obligation
whatsoever to provide same. Lessee assumes all responsibility for the
protection of the Premises, Lessee, its agents and invitees and their
property from the acts of third parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights
of way, utility raceways, and dedications that Lessor deems necessary,
and to cause the recordation of parcel maps and restrictions, as long
as such easements, rights of way, utility raceways, dedications, maps
and restrictions do not reasonably 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.
44. AUTHORITY. If either Party hereto is a corporation, trust, or
general or limited partnership, each individual executing this Lease on
behalf of such entity represents and warrants that he or she is duly
authorized to execute and deliver this Lease on its behalf. If Lessee
is a corporation, trust or partnership, Lessee shall, within thirty
(30) days after request by Lessor, deliver to Lessor evidence
satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease
and the typewritten or handwritten provisions shall he controlled by
the typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or
Lessor's agent or Lessee's agent and submission of same to Lessee or
Lessor shall not be deemed an offer to lease. This Lease is not
intended to be binding until executed and delivered by all Parties
hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by
the parties in interest at the time of the modification, The Parties
shall amend this Lease from time to time to reflect any adjustments
that are made to the Base Rent or other rent payable under this Lease.
As long as they do not materially change Lessee's obligations
hereunder, Lessee agrees to make such reasonable non-monetary
modifications to this Lease as may be reasonably required by an
institutional insurance company or pension plan Lender in connection
with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if
more than one person or entity is named herein as either Lessor or
Lessee the obligations of such multiple parties shall be the joint and
several responsibility of all persons or entities named herein as such
Lessor or Lessee.
Initials:_____
_____
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH
TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE
SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY
AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE
ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF
LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR
ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF
ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR
CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH
IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN
COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE
SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM
THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the
dates specified above their respective signatures.
<TABLE>
<CAPTION>
<S> <C> <C>
Executed at: Executed at: Rocklin,CA
on:___________________________________________ on: November 15, 1995
By LESSOR: By LESSEE:
BUZZ OATES ENTERPRISES II ZYTEC CORPORATION, A
Minesota Corporation
By:___________________________________________ By:______________________________
Name Printed: Marvin L. Oates Name Printed: Tom Kent
Title:________________________________________ Title: General Manager
By:___________________________________________ By:______________________________
Name Printed:_________________________________ Name Printed:
Title:________________________________________ Title:___________________________
Address: 8615 Elder Creek Road, Sacto CA 95828 Address: 7575 Market Place Drive,
Eden Prairie, MINN
Telephone:(916)381-0609 Telephone:(612) 941-1100
Facsimile:(916) 381-8671 Facsimile: ( )_________________
BROKER: BROKER:
Executed at:__________________________________ Executed at: ____________________
on:___________________________________________ on: _____________________________
By:___________________________________________ By:______________________________
Name Printed:_________________________________ Name Printed:____________________
Title:________________________________________ Title:___________________________
Address:______________________________________ Address:_________________________
Telephone:( )_______________________________ Telephone:( )__________________
Facsimile: ( )______________________________ Facsimile: ( )_________________
</TABLE>
Exhibit 10.19 Addendum
ADDENDUM TO STANDARD INDUSTRIAL COMMERCIAL MULTI-TENANT NET, DATED
SEPTEMBER 15, 1995 BY AND BETWEEN BUZZ OATES ENTERPRISES, II, A
CALIFORNIA GENERAL PARTNERSHIP (LESSOR) AND ZYTEC CORPORATION, A
MINNESOTA CORPORATION (LESSEE)
2.1 (CONT.) In the event that part of the building becomes unusable,
the monthly rent will be adjusted based prorata over the usable square
foot space.
2.4 (CONT) Lessee shall have six (6) months to accept the building as
completed. This does not constitute a right of the Lessee to cancel
this Lease within the first six (6) months, but shall have six (6)
months from the day of occupancy to have Lessor complete construction,
repair defections and "complete the building".
3.2 (CONT) EARLY OCCUPANCY CLAUSE- WAIVER OF LIABILITY: Lessor consents
to the entry of Lessee into and upon the premises 80 days after
issuance of a building permit for the purpose of fixturization and
additional tenant improvements. Prior to commencement date of this
lease and during the period Lessor has consented to Lessee's entry into
and upon the premises, Lessee shall indemnify and hold harmless Lessor
from and against any and all claims arising from Lessee's use of the
premises, or from the conduct of Lessee's business or from any
activity, work or things done, permitted or suffered by Lessee in or
about the premises or elsewhere, and shall further indemnify and hold
harmless Lessor from and against any and all claims arising from any
negligence of the Lessee, or any of Lessee's agents, contractors, or
employees, and from and against all costs, attorney's fees, expenses
and liabilities incurred in the defense of any such claim; Lessee upon
notice from Lessor shall defend the same at Lessee's expense by counsel
satisfactory to Lessor, Lessee, as a material part of the consideration
to Lessor, hereby assumes all risk of damage to property or injury to
persons, in or upon, or against the premises arising from any use, and
Lessee hereby waives all claims in respect thereof against Lessor.
3.3 DELAY IN POSSESSION: Lessor shall guarantee occupancy no later than
March 1, 1996. Penalty shall be assessed to the Lessor in the amount of
$2,000.00 per day for each day of delay in occupancy by Lessee. Lessee
shall not, unless otherwise provided for herein, be obligated to pay
rent or perform any other obligation of the terms of this Lease until
Lessor delivers possession of the premises. Lessee agrees not to ask
for possession of the premises prior to February 1, 1996.
4.1 Schedule for the base rent shall be as follows:
MONTHS 01-12 $23,000.00
MONTHS 13-24 $23,920.00
MONTHS 25-36 $24,876.00
MONTHS 37-48 $25,872.00
MONTHS 49-60 $26,907.00
4.2E Lessee's share shall not exceed the cost per square foot per month
as follows:
MONTHS 01-12 $.055 PER SQUARE FOOT PER MONTH
MONTHS 13-24 $.0575 PER SQUARE FOOT PER MONTH
MONTHS 25-36 $.060 PER SQUARE FOOT PER MONTH
MONTHS 37-48 $.0625 PER SQUARE FOOT PER MONTH
MONTHS 49-60 $.065 PER SQUARE FOOT PER MONTH
A portion of these expenses, not to exceed $.01 cents per square foot
per month, shall be set aside as reserves for roof and parking lot.
5.SECURITY DEPOSIT (CONT.): Security deposit shall beheld in an
interest bearing account, and will be returned to the Lessee after
sixty (60) months, provided the Lessee is not in default or in breach
of any term or condition of this Lease. Said deposit shall be held at
the Arden Town Branch, Wells Fargo Bank in a money market account,
interest shall be the prevailing rate.
ADDENDUM TO STANDARD INDUSTRIAL COMMERCIAL MULTI-TENANT NET,
DATED SEPTEMBER 15, 1995, BY AND BETWEEN BUZZ OATES ENTERPRISES, II, A
CALIFORNIA GENERAL PARTNERSHIP (LESSOR) ZYTEC CORPORATION, A MINNESOTA
CORPORATION (LESSEE)
PAGE TWO
6.3(a) Lessor warrants that any new construction by Lessor pursuant to
this Lease shall be in conformity with the building plans and permits,
and shall comply with current interpretations of the Americans With
Disabilities Act of 1990 ("ADA") regarding the type of building and/or
tenant improvements constructed by lessor. However, if any governmental
authority should require any additional improvements, permits or
approvals, under ADA or otherwise, due to Lessee's particular use, or
Lessee's employees, customers, or invitees, other than those which are
state din this Lease, and other than requirements generally for
buildings of this type, including without limitation additional fire
protection equipment or flow capacity, use permits, or zoning
variances, such improvements or changes to be permitted uses shall be
made at Lessee's sole expense.
7.2 EXTERNAL INFRASTRUCTURE: Lessor shall be responsible for all of the
cost of installing or having to install water, gas and electricity to
the site.
7.4 LESSEE'S INSTALLATIONS: Lessee shall have the right to install
certain equipment to the building with Lessor's consent and by
notifying Lessor's property manager, in writing, of their intent to do
so. Lessor shall not withhold consent for any reasonable request. At
the end of the Lease term, Lessee shall have the right to remove said
equipment provided the building and premises are restored to repaired
condition and any harm or damage to the building is corrected.
8.2 LIABILITY INSURANCE - LESSEE. (CONTINUED) Lessee shall, at Lessee's
expense, obtain and keep in force during the term of this Lease a
policy of Combined Single Limit bodily Injury, Personal Injury,
Advertising Injury, and Property Damage insurance insuring Lessee and
Lessor against any claim arising out of, or related in any manner to,
the use, occupancy, or maintenance of the Premises and the Industrial
Center. Such insurance shall be in an amount not less than $1,000,000
per occurrence. The policy shall insure performance by Lessee of the
indemnity provisions of this PARAGRAPH 8. The provisions of said
insurance nor the limits of said insurance shall not, however, limit
the liability of Lessee hereunder. Lessee covenants and agrees that
Lessor will be listed as an Additional Named Insured in said policy in
conformity with the agreements to defend and indemnify herein, and that
said insurance maintained by Lessee is agreed to be primary, with any
insurance maintained by Lessor to be excess.
10.4 (CONT) Lessee shall have the right, at its own expense, to appeal
tax assessments.
12.1 (CONT) Lessee shall have the right to assign the Lease, as long as
Lessee remains obligated and guarantees the terms of this Lease, and
the sub-lease is bound by the same terms and conditions of the Lease.
Lessor shall have the right to approve the sublessee. Lessor will not
withhold approval if sublessee meets requirements including but not
limited to type of business and financial condition.
26. HOLD OVER: If Lessee, with Lessor's consent, remains in possession
of the Premises or any part thereof after the expiration of the terms
thereof, or any optional extension, (See Addendum) such occupancy shall
be a tenancy from month to month upon all provisions of this Lease
pertaining to the obligations of the Lessee shall remain the same
except rent which shall be subject to a ten percent (10%) increase, at
Lessor's discretion. Lessor shall notify Tenant of any termination, or
desire to terminate, after the expiration of this Lease and all
Options, by giving Lessee sixty (60) days written notice.
ADDENDUM TO STANDARD INDUSTRIAL COMMERCIAL MULTI-TENANT NET, DATED
SEPTEMBER 15, 1995, BY AND BETWEEN BUZZ OATES ENTERPRISES, II, A
CALIFORNIA GENERAL PARTNERSHIP (LESSOR) AND ZYTEC CORPORATION, A
MINNESOTA CORPORATION (LESSEE)
PAGE THREE
49. MATERIALS DISCLOSURE. The United States Congress has recently
enacted the Americans with Disabilities Act. Among other things, this
act is intended to make many business establishments equally accessible
to persons with a variety of disabilities; modifications to real
property may be required. State and local laws also may mandate
changes. The real estate brokers in this transaction are not qualified
to advise you as to what, if any, changes may be required now, or in
the future. Owners and tenants should consult the attorneys and
qualified design professionals of their choice for information
regarding these matters. Real estate brokers cannot determine which
attorneys or design professionals have the appropriate expertise in
this area.
Various construction materials may contain items that have been or may
be in the future be determined to be hazardous (toxic) or undesirable
and may need to be specifically treated/handled or removed. For
example, some transformers and other electrical components contain
PCB's and asbestos has been used in components such as fireproofing,
heating, and cooling systems, air duct insulation, spray-on and tile
acoustical materials, linoleum, floor tiles, roofing dry wall and
plaster. Due to prior or current uses of the Property or in the area,
the Property may have hazardous or undesirable metals, minerals,
chemicals, hydrocarbons, or biological or radioactive items (including
electric and magnetic fields) in soils, water, building components,
above or below-ground containers or elsewhere in areas that may or may
not be accessible or noticeable. Such items may not leak or otherwise
be released. Real estate agents have no expertise in the detection or
correction of hazardous or undesirable items. Expert inspections are
necessary. Current or future laws may require clean up by past, present
and/or future owners and/or operators. It is the responsibility of the
Seller/Lessor and Buyer/Tenant to retain qualified experts to detect
and correct such matters and to consult with legal counsel of their
choice to determine what provision, if any, they may wish to include in
transaction documents regarding the Property. To the best of
Seller/Lessor's knowledge, Seller/Lessor has attached to this
Disclosure copies of all existing surveys and reports known to
Seller/Lessor regarding asbestos and other hazardous materials and
undesirable substances related to the Property. Sellers/Lessors are
required under California Health and Safety Code Section 25915 at seq.
to disclose reports and surveys regarding asbestos to certain persons,
including their employees, contractors, co-owners, purchasers and
tenants. Buyers/Tenants have similar disclosure obligations.
Sellers/Lessors and Buyers/Tenants have additional hazardous materials
disclosure responsibilities to each other under California Health and
Safety Code Section 25359.7 and other California laws. Consult your
attorney regarding this matter. LESSOR HAS NO KNOWLEDGE OF ANY
HAZARDOUS SUBSTANCES ON OR ABOUT THE PROPERTY.
50. OCCUPANCY: If any, governmental authority should require any
additional improvements due to Lessee's occupancy other than those
which are stated in this addendum, such improvement shall be made at
Lessee's sole expense.
51. FIRE EXTINGUISHERS: Lessee responsible for supplying fire
extinguishers (2A 10:BC) as required per code within 75 feet of any
door in space.
52. FORKLIFT RESTRICTIONS: Asphaltic cement can not withstand hard
rubber forklift tires. In the event the asphalt is damaged by Lessee's
use of a forklift with hard rubber tires, it will be Lessee's
obligation to repair the damaged asphaltic cement at Lessee's sole
expense.
53. OUTSIDE STORAGE: Lessee shall only store materials within the
building or outside on concrete inside a screened fence as specifically
allowed by the applicable governmental authorities.
ADDENDUM TO STANDARD INDUSTRIAL COMMERCIAL MULTI-TENANT NET, DATED
SEPTEMBER 15, 1995, BY AND BETWEEN BUZZ OATES ENTERPRISES, II, A
CALIFORNIA GENERAL PARTNERSHIP (LESSOR) AND ZYTEC CORPORATION, A
MINNESOTA CORPORATION (LESSEE)
PAGE FOUR
54. HAZARDOUS WASTE: Each party shall be fully and completely
responsible and shall indemnify and hold the other party harmless from
and against waste on the Premises as a result of each such party's
activity, or permitted or suffered by each such party on or about the
Premises, as well as all costs, attorney's fees, expenses, and
liabilities incurred in defense of any such claim, action or proceeding
brought thereon, including provision of counsel reasonably satisfactory
to the other party, and regardless of whether suit or any
administrative action is filed or commenced. Lessor warrants there is
not currently any hazardous waste in, on, or under the Premises, and
similarly indemnifies Lessee for any such currently existing hazardous
waste.
55. FLOOR SEALER: Lessor does not warrant the fitness of the floor slab
for applying floor sealer. For example, soil conditions may cause
moisture to be present under the concrete slab or migrate through the
slab, which may affect the sealer's performance. Lessee has been
advised to consult directly with the manufacturer's representative, and
Lessee shall look directly to the manufacturer in the event of product
failure.
56. DESCRIPTION OF THE PREMISES: Buzz Oates Enterprises shall construct
a 100,000 square foot shell to be built on approximately 4.6 acres of
land. Lessee shall occupy approximately 100,000 square feet of
premises. Approximately 2.4 acres of land shall be paved, drained and
landscaped with the following (See Exhibit A):
BUILDING DESCRIPTION - 100,000 SF SHELL 4000 PSI SLAB
- wood roof
- 28-31' clear height
- 270/480 volt, 2000 amps, three-phase power
- minimum of 200 parking spaces
- minimum of 4 grade level doors
- 10 doors with manual levelers and bumpers
- Dock boots and lights and bumpers
57. LESSEE'S RIGHT TO TERMINATE THE LEASE: Lessee shall have the right
to terminate the lease after the thirty six (36) month. The Lessee
shall pay a termination fee equal to 75% of the unamortized portion of
the interior tenant improvements, plus unamortized commissions. Lessee
shall notify in writing ninety (90) days prior to termination of the
Lease. A schedule for termination shall be amended to this lease as
Exhibit D, when the tenant improvements become explicit and mutually
agreed upon.
58. OTHER EXHIBITS TO THE LEASE: Other Exhibits, specifically EXHIBIT
C, shall be added to this lease after both parties, Lessor and Lessee,
agree on the specifications of the OFFICE IMPROVEMENTS. Such approvals
shall be noted by signatures to the copy of the plans submitted for
permit.
59. TENANT IMPROVEMENTS: Lessee shall have the right to work with Buzz
Oates Enterprises to design tenant improvement, including but not
limited to, office space, conditioning of the production areas,
concrete pads in the yard area, and have these costs amortized over the
term of the lease. Said tenant improvements must be designed and agreed
upon by both parties ninety (90) days before expected commencement date
of the lease or Lessor shall have the right to extend the commencement
date of the lease or Lessor shall have the right to extend the
commencement date penalty free the amount of days needed to keep said
notice at ninety days. Said improvements shall be amortized over the
term of the five (5) year Lease at ten percent (10%) interest and
confirmed by future Exhibit C.
Costs for the over all tenant improvements to the premises shall be
given to the Lessee no later than December 1, 1995. Lessee is free to
have the scope of work quoted and built by other parties at Lessee's
discretion.
ADDENDUM TO STANDARD INDUSTRIAL COMMERCIAL MULTI-TENANT NET, DATED
SEPTEMBER 15, 1995, BY AND BETWEEN BUZZ OATES ENTERPRISES, II, A
CALIFORNIA GENERAL PARTNERSHIP (LESSOR) AND ZYTEC CORPORATION, A
MINNESOTA CORPORATION (LESSEE)
PAGE FIVE
60. CONDITIONING THE WAREHOUSE AND PRODUCTION AREA: Due to Title XXIV
provisions, this Lease contains no provisions for conditioning the
warehouse or production area - due to the actual design of the Tenant
Improvements. Lessor agrees to amortize such costs into this Lease at
ten percent (10%) per annum over the term of the Lease, once costs for
such conditioning are mutually agreed upon by Lessor and Lessee.
61. FIRST RIGHT OF REFUSAL ON ADJACENT LAND: Lessor hereby grants
Lessee First Right of Refusal to the lease the designated land below
for future expansion under terms and conditions under the following
provisions:
A. Lessee is not in default under any of the conditions and provisions
of this Lease.
B. Lessor hereby agrees to provide Lessee with one (1) copy of the
proposed lease or documents from others defining the terms and
conditions of any proposed lease from the outside parties.
Lessor hereby grants Lessee First Right of Refusal to lease or buy the
adjacent Lots 101, 102, 131, 132, Lot 6 and Parcel 2 of Exhibit F
located at Venture Drive and Airport Blvd in Lincoln, California, for
the term of the Lease.
In the event the Lessor procures a prospective third party Lessee for
any of the above mentioned property, Lessor agrees to notify Lessee of
third party's offer within three (3) working days of receipt of third
party's offer.
Upon receipt of notification from the Lessor or third party's offer,
Lessee agrees to surrender first right of refusal to lessor or execute
a lease agreement or purchase contract for the subject space or
property within seven (7) working days of said notification.
In the event Lessee fails to notify Lessor within seven (7) working
days of Lessor's notification of the third party's offer, it is
understood between the parties that the first right of refusal shall
become null and void and shall bear no further force and effect.
62. OPTION TO EXTEND THE LEASE: Lessee has the right to five (5) one
(1) year extensions of the Lease under the following terms and
conditions: Lessee shall, provided Lessee is not in default or in any
violation of this Lease herein, have the right to extend this Lease one
(1) year from the date of the expiration. Lessee shall notify in
writing the Lessor of its intent to exercise its option to extend,
sixty (60) days prior to the expiration date of this Lease or any of
its extensions. Lessor agrees to pay Buzz Oates Real Estate a
commission of 2.5% of the total consideration of each option to extend
the lease that is exercised.
Base rent for each option period shall be as follows:
MONTHS $ PER MONTH
------ -----------
61 - 72 $27,983.00
73 - 84 $29,102.00
85 - 96 $30,266.00
97 - 108 $31,487.00
109- 120 $32,736.00
ADDENDUM TO STANDARD INDUSTRIAL COMMERCIAL MULTI-TENANT NET, DATED
SEPTEMBER 15, 1995, BY AND BETWEEN BUZZ OATES ENTERPRISES, II, A
CALIFORNIA GENERAL PARTNERSHIP (LESSOR) AND ZYTEC CORPORATION, A
MINNESOTA CORPORATION (LESSEE)
PAGE SIX
63. FUTURE EXHIBITS: Future exhibits amended to this lease shall
include:
A1. Site plan of building.
A2. Floor plan of building.
B. Building Standard Work Area.
C. Scope of work for tenant improvements.
D. Amortization Buy-Out Schedule.
E. Site plan of Industrial Park showing properties referred to by
Paragraph 62, Lots 101, 102, 131, Lot 6 and parcel 4.
F1. "ZYTEC CAMPUS".
64. LIMITATIONS, OPTIONS AND REBATES ON THE TENANT IMPROVEMENTS: Lessee
shall have a limit of $35.00 per square foot on the office and $15.00
per square foot on the warehouse for Tenant Improvements for the above
described building. Buzz Oates Enterprises will quote the cost for the
tenant improvements and the Lessee has the option to employ Buzz Oates
Enterprises for these tenant improvements or use an independent
contractor with the approval of the Lessor, which will not be
unreasonably withheld. Whatever the final tenant improvement amounts
are, they will be amortized over the term of the lease.
65. Buzz Oates Real Estate represents both Lessor and Lessor's
designates and Lessee and Lessee's designates in all future expansions
and renewals of leases and/or sales in the Zytec Corporation project
noted by Exhibit E - "Zytec Campus".
AGREED AND ACCEPTED
LESSOR: LESSEE:
BUZZ OATES ENTERPRISES II ZYTEC CORPORATION
A CA GENERAL PARTNERSHIP A MINNESOTA CORPORATION
_________________________ _________________
MARVIN L. OATES TOM KENT
MANAGING PARTNER GENERAL MANAGER
DATE: DATE: NOVEMBER 15, 1995
SEE ATTACHED BOARD OF DIRECTORS
RESOLUTION
EXHIBITS ATTACHED TO LEASE
EXHIBIT A1 -- ORIGINAL DOCUMENT CONTAINS A TOPOGRAPHIC MAP SHOWING BUILDING
SITE.
EXHIBIT A2 -- ORIGINAL DOCUMENT CONTAINS A FLOOR PLAN DRAWING OF THE BUILDING.
EXHIBIT B -- LISTING OF INTERIOR CONSTRUCTION FINISHING DETAILS FOR OFFICE AREA
AND WAREHOUSE AREA.
EXHIBIT E -- ORIGINAL DOCUMENT CONTAINS A MAP OF THE LEGAL PARCELS OF LAND
INVOLVED IN THE LEASE.
EXHIBIT F1 -- ORIGINAL DOCUMENT CONTAINS A MAP OF THE LEASED BUILDING AND
RELATED SURROUNDING BUILDINGS AND PROPOSED BUILDINGS.
LEASE AMENDMENT #1
THIS AGREEMENT, is made and entered into this 8th day of December, 1995, by and
between BUZZ OATES ENTERPRISES II, as Lessor and ZYTEC CORPORATION, A Minnesota
Corporation, as Lessee.
RECITALS
1. The parties hereto have entered into a certain Lease ("LEASE") dated
September 15, 1995, regarding premises described therein as the 3500 Venture
Drive, Lincoln, California consisting of approximately 100,000 square feet of
office and production-warehouse space.
2. The parties desire to amend the Lease as stated below.
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants and agreements contained
herein, and for other valuable consideration and receipt and adequacy of which
are hereby acknowledged, the parties agree as follows:
1.3 TERM-- five (5) years and zero (0) months ("Original Term") commencing April
1, 1996 and ending March 31, 2001 ("Expiration Date") (Also see Paragraph 3).
1.5 BASE RENT-- $48,234.75 per month payable on the first day of each month
commencing April 1, 1996.
1.6 (a) BASE RENT PAID UPON EXECUTION-- $48,110.00 as Base Rent for the First
Month's rent.
1.7 SECURITY DEPOSIT-- $48,110.00 ("Security Deposit") (also see Paragraph 5)
SEE ADDENDUM
4.1 RENT SCHEDULE -- Schedule for the base rent shall be as follows:
Months 01-12 $48,234.75
Months 13-24 $49,154.75
Months 25-36 $50,110.75
Months 37-48 $51,982.75
Months 49-60 $52,141.75
57. LESSEE'S RIGHT TO TERMINATE THE LEASE: Lessee shall have the right to
terminate the lease after the thirty-six (36) month. The Lessee shall pay a
termination fee equal to 100% of the un-amortized portion of the interior tenant
improvements, plus un-amortized commissions. Lessee shall notify in writing
ninety (90) days prior to termination of the Lease. A schedule for termination
shall be amended to this lease as Exhibit D, when the tenant improvements become
explicit and mutually agreed upon.
59. TENANT IMPROVEMENTS: Lessor shall complete the following tenant improvements
in a timely manner to coincide with the anticipated commencement of the Lease.
These improvements shall be amortized over a ten year period at ten percent
(10%) interest. This paragraph 59 supersedes all points and interests in
Paragraph 59 in the Lease dated September 15, 1995.
ORIGINAL DOCUMENT CONTAINS LISTING OF DETAILS OF FINISHING CONSTRUCTION NEEDS.
62. OPTION TO EXTEND THE LEASE: Lessee has the right to five (5) one (1) year
extensions of the Lease under the following terms and conditions: Lessee shall,
provided Lessee is not in default or in any violation of this Lease herein, have
the right to extend this Lease one (1) year from the date of the expiration.
Lessee shall notify in writing the Lessor of its intent to exercise its option
to extend, sixty (60) days prior to the expiration date of this Lease or any of
its extensions. Lessor agrees to pay Buzz Oakes Real Estate a commission of 2.5%
of the total consideration of each option to extend the lease that is exercised.
Base rent for each option period shall be as follows:
MONTHS $ PER MONTH
61- 72 $53,217.75
73- 84 $54,336.00
85- 96 $55,500.75
97-108 $56,711.75
109-120 $57,970.75
64.) Deleted.
66. FORCE MAJEURE: If Lessor cannot perform any of its obligations due to events
beyond Lessor's control, the time provided for performing such obligations shall
be extended by a period of time equal to the duration of such events. Events
beyond Landlord's control include, but are not limited to, Acts of God, war,
civil commotion, labor disputes, strikes, fire, flood, excessive rain or other
casualty, shortages of labor or material, governments regulations or restriction
and weather conditions.
All other terms and conditions of said Lease shall remain the same in full force
and effort.
IN WITNESS WHEREOF, the parties hereto have caused this 1st Amendment to be
executed as of the day and year first written above.
LANDLORD: TENANT:
BUZZ OAKES ENTERPRISES II ZYTEC CORPORATION
A Minnesota Corporation
/s/ Marvin L. Oates /s/ Tom Kent
Date: Date: 1/1/96
LEASE AMENDMENT #2
THIS AMENDMENT #2, is made and entered into this 8th day of March, 1996, by and
between BUZZ OATES ENTERPRISES II, as Lessor and ZYTEC CORPORATION, A Minnesota
Corporation, as Lessee.
RECITALS
1. The parties hereto have entered into a certain Lease ("LEASE") dated
September 15, 1995, regarding premises described therein as 3500 Venture
Drive, Lincoln, California consisting of approximately 100,000 square feet
of office and production-warehouse space.
2. The parties hereto have entered into a certain Amendment #1 to that Lease
dated December 8th, 1995 regarding the premises described therein as 3500
Venture Drive, Lincoln, California consisting of approximately 100,000
square feet of office and production warehouse space.
3. The parties desire to amend the Lease as stated below.
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants and agreements contained
herein, and for other valuable consideration, and receipt and adequacy of which
are hereby acknowledged, the parties agree as follows:
1.3 TERM - Ten (10) years and zero (O) months ("Original Term") commencing May
1, 1996 and ending April 30, 2006 ("Expiration Date") (Also see Paragraph 3).
1.5 BASE RENT - $56,100.12 per month payable on the first day of each month
commencing April 1,1996
4.1 RENT SCHEDULE - Schedule for the base rent shall be as follows:
Months Rent T.I. Pymt Total Rent
5/1/96-4/30/97 $25,500.00 $31,029.23 $56,529.23
5/1/97-4/30/98 $26,520.00 $31,029.23 $57,549.23
5/1/98-4/30/99 $27,580.80 $31,029.23 $58,610.03
5/1/99-4/30/00 $28,684.03 $31,029.23 $59,713.26
5/1/00-4/30/01 $29,831.39 $31,029.23 $60,860.62
5/1/01-4/30/02 $31,024.65 $31,029.23 $62,053.88
5/1/02-4/30/03 $32,265.63 $31,029.23 $63,294.86
5/1/03-4/30/04 $33,556.26 $31,029.23 $64,585.49
5/1/04-4/30/05 $34,898.51 $31,029.23 $65,927.74
5/1/05-4/30/06 $36,294.45 $31,029.23 $67,323.68
1.6 (a) BASE RENT PAID UPON EXECUTION - $60,600.12 as Base Rent for the First
Month's rent.
1.7. SECURITY DEPOSIT - $60,600.12 ("Security Deposit") Security deposit shall
be held in an interest bearing account, and will be returned to the Lessee after
sixty (60) months, provided the Lessee is not in default or in breach of any
term or condition of this Lease. Said deposit shall be held in a money market
account, interest shall be the prevailing rate.
57. LESSEE'S RIGHT TO TERMINATE THE LEASE: Lessee shall have the right to
terminate the lease after the forty-eight (48) month. The Lessee shall pay a
termination fee equal to 100% of the unamortized portion of the interior tenant
improvements, plus unamortized commissions, 50% of 2 years rent and property
taxes for 2 years. Lessee shall notify in writing ninety (90) days prior to
termination of the Lease. A schedule for termination shall be amended to this
Lease as Exhibit D, when the tenant improvements become explicit and mutually
agreed upon.
58. ADDITIONAL TENANT IMPROVEMENTS : Lessor shall complete the following tenant
improvements in a timely manner to coincide with the completion of Tenant
Improvements agreed to in Lease Amendment #1, of the Lease. These improvements
shall be amortized over a ten year period at ten percent (10%) interest. Below
is a list of the additional Tenant Improvements:
<TABLE>
<CAPTION>
A. GENERAL
<S> <C> <C>
1. Additional 4,032 s.f. of improved office space for Zytec $ 98,180.00
Credit for T-Bar [$ 3.831.00]
REVISED COST FOR ADDITIONAL 4,032 S.F. $ 94,349.00
Upcharges:
a. New break-room sized for 400 people which requires a one hour
separation, which will be a 256 ft. of full height walls.
b. 12 ea. 3' x 6' rated windows & frames in break-room wall as
requested by Zytec.
c. Install 4,032 s.f. of additional VCT in break-room with floor prep.
d. Concrete cut for double door exit, seismic bracing wall, and
installation of doors with panic hardware.
e. At break-room exit double doors install concrete landing with ramp
into parking lot.
f. 48" VCT aisle in warehouse approximately 398 lf.
g. Reengineering & redesigning plans
Subtotal of Zytec T.I. Upcharges: $ 44,065.00
SUBTOTAL OF ZYTEC'S A.1 AND UPCHARGES ITEMS a. - e. ABOVE $ 138,414.00
2. Additional 650 s.f. of T.I. space for Zytec's
tenant (Comtec) Subtotal for additional 650 s.f.: $ 15,828.00
TOTAL GENERAL ITEMS A.1 AND UPCHARGES AND A.2 ABOVE: $ 154,239.00
B. VOICE/DATA FOR ZYTEC'S TENANT (COMTEC )
1.Install one (1) 7' X 19" relay rack with wire managers in
Comtec Storage room.
2. Install and terminate 200 pair Voice backbone cable from
Zytec Telco Room storage space located in Comtec space to
allow Comtec connectivity to Zytec's Meridian Telephone
System. The proposed cabling system in this addendum will
allow Comtec to easily add their own Telephone system should
the need arise.
3. Install and terminate 12 strand multi-mode OFNR optical
fiber cable from Zytec Telco Room to storage space located in
Comtec space to allow Comtec connectivity to Zytec's LAN
System. The proposed cabling system in this addendum will
allow Comet to operate their own LAN and to connect with
Zytec's LAN. Fiber run to be continuous and enclosed in
inner-duct.
4. Install cables, jacks and patch panels to provide Category
5 UTP connectivity to the following locations in Comtec's
space:
- (104) bench locations in Repair Floor area, one (1)
jack per bench.
- (2) pay telephone jacks
- (9) Universal outlet drops in modular furniture
office area, two (2) Category 5 jacks per outlet
(26 total).
- One (1) Universal outlet in Conference Room, two
(2) Category 5 jacks.
5. Install cables, jacks and punch blocks to provide Category
3 UTP connectivity to the following locations in Comtec's
space:
- Thirteen (13) telephone jacks in bench area.
- Two (2) pay telephone jacks.
- Nine (9) universal outlets in modular furniture
office area, two (2) jacks per outlet (26 total).
- One (1) universal outlet in conference room, two
(2) jacks total.
SUB-TOTAL OF ITEMS 1 - 5 FOR ADDITIONAL VOICE/DATA: $ 34,538.00
C. ELECTRICAL:
1. WIREMOLD: Install 830 ft. of new wire-mold base on 3rd plan
revision Deduct 380 ft. of wire-mold from prior bid. Additional 450
ft. of wire-mold is needed
SUBTOTAL FOR WIRE-MOLD ADDED: $ 21,750.00
2. NEW POWER DISTRIBUTION:
a. New 3000 amps underground pull section for 2400 amps of power
b. New 800 amp meter main for Comtec rear warehouse area & Office.
c. 1- new 800 amp distribution panel
d. 2- new 75 KVA transformers
e. 3- new 200 amp 120/208 volt panel
f. 360'- 800 amp conduit & wire run
g. 300' - 100 amp conduit & wire run
SUBTOTAL OF ITEMS C.2. a - g. $ 31,152.00
3. TELEPHONE CONDUIT
a. 1- 2" conduit from southwest corner of bldg. To 'Zytec's New room.
b. 1 - 2" conduit from northeast corner of bldg. to Zytec's New Teleco
Room.
c. Electrical reengineering and redesign:
SUBTOTAL OF ITEMS C.3. a - c: $ 8,833.00
.
TOTAL COST FOR ADDENDUM#1 EXTRAS DATED1/19/96 IS:
$ 250,512.00
B. ELECTRICAL ALTERNATES:
Option 2. 330 amp generator at 480 volt to run phones office,
some warehouse/lighting $ 78,345.00
ORIGINAL COST AGREED TO IN LEASE AMENDMENT #1 $1,909,542.00
EXTRAS ADDED PER SKOTT HUTTON SINCE AMENDMENT 1 $ 250,512.00
BACKUP GENERATOR $ 78,345.00
ADDITIONAL LAND REQUIRED FOR 200 ADDITIONAL PARKING
PLACES; PAVED, LANDSCAPED, LIGHTED AND STRIPED $ 352,836.00
ROOF SCREENS $ 52,160.00
HOT MOP CURBS FOR HVAC UNITS $ 9,600.00
B.O.E. MARK UP 10% $ 38,102.00
EXTRAS ADDED BY SKOTT HUTTON 2/7/96 $ 9,757.00
- ------------------------------------------------------------------------------------------------------------------------
$2,700,854.00
DEDUCT AIR COMPRESSORS AND VACUUMS ($ 33,185.00)
DEDUCT LOCKERS ($ 11,602.00)
- ------------------------------------------------------------------------------------------------------------------------
$ 2,656,067.00
AMORTIZED OVER THE TERM OF THE LEASE AT 10% INTEREST $ .351
STARTING SHELL RENT $ .210
- -------------------------------------------------------------------------------------------------------------------------
STARTING RENT FOR THE PREMISES $ .561
</TABLE>
15.4 PAYMENT TO BROKER - Lessor agrees to pay Buzz Oates Real Estate 5 % of
the cost of the Tenant Improvements as consideration for negotiation of the
Tenant Improvements. Payments shall be made quarterly for the ten year
Term. At any time during the term, Lessor or any subsequent Lessor or Buyer
of the property may have the option of retiring this obligation by paying
not less than eighty percent (80%) of the balance of the unpaid portion of
the total consideration.
62.) OPTION TO EXTEND THE LEASE: Lessee shall have the right to five (5)
two year extensions of the Lease under the following terms and conditions:
Lessee shall, provided Lessee is not in default or in any violation of this
Lease herein, give written notice of intent to extend one (1) year from the
date of expiration. Lessor, and any subsequent Lessor, shall pay Buzz Oates
Real Estate a commission or 2.5 % of the total consideration of each option
to extend the lease that is exercised
Base Rent for each option shall be as follows:
May 1,2006 to April 30,2007 $36,294.45
May 1,2007 to April 30,2008 $37,746.23
May 1,2008 to April 30,2009 $39,256.08
May 1,2009 to April 30,2010 $40,826.32
May 1,2010 to April 30,2011 $42,459.37
May 1,2011 to April 30,2012 $44,157.75
May 1,2012 to April 30,2013 $45,924.06
May 1,2013 to April 30,2014 $47,761.02
May 1,2014 to April 30,2015 $49,671.46
May 1,2015 to April 30, 2016 $51,658.32
63. FUTURE EXHIBITS: Future exhibits amended to this Lease shall include:
A. Site plan of building.
B. Floor plan of building.
C. Amortization Buy-Out Schedule.
D. Site plan of Industrial Park showing properties referred to by
Paragraph 62, Lots 101,102,131, Lot 6 and Parcel 4.
E. "ZYTEC CAMPUS".
All other terms and conditions of said Lease, dated June 14, 1995, shall remain
the same in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this amendment to be executed
as of the day and year first written above.
LESSOR: LESSEE:
BUZZ OATES ENTERPRISES II ZYTEC CORPORATION
A MINNESOTA CORPORATION
/S/ MARVIN L. OATES /S/ TOM KENT
MARVIN L. OATES TOM KENT
DATE_______________ DATE: 3/15/96
LEASE AMENDMENT #3
THIS AGREEMENT, is made and entered into this 14th day of May, 1996, by and
between BUZZ OATES ENTERPRISES II, as Lessor and ZYTEC CORPORATION, A Minnesota
Corporation, as Lessee.
RECITALS
1. The parties hereto have entered into a certain Lease ("LEASE") dated
September 15, 1995, regarding premises described therein as the3500 Venture
Drive, Lincoln, California consisting of approximately 100,000 square feet
of office and production-warehouse space.
2. The parties hereto have entered into a certain Amendment #1 to that Lease
dated December 8th, regarding the premises described therein as 3500
Venture Drive, Lincoln, California consisting of approximately 100,000
square feet of office and production warehouse space.
3. The parties hereto have entered into a certain Amendment #2 to that Lease
dated March 8th,1995 regarding the premises described therein as 3500
Venture Drive, Lincoln, California consisting of approximately 100,000
square feet of office and production warehouse space.
3. The parties desire to amend the Lease as stated below.
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants and agreements contained
herein, and for other valuable consideration, and receipt and adequacy of which
are hereby acknowledged, the parties agree as follows:
1.3 TERM - Ten (10) years and zero (O) months ("Original Term") commencing May
14, 1996 and ending May 13, 2006 ("Expiration Date") (Also see Paragraph 3).
1.5 BASE RENT - $58,432.52 per month payable on the first day of each month
commencing April 1,1996
1.6 (a) BASE RENT PAID UPON EXECUTION - $58,432.52 as Base Rent for the First
Month's rent.
1.7 SECURITY DEPOSIT - $58,432.52 ("Security Deposit") (also see Paragraph 5)
SEE Paragraph 59 Tenant has already paid $56,529.23 as Security Deposit for
construction of the building. Lessee shall increase the deposit by
$1,903.29.
4.1 RENT SCHEDULE - Schedule for the base rent shall be as follows:
Rent Period Base Rent Tenant Total Rent
Improvement
Payments
May 1,1996 to April 30,1997 $25,500.00 $32,932.52 $58,432.52
May 1,1997 to April 30,1998 $26,520.00 $32,932.52 $59,452.52
May 1,1998 to April 30,1999 $27,580.80 $32,932.52 $60,513.32
May 1,1999 to April 30,2000 $28,684.03 $32,932.52 $61,616.55
May 1,2000 to April 30,2001 $29,831.39 $32,932.52 $62,763.91
May 1,2001 to April 30,2002 $31,024.65 $32,932.52 $63,957.17
May 1,2002 to April 30,2003 $32,265.63 $32,932.52 $65,198.15
May 1,2003 to April 30,2004 $33,556.26 $32,932.52 $66,488.78
May 1,2004 to April 30,2005 $34,898.51 $32,932.52 $67,831.03
May 1,2005 to April 30,2006 $36,294.45 $32,932.52 $69,226.97
5. SECURITY DEPOSIT : The Security Deposit shall be held by the Lessor for the
first sixty months of the Lease after which time it shall be returned to
the Lessee or applied to the Lessee's rent.
58. ADDITIONAL TENANT IMPROVEMENTS : Lessor has substantially completed the
following tenant improvements in a timely manner to coincide with the
completion of Tenant Improvements agreed to in Lease Amendment #1, and
Lease Amendment #2 of the Lease. These improvements shall be amortized over
a ten year period at ten percent (10%) interest. Below is a list of the
additional Tenant Improvements of this Third Amendment:
1.) CHANGE ORDER #1
* Furnish and install seven (7) each 9'x10' roll
up doors @ $600.00 each
TOTAL CHANGE ORDER #1 : $4,200.00
2.) CHANGE ORDER #2
* Incorporated into Change Order #4
3.) CHANGE ORDER #3
* Furnish and Install seven (7) each dock seals
* Furnish and Install seven (7) each edge of dock
levelers
TOTAL COST OF CHANGE ORDER #3 $16,800.00
4.) CHANGE ORDER #4
ELECTRICAL:
* 1,000 ft. of additional wire-mold
* 3 ea. 200 amps 120/208v. sub-panels for new wire-mold
* 1 ea. 75 kva transformer, 1 ea 100 amp 480 v. distribution
breaker in swath board
* 1 ea. 200 amp sub feed run to new panels, 36 ea. wire-mold
feeder drops
* 2 ea. 30 amp 3(/) receptacles, 10 ea. 20 amp 1(/) outlets on
south wall
* Reengineering production area cost
TOTAL COST OF ELECTRICAL : $61,725.00
PLUMBING; COMPRESSED AIR/VACUUM SYSTEM
* 440 ft. overhead main to accommodate new outlet location in
production area
* 17 ea. additional main air drops to production area
* 320 ft. of main vacuum drops
* Credit for 4 outlets
* Reengineering costs
TOTAL COST OF PLUMBING;
COMPRESSED AIR AND VACUUM: $10,860.00
VOICE/DATA SYSTEM
* Install one (1) 7'x19 relay rack with wire managers in
storage room
* Install and terminate 200 pair Voice backbone cable from
Zytec Telco Room storage space located in Comtec space to
allow Comtec connectivity to Zytec's Meridian Telephone
System.
* Install and terminate 12 strand multi-mode OFNR optical
fiber cable from Zytec Telco room to storage space located
in Comtek space. To allow connectivity to Zytec LAN system.
* Install cables, jacks and patch panels to provide Category 3
UTP connectivity to various described locations.
* Thirteen (13) telephone jacks to the bench area.
* Two (2) pay phone jacks
* Nine (9) universal outlets in modular furniture
office area, two (2) jacks per outlet (26 total).
* One (1) universal outlet in conference room, two (2)
jacks total.
GENERAL MISCELLANEOUS
* Engineering, plans for 12'x8' half dome type vinyl
canopy at front entrance to building.
* Engineering and plans for 8' x 20' concrete patio
slab with 8' x 20' vinyl canopy.
* Build 8' x 10' storage room in new break room area.
* Install wire-old at storefront to accommodate
location of office partitions.
* Increase VCT walkway by four (4) feet.
* Install double doors in the wash room.
* Architectural fees
TOTAL COST FOR GENERAL MISCELLANEOUS: $17,252.00
DATE/VOICE CABLING SCOPE OF WORK :
* Provide and install seventy-nine (79) additional
cables in the repair floor area.
* Install additional cables from the IDF RF and into
the repair floor overhead.
* Terminate the installed additional cables from the
IDF on 48-ports CATS patch panels mounted in an
enclosed cabinet.
* Leave the cables un-terminated above T-Bar in
Production area with 25' slack at the corresponding
column line.
TOTAL COST DATA/VOICE CABLING
SCOPE OF WORK:-- $9,516.00
AIR VACUUM EQUIPMENT SUPPLIED BY MARK III PLUMBING DEPARTMENT
* One (1) 15 hp air compressor
* One 400 gallon tank
* One coalescing filter
* Two (2) vacuum pumps
TOTAL AIR/VACUUM EQUIPMENT $ 32,955.00
SUB-TOTAL CHANGE ORDER #4 $161,846.00
B.O.E. 10% MARKUP $ 16,185.50
SUB_TOTAL CHANGE ORDER #4 ONLY $178,031.50
5.) CHANGE ORDER #5
* Install 5' of sidewalk along the West side of building
parallel to Aviation Blvd.
TOTAL COST FOR CHANGE ORDER #5 $ 3,500.00
6.) CHANGE ORDER #6
* REMOVE AND RE-INSTALL 11 EACH MAN-DOORS MORTISED FOR SCHLAGE
L9080 DEAD BOLT -LEVER ASSEMBLIES.
TOTAL COST CHANGE ORDER #6 $ 5,720.00
7.) CHANGE ORDER #7
DESCRIPTION OF WORK
* Remove two existing countertops and double sinks in
equipment wash room and replace with two stainless steel 18"
deep sinks with drain boards and back splash.
* Change 8' x 20' patio slab area to 12' 30' concrete slab.
* Install Omni combination security lock
* Install one standard 110v. receptacle at four 94) locations
between the column line G & H,
* Install one (1) 20 amp twist lock receptacle at four (4)
locations between the column line G & H,
* Install one (1) 30 amp twist lock receptacle at four
locations between column line G & H.
* Install one additional 100 amp sub-panel for the above.
TOTAL COST CHANGE ORDER #7 $ 7,300.00
8.) CHANGE ORDER #8
GENERAL
* INSTALL FOUR(4) MELAMINE SHELVES IN EACH (4) RESTROOMS
* REMOVE MIRRORS IN WAREHOUSE AND WOMEN'S RESTROOM AND INSTALL
3' X 11' IN EACH (TWO MIRRORS) .
* ADD TWO LOCKSETS FOR STORAGE CLOSETS IN "E.T.", MAINTENANCE
AND BREAK-ROOM
$ 1,227.00
ELECTRICAL
BACK UP GENERATOR HOOK UP (GENERATOR SUPPLIED BY ZYTEC)
* OFF LOAD THE GENERATOR
* BUILD CONTAINMENT PAD
* RE-ENGINEERING AND PERMIT FEE
* FEE TO PLACER AIR BOARD
* INSTALL TRANSFER SWITCH GEAR
* INSTALL NEW BREAKERS
* BUILD AND INSTALL NEW BATTERY TRAY
* PROVIDE NEW BATTERIES
* INSTALL WIRING TO PREHEAT WATER
* LIFT INTO PLACE WITH CRANE AND MAKE ALL NECESSARY
CONNECTIONS
* START-UP AND TESTING
$ 22,726.00
MISCELLANEOUS ELECTRICAL
* RELOCATE WIRE-MOLD AS DIRECTED BY ZYTEC
* REMOVE WIRE-MOLD AS DIRECTED BY ZYTEC
* ADD ADDITIONAL OUTLETS IN WIRE-MOLD AS DIRECTED BY
ZYTEC
$ 3,972.00
ELECTRICAL TELEPHONE CONDUIT
* CHANGE FOUR (4) TWO INCH CONDUIT FOR TELEPHONE TO
FOUR (4) FOUR INCH CONDUIT
* TWO 4" CONDUITS RUNS OF 495 FEET
* TWO 4" CONDUITS OF 195 FEET
UP-CHARGE OF CONDUIT FROM 2" TO 4" CONDUIT $ 4,607.00
CABLING TELEPHONE/VOICE/DATA
* RELOCATE TELEPHONE/DATA WITH WIRE-MOLD RELOCATION.
ADD FOUR (FAX) LINES.
* ADD DATA LINE AT AREA A-7 AND A-8.
* ADD TWO (2) TELEPHONE/DATA LINES AT AREA I-9.
* ADD SIX (6) TELEPHONE LINES TO THE SHIPPING AREA.
* ADD THREE (3) DATA LINES AT SHIPPING AREA.
* ADD ONE TELEPHONE LINE AT MDF
$ 3,025.00
PLUMBING AIR/VACUUM
* RELOCATE AIR/VAC DROPS AS DIRECTED BY ZYTEC
* ADD OWNER SUPPLIED AIR COMPRESSOR CONNECTION.
$ 2,953.00
-------------------------------------------------------
TOTAL COST FOR AMENDMENT #8 $ 38,510.00
B.O. E. MARKUP 10% $ 42,361.00
=======================================================
SUB- TOTAL FOR CHANGE ORDERS 1-8 $ 257,912.00
CREDIT FOR BACK-UP GENERATOR
SUPPLIED BY TENANT BUT SIGNED FOR
IN AMENDMENT #2 ($78,345.00)
CREDIT FOR ITEMS NOT USED #1 FOR ITEMS NOT USED
IN TENANT IMPROVEMENT BUT SIGNED FOR IN
AMENDMENT #1 ($34,538.00)
----------------------------------------------------
ADDITIONAL TENANT IMPROVEMENTS TO BE ADDED TO
TENANT IMPROVEMENT AMORTIZATION SCHEDULE $144,029.00
TENANT IMPROVEMENTS SIGNED FOR IN AMENDMENT #1 $1,909,542.00
TENANT IMPROVEMENTS SIGNED FOR IN AMENDMENT # 2 $2,700,854.00
DEDUCT COST OF LAND FOR EXTRA PARKING
(THIS ITEM TO BE ADDED TO THE RENT OF THE BUILDING ($352,836.00)
- --------------------------------------------------------------------------------
SUB-TOTAL TENANT IMPROVEMENT $2,348,018.00
INCREASE IN TENANT IMPROVEMENTS COST DUE TO CHANGE ORDERS 1-8 $ 144,029.00
================================================================================
AMOUNT TO BE AMORTIZED OVER TEN YEARS $2,492,047.00
AMORTIZED COST PER SQUARE PAYMENT PER SQUARE FOOT $ 0.329
BASE RENT FOR SHELL $ 0.220
BASE RENT FOR ADDITIONAL PARKING
(BASED ON ABOVE STATED VALUE $ 352,836.00) $0.035
================================================================================
TOTAL RENT PER SQUARE FOOT $ 0.584
All other terms and conditions of said Lease shall remain the same and in full
force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this 3rd Amendment to be
executed as of the day and year first written above.
LESSOR: LESSEE:
BUZZ OATES ENTERPRISES II ZYTEC CORPORATION
A MINNESOTA CORPORATION
- -------------------------- ----------------------
MARVIN L. OATES TOM KENT
DATE______________________ DATE__________________
LEASE AMENDMENT #4
THIS AGREEMENT, is made and entered into this 8th day of November, 1996, by and
between BUZZ OATES ENTERPRISES II, as Lessor and ZYTEC CORPORATION, A Minnesota
Corporation, as Lessee.
RECITALS
1. The parties hereto have entered into a certain Lease ("LEASE") dated
September 15, 1995, regarding premises described therein as the3500 Venture
Drive, Lincoln, California consisting of approximately 100,000 square feet
of office and production-warehouse space.
2. The parties hereto have entered into a certain Amendment #1 to that Lease
dated December 8th, 1995 regarding the premises described therein as 3500
Venture Drive, Lincoln, California consisting of approximately 100,000
square feet of office and production warehouse space.
3. The parties hereto have entered into a certain Amendment #2 to that Lease
dated March 8th,1996 regarding the premises described therein as 3500
Venture Drive, Lincoln, California consisting of approximately 100,000
square feet of office and production warehouse space.
3. The parties hereto have entered into a certain Amendment #3 to that Lease
datedSeptember 15,1996 regarding the premises described therein as 3500
Venture Drive, Lincoln, California consisting of approximately 100,000
square feet of office and production warehouse space.
4. The parties desire to amend the Lease as stated below.
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants and agreements contained
herein, and for other valuable consideration, and receipt and adequacy of which
are hereby acknowledged, the parties agree as follows:
1.2 PREMISES-- THE ADDRESS OF THE PREMISES IS 1601 AVIATION BLVD., CITY
OF LINCOLN, COUNTY OF PLACER, STATE OF CALIFORNIA, 95648.
1.5 BASE RENT-- $60,964.75 PER MONTH PAYABLE ON THE FIRST DAY OF EACH
MONTH COMMENCING APRIL 1, 1996.
1.6 (a) BASE RENT PAID UPON EXECUTION - $56,100.12 AS BASE RENT FOR THE
FIRST MONTH'S RENT.
1.7 SECURITY DEPOSIT - $56,100.12 ("SECURITY DEPOSIT") (ALSO SEE
PARAGRAPH 5) SEE ADDENDUM
4.1 RENT SCHEDULE - Schedule for the base rent shall be as follows:
TENNANT
IMPROVEMENT
DATE BASE RENT PAYMENTS Total Rent
Months 1-12 $25,500.00 $35,464.75 $60,964.75
Months 13-24 $26,520.00 $35,464.75 $58,992.44
Months 25-36 $27,580.80 $35,464.75 $60,302.84
Months 37-48 $28,684.03 $35,464.75 $61,665.66
Months 49-60 $29,831.39 $35,464.75 $63,082.98
Months 61-72 $31,024.65 $35,464.75 $63,978.67
Months 73-84 $32,265.63 $35,464.75 $65,488.52
Months 85-96 $33,556.26 $35,464.75 $67,058.76
Months 97-108 $34,898.51 $35,464.75 $68,691.81
Months 109-120 $36,294.45 $35,464.75 $70,390.19
4.2 OPERATING EXPENSES: Lessee shall contract directly and pay directly
for the operation, repair and maintenance of "The Common Areas"
including the parking areas, the loading and un-loading areas,
trash areas, roadways, sidewalks, walkways, parkways, driveways,
landscaped areas, sprinkler systems, striping bumpers and
irrigation systems, Common Area Lighting facilities, fencing and
gates.
Lessor shall pay the Property Taxes and Lessee shall reimburse the
Lessor as outlined in Paragraphs 10, 10.1, 10.2, 10.3, 10.4, 10.5
of the Lease.
Lessor shall pay the Property Insurance and Lessee shall reimburse
the Lessor as outlined in Paragraphs 8.,8.1,8.2,8.3,8.4,8.5,8.6,
8.7,8.8 ; of the Lease.
Lessor shall bill monthly for, and shall set aside on the Lessee's
behalf, a reserve equal to $.02 per square foot per month for
general repairs and eventual replacement due to normal wear and
tear of the roof and parking lots.
5.8 ADDITIONAL TENANT IMPROVEMENTS : Lessor has substantially completed
the following tenant improvements in a timely manner to coincide
with the completion of Tenant Improvements agreed to in Lease
Amendment #1, and Lease Amendment #2 and Lease Amendment #3 of the
Lease. These improvements shall be amortized over a ten year period
at ten percent (10%) interest. Below is a list of the additional
Tenant Improvements of this Fourth Amendment:
1.) CHANGE ORDER #9
* Install Five (5) - Data Drops 60' to 100 from IDS
* Install twenty-five (25) Quick Connects, on Existing Air
Lines
* Install eleven (11) stand alone door alarms with strobe.
TOTAL CHANGE ORDER #9 : $4,840.00
2.) CHANGE ORDER #10
* In Wash Equipment Room remove two (2) stainless steel
double sinks 18" deep.
* In Wash Equipment Room install two (2) stainless steel
double sink tables 24" x 24" x18" deep sink basins
* In Wash Equipment Room install FRP behind sink tables,
approximately 48" AFF/ and 12" long.
* In monitoring unit area add thirty six (36) quick
disconnects in area and add one (1) new drip.
* In monitoring unit area relocate three (3) wire-molds,
electrical voice and data and air /vac and add one
air/vac drop.
* Supply and plumb future 8' double compartment stainless
steel sink table with FRP wainscoting 10' long. Plumbing
to be within five feet of existing sewer vent.
TOTAL CHANGE ORDER # 10 $ 16,390.00
-----------------------------------------------------------------------
3.) CHANGE ORDER #11 - VOIDED
4.) CHANGE ORDER #12 - VOIDED
5.) CHANGE ORDER #13
* INSTALL THE MASONRY FOR CLOSURE WALLS ON TILT-UP
BUILDING.
TOTAL CHANGE ORDER #13 $ 6,174.00
TOTAL COST OF CHANGE ORDERS 9 THROUGH 13 $ 27,404.00
B.O.E. MARK UP 10% $ 2,740.40
59. TENANT IMPROVEMENTS PERMIT (SEE EXHIBIT G) $ 211,471.90
CREDIT OF $50,000 FROM LESSOR $(50,000.00)
TOTAL TO BE AMORTIZED $ 191,616.30
AMORTIZED OVER THE TERM OF THE LEASE AT 10% INTEREST $ 0.256
RENT AS OF LEASE AMENDMENT #3 $ .575
ADJUSTED STARTING RENT $ .60964
NOTE: LESSEE SHALL BE CHARGED THE DIFFERENCE IN BACK RENT.
All other terms and conditions of said Lease shall remain the same and in full
force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this 4rd Amendment to be
executed as of the day and year first written above.
LESSOR: LESSEE:
BUZZ OATES ENTERPRISES II ZYTEC CORPORATION
A MINNESOTA CORPORATION
- -------------------------- ----------------------
MARVIN L. OATES TOM KENT
DATE______________________ DATE__________________
Exhibit 10.20
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference
purposes only, June 17, 1996, is made by and between BLUE SKY
VENTURE, A California General Partnership ("LESSOR") and ZYTEC
CORPORATION, A Minnesota Corporation ("LESSEE"), (collectively the
"PARTIES," or individually a "PARTY").
1.2(a) PREMISES: That certain portion of the Building,
including all improvements therein or to be provided by Lessor under
the terms of this Lease, commonly known by the street address of 3144
Venture Drive, located in the City of Lincoln, County of Placer, State
of California, with zip code 95648, as outlined on Exhibit A attached
hereto ("PREMISES"). The "BUILDING" is that certain building containing
the Premises and generally described as (describe briefly the nature of
the Building): Approximately 30,240 square feet of warehouse area. In
addition to Lessee's rights to use and occupy the Premises as
hereinafter specified, Lessee shall have non-exclusive rights to the
Common Areas (as defined in Paragraph 2.7 below) as hereinafter
specified, but shall not have any rights to the roof, exterior walls or
utility raceways of the Building or to any other buildings in the
Industrial Center. The Premises, the Building, the Common Areas, the
land upon which they are located, along with all other buildings and
improvements thereon, are herein collectively referred to as the
"INDUSTRIAL CENTER." (Also see Paragraph 2.)
1.2(b) PARKING: 25 unreserved vehicle parking spaces
("UNRESERVED PARKING SPACES"); and eight (8) reserved vehicle parking
spaces ("RESERVED PARKING SPACES"). (Also see Paragraph 2.6.)
1.3 TERM: Month to month ("ORIGINAL TERM") commencing June 21,
1996 ("COMMENCEMENT DATE") and ending upon thirty (30) days written
notice by either party ("EXPIRATION DATE"). (Also see Paragraph 3.)
1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). (Also see
Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $7,560.00 per month ("BASE RENT"), payable on
the first day of each month commencing June 21, 1996 (Also see
Paragraph 4.) [x] If this box is checked, this Lease provides for the
Base Rent to be adjusted per Addendum 4.1, attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $7,560.00 as Base Rent
for the period first month's rent.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES:
eighty percent (80%) ("LESSEE'S SHARE") as determined by [x] prorata
square footage of the Premises as compared to the total square footage
of the Building or [ ] other criteria as described in Addendum________.
1.7 SECURITY DEPOSIT: $7,560.00 ("SECURITY DEPOSIT"). (Also
see Paragraph 5.) SEE ADDENDUM
1.8 PERMITTED USE: distribution building and other legal uses
("PERMITTED USE"). (Also see Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY." (Also see
Paragraph 8.)
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable
boxes):
[ ]____________________________________________________ represents
Lessor exclusively ("LESSOR'S BROKER");
[ ]____________________________________________________ represents
Lessee exclusively ("LESSEE'S BROKER"); or
[x] BUZZ OATES REAL ESTATE represents both Lessor and Lessee ("DUAL
AGENCY"). (Also see Paragraph 15.)
1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease
by both Parties, Lessor shall pay to said Broker(s) jointly, or in such
separate shares as they may mutually designate in writing, a fee as set
forth in a separate written agreement between Lessor and said Broker(s)
(or in the event there is no separate written agreement between Lessor
and said Broker(s), the sum of $ per separate agreement) for brokerage
----------------------
services rendered by said Broker(s) in connection with this
transaction.
1.11 GUARANTOR. The obligations of the Lessee under this Lease
are to be guaranteed by N/A ("GUARANTOR"). (Also see Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or
Addenda consisting of Paragraphs 2.1 through 58, and Exhibits A, all
of which constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon
all of the terms, covenants and conditions set forth in this Lease.
Unless otherwise provided herein, any statement of square footage set
forth in this Lease, or that may have been used in calculating rental
and/or Common Area Operating Expenses, is an approximation which Lessor
and Lessee agree is reasonable and the rental and Lessee's Share (as
defined in Paragraph 1.6(b)) based thereon is not subject to revision
whether or not the actual square footage is more or less. SEE ADDENDUM
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 ROOF, plumbing, electrical systems, fire
sprinkler system, lighting, air conditioning and heating systems and
loading doors, if any, in the Premises, other than those constructed by
Lessee, shall be in good operating condition on the Commencement Date.
If a non-compliance with said warranty exists as of the Commencement
Date, Lessor shall, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same
at Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within three hundred sixty five (365)
days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE.
Lessor warrants that any improvements (other than those constructed by
Lessee or at Lessee's direction) on or in the Premises which have been
constructed or installed by Lessor or with Lessor's consent or at
Lessor's direction shall comply with all applicable covenants or
restrictions of record and applicable building codes, regulations and
ordinances in effect on the Commencement Date. Lessor further warrants
to Lessee that Lessor has no knowledge of any claim having been made by
any governmental agency that a violation or violations of applicable
building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply
to any Alterations or Utility Installations (defined in Paragraph
7.3(a)) made or to be made by Lessee. If the Premises do not comply
with said warranties, Lessor shall, except as otherwise provided in
this Lease, promptly after receipt of written notice from Lessee given
within six (6) months following the Commencement Date and setting forth
with specificity the nature and extent of such non-compliance, take
such action, at Lessor's expense, as may be reasonable or appropriate
to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under
Applicable Laws (as defined in Paragraph 2.4).
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a)
that it has been advised by the Broker(s) to satisfy itself with
respect to the condition of the Premises (including but not limited to
the electrical and fire sprinkler systems, security, environmental
aspects, seismic and earthquake requirements, and compliance with the
Americans with Disabilities Act and applicable zoning, municipal,
county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "APPLICABLE LAWS")
and the present and future suitability of the Premises for Lessee's
intended use; (b) that Lessee has made such investigation as it deems
necessary with reference to such matters, is satisfied with reference
thereto, and assumes all responsibility therefore as the same relate to
Lessee's occupancy of the Premises and/or the terms of this Lease; and
(c) that neither Lessor, nor any of Lessor's agents, has made any oral
or written representations or warranties with respect to said matters
other than as set forth in this Lease.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by
Lessor in this Paragraph 2 shall be of no force or effect if
immediately prior to the date set forth in Paragraph 1.1 Lessee was the
owner or occupant of the Premises. In such event, Lessee shall, at
Lessee's sole cost and expense, correct any non-compliance of the
Premises with said warranties.
2.6 VEHICLE PARKING. Lessee shall be entitled to use the
number of Unreserved Parking Spaces and Reserved Parking Spaces
specified in Paragraph 1.2(b) on those portions of the Common Areas
designated from time to time by Lessor for parking. Lessee shall not
use more parking spaces than said number. Said parking spaces shall be
used for parking by vehicles no larger than full-size passenger
automobiles or pick-up trucks, herein called "PERMITTED SIZE VEHICLES."
Vehicles other than Permitted Size Vehicles shall be parked and loaded
or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles
that belong to or are controlled by Lessee or Lessee's employees,
suppliers, shippers, customers, contractors or invitees to be loaded,
unloaded, or parked in areas other than those designated by Lessor for
such activities.
(b) If Lessee permits or allows any of the prohibited
activities described in this Paragraph 2.6, then Lessor shall have the
right, without notice, in addition to such other rights and remedies
that it may have, to remove or tow away the vehicle involved and charge
the cost to Lessee, which cost shall be immediately payable upon demand
by Lessor.
(c) Lessor shall at the Commencement Date of this
Lease, provide the parking facilities required by Applicable Law.
2.7 COMMON AREAS - DEFINITION. The term "COMMON AREAS" is
defined as all areas and facilities outside the Premises and within the
exterior boundary line of the Industrial Center and interior utility
raceways within the Premises that are provided and designated by the
Lessor from time to time for the general non-exclusive use of Lessor,
Lessee and other lessees of the Industrial Center and their respective
employees, suppliers, shippers, customers, contractors and invitees,
including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped
areas.
2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to
Lessee, for the benefit of Lessee and its employees, suppliers,
shippers, contractors, customers and invitees, during the term of this
Lease, the non-exclusive right to use, in common with others entitled
to such use, the Common Areas as they exist from time to time, subject
to any rights, powers, and privileges reserved by Lessor under the
terms hereof or under the terms of any rules and regulations or
restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be
deemed to include the right to store any property, temporarily or
permanently, in the Common Areas. Any such storage shall be permitted
only by the prior written consent of Lessor or Lessor's designated
agent, which consent may be revoked at any time. In the event that any
unauthorized storage shall occur then Lessor shall have the right,
without notice, in addition to such other rights and remedies that it
may have, to remove the property and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to
time, to establish, modify, amend and enforce reasonable Rules and
Regulations with respect thereto in accordance with Paragraph 40.
Lessee agrees to abide by and conform to all such Rules and
Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor
shall not be responsible to Lessee for the non-compliance with said
rules and regulations by other lessees of the Industrial Center.
2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in
Lessor's sole discretion, from time to time:
(a) To make changes to the Common Areas, including,
without limitation, changes in the location, size, shape and number of
driveways, entrances, parking spaces, parking areas, loading and
unloading areas, ingress, egress, direction of traffic, landscaped
areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises
remains available;
(c) To designate other land outside the boundaries of
the Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to
the Common Areas;
(e) To use the Common Areas while engaged in making
additional improvements, repairs or alterations to the Industrial
Center, or any portion thereof; and
(f) To do and perform such other acts and make such
other changes in, to or with respect to the Common Areas and Industrial
Center as Lessor may, in the exercise of sound business judgment, deem
to be appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original
Term of this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If an Early Possession Date is specified
in Paragraph 1.4 and if Lessee totally or partially occupies the
Premises after the Early Possession Date but prior to the Commencement
Date, the obligation to pay Base Rent shall be abated for the period of
such early occupancy. All other terms of this Lease, however,
(including but not limited to the obligations to pay Lessee's Share of
Common Area Operating Expenses and to carry the insurance required by
Paragraph 8) shall be in effect including such period. Any such early
possession shall not affect nor advance the Expiration Date of the
Original Term.
SEE ADDENDUM
4. RENT.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or
charges, as the same may be adjusted from time to time, to Lessor in
lawful money of the United States, without offset or deduction, on or
before the day on which it is due under the terms of this Lease. Base
Rent and all other rent and charges for any period during the term
hereof which is for less than one full month shall be prorated based
upon the actual number of days of the month involved. Payment of Base
Rent and other charges shall be made to Lessor at its address stated
herein or to such other persons or at such other addresses as Lessor
may from time to time designate in writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor
during the term hereof, in addition to the Base Rent, Lessee's Share
(as specified in Paragraph 1.6(b)) of all Common Area Operating
Expenses, as hereinafter defined, during each calendar year of the term
of this Lease, in accordance with the following provisions:
(a) "COMMON AREA OPERATING EXPENSES" are defined, for
purposes of this Lease, as all costs incurred by Lessor relating to the
ownership and operation of the Industrial Center, including, but not
limited to, the following:
(i) The operation, repair and maintenance,
in neat, clean, good order and condition, of the following:
(aa) The Common Areas, including
parking areas, loading and unloading areas, trash areas, roadways,
sidewalks, walkways, parkways, driveways, landscaped areas, striping,
bumpers, irrigation systems, Common Area lighting facilities, fences
and gates, elevators and roof.
(bb) Exterior signs and any tenant
directories.
(cc) Fire detection and sprinkler
systems.
(ii) The cost of water, gas, electricity and
telephone to service the Common Areas.
(iii) Trash disposal, property management
and security services and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and
repair of Common Areas.
(v) Real Property Taxes (as defined in
Paragraph 10.2) to be paid by Lessor for the Building and the Common
Areas under Paragraph 10 hereof.
(vi) The cost of the premiums for the
insurance policies maintained by Lessor under Paragraph 8 hereof.
(viii) Any other services to be provided by
Lessor that are stated elsewhere in this Lease to be a Common Area
Operating Expense.
(b) Any Common Area Operating Expenses and Real
Property Taxes that are specifically attributable to the Building or to
any other building in the Industrial Center or to the operation, repair
and maintenance thereof, shall be allocated entirely to the Building or
to such other building. However, any Common Area Operating Expenses and
Real Property Taxes that are not specifically attributable to the
Building or to any other building or to the operation, repair and
maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Industrial Center.
(c) The infusion of the improvements, facilities and
services set forth in Subparagraph 4.2(a) shall not be deemed to impose
an obligation upon Lessor to either have said improvements or
facilities or to provide those services unless the Industrial Center
already has the same, Lessor already provides the services, or Lessor
has agreed elsewhere in this Lease to provide the same or some of them.
(d) Lessee's Share of Common Area operating Expenses
shall be payable by Lessee within ten (10) days after a reasonably
detailed statement of actual expenses is presented to Lessee by Lessor.
At Lessor's option, however, an amount may be estimated by Lessor from
time to time of Lessee's Share of annual Common Area Operating Expenses
and the same shall be payable monthly or quarterly, as Lessor shall
designate, during each 12-month period of the Lease term, on the same
day as the Base Rent is due hereunder. Lessor shall deliver to Lessee
within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual
Common Area Operating Expenses incurred during the preceding year. If
Lessee's payments under this Paragraph 4.2(d) during said preceding
year exceed Lessee's Share as indicated on said statement, Lessor shall
be credited the amount of such overpayment against Lessee's Share of
Common Area Operating Expenses next becoming due. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year were less than
Lessee's Share as indicated on said statement, Lessee shall pay to
Lessor the amount of the deficiency within ten (10) days after delivery
by Lessor to Lessee of said statement. SEE ADDENDUM 4.2E
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's
execution hereof the Security Deposit set forth in Paragraph 1.7 as
security for Lessee's faithful performance of Lessee's obligations
under this Lease. If Lessee fails to pay Base Rent or other rent or
charges due hereunder, or otherwise Defaults under this Lease (as
defined in Paragraph 13.1 ), Lessor may use, apply or retain all or any
portion 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 therefore deposit monies with Lessor sufficient
to restore said Security Deposit to the full amount required by this
Lease. Any time the Base Rent increases during the term of this Lease,
Lessee shall, upon written request from Lessor, deposit additional
monies with Lessor as an addition to the Security Deposit so that the
total amount of the Security Deposit shall at all times bear the same
proportion to the then current Base Rent as the initial Security
Deposit bears to the initial Base Rent set forth in Paragraph 1.5.
Lessor shall not be required to keep all or any part of the Security
Deposit separate from its general accounts. Lessor shall, at the
expiration or earlier termination of the term hereof and after Lessee
has vacated the Premises, return to Lessee (or, at Lessor's option, to
the last assignee, if any, of Lessee's interest herein), that portion
of the Security Deposit not used or applied by Lessor. Unless otherwise
expressly agreed in writing by Lessor, no part of the Security Deposit
shall be considered to be held in trust, to bear interest or other
increment for its use, or to be prepayment for any monies to be paid by
Lessee under this Lease.
6. USE.
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for
the Permitted Use set forth in Paragraph 1.8, or any other legal use
which is reasonably comparable thereto, and for no other purpose.
Lessee shall not use or permit the use of the Premises in a manner that
is unlawful, creates waste or a nuisance, or that disturbs owners
and/or occupants of, or causes damage to the Premises or neighboring
premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold
or delay its consent to any written request by Lessee, Lessee's
assignees or subtenants, and by prospective assignees and subtenants of
Lessee, its assignees and subtenants, for a modification of said
Permitted Use, so long as the same will not impair the structural
integrity of the improvements on the Premises or in the Building or the
mechanical or electrical systems therein, does not conflict with uses
by other lessees, is not significantly more burdensome to the Premises
or the Building and the improvements thereon, and is otherwise
permissible pursuant to this Paragraph 6. If Lessor elects to withhold
such consent, Lessor shall within five (5) business days after such
request give a written notification of same, which notice shall include
an explanation of Lessor's reasonable objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term
"HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product,
substance, chemical, material or waste whose presence, nature, quantity
and/or intensity of existence, use, manufacture, disposal,
transportation, spill, release or effect, either by itself or in
combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or
welfare, the environment, or the Premises; (ii) regulated or monitored
by any governmental authority; or (iii) a basis for potential liability
of Lessor to any governmental agency or third party under any
applicable statute or common law theory. Hazardous Substance shall
include, but not be limited to, hydrocarbons, petroleum, gasoline,
crude oil or any products or by-products thereof. Lessee shall not
engage in any activity in or about the Premises which constitutes a
Reportable Use (as hereinafter defined) of Hazardous Substances without
the express prior written consent of Lessor and compliance in a timely
manner (at Lessee's sole cost and expense) with all Applicable
Requirements (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean
(i) the installation or use of any above or below ground storage tank,
(ii) the generation, possession, storage, use, transportation, or
disposal of a Hazardous Substance that requires a permit from, or with
respect to which a report, notice, registration or business plan is
required to be filed with, any governmental authority, and (iii) the
presence in, on or about the Premises of a Hazardous Substance with
respect to which any Applicable Laws require that a notice be given to
persons entering or occupying the Premises or neighboring properties.
Notwithstanding the foregoing, Lessee may, without Lessor's prior
consent, but upon notice to Lessor and in compliance with all
Applicable Requirements, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of the
Permitted Use, so long as such use is not a Reportable Use and does not
expose the Premises or neighboring properties to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In
addition, Lessor may (but without any obligation to do so) condition
its consent to any Reportable Use of any Hazardous Substance by Lessee
upon Lessee's giving Lessor such additional assurances as Lessor, in
its reasonable discretion deems necessary to protect itself, the
public, the Premises and the environment against damage, contamination
or injury and/or liability therefor, including but not limited to the
installation (and, at Lessor's option, removal on or before Lease
expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasement) 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 has come to be
located in, on, under or about the Premises or the Building, other than
as previously consented to by Lessor, Lessee shall immediately give
Lessor written notice thereof, together with a copy of any statement,
report, notice, registration, application, permit, business plan,
license, claim, action, or proceeding given to, or received from, any
governmental authority or private party concerning the presence, spill,
release, discharge of, or exposure to, such Hazardous Substance
including but not limited to all such documents as may be involved in
any Reportable Use involving the Premises. Lessee shall not cause or
permit any Hazardous Substance to be spilled or released in, on, under
or about the Premises (including, without limitation, through the
plumbing or sanitary sewer system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect,
defend and hold Lessor, its agents, employees, lenders and ground
lessor, if any, and the Premises, harmless from and against any and all
damages, liabilities, judgments, costs, claims, liens, expenses,
penalties, loss of permits and attorneys' and consultants' fees arising
out of or involving any Hazardous Substance brought onto the Premises
by or for Lessee or by anyone under Lessee's control. Lessee's
obligations under this Paragraph 6.2(c) shall include, but not be
limited to, the effects of any contamination or injury to parson,
property or the environment created or suffered by Lessee, and the cost
of investigation (including consultants' and attorneys' fees and
testing), removal, remediation, restoration and/or abatement thereof,
or of any contamination therein involved, and shall survive the
expiration or earlier termination of this Lease. No termination,
cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect
to Hazardous Substances, unless specifically so agreed by Lessor in
writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at
Lessee's sole cost and expense, fully, diligently and in a timely
manner, comply with all "APPLICABLE REQUIREMENTS," which term is used
in this Lease to mean all laws, rules, regulations, ordinances,
directives, covenants, easements and restrictions of record, permits,
the requirements of any applicable fire insurance underwriter or rating
bureau, and the REASONABLE 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),
now in effect or which may hereafter come into effect. Lessee shall,
within five (5) days after receipt of Lessor's written request, provide
Lessor with copies of all documents and information, including but not
limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable
Requirements specified by Lessor, and shall immediately upon receipt,
notify Lessor in writing (with copies of any documents involved) of any
threatened or actual claim, notice, citation, warning, complaint or
report pertaining to or involving failure by Lessee or the Premises to
comply with any Applicable Requirements. SEE ADDENDUM 6.3A
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents,
employees, contractors and designated representatives, and the holders
of any mortgages, deeds of trust or ground leases on the Premises
("LENDERS") shall have the right to enter the Premises at any time in
the case of an emergency, and otherwise at reasonable advance notice
times, for the purpose of inspecting the condition of the Premises and
for verifying compliance by Lessee with this Lease and all Applicable
Requirements (as defined in Paragraph 6.3), and Lessor shall be
entitled to employ experts and/or consultants in connection therewith
to advise Lessor with respect to Lessee's activities, including but not
limited to Lessee's installation, operation, use, monitoring,
maintenance, or removal of any Hazardous Substance on or from the
Premises. The costs and expenses of any such inspections shall be paid
by the party requesting same, unless a Default or Breach of this Lease
by Lessee or a violation of Applicable Requirements or a contamination,
caused or materially contributed to by Lessee, is found to exist or to
be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent
violation or contamination. In such case, Lessee shall upon request
reimburse Lessor or Lessor's Lender, as the case may be, for the costs
and expenses of such inspections.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES END
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building
Code), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole cost and expense and at
all times, keep the Premises and every part thereof in good order,
condition and repair (whether or not such portion of the Premises
requiring repair, or the means of repairing the same, are reasonably or
readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements
or the age of such portion of the Premises), including, without
limiting the generality of the foregoing, all equipment or facilities
specifically serving the Premises, such as plumbing, heating, air
conditioning, ventilating, electrical, lighting facilities, boilers,
fired or unfired pressure vessels, fire hose connections if within the
Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors, plate glass, and skylights,
but excluding any items which are the responsibility of Lessor pursuant
to Paragraph 7.2 below. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance
practices. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition and
state of repair.
(b) Lessee shall, at Lessee's sole cost and expense,
procure and maintain a contract, with copies to Lessor, in customary
form and substance for and with a contractor specializing and
experienced in the inspection, maintenance and service of the heating,
air conditioning and ventilation system for the Premises. However,
Lessor reserves the right, upon notice to Lessee, to procure and
maintain the contract for the heating, air conditioning and ventilating
systems, and if Lessor so elects, Lessee shall reimburse Lessor, upon
demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations
under this Paragraph 7.1, Lessor may enter upon the Premises after ten
(10) days' prior written notice to Lessee (except in the case of an
emergency, in which case no notice shall be required), perform such
obligations on Lessee's behalf, and put the Premises in good order,
condition and repair, in accordance with Paragraph 13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of
Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants,
Restrictions and Building Code), 4.2 (Common Area Operating Expenses),
6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14
(Condemnation), Lessor, subject to reimbursement pursuant to Paragraph
4.2, shall keep in good order, condition and repair the foundations,
exterior walls, structural condition of interior bearing walls,
exterior reef, fire sprinkler and/or standpipe and hose (if located in
the Common Areas) or other automatic fire extinguishing system
including fire alarm and/or smoke detection system and equipment, fire
hydrants, parking lots, walkways, parkways, driveways, landscaping,
fences, signs and utility systems serving the Common Areas and all
parts thereof, as well as providing the services for which there is a
Common Area Operating Expanse pursuant to Paragraph 4.2. Lessor shall
not be obligated to paint the exterior or interior surfaces of exterior
walls nor shall Lessor be obligated to maintain, repair or replace
windows, doors or plate glass of the Premises. Lessee expressly waives
the benefit of any statute now or hereafter in effect which would
otherwise afford Lessee the right to make repairs at Lessor's expanse
or to terminate this Lease because of Lessor's failure to keep the
Building, Industrial Center or Common Areas in good order, condition
and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" is used in this Lease to refer to all air lines, power
panels, electrical distribution, security, fire protection systems,
communications systems, lighting fixtures, heating, ventilating and air
conditioning equipment, plumbing, and fencing in, on or about the
Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and
equipment which can be removed without doing material damage to the
Premises. The term "ALTERATIONS" shall mean any modification of the
improvements on the Premises which are provided by Lessor under the
terms of this Lease, other than Utility Installations or Trade
Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are
defined as Alterations and/or Utility Installations made by Lessee that
are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall
not make nor cause to be made any Alterations or Utility Installations
in, on, under or about the Premises without Lessor's prior written
consent. Lessee may, however, make non-structural Utility Installations
to the interior of the Premises (excluding the roof) without Lessor's
consent but upon notice to Lessor, so long as they are not visible from
the outside of the Premises, do not involve puncturing, relocating or
removing the roof or any existing walls, or changing or interfering
with the fire sprinkler or fire detection systems and the cumulative
cost thereof during the term of this Lease as extended does not exceed
$10,000.00.
(b) CONSENT. Any Alterations or Utility Installations
that Lessee shall desire to make and which require the consent of the
Lessor shall be presented to Lessor in written form with detailed
plans. All consents given by Lessor, whether by virtue of Paragraph
7.3(a) or by subsequent specific consent, shall be deemed conditioned
upon: (i) Lessee's acquiring all applicable permits required by
governmental authorities; (ii) the furnishing of copies of such permits
together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work
thereon; and (iii) the compliance by Lessee with all conditions of said
permits in a prompt and expeditious manner. Any Alterations or Utility
Installations by Lessee during the term of this Lease shall be done in
a good and workmanlike manner, with good and sufficient materials, and
be in compliance with all Applicable Requirements. Lessee shall
promptly upon completion thereof furnish Lessor with as-built plans and
specifications therefor. Lessor may, (but without obligation to do so)
condition its consent to any requested Alteration or Utility
Installation that costs $10,000.00 or more upon Lessee's providing
Lessor with a lien and completion bond in an amount equal to one and
one-haft times the estimated cost of such Alteration or Utility
Installation.
(c) LIEN PROTECTION. Lessee shall pay when due all
claims for labor or materials furnished or alleged to have been
furnished to or for Lessee ator for use on the Premises, which claims
are or may be secured by any mechanic's or materialmen's lien against
the Premises or any interest therein. Lessee shall give Lessor not less
than ten (10) days' notice prior to the commencement of any work in,
on, or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law.
If Lessee shall, in good faith, contest the validity of any such lien,
claim or demand, then Lessee shall, at its sole expense, defend and
protect itself, Lessor and the Premises against the same and shall pay
and satisfy any such adverse judgment that may be rendered thereon
before the enforcement thereof against the Lessor or the Premises. If
Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to one and one-half times the
amount of such contested lien claim or demand, indemnifying Lessor
against liability for the same, as required by law for the holding of
the Premises free from the effect of such lien or claim. In addition,
Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to its best
interest to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require
their removal and to cause Lessee to become the owner thereof as
hereinafter provided in this Paragraph 7.4, all Alterations and Utility
Installations made to the Premises by Lessee shall be the property of
and owned by Lessee, but considered a part of the Premises. Lessor may,
at any time and at its option, elect in writing to Lessee to be the
owner of all or any specified part of the Lessee-Owned Alterations and
Utility 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 the Premises and be surrendered
with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing,
Lessor may require that any or all Lessee-owned Alterations or Utility
Installations be removed by the expiration or earlier termination of
this Lease, notwithstanding that their installation may have been
consented to by Lessor. Lessor may require the removal at any time of
all or any part of any Alterations or Utility Installations made
without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the
Premises by the end of the last day of the Lease term or any earlier
termination date, clean and free of debris and in good operating order,
condition and state of repair, ordinary wear and tear excepted.
Ordinary wear and tear shall not include any damage or deterioration
that would have been prevented by good maintenance practice or by
Lessee performing all of its obligations under this Lease. Except as
otherwise agreed or specified herein, the Premises, as surrendered,
shall include the Alterations and Utility Installations. The obligation
of Lessee shall include the repair of any damage occasioned by the
installation, maintenance or removal of Lessee's Trade Fixtures,
furnishings, equipment, and Lessee-Owned Alterations and Utility
Installations, as well as the removal of any storage tank installed by
or for Lessee, and the removal, replacement, or remediation of any
soil, material or ground water contaminated by Lessee, all as may then
be required by Applicable Requirements and/or good practice. Lessee's
Trade Fixtures shall remain the property of Lessee and shall be removed
by Lessee subject to its obligation to repair and restore the Premises
per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUMS. The cost of the premium for the
insurance policies maintained by Lessor under this Paragraph 8 shall be
a Common Area Operating Expanse pursuant to Paragraph 4.2 hereof.
Premiums for policy periods commencing prior to, or extending beyond,
the term of this Lease shall be pro-rated to coincide with the
corresponding Commencement Date or Expiration Date.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep
in force during the term of this Lease a Commercial General Liability
policy of insurance protecting Lessee, Lessor and any Lender(s) whose
names have been provided to Lessee in writing (as 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" endorsement for
damage caused by heat, smoke or fumes from a hostile fire. The policy
shall not contain any intra-insured exclusions as between insured
persons or organizations, but shall include coverage for liability
assumed under this Lease as an "INSURED CONTRACT" for the performance
of Lessee's indemnity obligations under this Lease. The limits of said
insurance required by this Lease or as carried by Lessee shall not,
however, limit the liability of Lessee nor relieve Lessee of any
obligation hereunder. All insurance to be carried by Lessee shall be
primary to and not contributory with any similar insurance carried by
Lessor, whose insurance shall be considered excess insurance only. SEE
ADDENDUM
(b) CARRIED BY LESSOR. Lessor shall also maintain
liability insurance described in Paragraph 8.2(a) above, in addition to
and not in lieu of, the insurance required to be maintained by Lessee.
Lessee shall not be named as an additional insured herein.
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL
VALUE.
(a) BUILDING END IMPROVEMENTS. Lessor shall obtain
and keep in force during the term of this Lease a policy or policies in
the name of Lessor, with loss payable to Lessor and to any Lender(s),
insuring against loss or damage to the Premises. Such insurance shall
be for full replacement cost, as the same shall exist from time to
time, or the amount required by any Lender(s), but in no event more
than the commercially reasonable and available insurable value thereof
if, by reason of the unique nature or age of the improvements involved,
such latter amount is less than full replacement cost. Lessee-Owned
Alterations and Utility Installations, Trade Fixtures and Lessee's
personal property shall be insured by Lessee pursuant to Paragraph 8.4.
If the coverage is available and commercially appropriate, Lessor's
policy or policies shall insure against all risks of direct physical
loss or damage (except the perils of flood and/or earthquake unless
required by a Lender), including coverage for any additional costs
resulting from debris removal and reasonable amounts of coverage for
the enforcement of any ordinance or law regulating the reconstruction
or replacement of any undamaged sections of the Building required to be
demolished or removed by reason of the enforcement of any building,
zoning, safety or land use laws as the result of a covered loss, but
not including plate glass insurance. Said policy or policies shall also
contain an agreed valuation provision in lieu of any co-insurance
clause, waiver of subrogation, and inflation guard protection causing
an increase in the annual property insurance coverage amount by a
factor of not less than the adjusted U.S. Department of Labor Consumer
Price Index for All Urban Consumers for the city nearest to where the
Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep
in force during the term of this Lease a policy or policies in the name
of Lessor, with loss payable to Lessor and any Lender(s), insuring the
loss of the full rental and other charges payable by all lessees of the
Building to Lessor for one year (including all Real Property Taxes,
insurance costs, all Common Area operating Expenses and any scheduled
rental increases). Said insurance may provide that in the event the
Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the
completion of repairs or replacement of the Premises, to provide for
one full year's loss of rental revenues from the date of any such loss.
Said insurance shall contain an agreed valuation provision in lieu of
any co-insurance clause, and the amount of coverage shall be adjusted
annually to reflect the projected rental income, Real Property Taxes,
insurance premium costs and other expenses, if any, otherwise payable,
for the next 12-month period. Common Area Operating Expenses shall
include any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any
increase in the premiums for the property insurance of the Building and
for the Common Areas or other buildings in the Industrial Center if
said increase is caused by Lessee's acts, omissions, use or occupancy
of the Premises.
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the
Insuring Party, Lessor shall not be required to insure Lessee-Owned
Alterations and Utility Installations unless the item in question has
become the property of Lessor under the terms of this Lease. SEE
ADDENDUM
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 carded,
maintain insurance coverage on all of Lessee's personal property, Trade
Fixtures and Lessee-Owned Alterations and Utility Installations in, on,
or about the Premises similar in coverage to that carried by Lessor as
the Insuring Party under Paragraph 8.3(a). Such insurance shall be full
replacement cost coverage with a deductible not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by
Lessee for the replacement of personal property and the restoration of
Trade Fixtures and Lessee-Owned Alterations and Utility Installations.
Upon request from Lessor, Lessee shall provide Lessor with written
evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be
in companies duly licensed to transact business in the state where the
Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least B+, V, or such other rating as may be
required by a Lender, as set forth in the most current issue of "Best's
Insurance Guide." Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies referred to in this
Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven
(7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the
existence and amounts of, the insurance required under Paragraph 8.2(a)
and 8.4. No such policy shall be cancelable or subject to modification
except after thirty (30) days' prior written notice to Lessor. Lessee
shall at least thirty (30) days prior to the expiration of such
policies and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights
or remedies, Lessee and Lessor each hereby release and relieve the
other, and waive their entire right to recover damages (whether in
contract or in tort) against the other, for loss or damage to their
property arising out of or incident to the perils required to be
insured against under Paragraph 8. The effect of such releases and
waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles
applicable thereto. Lessor and Lessee agree to have their respective
insurance companies issuing property damage insurance waive any right
to subrogation that such companies may have against Lessor or Lessee,
as the case may be, so long as the insurance is not invalidated
thereby.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of
express warranties, Lessee shall indemnify, protect, defend and hold
harmless the Premises, Lessor and its agents, Lessor's master or ground
lessor, partners and Lenders from and against any and all claims, loss
of rents and/or damages, costs, liens, judgments, penalties, loss of
permits, attorneys' and consultants' fees, expenses and/or liabilities
arising out of, involving, or in connection with, 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. 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. SEE ADDENDUM
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be
liable for injury or damage to the person or goods, wares, merchandise
or other property of Lessee, Lessee's employees, contractors, invitees,
customers, or any other person in or about the Premises, whether such
damage or injury is caused by or results from fire, steam, electricity,
gas, water or rain, or from the breakage, leakage, obstruction or other
defects of pipes, fire sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures, or from any other cause, whether
said injury or damage results from conditions arising upon the Premises
or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause
of such damage or injury or the means of repairing the same is
accessible or not. Lessor shall not be liable for any damages arising
from any act or neglect of any other lessee of Lessor nor from the
failure by Lessor to enforce the provisions of any other lease in the
Industrial Center. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to
Lessee's business or for any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and
Utility Installations, the repair cost of which damage or destruction
is less than fifty percent (50%) of the then Replacement Cost (as
defined in Paragraph 9.1 (d)) of the Premises (excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures) immediately
prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and
Utility Installations, the repair cost of which damage or destruction
is fifty percent (50%) or more of the than Replacement Cost of the
Premises (excluding Lessee-Owned Alterations and Utility Installations
and Trade Fixtures) immediately prior to such damage or destruction. In
addition, damage or destruction to the Building, other than
Lessee-Owned Alterations and Utility Installations and Trade Fixtures
of any lessees of the Building, the cost of which damage or destruction
is fifty percent (50%) or more of the then Replacement Cost (excluding
Lessee-Owned Alterations and Utility Installations and Trade Fixtures
of any lessees of the Building) of the Building shall, at the option of
Lessor, be deemed to be Premises Total Destruction.
(c) "INSURED LOSS" shall mean damage or destruction
to the Premises, other than Lessee-Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required
to be covered by the insurance described in Paragraph 8.3(a)
irrespective of any deductible amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair
or rebuild the improvements owned by Lessor at the time of the
occurrence to their condition existing immediately prior thereto,
including demolition, debris removal and upgrading required by the
operation of applicable building codes, ordinances or laws, and without
deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the
occurrence or discovery of a condition involving the presence of, or a
contamination by, a Hazardous Substance as defined in Paragraph 6.2(a),
in, on, or under the Premises.
9.2 PREMISES PARTIAL DAMAGE - INSURED LOSS. If Premises
Partial Damage that is an Insured Loss occurs, 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. In the event, however, that there is a shortage of insurance
proceeds and such shortage is due to the fact that, by reason of the
unique nature of the improvements in the Premises, full replacement
cost insurance coverage was not commercially reasonable and available,
Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless
Lessee provides Lessor with the funds to cover same, or adequate
assurance thereof, within ten (10) days following receipt of written
notice of such shortage and request therefor. If Lessor receives said
funds or adequate assurance thereof within said ten (10) day period,
Lessor shall complete them as soon as reasonably possible and this
Lease shall remain in full force and effect. If Lessor does not receive
such funds or assurance within said period, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to
make such restoration and repair as is commercially reasonable with
Lessor paying any shortage in proceeds, in which case this Lease shall
remain in full force and effect. If Lessor does not receive such funds
or assurance within such ten (10) day period, 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 it made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If Premises Partial
Damage that is not an Insured Loss occurs (as provided in a standard
commercial all risk policy), unless caused by a negligent or willful
act of Lessee (in which event Lessee shall make the repairs at Lessee's
expanse and this Lease shall continue in full force and effect), Lessor
may at Lessor's option, either (i) repair such damage as soon as
reasonably possible at Lessor's expense, in which event this Lease
shall continue in full force and effect, or (ii) give written notice to
Lessee within thirty (30) days after receipt by Lessor 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 date of such notice.
In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days
after the receipt of such notice to give written notice to Lessor of
Lessee's commitment to pay for the repair of such damage totally at
Lessee's expanse and without reimbursement from Lessor. Lessee shall
provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following such commitment from Lessee.
In such event this Lease shall continue in full force and effect, and
Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not
give such notice and provide the funds or assurance thereof within the
times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision
hereof, if Premises Total Destruction occurs (including any destruction
required by any authorized public authority), this Lease shall
terminate sixty (60) days following the date of such Premises Total
Destruction, whether or not the damage or destruction is an Insured
Loss or was caused by a negligent or willful act of Lessee. In the
event, however, that the damage or destruction was caused by Lessee,
Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last
six (6) months of the term of this Lease there is damage for which the
cost to repair exceeds one month's Base Rent, whether or not an Insured
Loss, Lessor may, at Lessor's option, terminate this Lease effective
sixty (60) days following the date of occurrence of such damage by
giving written notice to Lessee of Lessor's election to do so within
thirty (30) days after the date of occurrence of such damage. Provided,
however, if Lessee at that time has an exercisable option to extend
this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any
shortage in insurance proceeds (or adequate assurance thereof) needed
to make the repairs on or before the earlier of (i) the date which is
ten (10) days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date
upon which such option expires. If Lessee duly exercises such option
during such period and provides Lessor with funds (or adequate
assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably
possible and this Lease shall continue in full force and effect. If
Lessee fails to exercise such option and provide such funds or
assurance during such period, then this Lease shall terminate as of the
date set forth in the first sentence of this Paragraph 9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or
(ii) Hazardous Substance Condition for Which Lessee is not legally
responsible, the Base Rent, Common Area Operating Expenses and other
charges, if any, payable by Lessee hereunder for the period during
which such damage or condition, its repair, remediation or restoration
continues, shall be abated in proportion to the degree to which
Lessee's use of the Premises is impaired, but not in excess of proceeds
from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other
charges, if any, as aforesaid, all other obligations of Lessee
hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such damage,
destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore
the Premises under the provisions of this Paragraph 9 and shall not
commence, in a substantial and meaningful way, the repair or
restoration of the Premises within ninety (90) days after such
obligation shall accrue, Lessee may, at any time prior to the
commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's
election to terminate this Lease on a date not less than sixty (60)
days following the giving of such notice. If Lessee gives such notice
to Lessor and such Lenders and such repair or restoration is not
commenced within thirty (30) days after receipt of such notice, this
Lease shall terminate as of the date specified in said notice. If
Lessor or a Lender commences the repair or restoration of the Premises
within thirty (30) days after the receipt of such notice, this Lease
shall continue in full force and effect. "COMMENCE" as used in this
Paragraph 9.6 shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work
on the Premises, whichever occurs first.
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this
Lease pursuant to this Paragraph 9, Lessor shall return to Lessee any
advance payment made by Lessee to Lessor and so much of Lessee's
Security Deposit as has not been, or is not then required to be, used
by Lessor under the terms of this Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms
of this Lease shall govern the effect of any damage to or destruction
of the Premises and the Building with respect to the termination of
this Lease and hereby waive the provisions of any present or future
statute to the extent it is inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property
Taxes, as defined in Paragraph 10.2, applicable to the Industrial
Center, and except as otherwise provided in Paragraph 10.3, any such
amounts shall be included in the calculation of Common Area Operating
Expenses in accordance with the provisions of Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITION. As used herein, the term
"REAL PROPERTY TAXES" shall include any form of real estate tax or
assessment, general, special, ordinary or extraordinary, and any
license fee, commercial rental tax, improvement bond or bonds, levy or
tax (other than inheritance, personal income or estate taxes) imposed
upon the Industrial Center by any authority having the direct or
indirect power to tax, including any city, state or federal government,
or any school, agricultural, sanitary, fire, street, drainage, or other
improvement district thereof, levied against any legal or equitable
interest of Lessor in the Industrial Center or any portion thereof,
Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "REAL PROPERTY TAXES" shall
also include any tax, fee, levy, assessment or charge, or any increase
therein, imposed by reason of events occurring, or changes in
Applicable Law taking effect, during the term of this Lease, including
but not limited to a change in the ownership of the Industrial Center
or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not
contemplated by the Parties. In calculating Real Property Taxes for any
calendar year, the Real Property Taxes for any real estate tax year
shall be included in the calculation of Real Property Taxes for such
calendar year based upon the number of days which such calendar year
and tax year have in common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses
shall not include Real Property Taxes specified in the tax assessor's
records and work sheets as being caused by additional improvements
placed upon the Industrial Center by other lessees or by Lessor for the
exclusive enjoyment of such other lessees. Notwithstanding Paragraph
10.1 hereof, Lessee shall, however, pay to Lessor at the time Common
Area Operating Expenses are payable under Paragraph 4.2, the entirety
of any increase in Real Property Taxes if assessed solely by reason of
Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately
assessed, Real Property Taxes allocated to the Building shall be an
equitable proportion of the Real Property Taxes for all of the land and
improvements included within the tax parcel assessed, such proportion
to be determined by Lessor from the respective valuations assigned in
the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in
good faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to
delinquency all taxes assessed against and levied upon Lessee-Owned
Alterations and Utility Installations, Trade Fixtures, furnishings,
equipment and all personal property of Lessee contained in the Premises
or stored within the Industrial Center. When possible, Lessee shall
cause its Lessee-Owned Alterations and Utility Installations, Trade
Fixtures, furnishings, equipment and all other personal property to be
assessed and billed separately from the real property of Lessor. If any
of Lessee's said property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee's
property within ten (10) days after receipt of a written statement
setting forth the taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity,
telephone, security, gas and cleaning of the Premises, together with
any taxes thereon. If any such utilities or services are not separately
metered to the Premises or separately billed to the Premises, Lessee
shall pay to Lessor a reasonable proportion to be determined by Lessor
of all such charges jointly metered or billed with other premises in
the Building, in the manner and within the time periods set forth in
Paragraph 4.2(d).
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of
law assign, transfer, mortgage or otherwise transfer or encumber
(collectively, "assign") or sublet all or any part of Lessee's interest
in this Lease or in the Premises without Lessor's prior written consent
given under and subject to the terms of Paragraph 36.
(b) A change in the control of Lessee shall
constitute an assignment requiring Lessor's consent. The transfer, on a
cumulative basis, of twenty-five percent (25%) or more of the voting
control of Lessee shall constitute a change in control for this
purpose.
(c) The involvement of Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale,
acquisition, financing, refinancing, transfer, leveraged buy-out or
otherwise), whether or not a formal assignment or hypothecation of this
Lease or Lessee's assets occurs, which results or will result in a
reduction of the Net Worth of Lessee, as hereinafter defined, by an
amount equal to or greater than twenty-five percent (25%) of such Net
Worth of Lessee as it was represented to Lessor at the time of full
execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately
prior to said transaction or transactions constituting such reduction,
at whichever time said Net Worth of Lessee was or is greater, shall be
considered an assignment of this Lease by Lessee to which Lessor may
reasonably withheld its consent. "NET WORTH OF LESSEE" for purposes of
this Lease shall be the net worth of Lessee (excluding any Guarantors)
established under generally accepted accounting principles consistently
applied.
(d) An assignment or subletting of Lessee's interest
in this Lease without Lessor's specific prior written consent shall, at
Lessor's option, be a Default curable after notice per Paragraph 13.1,
or a non-curable Breach without the necessity of any notice and grace
period. If Lessor elects to treat such unconsented to assignment or
subletting as a non-curable Breach, Lessor shall have the right to
either: (i) terminate this Lease, or (ii) upon thirty (30) days'
written notice ("LESSOR'S NOTICE"), increase the monthly Base Rent for
the Premises to the greeter of the then fair market rental value of the
Premises, as reasonably determined by Lessor, or one hundred ten
percent (110%) of the Base Rent then in effect. Pending determination
of the new fair market rental value, if disputed by Lessee, Lessee
shall pay the amount set forth in Lessor's Notice, with any overpayment
credited against the next installment(s) of Base Rent coming due, and
any underpayment for the period retroactively to the effective date of
the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and rental adjustment,
(i) the purchase price of any option to purchase the Premises held by
Lessee shall be subject to similar adjustment to the then fair market
value as reasonably determined by Lessor (without the Lease being
considered an encumbrance or any deduction for depreciation or
obsolescence, and considering the Premises at its highest and bast use
and in good condition) or one hundred ten percent (110%) of the price
previously in effect, (ii) any index-oriented rental or price
adjustment formulas contained in this Lease shall be adjusted to
require that the base index be determined with reference to the index
applicable to the time of such adjustment, and (iii) any fixed rental
adjustments scheduled during the remainder of the Lease term shall be
increased in the same ratio as the new rental hears to the Base Rent in
effect immediately prior to the adjustment specified in Lessor's
Notice.
(e) Lessee's remedy for any breach of this Paragraph
12.1 by Lessor shall be limited to compensatory damages and/or
injunctive relief. SEE ADDENDUM
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND
SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not (i) be effective without the express written
assumption by such assignee or sublessee of the obligations of Lessee
under this Lease, (ii) release Lessee of any obligations hereunder, nor
(iii) alter the primary liability of Lessee for the payment of Base
Rent and other sums due Lessor hereunder or for the performance of any
other obligations to he performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of
Lessee's obligations from any person other than Lessee pending approval
or disapproval of an assignment. Neither a delay in the approval or
disapproval of such assignment nor the acceptance of any rent for
performance shall constitute a waiver or estoppel of Lessor's right to
exercise its remedies for the Default or Breach by Lessee of any of the
terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or
subletting shall not constitute a consent to any subsequent assignment
or subletting by Lessee or to any subsequent or successive assignment
or subletting by the assignee or sublessee. However, Lessor may consent
to subsequent subletting and assignments of the sublease or any
amendments or modifications thereto without notifying Lessee or anyone
else liable under this Lease or the sublease and without obtaining
their consent, and such action shall not relieve such persons from
liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's
obligation under this Lease. Lessor may proceed directly against
Lessee, any Guarantors or anyone else responsible for the performance
of the Lessee's obligations under this Lease, including any sublessee,
without first exhausting Lessor's remedies against any other person or
entity responsible therefor to Lessor, or any security held by Lessor.
(f) Any assignee of, or sublessee under, this Lease
shall, by reason of accepting such assignment or entering into such
sublease, he 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 he 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.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING.
The following terms and conditions shall apply to any subletting by
Lessee of all or any part of the Premises and shall be deemed included
in all subleases under this Lease whether or not expressly incorporated
therein:
(a) Lessee hereby assigns and transfers to Lessor all
of Lessee's interest in all 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
the foregoing provision or any other assignment of such sublease to
Lessor, nor by reason of the collection of the rents from a sublessee,
be deemed liable to the sublessee for any failure of Lessee to perform
and comply with any of Lessee's obligations to such sublessee under
such Sublease. Lessee hereby irrevocably authorizes and directs any
such sublessee, upon receipt of a written notice from Lessor stating
that a Breech exists in the performance of Lessee's obligations under
this Lease, to pay to Lessor the rents and other charges due and to
become due under the sublease. Sublessee shall rely upon any such
statement and request from Lessor and shall pay such rents and other
charges to Lessor without any obligation or right to inquire as to
whether such Breach exists and notwithstanding any notice from or claim
from Lessee to the contrary. Lessee shall have no right or claim
against such sublessee, or, until the Breach has been cured, against
Lessor, for any such rents and other charges so paid by said sublessee
to Lessor.
(b) In the event of a Breach by Lessee in the
performance of its obligations under this Lease, Lessor, at its option
and without any obligation to do so, may require any sublessee to
attorn to Lessor, in which event Lessor shall undertake the obligations
of the sublessor under such sublease from the time of the exercise of
said option to the expiration of such sublease; provided, however,
Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor or for any other prior
defaults or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the
sublessor under a sublease shall also require the consent of Lessor
herein.
(d) No sublessee under a sublease approved by Lessor
shall further assign or sublet all or any part of the Premises without
Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of
Default or Breach by Lessee to the sublessee, who shall have the right
to cure the Default of Lessee within the grace period, if any,
specified in such notice. The sublessee shall have a right of
reimbursement and offset from and against Lessee for any such Defaults
cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an
attorney is consulted by Lessor in connection with a Lessee Default or
Breach (as hereinafter defined}, $350.00 is a reasonable minimum sum
per such occurrence for legal services and costs in the preparation and
service of a notice of Default, and that Lessor may include the cost of
such services and costs in said notice as rent due and payable to cure
said default. A "DEFAULT" by Lessee is defined as a failure by Lessee
to observe, comply with or perform any of the terms, covenants,
conditions or roles applicable to Lessee under this Lease. A "BREACH"
by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is
specified herein, the failure by Lessee to cure such Default prior to
the expiration of the applicable grace period, and shall entitle Lessor
to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(b) Except as expressly otherwise provided in this
Lease, the failure by Lessee to make any payment of Base Rent, Lessee's
Share of Common Area Operating Expenses, or any other monetary payment
required to be made by Lessee hereunder as and when due, the failure by
Lessee to provide Lessor with reasonable evidence of insurance or
surety bond required under this Lease, or 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) BUSINESS days following written notice thereof by or on behalf of
Lessor to Lessee.
(c) Except as expressly otherwise provided in this
Lease, the failure by Lessee to provide Lessor with reasonable written
evidence (in duly executed original form, if applicable) of (i)
compliance with Applicable Requirements per Paragraph 6.3, (ii) the
inspection, maintenance and service contracts required under Paragraph
7.1 (b), (iii) the rescission of an unauthorized assignment or
subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs
16 or 37, (v) the subordination or non-subordination of this Lease per
Paragraph 30, (vi) the guaranty of the performance of Lessee's
obligations under this Lease if required under Paragraphs 1.11 and 37,
(vii) the execution of any document requested under Paragraph 42
(easements), or (viii) any other documentation or information which
Lessor may reasonably require of Lessee under the terms of this lease,
where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants,
conditions or provisions of this Lease, or of the rules adopted under
Paragraph 40 hereof that are to be observed, complied with or performed
by Lessee, other than those described in Subparagraphs 13.1 (a), (b) or
(c), above, where such Default continues for a period of thirty (30)
days after written notice thereof by or on behalf of Lessor to Lessee;
provided, however, that if the nature of Lessee's Default is such that
more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events:
(i) the making by Lessee of any general arrangement or assignment for
the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined
in 11 U.S. Code Section 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 13.1 (e)
is contrary to any applicable law, such provision shall be of no force
or effect, and shall not affect the validity of the remaining
provisions.
(g) If the performance of Lessee's obligations under
this Lease is guaranteed: (i) the death of a Guarantor, (ii) the
termination of a Guarantor's liability with respect to this Lease other
than in accordance with the terms of such guaranty, (iii) a Guarantor's
becoming insolvent or the subject of a bankruptcy filing, (iv) a
Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach
of its guaranty obligation on an anticipatory breach basis, and
Lessee's failure, within sixty (60) days following written notice by or
on behalf of Lessor to Lessee of any such event, to provide Lessor with
written alternative assurances of security, which, when coupled with
the then existing resources of Lessee, equals or exceeds the combined
financial resources of Lessee and the Guarantors that existed at the
time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty
or obligation of Lessee under this Lease, within ten (10) days after
written notice to Lessee (or in case of an emergency, without notice),
Lessor may at its option (but without obligation to do so), perform
such duty or obligation on Lessees behalf, including but not limited to
the obtaining of reasonably required bends, insurance policies, or
governmental licenses, permits or approvals. The costs and expenses of
any such performance by Lessor shall be due and payable by Lessee to
Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its
own option, may require all future payments to be made under this Lease
by Lessee to be made only by cashier's check. In the event of a Breach
of this Lease by Lessee (as defined in Paragraph 13.1), with or without
further notice or demand, and without limiting Lessor in the exercise
of any right or remedy which Lessor may have by reason of such Breach,
Lessor may:
(a) Terminate Lessee's right to possession of the
Premises by any lawful means, in which case this Lease and the term
hereof shall terminate and Lessee shall immediately surrender
possession of the Premises to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the worth at the time of the award
of the unpaid rent which had been earned at the time of termination;
(ii) the worth at the time of award of the amount by which the unpaid
rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of
award of the amount by which the unpaid rent for the balance of the
term after the time of award exceeds the amount of such rental loss
that the Lessee proves could be reasonably avoided; and (iv) any other
amount necessary to compensate Lessor for all the detriment proximately
caused by the Lessee's failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to
result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees,
and that portion of any leasing commission paid by Lessor in connection
with this Lease applicable to the unexpired term of this Lease. The
worth at the time of award of the amount referred to in provision (iii)
of the immediately preceding sentence shall be computed by discounting
such amount at the discount rate of the Federal Reserve Bank of San
Francisco or the Federal Reserve Bank District in which the Premises
are located at the time of award plus one percent (1%). Efforts by
Lessor to mitigate damages caused by Lessee's Default or Breach of this
Lease shall not waive Lessor's right to recover damages under this
Paragraph 13.2. If termination of this Lease is obtained through the
provisional remedy of unlawful detainer, Lessor shall have the right to
recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a
notice and grace period required under Subparagraph 13.1 (b), (c) or
(d) was not previously given, a notice to pay rent or quit, or to
perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also
constitute the applicable notice for grace period purposes required by
Subparagraph 13.1 (b),(c) or (d). In such case, the applicable grace
period under the unlawful detainer statue shall run concurrently after
the one such statutory notice, and the failure of Lessee to cure the
Default within the greater of the two (2) such grace periods shall
constitute both an unlawful detainer and a Breach of this Lease
entitling Lessor to the remedies provided for in this Lease and/or by
said statute.
(b) Continue the Lease and Lessee's right to
possession in effect (in California under California Civil Code Section
1951.4) after Lessee's Breach and recover the rent as it becomes due,
provided Lessee has the right to sublet or sign, subject only to
reasonable limitations. Lessor and Lessee agree that the limitations on
assignment and subletting in this Lease are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver to protect the Lessor's interest under this
Lease, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter
available to Lessor under the laws or judicial decisions of the state
wherein the Premises are located.
(d) The expiration or termination of this Lease
and/or the termination of Lessee's right to possession shall not
relieve Lessee from liability under any indemnity provisions of this
Lease as to matters occurring or accruing during the term hereof or by
reason of Lessee's occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by
Lessor for tree or abated rent or other charges applicable to the
Premises, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering
into this Lease, all of which concessions are hereinafter referred to
as "INDUCEMENT PROVISIONS" shall be deemed conditioned upon Lessee's
full and faithful performance of all of the terms, covenants and
conditions of this Lease to be performed or observed by Lessee during
the term hereof as the same may be extended. Upon the occurrence of a
Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provision shall automatically be deemed deleted from this
Lease and of no further force or effect, and any rent, other charge,
bonus, inducement or consideration theretofore abated, given or paid by
Lessor under such an Inducement Provision shall be immediately due and
payable by Lessee to Lessor, and recoverable by Lessor, as additional
rent due under this Lease, notwithstanding any subsequent cure of said
Breach by Lessee. The acceptance by Lessor of rent or the sure of the
Breach which initiated the operation of this Paragraph 13.3 shall not
be deemed a waiver by Lessor of the provisions of this Paragraph 13.3
unless specifically so stated in written by Lessor at the time of such
acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late
payment by Lessee to Lessor of rent and other sums due hereunder will
cause Lessor to incur costs not contemplated by this Lease, the exact
amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges. and
late charges which may be imposed upon Lessor by the terms of any
ground lease, mortgage or deed of trust covering the Premises.
Accordingly, if any installment of rent or other sum due from Lessee
shall not be received by Lessor or Lessor's designee within ten (10)
days after such amount shall be due, then, without any requirement for
notice to Lessee, Lessee shall pay to Lessor a late charge equal to 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's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies
granted hereunder. In the event that a late charge is payable
hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any
other provision of this Lease to the contrary, Base Rent shall, at
Lessor's option, become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an
obligation required to be performed by Lessor. For purposes of this
Paragraph 13.5, a reasonable time shall in no event be less than
fourteen (14) days after receipt by Lessor, and by any Lender(s) whose
name and address shall have been furnished to Lessee in writing for
such purpose, of written notice specifying wherein such obligation of
Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more then 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 (ell of which are herein called "condemnation"),
this Lease shall terminate as to the part so taken as of the date the
condemning authority takes title or possession, whichever first occurs.
If more than ten percent (10%) of the floor area of the Premises, or
more than twenty-five percent (25%) of the portion of the Common Areas
designated for Lessee's parking, is taken by condemnation, Lessee may,
at Lessee's option, to be exercised in writing within THIRTY (30) days
after Lessor shall have given Lessee written notice of such taking (or
in the absence of such notice, within ten (10) days after the
condemning authority shall have taken possession) terminate this Lease
as of the date the condemning authority takes such possession. If
Lessee does not terminate this Lease in accordance with the foregoing,
this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in
the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises. No reduction of
Base Rent shall occur if the condemnation does not apply to any portion
of the Premises. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under
threat of the exercise of such power shall be the property of Lessor,
whether such award shall be made as compensation for diminution of
value of the leasehold or for the taking of the fee, or as severance
damages; provided, however, that Lessee shall be entitled to any
compensation, separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this
Lease is not terminated by reason of such condemnation, Lessor shall to
the extent of its net severance damages received, over and above
Lessee's Share of the legal and other expenses incurred by Lessor in
the condemnation matter, repair any damage to the Premises caused by
such condemnation authority. Lessee shall be responsible for the
payment of any amount in excess of such net severance damages required
to complete such repair.
15. BROKERS' FEES.
15.1 PROCURING CAUSE. The Broker(s) named in Paragraph 1.10
is/are the procuring cause of this Lease.
15.2 ADDITIONAL TERMS. Unless Lessor and Broker(s) have
otherwise agreed in writing, Lessor agrees that: (a) if Lessee
exercises any Option (as defined in Paragraph 39.1 ) granted under this
Lease or any Option subsequently granted, or (b) if Lessee acquires any
rights to the Premises or other premises in which Lessor has an
interest, 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) it 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 Broker(s) a fee in
accordance with the schedule of said Broker(s) in effect at the time of
the execution of this Lease.
15.3 ASSUMPTION OF OBLIGATIONS. 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 an intended
third party beneficiary of the provisions of Paragraph 1.10 and 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.
15.4 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each
represent and warrant to the other that it has had no dealings with any
person, firm, broker or finder other than as named in Paragraph 1.10(a)
in connection with the negotiation of this Lease and/or the
consummation of the transaction contemplated hereby, and that no broker
or other person, firm or entity other than said named Broker(s) is
entitled to any commission or finder's fee in connection with said
transaction. Lessee and Lessor do each hereby agree to indemnify,
protect, defend and hold the other harmless from and against liability
for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or
actions of the indemnifying Party, including any costs, expenses,
and/or attorneys' fees reasonably incurred with respect thereto.
16. TENANCY AND FINANCIAL STATEMENTS.
16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY")
shall within ten (10) days after written notice from the other Party
(the "REQUESTING PARTY") execute, acknowledge and deliver to the
Requesting Party a statement in writing in a form similar to the then
most current "TENANCY STATEMENT" form published by the American
Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the
Requesting Party.
16.2 FINANCIAL STATEMENT. If Lessor desires to finance,
refinance, or sell the Premises or the Building, or any part thereof,
Lessee and all Guarantors shall deliver to any potential lender or
purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or
purchaser, including but not limited to Lessee's financial statements
for the past three (3) years. All such financial statements shall be
received by Lessor and such lender or purchaser in confidence and shall
be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the
Premises. In the event of a transfer of Lessor's title or interest in
the Premises or in this Lease, Lessor shall deliver to the transferee
or assignee (in cash or by credit) any unused Security Deposit held by
Lessor at the time of such transfer or assignment. Except as provided
in Paragraph 15.3, upon such transfer or assignment and delivery of the
Security Deposit, as aforesaid, the prior Lessor shall be relieved of
all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor. Subject to the
foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as
hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect
the validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten
(10) days following the date on which it was due, shall bear interest
from the date due at the prime rate charged by the largest state
chartered bank in the state in which the Premises are located plus four
percent (4%) per annum, but not exceeding the maximum rate allowed by
law, in addition to the potential late charge provided for in Paragraph
13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the
performance of all obligations to be performed or observed by the
Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under
the terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease
contains all agreements between the Parties with respect to any matter
mentioned herein, and no other prior or contemporaneous agreement or
understanding shall be effective. Lessor and Lessee each represents and
warrants to the Brokers that it has made, and is relying solely upon,
its own investigation as to the nature, quality, character and
financial responsibility of the other Party to this Lease and as to the
nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or
breach hereof by either Party. Each Broker shall be an intended third
party beneficiary of the provisions of this Paragraph 22.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by
this Lease shall be in writing and may be delivered in person (by hand
or by messenger or courier service) or may be sent by regular,
certified or registered mail or U.S. Postal Service Express Mail, with
postage prepaid, or by facsimile transmission during normal business
hours, and shall be deemed sufficiently given if served in a manner
specified in this Paragraph 23. The addresses noted adjacent to a
Party's signature on this Lease shall be that Party's address for
delivery or mailing of notice purposes. Either Party may by written
notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the
Premises shall constitute Lessee's address for the purpose of mailing
or delivering notices to Lessee. A copy of all notices required or
permitted to be given to Lessor hereunder shall be concurrently
transmitted to such party or parties at such addresses as Lessor may
from time to time hereafter designate by written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or
certified mail, return receipt requested, shall he 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 FORTY-EIGHT (48) hours after
delivery of the same to the United States Postal Service or courier, If
any notice is transmitted by facsimile transmission or similar means,
the same shall be deemed served or delivered upon telephone or
facsimile confirmation of receipt of the transmission thereof, provided
a copy is also delivered via delivery or mall. If notice is received on
a Saturday or a Sunday or a legal holiday, it shall be deemed received
on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any
other term, covenant or condition hereof, or of any subsequent Default
or Breach by Lessee of the same or any other term, covenant or
condition hereof. Lessor's consent to, or approval of, any such act
shall not be deemed to render unnecessary the obtaining of Lessor's
consent to, or approval of, any subsequent or similar act by Lessee, or
be construed as the basis of an estoppel to enforce the provision or
provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any Default or
Breach by Lessee of any provision hereof. Any payment given Lessor by
Lessee may be accepted by Lessor on account of 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.
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 laws of the State in which the Premises are located.
Any litigation between the Parties hereto concerning this Lease shall
be initiated in the county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby
shall be subject and subordinate to any ground lease, mortgage, deed of
trust, or other hypothecation or security device (collectively,
"SECURITY DEVICE"), now or hereafter placed by Lessor upon the real
property of which the Premises are a part, to any and all advances made
on the security thereof, and to all renewals, modifications,
consolidations, replacements and extensions thereof. Lessee agrees that
the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor
under this Lease, but that in the event of Lessor's default with
respect to any such obligation, Lessee will give any Lender whose name
and address have been furnished Lessee in writing for such purpose
notice of Lessor's default pursuant to Paragraph 13.5. If any Lender
shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written
notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of
the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party
who acquires ownership of the Premises by reason of a foreclosure of a
Security Device, and that in the event of such foreclosure, such new
owner shall not: (i) be liable for any act or omission of any prior
lessor or with respect to events occurring prior to acquisition of
ownership, (ii) be subject to any offsets or defenses which Lessee
might have against any prior lessor, or (iii) be bound by prepayment of
more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered
into by Lessor after the execution of this lease, Lessee's
subordination of this Lease shall be subject to receiving assurance (a
"non-disturbance agreement") from the Lender that Lessee's possession
and this Lease, including any options to extend the term hereof, will
not be disturbed so long as Lessee is not in Breach hereof and attorns
to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this
Paragraph 30 shall be effective without the execution of any further
documents; provided, however, that upon written request from Lessor or
a Lender in connection with a sale, financing or refinancing of
Premises, Lessee and Lessor shall execute such further writings as may
be reasonably required to separately document any such subordination or
non-subordination, attornment and/or non-disturbance agreement as is
provided for herein.
31. ATTORNEYS' FEE. If any Party or Broker brings an action or
proceeding to enforce the terms hereof or declare rights hereunder, the
Prevailing Party (as hereafter defined) in any such proceeding, action,
or appeal thereon, shall be entitled to reasonable attorneys' fees.
Such fees may be awarded in the same suit or recovered in a separate
suit, whether or not such action or proceeding is pursued to decision
or judgment. The term "PREVAILING PARTY" shall include, without
limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by settlement, judgment,
or the abandonment by the other Party or Broker of its claim or
defense. The attorneys' fee award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse
all attorneys' fees reasonably incurred. Lessor shall be entitled to
attorneys' fees, costs and expenses incurred in preparation and service
of notices of Default and consultations in connection therewith,
whether or not a legal action is subsequently commenced in connection
with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's
agents shall have the right to enter the Premises at any time, in the
case of an emergency, and otherwise at reasonable times for the purpose
of showing the same to prospective purchasers, lenders, or lessees, and
making such alterations, repairs, improvements or additions to the
Premises or to the Building, as Lessor may reasonably deem necessary.
Lessor may at any time place on or about the Premises or Building any
ordinary "For Sale" signs and Lessor may at any time during the last
one hundred eighty (180) days of the term hereof place on or about the
Premises any ordinary "For Lease" signs. All such activities of Lessor
shall be without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted,
either voluntarily or involuntarily, any auction upon the Premises
without first having obtained Lessor's prior written consent.
Notwithstanding anything to the contrary in this Lease, Lessor shall
not be obligated to exercise any standard of reasonableness in
determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the
Premises or the Building, except that Lessee may, with Lessor's prior
written consent, install (but not on the roof) such signs as are
reasonably required to advertise Lessee's own business so long as such
signs are in a location designated by Lessor and comply with Applicable
Requirements and the signage criteria established for the Industrial
Center by Lessor. The installation of any sign on the Premises by or
for Lessee shall be subject to the provisions of Paragraph 7
(Maintenance, Repairs, Utility Installations, Trade Fixtures and
Alterations). Unless otherwise expressly agreed herein, Lessor reserves
all rights to the use of the roof of the Building, and the right to
install advertising signs on the Building, including the roof, which do
not unreasonably interfere with the conduct of Lessee's business;
Lessor shall be entitled to all revenues from such advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in
writing by Lessor, the voluntary or other surrender of this Lease by
Lessee, the mutual termination or cancellation hereof, or a termination
hereof by Lessor for Breach by Lessee, shall automatically terminate
any sublease or lessor 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 lessor interest, shall constitute
Lessor's election to have such event constitute the termination of such
interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as
otherwise provided herein, wherever in this Lease the consent of a
Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual
reasonable costs and expenses (including but not limited to
architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee
for any Lessor consent pertaining to this Lease or the Premises,
including but not limited to consents to an assignment a subletting or
the presence or use of a Hazardous Substance, shall be paid by Lessee
to Lessor upon receipt of an invoice and supporting documentation
therefor. in addition to the deposit described in Paragraph 12.2(e),
Lessor may, as a condition to considering any such request by Lessee,
require that Lessee deposit with Lessor an amount of money (in addition
to the Security Deposit held under Paragraph 5) reasonably calculated
by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit
shall be refunded to Lessee without interest. Lessor's consent to any
act, assignment of this Lease or subletting of the Premises by Lessee
shall not constitute an acknowledgment that no Default or Breach by
Lessee of this Lease exists, nor shall such consent be deemed a waiver
of any then existing Default or Breach, except as may be otherwise
specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by
this Lease are acknowledged by Lessee as being reasonable. The failure
to specify herein any particular condition to Lessor's consent shall
not preclude the impositions by Lessor at the time of consent of such
further or other conditions as are then reasonable with reference to
the particular matter for which consent is being given.
37. GUARANTOR
37.1 FORM OF GUARANTY. If there are to be any Guarantors of
this Lease per Paragraph 1.11, the form of the guaranty to be executed
by each such Guarantor shall be in the form most recently published by
the American Industrial Real Estate Association, and each such
Guarantor shall have the same obligations as Lessee under this lease,
including but not limited to the obligation to provide the Tenancy
Statement and information required in Paragraph 16.
37.2 ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute
a Default of the Lessee under this Lease if any such Guarantor fails or
refuses, upon reasonable request by Lessor to give: (a) evidence of the
due execution of the guaranty called for by this Lease, including the
authority of the Guarantor (and of the party signing on Guarantor's
behalf) to obligate such Guarantor on said guaranty, and resolution of
its board of directors authorizing the making of such guaranty,
together with a certificate of incumbency showing the signatures of the
persons authorized to sign on its behalf, (b) current financial
statements of Guarantor as may from time to time be requested by
Lessor, (c) a Tenancy Statement, or (d) written confirmation that the
guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the
Premises and the performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this
Lease, Lessee shall have quiet possession of the Premises for the
entire term hereof subject to all of the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the word "OPTION" has
the following meaning: (a) the right to extend the term of this Lease
or to renew this Lease or to extend or renew any lease that Lessee has
on other property of Lessor; (b) the right of first refusal to lease
the Premises or the right of first offer to lease the Premises or the
right of first refusal to lease other property of Lessor or the right
of first offer to lease other property of Lessor; (c) the right to
purchase the Premises, or the right of first refusal to purchase the
Premises, or the right of first offer to purchase the Premises, or the
right to purchase other property of Lessor, or the right of first
refusal to purchase other property of Lessor, or the right of first
offer to purchase other property of Lessor.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any
multiple Options to extend or renew this Lease, a later option cannot
be exercised unless the prior Options to extend or renew this Lease
have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary:
(i) during the period commencing with the giving of any notice of
Default under Paragraph 13.1 and continuing until the noticed Default
is cured, or (ii) during the period of time any monetary obligation due
Lessor from Lessee is unpaid (but regard to whether notice thereof is
given Lessee), or (iii) during the time Lessee is in Breach of this
Lease, or
(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 andtimely exercise of the Option, if,
after such exercise and during the term of this Lease, (i) Lessee fails
to pay to Lessor a monetary obligation of Lessee for a period of thirty
(30) days after such obligation becomes due (without any necessity of
Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph
13.1 during any twelve (12) month period, whether or not the Defaults
are cured, or (iii) if Lessee commits a Breach of this Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and
keep and observe all reasonable rules and regulations ("Rules and
Regulations") which Lessor may make from time to time for the
management, safety, care, and cleanliness of the grounds, the parking
and unloading of vehicles and the preservation of good order, as well
as for the convenience of other occupants or tenants of the Building
and the Industrial Center and their invitees.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental
payable to Lessor hereunder does not include the cost of guard service
or other security measures, and that Lessor shall have no obligation
whatsoever to provide same. Lessee assumes all responsibility for the
protection of the Premises, Lessee, its agents and invitees and their
property from the acts of third parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights
of way, utility raceways, and dedications that Lessor deems necessary,
and to cause the recordation of parcel maps and restrictions, as long
as such easements, rights of way, utility raceways, dedications, maps
and restrictions do not reasonably 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.
44. AUTHORITY. If either Party hereto is a corporation, trust, or
general or limited partnership, each individual executing this Lease on
behalf of such entity represents and warrants that he or she is duly
authorized to execute and deliver this Lease on its behalf. If Lessee
is a corporation, trust or partnership, Lessee shall, within thirty
(30) days after request by Lessor, deliver to Lessor evidence
satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease
and the typewritten or handwritten provisions shall he controlled by
the typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or
Lessor's agent or Lessee's agent and submission of same to Lessee or
Lessor shall not be deemed an offer to lease. This Lease is not
intended to be binding until executed and delivered by all Parties
hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by
the parties in interest at the time of the modification, The Parties
shall amend this Lease from time to time to reflect any adjustments
that are made to the Base Rent or other rent payable under this Lease.
As long as they do not materially change Lessee's obligations
hereunder, Lessee agrees to make such reasonable non-monetary
modifications to this Lease as may be reasonably required by an
institutional insurance company or pension plan Lender in connection
with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if
more than one person or entity is named herein as either Lessor or
Lessee the obligations of such multiple parties shall be the joint and
several responsibility of all persons or entities named herein as such
Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH
TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE
SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY
AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE
ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF
LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR
ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF
ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR
CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH
IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN
COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE
SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM
THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the
dates specified above their respective signatures.
<TABLE>
<CAPTION>
<S> <C> <C>
Executed at:___________________________________ Executed at: Lincoln, CA
on:____________________________________________ on: June 18, 1996
By LESSOR: By LESSEE:
BLUE SKY VENTURE ZYTEC CORPORATION,
A California General Partnership A Minesota Corporation
By:____________________________________________ By: ____________________________
Name Printed: Marvin L. Oates Name Printed: Tom Kent
Title: Partner Title: Vice President
By:____________________________________________ By:______________________________
Name Printed: L. R. Houlihan Name Printed:____________________
Title: Partner Title:___________________________
Address:21 Blue Sky Court, Sacramento, CA 95828 Address: 7575 Market Place Drive,
Eden Prairie, MINN
Telephone:(916)381-1492 Telephone:(612)941-1100
Facsimile:(916)383-3768 Facsimile: ( )_________________
BROKER: BROKER:
Executed at:___________________________________ Executed at: ___________________
on:____________________________________________ on: ____________________________
By:____________________________________________ By:_____________________________
Name Printed:__________________________________ Name Printed:___________________
Title:_________________________________________ Title:__________________________
Address:_______________________________________ Address:________________________
Telephone:( )________________________________ Telephone:( )_________________
Facsimile: ( )_______________________________ Facsimile: ( )________________
</TABLE>
Exhibit 10.20 Addendum
ADDENDUM TO STANDARD INDUSTRIAL COMMERCIAL MULTI-TENANT NET, DATED JUNE
17, 1996 BY AND BLUE SKY VENTURE, A CALIFORNIA GENERAL PARTNERSHIP
(LESSOR) AND ZYTEC CORPORATION, A MINNESOTA CORPORATION (LESSEE)
2.1 (CONT.) In the event that part of the building becomes
unusable, the monthly rent will be adjusted based prorata over the
usable square foot space.
4.2E Lessee's share shall not exceed $.80 per square foot per month.
6.3(a) Lessor warrants that the building is in conformity with the
building plans and permits, and complies with the Americans With
Disabilities Act of 1990 ("ADA). However, if any governmental authority
should require any additional improvements, permits or approvals, under
ADA or otherwise, due to Lessee's particular use, or Lessee's
employees, customers, or invitees, other than those which are stated in
this Lease, and other than requirements generally for buildings of this
type, including without limitation additional fire protection equipment
or flow capacity, use permits, or zoning variances, such improvements
or changes to be permitted uses shall be made at Lessee's sole expense.
7.4 LESSEE'S INSTALLATIONS: Lessee shall have the right to install
certain equipment to the building with Lessor's consent and by
notifying Lessor's property manager, in writing, of their intent to do
so. Lessor shall not withhold consent for any reasonable request. At
the end of the Lease term, Lessee shall have the right to remove said
equipment provided the building and premises are restored to repaired
condition and any harm or damage to the building is corrected.
8.2 LIABILITY INSURANCE - LESSEE. (CONTINUED) Lessee shall, at Lessee's
expense, obtain and keep in force during the term of this Lease a
policy of Combined Single Limit bodily Injury, Personal Injury,
Advertising Injury, and Property Damage insurance insuring Lessee and
Lessor against any claim arising out of, or related in any manner to,
the use, occupancy, or maintenance of the Premises and the Industrial
Center. Such insurance shall be in an amount not less than $1,000,000
per occurrence. The policy shall insure performance by Lessee of the
indemnity provisions of this PARAGRAPH 8. The provisions of said
insurance nor the limits of said insurance shall not, however, limit
the liability of Lessee hereunder. Lessee covenants and agrees that
Lessor and LessorOs property manager will be listed as an Additional
Named Insured in said policy in conformity with the agreements to
defend and indemnify herein, and that said insurance maintained by
Lessee is agreed to be primary, with any insurance maintained by Lessor
to be excess.
10.4 (CONT) Lessee shall have the right, at its own expense, to appeal
tax assessments.
12.1 (CONT) Lessee shall have the right to assign the Lease, as long as
Lessee remains obligated and guarantees the terms of this Lease, and
the sub-lessee is bound by the same terms and conditions of the Lease.
Lessor shall have the right to approve the sublessee. Lessor will not
withhold approval if sublessee meets requirements including but not
limited to type of business and financial condition.
26. HOLD OVER: If Lessee, with Lessor's consent, remains in possession
of the Premises or any part thereof after the expiration of the terms
thereof, or any optional extension, such occupancy shall be a tenancy
from month to month upon all provisions of this Lease pertaining to the
obligations of the Lessee shall remain the same except rent which shall
be subject to a ten percent (10%) increase, at Lessor's discretion.
Lessor shall notify Tenant of any termination, or desire to terminate,
after the expiration of this Lease and all Options, by giving Lessee
sixty (60) days written notice.
ADDENDUM TO STANDARD INDUSTRIAL COMMERCIAL MULTI-TENANT NET, DATED JUNE
17, 1996, BY AND BETWEEN BLUE SKY VENTURE, A CALIFORNIA GENERAL
PARTNERSHIP (LESSOR) AND ZYTEC CORPORATION, A MINNESOTA CORPORATION
(LESSEE) PAGE TWO
49. MATERIALS DISCLOSURE. The United States Congress has recently
enacted the Americans with Disabilities Act. Among other things, this
act is intended to make many business establishments equally accessible
to persons with a variety of disabilities; modifications to real
property may be required. State and local laws also may mandate
changes. The real estate brokers in this transaction are not qualified
to advise you as to what, if any, changes may be required now, or in
the future. Owners and tenants should consult the attorneys and
qualified design professionals of their choice for information
regarding these matters. Real estate brokers cannot determine which
attorneys or design professionals have the appropriate expertise in
this area.
Various construction materials may contain items that have been or may
be in the future be determined to be hazardous (toxic) or undesirable
and may need to be specifically treated/handled or removed. For
example, some transformers and other electrical components contain
PCB's and asbestos has been used in components such as fireproofing,
heating, and cooling systems, air duct insulation, spray-on and tile
acoustical materials, linoleum, floor tiles, roofing dry wall and
plaster. Due to prior or current uses of the Property or in the area,
the Property may have hazardous or undesirable metals, minerals,
chemicals, hydrocarbons, or biological or radioactive items (including
electric and magnetic fields) in soils, water, building components,
above or below-ground containers or elsewhere in areas that may or may
not be accessible or noticeable. Such items may not leak or otherwise
be released. Real estate agents have no expertise in the detection or
correction of hazardous or undesirable items. Expert inspections are
necessary. Current or future laws may require clean up by past, present
and/or future owners and/or operators. It is the responsibility of the
Seller/Lessor and Buyer/Tenant to retain qualified experts to detect
and correct such matters and to consult with legal counsel of their
choice to determine what provision, if any, they may wish to include in
transaction documents regarding the Property. To the best of
Seller/Lessor's knowledge, Seller/Lessor has attached to this
Disclosure copies of all existing surveys and reports known to
Seller/Lessor regarding asbestos and other hazardous materials and
undesirable substances related to the Property. Sellers/Lessors are
required under California Health and Safety Code Section 25915 at seq.
to disclose reports and surveys regarding asbestos to certain persons,
including their employees, contractors, co-owners, purchasers and
tenants. Buyers/Tenants have similar disclosure obligations.
Sellers/Lessors and Buyers/Tenants have additional hazardous materials
disclosure responsibilities to each other under California Health and
Safety Code Section 25359.7 and other California laws. Consult your
attorney regarding this matter. LESSOR HAS NO KNOWLEDGE OF ANY
HAZARDOUS SUBSTANCES ON OR ABOUT THE PROPERTY.
50. OCCUPANCY: If any, governmental authority should require any
additional improvements due to Lessee's occupancy other than those
which are stated in this addendum, such improvement shall be made at
Lessee's sole expense.
51. FIRE EXTINGUISHERS: Lessee responsible for supplying fire
extinguishers (2A 10:BC) as required per code within 75 feet of any
door in space.
52. FORKLIFT RESTRICTIONS: Asphaltic cement can not withstand hard
rubber forklift tires. In the event the asphalt is damaged by Lessee's
use of a forklift with hard rubber tires, it will be Lessee's
obligation to repair the damaged asphaltic cement at Lessee's sole
expense.
53. OUTSIDE STORAGE: Lessee shall only store materials within the
building or outside on concrete inside a screened fence as specifically
allowed by the applicable governmental authorities.
EXHIBIT A -- ORIGINAL DOCUMENT CONTAINS A MAP SHOWING THE LOCATION OF
THE LEASED BUILDING AND PARKING LOTS.
ADDENDUM TO STANDARD INDUSTRIAL COMMERCIAL MULTI-TENANT NET, DATED JUNE
17, 1996, BY ANDBLUE SKY VENTURE, A CALIFORNIA GENERAL PARTNERSHIP
(LESSOR) AND ZYTEC CORPORATION, A MINNESOTA CORPORATION (LESSEE)
PAGE THREE
54. HAZARDOUS WASTE: Each party shall be fully and completely
responsible and shall indemnify and hold the other party harmless from
and against waste on the Premises as a result of each such party's
activity, or permitted or suffered by each such party on or about the
Premises, as well as all costs, attorney's fees, expenses, and
liabilities incurred in defense of any such claim, action or proceeding
brought thereon, including provision of counsel reasonably satisfactory
to the other party, and regardless of whether suit or any
administrative action is filed or commenced. Lessor warrants there is
not currently any hazardous waste in, on, or under the Premises, and
similarly indemnifies Lessee for any such currently existing hazardous
waste.
55. FLOOR SEALER: Lessor does not warrant the fitness of the floor slab
for applying floor sealer. For example, soil conditions may cause
moisture to be present under the concrete slab or migrate through the
slab, which may affect the sealer's performance. Lessee has been
advised to consult directly with the manufacturer's representative, and
Lessee shall look directly to the manufacturer in the event of product
failure.
56. TENANT IMPROVEMENTS DONE BY OTHERS: Tenant improvements done by
contractors other than Buzz Oaks Enterprises or its subcontractors,
shall be subject to a fifteen percent (15%) mark up on the cost of the
invoice from that particular contractor.
57. Buzz Oates Real Estate represents both Lessor and Lessor's
designates and Lessee and Lessee's designates in all future expansions
and renewals of leases and/or sales in the Zytec Corporation project
noted by Exhibit E - "Zytec Campus".
58. FORCE MAJEURE: If Lessor can not perform any of its
obligations due to events beyond Lessor's control, the time provided
for performing such obligations shall be extended by a period of time
equal to the duration of such events. Events beyond Landlord's control
include, but are not limited to, Acts of God, war, civil commotion,
labor disputes, strikes, fire, flood, excessive rain or other casualty,
shortages of labor or material, governments regulation or restriction
and weather conditions.
AGREED AND ACCEPTED
LESSOR: LESSEE:
BLUE SKY VENTURE ZYTEC CORPORATION
A CA GENERAL PARTNERSHIP A MINNESOTA CORPORATION
_________________________ _______________________
MARVIN L. OATES TOM KENT
PARTNER GENERAL MANAGER
DATE:____________________ DATE: 6/18/96
_________________________
L. R. HOULIHAN
PARTNER
DATE: ________________
Exhibit 10.29
[LOGO] ZYTEC
EMPLOYEE DISCLOSURE AND ASSIGNMENT AGREEMENT
For valuable consideration including my employment by ZYTEC CORPORATION
(hereinafter called the "Company"), the Company and I agree as follows:
I will disclose promptly in writing to the Company all inventions, improvements,
discoveries, software and writings which are conceived, made, discovered or
written jointly or singly on Company time or on my own time, providing the
invention, improvement, discovery, software or writing is capable of being used
by the Company or its subsidiaries or affiliates in the normal course of
business, and all such inventions, improvements, discoveries, software and
writing shall belong solely and exclusively to the Company.
I will sign and execute all instruments of assignment and other papers to
evidence vestiture of my entire right, title, and interest in such inventions,
improvements, discoveries, software or writings in the Company, at the request
and the expense of the Company, and I will do all acts and sign all instruments
of assignment and other papers the Company may reasonably request relating to
applications for patents, to patents, copyrights, and to the enforcement and
protection thereof.
The two immediately preceding paragraphs do not apply to inventions in which a
Company claim of any rights will create a violation of Chapter 47 Minnesota
Revised Statutes, Section 1-181.78, reproduced below and constituting the
written notification of its Subdivision 3.
181.78 AGREEMENTS RELATING TO INVENTIONS
Subdivision 1. Any provision in an employment agreement which provides
that an employee shall assign or offer to assign any of his rights in
an invention to his employer shall not apply to an invention for which
no equipment, supplies, facility or trade secret information of the
employer was used and which was developed entirely on the employee's
own time, and (1) which does not relate (a) directly to the business of
the employer or (b) to the employer's actual or demonstrably
anticipated research or development, or (2) which does not result from
any work performed by the employee for the employer. Any provision
which purports to apply to such an invention is to that extent against
the public policy of this state and is to that extent void and
unenforceable.
Subdivision 2. No employer shall require a provision made void and
unenforceable by subdivision 1 as a condition of employment or
continuing employment.
Subdivision 3. IF AN EMPLOYMENT AGREEMENT ENTERED INTO AFTER AUGUST 1,
1977, CONTAINS A PROVISION REQUIRING THE EMPLOYEE TO ASSIGN OR OFFER TO
ASSIGN ANY OF HIS RIGHTS IN ANY INVENTION TO HIS EMPLOYER, THE EMPLOYER
MUST ALSO, AT THE TIME THE AGREEMENT IS MADE, PROVIDE A WRITTEN
NOTIFICATION TO THE EMPLOYEE THAT THE AGREEMENT DOES NOT APPLY TO AN
INVENTION FOR WHICH NO EQUIPMENT, SUPPLIES, FACILITY OR TRADE SECRET
INFORMATION OF THE EMPLOYER WAS USED AND WHICH WAS DEVELOPED ENTIRELY
ON THE EMPLOYEE'S OWN TIME, AND (1) WHICH DOES NOT RELATE (a) DIRECTLY
TO THE BUSINESS OF THE EMPLOYER OR (b) TO THE EMPLOYER'S ACTUAL OR
DEMONSTRABLY ANTICIPATED RESEARCH OR DEVELOPMENT, OR (2) WHICH DOES NOT
RESULT FROM ANY WORK PERFORMED BY THE EMPLOYEE FOR THE EMPLOYER.
I have no inventions, improvements, discoveries, software or writings useful to
the Company or its subsidiaries or affiliates in the normal course of business,
which were conceived, made or written prior to and are excluded from this
Agreement except as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company and I understand that I may now be in possession of proprietary
information or other proprietary subject matter of another and that the Company
will not consent to disclosure, receipt or acceptance thereof.
I will not publish or otherwise disclose, either during or after my employment,
any unpublished or proprietary or confidential information or secret relating to
the Company or its business or its operations or to the Company products or
services or to the materials, apparatus, processes, formulae, plans and methods
used in development or manufacture or marketing of its software or products or
services; nor will I publish or otherwise disclose proprietary or confidential
information of others to which I have had access or obtained knowledge in the
course of my employment. If I leave the employ of the Company I will not,
without its prior written consent, retain or take with me any drawing, writing
or other record in any form or nature which relates to any of the foregoing.
During the term of my employment I shall engage in no activity or employment
which may conflict with the interest of the Company, and I shall comply with all
Policies and Procedures of the Company including, without limiting the
generality of the foregoing, the Policies and Procedures pertaining to Ethics.
This Agreement may be assigned by the Company only, and the Agreement is binding
on my heirs, executors, administrators and assigns.
/s/ Thomas J. Kent 6/21/94
---------------------------------------- -------
Signature of Employee Date
5867 Valle Vista Court, Loomis, CA 95650
---------------------------------------
Address
Accepted by ZYTEC CORPORATION
By /s/Dorothy Dimick 6/21/94
---------------------------------------- -------
HR Assistant Date
Exhibit 10.30
[LOGO] ZYTEC
EMPLOYEE DISCLOSURE AND ASSIGNMENT AGREEMENT
For valuable consideration including my employment by ZYTEC CORPORATION
(hereinafter called the "Company"), the Company and I agree as follows:
I will disclose promptly in writing to the Company all inventions, improvements,
discoveries, software and writings which are conceived, made, discovered or
written jointly or singly on Company time or on my own time, providing the
invention, improvement, discovery, software or writing is capable of being used
by the Company or its subsidiaries or affiliates in the normal course of
business, and all such inventions, improvements, discoveries, software and
writing shall belong solely and exclusively to the Company.
I will sign and execute all instruments of assignment and other papers to
evidence vestiture of my entire right, title, and interest in such inventions,
improvements, discoveries, software or writings in the Company, at the request
and the expense of the Company, and I will do all acts and sign all instruments
of assignment and other papers the Company may reasonably request relating to
applications for patents, to patents, copyrights, and to the enforcement and
protection thereof.
The two immediately preceding paragraphs do not apply to inventions in which a
Company claim of any rights will create a violation of Chapter 47 Minnesota
Revised Statutes, Section 1-181.78, reproduced below and constituting the
written notification of its Subdivision 3.
181.78 AGREEMENTS RELATING TO INVENTIONS
Subdivision 1. Any provision in an employment agreement which provides
that an employee shall assign or offer to assign any of his rights in
an invention to his employer shall not apply to an invention for which
no equipment, supplies, facility or trade secret information of the
employer was used and which was developed entirely on the employee's
own time, and (1) which does not relate (a) directly to the business of
the employer or (b) to the employer's actual or demonstrably
anticipated research or development, or (2) which does not result from
any work performed by the employee for the employer. Any provision
which purports to apply to such an invention is to that extent against
the public policy of this state and is to that extent void and
unenforceable.
Subdivision 2. No employer shall require a provision made void and
unenforceable by subdivision 1 as a condition of employment or
continuing employment.
Subdivision 3. IF AN EMPLOYMENT AGREEMENT ENTERED INTO AFTER AUGUST 1,
1977, CONTAINS A PROVISION REQUIRING THE EMPLOYEE TO ASSIGN OR OFFER TO
ASSIGN ANY OF HIS RIGHTS IN ANY INVENTION TO HIS EMPLOYER, THE EMPLOYER
MUST ALSO, AT THE TIME THE AGREEMENT IS MADE, PROVIDE A WRITTEN
NOTIFICATION TO THE EMPLOYEE THAT THE AGREEMENT DOES NOT APPLY TO AN
INVENTION FOR WHICH NO EQUIPMENT, SUPPLIES, FACILITY OR TRADE SECRET
INFORMATION OF THE EMPLOYER WAS USED AND WHICH WAS DEVELOPED ENTIRELY
ON THE EMPLOYEE'S OWN TIME, AND (1) WHICH DOES NOT RELATE (a) DIRECTLY
TO THE BUSINESS OF THE EMPLOYER OR (b) TO THE EMPLOYER'S ACTUAL OR
DEMONSTRABLY ANTICIPATED RESEARCH OR DEVELOPMENT, OR (2) WHICH DOES NOT
RESULT FROM ANY WORK PERFORMED BY THE EMPLOYEE FOR THE EMPLOYER.
I have no inventions, improvements, discoveries, software or writings useful to
the Company or its subsidiaries or affiliates in the normal course of business,
which were conceived, made or written prior to and are excluded from this
Agreement except as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company and I understand that I may now be in possession of proprietary
information or other proprietary subject matter of another and that the Company
will not consent to disclosure, receipt or acceptance thereof.
I will not publish or otherwise disclose, either during or after my employment,
any unpublished or proprietary or confidential information or secret relating to
the Company or its business or its operations or to the Company products or
services or to the materials, apparatus, processes, formulae, plans and methods
used in development or manufacture or marketing of its software or products or
services; nor will I publish or otherwise disclose proprietary or confidential
information of others to which I have had access or obtained knowledge in the
course of my employment. If I leave the employ of the Company I will not,
without its prior written consent, retain or take with me any drawing, writing
or other record in any form or nature which relates to any of the foregoing.
During the term of my employment I shall engage in no activity or employment
which may conflict with the interest of the Company, and I shall comply with all
Policies and Procedures of the Company including, without limiting the
generality of the foregoing, the Policies and Procedures pertaining to Ethics.
This Agreement may be assigned by the Company only, and the Agreement is binding
on my heirs, executors, administrators and assigns.
/s/ Ervin F. Kamm, Jr 1/24/97
--------------------------------------- -------
Signature of Employee Date
763 N. Ferndale Road, Wayzata, MN 55331
---------------------------------------
Address
Accepted by ZYTEC CORPORATION
By /s/ P. T. Vincelli 1/27/97
--------------------------------------- -------
Director, H.R. Date
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
ZYTEC CORPORATION
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
In thousands, except per share and employee data 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 228,168 $ 170,518 $ 128,141 $ 90,614 $ 89,639
Operating income (loss) $ 13,650 $ 6,429 $ 6,222 $ 5,371 $ (1,893)
Net income (loss)(A) $ 10,481 $ 3,878 $ 3,364 $ 2,671 $ (3,287)
Net income (loss) per share (fully diluted)(A) $ 1.04 $ .41 $ .36 $ .35 $ (.55)
Common and common equivalent shares outstanding
(fully diluted) 10,040 9,389 9,324 7,555 6,011
Total assets $ 83,477 $ 66,367 $ 45,475 $ 32,867 $ 24,793
Debt and capital lease obligations, less current portion $ 20,861 $ 4,050 $ 4,764 $ 3,902 $ 5,262
Stockholders' equity $ 32,987 $ 21,367 $ 17,113 $ 13,331 $ 1,148
Net cash provided by (used in) operating activities $ 9,413 $ 820 $ (5,691) $ 1,812 $ (692)
Debt to total capital ratio 47.5% 45.7% 41.3% 39.6% 92.1%
Return on invested capital(B) 16.6% 13.8% 15.6% 20.4% (9.6)%
Employees 1,962 1,241 1,028 818 854
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) 1996 includes the net income tax benefit related to the recognition of the
net operating loss carryforwards of the Company's Austrian subsidiary of
$2,626,000 or $.26 per share.
(B) Excludes the tax benefit discussed in (A).
The following table sets forth certain information derived from the
Company's Consolidated Statements of Operations, expressed as a percent of net
sales.
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 86.0 87.9 85.7
- --------------------------------------------------------------------------------
Gross profit 14.0 12.1 14.3
- --------------------------------------------------------------------------------
Other revenue 0.7 0.9 1.9
- --------------------------------------------------------------------------------
Selling, general and administrative 4.6 4.2 5.0
Research and development 4.1 5.0 6.4
- --------------------------------------------------------------------------------
Operating income 6.0 3.8 4.8
- --------------------------------------------------------------------------------
Interest expense (0.8) (0.6) (0.6)
Other, net 0.0 0.4 0.0
- --------------------------------------------------------------------------------
Income before income taxes 5.2 3.6 4.2
Income taxes 0.6 1.3 1.6
- --------------------------------------------------------------------------------
Net income 4.6% 2.3% 2.6%
================================================================================
10
FINANCIAL AND OPERATIONS REVIEW
ZYTEC CORPORATION
1996 was a year of strong sales growth and record profits. Net income
was $10,481,000, or $1.04 per share. Excluding a one-time income tax benefit of
$0.26 per share, net income was $7,855,000, or $0.78 per share, an increase of
103% over 1995 net income of $3,878,000, or $0.41 per share on a fully diluted
basis. In 1994, net income was $3,364,000, or $0.36 per share.
1996 consolidated net sales were $228,168,000, an increase of 34% over
net sales of $170,518,000 in 1995, which were 33% higher than net sales of
$128,141,000 in 1994. The compound average growth rate of consolidated net sales
from the end of 1992 to 1996 was 26%. The Company's business falls into two
business segments: power supply design and manufacture (Power Conversion) and
Services and Logistics. The Power Conversion segment is further segmented
geographically between the US and Europe. US Power net sales of $154,730,000
increased 30% over net sales of $118,931,000 in 1995, which were 29% greater
than 1994 net sales of $92,120,000. Similarly, Europe Power net sales of
$58,240,000 were 29% greater than 1995 net sales of $45,124,000, which were 30%
greater than 1994 net sales of $34,804,000. Both power operations experienced
generally strong demand, and the portion of sales relating to networking
continued to grow faster than the overall average for the Company.
The continuing strong demand for networking-related power products
forced the US Power group to operate above capacity in Redwood Falls during 1995
and allowed the Europe Power facility in Austria to come up to full capacity
usage during 1996. In US Power, an expansion of the Redwood Falls plant was
completed in April 1996. This addition allowed reorganization of manufacturing
lines and reduction of leased space near Redwood Falls. In addition to this
increase in capacity, US Power opened a new plant in Broomfield, Colorado. This
plant was in startup mode during the first quarter of 1996, started production
in the second quarter and was running at normal operating levels in the third
and fourth quarters. During the last half of the year, the Redwood Falls
facility produced 73% of US Power's net sales, while the Colorado plant produced
27%. This split of net sales is expected to continue in 1997.
In the Services and Logistics business segment, sales of $21,456,000 in
1996 were 86% greater than sales of $11,521,000 in 1995, which were 84% greater
than sales of $6,262,000 in 1994. Services and Logistics provides repair
services and logistics for a variety of products primarily for Hewlett-Packard
Company. These products include laser and ink jet printers, facsimile machines,
computers, monitors and other products. Growth of the Services and Logistics
business was due almost entirely to continued expansion of the number of
products repaired for Hewlett-Packard that made up 99% of the sales in this
segment in 1996. We expect that growth of sales to this customer will slow
somewhat in 1997, but that sales of similar services to new customers will
support continued rapid growth in the Services and Logistics business.
Zytec's consolidated gross margin was 14.0% in 1996, which was 1.9
percentage points greater than 1995. Gross margin was 14.3% in 1994. The gross
margin in the US Power operation increased to 13.0% in 1996 from 12.6% in 1995.
There were improvements in 1996 both in material cost and labor cost, and the
improvements occurred despite startup costs for the Colorado plant which were
absorbed in the first and second quarters of 1996. The Europe Power operation
improvement was more dramatic, with gross margin rising to 12.3% from 8.8% in
1995. The 1996 improvement was due to cost reductions in both materials and
labor, as well as to slow growth in overhead expenses due to leveraging of these
costs with the higher production volume. The Services and Logistics gross margin
rose to 22.0% in 1996 from 14.0% in 1995. The primary reason
11
for this change was the growth of the operation, which resulted in development
of a full administrative function and the need to increase prices so that the
higher gross margins could cover the costs of that function.
Consolidated gross margins in 1995 were lower than 1994 due to mix of
products, component shortages and their effect on efficiency and capacity, new
product start-ups, and the effect of a weak dollar.
Consolidated cost of goods sold included charges related to inventory
obsolescence of $452,000 in 1996, $645,000 in 1995 and $991,000 in 1994. These
amounts represent 2.2%, 2.7% and 5.7% of year end inventories, respectively. The
Company believes these charges are low for its industry.
Selling, general and administrative (SG&A) expenses were 4.6% of net
sales in 1996, 4.2% in 1995 and 5.0% in 1994. The increase in rate from 1995 to
1996 was due primarily to the establishment of a separate administration
function in the Services and Logistics operation. Services and Logistics added
personnel in human resources, accounting and safety, incurred additional selling
expense for anticipated new business, and reduced its reliance on US Power for
these services. In US Power and Europe Power operations, selling expenses
decreased in relation to sales. US Power general and administrative expenses
increased slightly in rate due to staff additions, while Europe Power general
and administrative expenses were constant and thus decreased as a percent of net
sales.
Research and development (R&D) expenses increased 10% in 1996 to
$9,453,000, or 4.1% of net sales. R&D expenses were $8,587,000, or 5.0% of net
sales, in 1995 and $8,144,000, or 6.4% of net sales, in 1994. The Company
increased R&D expenses to develop a full line of DC/DC (distributed power
architecture) products and to develop tools to reduce the time necessary to
design a custom product. The number of programs in design was fairly constant
from the end of 1994 through most of 1996, and the 1996 increase in R&D is
primarily related to research.
Offsetting R&D expense, the Company reported other revenue of
$1,582,000 (17% of R&D expense) in 1996, $1,559,000 (18% of R&D expense) in 1995
and $2,462,000 (30% of R&D expense) in 1994. Other revenue consists of customer
payments to fund development of custom power supplies. The continued decline of
other revenue as a percentage of R&D expense is due to higher levels of
research, which are not reimbursed by customers, as well as to a trend toward
lower funding per program.
Interest expense of $1,834,000 was 0.8% of net sales in 1996, which was
an increase of 74% from interest expense of $1,053,000, or 0.6% of net sales, in
1995. Interest expense was $766,000, or 0.6% of net sales, in 1994. The increase
in interest expense in 1996 is related to higher debt which was used to fund
increases in working capital and capital expenditures.
Other income (expense), net was expense of $4,000 in 1996, income of
$703,000 in 1995 and expense of $38,000 in 1994. The 1995 amount is made up of
an exchange gain of $202,000 and an export duty refund of approximately
$124,000.
The Company's consolidated effective tax rate in 1996 was 11.3%
compared with 36.2% in 1995 and 37.9% in 1994. In 1996, the Company recognized
an income tax benefit related to the net operating loss (NOL) carryforwards in
its Austrian operations. In May 1996, the Austrian government changed the
treatment of NOL carryforwards by (a) suspending the use of NOLs during the
years 1996 and 1997 retroactively to January 1, 1996 and (b) removing the time
limitations on the use of the NOLs. In light of this new statute, and based on
the Company's assessment of the strong financial results of the Austrian
operations, the Company recognized the deferred income tax benefit related to
the Austrian NOL carryforwards. This resulted in a
12
$2,626,000 net reduction of income taxes in the second quarter of 1996,
comprised of a tax benefit of $3,175,000 relating to the recognition of the
deferred tax benefit offset by $549,000 in income tax expense resulting from the
retroactive application of this tax law change to first and second quarter
Austrian operations, thus significantly reducing the annual effective tax rate.
The effective income tax rates in the last two quarters of 1996 stabilized at
statutory rates of 38% to 39%, and the Company expects that the effective rate
will approximate these rates in the future.
POWER CONVERSION
MARKETS
For the past several years, Zytec's market focus has been on providing
power supplies for networking products such as servers, hubs, routers and disk
arrays. Within its target markets, Zytec focuses on retaining existing customers
and targets a few major and emerging OEM industry leaders for expansion. In
1996, Zytec won designs from four new customers. In 1995, the Company won no new
customers and in 1994 three customers. In 1995, telecommunications was added to
Zytec's target markets.
The chart below profiles Zytec's Power Conversion revenues and typical
customers in major market application segments:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Percentage of
Product or Market Served by Customers Revenues Representative Customers
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Data communications 22% Cabletron, Bay Networks, Cisco, Ericsson
File servers 18 Digital Equipment, Hewlett-Packard, Compaq, IBM, Dell
Computer peripherals 20 Digital Equipment, Hewlett-Packard, IBM, 3M
- -----------------------------------------------------------------------------------------------------------------
Inter/Intranet 60%
Workstations 15 Hewlett-Packard, Silicon Graphics, Sun Microsystems
Mini/Fault tolerant computers 11 IBM, Unisys, Stratus
Test and measurement 10 Tektronix, Hewlett-Packard, Abbott Laboratories
Repair, other 4
- -----------------------------------------------------------------------------------------------------------------
Total 100%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
TECHNOLOGY
Distributed Power Architecture (DPA): DPA technology offers high
efficiency and small size to customers who need flexibility and the potential
for redundancy in their products. While this technology is currently more
expensive than traditional switching power supplies, it is expected to grow
faster than industry averages. In March 1996, Zytec established a subsidiary in
Texas to design and market future generations of its DPA. In October 1996, Zytec
entered into a partnership with Ericsson Components AB to provide their DC/DC
converters for the Ericsson catalog.
Design Cycle Time: One way in which Zytec differentiates itself is to
design products quickly. Particularly in rapidly changing markets such as
internetworking products, the time to produce a quality design is a crucial
variable. In 1996, our average time to design and introduce a product improved
by about 20%, as it did in 1995 and 1994. Some of the improvement came from the
first use of an extensive computer simulation process that reduces original
design time and error, but most came from a continuing restructuring of
resources and process improvements.
13
MANUFACTURING CAPACITY
A new plant in Broomfield, Colorado added 73,000 square feet of space,
required approximately $4,320,000 in capital equipment and employed 171 by the
end of 1996. This factory is currently producing higher volume products, as well
as DC/DC products for our distributed power architecture offering.
A 44,000 square foot addition to the Redwood Falls main plant was
completed and in use by April 1996. We discontinued use of three separated
buildings in the Redwood Falls area, so the net gain in manufacturing space was
27,000 square feet. However, the reorganization allowed a redesign of production
lines and an improvement in product flow.
An existing supplier of magnetic components (transformers, coils and
toroids) to the Europe Power operation was acquired from the Hungarian
government by privatization in March 1996. Through most of 1996, the facility
produced magnetic components primarily for Europe Power and ran below capacity.
Capacity utilization improved substantially toward the end of 1996, as US Power
began to use the Hungarian product. In January 1997, the Hungarian facility sold
its first magnetic products to a major European electronics manufacturer and is
expected to run close to capacity in 1997.
SERVICES AND LOGISTICS
The Services and Logistics business has grown rapidly since 1992, when
it was established in Rocklin, California to provide repair services for
Hewlett-Packard. By the end of 1996, Services and Logistics had moved to nearby
Lincoln, California, and established a campus of five buildings devoted to
repair and logistics management for many of the customer's products. During
1996, Services and Logistics separated its computer systems from those of its
major customer, thus creating the capacity to add new customers. In addition,
Services and Logistics became large enough to support its own administrative
operations and added accounting, human resource and safety functions.
During the year, Services and Logistics began several new business
activities designed to broaden its business base, including (1) a Network
Services operation, which installs new hardware and software at large customer
locations and provides ongoing support services; (2) a Foreign Trade Zone (FTZ),
which allows reduced duties and fees for imported products to which value is
added in the zone; and (3) a remanufacturing operation that allows recycling of
returned products into equivalent-to-new (ETN) products, primarily for the
foreign market.
LIQUIDITY AND CAPITAL RESOURCES
In 1996, the Company's operating activities provided cash of
$9,413,000, up from $820,000 in 1995. The net cash used for operating assets and
liabilities of $2,488,000 was offset by net income of $10,481,000, depreciation
and amortization of $4,099,000, and deferred income tax benefit of $2,812,000,
primarily related to the one-time Austrian NOL tax benefit.
Cash and cash equivalents were $8,535,000 at December 31, 1996, up from
$2,000 at December 31, 1995 because the Company completed a convertible
subordinated debenture financing which provided $11,251,000 in late December
1996. In 1995, the Company was borrowing against its revolving credit
facilities, and the cash balance was near zero. Accounts receivable decreased
$435,000 from 1995 to 1996, reflecting the fact that operating levels at the end
of 1996 and 1995 were relatively similar. Average days sales outstanding (DSO)
were 46.3 in 1996, 43.5 in 1995 and 42.1 in 1994. The trend of increased DSO was
caused primarily by the reduction of a very large program which includes
faster-than-average payment of receivables. As of December 31, 1996, less than
3.8% of accounts receivable were 60 days or more beyond terms, and the Company
does not believe the trend of increase in DSO poses an
14
increased risk to collection of accounts receivable. Inventory turnover averaged
7.5 times in 1996, 7.4 times in 1995 and 7.9 times in 1994. Inventories were
$20,776,000 as of December 31, 1996, compared with $24,201,000 as of December
31, 1995, a $3,425,000 decrease. This reflects the fact that, at December 31,
1995, Zytec carried increased stocks of certain semiconductors as a precaution
due to limited capacity in the industry to support our growth rate. In early
1996, industry capacity problems eased, and Zytec elected to reduce its safety
stocks, which caused an improvement in inventory turnover despite the fact that
a new plant in the US Power operation caused some duplication of inventories.
Investing activities required cash of $4,392,000 in 1996, $3,335,000 in
1995 and $3,212,000 in 1994. Capital expenditures, including equipment financed
through new capital lease obligations and additional debt, were $12,157,000 in
1996 and $5,784,000 in 1995. Through most of 1996 and 1995, these purchases were
financed through borrowing against bank lines and leases, as well as by
internally generated funds. The 1996 and 1995 expenditures generally were made
to purchase surface mount technology, other automated insertion equipment, test
equipment, computer equipment and expansions to physical capacity. In 1996,
$4,320,000 was invested in the Broomfield, Colorado plant.
In December 1996, the Company completed a subordinated debenture
financing, which paid down the US credit facility. The debentures, which bear
interest at 7.5% and mature in 2001, are convertible at $13.68 per share.
Assuming conversion of the debenture, 877,000 shares of common stock would be
issued and interest would be reduced. The net income impact of this interest
reduction would be approximately $563,000 for 1997.
Cash provided by financing activities was $3,376,000 in 1996,
$2,678,000 in 1995 and $4,670,000 in 1994. In 1996, the increase was a result of
the subordinated debenture financing, net of debt repayments. In 1995 and 1994,
these increases were primarily from increases in the revolving credit loan.
The Company has two bank lines of credit which are described in Note 4
of the consolidated financial statements. The US facility provides up to
$23,000,000 in borrowings through May 1999. This facility is unsecured and
requires the Company to maintain certain leverage, interest coverage, current
and funded debt ratios. At December 31, 1996, there were no borrowings under
this facility. The Company's other line of credit is guaranteed by the Austrian
National Bank and issued to finance Austrian export sales. At December 31, 1996,
borrowings under this line were $4,098,000.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. This Annual Report and other materials
filed or to be filed by the Company with the Securities and Exchange Commission,
as well as other written materials or oral statements that the Company may make
or publish from time to time, contain forward-looking statements relating to
business prospects, plans for future expansion, anticipated financial
performance and similar matters. These statements by their nature involve
substantial risks and uncertainties, and actual results may differ materially
from the anticipated results or other expectations expressed in the
forward-looking statements. These risks and uncertainties include, but are not
limited to, changes in order quantities by customers, general conditions in the
computer and other electronic equipment market, and the risks and uncertainties
described in the Financial and Operations Review in this Annual Report.
15
CONSOLIDATED STATEMENTS OF OPERATIONS
ZYTEC CORPORATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Years ended December 31,
In thousands, except share and per share data 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 228,168 $ 170,518 $ 128,141
Cost of goods sold 196,121 149,922 109,847
- -----------------------------------------------------------------------------------------------------
Gross profit 32,047 20,596 18,294
- -----------------------------------------------------------------------------------------------------
Other revenue 1,582 1,559 2,462
- -----------------------------------------------------------------------------------------------------
Operating expenses:
Selling 3,440 3,117 2,857
General and administrative 7,086 4,022 3,533
Research and development 9,453 8,587 8,144
- -----------------------------------------------------------------------------------------------------
Total operating expenses 19,979 15,726 14,534
- -----------------------------------------------------------------------------------------------------
Operating income 13,650 6,429 6,222
Other income (expense):
Interest expense (1,834) (1,053) (766)
Other, net (4) 703 (38)
- -----------------------------------------------------------------------------------------------------
Income before income taxes 11,812 6,079 5,418
Income taxes 1,331 2,201 2,054
- -----------------------------------------------------------------------------------------------------
Net income $ 10,481 $ 3,878 $ 3,364
======================================================================================================
Net income per share:
Primary $ 1.04 $ .42 $ .36
======================================================================================================
Fully diluted $ 1.04 $ .41 $ .36
======================================================================================================
Common and common equivalent shares outstanding:
Primary 10,040,071 9,267,784 9,323,936
======================================================================================================
Fully diluted 10,040,071 9,388,880 9,323,936
======================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
CONSOLIDATED BALANCE SHEETS
ZYTEC CORPORATION
- --------------------------------------------------------------------------------
As of December 31,
In thousands, except share data 1996 1995
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 8,535 $ 2
Accounts receivable 26,213 26,648
Inventories 20,776 24,201
Other current assets 3,182 3,014
- --------------------------------------------------------------------------------
Total current assets 58,706 53,865
Property, plant and equipment, net 19,985 11,823
Deferred income taxes 3,067 --
Other assets 1,719 679
- --------------------------------------------------------------------------------
Total assets $83,477 $66,367
================================================================================
As of December 31,
In thousands, except share data 1996 1995
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Debt and capital lease obligations, current portion $ 8,997 $13,942
Accounts payable 11,486 18,487
Accrued expenses 7,279 6,979
- --------------------------------------------------------------------------------
Total current liabilities 27,762 39,408
Debt and capital lease obligations, less current portion 20,861 4,050
Other liabilities 1,867 1,542
Commitments
Stockholders equity (Common stock, no par
value; 25,000,000 shares authorized;
9,167,104 and 8,687,306 shares
outstanding at December 31, 1996 and
December 31, 1995, respectively) 32,987 21,367
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $83,477 $66,367
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
ZYTEC CORPORATION
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Years ended December 31,
In thousands 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,481 $ 3,878 $ 3,364
Adjustments to reconcile net income
to net cash from operating
activities:
Depreciation and amortization 4,099 2,728 2,172
Deferred income taxes (2,812) (4) (108)
Changes in operating assets and liabilities (2,488) (5,872) (11,243)
Other, net 133 90 124
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 9,413 820 (5,691)
- ----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (3,362) (3,035) (3,212)
Cash paid for Zytec Hungary Elektronikai Kft. (830) -- --
Increase in other assets (200) (300) --
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,392) (3,335) (3,212)
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from debt and capital lease obligations 20,643 6,950 6,500
Payments of debt and capital lease obligations (9,664) (8,884) (7,043)
Proceeds from revolving credit loans 144,806 139,050 71,872
Payments on revolving credit loans (152,104) (134,474) (68,493)
Increase (decrease) in bank overdrafts (1,220) (307) 1,442
Increase in deferred financing costs (761) -- --
Exercise of stock options 604 147 219
Tax benefit realized upon sale of stock options 868 196 173
Other 204 -- --
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,376 2,678 4,670
- ----------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 136 (163) (36)
- ----------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 8,533 -- (4,269)
Cash and cash equivalents, beginning of year 2 2 4,271
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 8,535 $ 2 $ 2
====================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ZYTEC CORPORATION
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Foreign
Common Stock Currency
------------ Retained Translation
In thousands, except share data Shares Amount Earnings Adjustments Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 4,034,763 $ 11,064 $ 2,443 $ (176) $ 13,331
Exercise of stock options 205,070 219 -- -- 219
Tax benefit realized upon sale of
stock options -- 173 -- -- 173
Net income for the year -- -- 3,364 -- 3,364
Foreign currency translation adjustments -- -- -- 26 26
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 4,239,833 11,456 5,807 (150) 17,113
Exercise of stock options 103,820 147 -- -- 147
Tax benefit realized upon sale of
stock options -- 196 -- -- 196
Net income for the year -- -- 3,878 -- 3,878
Foreign currency translation adjustments -- -- -- 33 33
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 4,343,653 11,799 9,685 (117) 21,367
Additional shares issued in two-for-one stock split 4,497,836 -- -- -- --
Exercise of stock options 325,615 604 -- -- 604
Tax benefit realized upon sale of
stock options -- 868 -- -- 868
Net income for the year -- -- 10,481 -- 10,481
Foreign currency translation adjustments -- -- -- (333) (333)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 9,167,104 $ 13,271 $ 20,166 $ (450) $ 32,987
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ZYTEC CORPORATION
Note 1
BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES:
Zytec Corporation (the Company) does business in two segments: Power
Conversion which provides power supply design, manufacture and repair, and
Services and Logistics which provides repair services and logistics for a
variety of products primarily for a significant customer.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of the Company, its wholly-owned Austrian subsidiary, Zytec
GmbH, and its wholly-owned Hungarian subsidiary, Zytec Hungary Elektronikai Kft.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
FOREIGN CURRENCY TRANSLATION: The financial position and results of
operations of the Company's international subsidiaries are measured using the
local currency as the functional currency. Assets and liabilities are translated
at the exchange rates in effect at each fiscal year-end. Income and expense
accounts are translated at the average rates of exchange prevailing during the
year. Translation adjustments arising from the use of differing exchange rates
from period to period are included in the foreign currency translation
adjustments account in stockholders' equity.
FOREIGN CURRENCY OPTIONS AND FORWARD CONTRACTS: The Company utilizes
financial instruments (foreign currency option and forward contracts) from time
to time to limit the financial risk of foreign currency exchange rates primarily
related to certain receivables. The Company does not use hedging instruments of
a speculative nature. Realized and unrealized gains and losses are deferred and
recognized as part of the specific transaction being hedged. The cash flows from
these contracts are classified in the Consolidated Statements of Cash Flows in
the same category as the transaction hedged. The Company had foreign currency
option and forward contracts with a face amount of $8,800,000 and $5,000,000 at
December 31, 1996 and December 31, 1995, respectively. The unrealized losses and
realized losses on these contracts were not significant.
CASH AND CASH EQUIVALENTS: The Company considers its investments in all
highly-liquid debt instruments with original maturities of three months or less
to be cash equivalents. The cash balance is primarily with two financial
institutions.
INVENTORIES: Inventories are valued at the lower of cost or market,
with cost determined on a first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are
recorded at cost. Depreciation and amortization are computed on the
straight-line method over the estimated useful lives of the assets or the lease
terms, if shorter.
Maintenance and repairs are charged to expense as incurred. The cost
and related accumulated depreciation on asset disposals are removed from the
accounts and any gain or loss thereon is included in operations in the year of
disposition.
INCOME TAXES: Deferred income tax assets and liabilities are recognized
for the expected future tax consequences of differences in the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are provided, when necessary, to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable for the
period and the change in deferred income tax assets and liabilities during the
period.
REVENUE RECOGNITION: Sales are recorded as products are shipped or
services are rendered. The Company enters into agreements with certain customers
whereby the customers fund a portion of research and development expenses
relating to the designing of particular products. This funding is recognized as
Other revenue in the Consolidated Statements of Operations in the periods the
Company incurs the related costs and has agreed with the customer as to the
amount.
The Company functions as a buying agent for certain materials and
supplies for a significant customer. Because the customer reimburses the Company
for all actual costs and bears all risk of loss under this arrangement, the
costs for these materials and supplies are presented net of the related
reimbursements in the Consolidated Statements of Operations. Revenues for the
services the Company provides as a buying agent and the related costs are
included in Net sales and Cost of goods sold, respectively, in the Consolidated
Statements of Operations.
20
PRODUCT WARRANTY: The Company records estimated product warranty costs
in the period in which the related sales are recognized.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed
as incurred.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARES: Net income per
common and common equivalent shares has been computed by dividing net income by
the weighted average number of common and common equivalent shares outstanding
for the period, using the modified treasury stock method. Common equivalent
shares relate to stock options. For 1995, fully diluted earnings per share
reflects the additional dilution related to stock options because the market
price at the end of the period was higher than the average market price during
the period.
STOCK SPLIT: In April 1996, the Company's Board of Directors authorized
a two-for-one stock split in the form of a 100% stock dividend distributed on
June 3, 1996 to shareholders of record on May 20, 1996. All per share and number
of share data in this annual report have been retroactively restated to reflect
the stock split, except for the Consolidated Statements of Stockholders' Equity.
STOCK OPTIONS: The Company uses the intrinsic value method of
accounting for its stock options.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant areas which require the use of management estimates relate
to product warranty costs, allowance for inventory obsolescence, and valuation
allowance for deferred taxes.
Note 2
SELECTED BALANCE SHEET DATA:
- --------------------------------------------------------------------------------
In thousands 1996 1995
- --------------------------------------------------------------------------------
Inventories:
Work in process and finished goods $ 6,123 $ 7,392
Parts and subassemblies 4,653 16,809
- --------------------------------------------------------------------------------
$ 20,776 $ 24,201
================================================================================
Property, plant and equipment, net:
Land and land improvements $ 76 $ 76
Building and building improvements 1,829 637
Equipment, furniture and leasehold
improvements 23,488 18,493
Equipment, furniture and leasehold
improvements under capital leases 11,525 5,228
- --------------------------------------------------------------------------------
36,918 24,434
Less accumulated depreciation (15,293) (12,176)
Less accumulated amortization (2,603) (1,970)
-------------------------------------------------------------------------------
19,022 10,288
Construction in progress and
deposits on equipment 963 1,535
- --------------------------------------------------------------------------------
$ 19,985 $ 11,823
================================================================================
Accrued expenses:
Vacation $ 2,469 $ 2,160
Other 4,810 4,819
- --------------------------------------------------------------------------------
$ 7,279 $ 6,979
================================================================================
Accounts payable included bank overdrafts of $1,148,000 at December 31,
1995.
Note 3
SUPPLEMENTAL CASH FLOW DATA:
The following provides supplemental disclosures of cash flow activities
for 1996, 1995 and 1994, respectively:
- --------------------------------------------------------------------------------
In thousands
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash
and Cash Equivalents 1996 1995 1994
- --------------------------------------------------------------------------------
Changes in operating assets and
liabilities:
Accounts receivable $ (205) $ (9,839) $ (5,835)
Inventories 3,000 (6,499) (7,820)
Other current assets (261) 244 (1,036)
Accounts payable (5,484) 8,472 2,032
Accrued expenses 462 1,750 1,416
- --------------------------------------------------------------------------------
$ (2,488) $ (5,872) $(11,243)
================================================================================
21
SUPPLEMENTAL CASH FLOW DATA (Continued):
- --------------------------------------------------------------------------------
In thousands 1996 1995 1994
- --------------------------------------------------------------------------------
Cash paid during the year for:
Interest $1,844 $1,054 $ 787
Income taxes 3,868 1,202 2,120
Significant noncash transactions:
Property and equipment
acquired through
capital lease obligations 7,372 2,377 331
Equipment acquired
through issuance of
debt 1,423 372 --
- --------------------------------------------------------------------------------
Cost of goods sold included charges related to inventory obsolescence
of $452,000 in 1996, $645,000 in 1995 and $991,000 in 1994.
Note 4
DEBT ARRANGEMENTS:
Debt consisted of the following at December 31:
- --------------------------------------------------------------------------------
In thousands 1996 1995
- --------------------------------------------------------------------------------
Capital lease obligations (Note 5) $ 8,344 $ 2,787
Convertible subordinated promissory note
due 2001 (A) 12,000 --
Variable rate demand industrial
development revenue bonds due 2002 (B) 980 1,140
Revolving credit and term loan (C) -- 7,273
Revolving credit loan due March 1997 (D) 4,098 3,461
Notes payable due 1997 (E) 2,260 2,156
Loan payable to bank due 2002 (F) 2,075 995
Other 101 180
- --------------------------------------------------------------------------------
29,858 17,992
Less current portion (8,997) (13,942)
- --------------------------------------------------------------------------------
$ 20,861 $ 4,050
================================================================================
(A) In December 1996, the Company entered into a convertible
subordinated promissory note with a bank for $12,000,000. Interest is payable
quarterly at an interest rate of 7.5%. The entire principal balance is due in
December 2001. The Company may at any time repay all or any portion of the
outstanding principal. The note may be converted at any time into shares of the
Company's common stock at a conversion price of $13.68 per share.
(B) The interest rate is established weekly according to market
conditions such that the market value of the bonds will remain equal to their
principal value; the maximum interest rate payable under the bonds is 10%. The
interest rate at December 31, 1996, was 4.8%. The agreement requires a bank
letter of credit to be maintained in an amount approximately equal to the
outstanding principal balance of the bonds. The letter of credit is
collateralized by US accounts receivable, inventories and certain property,
plant and equipment.
(C) In May 1996, the Company replaced its revolving credit facility
with a bank. The agreement provides up to $23,000,000 in borrowings through May
1999. Credit availability under this facility is subject to a defined borrowing
base that is based on certain percentages of US accounts receivable, inventories
and plant and equipment. At the Company's option, advances from the revolving
credit agreement may be made at either a floating rate which is approximately
equal to the bank's prime rate or at a LIBOR rate which is based on the British
Bankers' Association LIBOR setting rate. The Company must pay a fee of 0.25% on
the unused portion of the revolving credit balance. The agreement requires the
Company to maintain certain leverage, interest coverage, current and funded debt
ratios. At December 31, 1996, no amounts were outstanding under this facility.
(D) Zytec GmbH has a revolving credit loan with a bank for financing
export sales. The agreement is renewable quarterly and bears interest at 3.5%.
Zytec GmbH also has a line of credit agreement which provides $2,277,000 of
overdraft financing, which bears interest ranging from 4.0% to 7.75%. These
borrowings are collateralized by export receivables.
(E) Notes payable include various notes which mature from January to
April 1997. The interest rate on each of the notes was 4.0% at December 31,
1996. The notes are collateralized by accounts receivable of Zytec GmbH totaling
$3,728,000 and $3,241,000 at December 31, 1996 and 1995, respectively, which
exclude the export receivables in (D) above.
(F) Interest is payable at rates ranging from 3.5% to 5.25%. The loan
is guaranteed by the Austrian government and is collateralized by certain
Austrian property, plant and equipment. As part of the agreement, the Company is
obligated to make capital contributions to Zytec GmbH up to a limit of
$2,732,000, if its cumulative cash flow as defined in the loan agreement becomes
negative. Cumulative cash flow
22
was $8,912,000 at December 31, 1996; therefore, no capital contribution is
required at December 31, 1996.
The aggregate amount of maturities of long-term debt, excluding capital
lease obligations (see Note 5), is as follows at December 31, 1996:
---------------------------
In thousands
---------------------------
1997 $ 6,782
1998 584
1999 537
2000 537
2001 12,537
Thereafter 537
---------------------------
$21,514
===========================
The fair value of the debt, based upon discounted cash flow analysis
using current market interest rates, approximates its carrying value at December
31, 1996.
Note 5
LEASE OBLIGATIONS:
Equipment under capital leases includes certain production and office
equipment. The Company also leases production facilities, warehouses, office
buildings and various equipment under operating leases.
Related to certain capital lease agreements, the Company was
contingently liable under irrevocable letters of credit for $1,033,000 and
$1,200,000 at December 31, 1996 and December 31, 1995, respectively.
Minimum annual rental commitments as of December 31, 1996, are as
follows:
- --------------------------------------------------------------------------------
In thousands Capital Leases Operating Leases
- --------------------------------------------------------------------------------
1997 $ 2,896 $ 3,763
1998 2,592 3,170
1999 2,060 2,776
2000 1,288 2,760
2001 1,081 2,104
Thereafter 43 1,994
- --------------------------------------------------------------------------------
$ 9,960 $ 16,567
Less amount representing
interest (1,616)
- ----------------------------------
Present value of net
minimum lease payments $ 8,344
================================================================================
Rent expense for 1996, 1995 and 1994 was $3,725,000, $2,323,000, and
$1,638,000, respectively. Total future minimum rental income to be received
through 2001 under subleases related to operating leases is $370,000.
Note 6
INCOME TAXES:
Income tax expense (benefit) consisted of the following:
- --------------------------------------------------------------------------------
In thousands 1996 1995 1994
- --------------------------------------------------------------------------------
Current:
Federal $ 2,845 $ 1,906 $ 1,765
Foreign 835
State 463 299 397
Deferred:
Federal 177 (4) (108)
Foreign (2,989)
- --------------------------------------------------------------------------------
$ 1,331 $ 2,201 $ 2,054
================================================================================
The components of deferred income taxes as of December 31 are as
follows:
- --------------------------------------------------------------------------------
In thousands 1996 1995
- --------------------------------------------------------------------------------
Current deferred tax asset:
Inventories $ 204 $ 235
Other accruals, primarily
vacation 783 697
- --------------------------------------------------------------------------------
$ 987 $ 932
================================================================================
Noncurrent deferred tax asset:
Foreign net operating loss
carryforwards $ 3,067 $ --
================================================================================
Net current deferred foreign
tax liability $ 180 $ --
================================================================================
Net noncurrent deferred
tax liability:
Depreciation $ 1,163 $ 1,002
Other, net 70 (1)
- --------------------------------------------------------------------------------
$ 1,233 $ 1,001
================================================================================
At December 31, 1996, the Company's Austrian subsidiary has
approximately $9,000,000 of net operating loss (NOL) carryforwards for income
tax purposes (representing approximately $3,067,000 of tax benefits at the
statutory rate and the December 31, 1996 exchange rate). In May 1996, the
Austrian government changed the treatment of NOL carryforwards by (a) suspending
the use of NOLs during the years 1996 and 1997 retroactively to January 1, 1996
and (b) removing the time limitations on the use of the NOLs. In light of this
new statute, and based on the Company's assessment of the strong financial
results of the Austrian operations, the Company recognized the deferred income
tax benefit related to the Austrian NOL carryforwards. This resulted in a
$2,626,000 net reduction of income taxes in the second quarter of 1996,
comprised of a
23
tax benefit of $3,175,000 relating to recognition of the deferred tax benefit
offset by $549,000 in income tax expense resulting from the retroactive
applicaton of this tax law change to first and second quarter Austrian
operations.
A reconciliation of the provision for income taxes and the amount
computed by applying the federal statutory rate to income before income taxes is
as follows:
- --------------------------------------------------------------------------------
In thousands 1996 1995 1994
- --------------------------------------------------------------------------------
Income before income taxes:
Domestic $ 8,743 $ 5,119 $ 5,194
Foreign 3,069 960 224
- --------------------------------------------------------------------------------
$ 11,812 $ 6,079 $ 5,418
================================================================================
Computed income tax expense
at federal statutory rate $ 4,016 $ 2,067 $ 1,842
Increase (reduction) resulting from:
State taxes, net of federal
tax effect 330 196 236
Recognition of deferred tax
benefit of NOL carryforwards (3,175) -- --
Utilization of subsidiary
NOL carryforwards -- (326) (76)
Other 160 264 52
- --------------------------------------------------------------------------------
Income tax expense $ 1,331 $ 2,201 $ 2,054
================================================================================
Note 7
STOCK OPTION PLANS:
The Company has several qualified incentive stock option plans under
which a total of 6,000,000 shares of its common stock have been reserved for the
granting of options to employees until February 2006.
Plan participants will be granted options at the fair value of the
stock at the date of the grant. The options generally expire six years from the
grant date or three months after termination of employment, if earlier. Twenty
percent of the total number of options become exercisable at each anniversary
date of the granting of the options. As of December 31, 1996, 1,514,682 shares
were available for grant under the plans.
Incentive stock option transactions during 1996, 1995 and 1994 were as
follow:
- --------------------------------------------------------------------------------
Options Price
Outstanding Per Share
- --------------------------------------------------------------------------------
Balance, December 31, 1993 1,431,366 $0.50-$5.19
Granted 228,000 $4.25-$4.75
Exercised (386,454) $0.50-$1.50
Cancelled (71,800) $0.50-$5.19
- --------------------------------------------------------------------------------
Balance, December 31, 1994 1,201,112 $0.50-$5.19
Granted 495,000 $3.00-$4.81
Exercised (197,640) $0.50-$1.50
Cancelled (76,760) $0.50-$5.19
- --------------------------------------------------------------------------------
Balance, December 31, 1995 1,421,712 $0.50-$5.19
Granted 1,092,370 $5.75-$17.75
Exercised (330,741) $0.50-$5.19
Cancelled (176,640) $0.50-$17.75
- --------------------------------------------------------------------------------
Balance, December 31, 1996 2,006,701 $0.50-$17.75
- --------------------------------------------------------------------------------
Options exercisable at
December 31, 1996 304,891 $0.50-$5.19
- --------------------------------------------------------------------------------
At December 31, 1996, the weighted average exercise price and remaining
life of the stock options are as follows:
- --------------------------------------------------------------------------------
Range of exercise price $ 0.50- $9.88-
$5.75 $17.75 Total
- --------------------------------------------------------------------------------
Total options outstanding 1,285,331 721,370 2,006,701
Weighted average exercise
price $ 3.66 $ 13.34 $ 7.14
Weighted average remaining
life 3.7 years 5.6 years 4.3 years
Options exercisable 304,891 -- 304,891
Weighted average price of
exercisable options $ 2.31 -- $ 2.31
- --------------------------------------------------------------------------------
The Company has also granted nonqualified stock options to employees
and outside directors. The terms and conditions of these options are the same as
those provided under the Company's incentive stock option plans. As of December
31, 1996, 53,830 nonqualified options were outstanding with exercise
24
prices ranging from $12.00 to $12.75 per share and an average remaining life of
5.6 years. None of these options were exercisable.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, a new standard of
accounting and reporting for stock-based compensation plans. The Company has
adopted the new standard in 1996. The Company has continued to measure
compensation cost for its incentive stock plans using the intrinsic value method
of accounting it has historically used and, therefore, the new standard has no
effect on the Company's operating results.
Had the Company used the fair-value-based method of accounting for its
stock option and incentive plans (including the stock purchase plan discussed in
Note 8) beginning in 1995 and charged compensation cost against income over the
vesting period, net income and net income per share for 1996 and 1995 would have
been reduced to the following pro forma amounts:
- --------------------------------------------------------------------------------
In thousands, except per share data 1996 1995
- --------------------------------------------------------------------------------
Net income:
As reported $ 10,481 $ 3,878
Pro forma 10,014 3,837
- --------------------------------------------------------------------------------
Net income per share:
As reported (fully diluted) $ 1.04 $ .41
Pro forma 1.00 .41
- --------------------------------------------------------------------------------
The pro forma information above only includes stock options granted in
1995 and 1996. Compensation expense under the fair-value-based method of
accounting will increase over the next few years as additional stock option
grants are considered.
The weighted-average grant-date fair value of options granted during
1996 and 1995 was $5.04 and $1.90, respectively. The weighted-average grant-date
fair value of options was determined by using the fair value of each option
grant on the date of grant, utilizing the Black-Scholes option-pricing model and
the following key assumptions:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Risk-free interest rates 6.0% 6.3%
Expected life 4 years 4 years
Expected volatility 48.2 46.8
Expected dividends None None
- --------------------------------------------------------------------------------
Note 8
OTHER EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution 401(k) plan covering
substantially all domestic employees. Contributions to the plan by the Company
are based on employee contributions to the plan. Costs charged to operations
were $424,000, $370,000, and $350,000 for 1996, 1995 and 1994, respectively.
The Company has an Employee Stock Ownership Plan (ESOP) for the benefit
of its domestic employees. The amount contributed by the Company to the ESOP is
determined annually by the Board of Directors. No contribution was authorized
for 1996, 1995 or 1994. The ESOP has purchased no shares of the Company's common
stock and has no effect on the Company's financial statements.
On October 9, 1996, the Company's shareholders approved a stock
purchase plan allowing substantially all employees to purchase, through payroll
deductions, newly issued shares of the Company's common stock. The plan allows
employees to purchase common stock on a quarterly basis at the lower of 85% of
the market price at the beginning or end of each calendar quarter. As of
December 31, 1996, there were 600,000 shares of common stock reserved for the
stock purchase plan and there had been no issuances through December 31, 1996.
The plan operates on a calendar basis beginning January 1, 1997; a liability has
been recorded at December 31, 1996 for the employee payroll withholdings not yet
applied towards the purchase of common stock.
In April 1996, the Company's Board of Directors established a
noncontributory profit-sharing plan covering substantially all employees. The
Company may make semiannual contributions to the plan based on profit
performance in relation to goals to be established by the Board of Directors.
The plan was effective July 1, 1996. No contributions were made to the plan in
1996.
Substantially all of the employees of Zytec GmbH are entitled to
benefit payments under a severance plan. The benefit payments are based
primarily on the employees' salaries and the number of years of service and are
paid upon the employees' voluntary retirement. At December 31, 1996 and 1995,
the Company had recorded a liability of $543,000 and $541,000, respectively,
related to this severance plan. The Company recorded $106,000, $124,000, and
$104,000 in severance expense during 1996, 1995 and 1994, respectively. The
Company has invested in Austrian bonds of $301,000 and $282,000 at December 31,
1996 and 1995, respectively, to partially fund the severance plan as required by
Austrian law.
25
Note 9
TRANSACTIONS WITH SIGNIFICANT CUSTOMERS AND SUPPLIERS:
A portion of the Company's sales has been derived from significant
customers in 1996, 1995 and 1994 as follows:
---------------------------------------
1996 1995 1994
---------------------------------------
Customer 1 18% 16% 9%
Customer 2 16 17 11
Customer 3 11 12 12
Customer 4 10 15 29
---------------------------------------
55% 60% 61%
=======================================
The Company's major customers operate in the electronics industry. As a
result, the Company has a concentration of trade receivables in this broad
industrial segment.
The Company sells its manufactured products to original equipment
manufacturers in accordance with agreements specific to certain manufacturer
product programs. The Company's continued sales to these customers is often
dependent upon the continuance of the customers' product programs. The Company's
ten largest customers accounted for approximately 86% of net sales in 1996, 85%
in 1995, and 86% in 1994, and approximately 85% and 80% of accounts receivable
at December 31, 1996 and 1995, respectively.
Because of the custom nature of the Company's manufactured products and
quality-driven reasons, the Company currently limits the number of suppliers of
individual components used in the manufacture of products. Although there are a
limited number of manufacturers of certain components, management believes that
other suppliers could provide similar components on comparable terms. A change
in suppliers, however, could cause a delay in manufacturing and a possible loss
of sales, which could affect operating results adversely.
Note 10
BUSINESS SEGMENTS:
The Company's operations have been classified into two business
segments: Power Conversion and Services and Logistics. The Power Conversion
segment is further segmented geographically between the U.S. and Europe. The
U.S. and Europe Power Conversion segments include the design, manufacture and
repair of custom power supplies. The Services and Logistics segment includes
repair services and logistics of a variety of products primarily for a
significant customer. Nearly all of the net sales of the Services and Logistics
segment for 1996, 1995 and 1994 were to one customer.
The following presents information about the operations of each segment
for 1996, 1995 and 1994:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
U.S.
U.S. Services Europe
Power and Power
In thousands Conversion Logistics Conversion Eliminations Consolidated
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Net sales $154,730 $ 21,456 $ 58,240 $ (6,258) $228,168
Operating income 7,564 2,544 3,542 -- 13,650
Identifiable assets 66,535 8,087 22,004 (13,149) 83,477
Depreciation and
amortization 2,263 792 1,044 -- 4,099
Capital
expenditures 6,592 3,371 2,194 -- 12,157
- ------------------------------------------------------------------------------------------------
1995
Net sales 118,931 11,521 45,124 (5,058) 170,518
Operating income 4,239 1,388 802 -- 6,429
Identifiable assets 51,245 2,313 16,678 (3,869) 66,367
Depreciation and
amortization 1,654 147 927 -- 2,728
Capital
expenditures 3,289 973 1,522 -- 5,784
- ------------------------------------------------------------------------------------------------
1994
Net sales 92,120 6,262 34,804 (5,045) 128,141
Operating income 4,835 765 622 -- 6,222
Identifiable assets 32,358 1,457 14,030 (2,370) 45,475
Depreciation and
amortization 1,461 -- 711 -- 2,172
Capital
expenditures 2,182 -- 1,361 -- 3,543
- ------------------------------------------------------------------------------------------------
</TABLE>
Identifiable assets are all assets, including corporate assets,
identified with operations in each segment or geographic area. Loans between the
geographic areas and the investment in the wholly-owned subsidiaries have been
excluded. There are significant interdependencies between each segment; this
financial information is not intended to represent the results of operations if
the segments were operated as separate entities.
Foreign currency transaction gains (losses) included in Other, net in
the Consolidated Statements of Operations were ($134,000), $202,000, and
($229,000) in 1996, 1995 and 1994, respectively.
In March 1996, the Company completed the acquisition of the outstanding
stock of BHG Tatabanya Alkatrezsgyarto Kft. (now known as Zytec Hungary
Elektronikai Kft.) located in Hungary. The $830,000 purchase price was paid in
cash. This acquisition has been recorded using the purchase method of
accounting. This acquisition is not significant to the Company's consolidated
results of operations and financial position.
26
REPORT OF INDEPENDENT ACCOUNTANTS
ZYTEC CORPORATION
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF ZYTEC CORPORATION:
We have audited the accompanying consolidated balance sheets of Zytec
Corporation as of December 31, 1996 and 1995, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Zytec
Corporation as of December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
February 18, 1997
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL INFORMATION
- ----------------------------------------------------------------------------------------------------------------------
In thousands, except per share data (unaudited)
- ----------------------------------------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------------------------
3/31 6/30 9/29 12/31 4/2 7/2 10/1 12/31
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $61,087 $60,709 $53,693 $52,679 $32,881 $40,544 $44,589 $52,504
Gross profit 7,946 8,872 7,595 7,634 3,648 4,373 5,863 6,712
Operating income 3,449 4,098 3,213 2,890 266 773 2,459 2,931
Net income 2,108 4,889 1,774 1,710 120 355 1,448 1,955
Net income per share
(fully diluted) $ .21 $ .48 $ .18 $ .17 $ .01 $ .04 $ .16 $ .21
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The summation of quarterly net income per share does not equate to the
calculation for the full year, as quarterly calculations are performed on a
discrete basis.
ZYTEC COMMON STOCK
Zytec's common stock is traded on the Nasdaq National Market under the
symbol "ZTEC". As of February 28, 1997, the Company had 578 stockholders of
record. The following table sets forth the high and low prices of ZTEC common
stock as reported by Nasdaq for each quarter during 1996 and 1995:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
1st Quarter $10.00 $ 5.13 $ 4.38 $ 2.75
2nd Quarter 23.50 9.19 4.06 3.00
3rd Quarter 20.88 9.00 4.63 3.00
4th Quarter 15.00 10.00 6.13 4.19
- --------------------------------------------------------------------------------
In April 1996, the Companys Board of Directors authorized a two-for-one
stock split in the form of a 100% stock dividend distributed on June 3, 1996, to
shareholders of record on May 20, 1996. All per share and number of share data
in this annual report have been retroactively restated to reflect the stock
split, except for the Consolidated Statements of Stockholders' Equity.
Zytec has never paid cash dividends on its common stock. The Board of
Directors presently intends to retain all earnings for use in the Company's
business and does not anticipate paying cash dividends in the foreseeable
future.
27
EXHIBIT 11.1
<TABLE>
<CAPTION>
ZYTEC CORPORATION
COMPUTATION OF NET INCOME PER SHARE
Years ended December 31,
------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net income $10,481,000 $ 3,878,000 $ 3,364,000
Net income per common and common
equivalent share, primary $ 1.04 $ 0.42 $ 0.36
Net income per common and common
equivalent share, fully diluted $ 1.04 $ 0.41 $ 0.36
Primary:
Weighted average number of common
shares oustanding 8,991,650 8,560,952 8,291,612
Common equivalent shares:
Dilutive stock options and warrants,
using Modified Treasury Stock Method 1,048,421 706,832 1,032,324
----------- ----------- -----------
10,040,071 9,267,784 9,323,936
=========== =========== ===========
Fully: diluted:
Weighted average number of common
shares oustanding 8,991,650 8,560,952 8,291,612
Common equivalent shares:
Dilutive stock options and warrants,
using Modified Treasury Stock Method 1,048,421 827,928 1,032,324
----------- ----------- -----------
10,040,071 9,388,880 9,323,936
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 22
ZYTEC CORPORATION
SUBSIDIARIES AS OF FEBRUARY 28, 1997
JURISDICTION OF PERCENT
NAME OF SUBSIDIARY INCORPORATION OWNED
- ------------------ ------------- -----
<S> <C> <C>
Zytec GmbH Austria 100% by Zytec Corporation
Zytec Hungary Elektronikai Kft. Hungary 100% by Zytec GmbH
Zytec Modular Power Systems, Inc. Minnesota 100% by Zytec Corporation
Zytec FSC, Inc. Virgin Islands 100% by Zytec Corporation
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Zytec Corporation on Forms S-8 (File Nos. 33-71602 and 333-11533) of our reports
dated February 18, 1997, on our audits of the consolidated financial statements
and financial statement schedule of Zytec Corporation as of December 31, 1996
and 1995, and for the years ended December 31, 1996, 1995 and 1994, which
reports are included or incorporated by reference in this Annual Report on Form
10-K.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,535
<SECURITIES> 0
<RECEIVABLES> 26,213
<ALLOWANCES> 0
<INVENTORY> 20,776
<CURRENT-ASSETS> 58,706
<PP&E> 37,881
<DEPRECIATION> 17,896
<TOTAL-ASSETS> 83,477
<CURRENT-LIABILITIES> 27,762
<BONDS> 20,861
0
0
<COMMON> 13,271
<OTHER-SE> 19,716
<TOTAL-LIABILITY-AND-EQUITY> 83,477
<SALES> 228,168
<TOTAL-REVENUES> 229,750
<CGS> 196,121
<TOTAL-COSTS> 196,121
<OTHER-EXPENSES> 9,453
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,834
<INCOME-PRETAX> 11,812
<INCOME-TAX> 1,331
<INCOME-CONTINUING> 10,481
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,481
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
</TABLE>
