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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
COMMISSION FILE NUMBER 0-23034
ENCAD, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3672088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6059 CORNERSTONE COURT WEST
SAN DIEGO, CA 92121
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (858) 452-0882
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
(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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K.
---
Aggregate market value of the voting stock held by non-affiliates of the
registrant, computed using the closing price as reported by Nasdaq for the
Company's Common Stock on February 29, 2000: $51,279,316.*
Indicate the number of shares outstanding of the registrant's Common Stock as of
the latest practicable date:
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Outstanding at
Class February 29, 2000
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Common Stock, $.001 par value 11,785,237
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement (the "Proxy Statement")
to be filed with the Commission pursuant to Regulation 14A in connection with
the 2000 Annual Meeting are incorporated herein by reference into Part III of
this Report.
Certain Exhibits filed with the Registrant's prior registration statements
and Forms 10-K and 10-Q are incorporated herein by reference into Part IV of
this Report.
- ---------------------
* Excludes 3,819,518 shares of Common Stock held by executive officers,
directors and stockholders whose ownership exceeds 5% of the Common Stock
outstanding at February 29, 2000. Exclusion of such shares should not be
construed to indicate that any such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the Registrant or that such person is controlled by or under common control
with the Registrant.
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ENCAD, INC
FORM 10-K
TABLE OF CONTENTS
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PART I
ITEM 1: BUSINESS................................................................................1
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 REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................................................14
ITEM 6: SELECTED FINANCIAL DATA................................................................15
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................................16
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................................................19
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................20
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................................................20
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY........................................20
ITEM 11: EXECUTIVE COMPENSATION.................................................................20
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.........................................................................20
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................................20
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K............................................................................20
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................F-1
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PART I
ITEM 1: BUSINESS
THE DISCUSSION OF OUR BUSINESS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K MAY
CONTAIN CERTAIN PROJECTIONS, ESTIMATES AND OTHER FORWARD-LOOKING STATEMENTS THAT
INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW AT
"RISKS AND UNCERTAINTIES." WHILE THIS OUTLOOK REPRESENTS OUR CURRENT JUDGMENT ON
THE FUTURE DIRECTION OF THE BUSINESS, SUCH RISKS AND UNCERTAINTIES COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FUTURE PERFORMANCE SUGGESTED BELOW.
WE UNDERTAKE NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES ARISING
AFTER THE DATE OF THIS ANNUAL REPORT.
NovaJet and CADJET are registered trademarks of ENCAD. Other product names are
the trademarks or registered trademarks of their manufacturers.
GENERAL
We design, develop, manufacture and market wide-format (up to 60"), color
inkjet printer systems designed to increase productivity in computer
applications requiring quality printed output. Our current printer product line
consists of the CADJET-Registered Trademark-, Croma24-TM-, NovaJet-Registered
Trademark-, NovaJet PROe, NovaJet PRO600e, 1500 TX-TM-, and the recently
introduced NovaJet 700/630/500 series. Typical uses for these printers and their
related accessories and supplies are in:
- graphic arts production, also known as GAP, such as signage,
point-of-sale retail, also known as POS, digital photo imaging,
three-dimensional renderings and presentation graphics;
- computer-aided design, also known as CAD, used by architects,
engineers and construction designers;
- geographic information systems, also known as GIS, such as surveying
and mapping; and
- textiles, such as sampling, personalization and short run
manufacturing.
To support our wide-format inkjet printers, we offer a variety of
accessories, software and supplies, including specialty ink and media. The
market for wide-format, color inkjet printers, supplies, software and
accessories is relatively new and is still developing as a result of
technological advancements in performance and quality and continuing
improvements in price/performance ratios. We believe these advancements will
make quality wide-format inkjet output more affordable, allowing our products to
be more widely used in our existing markets, as well as addressing potential new
market applications.
MARKET
The market for wide-format, color inkjet printers emerged in the early
1990s as a result of the rapid growth in the use of high-powered personal
computers by a wide variety of technical professionals. More recently, graphic
arts professionals have begun to take advantage of the improved performance and
cost features associated with wide-format inkjet printers as a result of
expanded use of sophisticated graphics interface software programs. The market
for wide-format, color inkjet printers, accessories, and supplies, such as inks,
ink cartridges and print media, currently consists of four primary categories:
GAP, CAD, GIS and textiles.
Users in the GAP category include graphic artists, print shops, photo-labs,
sign shops and service bureaus. Applications in the GAP category include backlit
and other signs, point-of-sale retail advertising, posters, pre-press proofing,
consisting of proofs or other quick output to demonstrate concepts for
advertising or graphics layouts, and digital photo imaging. We are a leader in
this category. Our product lines are particularly well-suited to the graphic
arts category since they are capable of producing a full range of outputs, from
single line monochrome to full color, photorealistic images. Graphic arts users
require output in three distinct areas of the graphic arts and design process,
all of which require performance balanced by low-cost, quickly-produced output.
In the pre-press area, graphic arts users require proofs or other quick output
to demonstrate concepts for advertising or graphics layouts. Pre-press output
involves any output where form, shape or color is emphasized. In the quick print
area, graphic arts users include print shops, service bureaus and corporate
graphic arts departments that produce signs or posters. Quick print output
includes backlit and wall-mount signs and point-of-sale displays. In the digital
photo category, digitized photo
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output is used when photographic images are manipulated. Users include photo
labs, service bureaus and corporate graphic arts departments that produce
high-resolution digitized photographs.
Within the GAP category is the POS retail market, a sub-segment of the
Print-for-Pay category, where the end user desires a printing system that is
simple to use, convenient, has fast output and excellent print quality. POS
systems are usually used by national brand distributors or manufacturers wanting
to control their brand image centrally, while allowing their retailers localized
professional looking signage that sells. The NovaJet product line provides a
convenient and quick way to produce advertising signs or art for product
promotions for a fraction of the cost and time of traditional techniques.
The CAD category includes architectural, engineering and construction
design users. This is a diverse group that uses technical graphics applications
to automate the design process and includes architects, mechanical engineers,
electrical engineers and users involved in many aspects of building design and
construction. Historically, output for the CAD category consisted mostly of
two-dimensional monochrome line drawings. With the introduction of wide-format
inkjet printers, CAD users are now able to create full-color and
three-dimensional output. CAD and other design users often require spot color
and speed in their output and look for productivity enhancement in producing the
output. The NovaJet product line offers a full range of color outputs and our
CADJET product line offers a CAD user spot color in addition to excellent line
quality.
GIS users are a more specialized group that uses technical graphics
applications similar to those used in the CAD category, primarily for mapping.
GIS users include civil engineers, mining engineers and geologists working for
government agencies, utilities and natural resource companies. GIS involves a
distinct use of CAD databases to manage, analyze and present data in a
three-dimensional "mapping" format. Generally, these users require more color
than CAD users since their output involves the use of color fills and varied
fonts for richer presentations. This category, although smaller than the other
markets we serve, represents opportunities for our product lines since these
applications require, in some instances, both three-dimensional renderings and
color fills to differentiate acreage, objects and topographical features.
With the 1500 TX Digital Textile System-TM-, textile designers are able to
print their designs directly to fabric, make quick changes and have the fabric
cut and sewn into a sample immediately. This provides the benefit of significant
time and cost savings, as well as in-house control of proprietary designs.
Specialty inks and fabric treatments simplify the post-processing required after
printing and make the inks washable. Customers who desire to reduce inventory
and risk and response time from design to delivery should favor this system. The
system would also be useful to users who customize their output to the image and
programs of their individual customers.
PRINTING TECHNOLOGIES
There are a number of printing technologies, including thermal inkjet,
electrostatic, thermal, and piezo inkjet, that allow users to produce
wide-format output. Each of these technologies has specific qualities that can
be critical to any given application, including resolution, speed, accuracy,
color fill capability, the ability to render a three-dimensional image free of
banding or striping, reliability and cost.
A combination of characteristics has made thermal inkjet the fastest
growing technology in the wide-format printer market over the past decade. These
characteristics include relatively low cost, high speed and the ability to print
high-quality color images. Thermal inkjet printers form images, lines and other
characters by placing very small dots of heated ink as the print head moves
horizontally, called a raster scan, while the media is scrolled vertically.
Because thermal inkjet print heads move above the paper and never actually make
contact with the paper, there is less mechanical wear and tear than experienced
by technologies such as pen plotters which move across the paper. Thermal inkjet
printers can print on a wide variety of media.
Electrostatic printers operate by creating a dot pattern of electric
charges on special paper or other media. The colors are attracted to the media
as it passes across the color fountains. Although this technology offers some
advantages to users requiring enhanced color, color fills and high-speed
characteristics, it is generally more expensive than inkjet printers.
Electrostatic printers are considered production machines and typically used for
larger runs. The current market for this technology is small in size.
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Thermal transfer machines use wax- or resin-coated ribbons instead of inks
and generally require special media to take advantage of the thermal print head.
Thermal printers cost considerably more than inkjet printers.
Piezo inkjet technology forces small droplets of ink on to the media
through the use of a crystal that contracts the walls of the ink-holding chamber
when electricity is applied. As a result, this technology could yield
potentially faster printer performance and easier compatibility with pigmented
inks. Industry analysts predict that there is likely to be substantial growth in
this sector as the technology matures.
Other technologies that can be adapted to wide-format use include light
emitting diode, photographic output, electrophotographic output and dot matrix
printers. Each of these other technologies has disadvantages for the markets we
serve, including relatively poor resolution or high costs when compared to
inkjet technology.
OUR PRODUCTS
We have designed a variety of wide-format hard copy peripherals, including
color inkjet printers and pen plotters. Our product families include:
- the recently introduced CADJET 3D, the third generation of the CADJET
product line, the first of which was introduced in November 1994;
- four series of the NovaJet product line, first introduced in October
1991, and most recently, the NovaJet 700/630/500 series;
- the NovaXsell System;
- the Croma24; and
- the Digital Textile System.
All of our products support at least one, and typically several, emulation
graphics languages and interfaces, including the industry standard,
HP-GL-Registered Trademark-, HP-GL/2-Registered Trademark-, and
HP-RTL-Registered Trademark-, to provide compatibility and utility for the end
user. In addition, our products allow users to print in a variety of sizes from
standard small-format to wide-format. Our automatic media sensing feature also
permits our products to accommodate some special sizes. Our products have an
easy-to-operate keyboard and display, with drop-down menus to set printer
parameters and stored pre-set configurations. We currently offer the following
products in our product families.
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PRODUCT FAMILY/ DATE
PRODUCT NAME DESCRIPTION CAPABILITIES TARGETED CUSTOMERS INTRODUCED
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CADJET 2 Designed to give users low Print resolution of CAD users, creative June 1997
cost, advanced inkjet 300 x 300 dpi (dots professionals or
performance, available in per inch), 600x600 first-time wide-format
24" or 36" wide models. dpi is addressable users.
through ADI driver.
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CADJET 3D Designed from NovaJet Color print Technical designer/ March 2000
technology, using resolution of 300x600 architect in CAD and
Micro-burst(TM)inkjet dpi, 210 sfph GIS markets.
technology. Available in 36" (square feet per
model. hour) in supercharge
mode.
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PRODUCT FAMILY/ DATE
PRODUCT NAME DESCRIPTION CAPABILITIES TARGETED CUSTOMERS INTRODUCED
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NovaJet Family/ Graphics-oriented printer Print resolution of Sophisticated February 1996
NovaJet 4 engineered for 300x300 dpi. mid-range and high-end
high-performance output and pen plotter and
exceptional graphics thermal printer GAP
quality, available in 24" users, as well as
and 36" wide models. electrostatic printer
GAP users.
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NovaJet PRO Series/ PRO series designed for the Print resolution of Sophisticated November 1995
NovaJet PRO and professional graphics artist 300x300 dpi. mid-range and high-end
NovaJet PRO 50 and other short run printer GAP users, as
production-oriented users, well as electrostatic
PRO available in 36" wide printer GAP users and
model and PRO 50 in 50" in the graphic arts
model. market.
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NovaJet PROe Series Designed for print-for-pay Print resolution of High-volume producers May 1997
GAP users that require a 300x300 dpi. of large
high quality, fast and photo-realistic
productive printer, prints, murals, and
available in both 42" and point-of-sale displays.
60" wide models.
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NovaJet PRO 600e Include all features found Print resolution of GAP users who May 1998
Series on PROe series plus the 300x300 dpi or specialize in photo
ability to switch between 600x600 dpi. enlargements,
300 dpi and 600 dpi, signmaking and
available in both 42" and reproduction
60" wide models. enlargements
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NovaJet Family/ Fastest printer at the Print resolution of Sophisticated June 1999
NovaJet 500 lowest possible cost, 300x300 dpi, 97 sfph high-range and
professional's choice for in normal mode. mid-range pen plotter
high-production printing and and thermal printer
lower dpi quality, available GAP users.
in 42" and 60" wide models.
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NovaJet Family/ Designed for digital color Print resolution of Sophisticated June 1999
NovaJet 630 images and high productivity 600x600 dpi, 62 sfph high-range pen plotter
output, available in 42" and in normal mode. and thermal printer
60" wide models. GAP users who need
speedy output.
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NovaJet Family/ High-end printer of NovaJet Print resolution of Sophisticated June 1999
NovaJet 700 family, professional's 600x600 dpi, 75 sfph high-range and
choice for high-production in normal mode. high-end pen plotter
printing, available in 42" and thermal printer
and 60" wide models. GAP users.
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NovaXsell System/ Easy to use signage system, Print resolution of POS users who desire October 1999
NovaJet 505 produces POS signage quickly 300x300 dpi. to have a complete
and efficiently to meet system for their
signage requirements, signage needs.
utilizes Posterizer
software, available in 42"
and 60" wide models.
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Croma24 Industry's first Print resolution of CAD users, creative June 1997
cost-effective color inkjet 300x300 dpi, 600x600 professionals or
printer which produces 24" dpi is addressable first-time wide-format
photo-realistic images. through ADI driver. users.
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PRODUCT FAMILY/ DATE
PRODUCT NAME DESCRIPTION CAPABILITIES TARGETED CUSTOMERS INTRODUCED
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Digital Textile Alternative to traditional 300x300 dpi Textile designers. March 1998
System/ screen printing, targeted to
1500 TX textile designers who
require a faster, more
productive way to design and
handle sampling needs,
available in 60" wide model.
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Inventory of Croma24 was fully reserved at the end of 1998. 1999 sales were
made primarily through our Internet site and in volume quantities through our
existing distributors.
In the second quarter of 1999 we concluded that we were too early to the
textile market and that our product, although excellent as currently designed,
was not fully responsive to the needs of end-users. While we intend to stay in
the market with our current product offering and develop new products to fit the
emerging textile market opportunity, we have directed our limited resources to
support our other end-users and partners.
ENCAD QUALITY IMAGING SUPPLIES-TM-
Our line of supplies, launched in 1995, provides a comprehensive output
system for our printer owners. Because they are designed to ensure the highest
quality output possible from our printers, these supplies are branded ENCAD
Quality Imaging Supplies. Sales of supplies accounted for 32%, 36% and 22% of
net sales in 1999, 1998 and 1997, respectively.
The ENCAD Quality Imaging Supplies product line consists of both outdoor
and indoor solutions. The outdoor line of products includes fade-resistant
pigmented inks and a broad line of water-resistant and durable banner and sign
materials. Because outdoor solutions are new to the inkjet printing market, we
provide a guarantee for most of our outdoor products. The outdoor line of
products allows us to better compete in the sign-making market and also provides
new applications for traditional printer owners.
The indoor line of products includes specially formulated dye-based inks
optimized for our printers and our custom ink cartridges. In order to fulfill
the broad needs of our marketplace, we provide three ink options:
- - Graphic Arts Ink, for colors beyond the traditional color palette,
which is usually used for posters and photo-realistic images;
- - Graphic Standard Ink, for colors that mirror press-quality output,
which is more appropriate for color proofing; and
- - Graphic Extend Ink, for ultra violet protection, which is used in
indoor applications that require special fading resistance.
Our broad range of Quality Imaging Supplies media feature a proprietary
inkjet coating that is optimized for use with our inks. The coatings control ink
absorption for images that are vibrantly colorful and high in print quality. The
media line consists of numerous media options, from photo-based papers to
adhesive-backed vinyl, two types of canvas and three types of film. All Quality
Imaging Supplies media are made with a recyclable, water-based coating.
SOFTWARE AND ACCESSORIES
Our print utilities and drivers provide the user with the power to control
color output by providing several screening options and print quality modes,
user-selectable color device tables, gamma correction and the ability to set ink
drying times. The ENCAD FastPort 3400X Micro Print Server allows a printer or
plotter to be available to users of multiple network protocols simultaneously.
In order to minimize the need for costly on-board printer memory and increase
print speed, we provide software to run on the host computer which converts the
vector output (HP-GL, HP-GL/2) of third party application programs into raster
data.
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Our products are supported by leading Raster Image Processor, or RIP,
manufacturers that allow our printers to be compatible with most hardware and
software RIPs for both Macintosh and PC platforms. These RIPs support a wide
variety of applications from photo-realistic image reproductions to signage,
poster making and CAD/GIS. In addition, we co-brand a Fiery-Registered
Trademark- X2-W hardware RIP from Electronics for Imaging that is exclusively
designed for optimum performance with the latest NovaJet family of printers.
THIRD PARTY INTERFACES
Third party PostScript-Registered Trademark- hardware and software
developers have created products that interface with our NovaJet product line.
These products allow the various NovaJet products to output near photo-realistic
color images in an enhanced mode. In addition, numerous software packages, such
as AutoCAD-Registered Trademark-, Adobe Photoshop-Registered Trademark-,
VersaCAD-Registered Trademark-, Adobe Print Shop-Registered Trademark-, Adobe
Illustrator-Registered Trademark-, Quark XPress-Registered Trademark- and
ARC/INFO-Registered Trademark-, are used with our products in
Macintosh-Registered Trademark-, DOS-Registered Trademark- and
Windows-Registered Trademark- platforms.
RESEARCH, PRODUCT DEVELOPMENT AND ENGINEERING
Since our founding in 1981, we have been an industry leader in delivering
innovation to the wide-format printing marketplace. We have focused our
research, product development and engineering efforts on printers based on
thermal inkjet printing technology. Inkjet printers have been the fastest
growing segment of the wide-format printing market due to the ability to form
high quality color images at relatively low cost and high performance. We
pioneered wide-format inkjet photo realistic printing, extended ink delivery
systems and lightfast inks for outdoor signage.
We believe timely development and introduction of new products which
satisfy customer requirements are critical to our success. We strive to
anticipate and respond to user demands in selected wide-format printing
markets and to provide solutions with distinct competitive advantages for
those customers. We focus our research and development efforts on solutions
emphasizing superior performance, outstanding image quality, simplicity of
design, system productivity and low total cost of ownership for the end user.
We develop wide-format inkjet printers, inks, media, RIPs, and software.
We maintain a staff with expertise in design of mechanical systems,
electronics, control systems, firmware, software, chemistry, physics, fluid
dynamics and color science, which has enabled us to develop a significant patent
portfolio in inkjet printing. We augment our development staff through strategic
partnerships with industry leaders for the development of components and
subsystems. In some cases, we elect to outsource the development of complete
products to these partners. Additionally, we employ industry consultants and
contract engineering firms when specific expertise or additional resources are
required.
Research and development expenses were $12,078,000, $10,894,000 and
$10,544,000 in 1999, 1998 and 1997, respectively, which represent approximately
10%, 10% and 7% of net sales in those respective periods.
MANUFACTURING AND SUPPLIERS
Our printer manufacturing operations consist of subassembly, final assembly
and testing, quality assurance, packaging and shipping. We contract with various
outside vendors for printed circuit board fabrication and assembly and for
fabrication of metal and plastic parts. We then perform the final assembly of
our printer products in our San Diego facility. Most materials for printer
manufacturing operations are available locally in Southern California from
multiple vendors, and the majority is produced in the United States.
For our supplies business, we partner with large multi-national companies
for the acquisition of inks and media. Inks are acquired from three sources and
the various forms of media from multiple sources. Assembly of refill and
accessory ink kits are outsourced prior to distribution.
Selected components used in our products are available only from single
sources. Although we primarily buy components under purchase orders and do not
have long-term agreements with most of our suppliers, we anticipate that our
suppliers will be able to continue to satisfy our requirements. Although
alternative suppliers are readily available for most of these components, for
some components the process of qualifying replacement suppliers, replacing
existing tooling, or ordering and receiving replacement components could take up
to six additional months.
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Any difficulty in receiving components on time could have a material adverse
effect on our financial condition and results of operations.
Any significant increase in component prices or decrease in component
availability could also have a material adverse effect on our financial
condition and results of operations. Certain key components of our products are
supplied indirectly by our principal competitor, Hewlett-Packard Company, and
the inkjet cartridge, used in some of our older generation products, are
purchased from Hewlett-Packard resellers. We believe that Hewlett-Packard
supplies these components to many other companies.
Because we place strong emphasis on product quality and customer
satisfaction, we design our quality into products, components and the
manufacturing processes. As a result, we have developed quality control programs
with our suppliers in our product development and manufacturing operations.
Suppliers are encouraged to participate in new product designs. Many of our
suppliers' manufacturing capabilities are statistically evaluated to allow for
certification and direct shipment to the production floor. We use a
"Just-in-Time" program for delivery of some raw materials and subassemblies to
manufacturing to minimize these types of inventories. We also use a material
requirements planning system that is intended to aid in making "Just-in-Time"
decisions. We maintain raw materials which include printer parts for
manufacturing and service, ink and media.
MARKETING, SALES AND DISTRIBUTION
We market and sell our products throughout the world primarily through
specialty distributors, value-added resellers, also known as VARs, dealers and
Original Equipment Manufacturers, also known as OEMs.
DISTRIBUTORS, VARS AND DEALERS
In 2000, we will begin to move from a two-tier to a single-tier
distribution network. This strategy will initially only affect our North
American distribution and shift some of the sales from distributors to VARs. As
a result, the Company will sell its products directly to a network of
approximately 70 major VARs. This model will allow us to increase our knowledge
of our customers and their channel inventory and improve end-user customer
satisfaction. As VARs normally do not carry inventory, and existing distributor
inventory needs to sell through the distribution channel, there may be a
temporary negative impact on sales. Although VARs are, in general, not as well
financed as distributors, any collection risk we may have will be spread over
more accounts. Our total distribution network of approximately 300 active
domestic dealers remains a critical channel to deliver our products to
end-users. In addition to our sales and marketing headquarters located in San
Diego, California, we have field salespersons residing in Illinois, Texas, New
York, California, and Canada. These salespersons work closely with our regional
and local VARs and dealers.
Internationally, we generally utilize one major distributor in each market.
Over 50 international distributors sell to dealers, specialized systems
integrators and VARs. Our international distributor network provides us with a
presence in Canada, Mexico, Europe, the Pacific Rim, the Middle East, Central
and South America, South Africa, China and India. We maintain Pacific Rim sales
offices in Hong Kong and Beijing. We also have subsidiaries located in France,
Germany and England to which we pay commissions for sales to customers in
countries that they serve. Their revenues, operating profits and identifiable
assets are not material. Our dependence on international sales subjects us to
the risks associated with conducting business internationally, including
currency fluctuations, to the extent they affect local office expenses and
product pricing in local markets, general international market conditions,
export and import controls, and other governmental regulations.
All export sales accounted for the percentages of net sales as follows:
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1999 1998 1997
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Europe, Middle East, Africa 40% 39% 32%
Americas, excluding United States 6 9 8
Asia Pacific 19 15 19
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Total 65% 63% 59%
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Our agreements with our worldwide distributors and VARs generally grant
each distributor and VAR the non-exclusive right to distribute our products in
its market. Our international distribution agreement provides for payment net 45
days after shipment, by irrevocable letter of credit or by prepayment by wire
transfer for international distributors, unless otherwise agreed to by us. In
the case of domestic distributors, payment generally is net 30 days upon credit
approval, unless otherwise agreed to by us. Any outstanding amounts remain owing
subsequent to termination of the agreement. We provide price protection to some
of our distributors so that if we reduce the price of our products, a
distributor is entitled to a credit for the difference between the reduced price
and the price it previously paid for products purchased within a specified time
period, and which remain in inventory at the time of the price reduction. As a
result, price reductions of our products could have a material adverse effect on
results of operations, depending on distributor inventory levels at the time of
such price reductions.
We support the marketing and sales efforts of our worldwide distributors,
VARs and dealers through participation at worldwide computer industry trade
shows as well as specialized trade shows targeted at specific applications for
our products. We believe that we maintain good relationships with our worldwide
distributors, VARs and dealers. Domestically, we have developed an authorized
dealer network through an active dealer-support campaign consisting of
advertising, lead referrals, product literature, promotional pricing, training
and telephone support. Internationally, we assist our distributors in the larger
markets through active advertising and trade show participation. We offer our
distributors a cooperative advertising program that partially reimburses them
for expenses spent in advertising and promoting our products. Such
reimbursements are determined based upon the distributor's sales levels.
In 1999 one customer, Tekgraf, Inc., accounted for 13% of net sales. In
1998 and 1997, no one customer accounted for more than 10% of net sales.
OEMS
To expand our distribution channels, we have entered into several OEM
arrangements that allow us to better address specific market applications or
geographical areas. Sales from OEM arrangements accounted for 18%, 18% and 26%
of net sales in 1999, 1998 and 1997, respectively. We annually assess the
success of each individual arrangement and believe that, in the aggregate, they
will continue to represent a substantial portion of our revenue. We may not be
able to retain these existing arrangements or to obtain additional ones. If we
are not able to acquire additional OEM partners, the loss of existing OEM
partners could adversely affect our financial condition and results of
operations.
E-COMMERCE
Another emerging distribution strategy in 2000 is the development and
implementation of our Internet site - encad-direct.com. The site's content will
include information regarding our products; business solutions; technical
solutions and answers to frequently asked questions. The web site will also
include an online community specifically for our end-users to share moneymaking
ideas, discuss potential product improvements, dialog about trends in the
industry, or communicate directly with our engineering, sales, and marketing
team. A location on the site will be reserved for our resellers to meet and
share information. By facilitating an online community for our end-users and
resellers, we believe we will develop stronger long-term relationships with
them. Initially, the end-user portion of the web site will be restricted to
users located in the United States and will sell simple to use solutions. The
initial products offered will include a Macintosh solution for the Croma24 and
NovaJet 4, and will be followed by CAD solutions and ENCAD ink and media. The
majority of content and community areas of the web site are already established
and the remaining sections will be launched in stages in 2000 to ensure proper
execution.
CUSTOMER SUPPORT
We consider ongoing support of our products to be an essential element of
our business. We have established a customer service and support organization
which provides technical support and printer repair to our distributors, VARs,
dealers and end-users. Customers have telephone access to technical specialists
who respond to printer, software, supplies and applications questions. In
addition, we have established Internet access on which we post notes and
software updates to provide on-line support and solutions for our customers. We
provide a standard one-year warranty against defects in materials and
workmanship in our products. We also offer third party, on-site warranty for
selected products in the United States and selected European countries. A
maintenance agreement for most products
8
<PAGE>
sold in the U.S. is also available at additional cost. Our OEM suppliers do
their own warranty service. Any product sold domestically that needs to be
repaired may be returned directly to us for repair. International
distributors repair our products with us supplying the parts to them
directly. Since a large number of our products are the sole color inkjet
printers in a facility, we offer next day on-site repair for domestic
purchases during the warranty period. For selected products, during the
warranty period, the domestic end user can return the print head to us for
service and, in exchange, we will provide a replacement head within 24 to 48
hours. Warranty expense has constituted less than 3% of net sales on an
annual basis, and, to date, has not had a material adverse effect on our
financial condition or results of operations.
COMPETITION
In addition to the direct competition from products using inkjet
technology, our products face competition from other technologies that are
offered by several companies. The competition to sell ink, media and software
products to the customer is also intense. While we believe that we compete
successfully against these other technologies and products, they may compete
favorably for specified applications. We may not be able to compete successfully
in the future and competitive pressures may have a material adverse effect on
our financial condition and results of operations.
We compete in the wide-format market mainly on the basis of performance and
price. Price competition became intensive during 1998 and remained so in 1999.
We expect that competition will accelerate in the future. Historically, we have
reduced prices on older generation products upon introduction of the newer
generation models and in response to other competitive pressures. Our most
recent price reduction took effect in June 1999, and additional price reductions
will occur in the future. Price reductions will affect gross margin, and may
adversely affect our ability to generate positive financial results.
PROPRIETARY RIGHTS
We rely on a combination of trade secret, copyright, trademark and patent
protection, as well as confidentiality and non-disclosure agreements, in order
to protect our proprietary rights. We have pursued, and intend to continue to
pursue, patent protection for inventions we consider important. We believe our
success will also continue to be dependent upon our reputation for unique
technology, product innovation, affordability, marketing ability and
responsiveness to customers' needs. We currently hold 16 patents related to
inkjet technology and design. In 1999, we filed 9 patent applications covering
our imaging technology. We may not be successful in protecting our proprietary
technology. Our proprietary rights may not preclude competitors from developing
products or technology equivalent or superior to ours.
From time to time, various competitors, including Hewlett-Packard, have
asserted patent rights relevant to our business. We expect that this will
continue. We carefully evaluate each assertion relating to our products. If our
competitors are successful in establishing that asserted rights have been
violated, we could be forced to obtain a license to market or be prohibited from
marketing the products that incorporate such rights. We could also incur
substantial costs to redesign our products or to defend any legal action taken
against us. If our products should be found to infringe upon the intellectual
property rights of others, we could be enjoined from further infringement and be
liable for any damages. The measures adopted by us for the protection of our
intellectual property may not be adequate to protect our interests. In addition,
our competitors may independently develop technologies that are substantially
equivalent or superior to our technologies. For additional discussion concerning
ongoing litigation related to our intellectual property, please see "Item 3--
Legal Proceedings" which follows.
EMPLOYEES
As of February 29, 2000, we employed approximately 431 persons, including
117 in sales, marketing and related activities, 153 in manufacturing and
operations, 65 in research, product development and engineering, 39 in technical
support and service, and 57 in management, administration and finance. Our
success is highly dependent on our ability to attract and retain qualified
employees. Competition for employees is intense in our industry and our locale.
None of our employees is represented by a labor union or is the subject of a
collective bargaining agreement. We have never experienced a work stoppage and
believe that our employee relations are good.
9
<PAGE>
RISKS AND UNCERTAINTIES
OUR QUARTERLY OPERATING RESULTS CAN FLUCTUATE SIGNIFICANTLY.
Our quarterly operating results can fluctuate significantly depending on a
number of factors. Any one of these factors could have a material adverse effect
on our financial condition or results of operations. Factors affecting net sales
include:
- the timing of product announcements and subsequent introductions of
products by us and our competitors;
- timing of shipments of our products, including the mix of product
families shipped;
- market acceptance of new products;
- seasonality;
- changes in prices by us and our competitors; and
- price protection for price reductions offered to customers.
In addition, the availability and cost of components, the timing of
expenditures for staffing and related support costs, marketing programs and
research and development can have an effect on our operating results. Of course,
changes in general economic conditions and currency fluctuations can also affect
quarterly performance. We may experience significant quarterly fluctuations in
net sales as well as operating expenses with respect to future new product
introductions. Our component purchases, production and spending levels are based
upon forecast demand for our products. Accordingly, any inaccuracy in
forecasting could adversely affect our financial condition and results of
operations. Demand for our products could be adversely affected by a slowdown in
the overall demand for computer systems, printer products or digitally printed
images. Quarterly results are not necessarily indicative of future performance
for any particular period.
THE MARKETS FOR OUR PRODUCTS ARE HIGHLY COMPETITIVE AND RAPIDLY CHANGING
AND WE MAY NOT BE SUCCESSFUL IN COMPETING IN THIS MARKET.
The markets for our printers and supplies are highly competitive and
rapidly changing. Several new competitors have entered the market. Our principal
competitor is Hewlett-Packard, which dominates the CAD category of the
wide-format inkjet markets and is our principal competition in the graphic arts
category. In addition to direct competition in inkjet printers and related
supplies, our products also face competition from other technologies in the
wide-format market. The competition to sell ink, media and software products to
the customer is also intense. Some of our current and prospective competitors,
particularly Hewlett-Packard, have significantly greater financial, technical,
manufacturing and marketing resources than us. Our ability to compete in the
wide-format inkjet market depends on a number of factors within and outside our
control, including:
- the success and timing of product introductions by us and our
competitors;
- selling prices;
- product performance;
- product distribution;
- marketing ability; and
- customer support.
THE MARKETS IN WHICH WE COMPETE ARE CHARACTERIZED BY SHORT PRODUCT LIFE
CYCLES AND REDUCTIONS IN UNIT SELLING PRICES.
The markets for wide-format printers and related supplies are characterized
by rapidly evolving technology, frequent new product introductions and
significant price competition. Consequently, short product life cycles and
reductions in unit selling prices due to competitive pressures over the life of
a product are common. Our financial condition and results of operations could be
adversely affected if we are unable to develop and manufacture new, competitive
products in a timely manner. Our future success will depend on our ability to
develop and manufacture technologically competitive products, price them
competitively, and achieve cost reductions for our existing products. Advances
in technology will require increased investment to maintain our market position.
10
<PAGE>
THE GROWTH OF OUR BUSINESS WILL REQUIRE SUBSTANTIAL CAPITAL RESOURCES THAT
MAY NOT BE AVAILABLE WHEN NEEDED.
The growth of our business will require the commitment of substantial
capital resources. If funds are not available from operations, we will need
additional funds. Such additional funds may not be available when required on
terms acceptable to us. Insufficient funds may require us to delay, reduce or
eliminate some or all of our planned activities.
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO ATTRACT AND RETAIN QUALIFIED
EMPLOYEES AND CONSULTANTS.
Our success is dependent, in part, on our ability to attract and retain
qualified management and technical employees. Competition for such personnel is
intensifying. The inability to attract additional key employees or the loss of
key employees could adversely affect our ability to execute our business
strategy. We do not have employment agreements with members of senior
management. We may not be able to retain our key personnel. We rely heavily on
industry consultants and other specialists to assist and influence decisions,
keep abreast of technological and industry advances, and assist in other
processes.
MANY OF OUR COMPONENTS ARE SUPPLIED BY SINGLE-SOURCE SUPPLIERS THAT MAY NOT
BE ABLE TO BE REPLACED WITHOUT DISRUPTING OUR OPERATIONS.
Selected components used in our products are only available from single
sources. We generally do not have long-term agreements with our suppliers.
Although alternate suppliers are readily available for many of these components,
for some components the process of qualifying replacement suppliers, replacing
tooling or ordering and receiving replacement components could take up to six
months and cause substantial disruption to our operations. If a supplier is
unable to meet our needs or supplies parts which we find unacceptable, we may
not be able to meet production demands. Key components of our products are
supplied indirectly by our principal competitor, Hewlett-Packard.
IF OUR COMPETITORS PROVE THAT OUR PRODUCTS VIOLATE THEIR INTELLECTUAL
PROPERTY RIGHTS, OUR BUSINESS WOULD BE ADVERSELY AFFECTED.
From time to time, various competitors, including Hewlett-Packard, have
asserted patent rights relevant to our business. We expect that this will
continue. We carefully evaluate each assertion relating to our products. If our
competitors are successful in establishing that asserted rights have been
violated, we could be prohibited from marketing the products that incorporate
such rights. We could also incur substantial costs to redesign our products or
to defend any legal action taken against us. If our products should be found to
infringe upon the intellectual property rights of others, we could be enjoined
from further infringement and be liable for any damages. The measures adopted by
us for the protection of our intellectual property may not be adequate to
protect our interests. In addition, our competitors may independently develop
technologies that are substantially equivalent or superior to our technologies.
A SIGNIFICANT PORTION OF OUR NET SALES IS DERIVED FROM SALES TO COUNTRIES
OUTSIDE THE UNITED STATES AND FACTORS OUTSIDE OUR CONTROL COULD ADVERSELY
AFFECT THOSE SALES.
For the years ended December 31, 1999 and 1998, sales outside the United
States represented approximately 65% and 63% of our net sales, respectively. We
expect export sales to continue to represent a significant portion of our sales.
All of our products sold in international markets are denominated in U.S.
dollars; therefore an increase in the value of the U.S. dollar relative to
foreign currencies could make our products less competitive in these markets.
International sales and operations may also be subject to risks such as:
- currency exchange fluctuations;
- difficulties in staffing and managing international operations;
- collecting accounts receivable;
- restrictions on the export of critical technology;
- changes in tariffs;
- trade restrictions;
- export license requirements;
- political instability; and
- the imposition of governmental controls.
11
<PAGE>
In addition, the laws of some countries do not protect our products and
intellectual property rights to the same extent as the laws of the United
States. As we continue to pursue our international business, these factors may
have an adverse effect on our net sales and, consequently, on our business.
WE ARE DEPENDENT ON OUR DISTRIBUTORS, VARS, DEALERS AND OEMS TO SELL AND
MARKET OUR PRODUCTS AND THEY MAY NOT DEVOTE SUFFICIENT RESOURCES TO THIS
TASK TO ENSURE OUR SUCCESS.
Our sales are principally made through independent distributors, VARs and
dealers, which may carry competing product lines. We believe that our future
growth and success will continue to depend in large part upon our distribution
channels. They could reduce or discontinue sales of our products, which could
have a material adverse effect on our business. They may not devote the
resources necessary to provide effective sales, service and marketing support of
our products. In addition, we are dependent upon their continued viability and
financial stability, and many of them are organizations with limited capital.
They, in turn, are substantially dependent upon general economic conditions and
other unique factors affecting the wide-format printer market.
In 2000, we will begin to move from a two-tier to a single-tier
distribution network. This strategy will initially only affect our North
American distribution and shift some of the sales from distributors to VARs. As
a result, the Company will sell its products directly to a network of
approximately 70 major VARs. This model will allow us to increase our knowledge
of our customers and their channel inventory and improve end-user customer
satisfaction. As VARs normally do not carry inventory, and existing distributor
inventory needs to sell through the distribution channel, there may be a
temporary negative impact on sales. Although VARs are, in general, not as well
financed as distributors, any collection risk we may have will be spread over
more accounts.
Actual bad debts may in the future exceed recorded allowances resulting in
a material adverse effect on our business. In order to prevent inventory
write-downs, to the extent that OEM and private label customers do not purchase
products as anticipated, we may need to convert such products to make them
salable to other customers. Such a conversion would increase product costs and
would likely result in a delay in selling such products.
MANAGEMENT OF THE GROWTH OF OUR BUSINESS MAY PLACE STRAINS ON OUR
OPERATIONS.
We have experienced growth in the past which placed, and, if continued,
will continue to place, a significant strain on our management, employees,
systems and operations. Our future operating results will depend on our ability
to continue to broaden our senior management group, attract, hire and retain
skilled employees and enhance or replace existing operational information and
financial control systems. We may encounter difficulties in successfully
integrating new personnel into the organization, and changes to our information
and financial control systems may not be effective.
AS THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE IN THE PAST AND
MAY CONTINUE TO DO SO IN THE FUTURE, AN INVESTMENT IN OUR COMMON STOCK MAY
YIELD UNCERTAIN RESULTS.
The market price of our common stock has fluctuated significantly since our
initial public offering in December 1993. We believe factors such as the
following could cause further significant volatility in the price of the common
stock:
- general stock market trends;
- adverse results of pending litigation;
- announcements of developments related to our business;
- fluctuations in our operating results;
- general conditions in the computer peripheral market or the markets we
serve;
- general economic conditions;
- shortfalls in sales or earnings from securities analysts'
expectations;
- announcements of technological innovations, new inkjet products or
enhancements by us or our competitors;
- developments in patents or other intellectual property rights; and
- developments in our relationships with our customers or suppliers.
12
<PAGE>
In addition, in recent years the stock market in general, and the market
for shares of technology stocks in particular, have experienced extreme
volatility, which have often been unrelated to the operating performance of
affected companies. The market price of the common stock may continue to
experience significant fluctuations that are unrelated to our operating
performance.
WE DO NOT PAY DIVIDENDS ON THE COMMON STOCK AND YOU WILL HAVE TO RELY ON
INCREASES IN ITS PRICE TO GET A RETURN ON YOUR INVESTMENT.
We have not paid dividends on the common stock. We currently intend to
continue this policy to retain earnings, if any, for use in our business. In
addition, our line of credit arrangement prohibits the payment of cash dividends
without prior bank approval if amounts are outstanding under such line of
credit.
OUR CHARTER DOCUMENTS AND RIGHTS PLAN MAY PREVENT A CHANGE OF CONTROL WHICH
IS IN YOUR BEST INTERESTS.
The stockholder rights plan and some of our charter provisions may
discourage transactions involving an actual or potential change in control of
your company, including transactions in which you might otherwise receive a
premium for your shares over then-current market prices. These provisions may
limit your ability to approve transactions that you deem to be in your best
interests.
ITEM 2: PROPERTIES
In January 2000, we received cash proceeds of approximately $12.0 million
for a transaction in which we sold our headquarters buildings, located in San
Diego, California, and simultaneously leased the property back for a period of
seven years. The property consists of two buildings of approximately 51,000 and
47,000 square feet and houses the principal administrative, research and
manufacturing facility. We also lease a 62,000 square foot warehouse near our
headquarters. We consider our facilities adequate for our current needs and
believe that additional space can be obtained in the future if necessary.
ITEM 3: LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the usual course of business.
In February 1998, Hewlett-Packard filed a lawsuit against us in the U.S.
District Court for the District of Idaho, alleging that some of our products
infringe two of Hewlett-Packard's patents. Hewlett-Packard filed an amended
complaint alleging infringement of a third patent and seeking monetary damages
and injunctive relief. We have filed a counter-claim, alleging that our products
do not infringe the Hewlett-Packard patents, and that the Hewlett-Packard
patents are invalid.
In November 1998, a class action lawsuit was filed against us in the U.S.
District Court for the District of Colorado, alleging antitrust violations
pertaining to our sales of a specified printer product. Class members seek
damages caused by the allegedly faulty ink, including the cost of the ink, the
cost of the third party replacement ink, and damage to printing projects caused
by the ink.
The outcomes of these lawsuits cannot be determined; however, we believe
that the claims are without merit. We intend to vigorously defend against such
claims. No amounts have been reported in the financial statements for any losses
that may result from these lawsuits.
In January 1999, we filed a lawsuit against Hewlett-Packard in the
California Superior Court for the County of San Francisco, alleging sales of
competitive products below cost and as loss leaders, in violation of the
California Unfair Trade Practices Act. We have obtained a preliminary injunction
enjoining Hewlett Packard's sale of printer products below cost. We are
currently seeking permanent injunctive relief and treble damages.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
quarter ended December 31, 1999.
13
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of common stock are traded on the Nasdaq National Market under the
symbol "ENCD." The following table presents the quarterly high and low sales
prices of the common stock as reported by Nasdaq. Such quotations represent
inter-dealer prices without retail markup, markdown or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------
HIGH LOW HIGH LOW
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $ 6.813 $ 3.50 $ 28.50 $ 12.438
Second Quarter $ 7.469 $ 5.344 $ 15.375 $ 8.688
Third Quarter $ 9.50 $ 4.50 $ 15.125 $ 6.219
Fourth Quarter $ 7.00 $ 4.438 $ 6.50 $ 1.875
---------------------------------------------------------------------------------------
</TABLE>
We had 208 stockholders of record and approximately 10,000 beneficial
stockholders as of February 29, 2000.
DIVIDEND POLICY
Please see "Item 1 - Business - Risks and Uncertainties - We do not pay
dividends on the common stock and you will have to rely on increases in its
price to get a return on your investment" for a discussion of our dividend
policy.
14
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
FIVE YEAR FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA, PERCENTAGES AND EMPLOYEES)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales ............................. $117,712 $110,055 $149,041 $ 107,437 $ 65,548
Cost of sales ......................... 66,171 80,646 78,259 56,021 36,471
Gross profit .......................... 51,541 29,409 70,782 51,416 29,077
Research and development .............. 12,078 10,894 10,544 8,794 5,578
Operating income (loss) ............... 4,184 (23,668) 26,493 19,572 11,619
Interest (expense) income ............. (203) (412) 35 183 307
Pretax income (loss) .................. 3,981 (23,081) 26,528 19,755 11,926
Tax provision ......................... 917 (4,775) 9,099 6,902 4,069
Net income (loss) ..................... 3,064 (18,306) 17,429 12,853 7,857
Earnings (loss) per share - basic .... $ 0.26 $ (1.58) $ 1.53 $ 1.15 $ 0.72
Earnings (loss) per share - diluted .. $ 0.26 $ (1.58) $ 1.45 $ 1.08 $ 0.70
MARGINS
Gross profit .......................... 44% 27% 47% 48% 44%
Research and development .............. 10 10 7 8 9
Operating income ...................... 4 (22) 18 18 18
Pretax income ......................... 3 (21) 18 18 18
Net income ............................ 3 (17) 12 12 12
YEAR END FINANCIAL POSITION
Cash and cash equivalents ............. $ 3,953 $ 586 $ 1,265 $ 6,949 $ 3,067
Short-term investments ................ -- -- -- -- 6,072
Accounts receivable - net ............. 30,546 29,603 36,800 19,762 13,029
Inventories ........................... 11,992 16,205 29,155 13,630 8,047
Property - net ........................ 14,264 15,604 14,825 10,881 3,138
Total assets .......................... 68,479 72,143 90,295 57,467 36,128
Total current liabilities ............. 15,972 23,787 24,300 14,246 7,450
Stockholders' equity .................. 51,244 47,543 64,722 43,042 28,678
Working capital ....................... 35,822 31,320 47,818 30,326 25,304
CAPITAL MANAGEMENT
Depreciation expense .................. $ 3,266 $ 4,093 $ 3,709 $ 2,726 $ 1,599
Capital expenditures .................. $ 1,926 $ 4,872 $ 7,653 $ 10,469 $ 2,513
Operating return on average assets .... 6% (29%) 36% 42% 39%
Return on average equity .............. 6% (33%) 32% 36% 32%
Current ratio ......................... 3.2 2.3 3.0 3.1 4.4
Inventory turnover .................... 4.7 3.6 3.7 5.2 5.8
Average days receivable ............... 92 109 69 56 60
HUMAN RESOURCE MANAGEMENT
Average number of employees ........... 413 427 467 355 272
Average assets per employee ........... 170 190 158 132 111
Sales per employee .................... 285 258 319 303 241
COMMON SHARES OUTSTANDING*
Weighted average shares - basic ....... 11,707 11,572 11,390 11,217 10,971
Weighted average shares - diluted ..... 11,883 11,572 12,044 11,871 11,192
Number of shares outstanding at year
end ................................... 11,780 11,636 11,501 11,300 11,100
</TABLE>
* Common shares outstanding are adjusted for the two-for-one stock split in the
form of a 100% stock dividend that occurred on May 31, 1996.
15
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(in thousands, except percentages)
This discussion may contain forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from the
results discussed in such forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Item 1 -Business - Risks and Uncertainties." We undertake no obligation to
release publicly the results of any revisions to these forward-looking
statements to reflect events or circumstances arising after the date hereof.
The following table sets forth, as a percentage of net sales, various
consolidated statements of income data for the periods indicated.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES 100% 100% 100%
COST OF SALES 56 73 53
---------------------------------------------------------------------------
GROSS PROFIT 44 27 47
MARKETING AND SELLING 20 24 16
RESEARCH AND DEVELOPMENT 10 10 7
GENERAL AND ADMINISTRATIVE 10 12 6
RESTRUCTURING CHARGES - 3 -
---------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 4 (22) 18
INTEREST INCOME - NET - - -
OTHER INCOME - 1 -
---------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 4 (21) 18
PROVISION FOR INCOME TAXES 1 (4) 6
---------------------------------------------------------------------------
NET INCOME (LOSS) 3% (17%) 12%
---------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Our 1999 net sales increased 7% over 1998 net sales. This increase was due
to strong sales generally throughout our GAP printer product line. In 1999,
supplies sales decreased 3% from 1998, and accounted for approximately 32% of
1999 net sales versus 36% in 1998. The decrease in supplies sales was due
primarily to our de-emphasis of lower margin media products. We plan to continue
to focus our supplies selling efforts on higher margin ink products. An increase
in OEM performance also contributed to the overall increase in net sales for
1999, accounting for 18% of product sales during both 1999 and 1998.
One customer accounted for 13% of product sales in 1999 while no one
customer accounted for 10% of product sales in 1998. International sales
accounted for approximately 65% and 63% of our product sales in 1999 and 1998,
respectively.
Cost of sales includes standard costs related to product shipments,
including materials, labor and overhead, inventory reserves and manufacturing
variances, and other direct or allocated costs involved in the manufacture,
delivery, support and maintenance of products. Cost of sales as a percentage of
net sales decreased to 56% in 1999, from 73% in 1998, causing a comparable
increase in gross margin percentages. During 1998 we incurred total charges of
$8,928 related to inventory and related charges for unprofitable products,
including Croma24 and several lines of media. This improvement reflects the
result of our efforts to reduce material costs, as well as the higher gross
margins we are realizing on our newly introduced products. Our future success
will depend on our ability to continue to develop and manufacture competitive
higher margin products and achieve cost reductions for our existing products.
16
<PAGE>
Marketing and selling expenses were 20% of net sales compared to 24% in
1998 and decreased by 7% in absolute dollars from 1998. This decrease was due to
decreased spending for advertising and tradeshows and an overall decrease in
spending as a result of the consolidation of our supplies and textile business
units into our core business.
1999 research and development spending grew by 11% in absolute dollars over
1998 and remained flat at 10% as a percentage of net sales. The increase in
spending was driven by new product development. We expect to continue to invest
significant resources in our strategic programs and enhancements to existing
products and consequently expect that research and development expenses will
remain at levels consistent with prior periods.
General and administrative expenses were 10% of net sales in 1999 compared
to 12% in 1998. This decrease was primarily related to a lower amount of bad
debt expense and lower staffing costs offset somewhat by higher than normal
legal expenses associated with litigation, which is more fully described in the
section of this report entitled "Legal Proceedings."
There was no significant other income in 1999. The product development and
manufacturing license agreement signed in 1998 was terminated in 1999.
Interest expense in 1999 totaled $227 compared to $437 in 1998. Decreased
borrowings under our line of credit arrangement caused the decrease in interest
expense. Interest income in 1999 totaled $25 compared to $25 in 1998.
The effective income tax rate in 1999 was 23%, compared to 21% in 1998. The
higher rate was due primarily to the recording of the deferred tax asset
allowance previously described in 1998.
The previously described elements caused 1999 net income to stand at $3,064
compared to a 1998 net loss of $18,306.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Our 1998 net sales decreased 26% from 1997 net sales. This decrease was
primarily due to decreased unit sales and average selling prices across all
printer product lines, with the exception of the NovaJet PRO 600e which was
introduced in May 1998. Also contributing to the decline was the introduction
of various rebate programs which were required to match competitive
offerings. In 1998, supplies sales increased 19% over 1997, and accounted for
approximately 36% of 1998 net sales versus 22% in 1997. A shortfall in OEM
performance also contributed to the decrease in net sales for 1998,
accounting for 18% of product sales as compared to 26% for 1997.
No one customer accounted for 10% of product sales in either 1998 or 1997.
International sales accounted for approximately 63% and 59% of our product sales
in 1998 and 1997, respectively.
Cost of sales as a percentage of net sales increased to 73% in 1998, from
53% in 1997, causing a comparable decrease in gross margin percentages. The
increase in the cost of sales was due to a large increase to inventory reserves
related to selected unprofitable media product lines, Croma24, and products
which are reaching end-of-life status, unfavorable manufacturing overhead
variances, and the write-off of various Croma24 assets. Also contributing to the
increased cost of sales percentage were the decrease in average selling price
and the implementation of rebate programs previously discussed.
Marketing and selling expenses were 24% of net sales compared to 16% in
1997 and grew by 3% in absolute dollars over 1997. Most of the increase was
related to costs associated with increased staffing, primarily in the supplies
and textiles areas, offset by decreases in advertising and trade show activity
compared to 1997.
1998 research and development spending grew by 3% in absolute dollars over
1997 and increased as a percentage of net sales from 7% in 1997 to 10% in 1998.
The increase in spending was driven by new product development.
General and administrative expenses were 12% of net sales in 1998 compared
to 6% in 1997. The 55% increase in absolute dollars was due in large part to the
increase in the allowance for doubtful accounts. We increased the allowance to
reflect the worsening accounts receivable balances of a few specific customers,
the gradual worsening
17
<PAGE>
condition of balances of some Asian and European customers, and our adoption of
a more conservative method in assessing the creditworthiness of our smaller
customers.
In the fourth quarter of 1998 we recorded a $2,934 restructuring charge to
cover the planned cost of our reorganization and related workforce reduction.
These charges reflect steps we took to consolidate business units, focus on
niche markets, and improve future growth and profitability.
Other income for the year ended December 31, 1998 included payments
received under a product development and manufacturing license agreement signed
during the first quarter of 1998. Under this agreement, we assisted in the
development of a wide-format color inkjet product targeted for markets outside
of our focus. We received additional reimbursements for engineering expenses.
Interest expense in 1998 totaled $437 compared to $140 in 1997. Increased
borrowings under our line of credit arrangement caused the increase in interest
expense. Interest income in 1998 totaled $25 compared to $175 in 1997.
The effective income tax rate in 1998 was 21%, compared to 34% in 1997. The
low rate was due primarily to the recording of the deferred tax asset allowance
in 1998 as previously described.
The previously described elements caused 1998 net loss to stand at $18,306
compared to a 1997 net income of $17,429.
LIQUIDITY AND CAPITAL RESOURCES
We fund our operations primarily through cash flow provided from
operations. As of December 31, 1999, we had cash and cash equivalents totaling
$3,953, and working capital of $35,822. In comparison, we had cash and cash
equivalents totaling $586, and working capital of $31,320 as of December 31,
1998. The increase in cash and cash equivalents was due primarily to the net
income before depreciation and amortization of $6,330, a reduction in inventory
of $4,713, and a reduction in income taxes receivable of $2,122, offset by a
$6,000 paydown of our line of credit and capital expenditures of $1,926.
We have received and anticipate we will continue to receive the majority of
our cash from collections of accounts receivable from our distributors, dealers,
VARs and OEMs. These groups in general have a history of timely payments;
however, an increasing percentage of international sales can increase accounts
receivable balances due to traditionally slower payments by international
customers.
At December 31, 1999, net accounts receivable increased by $1,483 over
1998's year end balance of $29,063. The increase was related to increased
sales in 1999 and, more directly, increased sales in the fourth quarter of
1999.
We invest our excess cash in money market accounts and have established
guidelines relative to diversification and maturities to maintain safety and
liquidity. These guidelines are periodically reviewed and modified to take
advantage of trends in yields and interest rates. We have not experienced, to
date, any losses on our short-term investments. During 1999, we invested cash in
short-term investments which generated interest income of $25.
Inventory levels decreased by $4,213 at December 31, 1999 from $16,205 at
the end of 1998. This decrease was primarily attributable to a more focused
effort to reduce finished goods inventories while maintaining required
availability to meet demand.
In the years ended December 31, 1999 and 1998, we made capital expenditures
of $1,926 and $4,872, respectively. 1998 expenditures included consulting and
other expenses related to the initial implementation of the enterprise-wide
information system software purchased in 1997. During 2000, we plan to increase
our capital expenditures, especially for computers and related systems, and
tooling relating to new products.
At December 31, 1999, the Company had available a $15,000 revolving line of
credit which expired in January 2000. The bank has agreed to extend the maturity
date of the line until April 30, 2000, at which time we plan to replace it with
another line. The line bears interest at the bank's prime rate (8.50% at
December 31, 1999) or at the Company's option, a rate based on the London
Interbank Overnight Rate (6.50% at December 31, 1999) plus 2.25%
18
<PAGE>
on outstanding balances. The Company pays a commitment fee on the unused portion
of the line. The line is secured by specified assets with a borrowing base
limited to eligible accounts receivable and inventory. In addition, the
availability of the line is subject to our maintaining financial covenants
including working capital and tangible net worth ratios. No amounts were
outstanding under the line of credit at December 31, 1999 and $6,000 was
outstanding under a prior agreement with the same bank at December 31, 1998. The
Company is currently negotiating a new line of credit with a new bank.
In January 2000, we received cash proceeds of approximately $12,000 for a
transaction in which we sold our headquarters property in San Diego, California,
and leased the property back for a period of seven years. The leaseback will be
accounted for as an operating lease. The transaction resulted in a gain of
$5,472, which will be deferred and amortized over the term of the lease.
We believe that our existing cash, cash equivalents, cash generated, and
funds available under the bank line of credit will be sufficient to satisfy our
currently anticipated working capital needs. Actual cash requirements may vary
from planned amounts, depending on the timing of the launch and extent of
acceptance of new products. There can be no assurances that future cash
requirements to fund operations will not require us to seek additional capital,
or that such additional capital will be available when required on terms
acceptable to us. To date, inflation has not had a significant effect on our
operating results.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our only financial instruments with market risk exposure are domestic
revolving line of credit borrowings, of which no amounts were outstanding at
December 31, 1999. The amount of variable rate debt fluctuates during the year
based upon our cash requirements. Maximum borrowings at any fiscal quarter end
during fiscal 1999 were $2,500,000. Based on the outstanding balance at December
31, 1999, an adverse 10% change in the interest rate underlying these borrowings
would result in no annual change in our pre-tax earnings and cash flow.
These instruments are non-trading in nature and carry interest at the
bank's prime rate (8.50% at December 31, 1999) or at our option, a rate based on
the London Interbank Overnight Rate (6.50% at December 31, 1999 plus 2.25%). Our
objective in maintaining these variable rate borrowings is the flexibility
obtained regarding early repayment without penalties and lower overall cost as
compared with fixed rate borrowings.
Foreign Currency Risk. We conduct business on a global basis and all of
our products sold in international markets are denominated in U.S. dollars.
Historically, export sales have represented a significant portion of our
sales and we expect export sale to continue to represent a significant
portion of our sales.
Our international business is subject to risks typical of an international
business, including, but not limited to:
- currency exchange fluctuations;
- difficulties in staffing and managing international operations;
- collecting accounts receivable;
- restrictions on the export of critical technology;
- changes in tariffs;
- trade restrictions;
- export license requirements;
- political instability; and
- the imposition of government controls.
Accordingly, our future results could be materially adversely impacted by
changes in these or other factors.
Our sales offices in France, Germany, the United Kingdom, China and Japan,
incur costs which are denominated in local currencies. As exchange rates vary,
these results, when translated, may vary from expectations and adversely impact
overall expected profitability. The effect of exchange rate fluctuations on our
1999 results was not material.
19
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in Part IV, Item 14(a)(1)
and (2).
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item is incorporated by reference from the
Proxy Statement in the sections entitled "Election of Directors," "Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Proxy Statement in the section entitled "Compensation of Executive Officers."
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Proxy Statement in the section entitled "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Proxy Statement in the section entitled "Certain Relationships and Related
Transactions."
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF, OR INCORPORATED BY REFERENCE
INTO, THIS ANNUAL REPORT ON FORM 10-K:
(1) FINANCIAL STATEMENTS. The following Consolidated Financial Statements
of ENCAD, Inc. and Independent Auditors' Report are included in a separate
section of this Report beginning on page F-1:
<TABLE>
<CAPTION>
Page
Description Number
----------- ------
<S> <C>
Independent Auditors' Report ................................................................F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 ................................F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 ........................................................F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997 ..................................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 ........................................................F-6
Notes to Consolidated Financial Statements ..................................................F-7
</TABLE>
20
<PAGE>
(2) FINANCIAL STATEMENT SCHEDULES. Financial statement schedules have been
omitted because they are either not required, not applicable or the information
is otherwise included.
(3) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
2.1 Agreement and Plan of Merger between ENCAD Delaware and
ENCAD California dated January 5,1998 (filed as Exhibit 2.1). (1)
3.1 Certificate of Incorporation of the Company (filed as Exhibit
3.1). (1)
3.2 Bylaws of the Company (filed as Exhibit 3.2). (1)
3.3 Certificate of Designation for Series A Junior Participating
Preferred Stock (filed as Exhibit 3.2).(2)
4.1 Rights Agreement, dated as of March 19, 1998, between the
Company and Harris Trust Company of California, which
includes the Form of Certificate of Designation for the
Series A Preferred Stock as Exhibit A, the Form of Rights
Certificate as Exhibit B and the Summary of Rights to
Purchase Shares as Exhibit C. (2)
4.2 First Amendment to the Company's Rights Plan.(3)
10.1 Form of Distributor Agreement (Domestic) (filed as Exhibit
10.14). (4)
10.2 Form of International Distributor Agreement (filed as Exhibit
10.15). (4)
10.3 Form of OEM Agreement (filed as Exhibit 10.16). (4)
+ 10.8 The Company's 1993 Stock Option/Stock Issuance Plan, as
amended (filed as Exhibit 99.1). (5)
+ 10.9 Form of Notice of Grant of Stock Option and Stock Option
Agreement (filed as Exhibit 10.34). (4)
+ 10.10 Form of Stock Issuance Agreement (filed as Exhibit 10.35). (4)
+ 10.11 1993 Employee Stock Purchase Plan, as amended (filed as
Exhibit 99.1). (6)
+ 10.12 Form of Stock Purchase Agreement (filed as Exhibit 10.37). (4)
10.13 Form of Non-Disclosure Agreement (filed as Exhibit 10.38). (4)
10.14 Form of Employee Proprietary Information Agreement (filed as
Exhibit 10.39). (4)
+ 10.15 Form of Indemnification Agreements between the Company and
each of its directors. (7)
+ 10.16 Form of Indemnification Agreements between the Company and
each of its officers. (7)
+ 10.17 Form of Severance Letter Agreements between the Company and
each of its officers. (8)
+ 10.18 Amendment to Form of Severance Letter Agreements between the
Company and David A. Purcell.
+ 10.19 Amendment to Form of Severance Letter Agreements between the
Company and each of its officers.
+ 10.20 Form of Severance Letter Agreements between the Company and
each of its vice presidents.
+ 10.21 Form of Senior Executive 1998 Annual Performance Bonus between
the Company and each of its officers.(10)
+ 10.22 Select Compensation, Non-Qualified Deferred Compensation Plan
and related documents.(8)
10.23 1997 Supplemental Stock Option Plan (filed as Exhibit 99.2).
(5)
10.24 Form of Notice of Grant of Stock Option (filed as Exhibit
99.3.) (5)
10.25 Form of Stock Option Agreement (filed as Exhibit 99.4).(5)
+ 10.26 Non-Statutory Stock Option Agreement between the Company and
Richard L. Diamond (filed as Exhibit 99.5). (5)
+ 10.27 1998 Stock Option Plan (filed as Exhibit 99.1).(9)
+ 10.28 Form of Notice of Grant of Stock Option (filed as Exhibit
99.2).(9)
+ 10.29 Form of Stock Option Agreement (filed as Exhibit 99.3).(9)
+ 10.30 Non-Statutory Stock Option Agreement between the Company and
Michael J.T. Steep (filed as Exhibit 99.5).(9)
</TABLE>
21
<PAGE>
<TABLE>
<S> <C>
+ 10.31 Form of Senior Executive 1999 Annual Performance Bonus between
the Company and each of its Officers. (10)
+ 10.32 ENCAD, Inc. 1999 Stock Option/Stock Issuance Plan (filed as
Exhibit 99.1).(11)
+ 10.33 Form of Notice of Grant of Stock Option (filed as Exhibit
99.2).(11)
+ 10.34 Form of Stock Option Agreement (filed as Exhibit 99.3). (11)
+ 10.35 Form of Addendum to Stock Option Agreement - Involuntary
Termination Following Corporate Transaction/Change in
Control (filed as Exhibit 99.4). (11)
+ 10.36 Form of Addendum to Stock Option Agreement - Limited
Stock Appreciation Right (filed as Exhibit 99.5).
(11)
+ 10.37 Form of Stock Issuance Agreement (filed as Exhibit 99.6). (11)
+ 10.38 Form of Addendum to Stock Issuance Agreement -
Involuntary Termination Following Corporate
Transaction/Change in Control (filed as Exhibit
99.7). (11)
+ 10.39 Form of Notice of Grant of Non-Employee Director - Initial
(filed as Exhibit 99.8). (11)
+ 10.40 Form of Notice of Grant of Non-Employee Director - Annual
(filed as Exhibit 99.9). (11)
+ 10.41 Form of Automatic Stock Option Agreement (filed as Exhibit
99.10). (11)
+ 10.42 Executive Life Program, Collateral Assignment Split Dollar
Agreement Between the Company and David A. Purcell, dated
December 1, 1999.
+ 10.43 Split Dollar Collateral Assignment Between the Company and
David A. Purcell, dated December 1, 1999.
10.44 Agreement for Purchase and Sale of Real Property and Escrow
Instructions, ENCAD Corporate Headquarters ("Agreement for
Purchase and Sale"), Between the Company and Birtcher
Properties, a California Corporation, dated August 5,
1999, as amended pursuant to the First Amendment to
Agreement for Purchase and Sale, dated effective as
of September 30, the Second Amendment to Agreement
for Purchase and Sale, dated October 18, 1999, the
Third Amendment to Agreement for Purchase and Sale,
dated October 26, 1999, the Fourth Amendment to
Agreement for Purchase and Sale, dated November 9,
1999, the Fifth Amendment to Agreement for Purchase
and Sale, dated November 16, 1999, the Sixth
Amendment to Agreement for Purchase and Sale, dated
November 19, 1999, and the Seventh Amendment to
Agreement for Purchase and Sale, dated November 23,
1999.
10.45 Lease Agreement dated October 15, 1999 between the Company and
Birtcher Cornerstone, L.P., a Delaware Limited Partnership.
+ 10.46 Offer of Employment Letter from the Company to Michael Liess
+ 10.47 Offer of Employment Letter from the Company to Charles Sharp
+ 10.48 Offer of Employment Letter from the Company to Guri Stark
21.1 Subsidiaries.
23.1 Independent Auditors' Consent, Deloitte & Touche LLP.
24.1 Power of Attorney. (See page 24)
27.1 Financial Data Schedule for fiscal year end 1999.
</TABLE>
-----------------------
(1) Filed as an exhibit to Registrant's Current Report on Form 8-K dated
January 5, 1998 and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Current Report on Form 8-K dated March
20, 1998 and incorporated herein by reference.
(3) Filed as exhibit to the Registrant's Registration Statement on Form
8-A12G/A (No. 000-23034) and incorporated herein by reference.
(4) Filed as exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-70220) or amendments thereto and incorporated herein by reference.
(5) Filed as exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-44923) and incorporated herein by reference.
(6) Filed as exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-45327) and incorporated herein by reference.
(7) Filed as exhibit to the Registrant's annual report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by reference.
(8) Filed as an exhibit to the Registrant's annual report on Form 10-K for the
(8) Filed as an exhibit to the Registrant's annual report on Form 10-K for
the year ended December 31, 1996, as amended, and incorporated herein by
reference.
(9) Filed as exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-59779) and incorporated herein by reference.
22
<PAGE>
(10) Filed as exhibit to the Registrant's annual report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference
(11) Filed as exhibit to Registrant's Registration Statement on Form S-8 (No.
333-85143) and incorporated herein by reference.
+ Management compensatory plan.
(b) REPORTS ON FORM 8-K
None
(c) EXHIBITS
The exhibits required by this Item are listed under Item
14(a)(3).
(d) FINANCIAL STATEMENT SCHEDULES
The consolidated financial statement schedules required by this
Item are listed under Item 14(a)(2).
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ENCAD, Inc.
By /s/ David A. Purcell
--------------------------- March 30, 2000
David A. Purcell
Chief Executive Officer
By /s/ Todd W. Schmidt
--------------------------- March 30, 2000
Todd W. Schmidt
Chief Financial Officer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears below
constitutes and appoints David A. Purcell or Thomas L. Green, his
attorney-in-fact, with power of substitution in any and all capacities, to sign
any amendments to this annual report on Form 10-K, and to file the same with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
attorney-in-fact or his substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ David A. Purcell Chairman of the Board, President March 30, 2000
- -------------------------------- and Chief Executive Officer
(David A. Purcell) (Principal Executive Officer)
/s/ Robert V. Adams Director March 30, 2000
- --------------------------------
(Robert V. Adams)
/s/ Craig S. Andrews Director March 30, 2000
- --------------------------------
(Craig S. Andrews)
/s/ Ronald J. Hall Director March 30, 2000
- --------------------------------
(Ronald J. Hall)
/s/ Howard L. Jenkins Director March 30, 2000
- --------------------------------
(Howard L. Jenkins)
/s/ Charles E. Volpe Director March 30, 2000
- --------------------------------
(Charles E. Volpe)
</TABLE>
24
<PAGE>
ENCAD, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.................................................F-2
Consolidated Balance Sheets..................................................F-3
Consolidated Statements of Operations........................................F-4
Consolidated Statements of Stockholders' Equity..............................F-5
Consolidated Statements of Cash Flows........................................F-6
Notes to Consolidated Financial Statements...................................F-7
</TABLE>
F-1
<PAGE>
ENCAD, INC.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of ENCAD, Inc.
We have audited the accompanying consolidated balance
sheets of ENCAD, Inc. and its subsidiaries (collectively, the
"Company") as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended
December 31, 1999. 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 auditing
standards generally accepted in the United States of America.
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, such consolidated financial statements
present fairly, in all material respects, the financial
position of the Company at December 31, 1999 and 1998 and the
results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in
the United States of America.
/s/ DELOITTE & TOUCHE LLP
SAN DIEGO, CALIFORNIA
FEBRUARY 18, 2000
F-2
<PAGE>
ENCAD, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,953 $ 586
Accounts receivable - net 30,546 29,063
Income taxes receivable 281 2,403
Inventories 11,992 16,205
Deferred income taxes 4,004 6,025
Prepaid expenses 1,018 825
- -------------------------------------------------------------------------------------------------------------
Total current assets 51,794 55,107
Property - net 14,264 15,604
Other assets 2,421 1,432
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 68,479 $ 72,143
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,882 $ 11,785
Accrued expenses and other liabilities 8,090 6,002
Borrowings under line of credit - 6,000
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 15,972 23,787
OTHER LIABILITIES 1,263 813
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value, 5,000 shares authorized: Series A
Junior Participating Preferred Stock - no shares issued
and outstanding - -
Common stock - $.001 par value, 60,000 shares authorized, 11,780 and
11,636 shares issued and outstanding in 1999 and 1998 respectively 12 12
Additional paid-in capital 19,341 18,704
Retained earnings 31,891 28,827
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 51,244 47,543
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 68,479 $ 72,143
=============================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
ENCAD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 117,712 $ 110,055 $ 149,041
Cost of sales 66,171 80,646 78,259
- -------------------------------------------------------------------------------------------------------------------
Gross profit 51,541 29,409 70,782
- -------------------------------------------------------------------------------------------------------------------
Marketing and selling 23,983 25,745 25,023
Research and development 12,078 10,894 10,544
General and administrative 11,296 13,504 8,722
Restructuring charges - 2,934 -
- -------------------------------------------------------------------------------------------------------------------
Operating costs and expenses 47,357 53,077 44,289
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 4,184 (23,668) 26,493
Interest (expense) income - net (203) (412) 35
Other income - 999 -
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 3,981 (23,081) 26,528
Provision for income taxes 917 (4,775) 9,099
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,064 $ (18,306) $ 17,429
===================================================================================================================
Earnings (loss) per share - basic $ 0.26 $ (1.58) $ 1.53
===================================================================================================================
Earnings (loss) per share - diluted $ 0.26 $ (1.58) $ 1.45
===================================================================================================================
Weighted average common shares outstanding - basic 11,707 11,572 11,390
===================================================================================================================
Weighted average common and common equivalent shares outstanding
- - diluted 11,883 11,572 12,044
===================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
ENCAD, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- ADDITIONAL
PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 11,300 $ 13,338 - $ 29,704 $ 43,042
Conversion to $.001 par value stock (13,326) 13,326 - -
Common stock issued under stock
option and purchase plans,
including related tax benefits 201 - 4,251 - 4,251
Net income 17,429 17,429
- -------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 11,501 12 17,577 47,133 64,722
Common stock issued under stock
option and purchase plans,
including related tax benefits 135 - 1,127 - 1,127
Net loss (18,306) (18,306)
- -------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 11,636 12 18,704 28,827 47,543
Common stock issued under stock
option and purchase plans,
including related tax benefits 144 637 - 637
Net income 3,064 3,064
- -------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 11,780 $ 12 $ 19,341 $ 31,891 $ 51,244
===================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
ENCAD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,064 $ (18,306) $ 17,429
Adjustments to reconcile net income (loss) to cash provided by (used
in) operating activities:
Depreciation and amortization 3,266 4,093 3,709
Provision for losses on accounts receivable and inventories (1,444) 12,479 198
Tax benefit from exercise of stock options 25 267 2,568
Changes in assets and liabilities:
Accounts receivable (539) 4,208 (17,546)
Income taxes receivable 2,122 (2,403) -
Inventories 4,713 4,000 (15,215)
Deferred income taxes 2,021 (1,641) 154
Prepaid expenses and other assets (1,182) 1,609 (2,159)
Accounts payable (3,903) (584) 4,125
Accrued expenses and other liabilities 2,538 (3,128) 3,762
- ------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 10,681 594 (2,975)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property (1,926) (4,872) (7,653)
- ------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (1,926) (4,872) (7,653)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and sale of stock under
employee stock purchase plan 612 860 1,683
Net borrowings under line of credit (6,000) 2,739 3,261
- ------------------------------------------------------------------------------------------------------------------------
Cash (used in) provided by financing activities (5,388) 3,599 4,944
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,367 (679) (5,684)
Cash and cash equivalents at beginning of year 586 1,265 6,949
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,953 $ 586 $ 1,265
========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash received (paid) during the year for income taxes $ 3,412 $ (1,426) $ (4,234)
Cash paid during the year for interest (250) (379) (140)
========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
ENCAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY ENCAD, Inc. and its subsidiaries (collectively, the "Company")
is engaged principally in the design, development, manufacture and sale of
wide-format color inkjet printers and related supplies for the graphic arts,
computer-aided design, geographic information systems and textile markets. The
Company markets and sells its products domestically and internationally
primarily through specialty distributors, dealers, value-added resellers and
original equipment manufacturers.
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial
statements include the accounts of the Company. All significant intercompany
balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid
investments purchased with an original maturity date of three months or less to
be cash equivalents.
INVENTORIES Inventories are stated at the lower of cost (first-in,
first-out method) or market.
PROPERTY Property is stated at cost. Depreciation and amortization are
computed using the straight-line method over the following estimated useful
lives of the property: buildings and related improvements - 40 years; computer
equipment, software, machinery, equipment, furniture and fixtures - three to
five years.
REVENUE RECOGNITION Revenue from product sales is recognized at the time of
shipment. Price protection adjustments for customers are accrued when the
anticipated price reduction is published.
WARRANTY The Company warrants its products against defects, generally for
one year. Management evaluates the Company's warranty experience and adjusts its
warranty reserves accordingly.
PRODUCT RETURNS In the event the Company terminates any of its distribution
agreements, the terminated distributor may return products purchased within a
specified timeframe for a refund. The Company has not experienced any
significant terminations or product returns to date.
INCOME TAXES The Company adopted the Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." This statement
requires that deferred income taxes be reported in the Company's financial
statements utilizing the asset and liability method. Under this method, deferred
income taxes are determined based on enacted tax rates applied to the
differences between the financial statement and tax bases of assets and
liabilities.
FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's
foreign operations are translated into U.S. dollars at the exchange rate in
effect at the balance sheet date, and revenue and expenses are translated at the
average exchange rate for the year. Translation gains or losses of the Company's
foreign subsidiaries historically have not been material. All of the Company's
worldwide sales are transacted in U.S. dollars. Gains and losses on transactions
in denominations other than the functional currency of the Company's foreign
operations, while not material in amount, are included in the results of
operations. The Company has not entered into foreign exchange transactions to
hedge certain balance sheet exposures and intercompany balances against
movements in foreign exchange rates as these balances have historically not been
material.
CONCENTRATION OF CREDIT RISK The Company sells its products primarily to
customers in the United States, Europe and Asia. The Company maintains a reserve
for potential credit losses and such actual losses, to date, have been minimal.
To date, the Company has not recorded any losses on its cash accounts.
F-7
<PAGE>
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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
ACCOUNTING FOR STOCK-BASED COMPENSATION SFAS No. 123, "Accounting for
Stock-Based Compensation" requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB Opinion
No. 25 to its stock-based compensation awards to employees and has disclosed the
required pro forma effect on the net income and earnings per share. See Note 7.
EARNINGS PER SHARE Basic earnings per share are computed by dividing net
income by the weighted average number of shares outstanding during the year.
Diluted earnings per share are calculated to give effect to all potentially
dilutive common shares that were outstanding during the year.
The following table is a reconciliation of the basic and diluted earnings
per share computations for the years ended December 31, 1999, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
===============================================================================================
<S> <C> <C> <C>
Net income (loss) $ 3,064 $ (18,306) $ 17,429
-----------------------------------------------------------------------------------------------
Earnings (loss) per share - basic $ 0.26 $ (1.58) $ 1.53
===============================================================================================
Basic weighted average common
shares outstanding 11,707 11,572 11,390
Effect of dilutive securities:
Stock options 176 - 654
-----------------------------------------------------------------------------------------------
Diluted weighted average common and
common equivalent shares outstanding 11,883 11,572 12,044
-----------------------------------------------------------------------------------------------
Earnings (loss) per share - diluted $ 0.26 $ (1.58) $ 1.45
===============================================================================================
</TABLE>
COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in
financial statements. Comprehensive income is defined as "the change in equity
(net assets) of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners." There are no material current differences between net
income and comprehensive income and, accordingly, no amounts have been reflected
in the accompanying consolidated financial statements.
ACCOUNTING CHANGES Effective January 1, 1998, the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal reporting that is used
by management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect results of operations or the
financial position of the Company.
Effective January 1, 1999, the Company adopted AICPA SOP 98-5, "Reporting
on the Costs of Start-up Activities." The statement requires costs of start-up
activities and organization costs to be expensed as incurred. The adoption of
SOP No. 98-5 did not have a material impact on the Company's results of
operations, financial position or cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 is effective for all fiscal
F-8
<PAGE>
quarters of all fiscal years beginning after June 15, 1999. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if it is, the type of
hedge transaction. In July 1999, the Financial Accounting Standards Board issued
SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 deferred
the effective date of SFAS No. 133 until the Company's first quarter beginning
after January 1, 2001. The Company does not expect that the adoption of SFAS No.
133 will have a material impact on its consolidated financial statements.
STOCKHOLDERS' EQUITY In July 1997, the Company's stockholders approved an
Agreement and Plan of Merger whereby the Company merged with and into a newly
incorporated Delaware corporation ("ENCAD, Inc.") which was the surviving
corporation. In conjunction with the merger, each share of the Company's common
stock, no par value, and options or rights to acquire shares of common stock
were exchanged for one share of ENCAD, Inc. Delaware common stock, par value
$.001, options or rights to acquire common stock. The change in par value did
not affect any of the existing rights of the stockholders and has been recorded
as an adjustment to additional paid-in capital as of December 31, 1997.
In July 1997, the Company's stockholders approved an increase in the number
of shares of common stock authorized for issuance by the Delaware company from
15,000,000 to 60,000,000 shares, concurrently with the Company's reincorporation
in Delaware.
STOCKHOLDER RIGHTS AGREEMENT In March 1998, the Company's Board of
Directors adopted a preferred stockholder rights plan which provides for a
dividend distribution of one preferred share purchase right (a "Right") on each
outstanding share of the common stock. On March 19, 1998, the Company's Board of
Directors declared a dividend of one Right for each outstanding share of common
stock, payable on April 2, 1998 to stockholders of record on that date. Each
Right entitles stockholders to buy 1/1000th of a share of ENCAD Series A Junior
Participating Preferred Stock at an exercise price of $80, subject to
adjustment. The Rights will become exercisable on the close of business on the
first day a person or group announces an acquisition of 15% or more of the
common stock or on the tenth day after a person or a group commences or
announces commencement of a tender offer, the consummation of which would result
in ownership by the person or group of 15% or more of the common stock. The
Company will be entitled to redeem the Rights at $0.01 per Right at any time on
or before the close of business on the first date of a public announcement that
a person has acquired beneficial ownership of 15% or more of the common stock.
The Company amended the plan on November 18, 1998 to eliminate those provisions
requiring that certain actions may only be taken by directors who were Board
members at the time the plan was adopted.
RECLASSIFICATIONS Certain items in the 1998 and 1997 financial statements
have been reclassified to conform to the 1999 presentation.
F-9
<PAGE>
2. BALANCE SHEET DETAILS (in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
------------------------------------------------------------------------------------------
<S> <C> <C>
ACCOUNTS RECEIVABLE:
Trade receivables $ 32,159 $ 29,928
Allowance for doubtful accounts (2,500) (4,092)
------------------------------------------------------------------------------------------
Net trade accounts receivable 29,659 25,836
Receivables from vendors 743 2,770
Other accounts receivable 144 457
------------------------------------------------------------------------------------------
Total $ 30,546 $ 29,063
==========================================================================================
INVENTORIES:
Raw materials $ 6,017 $ 5,061
Work-in-process 131 269
Finished goods 5,844 10,875
------------------------------------------------------------------------------------------
Total $ 11,992 $ 16,205
==========================================================================================
PROPERTY:
Computer equipment and software $ 12,363 $ 11,623
Machinery and equipment 6,488 6,619
Buildings and improvements 6,210 6,028
Furniture and fixtures 2,398 2,385
Land 1,250 1,250
------------------------------------------------------------------------------------------
28,709 27,905
Accumulated depreciation and amortization (14,445) (12,301)
------------------------------------------------------------------------------------------
Total $ 14,264 $ 15,604
==========================================================================================
ACCRUED EXPENSES AND OTHER LIABILITIES:
Compensation and vacation pay $ 4,021 $ 1,864
Warranty 2,573 1,225
Other 695 29
Co-op programs 582 739
Restructuring charges 219 2,097
Income taxes payable - 48
------------------------------------------------------------------------------------------
Total $ 8,090 $ 6,002
==========================================================================================
</TABLE>
3. REVOLVING LINE OF CREDIT (in thousands)
At December 31, 1999, the Company had available a $15,000 revolving line of
credit which expired in January 2000. The bank has agreed to extend the maturity
date of the line until April 30, 2000, at which time we plan to replace it with
another line with a different entity. The line bears interest at the bank's
prime rate (8.50% at December 31, 1999) or at the Company's option, a rate based
on the London Interbank Overnight Rate (6.50% at December 31, 1999) plus 2.25%
on outstanding balances. The Company pays a commitment fee on the unused portion
of the line. The line is secured by specified assets with a borrowing base
limited to eligible accounts receivable and inventory. In addition, the
availability of the line is subject to our maintaining financial covenants
including working capital and tangible net worth ratios. No amounts were
outstanding under the line of credit at December 31, 1999 and $6,000 was
outstanding under a prior agreement with the same bank at December 31, 1998.
F-10
<PAGE>
4. OPERATING LEASE COMMITMENTS (in thousands)
The Company leases certain facilities and equipment under operating leases
which expire over the next five years. Most of these operating leases provide
the Company with the option after the initial lease term to renew its lease at
the then fair rental value of periods ranging from one month to four years.
Generally, management expects that leases will be renewed in the normal course
of business.
Minimum payments for operating leases having initial or remaining
noncancelable terms of one year are as follows: 2000 - $884; 2001 - $847; 2002 -
$770; 2003 - $625; 2004 - $521; Total - $3,647.
Total rent expense under operating leases was approximately $796, $982 and
$416 for the years ended December 31, 1999, 1998 and 1997, respectively.
5. RESTRUCTURING COSTS (in thousands)
On October 26, 1998, the Company's Board of Directors agreed to a plan of
reorganization and the restructuring of its printer and supplies business units
into one business unit, the Digital Imaging Systems business unit. In the
quarter ended December 31, 1998, the Company estimated and recorded a
restructuring charge of $2,934. The plan of reorganization and restructuring,
which was deemed necessary to facilitate the Company's strategy of developing
and delivering value-added digital imaging solutions directed at niche vertical
market applications, included costs of workforce reductions, including the
elimination of senior management positions, of approximately 60 people and the
consolidation of excess sales facilities. While selling and marketing staff were
the primary focus of the reduction, research and development and administrative
staff were also affected.
As of December 31, 1999, the restructuring was substantially completed. The
following table summarizes the Company's reorganization and restructuring
activity for the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
Employee Lease and
Related Facility Other Total
===========================================================
<S> <C> <C> <C> <C>
Restructuring charges $ 2,741 $ 81 $ 112 $ 2,934
Cash paid during the period (796) - (41) (837)
-----------------------------------------------------------
RESERVE BALANCE, DECEMBER 31, 1998 1,945 81 71 2,097
Cash paid during the period (1,732) (75) (71) (1,878)
-----------------------------------------------------------
RESERVE BALANCE, DECEMBER 31, 1999 $ 213 $ 6 $ - $ 219
===========================================================
</TABLE>
F-11
<PAGE>
6. INCOME TAXES (in thousands except for percentages)
The tax effects of items comprising the Company's net deferred income tax
asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
-------------------------------------------------------------------------------------------
<S> <C> <C>
Non deductible reserves and accruals $ 5,326 $ 7,261
Restructuring accrual 124 739
Differences between book and tax basis in inventory and 1,134 1,403
property
Accrued co-op advertising 237 301
State taxes (731) (650)
Tax losses and credits 797 459
Other 517 112
-------------------------------------------------------------------------------------------
Total deferred tax asset 7,404 9,625
Valuation allowance (3,400) (3,600)
-------------------------------------------------------------------------------------------
Net deferred tax asset $ 4,004 $ 6,025
===========================================================================================
</TABLE>
The net deferred tax asset is classified entirely as a current asset.
As of December 1999, the Company had a state operating loss carry forward
of approximately $2,814 which expires in 2003 and 2004.
Deferred income taxes are provided to reflect the future tax consequences
of differences between the book and tax basis of assets and liabilities. The
Company's deferred tax asset consists primarily of book and tax differences in
accruals and reserves. Under SFAS No. 109, "Accounting for Income Taxes," the
Company is required to place a valuation allowance if it is more likely than not
that a portion of the deferred tax asset will not be realized. The valuation
allowance is principally composed of future tax benefits that are not expected
to be available for a carry back to offset the taxable income in 1997 and future
taxable income. To the extent that future taxable income is dependent on new
products, the Company believes it would not be prudent to rely on the related
future income for the realization of deferred tax benefits and accordingly has
an allowance recorded.
The components of income before income tax expense and income taxes
attributable to foreign operations are not material. The components of the
provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
==========================================================================================
<S> <C> <C> <C>
CURRENT (BENEFIT) EXPENSE:
Federal $ (1,181) $ (3,314) $ 7,626
State 78 180 1,521
DEFERRED EXPENSE (BENEFIT):
Federal 2,184 (1,272) (22)
State (164) (369) (26)
------------------------------------------------------------------------------------------
Total $ 917 $ (4,775) $ 9,099
==========================================================================================
</TABLE>
F-12
<PAGE>
The effective rate of the provision for income taxes differs from the
federal statutory rate because of the effect of the following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
==========================================================================================
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 35.0%
State income taxes, net of federal benefit 4.5 3.3 4.5
Benefit of foreign sales corporation, net of (2.1) - (4.1)
tax
Research and development tax credit (4.5) - (0.9)
Valuation allowance (5.5) (15.6) -
Other (3.4) (1.0) (0.2)
------------------------------------------------------------------------------------------
Effective rate 23.0% 20.7% 34.3%
==========================================================================================
</TABLE>
7. EMPLOYEE BENEFIT PLANS (in thousands except for percentages and average and
per share data)
The number of shares authorized under the following plans and the number of
shares outstanding under those plans will be appropriately adjusted in the event
of certain changes in the Company's capital structure, such as stock dividends
or splits, or other recapitalizations.
1993 EMPLOYEE STOCK PURCHASE PLAN Under this plan, for which 520 shares of
common stock have been reserved for issuance, eligible employees may elect up to
10% of their base cash compensation to be deducted each pay period for the
purchase of the Company's common stock. On the last business day of each
calendar quarter, shares of common stock are purchased with the employees'
payroll deductions, at a price per share of 85% of the lesser of the closing
market price of the common stock on the purchase date, or the closing market
price on the first day of the purchase period. Participants may not purchase
more than 2 shares of common stock and not more than $25 worth of common stock
in any one calendar year. The plan will terminate on January 1, 2003. In 1999,
1998 and 1997, 99, 80, and 45 shares, respectively, were issued, at average
prices ranging from $3.08 to $4.89, $3.08 to $11.05, and $7.44 to $35.06,
respectively.
1993 STOCK OPTION/STOCK ISSUANCE PLAN Under this plan, for which 1,799
shares of common stock have been reserved for issuance, employees, officers,
directors and consultants may be granted incentive or non-qualified stock
options. All outstanding options under any of the Company's previous stock
option plans were incorporated into this plan but will continue to be governed
by the terms and conditions under which those options were granted. To date,
only non-qualified stock options have been granted under this plan at prices not
less than fair market value on the date of grant. The options granted under this
plan as of December 31, 1999 are exercisable quarterly over four years and
expire in ten years.
1997 SUPPLEMENTAL STOCK OPTION PLAN On October 13, 1997, the Company's
Board of Directors adopted the 1997 Supplemental Stock Option Plan. Under this
plan, for which 255 shares of common stock have been reserved for issuance,
employees other than executive officers, consultants and independent advisors,
may be granted non-qualified stock options. To date, only non-qualified stock
options have been granted under this plan at prices not less than fair market
value on the date of grant. The options granted under this plan as of December
31, 1999 are exercisable quarterly over four years and expire in ten years.
1998 STOCK OPTION PLAN On June 9, 1998, the Company's stockholders approved
the 1998 Stock Option Plan. Under this plan, for which 575 shares of common
stock have been reserved for issuance, employees, including officers,
consultants, independent advisors and directors of the corporation, may be
granted incentive or non-qualified stock options. To date, only non-qualified
stock options have been granted under this plan at prices not less than fair
market value on the date of grant. The options granted under this plan as of
December 31, 1999 are exercisable quarterly over four years and expire in ten
years.
NON-PLAN OPTIONS On January 26, 1998 and July 24, 1998 the Company filed
S-8 registration statements, pursuant to which options were granted to the
Company's Chief Information Officer and the General Manager, Digital Imaging
Solutions, respectively. The Chief Information Officer was granted 30 shares at
an exercise price of $26.13,
F-13
<PAGE>
the fair market value on the date of the grant, of which all shares were
subsequently canceled subject to his termination of employment with the Company.
The General Manager, Digital Imaging Solutions business unit, was granted 75
shares at an exercise price of $13.88, the fair value on the date of the grant.
The options granted under both of these agreements are exercisable quarterly
over four years and expire in ten years.
RE-GRANTING OF STOCK OPTIONS On May 12, 1998, the Stock Option Committee of
the Board of Directors approved a stock option re-granting program pursuant to
which employees, excluding officers, of the Company could elect to cancel
certain unexercised stock options in exchange for new stock options with an
exercise price equal to the closing price of the Company's common stock on May
22, 1998. Approximately 200 shares were eligible for repricing, of which 198
were repriced at an exercise price of $10.56. The new options vested quarterly
over four years from the date of re-grant and expire in ten years and would have
become fully vested on May 22, 2002. These options were subsequently canceled
because on November 13, 1998, the Stock Option Committee of the Board of
Directors approved a stock option re-granting program pursuant to which
employees could elect to cancel certain unexercised stock options in exchange
for new stock options with an exercise price equal to the closing price of the
Company's common stock on November 30, 1998. Approximately 1,046 shares were
eligible for repricing, of which 820 were repriced at an exercise price of
$5.75. The new options vest quarterly over four years from the date of re-grant
and expire in ten years. The options issued under the re-grant program will
become fully vested on November 30, 2002. Certain executive officers that
participated in the re-grant program were required to forfeit a portion of stock
options previously granted.
1999 STOCK OPTION/STOCK ISSUANCE PLAN Under this plan, for which 580 shares
of common stock have been reserved for issuance, employees, officers, directors
and consultants may be granted incentive or non-qualified stock options. All
outstanding options under any of the Company's previous stock option plans were
incorporated into this plan but will continue to be governed by the terms and
conditions under which those options were granted. To date, only non-qualified
stock options have been granted under this plan at prices not less than fair
market value on the date of grant. The options granted under this plan as of
December 31, 1999 are exercisable quarterly over four years and expire in ten
years.
A summary of option activity under all the Company's stock option plans and
non-plan option grants is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------
WEIGHTED
AVAILABLE AVERAGE EXERCISE AGGREGATE
FOR GRANT SHARES PRICES PRICE
===========================================================================================================
<S> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996 89 942 $ 8.36 $ 7,874
Authorized 380 - - -
Options granted (371) 371 30.42 11,297
Options exercised - (156) 5.05 (786)
Options canceled 42 (42) 19.25 (811)
-----------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 140 1,115 15.75 17,574
Authorized 765 - - -
Options granted (1,857) 1,857 9.38 16,916
Options exercised - (55) 5.95 (328)
Options canceled 1,471 (1,471) 16.75 (24,433)
-----------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1998 519 1,446 6.81 9,729
Authorized 580 - - -
Options granted (711) 711 5.39 3,832
Options exercised - (41) 4.59 (188)
Options canceled 443 (443) 7.68 (3,403)
-----------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1999 831 1,673 $ 5.96 $ 9,970
Exercisable at December 31, 1997 378 $ 8.84
Exercisable at December 31, 1998 422 $ 8.50
EXERCISABLE AT DECEMBER 31, 1999 537 $ 6.38
===========================================================================================================
</TABLE>
F-14
<PAGE>
The following table summarizes outstanding stock option information at
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
==========================================================================================================
<S> <C> <C> <C> <C> <C>
$ 2.81 - $ 5.56 503 8.35 $ 4.04 155 $ 3.76
$ 5.62 - $ 7.13 830 8.99 $ 5.85 217 $ 5.79
$ 7.25 - $13.75 331 7.86 $ 8.51 158 $ 8.79
$ 17.44 - $39.13 9 7.06 $ 29.49 7 $ 27.30
----------------------------------------------------------------------------------------------------------
$ 2.81 - $39.13 1,673 8.56 $ 5.96 537 $ 6.38
==========================================================================================================
</TABLE>
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its plans.
Accordingly, no compensation expense has been recognized for its stock-based
compensation plans. Had compensation expense for the Company's stock option
plans and stock purchase plan been determined based upon the fair value at
the grant date for awards under those plans consistent with the methodology
prescribed under SFAS No. 123, the Company's net income, earnings per share
- -basic and earnings per share - diluted for 1999 would have been decreased by
approximately $1,328, or $0.11 and $0.11 per share, respectively. The
Company's net income, earnings per share - basic and earnings per share -
diluted for 1998 and 1997 would have been reduced by approximately $1,875 or
$0.16 and $0.16 per share and $1,217 or $0.11 and $0.10 per share,
respectively.
The weighted-average fair value of the options granted during 1999, 1998
and 1997 is estimated to be $1,662, $8,800 and $4,999, respectively, on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1999, 1998 and 1997,
respectively: no dividend yield; expected volatility of 77%, 77% and 65%;
risk-free interest rate of 6.0%, 6.0% and 6.1% and expected life of 3.29,
3.41 and 3.40 years.
8. SEGMENT AND GEOGRAPHIC INFORMATION (in thousands)
For the years ended December 31, 1997 and 1998, and during the first
quarter of 1999 the Company's business was organized, managed and internally
reported as two segments: the Digital Imaging Solutions business unit and the
Textile business unit. Due to the similarity of production processes,
distribution methods, customers and products, the segment information for the
Digital Imaging Solutions and Textile business units had been aggregated into
one segment. On April 22, 1999, the Company consolidated its Digital Imaging
Solutions and Textile business units in order to further leverage the Company's
resources in support of its solutions-based, vertical market strategy. As a
result, the Company is managing and internally reporting the Company's business
as one reportable segment, principally, the design, development, manufacture and
sales of digital imaging solutions, including wide-format color inkjet printers
and related supplies, accessories, software and service for the graphic arts and
computer aided design markets.
Additional information regarding revenue by products and service groups for
the years ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
==============================================
<S> <C> <C> <C>
Printers and accessories $ 73,739 $ 65,070 $ 111,033
Ink and media 37,986 39,243 32,737
Service, royalties and contracts 5,987 5,742 5,271
----------------------------------------------
Total $ 117,712 $ 110,055 $ 149,041
==============================================
</TABLE>
In 1999 one customer accounted for 13% of net sales. In 1998 and 1997 no
one customer accounted for more than 10% of net sales.
F-15
<PAGE>
The Company has subsidiaries located in France, Germany and England to
which it pays commissions for sales to customers that they identify. The
revenues, operating profits and identifiable assets of these European
subsidiaries are not material.
Net sales from principal geographic areas were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
===================================================
<S> <C> <C> <C>
Europe, Middle East and Africa $ 46,794 $ 42,770 $ 46,948
Asia Pacific 22,757 16,026 28,412
Americas, excluding the United States 7,213 10,328 12,011
---------------------------------------------------
Export sales 76,764 69,124 87,371
Domestic 40,948 40,931 61,670
---------------------------------------------------
Total net sales $ 117,712 $ 110,055 $ 149,041
===================================================
</TABLE>
Receivables from export sales at December 31, 1999 and 1998 were
approximately $23,653 and $15,479 respectively.
9. SUBSEQUENT EVENT (in thousands)
In January 2000, the Company received cash proceeds of approximately
$12,000 for a transaction in which the Company sold its headquarters
buildings and land in San Diego, California and leased the property back for
a period of seven years. The leaseback will be accounted for as an operating
lease. The sale-leaseback resulted in a gain of $5,472 which will be deferred
and amortized to income over the term of the lease. The lease requires the
Company to pay customary operating and repair expenses and to observe certain
operating restrictions and covenants.
Future scheduled minimum rental payments required are as follows: 2000 -
$1,121; 2001 - $1,319; 2002 - $1,414; 2003 - $1,465; 2004 - $1,523; thereafter -
$3,324; total - $10,166.
10. QUARTERLY FINANCIAL INFORMATION (unaudited; in thousands, except per share
data)
Summarized quarterly financial information for each of the three years
ended December 31, 1999, 1998, and 1997 is as follows:
<TABLE>
<CAPTION>
QUARTER 1 QUARTER 2 QUARTER 3 QUARTER 4 YEAR
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Net sales $ 28,982 $ 29,253 $ 27,022 $ 32,455 $ 117,712
Gross profit 12,403 12,805 11,920 14,413 51,541
Income from operations 658 1,302 993 1,231 4,184
Net income 349 807 690 1,218 3,064
Earnings per share - basic $ 0.03 $ 0.07 $ 0.06 $ 0.10 $ 0.26
Earnings per share - diluted $ 0.03 $ 0.07 $ 0.06 $ 0.10 $ 0.26
------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
Net sales $ 23,517 $ 34,695 $ 24,201 $ 27,642 $ 110,055
Gross profit 8,898 14,109 5,716 686 29,409
(Loss) income from operations (2,060) 2,215 (5,972) (17,851) (23,668)
Net (loss) income (726) 1,374 (3,918) (15,036) (18,306)
(Loss) earnings per share - basic $ (0.06) $ 0.12 $ (0.34) $ (1.30) $ (1.58)
(Loss) earnings per share - diluted $ (0.06) $ 0.12 $ (0.34) $ (1.30) $ (1.58)
------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
Net sales $ 31,511 $ 37,725 $ 38,509 $ 41,296 $ 149,041
Gross profit 15,406 17,665 18,100 19,611 70,782
Income from operations 5,642 6,398 6,811 7,642 26,493
Net income 3,694 4,223 4,443 5,069 17,429
Earnings per share - basic $ 0.33 $ 0.37 $ 0.39 $ 0.44 $ 1.53
Earnings per share - diluted $ 0.31 $ 0.35 $ 0.37 $ 0.42 $ 1.45
------------------------------------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
EXHIBIT 10.18
AMENDMENT TO FORM OF SEVERANCE LETTER AGREEMENTS
BETWEEN THE COMPANY AND DAVID A. PURCELL
We are pleased to inform you that the Company's Board of
Directors has recently approved an amendment to the special severance benefit
program established for you pursuant to your letter agreement with the Company
dated February 19, 1997 (the "Severance Agreement"). The changes which have been
made to your existing Severance Agreement apply only to the severance benefits
to which you may become entitled following a change in control of the Company
and may be summarized as follows:
(i) The period of time for which you will be
protected following a change in control of the Company has been
increased so that if your employment now terminates under certain
circumstances within twenty-four (24) months following a change in
control, you will be eligible to receive your severance benefits under
the amended Severance Agreement.
(ii) The multiple of salary and bonus to which you
may become entitled under the amended Severance Agreement as a cash
severance payment in connection with the termination of your employment
following a change in control will now be paid to you in a lump sum
rather than through a series of payments over a one-year period.
(iii) There will no longer be a non-compete covenant
or other restrictive covenants in effect following your termination of
employment in connection with a change in control of the Company.
(iv) The parachute tax gross-up previously provided
you under Paragraph 5 of Part Three of your existing Severance
Agreement has been eliminated, and any parachute payments attributable
to your severance benefits will now be limited to an amount which does
not constitute an excess parachute payment under the federal tax laws
or (solely in the event of a Hostile Take-Over) the greatest after-tax
benefit such severance benefits can provide you after taking into
account any excise parachute tax which may be imposed under the federal
tax laws.
The purpose of this letter agreement is to set forth those
changes in more detail so that your Severance Agreement will be formally amended
by this new letter agreement. Unless specifically noted in this letter, all of
the terms and conditions of your existing Severance Agreement will be preserved,
and all capitalized terms in this letter agreement will have the same meanings
assigned to those terms in your Severance Agreement as in effect immediately
prior to this amendment..
1. The introductory paragraph to Part Three of your existing
Severance Agreement is hereby amended in its entirety to read as follows:
PART THREE -- CHANGE IN CONTROL BENEFITS
Upon your Termination Without Cause or Resignation for Good
Cause within twenty-four (24) months following a Change in Control and
seven (7) days after your execution of a General Release in favor of
the Company within three (3) days after such Termination Without Cause
or Resignation for Good Cause, as the case may be, then (provided such
General Release is not revoked by you prior to the end of the
Revocation Period), you shall become entitled to receive the special
severance benefits provided in this Part Three in substitution of the
severance benefits set forth in Part Two hereof. However, your
severance benefits under this Part Three shall be subject to the
benefit limitation of Paragraph 5 of this Part Three.
<PAGE>
2. Paragraph 1 of Part Three of your Severance Agreement is
hereby amended and restated in its entirety to read as follows:
1. CIC SEVERANCE PAYMENT. You shall be entitled to
the following CIC Severance Payment:
AMOUNT. You shall be entitled to a CIC Severance
Payment in an amount equal to ** times your Total Compensation
determined as of the date of your Termination Without Cause or
Resignation for Good Cause.
FORM. Your CIC Severance Payment will be paid in a
lump sum payment (subject to all applicable withholding taxes) within
thirty (30) days after your Termination Without Cause or Resignation
for Good Cause.
OTHER TERMINATIONS. You will not be entitled to
receive any CIC Severance Payment or any other benefits under this
letter agreement in the event your employment terminated by reason of
your death, disability or your Termination for Cause.
3. The restrictive covenants set forth in Paragraph 4 of Part
Three of your Severance Agreement will no longer be applicable in the event you
receive benefits under this Part Three following your Termination Without Cause
or Resignation for Good Cause within twenty-four (24) months after a Change in
Control.
4. In consideration of the additional benefits provided to you
under this amendment to your Severance Agreement, your Benefit Tax Protection in
Paragraph 5 of Part Three of the existing Severance Agreement is hereby deleted
and rendered null and void in its entirety, and the following new benefit
limitation is hereby imposed upon your Part Three benefits:
5. BENEFIT LIMITATIONS. The following provisions
shall govern the Change in Control benefits payable to you under this
Part Three.
(a) The following benefit limitations shall be in
effect for any Change in Control benefits provided you under Part Three
of this letter agreement:
CHANGE IN CONTROL OTHER THAN HOSTILE TAKE-OVER. If
the Change in Control does not constitute a Hostile Take-Over, the
dollar amount of your CIC Severance Payment will be reduced to the
extent necessary to assure that the present value of that benefit will
not, when added to the present value of your Option Parachute Payment
and your Other Parachute Payments, exceed the maximum amount which may
be paid under your Severance Agreement (as amended by this letter
agreement) without any of those amounts being treated as an excess
parachute payment under Code Section 280(G).
HOSTILE TAKEOVER.In the event of a Hostile Takeover,
no reduction will be made to your CIC Severance Payment (or any other
benefits under your Severance Agreement as supplemented by this letter
agreement), except and only to the extent necessary to provide you with
the maximum after-tax benefit under this Part Three, after taking into
account any parachute excise tax that might otherwise be payable by you
under Code Section 4999 and any analogous State income tax provision.
** CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
(b) RESOLUTION OF DISPUTES. In the event there is any
disagreement between you and the Company as to whether one or more
benefits to which you become entitled (whether under this letter
agreement or otherwise) in connection with a Change in Control
constitute Option Parachute Payments or Other Parachute Payments or
would otherwise result in an excess parachute payment under Code
Section 280G, such dispute is to be resolved as follows:
(i) In the event temporary, proposed or final
Treasury Regulations in effect at the time under Code Section 280G
specifically address the status of such benefits or the method for
their valuation, the characterization afforded to such benefits by the
Regulations, together with the methods prescribed for their valuation,
shall be controlling.
(ii) In the event such Regulations do not address the
status of the benefits in dispute, the matter shall be submitted for
resolution to independent counsel mutually acceptable to you and the
Company ("Independent Counsel"). The resolution reached by Independent
Counsel shall be final and controlling. However, should the Independent
Counsel determine that the status of the benefits in dispute can be
resolved through the obtainment of a private letter ruling from the
Internal Revenue Service, a formal and proper request for such ruling
shall be prepared and submitted by Independent Counsel, and the
determination made by the Internal Revenue Service in the issued ruling
shall be controlling. All expenses incurred in connection with the
retention of Independent Counsel and (if applicable) the preparation
and submission of the ruling request shall be paid by the Company.
The full amount of your severance benefit under
Paragraph 1 shall not be paid to you until any amounts in dispute under
this Paragraph 5(b) have been resolved in accordance herewith. However,
any portion of such severance payment or such accelerated balance of
your Performance Plan accounts which would not otherwise exceed the
benefit limitation of Paragraph 5(a) even if all amounts in dispute
under this Paragraph 5(b) were to be resolved against you will be paid
to you in accordance with the applicable provisions of this letter
agreement.
(c) OVERRIDING LIMITATION. You will in all events be
entitled to receive the full amount of your severance payment under
Paragraph 1, to the extent that benefit, when added to the present
value of your Option Parachute Payment and your Other Parachute
Payments (excluding such severance payment), will nevertheless qualify
as reasonable compensation within the standards established under Code
Section 280G(b)(4).
5. Paragraph 7 of Part Four of the existing Severance
Agreement is hereby amended in its entirety to read as follows:
7. ARBITRATION
Except for the dispute resolution procedure in
Paragraph (b) of Section 5 of Part Three of your Severance Agreement,
any controversy that may arise between you and the Company with respect
to the construction, interpretation or application of any of the terms,
provisions or conditions of your Severance Agreement (as amended by
this letter agreement) or any monetary claim arising from or relating
to your Severance Agreement will be submitted to final and binding
arbitration in San Diego, California in accordance with the rules of
the American Arbitration Association then in effect. The prevailing
party in the arbitration shall be entitled to the recovery of all
reasonable attorney's fees and costs incurred with respect to the
arbitration. Both parties understand and agree that the arbitration
shall be instead of any civil litigation and that the arbitrator's
decision shall be final and binding to the fullest extent permitted by
law and enforceable by any court having jurisdiction thereof.
This letter agreement will be binding upon the Company, its
successors and assigns (including, without limitation, the surviving entity in
any Change in Control) and is to be construed and interpreted under the laws of
the State of California applicable to agreements executed and to be wholly
performed within the State of California.
<PAGE>
All terms of your February 19, 1997 Severance Agreement shall
remain in full force and effect, except to the extent those terms are expressly
modified by the terms of this letter agreement. Any severance benefits to which
you may become entitled upon the termination of your employment with the Company
will be governed solely by the terms of your Severance Agreement (as modified
hereby).
Please indicate your acceptance of the foregoing amendments to
your February 19, 1997 Severance Agreement by signing the enclosed copy of this
letter and returning it to the Company not later than February 4, 2000.
Very truly yours,
ENCAD, INC.
By: /s/ Charles E. Volpe
----------------------
Name: Charles E. Volpe
Title: Director
ACCEPTANCE
I hereby agree to and accept all the modifications made by the
terms and provisions of the foregoing letter agreement to the severance benefits
to which I may become entitled under my existing Severance Agreement upon a
termination of my employment under certain prescribed circumstances following a
Change in Control of the Company.
Dated: , 2000
----------
/s/ David A. Purcell
--------------------------------------
DAVID A. PURCELL
<PAGE>
EXHIBIT 10.19
AMENDMENT TO FORM OF SEVERANCE LETTER AGREEMENTS
BETWEEN THE COMPANY AND EACH OF ITS OFFICERS
Mr.
ENCAD, Inc.
6059 Cornerstone Court West
San Diego, CA 92121
Dear Mr.
We are pleased to inform you that the Company's Board of
Directors has recently approved an amendment to the special severance benefit
program established for you pursuant to your letter agreement with the Company
dated February 19, 1997 (the "Severance Agreement"). The changes which have been
made to your existing Severance Agreement apply only to the severance benefits
to which you may become entitled following a change in control of the Company
and may be summarized as follows:
(i) The period of time for which you will be
protected following a change in control of the Company has been
increased so that if your employment now terminates under certain
circumstances within _______ (___) months following a change in
control, you will be eligible to receive your severance benefits under
the amended Severance Agreement.
(ii) The multiple of salary and bonus to which you
may become entitled under the amended Severance Agreement as a cash
severance payment in connection with the termination of your employment
following a change in control HAS BEEN INCREASED FROM ONE TIMES YOUR
TOTAL COMPENSATION TO [____] TIMES SUCH TOTAL COMPENSATION AND will now
be paid to you in a lump sum rather than through a series of payments
over a one-year period.
(iii) There will no longer be a non-compete covenant
or other restrictive covenants in effect following your termination of
employment in connection with a change in control of the Company.
The purpose of this letter agreement is to set forth those
changes in more detail so that your Severance Agreement will be formally amended
by this new letter agreement. Unless specifically noted in this letter, all of
the terms and conditions of your existing Severance Agreement will be preserved,
and all capitalized terms in this letter agreement will have the same meanings
assigned to those terms in your Severance Agreement as in effect immediately
prior to this amendment.
1. The introductory paragraph to Part Three of your existing
Severance Agreement is hereby amended in its entirety to read as follows:
PART THREE -- CHANGE IN CONTROL BENEFITS
Upon your Termination Without Cause or Resignation for Good
Cause within _____________ (____) months following a Change in Control
and seven (7) days after your execution of a General Release in favor
of the Company within three (3) days after such Termination Without
Cause or Resignation for Good Cause, as the case may be, then (provided
such General Release is not revoked by you prior to the end of the
Revocation Period), you shall become entitled to receive the special
severance benefits provided in this Part Three in substitution of the
severance benefits set forth in Part Two hereof. However, your
severance benefits under this Part Three shall be subject to the
benefit limitation of Paragraph 5 of this Part Three.
2. Paragraph 1 of Part Three of your Severance Agreement is
hereby amended and restated in its entirety to read as follows:
<PAGE>
1. CIC SEVERANCE PAYMENT. You shall be entitled to
the following CIC Severance Payment:
AMOUNT. You shall be entitled to a CIC Severance
Payment in an amount equal to _____ (__) times your Total Compensation
determined as of the date of your Termination Without Cause or
Resignation for Good Cause.
FORM. Your CIC Severance Payment will be paid in a
lump sum payment (subject to all applicable withholding taxes) within
thirty (30) days after your Termination Without Cause or Resignation
for Good Cause.
OTHER TERMINATIONS. You will not be entitled to
receive any CIC Severance Payment or any other benefits under this
letter agreement in the event your employment terminated by reason of
your death, disability or your Termination for Cause.
3. The restrictive covenants set forth in Paragraph 4 of Part
Three of your Severance Agreement will no longer be applicable in the event you
receive benefits under this Part Three following your Termination Without Cause
or Resignation for Good Cause within _________ (_____) months after a Change in
Control.
4. Paragraph 7 of Part Four of the existing Severance
Agreement is hereby amended in its entirety to read as follows:
7. ARBITRATION
Except for the dispute resolution procedure in
Paragraph (b) of Section 5 of Part Three of your Severance Agreement,
any controversy that may arise between you and the Company with respect
to the construction, interpretation or application of any of the terms,
provisions or conditions of your Severance Agreement (as amended by
this letter agreement) or any monetary claim arising from or relating
to your Severance Agreement will be submitted to final and binding
arbitration in San Diego, California in accordance with the rules of
the American Arbitration Association then in effect. The prevailing
party in the arbitration shall be entitled to the recovery of all
reasonable attorney's fees and costs incurred with respect to the
arbitration, as awarded by the arbitrator. Both parties understand and
agree that the arbitration shall be instead of any civil litigation and
that the arbitrator's decision shall be final and binding to the
fullest extent permitted by law and enforceable by any court having
jurisdiction thereof.
This letter agreement will be binding upon the Company, its
successors and assigns (including, without limitation, the surviving entity in
any Change in Control) and is to be construed and interpreted under the laws of
the State of California applicable to agreements executed and to be wholly
performed within the State of California.
All terms of your February 19, 1997 Severance Agreement shall
remain in full force and effect, except to the extent those terms are expressly
modified by the terms of this letter agreement. Any severance benefits to which
you may become entitled upon the termination of your employment with the Company
will be governed solely by the terms of your Severance Agreement (as modified
hereby).
Please indicate your acceptance of the foregoing amendments to
your February 19, 1997 Severance Agreement by signing the enclosed copy of this
letter and returning it to the Company not later than February 4, 2000.
Very truly yours,
ENCAD, INC.
By: /s/ David A. Purcell
---------------------------
<PAGE>
Title: Chairman, President and CEO
ACCEPTANCE
I hereby agree to and accept all the modifications made by the
terms and provisions of the foregoing letter agreement to the severance benefits
to which I may become entitled under my existing Severance Agreement upon a
termination of my employment under certain prescribed circumstances following a
Change in Control of the Company.
Dated: , 2000
-----------------
Signature:
---------------------------
Printed Name:
-------------------------
<PAGE>
EXHIBIT 10.20
FORM OF SEVERANCE LETTER AGREEMENTS
BETWEEN THE COMPANY AND EACH OF ITS VICE PRESIDENTS
Mr.
ENCAD, Inc.
6059 Cornerstone Court West
San Diego, CA 92121
Dear
We are pleased to inform you that the Company's Board of
Directors has recently approved a special severance benefit program for you. The
purpose of this letter agreement is to set forth the terms and conditions of
your benefit package and to explain the limitations which will govern the
overall value of your benefits.
Your severance benefits may become payable under if your
employment terminates under certain circumstances within a specified time period
following a substantial change in ownership or control of the Company. To
understand the full scope of your severance benefits, you should familiarize
yourself with the definitional provisions of Part One of this letter agreement.
The benefits comprising your severance package are detailed in Part Two, and the
dollar limitations on the overall value of your benefit package and other
applicable restrictions are specified in Parts Three and Four. Part Five deals
with ancillary matters affecting your severance arrangement.
PART ONE -- DEFINITIONS
For purposes of this letter agreement, the following
definitions will be in effect:
AVERAGE COMPENSATION means the average of your W-2 wages from
the Company for the five (5) calendar years (or such fewer number of calendar
years of employment with the Company) completed immediately prior to the
calendar year in which the Change of Control is effected. Any W-2 wages for a
partial year of employment will be annualized, in accordance with the frequency
which such wages are paid during such partial year, before inclusion in your
Average Compensation.
BASE SALARY means the annual rate of base salary in effect for
you immediately prior to the Change in Control or (if greater) the annual rate
of base salary in effect at the time of the termination of your employment
Without Cause.
BOARD means the Company's Board of Directors.
CAUSE means the following: (i) dishonesty resulting or
intending to result, directly or indirectly, in gain or personal enrichment at
the expense of the Company; (ii) gross misconduct, including, without
limitation, fraud, sexual harassment or misappropriation of Company property or
confidential information; (iii) conviction for a felony under the laws of the
United States or any state thereof; or (iv) willful and continued failure
substantially to perform your duties with the Company (other than any such
failure resulting from your incapacity due to physical or mental illness), which
is not remedied within a reasonable period after a written demand for
substantial performance is delivered to you which specifically identifies the
manner in which it is believed that you have not substantially performed your
duties.
CHANGE IN CONTROL means:
(i) a merger or consolidation in which securities
possessing more than 50% of the total combined voting power of the
Company's outstanding voting securities are
<PAGE>
transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction;
(ii) a sale, transfer or other disposition of all or
substantially all of the assets of the Company in liquidation or
dissolution of the Company;
(iii) the acquisition of beneficial ownership, by any
person or a group of related persons, of securities possessing
twenty-five percent (25%) or more of the total combined voting power of
the Company's outstanding voting securities pursuant to a third-party
tender or exchange offer made directly to the Company's shareholders,
private purchases from one or more of the Company's shareholders, open
market purchases or any other transaction;
(iv) the acquisition of beneficial ownership, by any
person or a group of related persons, of additional securities of the
Company that increase the total holdings of such person (or group) to a
level of securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding voting
securities pursuant to a third-party tender or exchange offer made
directly to the Company's shareholders, private purchases from one or
more of the Company's shareholders, open market purchases or any other
transaction;
(v) the acquisition of beneficial ownership, by any
person or a group of related persons, of securities of the Company
possessing sufficient voting power in the aggregate to elect an
absolute majority of the members of the Board (rounded up to the
nearest whole number) pursuant to a third-party tender or exchange
offer made directly to the Company's shareholders, private purchases
from one or more of the Company's shareholders, open market purchases
or any other transaction; or
(vi) a change in the composition of the Board over a
period of twenty-four (24) consecutive months or less such that a
majority of the Board ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals who
either (a) have been Board members continuously since the beginning of
such period or (b) have been elected or nominated for election as Board
members during such period by at least a two-thirds majority of the
Board members described in clause (a) who were still in office at the
time such election or nomination was approved by the Board.
CODE means the Internal Revenue Code of 1986, as amended.
COMMON STOCK means the Company's common stock.
COMPANY means ENCAD, Inc. or any successor corporation,
whether or not resulting from a Change in Control.
FAIR MARKET VALUE means, with respect to any shares of Common
Stock subject to any of your Options, the closing selling price per share of
Common Stock on the date in question, as reported on the Nasdaq National Market.
If there is no reported sale of Common Stock on such date, then the closing
selling price on the next preceding day for which there exists such quotation
will be determinative of Fair Market Value.
GENERAL RELEASE means the form of general release attached to
this letter as EXHIBIT A.
OPTION means any option granted to you under the Plan which is
outstanding at the time of the Change in Control or upon the subsequent
termination of your employment.
OPTION PARACHUTE PAYMENT means, with respect to any Option,
the portion of that Option deemed to be a parachute payment under Code Section
280G and the Treasury Regulations issued thereunder. The portion of such Option
which is categorized as an Option Parachute Payment will be calculated in
accordance with the valuation provisions established under Code Section 280G and
the applicable Treasury Regulations and will include an appropriate dollar
adjustment to reflect the lapse of your obligation to remain in the Company's
employ as a condition to the vesting of the accelerated installment. In no
event, however, will the Option Parachute
<PAGE>
Payment attributable to any Option (or accelerated installment) exceed the
spread (the excess of the Fair Market Value of the accelerated option shares
over the option exercise price payable for those shares) existing at the time of
acceleration.
OTHER PARACHUTE PAYMENT means any payment in the nature of
compensation (other than the benefits to which you become entitled under Part
Two of this letter agreement) which are made to you in connection with the
Change in Control and which accordingly qualify as parachute payments within the
meaning of Code Section 280G(b)(2) and the Treasury Regulations issued
thereunder. Your Other Parachute Payment will include (without limitation) the
Present Value, measured as of the Change in Control, of the aggregate Option
Parachute Payment attributable to your Options (if any).
PARACHUTE PAYMENT means any payment or benefit provided you
under Part Two of this letter agreement which is deemed to constitute a
parachute payment within the meaning of Code Section 280G(b)(2) and the Treasury
Regulations issued thereunder.
PLAN means (i) the Company's 1993 Stock Option/Stock Issuance
Plan, as amended or restated from time to time, and (ii) any successor stock
incentive plan subsequently implemented by the Company.
PRESENT VALUE means the value, determined as of the date of
the Change in Control, of any payment in the nature of compensation to which you
become entitled in connection with the Change in Control or the subsequent
termination of your employment, including (without limitation) any Option
Parachute Payment and the additional benefits to which you become entitled under
Part Two of this letter agreement. The Present Value of each such payment shall
be determined in accordance with the provisions of Code Section 280G(d)(4),
utilizing a discount rate equal to one hundred twenty percent (120%) of the
applicable Federal rate in effect at the time of such determination, compounded
semi-annually to the effective date of the Change in Control.
TOTAL COMPENSATION means:
(i) if a Change in Control occurs before January 1, 2001 AND
prior to the payment of your 2000 annual bonus, the aggregate of: (a)
Base Salary; (b) your target annual award in effect at the time of the
Change in Control; and (c) the value of all general benefits and all
supplemental benefits or perquisites (including, without limitation,
financial planning services, annual physical examination, and
supplemental disability and life insurance premiums; but excluding any
auto allowance) made available to you in the fiscal year immediately
preceding the fiscal year of your termination, and in the event that
you were not employed during the entire fiscal year described in (c)
above, such amounts will be annualized in accordance with the frequency
for which the amounts were paid during the partial year; or
(ii) if a Change in Control occurs after December 31, 2000 OR
subsequent to the payment of your 2000 annual bonus, the aggregate of:
(a) Base Salary; (b) the average cash bonuses paid to you by the
Company for services rendered during the two (2) fiscal years
immediately preceding the fiscal year of your termination; and (c) the
value of all general benefits and all supplemental benefits or
perquisites (including, without limitation, financial planning
services, annual physical examination, and supplemental disability and
life insurance premiums; but excluding any auto allowance) made
available to you in the fiscal year immediately preceding the fiscal
year of your termination, and in the event that you were not employed
during the entire period described in (b) or (c) above, such amounts
will be annualized in accordance with the frequency for which the
amounts were paid during the partial period.
WITHOUT CAUSE means that the Company has without Cause and
without your written consent: (i) terminated your services with the Company;
(ii) materially reduced your job title, duties, and material responsibilities
with the Company; (iii) reduced your compensation (including base salary, fringe
benefits and participation in non-discretionary bonus programs under which
awards are payable pursuant to objective financial or performance standards) by
more than fifteen percent (15%); or (iv) required that you be based at a
location more than twenty-five (25) miles from the Company's present location.
PART TWO -- CHANGE IN CONTROL BENEFITS
<PAGE>
Subject to the release requirement of Part Four of this
letter agreement, should your employment be terminated Without Cause within
___________ months after a Change in Control, then you will become entitled
to receive the special severance benefits provided in this Part Two.
You will be entitled to a lump sum payment equal to _______
times your Total Compensation and payable within thirty (30) days after your
termination Without Cause.
Your payments will be subject to the Company's collection of
applicable federal and state income and employment withholding taxes.
PART THREE -- LIMITATION ON BENEFITS
1. BENEFIT LIMIT.
The aggregate Present Value (measured as of the Change in
Control) of the severance payment to which you become entitled under Part Two at
the time of your termination Without Cause will in no event exceed 2.99 times
your Average Compensation, less the Present Value, measured as of the Change in
Control, of all Other Parachute Payments to which you are entitled (the "Benefit
Limit").
2. RESOLUTION PROCEDURE.
For purposes of the foregoing Benefit Limit, the following
provisions will be in effect:
(a) In the event there is any disagreement between
you and the Company as to whether one or more payments to which you become
entitled in connection with either the Change in Control or the subsequent
termination of employment Without Cause constitute Parachute Payments, Option
Parachute Payments or Other Parachute Payments or as to the determination of the
Present Value thereof, such dispute will be resolved as follows:
(i) In the event temporary, proposed or final
Treasury Regulations in effect at the time under Code Section 280G (or
applicable judicial decisions) specifically address the status of any
such payment or the method of valuation therefor, the characterization
afforded to such payment by the Regulations (or such decisions) will,
together with the applicable valuation methodology, be controlling.
(ii) In the event Treasury Regulations (or
applicable judicial decisions) do not address the status of any payment
in dispute, the matter will be submitted for resolution to independent
counsel mutually acceptable to you and the Company ("Independent
Counsel"). The resolution reached by Independent Counsel will be final
and controlling; PROVIDED, however, that if in the judgment of
Independent Counsel the status of the payment in dispute can be
resolved through the obtainment of a private letter ruling from the
Internal Revenue Service, a formal and proper request for such ruling
will be prepared and submitted by Independent Counsel, and the
determination made by the Internal Revenue Service in the issued ruling
will be controlling. All expenses incurred in connection with the
retention of Independent Counsel and (if applicable) the preparation
and submission of the ruling request shall be shared equally by you and
the Company.
(iii) In the event Treasury Regulations (or
applicable judicial decisions) do not address the appropriate valuation
methodology for any payment in dispute, the Present Value thereof will,
at the Independent Counsel's election, be determined through an
independent third-party appraisal, and the expenses incurred in
obtaining such appraisal shall be shared equally by you and the
Company.
<PAGE>
3. STATUS OF BENEFITS.
(a) No severance payment will be made to you under Part Two of
this letter agreement until the Present Value of the Option Parachute Payment
attributable to your Options (if any) have been determined and the status of any
payments in dispute under Paragraph 2 above has been resolved in accordance
therewith.
(b) Once the requisite determinations under Paragraph 2 have
been made, then to the extent the aggregate Present Value, measured as of the
Change in Control, of the Parachute Payment attributable to your benefit
entitlements under Part Two of this letter agreement would, when added to the
Present Value of all your Other Parachute Payments (including the Option
Parachute Payment attributable to your Options (if any)), exceed the Benefit
Limit, your severance payment will be accordingly reduced.
PART FOUR -- RELEASE
You will be entitled to receive the special severance benefits
provided in Part Two of this letter agreement only upon: (i) execution of the
General Release (that is not subsequently revoked within seven (7) days) to the
Company within three (3) days of your termination Without Cause and (ii)
expiration of the seven (7)-day period following your execution of the General
Release.
PART FIVE -- GENERAL
1. TERMINATION FOR CAUSE.
Should your employment be terminated for Cause, the Company
will only be required to pay you (i) any unpaid compensation earned for services
previously rendered through the date of such termination and (ii) any accrued
but unpaid vacation benefits or sick days, and no benefits will be payable to
you under Part Two of this letter agreement.
2. DEATH.
Should you die before receipt of the severance payment to
which you become entitled under this letter agreement, then that payment will be
made to the executors or administrators of your estate.
3. GENERAL CREDITOR STATUS.
The payments and benefits to which you become entitled
hereunder will be paid, when due, from the general assets of the Company, and no
trust fund, escrow arrangement or other segregated account will be established
as a funding vehicle for such payment. Accordingly, your right (or the right of
the personal representatives or beneficiaries of your estate) to receive any
payments or benefits hereunder will at all times be that of a general creditor
of the Company and will have no priority over the claims of other general
creditors.
4. INDEMNIFICATION.
If applicable, the indemnification provisions for Officers and
Directors under the Company by-laws will (to the maximum extent permitted by
law) be extended to you, during the period following your termination Without
Cause, with respect to any and all matters, events or transactions occurring or
effected during your employment with the Company.
5. MISCELLANEOUS.
This letter agreement will be binding upon the Company, its
successors and assigns (including, without limitation, the surviving entity in
any Change in Control) and is to be construed and interpreted under the laws of
the State of California applicable to agreements executed and to be wholly
performed within the State of California. This letter agreement supersedes all
prior agreements between you and the Company relating to the subject of
severance benefits payable upon a change in control or ownership of the Company,
and you will not be entitled to any other severance benefits upon your
termination of employment. This letter may only be amended by
<PAGE>
written instrument signed by you and an authorized officer of the Company. If
any provision of this letter agreement as applied to you or the Company or to
any circumstance should be adjudged by a court of competent jurisdiction to be
void or unenforceable for any reason, the invalidity of that provision will in
no way affect (to the maximum extent permissible by law) the application of such
provision under circumstances different from those adjudicated by the court, the
application of any other provision of this letter agreement, or the
enforceability or invalidity of this letter agreement as a whole. Should any
provision of this letter agreement become or be deemed invalid, illegal or
unenforceable in any jurisdiction by reason of the scope, extent or duration of
its coverage, then such provision will be deemed amended to the extent necessary
to conform to applicable law so as to be valid and enforceable or, if such
provision cannot be so amended without materially altering the intention of the
parties, then such provision will be stricken and the remainder of this letter
agreement will continue in full force and effect.
6. NO EMPLOYMENT OR SERVICE CONTRACT.
Nothing in this letter agreement is intended to provide you
with any right to continue in the employ of the Company (or any subsidiary) for
any period of specific duration or interfere with or otherwise restrict in any
way your rights or the rights of the Company (or any subsidiary), which rights
are hereby expressly reserved by each, to terminate your employment at any time
for any reason whatsoever, with or without cause.
7. REMEDIES.
All rights and remedies provided pursuant to this letter
agreement or by law will be cumulative, and no such right or remedy will be
exclusive of any other. A party may pursue any one or more rights or remedies
hereunder or may seek damages or specific performance in the event of another
party's breach hereunder or may pursue any other remedy at law or in equity,
whether or not stated in this letter agreement.
8. ARBITRATION.
Except for the dispute resolution procedure in Paragraph 2 of
Part Three of this letter agreement, any controversy that may arise between you
and the Company with respect to the construction, interpretation or application
of any of the terms, provisions or conditions of this agreement or any monetary
claim arising from or relating to this agreement will be submitted to final and
binding arbitration in San Diego, California in accordance with the rules of the
American Arbitration Association then in effect. The prevailing party in the
arbitration shall be entitled to the recovery of all reasonable attorney's fees
and costs incurred with respect to the arbitration. Both parties understand and
agree that the arbitration shall be instead of any civil litigation and that the
arbitrator's decision shall be final and binding to the fullest extent permitted
by law and enforceable by any court having jurisdiction thereof.
9. EXCLUSIVE BENEFITS.
Any severance benefits to which you may become entitled upon
the termination of your employment will be governed solely by the terms of this
letter agreement.
Please indicate your acceptance of the foregoing by signing
the enclosed copy of this letter and returning it to the Company.
Very truly yours,
ENCAD, INC.
By:
-----------------------------
Name: David Purcell
Title: Chief Executive Officer
<PAGE>
ACCEPTANCE
I hereby agree to all the terms and provisions of the
foregoing letter agreement governing the special benefits to which I may become
entitled upon a termination of my employment under certain prescribed
circumstances.
Dated: January____, 2000
------------------------------------------
Name
<PAGE>
EXHIBIT 10.42
EXECUTIVE LIFE PROGRAM
COLLATERAL ASSIGNMENT SPLIT DOLLAR AGREEMENT
BETWEEN THE COMPANY AND DAVID A. PURCELL, DATED DECEMBER 1, 1999
This Split Dollar Agreement is entered into as of December 1, 1999, by and
between David A. Purcell, (the "Employee" or "Owner" when referred to in that
capacity) and ENCAD, Inc. (the "Employer").
RECITALS
Whereas, Employee is eligible for and wishes to participate in the
Employer's Executive Life Program (the "Program"); and
Whereas, Owner will be the sole owner and possessor of the Policy and
assign an interest in the Policy's death benefit and cash value to the Employer
as collateral to secure repayment of Employer's premium payments with respect to
the Policy; and
Whereas, it is the intent of the Employer and Owner to define the
limited extent of the Employer's security interest in the Policy;
Now, therefore, Employer and Owner mutually agree that:
SECTION (1): INTERESTS IN THE POLICY CASH VALUES The Policy,
which is the subject of this Split Dollar Agreement, is a variable universal
life policy issued by Nationwide Life Insurance Company (the "Insurer")
Policy Number **, on the life of the Employee. The Employer's interest in the
cash value of the Policy (the "Employer's Interest") shall be equal to the
sum of (a) plus (b), minus (c) where: (a) equals the total amount of the
premium payments made on the Policy during the five Policy Years following
the date of this Agreement, (b) equals the excess of the cash value of the
Policy over the sum of the premiums paid during the five Policy Years
following the date of this Agreement and the Owner's Interest as defined
below, and (c) equals the total loans or distributions taken by the Employer
as described in Section (4) below. The Owner's interest in the cash value of
the Policy (the "Owner's Interest") shall be equal to the cash value of the
Policy, if any, in excess of the premium payments made on the Policy during
the five years following the date of this Agreement, but in no event greater
than, **, and then reduced by the amount of any distributions from the cash
value of the Policy made to the Owner as permitted by this Agreement.
Notwithstanding anything in this Agreement to the contrary, in the event of
the bankruptcy or insolvency of the Employer during the term of this
Agreement, the Policy, including the Owner's Interest therein, shall be
subject to the claims of creditors of the Employer.
SECTION (2): PREMIUM PAYMENTS
On or before the due date of each premium payment on the Policies, or within the
grace period provided therein, Employer will pay the entire premium due on the
Policy. The current intent of the Employer is to make premium payments as they
are due until the termination of service of the Employee with the Employer, but
the Employer shall have the unrestricted right to cease the payment of any or
all premiums due at its discretion upon notice to the Owner of such intent.
The Employee shall have imputed income each year in an amount equal to the
annual cost of current death benefit protection on the life of the Employee,
measured by the lower of (a) the PS 58 rate, as set forth in Revenue Ruling
55-747 (or the corresponding applicable provision of any future Revenue Ruling),
or (b) the Insurer's current published premium rate for annually renewable term
insurance for standard risks.
** CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
SECTION (3): DEATH BENEFIT AMOUNTS In the event of the
Employee's death prior to the termination of this Agreement, the death
benefit payable to the Owner (or the Owner's designated beneficiaries) shall
be equal to the present value at the time of Employee's death of the
distributions which may be permitted to the Owner under this Agreement as
defined in Section (4) below had the Employee survived, reduced by the amount
of any distributions payable to the Owner from the cash value during the
lifetime of the Employee, except that in no event, shall the amount of the
death benefit to be received by the Owner (or the Owner's designated
beneficiaries) be less than **. For purposes of this Agreement, the present
value of the distributions which may be permitted to the Owner under this
Agreement shall be calculated assuming a discount rate of seven percent (7%).
In the event of Employee's death prior to the termination of this Agreement, the
death benefit payable to the Employer (or the Employer's designated
beneficiaries) under this Agreement shall be equal to the excess of the total
death proceeds under the Policy less the amount payable to the Owner (or the
Owner's designated beneficiaries) as defined above.
Owner understands that sufficiency of cash value in the Policy to provide
expected amounts of death benefit under this Agreement may vary as a result of
Policy performance and duration of premium payments and this is in no event
guaranteed by the Employer or the Insurer. The Employer makes no representation
or warranty as to the merits or risks of the investment performance of the
Policy.
SECTION (4): OWNERSHIP AND RIGHTS IN THE POLICY
The Policy will be owned exclusively by the Owner or the Owner's Assignee (for
purposes of this Agreement, Owner's Assignee shall be included in the definition
of Owner). Any rights in the Policy other than those specifically mentioned in
this Agreement must be exercised with the written consent of both the Owner and
the Employer (for purposes of this Agreement, Employer's Assignee shall be
included in the definition of Employer).
EMPLOYER'S RIGHTS. While this Agreement is in effect, the Employer has a
security interest in the Policy limited exclusively to: (a) that portion of the
cash value of the Policy equal to the Employer's Interest in the Policy; or (b)
the death benefit payable to the Employer as set forth in Section 3, above. The
Employer shall be permitted to receive a distribution from the Policy in the
form of a policy loan or withdrawal, but only to the extent of its Interest as
set forth in this Agreement. In addition, the Employer shall have the right to
make any investment choices permitted by the Policy with respect to the cash
value of the Policy, and Owner shall agree to waive this right as long as this
Agreement remains in force in accordance with the established procedures of the
Insurer.
OWNER'S RIGHTS. The Owner's rights include the right to irrevocably assign
any of their rights under the Policy, with the consent of the Employer and
the Insurer and to select and change beneficiaries to receive Owner's death
benefits. The Owner will not be permitted to borrow against, or partially or
totally surrender the Policy as long as the Collateral Assignment remains in
force. The Owner shall not be permitted to receive a distribution from the
cash value of the Policy while the Split Dollar Agreement remains in force,
except in accordance with the following rules: the Owner shall not receive a
distribution from the cash value of the Policy prior to the termination of
the Employee's service with the Employer. Beginning on the first day of the
sixth Policy Year, as defined in the Policy, the Owner may begin to receive
distributions from the Owner's Interest in the cash value of the Policy. The
distribution shall be made annually and shall be limited to an amount of * *,
and shall continue for a total of 10 years, or until the Owner's Interest is
exhausted.
** CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
SECTION (5): ASSIGNMENT OF POLICY TO SECURE EMPLOYER'S PAYMENTS
To secure Employer's Interest in the Policy under this Agreement, Owner will
collaterally assign the Policy to the Employer by signing the separate
Collateral Assignment. The Collateral Assignment cannot be altered without the
Employer's, Owner's, and Insurer's consent.
SECTION (6): TERMINATION OF SPLIT DOLLAR AGREEMENT
This Split Dollar Agreement, and all obligations of the Employer to pay premiums
under it, will terminate upon the earliest to occur of the following:
a) Death of the Employee;
b) Written agreement of both the Owner and the Employer to terminate this
Agreement; and,
c) Failure of the Employee or Owner to complete all necessary requirements
for the Insurer to issue a policy, including the waiver of investment
choices; and,
Upon Termination of this Agreement, the Employer shall receive the Employer's
Interest in the Policy as soon as is practical, but in no event shall receipt be
later than sixty (60) days from the earliest of the dates listed above. In the
event of termination of this Agreement for reason other than the death of the
Employee, the Employer's Interest in the Policy and under this Agreement shall
be satisfied either directly from the cash value of the Policy or by direct
payment by the Owner, at the discretion of the Owner. In this event, the
recovery of the Employer's Interest shall be limited to the cash value of the
Policy at that time. In the event of Termination of this Agreement by reason of
the death of the Employee, the Employer's Interest in the Policy and under this
Agreement shall be satisfied through direct payment from the Insurer from the
Policy proceeds.
SECTION (7): PAYMENT OF PROCEEDS OR CASH VALUE TO EMPLOYER
Upon receipt of the Employer's Interest in the Policy, as provided in Section 1
above, whether from the Policy, or from the Owner, the Employer will release the
Collateral Assignment. Upon satisfaction of the Employer's Interest in the
Policy, the Owner shall have unrestricted ownership to the Policy.
Upon termination of this Split Dollar Agreement by reason of the death of the
Insured, the Insurer in satisfaction of the Owner's obligations, will issue a
check directly to the Employer as collateral assignee in an amount equal to the
Employer's Interest in the Policy.
SECTION (8): MISCELLANEOUS
NOT AN EMPLOYMENT AGREEMENT. This Split Dollar Agreement does not in any way
constitute an employment agreement, and the Employer reserves the right to
terminate Employee's employment to the same extent as though the Split Dollar
Agreement did not exist. This Split Dollar Agreement may be amended at any time
by written agreement signed on behalf of the Employer and by the Owner.
BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of
the Employer and its successors and assigns, and to the Employee and the
Employee's successors, assigns, heirs, executor or personal representative, and
beneficiaries.
NOTICES. Any notice, consent or demand required or permitted under this
Agreement shall be made in writing and shall be signed by the party making the
notice, consent, or demand. Such notice shall sent by United States certified
mail, postage pre-paid and shall be sent to the other party's last known address
as shown on the records of the Employer. The date of such mailing shall be
deemed to be the date of such notice, consent or demand.
<PAGE>
AMENDMENT OF AGREEMENT. This Agreement may be altered, amended or modified,
including the addition of any additional policy provisions, by a written
agreement signed by the Employer and the Owner. It shall be the responsibility
of the Employer to notify the Insurer of any amendments or changes to this
Agreement.
GOVERNING LAW. This Agreement shall be governed by and be construed in
accordance with the laws of the State of California.
SECTION (9): NAMED FIDUCIARY
The Employer is designated as the Named Fiduciary of this Agreement for purposes
of the Employee Retirement Income Security Act of 1974, as amended. The business
address and telephone number of the Named Fiduciary are as follows:
ENCAD, Inc.
C/O Sheryl Roland
6059 Cornerstone Court West
San Diego CA 92122-3734
The Named Fiduciary shall have the authority to control and manage the operation
and administration of the Executive Life Program, of which this Agreement forms
a part thereof. The Named Fiduciary is empowered to construe and interpret the
terms of the Program and this Agreement, to supply omissions consistent with the
intent of the Program and the Agreement, and to make all determinations and
resolve all disputes regarding eligibility for and the amount of, benefits under
the Program and Agreement, consistent with the terms of the Policy. The Named
Fiduciary may delegate some or all of its duties and responsibilities to another
person or entity (e.g. a committee designated by the Employer), including
persons who are not Named Fiduciaries. Any decisions and determinations made by
the Named Fiduciary (or its delegate) shall be conclusive and binding on all
parties. The Named Fiduciary shall have the sole discretion of carrying out its
responsibilities. Any person or entity claiming a benefit, requesting an
interpretation or ruling under the Plan, or requesting information under the
Plan (hereinafter referred to as "Claimant") shall present the request in
writing to the Employer, which shall respond in writing as soon as practicable.
If the claim or request is denied, the written notice of denial shall state the
reason for denial, with specific reference to the provisions on which the denial
is based, a description of any additional material or information required and
an explanation of why it is necessary, and an explanation of the program's
claims review procedure.
SECTION (10): CLAIMS PROCEDURES
Any person or entity claiming a benefit, requesting an interpretation or ruling
under the Plan, or requesting information under the Plan (hereinafter referred
to as "Claimant") shall present the request in writing to the Employer, which
shall respond in writing as soon as practicable. If the claim or request is
denied, the written notice of denial shall state the reason for denial, with
specific reference to the provisions on which the denial is based, a description
of any additional material or information required and an explanation of why it
is necessary, and an explanation of the program's claims review procedure.
REVIEW OF CLAIM. Any Claimant whose claim or request is denied or who has not
received a response within sixty (60) days may request a review by notice given
in writing to the Employer. Such request must be made within sixty (60) days
after receipt by the Claimant of the written notice of denial, or in the event
Claimant has not received a response sixty (60) days after receipt by the
Employer of Claimant's claim or request. The claim or request shall be reviewed
by the Employer which may, but shall not be required to, grant the Claimant a
hearing. On review, the Claimant may have representation, examine pertinent
documents, and submit issues and comments in writing.
<PAGE>
FINAL DECISION. The decision on review shall normally be made within sixty (60)
days after the Employer's receipt of Claimant's claim or request. If an
extension of time is required for a hearing or other special circumstances, the
Claimant shall be notified and the time limit shall be one hundred twenty (120)
days. The decision shall be in writing and shall state the reason and the
relevant provisions. All decisions on review shall be final and bind all parties
concerned.
IN WITNESS WHEREOF, the Employer and the Owner or the Owner's Assignee have
signed this Split Dollar Agreement, which is effective as of the effective date
of the Policy described herein.
/s/ Thomas L. Green
---------------------------
OFFICER OF CORPORATION
V.P.
----------------------------
TITLE
/s/ Sheryl Roland /s/ David A. Purcell
- -------------------------- ---------------------------
WITNESS OWNER
11/8/99
---------------------------
DATE
<PAGE>
EXHIBIT 10.43
SPLIT DOLLAR COLLATERAL ASSIGNMENT BETWEEN THE COMPANY AND
DAVID A. PURCELL, DATED DECEMBER 1, 1999.
OWNER: David A. Purcell shall
----------------------------------------------------
refer to the Employee, Third Party, or Trust, and his/her/its
successors and assigns;
ASSIGNEE: Encad, Inc. shall
----------------------------------------------------
refer to the Employer, And its successors and assigns;
INSURER: Nationwide Life Insurance Company;
----------------------------------------------------
POLICY NO.: **
----------------------------------------------------
INSURED: David A. Purcell;
----------------------------------------------------
SPLIT DOLLAR AGREEMENT: shall refer to the Agreement entered into between the
Owner and the Assignee dated December 1, 1999, which is the subject of
this Collateral Assignment.
In consideration of the Split-Dollar Agreement (the "Agreement") entered into
between the above named Assignee and Owner, Assignee and Owner agree as follows:
a) The above numbered Policy is assigned by Owner to Assignee as
collateral security of Owner's liability to Assignee as
defined in the Agreement (the "Assignee's Interest"), subject
to all terms and conditions of the Policy and to all superior
liens, if any, which the Insurer may have against the Policy.
b) The rights of the Owner and Assignee are specified in the
Agreement. This Collateral Assignment is intended to provide
direction to the Insurer as to the required signatures when
either or both parties exercise certain policy rights.
In accordance with the Split Dollar Agreement, the parties agree to the
following limitations of the ability to exercise the rights provided under the
Policy:
DEATH BENEFITS
The Owner shall have the right to receive from the Policy Proceeds, an amount
determined in accordance with the Split Dollar Agreement and this Assignment.
The Assignee shall have the right to receive the balance, if any, of the Policy
Proceeds. Each Party shall have the right to designate and change the
beneficiary or beneficiaries to receive its portion of the Policy Proceeds
payable in accordance with the Split Dollar Agreement. Insurer may rely on the
Assignee's representation as to the amount so set forth in the Split Dollar
Agreement.
CASH VALUES
1. INVESTMENT CHOICES: The Assignee shall have the right to exercise any
investment choices permitted by the Policy with respect to the cash
value of the Policy, and Owner shall agree to waive this right as long
as this Agreement remains in force in accordance with the established
procedures of the Insurer.
2. SURRENDERS, POLICY LOANS AND PARTIAL WITHDRAWALS: The Assignee shall
be permitted to request and receive a distribution from the Policy in
the form of a Policy Loan, a withdrawal of cash value or a partial
surrender at an time without the prior consent of the Owner, except
that such distribution shall
** CONFIDENTIAL TREATMENT REQUESTED
1
<PAGE>
be limited to the Assignee's Interest in the Policy as defined in the
Split Dollar Agreement. The Owner shall not have the right to request
and receive a loan secured by Policy Cash Values without the express,
written consent of the Assignee. The Owner shall not have the right to
receive a distribution from the cash value of the Policy (in the form
of a Cash Withdrawal, Partial Surrender or otherwise) prior to the
termination of service by the Insured with the Assignee without the
express, written consent of the Assignee. After the termination of
service of the Insured with the Assignee, the Owner shall have the
right to receive distributions from the Policy Cash Values, but only
at the time and in the amount set forth in the Split Dollar Agreement.
Insurer may rely on the Assignee's representation as to the amount so
set forth in the Split Dollar Agreement and the manner in which the
distribution is to be accomplished.
3. TERMINATION OF THE SPLIT DOLLAR AGREEMENT: In the event of the
termination of the Split Dollar Agreement in accordance with the
provisions thereof, the Assignee shall have the right to receive an
amount equal to its Interest in the Policy payable from the cash
values of the Policy (in the form of a Cash Withdrawal, Partial or
Complete Surrender, Policy Loan or otherwise as chosen by the Assignee
with out the consent of the Owner). Pursuant to the Split Dollar
Agreement, the Owner may exercise the right to satisfy the Assignee's
Interest in the Policy by direct payment to the Assignee. Insurer may
rely on the Assignee's representation as to the amount of its Interest
in the Policy set forth in the Split Dollar Agreement and the manner
in which the distribution is to be accomplished.
MISCELLANEOUS RIGHTS
1. Any other rights not provided for in this Collateral Assignment,
including the right to surrender the Policy or exercise any
non-forfeiture options under the Policy, shall require the written
consent of both Owner and Assignee unless otherwise provided.
2. Insurer may rely on the Assignee's representation as to the amount of
the Assignee's Interest in the Policy in accordance with the Split
Dollar Agreement
3. Insurer may act on any request to exercise any right based on the
required signatures as set forth in this Collateral Assignment, and
Insurer has no duty to investigate the reason for any such exercise.
Upon payment of any amounts from the Policy based on this request,
during Insured's lifetime or at death, Insurer shall be fully
discharged and released as to its actions.
4. Owner represents that there are no other collateral assignments of the
Policy and no proceedings in bankruptcy are pending.
5. This Split-Dollar Collateral Assignment shall be binding upon the
parties and their successors, assigns, devisees, personal
representatives and other legal representatives.
6. In the event of any conflict between the terms specifying the required
signatures in this Split-Dollar Collateral Assignment and the
signatures required in the Agreement, the terms of this Split-Dollar
Collateral Assignment shall prevail as to signatures.
The Owner hereby assigns, transfers, and sets over the Policy to the Assignee,
as collateral, to secure the rights of the Assignee as set out in this
Collateral Assignment, and for no other purpose. The Policy shall remain subject
to this assignment notwithstanding any assignment, transfer or conveyance of the
Policy or any interest therein by the Owner. Nothing in this assignment shall
change the rights and obligations of the Owner and the Company as set out
herein, or in the Split Dollar Agreement as described in the preamble language
of this Assignment.
- --------------------------------------------------------------------------------
Agreed to this 1st day of December, 1999.
If signing for an entity, the undersigned represents that she/he has authority
to bind the entity.
2
<PAGE>
<TABLE>
<S> <C>
ENCAD, Inc.
- ------------------------------------------------------- -------------------------------------------------------
OWNER (Print name) ASSIGNEE (Print name of entity or individual)
/s/ David A. Purcell /s/ Thomas L. Green, V.P.
- ------------------------------------------------------- -------------------------------------------------------
SIGNATURE OF OWNER SIGNATURE OF ASSIGNEE
(and if an entity print title of authorized signor)
6059 Cornerstone Court West, San Diego, CA 92121
- ------------------------------------------------------- -------------------------------------------------------
ADDRESS ADDRESS
</TABLE>
================================================================================
Filed at the Home Office of the Insurer this ______ day of _______, 2000.
By
-----------------------------------
Authorized Officer
3
<PAGE>
EXHIBIT 10.44
AGREEMENT FOR PURCHASE AND SALE OF
REAL PROPERTY AND ESCROW INSTRUCTIONS
(ENCAD CORPORATE HEADQUARTERS)
AGREEMENT FOR PURCHASE AND SALE OF
REAL PROPERTY AND ESCROW INSTRUCTIONS
ENCAD CORPORATE HEADQUARTERS
BY AND BETWEEN
ENCAD, INC,
A DELAWARE CORPORATION,
"SELLER"
AND
BIRTCHER PROPERTIES,
A CALIFORNIA CORPORATION
"BUYER"
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
Number Title Number
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<S> <C> <C>
1. DEFINED TERMS...................................................................................1
1.1 Definitions..........................................................................1
1.1.1 Assignment of Intangible Property........................................1
1.1.2 Building Documents.......................................................1
1.1.3 Buyer's Conditions.......................................................1
1.1.4 Closing..................................................................1
1.1.5 Closing Date.............................................................1
1.1.6 Closing Office...........................................................1
1.1.7 Contract Period..........................................................2
1.1.8 Deed.....................................................................2
1.1.9 Effective Date...........................................................2
1.1.10 End of the Inspection Period.............................................2
1.1.11 End of the Financing Contingency Period..................................2
1.1.12 Exception Documents......................................................2
1.1.13 Improvements.............................................................2
1.1.14 Intangible Property......................................................2
1.1.15 Land.....................................................................2
1.1.16 Lender...................................................................2
1.1.17 New Lease................................................................3
1.1.18 Permitted Title Exceptions...............................................3
1.1.19 Plans and Specifications.................................................3
1.1.20 Project..................................................................3
1.1.21 Purchase Price...........................................................3
1.1.22 Survey...................................................................3
1.1.23 Title Commitment.........................................................3
1.1.24 Title Insurer............................................................3
1.1.25 Title Policy.............................................................3
2. PURCHASE PRICE..................................................................................4
2.1 Purchase Price.......................................................................4
2.2 Payment of Purchase Price............................................................4
3. INSPECTION OF PROJECT BY BUYER..................................................................4
3.1 Building Inspection and Documents....................................................5
3.1.1 Title Commitment.........................................................5
3.1.2 Survey...................................................................5
3.1.3 Operating Statements.....................................................5
3.1.4 Licenses and Permits.....................................................5
3.1.5 Plans and Specifications.................................................5
3.1.6 Soil Tests and Reports...................................................5
3.1.7 Inspection Reports.......................................................5
3.1.8 Warranties and Guaranties................................................5
3.1.9 Books and Records........................................................6
3.1.10 Agreements, Regulations and Orders.......................................6
3.1.11 Tax Bills................................................................6
3.1.12 Non-Foreign Person Affidavit.............................................6
3.2 Back-Up Information..................................................................6
3.3 Return of Building Documents.........................................................6
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Section Page
Number Title Number
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<S> <C> <C>
3.4 License to Enter.....................................................................6
4. CONDITIONS TO CLOSING...........................................................................7
4.1 Buyer's Conditions to Closing........................................................7
4.1.1 Condition of Title.......................................................7
4.1.2 Survey Approval and Recertification......................................7
4.1.3 Inspection Approval......................................................8
4.1.4 Due Diligence Approval...................................................8
4.1.5 Investment Committee Approval............................................8
4.1.6 Financing Approval.......................................................8
4.1.7 Leaseback................................................................8
4.1.8 Seller's Deliveries.....................................................10
4.1.9 Subordination Agreement.................................................10
4.1.10 Representations and Warranties..........................................10
4.1.11 Seller's Authorization..................................................10
4.1.12 Title Policy............................................................10
4.1.13 No Change...............................................................10
4.1.14 Seller's Covenants......................................................10
4.2 Failure of Buyer's Conditions.......................................................10
4.3 Seller's Conditions to Closing......................................................10
4.3.1 Board of Director Approval..............................................10
4.3.2 Representations and Warranties..........................................11
4.4 Failure of Seller's Conditions......................................................11
5. COVENANTS OF SELLER............................................................................11
5.1 Seller's Covenants..................................................................11
5.1.1 Leasing Activities......................................................11
5.1.2 Payment of Obligations..................................................11
5.1.3 Insurance...............................................................11
5.1.4 Compliance with Laws....................................................11
5.1.5 Encumbrances............................................................11
5.1.6 Remove Liens............................................................11
5.1.7 Change in Representation and/or Warranty................................12
5.1.8 Maintenance.............................................................12
5.1.9 Permits and Licenses....................................................12
6. CLOSING........................................................................................12
6.1 Agreement to Constitute Escrow Instructions.........................................12
6.2 Closing Date; Closing...............................................................12
6.3 Items to be Delivered by Seller.....................................................12
6.4 Items to be Delivered by Buyer......................................................13
6.5 Directions to Title Insurer.........................................................13
6.6 Prorations and Other Adjustments....................................................13
6.6.1 Items of Expense........................................................13
6.6.2 Remittance Between Parties..............................................14
6.7 Possession..........................................................................14
6.8 Seller's Closing Costs..............................................................14
6.9 Buyer's Closing Costs...............................................................14
7. WARRANTIES.....................................................................................14
7.1 Representations and Warranties of Seller............................................14
7.1.1 Access; Adjacent Development............................................15
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Section Page
Number Title Number
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<S> <C> <C>
7.1.2 Leases..................................................................15
7.1.3 Authority...............................................................15
7.1.4 Conformance with Laws...................................................15
7.1.5 Disclosure and Compliance...............................................15
7.1.6 Disclosure of Adverse Change............................................15
7.1.7 No Adverse Soil Conditions..............................................15
7.1.8 No Bankruptcy Proceedings...............................................15
7.1.9 No Default..............................................................16
7.1.10 No Hazardous Wastes.....................................................16
7.1.11 No Infestation..........................................................16
7.1.12 No Litigation...........................................................16
7.1.13 No Notices..............................................................16
7.1.14 No Undisclosed Assessments..............................................16
7.1.15 No Untrue Statements....................................................17
7.1.16 No Violation of Other Agreements........................................17
7.1.17 Operating Statements....................................................17
7.1.18 Operation During Contract Period........................................17
7.1.19 Parking.................................................................17
7.1.20 Improvements............................................................17
7.1.21 Project Condition.......................................................17
7.1.22 Storm Water.............................................................17
7.1.23 Title to Real Property..................................................17
7.1.24 Utilities Available.....................................................18
7.1.25 Zoning and Other Governmental Information...............................18
7.2 Representations and Warranties of Buyer.............................................18
7.2.1 Required Approvals......................................................18
7.2.2 No Conflicts............................................................18
7.2.3 Adverse Change..........................................................18
7.2.4 Securities Compliance...................................................18
8. TERMINATION OF AGREEMENT.......................................................................18
8.1 Termination.........................................................................18
8.2 Liquidated Damages..................................................................19
9. REAL ESTATE COMMISSION.........................................................................19
9.1 Broker Compensation.................................................................19
9.2 No Other Broker.....................................................................20
10. ASSIGNMENT.....................................................................................20
10.1 Right of Assignment.................................................................20
11. MISCELLANEOUS..................................................................................20
11.1 Material Damage or Condemnation.....................................................20
11.2 Attorneys'and Other Fees............................................................21
11.3 Notices.............................................................................21
11.4 Time of Essence.....................................................................22
11.5 Waiver or Modification..............................................................22
11.6 Successors and Assigns; Survival....................................................22
11.7 Number and Gender...................................................................22
11.8 Governing Law.......................................................................22
11.9 Construction........................................................................23
11.10 Integration of Other Agreements.....................................................23
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<PAGE>
<TABLE>
<CAPTION>
Section Page
Number Title Number
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<S> <C> <C>
11.11 Duplicate Originals; Counterparts...................................................23
11.12 Non-Waiver of Rights................................................................23
11.13 Days................................................................................23
11.14 Incorporation of Exhibits...........................................................23
11.15 IRS Form 1099-S.....................................................................24
11.16 Further Assurances..................................................................24
11.17 Exclusive Right to Negotiate........................................................24
</TABLE>
(iv)
<PAGE>
EXHIBIT 10.44
AGREEMENT FOR PURCHASE AND SALE OF
REAL PROPERTY AND ESCROW INSTRUCTIONS
(ENCAD CORPORATE HEADQUARTERS)
THIS AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND
ESCROW INSTRUCTIONS ("Agreement") is made and entered into as of August
,1999, by and between ENCAD, INC., a Delaware corporation ("Seller"), and
BIRTCHER PROPERTIES, a California corporation ("Buyer"), with reference to
the following facts:
A. Seller owns the "Project" (as that term is defined herein).
B. Buyer desires to purchase and acquire the Project, on the
terms and conditions set forth herein.
C. Seller, by this Agreement, agrees with Buyer to sell,
transfer, assign and convey the Project to Buyer, in accordance with the terms,
provisions and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises,
covenants, representations, conditions and agreements contained herein, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Seller hereby agrees to sell to Buyer, and Buyer hereby
agrees to purchase from Seller, the Project, on the following terms and
conditions:
1. DEFINED TERMS
1.1 Definitions.
For the purposes of this Agreement defined terms, as
indicated by initial capital letters, shall have the meanings set forth in this
Article 1:
1.1.1 ASSIGNMENT OF INTANGIBLE PROPERTY. "Assignment of
Intangible Property" shall mean an assignment of the Intangible Property
executed by Seller in favor of Buyer, together with an acknowledgment thereof by
Buyer, in a form approved by Buyer prior to the End of the Inspection Period.
1.1.2 BUILDING DOCUMENTS. "Building Documents" shall have
the meaning set forth in SECTION 3.1.
1.1.3 BUYER'S CONDITIONS. "Buyer's Conditions" shall have
the meaning set forth in SECTION 4.1.
1.1.4 CLOSING. "Closing" shall mean the delivery of the
Deed and the other documents required to be delivered hereunder and the payment
by Buyer to Seller of the Purchase Price for the Project.
1.1.5 CLOSING DATE. "Closing Date" shall mean the date on
which the Closing occurs and shall occur on the date specified in SECTION 6.2
below.
1.1.6 CLOSING OFFICE. "Closing Office" shall mean the
offices of First American Title Insurance Company in San Diego, California, or
such other place as Buyer and Seller shall designate.
<PAGE>
1.1.7 CONTRACT PERIOD. "Contract Period" shall mean the
period commencing upon the Effective Date and ending upon the first to occur of
the Closing or the termination of this Agreement.
1.1.8 DEED. "Deed" shall mean a grant deed conveying the
Land and the Improvements, executed and acknowledged by Seller in favor of
Buyer, in form and substance acceptable to Buyer, Buyer's counsel and the Title
Insurer. The form and substance of the Deed shall be agreed upon by Buyer and
Seller prior to the End of the Inspection Period.
1.1.9 EFFECTIVE DATE. "Effective Date" shall mean the date
set forth in this first paragraph of this Agreement.
1.1.10 END OF THE INSPECTION PERIOD. "End of the
Inspection Period" shall mean the date thirty (30) days after the later of (i)
Seller has advised Buyer in writing that Seller has delivered to Buyer all of
the Building Documents to be delivered to Buyer pursuant to SECTION 3.1 and
Buyer has acknowledged, in writing, receipt of all such items, and (ii) the date
Seller notifies Buyer of the approval of its Board of Directors as provided for
in SECTION 4.3.1 below.
1.1.11 END OF THE FINANCING CONTINGENCY PERIOD. "End of
Financing Contingency Period" shall mean the date forty-five (45) days after the
approval of Seller's Board of Directors, Seller may contact Buyer's proposed
Lender regarding the status of a potential loan at any time within fifteen (15)
days prior to the End of the Financing Contingency Period.
1.1.12 EXCEPTION DOCUMENTS. "Exception Documents" shall
have the meaning set forth in SUBSECTION 1.1.23.
1.1.13 IMPROVEMENTS. "Improvements" shall mean all
buildings, parking lots, walks and walkways, fixtures and equipment (including,
without limitation, all plumbing, electrical, heating, air conditioning and
ventilating lines and systems, elevators, and boilers) and all other
improvements located at or on or affixed to the Land to the full extent that
such items constitute realty under the laws of the state in which the Project is
located.
1.1.14 INTANGIBLE PROPERTY. "Intangible Property" shall
mean the permits, certificates of occupancy and all similar items owned by
Seller, including without limitation plans, specifications, maps, drawings, and
other similar documents and/or items relating to the Project which are in
Seller's possession.
1.1.15 LAND. "Land" shall mean all that certain land
located at 5959 and 6059 Cornerstone Court West in the City of San Diego,
California, known as "ENCAD Corporate Headquarters" and more particularly
described in EXHIBIT "A" attached hereto, together with all appurtenances
thereto, including without limitation all easements and rights to use adjacent
properties, any land lying in the bed of any street, road or avenue, open or
proposed, in front of, within or adjoining or adjacent to the Land, which are
owned by Seller. The Land shall include any and all oil, gas, water and mineral
rights and shares of stock pertaining to water or water rights, whether or not
appurtenant thereto, ownership of which affects the Land, and all easements,
rights of way, and other rights appurtenant thereto.
1.1.16 LENDER. "Lender" shall mean such bank, savings and
loan association, insurance company, or other financial institution or private
party if any, which shall provide the funds for Buyer's acquisition of the
Project.
<PAGE>
1.1.17 NEW LEASE. "New Lease" shall mean the leaseback
between Buyer and Seller on the form of lease approved by Buyer and Seller
pursuant to the provisions of SECTION 4.1.7 below.
1.1.18 PERMITTED TITLE EXCEPTIONS. "Permitted Title
Exceptions" shall have the meaning set forth in SUBSECTION 4.1.1.
1.1.19 PLANS AND SPECIFICATIONS. "Plans and
Specifications" shall mean the plans, specifications, and sepias for the
Project, including as-built drawings and specifications for the Improvements,
any drawings that have been prepared by Seller's architects or other
professionals after completion of the Project and reflect the Improvements
"as-built", and all architectural, structural, mechanical, electrical, and
landscaping plans and specifications, surveys, engineering studies and reports,
applicable flood plain maps and reports relating to the Project prepared prior
to the Effective Date which Seller has in its possession or can reasonably
obtain.
1.1.20 PROJECT. "Project" shall mean the Land, the
Improvements and the Intangible Property, collectively. The Project shall
include any and all rights appurtenant thereto which are owned by Seller.
1.1.21 PURCHASE PRICE. "Purchase Price" shall mean the
aggregate consideration, specified in SECTION 2.1 below, to be paid by Buyer to
Seller for the Project.
1.1.22 SURVEY. "Survey" shall mean an American Land Title
Association ("ALTA") Survey of the Project and a plat of the results of such
instrument survey, made by a surveyor or civil engineer duly licensed in the
jurisdiction in which the Project is located, and certified to Buyer, Lender,
and the Title Insurer in a manner that will permit the issuance of the Title
Policy and in form and substance otherwise satisfactory to Buyer, Lender, and
the Title Insurer. The Survey shall certify that it is made for Buyer, Lender,
the Title Insurer and their successors and assigns, and shall be dated, signed
and certified by the surveyor or engineer.
1.1.23 TITLE COMMITMENT. "Title Commitment" shall mean a
binder, preliminary title report or commitment issued by the Title Insurer to
Buyer providing for the issuance, at the Closing, to Buyer of the Title Policy.
The Title Commitment shall state that Seller is the owner of the fee simple
interest in the Land and Improvements and shall disclose, shall have attached to
it, and shall mean and include, copies of all matters of record affecting the
Land and Improvements and every other document referred to in the Title
Commitment creating exceptions to title or encumbrances against the Project
(collectively, "Exception Documents").
1.1.24 TITLE INSURER. "Title Insurer" shall mean First
American Title Insurance Company in San Diego, California.
1.1.25 TITLE POLICY. "Title Policy" shall mean the most
current form of ALTA (extended coverage) Policy (either (i) a Lender's Policy
and an Owner's Policy or (ii) a Joint Protection Policy, as appropriate) of
Title Insurance, dated the date and time of Closing and with liability in the
amount of the loan, if any, in favor of Lender, insuring Lender as to the
priority of its lien, and with liability in the amount of the Purchase Price,
insuring Buyer as owner of good, marketable and indefeasible fee title to the
Land and Improvements, subject only to the Permitted Title Exceptions and such
other exceptions over which Title Insurer is willing to insure that such
exceptions will result in no loss to the Project or to Buyer; provided that such
endorsements or other assurances from Title Insurer are in a form that is
satisfactory to Buyer and Lender, in Buyer's and/or Lender's sole discretion.
The Title Policy shall affirmatively insure (by endorsement or otherwise) that
the property described therein (that is, the
<PAGE>
Land) is the same as is depicted on the Survey and that the Improvements are
located thereon, and that none of the Permitted Title Exceptions are violated by
the existence or current use of the Improvements. Seller shall pay all expenses
directly associated with a CLTA policy, and Buyer shall pay all differential
expenses associated in any manner with the ALTA policy.
2. PURCHASE PRICE
2.1 PURCHASE PRICE.
The Purchase Price for the Project shall be Twelve Million
Two Hundred Thousand Dollars ($12,200,000.00).
2.2 PAYMENT OF PURCHASE PRICE.
The Purchase Price shall be payable all cash (or by
cashier's check or same day federal funds wire transfer) at the Closing.
2.3 EARNEST MONEY DEPOSIT.
Buyer agrees to cause an escrow (the "Escrow") to be
opened with First American Title Insurance Company in San Diego, California
("Escrow Holder"), and Buyer shall deposit into the Escrow within five (5) days
following the Effective Date Two Hundred Forty Thousand Dollars ($240,000.00)
(the "Earnest Money Deposit"). The Earnest Money Deposit shall be made by
delivering cash or certified funds to Escrow Holder. Any funds delivered to
Escrow Holder shall be deposited by Escrow Holder in an insured interest bearing
account or another account designated by Buyer. Interest accruing on the Earnest
Money Deposit, if any, shall be held for the benefit of Buyer and, if so
directed by Buyer, shall apply towards the payment of the Purchase Price. The
Escrow shall be opened and maintained for the purpose of holding and disbursing
monetary deposits and documents evidencing monetary amounts as directed by Buyer
and Seller, and Escrow Holder is hereby directed to disburse funds held by it in
accordance with the terms and provisions of this Agreement, or as otherwise
directed in a writing signed by both Buyer and Seller. If this Agreement is
terminated prior to or at the End of the Inspection Period and Buyer has made
the Earnest Money Deposit, Escrow Holder is hereby instructed to promptly return
the Earnest Money Deposit, together with any interest earned thereon, to Buyer.
Similarly, if this Agreement is terminated after the End of the Inspection
Period due to a default by Seller, Escrow Holder is hereby instructed to
promptly return the Earnest Money Deposit, together with any interest earned
thereon, to Buyer. If this Agreement is terminated after the End of the
Inspection Period due to a default by Buyer, Escrow Holder is hereby instructed
to promptly deliver the Earnest Money Deposit to Seller. These instructions
shall be irrevocable and shall supersede any conflicting provision in Escrow
Holder's general conditions or in any escrow instructions executed upon Escrow
Holder's request. This Agreement shall constitute escrow instructions to Escrow
Holder with respect to the Earnest Money Deposit, but Escrow Holder shall be
concerned only with the receipt and deposit of funds and the disbursement of
funds as provided in this Agreement, or as otherwise directed in writing by both
Buyer and Seller, but shall not be otherwise concerned with the terms and
provisions of this Agreement. At the Closing and at Buyer's request, Seller
shall deliver to Buyer, in addition to all other deliveries required herein, an
executed instruction directing the Escrow Holder to return the Earnest Money
Deposit to Buyer, which instruction shall be in a form approved by Buyer and
Escrow Holder.
3. INSPECTION OF PROJECT BY BUYER
<PAGE>
3.1 BUILDING INSPECTION AND DOCUMENTS.
Seller agrees to assist and cooperate with Buyer in
obtaining access to the Project and certain documents relating thereto for the
purpose of inspection. Seller agrees to provide Buyer and its agents,
consultants and employees access to the Project to inspect each and every part
thereof subject to the provisions of SECTION 3.4 hereof. To the extent such
documents are in Seller's possession or control, Seller shall also deliver to
Buyer, within ten (10) days after the Effective Date, the following documents
and records relating to the Project, or make the same available to Buyer as
herein provided (collectively "Building Documents"), for Buyer to inspect:
3.1.1 TITLE COMMITMENT. Two (2) copies of the Title
Commitment issued by the Title Insurer, dated not earlier than the Effective
Date.
3.1.2 SURVEY. Three (3) copies of the Survey. A survey
completed before the Effective Date shall be sufficient provided that it is
acceptable to the Title Insurer and that three (3) copies of a Survey completed
and certified by the surveyor after the Effective Date shall be delivered to
Buyer at least fifteen (15) days prior to the Closing Date.
3.1.3 OPERATING STATEMENTS. Income and expense statements
for the Project for the two (2) most recent full calendar years prior to the
Closing (or the period of time the Project has been in existence, if less than
three (3) years) and, to the extent available, the current year, all of which
shall be certified by the Chief Financial Officer of Seller, as having been
prepared from the books and records of the Project in accordance with generally
accepted accounting principles (except to the extent prepared on a cash or tax
basis). Seller shall deliver to Buyer the above statements prepared in the
ordinary course of business and relating to periods prior to the Closing, even
if prepared after the Closing, promptly upon preparation thereof. All statements
to be provided hereunder shall be certified by Seller as being true and correct
and shall be prepared from the actual operations of the Project. Included in
such information shall be a copy of any operating budgets for the Project for
the current year and the next succeeding calendar year. Any statements provided
hereunder shall include, to the extent available and to the extent applicable,
itemization of all capital expenditures made during the respective periods.
3.1.4 LICENSES AND PERMITS. Copies of all licenses, all
heating, ventilating, air conditioning, boiler, building and other permits,
authorizations, approvals, certificates and similar items, and all certificates
of occupancy and similar documents required in connection with the Project
and/or the maintenance or operation thereof.
3.1.5 PLANS AND SPECIFICATIONS. Copies of all existing
Plans and Specifications.
3.1.6 SOIL TESTS AND REPORTS. Soil and geological tests
and reports relating to the Project.
3.1.7 INSPECTION REPORTS. Inspection reports relating to
or referring to the construction and/or maintenance of the Improvements, if
available.
3.1.8 WARRANTIES AND GUARANTIES. Copies of any and all
written warranties and/or guaranties pertaining to the landscaping, roofs,
plumbing, mechanical, electrical and heating and air conditioning systems,
parking lots and equipment that are part of the Project, or Seller's
certification that there are no such warranties or guaranties.
<PAGE>
3.1.9 BOOKS AND RECORDS. Seller need not deliver, except
as otherwise provided herein, but shall make available for Buyer's review and
photocopying, all books and records covering the operations of the Project from
the date any certificate of occupancy and/or building permit for the Project was
originally issued by the appropriate governmental agency having jurisdiction
over the Project, including, without limitation, monthly operating statements,
cash receipt journals, and any and all invoices, receipts, and other items
relating to operation, repair or maintenance of the Project.
3.1.10 AGREEMENTS, REGULATIONS AND ORDERS. Copies of all
agreements, regulations and orders affecting the Project and the parking
requirements for the operation of the Project, including, but not limited to,
all such notices received by Seller during the two (2) year period immediately
preceding the date of this Agreement.
3.1.11 TAX BILLS. Copies of the current tax bill(s) or
notice(s) affecting the Project, as well as copies of the two (2) immediately
preceding years' tax bills and notices of proposed increases or changes in the
assessed value of the Project and any protests, complaints or appeals filed with
respect thereto during the last two (2) years.
3.1.12 NON-FOREIGN PERSON AFFIDAVIT. An affidavit,
executed by Seller and each person or entity comprising Seller, in a form
approved by Buyer, certifying that Seller is not a "foreign person" within the
meaning of Section 1445(f)(3) of the Internal Revenue Code of 1986, as amended.
3.2 BACK-UP INFORMATION.
Seller shall deliver to Buyer or provide Buyer access to,
within five (5) business days following the written request of Buyer, such
back-up information and documents relating to the operating records of Seller
with respect to the Project which Buyer may reasonably request, and which are in
the possession of Seller or reasonably available to Seller and which are
necessary to allow Buyer to perform its due diligence with respect to the
transaction contemplated by this Agreement.
3.3 RETURN OF BUILDING DOCUMENTS.
If this Agreement is terminated, then promptly following
such termination, Buyer shall return to Seller the Building Documents and any
other materials pertaining to the Project that Buyer has received from or
through Seller.
3.4 LICENSE TO ENTER.
Seller hereby agrees that, subject to prior written notice
to Seller and prior scheduling with Seller, and Seller's agreement, not to be
unreasonably withheld, Buyer and/or Buyer's agents, representatives, contractors
and subcontractors may enter upon the Project prior to the Closing in order to
conduct reasonable engineering studies, environmental tests and studies, soil
and compaction tests and other tests and studies provided that Buyer shall be
responsible for any damage caused thereby to the Property. Buyer shall be
responsible for any liability, costs, claims, damage or injury caused by such
entry and shall keep the Property free of any and all liens arising therefrom.
Buyer shall indemnify and hold Seller harmless against such liability, costs,
claims, demands, damage or injury. Buyer shall maintain commercial general
liability insurance policies to cover Buyer's activities on the Project pursuant
to this Section in such amounts as are reasonably required by Seller. Seller
shall be named as an additional insured on such policies. Buyer shall deliver to
Seller such evidence of compliance with such insurance requirements prior to
entering the Project. The
<PAGE>
provisions of this Section shall survive the Closing and the termination of this
Agreement, as applicable.
4. CONDITIONS TO CLOSING
4.1 BUYER'S CONDITIONS TO CLOSING.
Buyer's obligation to acquire the Project, and the
Closing, shall, in addition to any other conditions set forth herein, be
conditional and contingent upon the satisfaction, or waiver by Buyer (in Buyer's
sole and absolute discretion), of each and all of the following conditions
(collectively "Buyer's Conditions"):
4.1.1 CONDITION OF TITLE. Buyer shall have approved those
covenants, conditions, restrictions, rights of way, easements, reservations, and
other matters of record disclosed in (i) the Title Commitment, (ii) the
Exception Documents, and (iii) the Survey. Seller shall cause Title Insurer,
promptly following the Effective Date of this Agreement, to issue the Title
Commitment and to deliver to Buyer copies of all Exception Documents and copies
of all documents referenced in any recorded memorandum, all at Seller's sole
cost and expense. If Buyer disapproves of any matter disclosed in the Title
Commitment, Buyer shall notify Seller of such disapproval within thirty (30)
days following receipt of the Title Commitment and all Exception Documents in
legible form and the Survey, and Seller shall have ten (10) days from receipt of
such disapproval to agree to attempt to remove the disapproved matter; provided
however, if Buyer fails within such thirty (30) day period to approve any matter
disclosed in the Title Commitment or the Exception Documents, by written notice
to Seller and Escrow Holder, then such matter shall be deemed disapproved by
Buyer. Seller's agreement to attempt to remove such disapproved items shall not
be deemed an agreement by Seller to remove such disapproved items nor shall
Seller's failure to remove such disapproved items, for any reason whatsoever, be
considered or deemed a default by Seller under, or a breach by Seller of, the
terms of this Agreement. If Seller is successful in removing all disapproved
matters, the Title Commitment and Exception Documents shall then be deemed
approved, and this contingency shall be satisfied. If Seller does not agree to
attempt to remove all disapproved matters, or if Seller is not successful in
removing all disapproved matters, Buyer shall have five (5) days from the
earlier of (i) the date Seller notifies Buyer that Seller will not attempt to
remove or cannot remove disapproved matters, or (ii) ten (10) days from the date
of Seller's receipt of Buyer's disapproval, if Seller does not agree to remove
such disapproved matters, to either terminate this Agreement or agree to accept
title to the Project subject to the disapproved matters that Seller cannot, or
will not, remove. If Buyer does not notify Seller in writing within such five
(5) day period of its willingness to accept title to the Project subject to
those matters Seller cannot, or will not, remove, Buyer shall be deemed to have
elected to terminate this Agreement. The exceptions to title that Buyer
approves, or is deemed to have approved, under this SUBSECTION 4.1.1, and under
the terms of SUBSECTION 4.1.2 below, shall be referred to as "Permitted Title
Exceptions"; provided, however, that notwithstanding any other provision of this
SUBSECTION 4.1.1, or SUBSECTION 4.1.2 below, the Permitted Title Exceptions
shall not include, and Seller shall remove at or before the Closing and shall
cause the Project to be delivered free and clear of, any lien encumbering the
Project that secures the payment of money, such as mechanic's and materialmen's
liens, and the liens of deeds of trust and mortgages, unless Buyer otherwise
notifies Seller in writing.
4.1.2 SURVEY APPROVAL AND RECERTIFICATION. Buyer shall
have reviewed and approved those matters disclosed by the Survey within thirty
(30) days after the later to occur of Buyer's (i) receipt of the Survey or (ii)
receipt of the Title Commitment and the Exception Documents, in legible form.
The Survey shall be sufficient in all respects to allow Title Insurer to issue
the Title Policy at the Closing. If Buyer fails, within such thirty (30) day
period, to disapprove any matter disclosed in the
<PAGE>
Survey, by written notice to Seller, then the Survey shall be deemed approved by
Buyer. Otherwise, the process for removing and approving the matters disclosed
in the Survey shall be the same as applied to the Title Commitment, as set forth
in SUBSECTION 4.1.1 above.
4.1.3 INSPECTION APPROVAL. Buyer shall have approved in
writing in Buyer's sole and absolute discretion, at or before the End of the
Inspection Period, the condition of the Project following Buyer's inspection of
the Project. With respect to Buyer's investigation, Buyer may, by means of
agents and experts acceptable to Buyer, inspect and receive reports concerning
the condition of the Project, including, but not limited to, the condition of
the roof, the utilities and the mechanical systems and the structure of the
Improvements. Buyer's failure to notify Seller of Buyer's approval of the
physical condition of the Project at or prior to the End of the Inspection
Period, shall be deemed a disapproval of the Project's physical condition by
Buyer. If Buyer notifies Seller at or prior to the End of the Inspection Period
of Buyer's disapproval of the physical condition of the Project, Buyer shall
include with such notice a punch list of corrective work which Buyer considers
necessary to be performed. Within ten (10) days of receipt of such notice,
Seller shall notify Buyer of its election to either (i) perform the corrective
work designated by Buyer, at Seller's sole cost and expense, and complete such
work prior to the Closing, or (ii) not agree to perform such corrective work. In
the event Seller fails to give notice of Seller's election, Seller shall be
deemed to have elected to perform the corrective work. If Seller elects, or is
deemed to have elected, to perform the corrective work, this Buyer's Condition
shall be deemed satisfied, provided Seller performs the corrective work to
Buyer's reasonable satisfaction prior to the Closing. If Seller elects not to
perform the corrective work, the End of the Inspection period shall, for
purposes of this SUBSECTION 4.1.3 and SECTION 6.1 below, be extended for an
additional fifteen (15) day period, and this Agreement shall terminate
automatically at the End of the Inspection Period (as so extended), by reason of
the failure of this Buyer's Condition, unless Buyer notifies Seller in writing
at or prior to the End of the Inspection (as so extended) that Buyer waives the
necessity of the satisfaction of this Buyer's Condition.
4.1.4 DUE DILIGENCE APPROVAL. Buyer shall have approved,
in Buyer's sole discretion, at or prior to the End of the Inspection Period, all
matters disclosed by the Building Documents and other matters discovered by
Buyer in the course of its investigation of the Project. If Buyer fails, at or
prior to the End of the Inspection Period, to approve any matters disclosed
therein, by written notice to Seller, then all such matters shall be deemed
disapproved by Buyer and this Buyer's Condition shall be deemed not satisfied.
4.1.5 INVESTMENT COMMITTEE APPROVAL. Buyer shall have
received, on or before the date five (5) days after the Effective Date, the
unconditional approval of Buyer's Investment Committee for the acquisition of
the Project, pursuant to the terms and conditions of this Agreement and Buyer
shall have notified Seller in writing of such approval. If Buyer fails to obtain
the unconditional approval of Buyer's Investment Committee, then this Agreement
shall be deemed disapproved by Buyer and this Agreement shall terminate.
4.1.6 FINANCING APPROVAL. Buyer shall have received, on or
before the End of the Financing Contingency Period, an irrevocable commitment
from a Lender providing financing for the acquisition of the Project on such
terms and subject to such conditions as may be approved by Buyer in its sole and
absolute discretion.
4.1.7 LEASEBACK. Buyer and Seller shall have mutually
approved at or prior to the date twenty (20) days after the Effective Date, the
form and terms of a lease to be entered into between Buyer and Seller for the
Project as of the Closing (the "New Lease"). The New Lease shall be based upon
the 1997 AIR Standard
<PAGE>
Industrial/ Commercial Single-Tenant Net Lease form, subject to the terms and
provisions set forth below and such other terms and revisions as may be
appropriate. The basic terms of the New Lease shall be as follows:
TERM: Seven (7) years commencing upon Closing
with an option to extend for five (5) years at fair rental value so long as the
Tenant's financial condition is as good or better than Tenant's financial
condition as of the Closing.
RENT RATES.
<TABLE>
<CAPTION>
PERIOD MONTHS $ PSF/MO.
------ ------ ---------
<S> <C> <C>
1 1-12 $1.04
2 13-24 $1.13
3 25-36 $1.21
4 37-48 $1.25
5 49-60 $1.30*
6 61-72 $1.34
7 73-84 $1.38
</TABLE>
*At the commencement of period 5, the rent shall
be increased to the stipulated amount or the period 3 rent rate plus the
increase in the Consumer Price Index from months 25 through 48, whichever is
greater. Thereafter, the rental rates shall be increased as stipulated or three
percent (3%) over each previous period, whichever is greater.
TRIPLE NET: The New Lease shall be triple-net
basis with the Tenant assuming payment of all expenses associated with the
operation of the Project including both fixed expenses, such as taxes and
insurance, and all operating expenses, including maintenance, repair and
replacement.
SECURITY DEPOSIT: Tenant shall deposit with
Landlord an irrevocable Letter of Credit (the "Letter of Credit") in Landlord's
favor in an amount equal to the rent due for the first year of the New Lease.
For each fiscal year after the fiscal year ending 2001 that Tenant's audited
financials reflect a net income exceeding $1,000,000, the Letter of Credit shall
be reduced by an amount equal to one-fifth (1/5) of the original amount.
Conversely, for each fiscal year that Tenant's audited financials reflect a net
loss exceeding $500,000, any previous reductions in the Letter of Credit shall
be reinstated by an amount equal to one-fifth (1/5) of the original amount. The
total amount of the Letter of Credit shall never exceed the amount of the rent
due for the first year of the New Lease. The Letter of Credit may be called and
utilized in the event of any default by Tenant under the New Lease subject only
to applicable cure periods.
PROPERTY CONDITION AND REPAIR: The New Lease
shall contain no representations or warranties or liability of Seller in
connection with the condition of the Property at or prior to the Closing.
Further, all obligations of maintenance, repair, including capital replacement,
shall be the sole obligations of the Tenant.
ASSIGNMENT OR SUBLETTING: In the event of any
approved assignment or subletting, Buyer and Seller shall equally share any net
profits (subject to Seller's reasonable expenses associated with the assignment
or subletting) received by the Seller in connection with such an assignment or
subletting.
OCCUPANCY: The abandonment or failure to occupy
at least fifty percent (50%) of the Project for a period of more than ninety
(90) days shall constitute an event of default under the New Lease.
<PAGE>
4.1.8 SELLER'S DELIVERIES. Seller shall have delivered to
Buyer, at or before the Closing, all items to be delivered by Seller as
described in SECTION 6.3.
4.1.9 SUBORDINATION AGREEMENT. Seller shall have delivered
to Buyer at least ten (10) business days prior to the Closing a subordination
agreement in a form and substance satisfactory to Buyer, Buyer's Lender and
Seller, executed by Seller as Tenant under the New Lease, and dated not more
than thirty (30) days prior to the Closing Date.
4.1.10 REPRESENTATIONS AND WARRANTIES. Seller's
representations and warranties, as set forth in SECTION 7.1, shall be true and
correct in all material respects as of the date of the Closing.
4.1.11 SELLER'S AUTHORIZATION. At or prior to the End of
the Inspection Period, Buyer shall have received evidence satisfactory to Buyer
and Buyer's counsel that Seller has the power and authority to enter into this
Agreement and to execute and deliver all of the other agreements and documents
required to be executed and delivered as provided herein, and to sell the
Project to Buyer in accordance with the terms and provisions hereof, and that
the persons and parties executing this Agreement and such other agreements and
documents to be delivered to Buyer on behalf of Seller have been duly authorized
to do so.
4.1.12 TITLE POLICY. At the Closing, the Title Insurer
shall be irrevocably committed to issue the Title Policy.
4.1.13 NO CHANGE. There shall have been no material
adverse change in the economic, financial and/or physical condition of the
Project or in its operations during the Contract Period.
4.1.14 SELLER'S COVENANTS. Seller shall have performed
each and all of its covenants and agreements hereunder within the times provided
therefor.
4.2 FAILURE OF BUYER'S CONDITIONS.
Buyer shall have the right (in its sole and absolute
discretion) to elect to waive any Buyer's Condition or other condition to the
Closing. In the event any Buyer's Condition is not satisfied, deemed satisfied,
or waived by Buyer prior to the expiration of the applicable period for
satisfaction or waiver (and in the absence of a specified period then at or
before the Closing Date), Buyer may terminate this Agreement. In the event Buyer
elects to terminate this Agreement as provided herein, all documents and funds
delivered by one party to the other party shall be returned to the party making
delivery. In such case, Seller shall pay any cancellation charges imposed by the
Escrow Holder or Title Insurer.
4.3 SELLER'S CONDITIONS TO CLOSING.
Seller's obligation to sell the Project and the Closing
shall, in addition to any other conditions set forth herein, be conditioned and
contingent upon the satisfaction, or waiver by Seller (in Seller's sole and
absolute discretion), of each of the following conditions (collectively
"Seller's Conditions"):
4.3.1 BOARD OF DIRECTOR APPROVAL. Seller shall have
received on or before the date five (5) days from the Effective Date, the
unconditional approval of the Board of Directors of Seller for the sale and
leaseback of the Project pursuant to the material terms and conditions of this
Agreement, and Seller shall have notified Buyer in writing of such approval.
<PAGE>
4.3.2 REPRESENTATIONS AND WARRANTIES. Buyer's
representations and warranties, as set forth in SECTION 7.1, shall be true and
correct in all material respects as of the date of the Closing.
4.4 FAILURE OF SELLER'S CONDITIONS.
Seller shall have the right (in its sole and absolute
discretion) to elect to waive any Seller's Condition or any other condition to
the Closing in the event any Seller's Condition is not satisfied, deemed
satisfied, or waived by Seller prior to the expiration of the applicable period
for satisfaction of waiver (and in the absence of a specified period at or
before the Closing Date), Seller may terminate this Agreement and the rights of
Buyer and Seller hereunder. In the event Seller elects to terminate this
Agreement as provided herein, all documents and funds delivered by one party to
the other party shall be returned to the party making delivery. In such case,
Seller shall pay any cancellation charges imposed by Escrow Holder or Title
Insurer.
5. COVENANTS OF SELLER
5.1 SELLER'S COVENANTS.
In addition to all other covenants contained herein,
Seller makes the following covenants to Buyer:
5.1.1 LEASING ACTIVITIES. During the Contract Period,
Seller agrees that it shall not enter into any leases for any portion of the
Project without the prior written consent of Buyer, which consent shall not be
unreasonably withheld. Buyer's failure to respond to Seller in writing within
five (5) business days after its receipt of a written request from Seller
seeking Buyer's consent pursuant to this SECTION 5.1 shall be deemed
conclusively to constitute Buyer's consent to the proposed transaction.
5.1.2 PAYMENT OF OBLIGATIONS. At all times during the
Contract Period, Seller shall timely pay all taxes, assessments and utility
charges affecting the Project.
5.1.3 INSURANCE. At all times during the Contract Period,
Seller shall maintain in full force and effect and pay all premiums for all fire
and extended coverage and liability insurance policies currently covering the
Project.
5.1.4 COMPLIANCE WITH LAWS. During the Contract Period,
Seller shall not permit to exist, and Seller shall remove, any notices of
violations of any federal, state or municipal or other health, building, zoning,
safety, environmental protection or other applicable code, law, ordinance, rule
or regulation now or hereafter existing and relating or applying to the Project.
5.1.5 ENCUMBRANCES. During the Contract Period, Seller
shall not encumber, or permit or suffer to be encumbered with any encumbrance,
lien or other claim or right, the Project or any other right, appurtenance or
Property, real or personal, to be conveyed pursuant to this Agreement, which
encumbrance(s) cannot otherwise be removed as of the date of Closing at no cost
to Buyer.
5.1.6 REMOVE LIENS. At or prior to the Closing, Seller
agrees to fully pay, satisfy or otherwise remove, at Seller's sole expense, (i)
all deeds of trust, mortgages or other monetary liens against the Project,
unless otherwise requested by Buyer, and (ii) all mechanic's or materialmen's
liens or any similar claim or lien claimed against the Project, or any part
thereof, arising from work performed or commenced or
<PAGE>
materials supplied, prior to the Closing, such that there are and will be no
mechanic's or materialmen's liens existing or that may arise by reason of the
construction of the Improvements.
5.1.7 CHANGE IN REPRESENTATION AND/OR WARRANTY. At all
times during the Contract Period, if Seller learns of any material fact or
circumstance that causes or has a reasonable likelihood of causing a
representation or warranty of Seller's to be untrue or misleading, Seller shall
notify Buyer as soon as is reasonably possible, but in any event, within three
(3) days after Seller learns thereof.
5.1.8 MAINTENANCE. During the Contract Period, Seller
shall maintain the Project, including all landscaping, in its present condition,
ordinary wear and tear excepted, in accordance with all applicable federal,
state and local laws, ordinances and requirement; Seller shall not otherwise
deviate from its ordinary and customary operation, maintenance or management of
the Project. Seller shall, within three (3) days of its occurrence, provide
Buyer with written notice of any material change in the condition of the Project
which is other than as a result of ordinary wear and tear; the notice shall
indicate the extent of the damage, the anticipated cost of repair and the time
necessary to make such repairs.
5.1.9 PERMITS AND LICENSES. If Seller does not have any
license, permit or certificate that is required for the operation or maintenance
of the Project by any authority having jurisdiction over the Project, Seller
shall obtain the same prior to the Closing.
6. CLOSING
6.1 AGREEMENT TO CONSTITUTE ESCROW INSTRUCTIONS.
This Agreement, together with the General Provisions of
Escrow Holder attached hereto as EXHIBIT "B" (the "General Provisions"),
collectively shall constitute escrow instructions and a copy hereof shall be
deposited with Escrow Holder for this purpose. In the event of any inconsistency
between the terms of the General Provisions and this Agreement, the provisions
of this Agreement shall prevail to the extent of any such inconsistency.
6.2 CLOSING DATE; CLOSING.
Escrow shall open on the date on which a copy of this
Agreement, properly executed by the parties hereto, has been deposited with
Escrow Holder, which copy the parties hereto agree shall be delivered to Escrow
Holder immediately following execution. Escrow Holder shall notify the parties
immediately upon receipt of a copy of this Agreement as so executed as to the
date of the opening of Escrow. The Closing Date shall occur fifteen (15) days
following the End of the Financing Contingency Period; provided, however, that
if the Closing Date falls on a Saturday, Sunday or holiday, the Closing shall
occur on the next business day thereafter. Buyer shall have the right to extend
the Closing for up to fifteen (15) days if necessary to finalize the loan. In
such case Buyer agrees to deposit into the Escrow the additional amount of Sixty
Thousand Dollars ($60,000) to be held for the benefit of Buyer as part of the
Earnest Money Deposit. The Closing shall take place on the Closing Date, at the
Closing Office at 10:00 A.M. or at such other place and time as the parties
shall mutually agree.
6.3 ITEMS TO BE DELIVERED BY SELLER.
At the Closing and as a Buyer's Condition to the
occurrence of the Closing, Seller shall deliver or cause to be delivered to
Buyer the following (the items
<PAGE>
listed in SUBSECTIONS 6.3.1 THROUGH 6.3.6 shall be delivered through Escrow
Holder unless Seller and Buyer otherwise agree in writing):
6.3.1 The Deed.
6.3.2 The Bill of Sale.
6.3.3 The New Lease.
6.3.4 The Subordination Agreement for the New Lease.
6.3.5 The original Building Documents, including, but not
limited to, all books and records requested pursuant to SUBSECTION 3.1.11;
provided, however, that copies of the Building Documents shall be acceptable if
the originals are not in the possession or control of Seller.
6.3.6 Any other documents, instruments, records,
correspondence or agreements called for hereunder that have not previously been
delivered to Buyer.
6.4 ITEMS TO BE DELIVERED BY BUYER.
At the Closing and as a condition to the occurrence of the
Closing, Buyer shall deliver, or cause to be delivered, to Seller the following
(the items listed in SUBSECTIONS 6.4.1 THROUGH 6.4.4 shall be delivered through
Escrow Holder unless Seller and Buyer otherwise agree in writing):
6.4.1 The Purchase Price.
6.4.2 The Bill of Sale.
6.4.3 The New Lease.
6.4.4 Any other documents, instruments, records,
correspondence or agreements called for hereunder that have not previously been
delivered to Seller.
6.5 DIRECTIONS TO TITLE INSURER.
Buyer and Seller shall instruct the Title Insurer to
record the Deed in favor of Buyer and to record all other documents, including
deeds of reconveyance, necessary for title to the Land and Improvements to be
conveyed to Buyer free and clear of all liens and encumbrances and other matters
of record, except those matters specifically permitted under this Agreement.
6.6 PRORATIONS AND OTHER ADJUSTMENTS.
The parties shall prorate the following items between
Buyer and Seller as of 11:59 P.M. on the day preceding the Closing Date. Seller
shall provide to Buyer a tentative proration schedule at least five (5) days
prior to the expected Closing Date, together with all supporting documentation
necessary for the Buyer to evaluate the appropriateness of the prorations as
calculated. The calculations set forth in the proration schedule and the actual
prorations shall be made in accordance with the following provisions.
6.6.1 ITEMS OF EXPENSE.
<PAGE>
6.6.1.1 Real property taxes and assessments shall be
prorated based upon the final tax bill for the year in which the closing occurs.
If such final tax bill is not available, the proration shall be computed based
on the latest tax bill or notice available, and shall be subject to adjustment
within thirty (30) days of the first availability of the final tax bill. Seller
shall be solely responsible for the payment of any supplemental real property
tax bills received at any time, whether before or after the Closing Date, which
bills are applicable or relate to any period prior to the Closing.
6.6.1.2 Personal property taxes shall be prorated.
6.6.1.3 No other items of expense other than those
specifically agreed to between the parties shall be prorated.
6.6.2 REMITTANCE BETWEEN PARTIES. Any amounts determined
to be owed between Buyer and Seller in accordance with the foregoing provisions
shall be determined to be delinquent thirty (30) days after notification to the
party required to make remittance.
6.7 POSSESSION.
Possession of the Project shall be transferred by Seller
to Buyer upon the Closing Date, subject to the rights of Seller under the New
Lease.
6.8 SELLER'S CLOSING COSTS.
Seller shall pay (i) the documentary transfer tax, stamp
tax and/or other recording fees and charges, in the amount required to be paid
by law, (ii) the cost of the premium for a CLTA Owner's Title Policy, (iii)
one-half (1/2) of the Escrow Holder's fee, (iv) the cost of the Survey, and (v)
Seller's attorneys' fees in connection with this Agreement and the transactions
contemplated hereby.
6.9 BUYER'S CLOSING COSTS.
Buyer shall pay (i) the cost of the additional premium
(over and above the premium for a CLTA Owner's Title Policy), (ii) the cost for
the Lender's Title Policy, (ii) one-half (1/2) of the Escrow Holder's fee, (iii)
Four Thousand Eight Hundred Dollars ($4,800) as reimbursement for the cost
incurred by Seller for a Survey dated November 13, 1998, reduced by the cost to
update the Survey as required for Closing, and (iv) Buyer's attorneys' fees
incurred in connection with this Agreement and the transactions contemplated
hereby.
7. WARRANTIES
7.1 REPRESENTATIONS AND WARRANTIES OF SELLER.
Seller hereby makes the following representations and
warranties for the benefit of Buyer and Buyer's successors and assigns. Buyer
shall be entitled to rely upon the representations and warranties of Seller,
notwithstanding Buyer's inspection and investigation of the Project. Buyer and
Seller have entered into this Agreement on the condition that Seller make the
following representations and warranties, which were and are a material
inducement to Buyer entering into this Agreement and Buyer would not have
entered into this Agreement except in reliance upon the representations and
warranties of Seller made herein. Seller represents and warrants only to
Seller's best knowledge that the following representations and warranties, as
well as the facts and other matters contained therein, are true as of the date
of this Agreement and shall be true as of the Closing Date and shall survive the
Close of Escrow.
<PAGE>
7.1.1 ACCESS; ADJACENT DEVELOPMENT. The Project has full
and free access to and from public streets and roads, and there are no facts or
conditions that could result in the termination of the present access from or to
the Project to or from any such existing highways and roads, or in the
termination or expiration of any conditional use permits, sign permits or other
governmental permits or approvals necessary for the use and operation of the
Property for the purposes for which the Project is presently being used and
operated.
7.1.2 LEASES. Except with respect to the New Lease, there
are no Leases or other agreements that grant, and there is no person who has or
has asserted, any right of use or possession to the Project or any part thereof.
7.1.3 AUTHORITY. Seller is a corporation, properly
organized under the laws of the State of Delaware, and properly authorized to
own real property in the State of California. Seller is the owner of the Project
and has the right, power, legal capacity and power to enter into this Agreement
and to convey the Project to Buyer pursuant to the terms and provisions hereof
and perform Seller's other obligations hereunder. The parties and persons
executing this Agreement on behalf of Seller have been duly authorized to
execute this Agreement. The execution of this Agreement by Seller, the
performance by Seller of Seller's obligations hereunder, and the sale, transfer,
conveyance and/or assignments contemplated hereby, do not require the consent of
any third party.
7.1.4 CONFORMANCE WITH LAWS. The Project, including the
Improvements as constructed and as operated by Seller, conforms to, and is
operated and maintained in accordance with all applicable city, county, state,
federal and other applicable laws, statutes, ordinances, rules and regulations.
7.1.5 DISCLOSURE AND COMPLIANCE. There is no suit, action
or arbitration, bond issuance or proposal therefor, proposal for public
improvement assessments, pay-back agreement, paving agreement, road expansion or
improvement agreement, utility moratorium, use moratorium, improvement
moratorium, or legal, administrative, or other proceeding or governmental
investigation or requirement, formal or informal, existing or pending or
threatened that affects the Project or which adversely affects Seller's ability
to perform hereunder, or other charge or expense upon or relating to the
Project, which is not disclosed in the Title Commitment or which has not been
disclosed to Buyer in writing prior to the Effective Date.
7.1.6 DISCLOSURE OF ADVERSE CHANGE. Seller shall inform
Buyer in writing of any material adverse change in the condition, financial or
otherwise, of the Project, or the operation thereof, which occurs at any time
during the Contract Period.
7.1.7 NO ADVERSE SOIL CONDITIONS. There are no soil or
geological conditions affecting the Project that could materially and adversely
affect the Project, or the ownership and operation thereof by Buyer. The
condition of the soil at the Project is such that it will support all of the
Improvements thereon for the foreseeable life of the Improvements without the
need for unusual or new sub-surface excavations, fill, footings, caissons or
other installations. The Improvements, as built, were constructed in a manner
compatible with soil conditions at the time of construction and all necessary
excavations, fill, footings, caissons or other installations were provided.
7.1.8 NO BANKRUPTCY PROCEEDINGS. Seller has not (i) made a
general assignment for the benefit of creditors, (ii) filed any voluntary
petition in bankruptcy or suffered the filing of an involuntary petition by
Seller's creditors, (iii) suffered the appointment of a receiver to take
possession of all or substantially all of the
<PAGE>
Seller's assets, (iv) suffered the attachment or other judicial seizure of all,
or substantially all, of Seller's assets, (v) admitted in writing its inability
to pay its debts as they become due or (vi) made an offer of settlement,
extension or composition to its creditors generally.
7.1.9 NO DEFAULT. Seller is not in default under the terms
of any Lease or any other agreement pertaining to the Project, nor has any event
occurred that shall constitute a default by Seller under such documents and
instruments following the passage of time, nor has Seller received any notice of
any default under any Lease or other agreement pertaining to the Project.
7.1.10 NO HAZARDOUS WASTES. Seller has received no written
notice from any third parties, prior owners of the Project, or any federal,
state or local governmental agency, indicating that any hazardous substance
remedial or clean-up work will be required. There are not any on-site spills,
releases or discharges of Hazardous Substances which have occurred on the
Project during Seller's ownership of the Project, nor at any time prior to
Seller's ownership of the Project, nor on any property immediately adjoining the
Project, or of any spills of Hazardous Substances that have occurred or are
presently occurring off the Project as a result of any activities on the
Project, there are no underground storage tanks, wells, underground sumps,
clarifiers, oil/water separators, buried waste containers and/or any other
underground structures on or under the Project. Nothing in the foregoing shall
alter any obligations of Seller under applicable federal, state or local law.
For purposes of this Agreement, the term "Hazardous Substances" shall include
all substances which are classified as hazardous substances or hazardous wastes
under any of the following laws, rules and regulations: (i) the Toxic Substances
Control Act, 15 U.S.C., Section 2601 et seq., (ii) the Clean Water Act, 33
U.S.C., Section 1251 et seq., (iii) the Resource and Conservation and Recovery
Act, 42 U.S.C., Section 6901 et seq., (iv) the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C., Section 9601, et seq., (v)
the Hazardous Materials Transportation Act, 49 U.S.C., Section 1801 et seq.,
(vi) the California Hazardous Waste Control Act, Health and Safety Code, Section
25100 et seq., (vii) the California Hazardous Substance Account Act, Health and
Safety Code, Section 25249.5 et seq., (viii) the California Waste Management
Act, Health and Safety Code, Section 25170.1 et seq., (ix) Health and Safety
Code, Section 2550, Hazardous Materials Release Response Plans and Inventory,
(x) the California Porter-Cologne Water Quality Control Act, Water Code, Section
13000 et seq., or (xi) other federal or state laws, rules or regulations, all as
amended.
7.1.11 NO INFESTATION. The Project is free from
infestation by rodents, termites or other insects or animals.
7.1.12 NO LITIGATION. There is no pending litigation or
threatened litigation, or asserted or unasserted claims, relating to the
Project.
7.1.13 NO NOTICES. Seller has not received, and has no
knowledge of, any notification from any city, county, state or federal authority
having jurisdiction over the Project or of any utility providing service
requiring any work to be done to, or affecting the use of, the Project or any
portion thereof. Seller has received no notice from any insurance carrier, nor
is Seller aware, of defects or inadequacies in the Project that if not corrected
would result in termination of insurance coverage or increase in insurance
costs.
7.1.14 NO UNDISCLOSED ASSESSMENTS. There are no taxes,
assessments (special, general or otherwise) or bonds of any nature affecting the
Property, or any portion thereof, except as disclosed in the Title Commitment.
Seller has no understanding or agreement with any taxing authority respecting
the imposition or deferment of any taxes or assessments respecting the Project.
<PAGE>
7.1.15 NO UNTRUE STATEMENTS. Seller has made no untrue
statement or representation in connection with this Agreement, and all items
from Seller transferred or delivered and/or given to Buyer are genuine, true,
correct and complete copies of what they purport to be. Additionally, (i) said
items have not been amended or modified, other than as also transferred or
delivered and/or given to Buyer, and (ii) no item that should have been
transferred, delivered and/or given to Buyer has not been so transferred,
delivered and/or given. Seller has not failed to state or disclose any material
fact in connection with the transactions contemplated by this Agreement. Seller
knows of no facts and Seller has not misrepresented any facts that would prevent
Buyer from operating the Project after the Closing in the manner in which the
Project is currently being operated and used.
7.1.16 NO VIOLATION OF OTHER AGREEMENTS. Neither this
Agreement nor anything provided to be done hereunder (including, but not limited
to, the transfer of the Project to Buyer) violates or shall violate any
contract, document, understanding, agreement or instrument to which Seller is a
party or by which Seller may be bound, or any contract, document, understanding,
agreement or instrument affecting the Project.
7.1.17 OPERATING STATEMENTS. All operating statements
delivered to Buyer by Seller are accurate, true and correct, have been
accurately compiled from the books and records of the Project and accurately set
forth the results of the operation of the Project for the periods covered. The
financial records kept by Seller are complete, accurate, true and correct in all
respects and reflect all transactions affecting or relating to the Project, and
are kept and maintained at the office of Seller at the Project.
7.1.18 OPERATION DURING CONTRACT PERIOD. The Project shall
be operated and maintained in its current condition, normal wear and tear
excepted, until the Closing Date.
7.1.19 PARKING. There are ( ) parking spaces at the
Project. The parking spaces at the Project comply with all applicable laws,
rules and regulations. No person other than Seller under the New Lease shall
have the right to park on the Project.
7.1.20 IMPROVEMENTS. All Improvements at the Project are
in good condition and repair.
7.1.21 PROJECT CONDITION. The Project, and all components
thereof, including, but not limited to, parking lots, electrical systems, roofs,
air conditioning systems, heating systems and elevators are and, at the Closing,
shall be in good condition and working order, and will perform the work or
function for which intended. The Improvements, and all component parts thereof,
were constructed in substantial conformance with the Plans and Specifications,
as well as documents approved by the appropriate city, county, state, and other
officials, and are free of material construction, design and structural defects.
7.1.22 STORM WATER. All storm water flowing from the
Project drains either into a public system or onto a permitted location and
through easements, if any, for the benefit of the Project.
7.1.23 TITLE TO REAL PROPERTY. At the Closing fee simple
title to the Land and Improvements shall be conveyed to Buyer in a good and
marketable condition, free and clear of all liens, encumbrances, agreements,
encroachments, leases, tenancies, mechanics' liens, materialmen's liens, and
other interests affecting all or any
<PAGE>
portion of the Project or any interest therein other than (i) current
non-delinquent real Property taxes (but not assessments), (ii) New Lease, and
(iii) the Permitted Title Exceptions.
7.1.24 UTILITIES AVAILABLE. All utilities necessary for
the operation of the Project in accordance with its intended use are available
to the Land.
7.1.25 ZONING AND OTHER GOVERNMENTAL INFORMATION. There is
no pending or threatened request, application or proceeding to alter or restrict
the zoning or other use restrictions applicable to the Project; there is no
plan, study or effort by any governmental authority or agency or any private
party or entity that in any way affects or would affect the authorization of the
current use and operation of the Project. There is no pending or threatened
action or governmental proceeding in eminent domain, zoning change, rent control
or otherwise that would directly or indirectly affect the Project, nor any fact
that might give rise to such a proceeding; all governmental and regulatory
licenses, franchises, certificates and permits respecting the Project that are
necessary for the operation of the Project by Seller in accordance with its
intended use, if any, are possessed by Seller and will be transferred to Buyer,
if legally transferable, at the Closing.
7.2 REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer hereby represents and warrants to Seller, for the
benefit of Seller and Seller's successors and assigns, that the following
statements are true as of the date of this Agreement, and shall be true as of
the Closing Date.
7.2.1 REQUIRED APPROVALS. Except for the approval of the
Board of Directors of the general partner of Buyer as required by SECTION 4.1.5,
all required approvals or consents have been obtained in connection with the
execution of this Agreement by Buyer and with the performance by Buyer of
Buyer's obligations hereunder. Subject to obtaining the approval described
above, Buyer has full right and authority to enter into and fully perform its
obligations under this Agreement.
7.2.2 NO CONFLICTS. Neither this Agreement nor anything
provided to be done hereunder violates or shall violate any contract, document,
understanding, Agreement or instrument to which Buyer is a party or by which
Buyer may be bound.
7.2.3 ADVERSE CHANGE. Buyer shall inform Seller of any
material adverse change in the foregoing representations and warranties of Buyer
occurring at any time after the execution hereof and prior to the Closing Date.
7.2.4 SECURITIES COMPLIANCE. Buyer agrees to use
reasonable efforts to inform Buyer's employees with knowledge of the terms of
this transaction that they are prohibited from trading in the securities of
Seller until the subject matter of the transaction is publicly announced, if
deemed necessary by Seller (and the market has had an opportunity to absorb that
announcement). Buyer also agrees to use reasonable efforts not to make any
public statement regarding this transaction without the prior approval of Seller
(unless required to do so in good faith opinion of Buyer's counsel).
8. TERMINATION OF AGREEMENT
8.1 TERMINATION.
In the event of (i) a default by Seller, (ii) the failure
of any of Buyer's Conditions or other conditions to the Closing to be satisfied
or waived, (iii) any incorrect representation(s) or warranty(ies) by Seller
(which shall be deemed a default
<PAGE>
by Seller), or (iv) a termination of this Agreement pursuant to the operation of
Section 11.1, then and in any of such events, this Agreement may be cancelled
and terminated by Buyer and all funds and documents previously delivered shall
be returned to the party delivering same. In the event the Closing fails to
occur by reason of Buyer's default, then Seller shall be entitled solely to
liquidated damages as provided in Section 8.2. In the event of a default by
Seller, including, but not limited to, any incorrect representation(s) or
warranty(ies), whether or not such default results in termination, Buyer shall
have such remedies against Seller as may be available to Buyer either at law or
in equity, including the right to specifically enforce this Agreement.
8.2 LIQUIDATED DAMAGES.
SELLER WAIVES THE RIGHT TO SPECIFICALLY ENFORCE THIS
AGREEMENT. IN THE EVENT THE CLOSING FAILS TO OCCUR BY REASON OF BUYER'S DEFAULT
AFTER THE END OF THE INSPECTION PERIOD, SELLER AND BUYER AGREE THAT, BASED ON
THE CIRCUMSTANCES NOW EXISTING, KNOWN OR UNKNOWN, SELLER AND BUYER EACH
RECOGNIZE AND AGREE THAT IT WOULD BE EXCESSIVELY COSTLY AND IMPRACTICABLE TO
ESTABLISH SELLER'S DAMAGES BY REASON OF BUYER'S DEFAULT AND IT WOULD BE
REASONABLE TO AWARD SELLER LIQUIDATED DAMAGES IN THE AMOUNT OF THE EARNEST MONEY
DEPOSIT. BOTH PARTIES AGREE THAT SUCH AMOUNT STATED AS LIQUIDATED DAMAGES IS A
REASONABLE ESTIMATE OF SELLER'S DAMAGES IN THE EVENT OF BUYER'S DEFAULT AND SUCH
AMOUNT SHALL BE IN LIEU OF ANY OTHER MONETARY RELIEF TO WHICH SELLER MAY
OTHERWISE BE ENTITLED BY VIRTUE OF THIS AGREEMENT OR BY OPERATION OF LAW.
ACCORDINGLY, SELLER SHALL BE ENTITLED TO RETAIN SUCH AMOUNT AS LIQUIDATED
DAMAGES FOR BUYER'S BREACH OR FAILURE TO COMPLETE THE PURCHASE OF THE PROPERTY
AS PROVIDED HEREIN PURSUANT TO CALIFORNIA CIVIL CODE SECTIONS 1671 AND 1677. IN
SUCH EVENT, ESCROW HOLDER IS HEREBY IRREVOCABLY INSTRUCTED BY BUYER AND SELLER
TO DISBURSE IMMEDIATELY TO SELLER, UPON DEMAND OF SELLER ALONE, THE EARNEST
MONEY DEPOSIT AND ANY INTEREST EARNED THEREON. SELLER HEREBY AGREES THAT
LIQUIDATED DAMAGES SET FORTH HEREIN SHALL BE THE SOLE REMEDY OF SELLER IN THE
EVENT OF A DEFAULT BY BUYER AND SELLER HEREBY WAIVES ANY RIGHT TO SPECIFIC
PERFORMANCE BY BUYER. PRIOR TO THE END OF THE INSPECTION PERIOD, SELLER AND
BUYER AGREE IT WOULD BE REASONABLE NOT TO AWARD SELLER ANY DAMAGES BY REASON OF
BUYER'S DEFAULT.
---------------- -----------------
Buyer's Initials Seller's Initials
9. REAL ESTATE COMMISSION
9.1 BROKER COMPENSATION.
Seller hereby represents and warrants to Buyer that the
only real estate broker involved in this transaction, including any negotiations
relating to this Agreement and any other agreements and documents contemplated
hereby is John Burnham Real Estate Services, Inc. (the "Seller's Broker").
Seller agrees that any compensation due Seller's Broker as a result of this
Agreement or the Closing is and shall be the sole and exclusive responsibility
of Seller, and Buyer shall have no liability or responsibility therefor. Seller
shall indemnify Buyer against and hold Buyer free and harmless from any and all
loss, damage, liability or expense (including costs and reasonable attorneys'
fees) that Buyer may incur or sustain by reason of, or in
<PAGE>
connection with, any misrepresentation or breach of warranty with respect to the
foregoing.
9.2 NO OTHER BROKER.
Seller and Buyer represent and warrant to each other that
they have employed no broker and/or finder other than Seller's Broker. Seller
and Buyer each agree that, to the extent a brokerage and/or finder's fee shall
have been earned or claimed in connection with this Agreement, other than the
fee payable to Seller's Broker as provided above, the payment of such fees and
the defense of any action in connection therewith shall be the sole and
exclusive obligation of the party who requested the services of the broker
and/or finder. In the event that any claim, demand or cause of action for
brokerage and/or finder's fees is asserted against a party to this Agreement who
did not request such services, the party through whom the broker or finder is
making the claim shall indemnify, defend (with an attorney of indemnitee's
choice) and hold harmless the other party from and against any and all such
claims, demands and causes of action.
10. ASSIGNMENT
10.1 RIGHT OF ASSIGNMENT.
Upon written approval of Seller, which approval shall not
be unreasonably withheld or delayed, Buyer shall have the right to assign its
interest under this Agreement at any time prior to the date of the Closing. In
the event Buyer assigns its interest under this Agreement, Seller agrees that
Buyer shall, upon the making of such assignment, be released and relieved of all
of the Buyer's obligations and liabilities hereunder, provided the Buyer's
obligations and liabilities are assumed by such assignee. In the event of an
assignment of Buyer's rights and an assumption of Buyer's obligations hereunder,
Seller shall execute a consent to such assignment and assumption. The consent
document shall release and relieve Buyer of all its obligations hereunder, shall
provide that Seller shall look solely to Buyer's assignee with respect to such
obligations and liabilities. Notwithstanding the foregoing, Seller's consent
shall not be required for an assignment to an affiliate of Buyer, to any entity
in which Buyer, directly or indirectly, has a beneficial or equitable interest,
or to an accommodator for the purpose of completing a 1031 tax deferred exchange
so long as such entity is not a direct competitor of Seller.
11. MISCELLANEOUS
11.1 MATERIAL DAMAGE OR CONDEMNATION.
If the Project is materially damaged or if the Project or
any part thereof is materially taken by condemnation or there is any
condemnation or threatened condemnation of any direct or indirect access to the
Project prior to the Closing Date, then Buyer shall have the right to reject the
Project and, on written demand of Buyer, this Agreement shall be terminated
forthwith and neither Seller nor Buyer shall thereafter have any obligation to
each other, except as set forth in SECTION 8.1 above. In the alternative, Buyer
may elect to complete the transaction on the terms set forth in this Agreement
and, in such event, Buyer shall receive a full assignment of all insurance
proceeds (and shall use such proceeds to make necessary repairs to the Project)
or condemnation proceeds, as the case may be, allocable to the restoration of
the damaged Project or given as consideration for the taking. By "materially
damaged," Seller and Buyer mean (i) any uninsured damage or (ii) the cost to
repair such damage or destruction to the Project exceeds the sum of Fifty
Thousand Dollars ($50,000.00). By "materially taken," Seller and Buyer mean a
condemnation or taking by eminent domain occurring on the Project that results
in the elimination of more than five percent
<PAGE>
(5%) of the Project, the elimination of more than five percent (5%) of the total
gross square footage of the land comprising the Land or the elimination of more
than five percent (5%) of the total net rentable square footage in the
Improvements at the Project. The phrase "taking by eminent domain" includes any
notices of taking or commencement of proceedings under eminent domain power, but
excludes any claim for inverse condemnation.
11.2 ATTORNEYS' AND OTHER FEES.
Should either party institute any action or proceeding to
enforce or interpret this Agreement or any provision hereof, for damages by
reason of any alleged breach of this Agreement or of any provision hereof, or
for a declaration of rights hereunder, the prevailing party in any such action
or proceeding shall be entitled to receive from the other party all costs and
expenses, including reasonable attorneys' and other fees, incurred by the
prevailing party in connection with such action or proceeding. The term
"attorneys' and other fees" shall mean and include attorneys' fees, accountants'
fees, and any and all other similar fees incurred in connection with the action
or proceeding and preparations therefor. The term "action or proceeding" shall
mean and include legal actions, proceedings, suits, arbitrations, appeals and
other similar proceedings.
11.3 NOTICES.
Any notice, demand, request, covenant, approval or other
communication to be given by one party to the other shall be given by personal
service, express mail, Federal Express, DHL or any other similar form of
nationally recognized airborne/overnight delivery service, or mailing in the
United States mail (certified mail, return receipt requested), addressed to the
parties at their respective addresses as follows:
If to Buyer:
Birtcher Properties
27611 La Paz Road
Laguna Niguel, California 92677
Attn: Mr. Arthur B. Birtcher
Telephone: (949) 643-7700
Facsimile: (949) 643-7455
With a copy to:
Voss, Cook & Thel LLP
Suite 700
840 Newport Center Drive
Newport Beach, California 92660-6310
Attention: David A. Lurker, Esq.
Telephone: (949) 720-0300
Facsimile: (949) 720-1508
If to Seller:
Encad, Inc.
6059 Cornerstone Court West
San Diego, California 92121
Attention: Chief Executive Officer
<PAGE>
Telephone: (619) 452-0882
Facsimile: (619) 452-0891
With a copy to:
Encad, Inc.
5959 Cornerstone Court West
San Diego, California 92121
Attention: General Counsel
Telephone: (619) 677-6169
Facsimile: (619) 452-7229
Any such notice shall be deemed to have been given (i) upon delivery, if
personally delivered or delivered by any nationally recognized form of
airborne/overnight delivery service, or (ii) upon receipt or upon the expiration
of three (3) business days, whichever is earlier, if mailed. Either party may
change the address at which it desires to receive notice upon giving written
notice of such request to the other party. Buyer and Seller, and their
respective counsel, hereby agree that notices may be given hereunder by the
parties' respective counsel, and that if any communication is to be given
hereunder by Buyer's or Seller's counsel, such counsel may communicate directly
with all principals, as required to comply with the foregoing provisions.
11.4 TIME OF ESSENCE.
Time is of the essence of this Agreement and each and
every term and provision hereof.
11.5 WAIVER OR MODIFICATION.
A modification of any provision herein contained, or any
other amendment to this Agreement, shall be effective only if the modification
or amendment is in writing and signed by both Seller and Buyer. No waiver by any
party hereto of any breach or default shall be considered to be a waiver of any
other breach or default. The waiver of any condition shall not constitute a
waiver of any breach or default with respect to any covenant, representation or
warranty.
11.6 SUCCESSORS AND ASSIGNS; SURVIVAL.
This Agreement shall inure to the benefit of, and be
binding upon, the parties hereto and their respective heirs, successors and
assigns. All covenants, representations and warranties contained herein shall
survive the Closing. The term "Buyer" as used herein shall mean and include
Buyer's successors and assigns.
11.7 NUMBER AND GENDER.
As used in this Agreement, the neuter includes the
masculine and feminine, and the singular includes the plural.
11.8 GOVERNING LAW.
This Agreement shall be governed by, interpreted under,
and construed and enforced in accordance with, the laws of the State of
California applicable to agreements made and to be performed wholly within the
State of California.
<PAGE>
11.9 CONSTRUCTION.
Headings at the beginning of each Article, Section, and
subsection are solely for the convenience of the parties and are not a part of
this Agreement. All exhibits attached hereto are hereby incorporated herein by
this reference. Unless otherwise indicated, all references herein to Articles,
Sections, subsections, paragraphs, subparagraphs or provisions are to those in
this Agreement. Any reference to an Article herein includes all Sections thereof
and any reference to a Section herein includes all subsections thereof. This
Agreement shall not be construed as if it had been prepared by only Buyer or
Seller, but rather as if both Buyer and Seller had prepared the same. In the
event any portion of this Agreement shall be declared by any court of competent
jurisdiction to be invalid, illegal or unenforceable, such portion shall be
deemed severed from this Agreement, and the remaining parts hereof shall remain
in full force and effect, as fully as though such invalid, illegal or
unenforceable portion had never been part of this Agreement.
11.10 INTEGRATION OF OTHER AGREEMENTS.
This Agreement supersedes all previous contracts, letters
of intent, correspondence and documentation relating to the sale of the Project.
Any oral representations or modifications concerning this Agreement shall be of
no force or effect.
11.11 DUPLICATE ORIGINALS; COUNTERPARTS.
This Agreement may be executed in any number of duplicate
originals, all of which shall be of equal legal force and effect. This Agreement
may be executed in any number of counterparts, each of which shall be an
original but all of which shall constitute one and the same instrument.
11.12 NON-WAIVER OF RIGHTS.
No failure or delay of either party in the exercise of any
right given to such party hereunder shall constitute a waiver thereof unless the
time specified herein for exercise of such right has expired, nor shall any
single or partial exercise of any right preclude other or further exercise
thereof or of any other right.
11.13 DAYS.
The term "days," as used herein, shall mean actual days
occurring, including Saturdays, Sundays and holidays. The term "business days"
shall mean days other than Saturdays, Sundays and holidays. If any item must be
accomplished or delivered hereunder on a day that is not a business day, it
shall be deemed to have been timely accomplished or delivered if accomplished or
delivered on the next following business day.
11.14 INCORPORATION OF EXHIBITS.
All schedules and exhibits attached hereto and referred to
herein are incorporated in this Agreement as though fully set forth herein.
These schedules and exhibits are:
Exhibit "A" Description of Land
Exhibit "B" Escrow Holder's General Provisions
<PAGE>
11.15 IRS FORM 1099-S.
For purposes of complying with Section 6045 of the
Internal Revenue Code of 1986 ("Code"), as amended, Escrow Holder shall be
deemed the "person responsible for closing the transaction," and shall be
responsible for obtaining the information necessary to file with the Internal
Revenue Service Form 1099-S, "Statement for Recipients of Proceeds From Real
Estate, Broker and Barter Exchange Transactions."
11.16 FURTHER ASSURANCES.
Buyer and Seller each agree to execute any and all other
documents and to take any further actions reasonably necessary to consummate the
transaction contemplated hereby.
11.17 EXCLUSIVE RIGHT TO NEGOTIATE.
Seller agrees not to solicit or negotiate any other offer
from any other party for the sale of the Property or enter into any agreement
for the sale of the Property, unless and until specifically notified in writing
that Buyer has no further interest in purchasing the Property.
IN WITNESS WHEREOF, Buyer and Seller have executed this
Agreement as of the date first above written.
"Buyer" "Seller"
BIRTCHER PROPERTIES, ENCAD, INC.,
a California corporation a Delaware corporation
By: /s/ Robert M. Anderson By: /s/ T.W. Schmidt
------------------------------------- --------------------------
Robert M. Anderson,
President Its: Vice President & CFO
--------------------------
By: /s/ Thomas L. Green
--------------------------
Its: V.P./General Counsel
--------------------------
<PAGE>
ESCROW HOLDER'S RECEIPT
The undersigned, as Escrow Holder, hereby acknowledges receipt
of the foregoing Escrow Instructions, accepts said escrow account, and agrees to
carry out said Escrow Instructions and hold and dispose of the funds and
documents deposited in said account in accordance with such instructions.
Dated: August , 1999 FIRST AMERICAN TITLE INSURANCE COMPANY
----------
By:
-----------------------------------
Printed Name:
-------------------------
Its:
----------------------------------
Escrow No.:
------------------------------
Escrow Officer:
------------------------------
Telephone No.: ( ) -
------ -------- ------------
Fax No.: ( ) -
------ -------- ------------
Title Order No.:
------------------------------
Title Officer:
------------------------------
Telephone No.: ( ) -
------ -------- ------------
Fax No.: ( ) -
------ -------- ------------
<PAGE>
EXHIBIT "A"
DESCRIPTION OF LAND
PARCELS 1 AND 2 OF PARCEL MAP NO. 13800, IN THE CITY OF SAN DIEGO, COUNTY OF SAN
DIEGO, STATE OF CALIFORNIA, FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN
DIEGO COUNTY, MAY 22, 1985, AS FILE/PAGE NO. 85-180247 OF OFFICIAL RECORDS.
A-1
<PAGE>
EXHIBIT "B"
[ESCROW HOLDER'S GENERAL PROVISIONS]
B-1
<PAGE>
FIRST AMENDMENT TO
AGREEMENT FOR PURCHASE AND SALE
OF REAL PROPERTY AND ESCROW INSTRUCTIONS
ENCAD CORPORATE HEADQUARTERS
This FIRST AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF
REAL PROPERTY AND ESCROW INSTRUCTIONS, ENCAD CORPORATE HEADQUARTERS (the "First
Amendment") is made effective as of this 30th day of September, 1999, by and
between ENCAD, INC., a Delaware corporation ("Seller"), and BIRTCHER PROPERTIES,
a California corporation ("Buyer").
R E C I T A L S
A. Seller and Buyer are parties to that certain Agreement of
Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate
Headquarters, dated as of August 5, 1999 (the "Purchase Agreement"), providing
for the purchase and sale of that certain land and improvements more
particularly described in the Purchase Agreement.
B. Seller and Buyer desire to amend and modify the Purchase
Agreement in certain particulars, and the purpose of this First Amendment is to
set forth the terms and provisions agreed upon between Seller and Buyer with
respect to the amendment and modification of the Purchase Agreement.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Seller and Buyer
hereby agree to amend and modify the Purchase Agreement, as follows:
1. END OF THE INSPECTION PERIOD. Section 1.1.10 of the Purchase
Agreement is hereby modified and amended to delete the provisions thereof and
replace them with the date of October 18, 1999, which shall be deemed to be the
"End of the Inspection Period" for the purposes of the Purchase Agreement.
2. END OF THE FINANCING CONTINGENCY PERIOD. Section 1.1.11 of the
Purchase Agreement is hereby modified and amended to delete the provisions
thereof and replace them with the date of October 18, 1999, which shall be
deemed to be the "End of the Financing Contingency Period" for the purposes of
the Purchase Agreement.
3. NEW LEASE APPROVAL DATE. The provisions of Section 4.1.7 of the
Purchase Agreement are hereby amended and modified to provide that the New Lease
shall be mutually approved by Buyer and Seller on or prior to October 18, 1999.
4. CLOSING. Section 6.2 of the Purchase Agreement is hereby modified
and amended to change the "Closing Date" from the date "fifteen (15) days
following the End of the Financing Contingency Period" to November 1, 1999.
5. NOTICES. The provisions of Section 11.2 of the Purchase Agreement
are hereby amended to permit notice by facsimile and any notices given by
facsimile shall be deemed to have been given upon receipt. If such notice by
facsimile is given to Encad, such notice shall be given to Todd W. Schmidt, CFO,
at facsimile number (858) 452-6292, and to Encad's General Counsel at facsimile
number (858) 452-7229.
6. PROPERTY DEFICIENCIES. Seller acknowledges that, as a part of
Buyer's due diligence, Buyer has identified numerous potential violations of
applicable governmental requirements, including, without limitation, violations
relating to parking and outdoor storage under the terms of the Planned
Industrial Development Permit No. 83-0378 as amended by Planned Industrial
Development Permit No. 85-0830, as well as the fact that significant tenant
improvements were completed without building permits or inspection by applicable
governmental authorities. Seller agrees to use its best efforts to obtain
inspections of the Property by the applicable governmental authorities as soon
as possible and to engage its architect to identify the scope and nature of any
violations, including determining the extent of remedial work required, if any,
and the estimated cost to complete all work necessary to correct the
deficiencies. Seller further agrees that at the Closing, Escrow Holder shall
holdback in Escrow a portion of the Purchase Price in an amount equal to one
hundred fifty percent (150%) of the amount necessary to remedy all such
deficiencies, including the cost of any new work or improvements required.
Seller shall cause its architect to provide an estimate of such costs in
sufficient detail for Buyer and Buyer's lender to evaluate on or before October
18, 1999. Such costs shall include all governmental fees, consultants fees,
contractors fees, and all other third party costs necessary to complete such
work. Buyer shall have the right, on or before October 18, 1999, to approve the
scope and nature of the remedial work, as well as the amounts estimated to
complete the work. If Buyer fails, within such period, to approve such matters,
by written notice to Seller, then such matters shall be deemed disapproved by
Buyer. In such case, the failure shall be deemed a failure of a Buyer's
Condition governed by the provisions of Section 4.2 of the Agreement. The terms
of the holdback shall permit the disbursement of portions of the holdback amount
on a monthly basis to reimburse Seller for costs actually incurred to complete
the remedial work. The establishment of the holdback shall constitute a Buyer's
Condition to the Closing. The provisions of this Section shall survive the
Closing.
7. MISCELLANEOUS.
1
<PAGE>
7.1 CONFLICT OR INCONSISTENCY. In the event of any conflict or
inconsistency between the terms and provisions of this First Amendment and the
terms and provisions of the Purchase Agreement, the terms and provisions of this
First Amendment shall control and govern the rights, duties and obligations of
the parties.
7.2 DEFINED TERMS. The defined terms used in this First
Amendment, as indicated by the first letter of a word being capitalized, shall
have the same meaning and definition in this First Amendment as such terms have
in the Purchase Agreement, unless such terms have been redefined in this First
Amendment.
7.3 EFFECT OF AMENDMENT. Except as modified and amended by
this First Amendment, the Purchase Agreement shall remain in full force and
effect.
7.4 COUNTERPARTS. This First Amendment may be executed in any
number of counterparts, each of which shall be an original and all of which
shall constitute one and the same instrument.
7.5 TELEFAXED COPIES OF FIRST AMENDMENT. The parties hereto
hereby agree that either party may rely on telefaxed execution copies of this
First Amendment for all purposes.
[continued on next page]
IN WITNESS WHEREOF, Buyer and Seller have executed this First Amendment
as of the date first written above.
"Buyer" "Seller"
BIRTCHER PROPERTIES, ENCAD, INC.,
a California corporation a Delaware corporation
By: /s/ Robert M. Anderson By: /s/ David A. Purcell
----------------------- ----------------------
Its: President Its: President
--------- ---------
By: /s/ Thomas L. Green
---------------------
Its: V.P./General Counsel
--------------------
Birtcher/Birtcher Properties/Encad Acq/Docs/First Amendmt to APS8
2
<PAGE>
SECOND AMENDMENT TO
AGREEMENT FOR PURCHASE AND SALE
OF REAL PROPERTY AND ESCROW INSTRUCTIONS
ENCAD CORPORATE HEADQUARTERS
This SECOND AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF
REAL PROPERTY AND ESCROW INSTRUCTIONS, ENCAD CORPORATE HEADQUARTERS (the "Second
Amendment") is made effective as of this 18th day of October, 1999, by and
between ENCAD, INC., a Delaware corporation ("Seller"), and BIRTCHER PROPERTIES,
a California corporation ("Buyer").
R E C I T A L S
A. Seller and Buyer are parties to that certain Agreement of
Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate
Headquarters, dated as of August 5, 1999 (the "Purchase Agreement"), as amended
by that certain First Amendment to Agreement for Purchase and Sale of Real
Property and Escrow Instructions, Encad Corporate Headquarters, dated effective
as of September 30, 1999 (the "First Amendment"), providing for the purchase and
sale of that certain land and improvements more particularly described in the
Purchase Agreement. As used herein, the term "Purchase Agreement" shall mean the
Purchase Agreement as amended by the First Amendment.
B. Seller and Buyer desire to amend and modify the Purchase
Agreement in certain particulars, and the purpose of this Second Amendment is to
set forth the terms and provisions agreed upon between Seller and Buyer with
respect to the amendment and modification of the Purchase Agreement.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Seller and Buyer
hereby agree to amend and modify the Purchase Agreement, as follows:
1. END OF THE INSPECTION PERIOD. Section 1.1.10 of the Purchase
Agreement is hereby modified and amended to delete the provisions thereof and
replace them with the date of October 26, 1999, which shall be deemed to be the
"End of the Inspection Period" for the purposes of the Purchase Agreement.
2. END OF THE FINANCING CONTINGENCY PERIOD. Section 1.1.11 of the
Purchase Agreement is hereby modified and amended to delete the provisions
thereof and replace them with the date of November 2, 1999, which shall be
deemed to be the "End of the Financing Contingency Period" for the purposes of
the Purchase Agreement.
3. NEW LEASE APPROVAL DATE. The provisions of Section 4.1.7 of the
Purchase Agreement are hereby amended and modified to provide that the New Lease
shall be mutually approved by Buyer and Seller on or prior to October 26, 1999.
4. CLOSING. Section 6.2 of the Purchase Agreement is hereby modified
and amended to change the "Closing Date" to November 17, 1999.
5. PROPERTY DEFICIENCIES. Section 6 of the First Amendment is hereby
modified and amended to require as an additional covenant of Seller that Seller
cause its architect to provide an estimate of such costs in sufficient detail
for Buyer and Buyer's lender to evaluate on or before October 26, 1999. Further,
Section 6 of the First Amendment is hereby modified and amended to provide that
Buyer shall have the right, on or before October 26, 1999, to approve the scope
and nature of the remedial work, as well as the amounts estimated to complete
such work.
6. MISCELLANEOUS.
6.1 CONFLICT OR INCONSISTENCY. In the event of any conflict or
inconsistency between the terms and provisions of this Second Amendment and the
terms and provisions of the Purchase Agreement, the terms and provisions of this
Second Amendment shall control and govern the rights, duties and obligations of
the parties.
6.2 DEFINED TERMS. The defined terms used in this Second
Amendment, as indicated by the first letter of a word being capitalized, shall
have the same meaning and definition in this Second Amendment as such terms have
in the Purchase Agreement, unless such terms have been redefined in this Second
Amendment.
1
<PAGE>
6.3 EFFECT OF AMENDMENT. Except as modified and amended by
this Second Amendment, the Purchase Agreement shall remain in full force and
effect.
6.4 COUNTERPARTS. This Second Amendment may be executed in any
number of counterparts, each of which shall be an original and all of which
shall constitute one and the same instrument.
6.5 TELEFAXED COPIES OF SECOND AMENDMENT. The parties hereto
hereby agree that either party may rely on telefaxed execution copies of this
Second Amendment for all purposes.
IN WITNESS WHEREOF, Buyer and Seller have executed this Second
Amendment as of the date first written above.
"Buyer" "Seller"
BIRTCHER PROPERTIES, ENCAD, INC.,
a California corporation a Delaware corporation
By: /s/ Robert M. Anderson By: /s/ T.W. Schmidt
----------------------- ------------------
Its: President Its: Vice President & C.F.O.
--------- -----------------------
By: /s/ Thomas L. Green
--------------------
Its: V.P./General Counsel
--------------------
Birtcher/Birtcher Properties/Encad Acq/Docs/Second Amendmt to APS
2
<PAGE>
THIRD AMENDMENT TO
AGREEMENT FOR PURCHASE AND SALE
OF REAL PROPERTY AND ESCROW INSTRUCTIONS
ENCAD CORPORATE HEADQUARTERS
This THIRD AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF
REAL PROPERTY AND ESCROW INSTRUCTIONS, ENCAD CORPORATE HEADQUARTERS (the "Third
Amendment") is made effective as of this 26th day of October, 1999, by and
between ENCAD, INC., a Delaware corporation ("Seller"), and BIRTCHER PROPERTIES,
a California corporation ("Buyer").
R E C I T A L S
A. Seller and Buyer are parties to that certain Agreement of
Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate
Headquarters, dated as of August 5, 1999 (the "Purchase Agreement"), as amended
by that certain First Amendment to Agreement for Purchase and Sale of Real
Property and Escrow Instructions, Encad Corporate Headquarters, dated effective
as of September 30, 1999 (the "First Amendment"), and that certain Second
Amendment to Agreement for Purchase and Sale of Real Property and Escrow
Instructions, Encad Corporate Headquarters, dated October 18, 1999, providing
for the purchase and sale of that certain land and improvements more
particularly described in the Purchase Agreement. As used herein, the term
"Purchase Agreement" shall mean the Purchase Agreement as amended by the First
Amendment and the Second Amendment.
B. Seller and Buyer desire to amend and modify the Purchase
Agreement in certain particulars, and the purpose of this Third Amendment is to
set forth the terms and provisions agreed upon between Seller and Buyer with
respect to the amendment and modification of the Purchase Agreement.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Seller and Buyer
hereby agree to amend and modify the Purchase Agreement, as follows:
1. END OF THE INSPECTION PERIOD. Section 1.1.10 of the Purchase
Agreement is hereby modified and amended to delete the provisions thereof and
replace them with the date of November 2, 1999, which shall be deemed to be the
"End of the Inspection Period" for the purposes of the Purchase Agreement.
2. END OF THE FINANCING CONTINGENCY PERIOD. Section 1.1.11 of the
Purchase Agreement is hereby modified and amended to delete the provisions
thereof and replace them with the date of November 9, 1999, which shall be
deemed to be the "End of the Financing Contingency Period" for the purposes of
the Purchase Agreement.
3. NEW LEASE APPROVAL DATE. The provisions of Section 4.1.7 of the
Purchase Agreement are hereby amended and modified to provide that the New Lease
shall be mutually approved by Buyer and Seller on or prior to November 2, 1999.
4. CLOSING. Section 6.2 of the Purchase Agreement is hereby modified
and amended to change the "Closing Date" to November 24, 1999.
5. PROPERTY DEFICIENCIES. Section 6 of the Second Amendment is hereby
modified and amended to require as an additional covenant of Seller that Seller
cause its architect to provide an estimate of such costs in sufficient detail
for Buyer and Buyer's lender to evaluate on or before October 28, 1999. Further,
Section 6 of the Second Amendment is hereby modified and amended to provide that
Buyer shall have the right, on or before October 28, 1999, to approve the scope
and nature of the remedial work, as well as the amounts estimated to complete
such work.
6. MISCELLANEOUS.
6.1 CONFLICT OR INCONSISTENCY. In the event of any conflict or
inconsistency between the terms and provisions of this Third Amendment and the
terms and provisions of the Purchase Agreement, the terms and provisions of this
Third Amendment shall control and govern the rights, duties and obligations of
the parties.
6.2 DEFINED TERMS. The defined terms used in this Third
Amendment, as indicated by the first letter of a word being capitalized, shall
have the same meaning and definition in this Third Amendment as such terms have
in the Purchase Agreement, unless such terms have been redefined in this Third
Amendment.
6.3 EFFECT OF AMENDMENT. Except as modified and amended by
this Third Amendment, the Purchase Agreement shall remain in full force and
effect.
6.4 COUNTERPARTS. This Third Amendment may be executed in any
number of counterparts, each of which shall be an original and all of which
shall constitute one and the same instrument.
6.5 TELEFAXED COPIES OF THIRD AMENDMENT. The parties hereto
hereby agree that either party may rely on telefaxed execution copies of this
Third Amendment for all purposes.
1
<PAGE>
IN WITNESS WHEREOF, Buyer and Seller have executed this Third Amendment
as of the date first written above.
"Buyer" "Seller"
BIRTCHER PROPERTIES, ENCAD, INC.,
a California corporation a Delaware corporation
By: /s/ Robert M. Anderson By: /s/ T.W. Schmidt
----------------------- ------------------
Its: President Its: Vice President & C.F.O.
--------- -----------------------
By: /s/ Thomas L. Green
--------------------
Its: V.P./General Counsel
--------------------
Birtcher/Birtcher Properties/Encad Acq/Docs/Third Amendmt to APS
2
<PAGE>
FOURTH AMENDMENT TO
AGREEMENT FOR PURCHASE AND SALE
OF REAL PROPERTY AND ESCROW INSTRUCTIONS
ENCAD CORPORATE HEADQUARTERS
This FOURTH AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF
REAL PROPERTY AND ESCROW INSTRUCTIONS, ENCAD CORPORATE HEADQUARTERS (the "Fourth
Amendment") is made effective as of this 9th day of November, 1999, by and
between ENCAD, INC., a Delaware corporation ("Seller"), and BIRTCHER PROPERTIES,
a California corporation ("Buyer").
R E C I T A L S
A. Seller and Buyer are parties to that certain Agreement of
Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate
Headquarters, dated as of August 5, 1999 (the "Purchase Agreement"), as amended
by that certain First Amendment to Agreement for Purchase and Sale of Real
Property and Escrow Instructions, Encad Corporate Headquarters, dated effective
as of September 30, 1999 (the "First Amendment"), and that certain Second
Amendment to Agreement for Purchase and Sale of Real Property and Escrow
Instructions, Encad Corporate Headquarters, dated October 18, 1999, and that
certain Third Amendment to Agreement for Purchase and Sale of Real Property and
Escrow Instructions, Encad Corporate Headquarters, dated October 26, 1999,
providing for the purchase and sale of that certain land and improvements more
particularly described in the Purchase Agreement. As used herein, the term
"Purchase Agreement" shall mean the Purchase Agreement as amended by the First
Amendment, the Second Amendment, and the Third Amendment.
B. Seller and Buyer desire to amend and modify the Purchase
Agreement in certain particulars, and the purpose of this Fourth Amendment is to
set forth the terms and provisions agreed upon between Seller and Buyer with
respect to the amendment and modification of the Purchase Agreement.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Seller and Buyer
hereby agree to amend and modify the Purchase Agreement, as follows:
1. END OF THE FINANCING CONTINGENCY PERIOD. Section 1.1.11 of the
Purchase Agreement is hereby modified and amended to delete the provisions
thereof and replace them with the date of November 16, 1999, which shall be
deemed to be the "End of the Financing Contingency Period" for the purposes of
the Purchase Agreement.
2. NEW LEASE APPROVAL DATE. The provisions of Section 4.1.7 of the
Purchase Agreement are hereby amended and modified to provide that the New Lease
shall be mutually approved by Buyer and Seller on or prior to November 16, 1999.
3. MISCELLANEOUS.
3.1 CONFLICT OR INCONSISTENCY. In the event of any conflict or
inconsistency between the terms and provisions of this Fourth Amendment and the
terms and provisions of the Purchase Agreement, the terms and provisions of this
Fourth Amendment shall control and govern the rights, duties and obligations of
the parties.
3.2 DEFINED TERMS. The defined terms used in this Fourth
Amendment, as indicated by the first letter of a word being capitalized, shall
have the same meaning and definition in this Fourth Amendment as such terms have
in the Purchase Agreement, unless such terms have been redefined in this Fourth
Amendment.
3.3 EFFECT OF AMENDMENT. Except as modified and amended by
this Fourth Amendment, the Purchase Agreement shall remain in full force and
effect.
3.4 COUNTERPARTS. This Fourth Amendment may be executed in any
number of counterparts, each of which shall be an original and all of which
shall constitute one and the same instrument.
3.5 TELEFAXED COPIES OF FOURTH AMENDMENT. The parties hereto
hereby agree that either party may rely on telefaxed execution copies of this
Fourth Amendment for all purposes.
1
<PAGE>
IN WITNESS WHEREOF, Buyer and Seller have executed this Fourth
Amendment as of the date first written above.
"Buyer" "Seller"
BIRTCHER PROPERTIES, ENCAD, INC.,
a California corporation a Delaware corporation
By: /s/ Robert M. Anderson By: /s/ T.W. Schmidt
----------------------- ------------------
Its: President Its: Vice President & C.F.O.
--------- -----------------------
By: /s/ Thomas L. Green
--------------------
Its: V.P./General Counsel
--------------------
Birtcher/Birtcher Properties/Encad Acq/Docs/Fourth Amendmt to APS
2
<PAGE>
FIFTH AMENDMENT TO
AGREEMENT FOR PURCHASE AND SALE
OF REAL PROPERTY AND ESCROW INSTRUCTIONS
ENCAD CORPORATE HEADQUARTERS
This FIFTH AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF
REAL PROPERTY AND ESCROW INSTRUCTIONS, ENCAD CORPORATE HEADQUARTERS (the "Fifth
Amendment") is made effective as of this 16th day of November, 1999, by and
between ENCAD, INC., a Delaware corporation ("Seller"), and BIRTCHER PROPERTIES,
a California corporation ("Buyer").
R E C I T A L S
A. Seller and Buyer are parties to that certain Agreement of
Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate
Headquarters, dated as of August 5, 1999 (the "Purchase Agreement"), as amended
by that certain First Amendment to Agreement for Purchase and Sale of Real
Property and Escrow Instructions, Encad Corporate Headquarters, dated effective
as of September 30, 1999 (the "First Amendment"), and that certain Second
Amendment to Agreement for Purchase and Sale of Real Property and Escrow
Instructions, Encad Corporate Headquarters, dated October 18, 1999, that certain
Third Amendment to Agreement for Purchase and Sale of Real Property and Escrow
Instructions, Encad Corporate Headquarters, dated October 26, 1999, and that
certain Fourth Amendment to Agreement for Purchase and Sale of Real Property and
Escrow Instructions, Encad Corporate Headquarters, dated November 9, 1999,
providing for the purchase and sale of that certain land and improvements more
particularly described in the Purchase Agreement. As used herein, the term
"Purchase Agreement" shall mean the Purchase Agreement as amended by the First
Amendment, the Second Amendment, and the Third Amendment.
B. Seller and Buyer desire to amend and modify the Purchase
Agreement in certain particulars, and the purpose of this Fifth Amendment is to
set forth the terms and provisions agreed upon between Seller and Buyer with
respect to the amendment and modification of the Purchase Agreement.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Seller and Buyer
hereby agree to amend and modify the Purchase Agreement, as follows:
1. END OF THE FINANCING CONTINGENCY PERIOD. Section 1.1.11 of the
Purchase Agreement is hereby modified and amended to delete the date set forth
therein and replace it with the date of November 19, 1999, which shall be deemed
to be the "End of the Financing Contingency Period" for the purposes of the
Purchase Agreement.
2. NEW LEASE APPROVAL DATE. The provisions of Section 4.1.7 of the
Purchase Agreement are hereby amended and modified to provide that the New Lease
shall be mutually approved by Buyer and Seller on or prior to November 19, 1999.
3. MISCELLANEOUS.
3.1 CONFLICT OR INCONSISTENCY. In the event of any conflict or
inconsistency between the terms and provisions of this Fifth Amendment and the
terms and provisions of the Purchase Agreement, the terms and provisions of this
Fifth Amendment shall control and govern the rights, duties and obligations of
the parties.
3.2 DEFINED TERMS. The defined terms used in this Fifth
Amendment, as indicated by the first letter of a word being capitalized, shall
have the same meaning and definition in this Fifth Amendment as such terms have
in the Purchase Agreement, unless such terms have been redefined in this Fifth
Amendment.
3.3 EFFECT OF AMENDMENT. Except as modified and amended by
this Fifth Amendment, the Purchase Agreement shall remain in full force and
effect.
3.4 COUNTERPARTS. This Fifth Amendment may be executed in any
number of counterparts, each of which shall be an original and all of which
shall constitute one and the same instrument.
3.5 TELEFAXED COPIES OF FIFTH AMENDMENT. The parties hereto
hereby agree that either party may rely on telefaxed execution copies of this
Fifth Amendment for all purposes.
1
<PAGE>
IN WITNESS WHEREOF, Buyer and Seller have executed this Fifth Amendment
as of the date first written above.
"Buyer" "Seller"
BIRTCHER PROPERTIES, ENCAD, INC.,
a California corporation a Delaware corporation
By: /s/ Greg MacDiarmid By: /s/ T.W. Schmidt
-------------------- ------------------
Its: Chief Financial Officer Its: Vice President & C.F.O.
----------------------- -----------------------
By: /s/ Thomas L. Green
--------------------
Its: V.P./General Counsel
--------------------
Birtcher/Birtcher Properties/Encad Acq/Docs/Fifth Amendmt to APS
2
<PAGE>
SIXTH AMENDMENT TO
AGREEMENT FOR PURCHASE AND SALE
OF REAL PROPERTY AND ESCROW INSTRUCTIONS
ENCAD CORPORATE HEADQUARTERS
This SIXTH AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF
REAL PROPERTY AND ESCROW INSTRUCTIONS, ENCAD CORPORATE HEADQUARTERS (the "Sixth
Amendment") is made effective as of this 19th day of November, 1999, by and
between ENCAD, INC., a Delaware corporation ("Seller"), and BIRTCHER PROPERTIES,
a California corporation ("Buyer").
R E C I T A L S
A. Seller and Buyer are parties to that certain Agreement of
Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate
Headquarters, dated as of August 5, 1999 (the "Purchase Agreement"), as amended
by that certain First Amendment to Agreement for Purchase and Sale of Real
Property and Escrow Instructions, Encad Corporate Headquarters, dated effective
as of September 30, 1999 (the "First Amendment"), and that certain Second
Amendment to Agreement for Purchase and Sale of Real Property and Escrow
Instructions, Encad Corporate Headquarters, dated October 18, 1999, that certain
Third Amendment to Agreement for Purchase and Sale of Real Property and Escrow
Instructions, Encad Corporate Headquarters, dated October 26, 1999, that certain
Fourth Amendment to Agreement for Purchase and Sale of Real Property and Escrow
Instructions, Encad Corporate Headquarters, dated November 9, 1999, and that
certain Fifth Amendment to Agreement for Purchase and Sale of Real Property and
Escrow Instructions, Encad Corporate Headquarters, dated November 16, 1999,
providing for the purchase and sale of that certain land and improvements more
particularly described in the Purchase Agreement. As used herein, the term
"Purchase Agreement" shall mean the Purchase Agreement as amended by the First
Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, and
the Fifth Amendment.
B. Seller and Buyer desire to amend and modify the Purchase
Agreement in certain particulars, and the purpose of this Sixth Amendment is to
set forth the terms and provisions agreed upon between Seller and Buyer with
respect to the amendment and modification of the Purchase Agreement.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Seller and Buyer
hereby agree to amend and modify the Purchase Agreement, as follows:
1. END OF THE FINANCING CONTINGENCY PERIOD. Section 1.1.11 of the
Purchase Agreement is hereby modified and amended to delete the date set forth
therein and replace it with the date of November 23, 1999, which shall be deemed
to be the "End of the Financing Contingency Period" for the purposes of the
Purchase Agreement.
2. NEW LEASE APPROVAL DATE. The provisions of Section 4.1.7 of the
Purchase Agreement are hereby amended and modified to provide that the New Lease
shall be mutually approved by Buyer and Seller on or prior to November 23, 1999.
3. MISCELLANEOUS.
3.1 CONFLICT OR INCONSISTENCY. In the event of any conflict or
inconsistency between the terms and provisions of this Sixth Amendment and the
terms and provisions of the Purchase Agreement, the terms and provisions of this
Sixth Amendment shall control and govern the rights, duties and obligations of
the parties.
3.2 DEFINED TERMS. The defined terms used in this Sixth
Amendment, as indicated by the first letter of a word being capitalized, shall
have the same meaning and definition in this Sixth Amendment as such terms have
in the Purchase Agreement, unless such terms have been redefined in this Sixth
Amendment.
3.3 EFFECT OF AMENDMENT. Except as modified and amended by
this Sixth Amendment, the Purchase Agreement shall remain in full force and
effect.
3.4 COUNTERPARTS. This Sixth Amendment may be executed in any
number of counterparts, each of which shall be an original and all of which
shall constitute one and the same instrument.
3.5 TELEFAXED COPIES OF SIXTH AMENDMENT. The parties hereto
hereby agree that either party may rely on telefaxed execution copies of this
Sixth Amendment for all purposes.
1
<PAGE>
IN WITNESS WHEREOF, Buyer and Seller have executed this Sixth Amendment
as of the date first written above.
"Buyer" "Seller"
BIRTCHER PROPERTIES, ENCAD, INC.,
a California corporation a Delaware corporation
By: /s/ Greg McDiarmid By: /s/ T.W. Schmidt
------------------- ------------------
Its: Chief Financial Officer Its: Vice President & C.F.O.
----------------------- -----------------------
By: /s/ Thomas L. Green
--------------------
Its: V.P./General Counsel
--------------------
Birtcher/Birtcher Properties/Encad Acq/Docs/Sixth Amendmt to APS
2
<PAGE>
SEVENTH AMENDMENT TO
AGREEMENT FOR PURCHASE AND SALE
OF REAL PROPERTY AND ESCROW INSTRUCTIONS
ENCAD CORPORATE HEADQUARTERS
This SEVENTH AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF
REAL PROPERTY AND ESCROW INSTRUCTIONS, ENCAD CORPORATE HEADQUARTERS (the
"Seventh Amendment") is made effective as of this 23rd day of November, 1999, by
and between ENCAD, INC., a Delaware corporation ("Seller"), BIRTCHER PROPERTIES,
a California corporation ("Buyer") and BIRTCHER CORNERSTONE, L.P. a Delaware
limited partnership.
R E C I T A L S
A. Seller and Buyer are parties to that certain Agreement of
Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate
Headquarters, dated as of August 5, 1999 (the "Purchase Agreement"), as amended
by that certain First Amendment to Agreement for Purchase and Sale of Real
Property and Escrow Instructions, Encad Corporate Headquarters, dated effective
as of September 30, 1999 (the "First Amendment"), and that certain Second
Amendment to Agreement for Purchase and Sale of Real Property and Escrow
Instructions, Encad Corporate Headquarters, dated October 18, 1999, that certain
Third Amendment to Agreement for Purchase and Sale of Real Property and Escrow
Instructions, Encad Corporate Headquarters, dated October 26, 1999, that certain
Fourth Amendment to Agreement for Purchase and Sale of Real Property and Escrow
Instructions, Encad Corporate Headquarters, dated November 9, 1999, that certain
Fifth Amendment to Agreement for Purchase and Sale of Real Property and Escrow
Instructions, Encad Corporate Headquarters, dated November 16, 1999 that certain
Sixth Amendment to Agreement for Purchase and Sale of Real Property and Escrow
Instructions, Encad corporate headquarters, dated November 19, 1999, providing
for the purchase and sale of that certain land and improvements more
particularly described in the Purchase Agreement. As used herein, the term
"Purchase Agreement" shall mean the Purchase Agreement as amended by the First
Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the
Fifth Amendment, and the Sixth Amendment.
B. Seller and Buyer desire to amend and modify the Purchase
Agreement in certain particulars, and the purpose of this Seventh Amendment is
to set forth the terms and provisions agreed upon between Seller and Buyer with
respect to the amendment and modification of the Purchase Agreement. Buyer, by
this Seventh Amendment also desires to assign all of its rights, duties and
obligations under the Purchase Agreement to Birtcher Cornerstone, L.P., and have
that entity assume the duties and obligations of Buyer thereunder.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Seller, Buyer and
Birtcher Cornerstone, L.P., a Delaware limited partnership, hereby agree to
amend and modify the Purchase Agreement, as follows:
1. APPROVAL OF FINANCING CONTINGENCY. Buyer hereby confirms that the
Buyer has satisfied, and hereby waives, the Buyer's Condition set forth in
Section 4.1.6 of the Purchase Agreement providing for the approval of financing
for the acquisition.
2. NEW LEASE APPROVAL. Buyer and Seller hereby approve the form of the
New Lease negotiated between the parties and forwarded to Seller by letter dated
January 19, 2000, which form of lease shall be executed and delivered at the
Closing.
3. CLOSING. Section 6.2 of the Purchase Agreement is hereby modified
and amended to change the "Closing Date" to on January 26, 2000.
4. PROPERTY CONDITION. Pursuant to the terms of Section 4.1.3
"Inspection Approval," Buyer delivered to Seller a punch list of corrective work
which Buyer considered necessary to be performed, which punch list was dated
November 2, 1999, and a copy of which is attached hereto and incorporated herein
by this reference (hereinafter the "Punch List"). In reviewing the Punch List,
Seller retained the services of architect Don Reeves of Turpit and Potter
Architects (the "Architect") to review the items listed in the Punch List. Based
upon the review by Buyer, Seller and the Architect of the Punch List, the Seller
has agreed to the complete following items after the Closing, and Seller agrees
that the obligation to complete these items shall survive the Closing:
(a) MINOR REPAIR ITEMS. Seller hereby agrees to perform all of
the minor repair items set forth on the Punch List within thirty (30)
days of the Closing.
(b) MAJOR REPAIR ITEMS. Seller agrees to repair, slurry and
re-stripe the parking on the Property. Seller shall perform the
required work within one hundred twenty (120) days of the Closing. In
the event the City, at any time during the term of the New Lease,
determines that the parking is not in compliance with City requirements
as interpreted by the City, the Seller shall promptly make all
modifications requested by the City.
(c) ADA COMPLIANCE. If the City, at any time during the term
of the New Lease, determines that the Property does not comply with the
requirements of the Americans with Disabilities Act
1
<PAGE>
("ADA"), Seller agrees to promptly comply with such requirements as
interpreted by the City and to make all modifications requested by the
City.
(d) CODE COMPLIANCE. Buyer shall obtain electrical permits,
complete the work, and seek inspections and approvals for all of the
electrical work items identified in the Turpit and Potter Review of
Building Alterations for Encad, Inc., 21 October 1999, Revised, 3
November 1999. Seller shall use its best efforts to obtain the
electrical permits for such work within sixty (60) days of the Closing
and shall use its best efforts to complete such work and seek the
inspections of the work within one hundred twenty (120) days of the
Closing. Further, Seller shall use its best efforts to obtain
certificates of occupancy for the Property, or the equivalency thereof,
after the electrical work is completed. In the event the City, at any
time during the term of the New Lease, determines that the Property
does not comply with all codes, regulations and requirements as
interpreted by the City, the Seller shall promptly make all
modifications requested by the City.
5. REMEDIAL WORK. Pursuant to the provisions of paragraph 6 of the
First Amendment, Buyer and Seller hereby agree that the holdback in Escrow of
the Purchase Price shall be in the amount of Thirty-six Thousand Dollars
($36,000.00). Such amount shall be subject to monthly disbursement to reimburse
Seller for costs actually incurred to complete the remedial work identified in
paragraphs 4(c) and (d), above. All disbursements shall require evidence of
payment for such work performed on the Property as identified in paragraphs 4(a)
through (d) above, release of all lien claims, and evidence of the approval of
the work by applicable governmental authorities, if such approval is required
and can be obtained. Seller shall be entitled to a release of any balance of the
holdback once Seller has completed the work required by paragraphs 4(a) through
(d), above, and obtained a certificates of occupancy, or its equivalent, from
the City, or provided Buyer with reasonable evidence that such approvals cannot
be obtained from the City.
6. ASSIGNMENT. Buyer hereby assigns all of its rights, duties and
obligations under the Purchase Agreement to Birtcher Cornerstone, L.P., a
Delaware limited partnership, and Birtcher Cornerstone, L.P., a Delaware limited
partnership, hereby agrees to assume all of Buyer's duties and obligations under
the Purchase Agreement. All references in the Purchase Agreement to "Buyer"
shall hereinafter refer to Birtcher Cornerstone, L.P., a Delaware limited
partnership.
7. MISCELLANEOUS.
7.1 CONFLICT OR INCONSISTENCY. In the event of any conflict or
inconsistency between the terms and provisions of this Seventh Amendment and the
terms and provisions of the Purchase Agreement, the terms and provisions of this
Seventh Amendment shall control and govern the rights, duties and obligations of
the parties.
7.2 DEFINED TERMS. The defined terms used in this Seventh
Amendment, as indicated by the first letter of a word being capitalized, shall
have the same meaning and definition in this Seventh Amendment as such terms
have in the Purchase Agreement, unless such terms have been redefined in this
Seventh Amendment.
7.3 EFFECT OF AMENDMENT. Except as modified and amended by
this Seventh Amendment, the Purchase Agreement shall remain in full force and
effect.
7.4 COUNTERPARTS. This Seventh Amendment may be executed in
any number of counterparts, each of which shall be an original and all of which
shall constitute one and the same instrument.
7.5 TELEFAXED COPIES OF SEVENTH AMENDMENT. The parties hereto
hereby agree that either party may rely on telefaxed execution copies of this
Seventh Amendment for all purposes.
2
<PAGE>
IN WITNESS WHEREOF, Buyer and Seller have executed this Seventh
Amendment as of the date first written above.
"Buyer" "Seller"
BIRTCHER PROPERTIES, ENCAD, INC.,
a California corporation, a Delaware corporation
By: /s/ Robert M. Anderson By: /s/ T.W. Schmidt
------------------------ ------------------
Its: President Its: V.P. and C.F.O.
--------- ---------------
BIRTCHER CORNERSTONE, L.P., By: /s/ Thomas L. Green
a Delaware limited partnership, ---------------------
Its: V.P.
----
By: Birtcher Cornerstone G.P., L.L.C.,
a Delaware limited liability company, General Partner
of Birtcher Cornerstone, L.P.
By: /s/ Robert M. Anderson
-----------------------
Its:
-----------------------
Birtcher/Birtcher Properties/Encad Acq/Docs/Seventh Amendmt to APS6
3
<PAGE>
PUNCH LIST OF CORRECTIVE WORK
ENCAD CORPORATE HEADQUARTERS
MINOR REPAIR ITEMS - All corrective work to be completed prior to Closing.
- - 5959 Building - Connect condensate line directly to the underground storm
drain at the computer room cooling tower;
- - 5959 Building - Replace stained ceiling tiles surrounding the skylight
opening;
- - 6059 Building - Repair fence section at top-of-slope adjacent to eastern
parking area; and
- - 6059 Building - Trim tree from building line at west elevation.
MAJOR REPAIR ITEM - To be completed in conjunction with correction of Compliance
Issues referenced in Paragraph 2.5, Lessee as Prior Owner/Occupant, of the
Lease.
- - Repair, slurry, and re-stripe parking/parking areas.
- - ADA Compliance:
- Install correct signage; provide path of travel to lobby entrances;
provide parking space pavement marking including van-accessible space;
- Install compliant lever faucets in restrooms;
- Install insulation over drain and hot water piping in restrooms;
- Provide handrail extensions at all stairways;
- Provide visible signal at elevator doors; and
- Install visible fire alarm systems (covered in Turpit & Potter
report).
CODE COMPLIANCE ITEMS - To be completed per Paragraph 2.5 of the Lease.
- - Based on Turpit & Potter report (Review of Building Alterations for ENCAD,
Inc. dated 21 October 1999, revised 1 November 1999), deposit of $36,000
into Escrow pursuant to the Third Amendment to Purchase and Sale Agreement;
- - Completion of compliance items.
4
<PAGE>
EXHIBIT 10.45
LEASE AGREEMENT DATED OCTOBER 15, 1999 BETWEEN THE COMPANY
AND BIRTCHER CORNERSTONE, L.P., A DELAWARE LIMITED PARTNERSHIP
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
October 15, 1999, is made by and between Birtcher Cornerstone, L.P., a Delaware
Limited partnership ("Lessor") and ENCAD, INC., a Delaware corporation
("Lessee"), (collectively the "Parties," or individually a "Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 6059 and 5959 Cornerstone Court West, San Diego (APNs 341-370-18 &
341-370-19), located in the County of San Diego, State of California, and
generally described as (describe briefly the nature of the property and, if
applicable, the "Project", if the property is located within a Project) two (2)
two-story high-tech R&D/office buildings containing approximately 97,945 square
feet as follows: 6059 Cornerstone Court West - approx. 50,600 square feet; and
5959 Cornerstone Court West - approx. 47,345 square feet ("Premises"). (See also
Paragraph 2)
1.3 Term: Seven (7) years and zero (0) months ("Original Term")
commencing per Paragraph 59 ("Commencement Date") and ending per Paragraph 59
("Expiration Date"). (See also Paragraph 3)
1.4 Early Possession: N/A ("Early Possession Date"). (See also
Paragraphs 3.2 and 3.3)
1.5 Base Rent: $101,862.80 per month ("Base Rent") subject to the
increase and as increased in accordance with Paragraph 51, payable on the
Commencement Date and thereafter on the first (1st) day of each month commencing
on the Commencement Date. (See also Paragraph 4)
/X/ If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.
1.6 Base Rent Paid Upon Execution: $0 as Base Rent for the period.
1.7 Security Deposit: See Paragraph 53.
1.8 Agreed Use: Design, research, warehousing and manufacturing of high
technology products and/or general office uses, but subject to Applicable
Requirements. (See also Paragraph 6)
1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise
stated herein. (See also Paragraph 8)
1.10 [Intentionally Omitted]
1.11 [Intentionally Omitted]
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through 60 and Exhibits "A", "B" and "C", all of
which constitute a part of this Lease.
2. PREMISES. (See also Paragraph 50)
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 size set forth in this Lease, or that may have
been used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less
2.2 Condition. Lessor shall deliver the Premises to Lessee broom clean
and free of debris on the Commencement Date or the Early Possession Date,
whichever first occurs ("Start Date"), and, so long as the required service
contracts described in Paragraph 7.1(b) below are obtained by Lessee within
thirty (30) days following the Start Date, warrants that the existing
electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air
conditioning systems ("HVAC"), loading doors, if any, and all other such
elements in the Premises, other than those constructed by Lessee, shall be in
good operating condition on said date and that the structural elements of the
roof, bearing walls and foundation of any buildings on the Premises (the
"Building") shall be free of material defects. If a non-compliance with said
warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation
with respect to such matter, 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, after the Start Date, Lessee does not give Lessor written
notice of any non-compliance with this warranty within: (i) one year as to the
surface of the roof and the structural portions of the roof, foundations and
bearing walls, (ii) six (6) months as to the HVAC systems, (iii) thirty (30)
days as to the remaining systems and other elements of the Building, correction
of such non-compliance shall be the obligation of Lessee at Lessee's sole cost
and expense.
2.3 Compliance. Lessor warrants that the improvements on the Premises
comply with all applicable laws, covenants or restrictions of record, building
codes, regulations and ordinances ("Applicable Requirements") in effect on the
Start Date. Said warranty does not apply to the use to which Lessee will put the
Premises or to any Alterations or Utility Installations (as defined in Paragraph
7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for
determining whether or not the zoning is appropriate for Lessee's intended use,
and acknowledges that past uses of the Premises may no longer be allowed. If the
Premises doe not comply with said warranty, Lessor shall, except as otherwise
provided, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify the same
at Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within six (6) months following the Start
Date, correction of that non-compliance shall be the obligation of Lessee at
Lessee's sole cost and expense. If the Applicable Requirements are hereafter
changed (as opposed to being in existence at the Start Date, which is addressed
in Paragraph 6.2(e) below) so as to require during the term of this Lease the
construction of an addition to or an alteration of the Building, the remediation
of any Hazardous Substance, or the reinforcement or other physical modification
of the Building ("Capital Expenditure"), Lessor and Lessee shall allocate the
cost of such work as follows:
(a) Subject to Paragraph 2.3(c) below, if such Capital
Expenditures are required as a result of the specific and unique use of the
Premises by Lessee as compared with uses by tenants in general, Lessee shall be
fully responsible for the cost thereof.
(b) If such Capital Expenditure is not the result of the
specific and unique use of the Premises by Lessee (such as, governmentally
mandated seismic modifications), then Lessor and Lessee shall allocate the
obligation to pay for such costs pursuant to the provisions of Paragraph 7.1(c);
provided, however, that if such Capital Expenditure is required during the last
two years of this Lease or if Lessor reasonably determines that it is not
economically feasible to pay its share thereof, Lessor shall have the option to
terminate this Lease upon ninety (90) days prior written notice to Lessee unless
Lessee notifies Lessor, in writing, within ten (10) days after receipt of
Lessor's termination notice
<PAGE>
that Lessee will pay for such Capital Expenditure. If Lessor does not elect
to terminate, and fails to tender its share of any such Capital Expenditure,
Lessee may advance such funds and bring an action against Lessor to recover
the same, together with Interest.
(c) Notwithstanding the above, the provisions concerning
Capital Expenditures are intended to apply only to non-voluntary, unexpected,
and new Applicable Requirements. If the Capital Expenditures are instead
triggered by Lessee as a result of an actual or proposed change in use, change
in intensity of use, or modification to the Premises then, and in that event,
Lessee shall be fully responsible for the cost thereof, and Lessee shall not
have any right to terminate this Lease.
2.4 Acknowledgements. Lessee acknowledges that: (a) it has been advised
by Lessor to satisfy itself with respect to the condition of the Premises
(including but not limited to the electrical, HVAC and fire sprinkler systems,
security, environmental aspects, and compliance with Applicable Requirements),
and their suitability for Lessee's intended use; (b) Lessee has made such
investigation as it deems necessary with reference to such matters and assumes
all responsibility therefore as the same relate to its occupancy of the
Premises; and (c) neither Lessor, Lessor's agents, nor any Broker 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
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work. In this regard, Lessee
acknowledges and agrees that (i) Lessee is fully responsible and liable for
obtaining any and all building permits required for improvements in, to, on
and/or about the Premises as the same exist as of the Commencement Date and
shall obtain and deliver them to Landlord within sixty (60) days thereafter,
(ii) Lessee shall bring the Premises into compliance with Applicable
Requirements and obtain final Certificates of Occupancy therefore within
one-hundred twenty (120) days of the Commencement Date, and (iii) Lessee shall
indemnify, defend and hold Lessor free and harmless of, from and against any and
all claims, demands, losses, liabilities, damages, fees, penalties, costs and/or
expenses, including without limitation reasonable attorneys fees, arising out
of, resulting from or incurred in connection with the Premises not having
required licenses, permits or Certificates of Occupancy as of the Commencement
Date or the Premises not being in compliance with Applicable Requirements as of
the Commencement Date.
3. TERM.
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this Lease
(including, but not limited to, the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall, however, be in effect
during such period. Any such early possession shall not affect the Expiration
Date.
3.3 Delay in Possession. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefore,
nor shall such failure affect the validity of this Lease. Lessee shall not,
however, be obligated to pay Rent or perform its other obligations until it
receives possession of the Premises. If possession is not delivered within sixty
(60) days after the Commencement Date, Lessee may, at its option, by notice in
writing within ten (10) days after the end of such sixty (60) day period, cancel
this Lease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is not received by Lessor within said ten (10)
day period, Lessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Lessee by the Start Date and Lessee
does not terminate this Lease, as aforesaid, any period of rent abatement that
Lessee would otherwise have enjoyed shall run from the date of delivery of
possession and continue for a period equal to what Lessee would otherwise have
enjoyed under the terms hereof, but minus any days of delay caused by the acts
or omissions of Lessee. If possession of the Premises is not delivered within
four (4) months after the Commencement Date, this Lease shall terminate unless
other agreements are reached between Lessor and Lessee, in writing.
3.4 Lessee Compliance. Lessor shall not be required to tender
possession of the Premises to Lessee until Lessee complies with its obligation
to provide evidence of insurance (Paragraph 8.5). Pending delivery of such
evidence, Lessee shall be required to perform all of its obligations under this
Lease from and after the Start Date, including the payment of Rent,
notwithstanding Lessor's election to withhold possession pending receipt of such
evidence of insurance. Further, if Lessee is required to perform any other
conditions prior to or concurrent with the Start Date, the Start Date shall
occur but Lessor may elect to withhold possession until such conditions are
satisfied.
4. RENT. (See also Paragraphs 51 and 52)
4.1 Rent Defined. All monetary obligations of Lessee to Lessor under
the terms of this Lease (except for the Security Deposit) are deemed to be rent
("Rent").
4.2 Payment. Lessee shall cause payment of Rent to be received by
Lessor in lawful money of the United States, without offset or deduction (except
as specifically permitted in Paragraph 13.6(b) of this Lease), on or before the
day on which it is due. Rent for any period during the term hereof which is for
less than one (1) full calendar month shall be prorated based upon the actual
number of days of said month. Payment of Rent shall be made to Lessor at its
address stated herein or to such other persons or place as Lessor may from time
to time designate in writing. Acceptance of a payment which is less than the
amount then due shall not be a waiver of Lessor's rights to the balance of such
Rent, regardless of Lessor's endorsement of any check so stating.
5. [INTENTIONALLY OMITTED]
6. USE.
6.1 Use. Lessee shall use and occupy the Premises only for the Agreed
Use, 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 damage, waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to neighboring properties. Lessor
shall not unreasonably withhold or delay its consent to any written request for
a modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which notice
shall include an explanation of Lessor's 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 hazardous or toxic substance,
material or waste which is or becomes regulated by any local governmental
authority, the State of California or the United States Government, as well as
any product, substance, or waste whose presence, use, manufacture, disposal,
transportation, or release, 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 Substances shall include,
but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or
any products, by-products or fractions thereof. Lessee shall not engage in any
activity in or on the Premises which constitutes a Reportable Use of Hazardous
Substances without the express prior written consent of Lessor and timely
compliance (at Lessee's expense) with all Applicable Requirements. "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
<PAGE>
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority, and/or (iii) the
presence at the Premises of a Hazardous Substance with respect to which any
Applicable Requirements requires that a notice be given to persons entering or
occupying the Premises or neighboring properties. Notwithstanding the foregoing,
Lessee may use any ordinary and customary materials reasonably required to be
used in the normal course of the Agreed Use, so long as such use is in
compliance with all Applicable Requirements, is not a Reportable Use, and does
not expose the Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefore. In
addition, Lessor may condition its consent to any Reportable Use upon receiving
such additional assurances as Lessor reasonably deems necessary to protect
itself, the public, the Premises and/or the environment against damage,
contamination, injury and/or liability, including, but not limited to, the
installation (and removal on or before Lease expiration or termination) of
protective modifications (such as concrete encasements) and/or increasing the
Security Deposit.
(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, other than as previously consented to by Lessor,
Lessee shall immediately give written notice of such fact to Lessor, and provide
Lessor with a copy of any report, notice, claim or other documentation which it
has concerning the presence of such Hazardous Substance.
(c) Lessee Remediation. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any Hazardous
Substance brought onto the Premises during the term of this Lease, by or for
Lessee, or any third party.
(d) Lessee Indemnification. Lessee shall indemnify, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless
from and against any and all loss of rents and/or damages, liabilities,
judgments, claims, expenses, penalties, and attorneys' and consultants' fees
arising out of involving any Hazardous Substance brought onto the Premises by or
for Lessee, or any third party (provided, however, that Lessee shall have no
liability under this Lease with respect to underground migration of any
Hazardous Substance under the Premises from adjacent properties). Lessee's
obligations shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by Lessee, and the cost of investigation, removal, remediation,
restoration and/or abatement, and shall survive the expiration or 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.
(e) Lessor Indemnification. Lessor and its successors and
assigns shall indemnify, defend, reimburse and hold Lessee, its employees and
lenders, harmless from and against any and all environmental damages, including
the cost of remediation, which existed as a result of Hazardous Substances on
the Premises or which are caused by the gross negligence or willful misconduct
of Lessor, its agents or employees. Lessor's obligations, as and when required
by the Applicable Requirements, shall include, but not be limited to, the cost
of investigation, removal, remediation, restoration and/or abatement, and shall
survive the expiration or termination of this Lease.
(f) Investigations and Remediations. As a result of, among
other things, Lessee's previous ownership, occupancy and/or use of the Premises,
Lessee shall have and retain the responsibility and pay for any investigations
or remediation measures required by governmental entities having jurisdiction
with respect to the existence of Hazardous Substances on the Premises prior to
the Start Date. Additionally, if such remediation measure is required as a
result of Lessee's use (including Alterations", as defined in Paragraph 7.3(a)
below) of the Premises (whether before, on or after the Start Date), Lessee
shall also be responsible for the same. Lessee shall cooperate fully in any such
activities at the request of Lessor, including allowing Lessor and Lessor's
agents to have reasonable access to the Premises at reasonable times in order to
carry out investigative, monitoring and remedial responsibilities.
(g) Lessor Termination Open. If a Hazardous Substance
Condition occurs during the term of this Lease, unless Lessee is legally
responsible therefore (in which case Lessee shall make the investigation and
remediation thereof required by the Applicable Requirements and this Lease shall
continue in full force and effect, but subject to Lessor's rights under
Paragraph 6.23(d) and Paragraph 13), Lessor may, at Lessor's option, either (i)
investigate and remediate such Hazardous Substance Condition, if required, as
soon as reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to remediate
such condition exceeds twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater, give written notice to Lessee, within thirty (30) days
after receipt by Lessor of knowledge of the occurrence of such Hazardous
Substance Condition, of Lessor's desire to terminate this Lease as of the date
sixty (60) days following the date of such notice. In the event Lessor elects to
give a termination notice, Lessee may, within ten (10) days thereafter, give
written notice to Lessor of Lessee's commitment to pay the amount by which the
cost of remediation of such Hazardous Substance Condition exceeds an amount
equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater. Lessee shall provide Lessor with said funds or satisfactory assurance
thereof within thirty (30) days following such commitment. In such event, this
Lease shall continue in full force and effect, and Lessor shall proceed to make
such remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time provided, this Lease shall terminate as of the
date specified in Lessor's notice of termination.
6.3 Lessee's Compliance with Applicable Requirements. Except as
otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within ten (10) days after receipt of Lessor's written request, provide
Lessor with copies of all permits and other documents, and other information
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 the failure of
Lessee or the Premises to comply with any Applicable Requirements.
6.4 Inspection; Compliance. Lessor and Lessor's "Lender" (as defined in
Paragraph 30 below) and consultants shall have the right to enter into 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. The cost of any such inspections shall be
paid by Lessor, unless a violation of Applicable Requirements, or a
contamination is found to exist or be imminent, or the inspection is requested
or ordered by a governmental authority. In such case, Lessee shall upon request
reimburse Lessor for the commercially reasonable cost of such inspections, so
long as such inspection is reasonably related to the violation or contamination.
7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 Lessee's Obligations. (See also Paragraphs 52 and 54)
(a) In General. Subject to the provisions of Paragraph 2.2
(Condition), as modified by Paragraph 2.5, Paragraph 2.3 (Compliance), as
modified by Paragraph 2.5, Paragraph 6.3 (Lessee's Compliance with Applicable
Requirements), Paragraph 7.2 (Lessor's Obligations), Paragraph 9 (Damage or
Destruction), and Paragraph 14 (Condemnation), as well as Paragraphs 52 and 54,
Lessee shall, at Lessee's sole expense, keep the Premises, Utility
Installations, and Alterations in good order, condition and repair (whether or
not the portion of
<PAGE>
the Premises requiring repairs, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
reapirs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, but not limited to, all
equipment or facilities, such as plumbing, heating, ventilating,
air-conditioning, electrical, lighting facilities, boilers, pressure vessels,
fire protection system, fixtures, walls (interior and exterior), foundations,
ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping,
driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways
located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in
good order, condition and repair, shall exercise and perform good maintenance
practices, specifically including the procurement and maintenance of the service
contracts required by Paragraph 7.1(b) below. 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. Lessee shall, during the term of this Lease, keep the exterior
appearance of the Building in a first-class condition consistent with the
exterior appearance of other similar facilities of comparable age and size in
the vicinity, including, when necessary, the exterior repainting of the
Building.
(b) Service Contracts. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation systems, (v) roof covering and
drains, (vi) driveways and parking lots, (vii) clarifiers, (viii) basic utility
feed to the perimeter of the Building, and (ix) any other equipment, if it is
required by Lessor and commercially reasonable to impose such requirement.
(c) Replacement. Subject to Lessee's indemnification of Lessor
as set forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if an item described in Paragraph 7.1(b) cannot be repaired other
than at a cost which is in excess of 50% of the cost of replacing such item,
then such item shall be replaced by Lessor, and the cost thereof shall be
prorated between the Parties and Lessee shall only be obligated to pay, each
month during the remainder of the term of this Lease, on the date on which Base
Rent is due, an amount equal to the product of multiplying the cost of such
replacement by a fraction, the numerator of which is one, and the denominator of
which is the number of months of the useful life of such replacement as such
useful life is specified pursuant to Federal income tax regulations or
guidelines for depreciation thereof (including, that is, plus, interest on the
unamortized balance at the lesser of ten percent (10%) per annum or the maximum
legal rate, with Lessee reserving the right to prepay its obligation at any
time.
7.2 Lessor's Obligations. Subject to the provisions of Paragraph 2.2
(Condition), as modified by Paragraph 2.5, Paragraph 2.3 (Compliance), as
modified by Paragraph 2.5, Paragraph 7.1(c), Paragraph 9 (Damage or Destruction)
and Paragraph 14 (Condemnation) and except as is otherwise specifically provided
in this Lease, it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, or
the equipment therein, all of which obligations are intended to be that of the
Lessee. It is the intention of the Parties that the terms of this Lease govern
the respective obligations of the Parties as to maintenance and repair or the
Premises, and they expressly waive the benefit of any statute now or hereafter
in effect to the extent it is inconsistent with the terms of this Lease.
7.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility
Installations" refers to all floor and window coverings, air lines, power
panels, electrical distribution, security and fire protection systems,
communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing
in or on the Premises. The term "Trade Fixtures" shall mean Lessee's machinery
and equipment that can be removed without doing material damage to the Premises.
The term "Alterations" shall mean any modification of the improvements, other
than Utility Installations or Trade Fixtures, whether by addition or deletion.
"Lessee Owned Alterations and/or Utility Installations" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or
Utility Installations to the Premises without Lessor's prior written consent,
which consent shall not be unreasonably withheld. Lessee may, however, make non
structural Alterations and/or non-structural Utility Installations to the
interior of the Premises (excluding the roof) without such consent but upon
notice to Lessor, as long as they are not visible from the outside, do not
involve puncturing, relocating or removing the roof or any existing walls, and
the cumulative cost thereof during this Lease as extended does not exceed
$50,000 in the aggregate or $10,000 in any one year; provided, however, that in
no event shall Lessor's consent be required to recarpet or paint the interior of
the building(s) at the Premises.
(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. Consent shall be deemed
conditioned upon Lessee's: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor many condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation.
(c) Indemnification. Lessee shall pay, when due, all claims
for labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by any
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. If Lessee shall 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. If Lessor shall require, Lessee shall furnish a
surety bond in an amount equal to one and on-half times the amount of such
contested lien, claim or demand, indemnifying Lessor against liability for the
same. If Lessor elects to participate in any such action, Lessee shall pay
Lessor's reasonable attorneys' fees and costs.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. All Alterations and Utility Installations made
by Lessee shall be the property of Lessee, but considered a part of the
Premises.
(b) Removal. All Lessee Owned Alterations or Utility
Installations shall be removed by the expiration or termination of this Lease.
Lessor may require the removal at any time of all or any part of any Lessee
Owned Alterations or Utility Installations made without the required consent.
(c) Surrender/Restoration. Lessee shall surrender the Premises
by the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom 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. Lessee shall repair
any damage occasioned by the installation, maintenance or removal of Trade
Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings,
and equipment 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
groundwater contaminated by Lessee. Trade Fixtures shall remain the property of
Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate
the Premises pursuant to this Paragraph 7.4(c) without the express written
consent of Lessor shall constitute a holdover under the provisions of Paragraph
26 below.
<PAGE>
8. INSURANCE; INDEMNITY.
8.1 Payment for Insurance. Lessee shall pay (or reimburse Lessor, as
appropriate) for all insurance required under Paragraph 8 except to the extent
of the cost attributable to liability insurance carried by Lessor under
Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy
period commencing prior to or extending beyond the Lease term shall be prorated
to correspond to the Lease term. Payment shall be made by Lessee to Lessor
within ten (10) days following receipt of any invoice.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based upon
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 $2,000,000 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 shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance carried by Lessee shall be primary and not contributory with any
similar insurance carried by Lessor, whose insurance shall be considered excess
insurance only.
(b) Carried by Lessor. Lessor shall maintain liability
insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of,
the insurance required to be maintained by Lessee. Lessee shall not be named as
an additional insured therein.
8.3 Property Insurance - Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain
and keep in force a policy or policies in the name of Lessor, with loss payable
to Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by any Lenders, but in no event more than the commercially reasonable
and available insurable value thereof. If Lessor is the Insuring Party, however,
Lessee Owned Alternations and Utility Installations, Trade Fixtures, and
Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather
than by Lessor. If the coverage is available and commercially appropriate, such
policy or policies shall insure against all risks of direct physical loss or
damage (including the perils of flood and/or earthquake if desired by Lessor or
required by a Lender), including coverage for debris removal and the enforcement
of any Applicable Requirements requiring the upgrading, demolition,
reconstruction or replacement of any portion of the Premises as the result of a
covered loss. Said policy or policies shall also contain an agreed valuation
provision in lieu of any coinsurance clause, waiver of subrogation, and
inflation guard protection causing an increase in the annual property insurance
coverage amount by a factor of not less than the adjusted U.S. Department of
Labor Consumer Price Index for All Urban Consumers for the city nearest to where
the Premises are located. If such insurance coverage has deductible clause, the
deductible amount shall not exceed $5,000 per occurrence, and Lessee shall be
liable for such deductible amount in the event of an Insured Loss.
(b) Rental Value. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor with loss payable to Lessor and
any Lender, insuring the loss of the full Rent for one (1) year. Said insurance
shall provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide for
one full year's loss of Rent from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any coinsurance clause,
and the amount of coverage shall be adjusted annually to reflect the projected
Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee
shall be liable for any deductible amount in the event of such loss.
(c) Adjacent Premises. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are adjacent to the
Premises, the Lessee shall pay for any increase in the premiums for the property
insurance of such building or buildings if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
8.4 Lessee's Property/Business Interruption Insurance.
(a) Property Damage. Lessee shall obtain and maintain
insurance coverage on all of Lessee's personal property, Trade Fixtures, and
Lessee Owned Alterations and Utility Installations. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $5,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for the
replacement of personal property, Trade Fixtures and Lessee owned Alterations
and Utility Installations. Lessee shall provide Lessor with written evidence
that such insurance is in force.
(b) Business Interruption. Lessee shall obtain and maintain
loss of income and extra expense insurance in amounts as will reimburse Lessee
for direct or indirect loss of earnings attributable to all perils commonly
insured against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.
(c) No Representation of Adequate Coverage. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 Insurance Policies. Insurance required herein shall be by companies
duly licensed or admitted to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least A-X, as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender. Lessee
shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after thirty (30) days prior
written notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. Such policies shall be for a term of at least
one year, or the length of the remaining term of this Lease, whichever is less.
If either Party shall fail to procure and maintain the insurance required to be
carried by it, the other Party may, but shall not be required to, procure and
maintain the same.
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 against the other, for loss of or damage
to its property arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductibles applicable
hereto. The Parties agree to have their respective property damage insurance
carriers 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 or greater fault (to the
extent, but only to the extent, such negligence or greater fault is not covered
by insurance Lessee maintains or would not have been covered by such insurance
if Lessee had maintained all insurance required to be obtained and maintained by
Lessee hereunder), 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,
liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or
liabilities arising out of, involving, or in connection with, the use and/or
occupancy of the Premises by Lessee. If any action or proceeding is brought
against Lessor by reason of any of the foregoing matters, Lessee shall upon
notice defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in
<PAGE>
such defense. Lessor need not have first paid any such claim in order to be
defended or indemnified. Lessee's indemnity and other obligations, liabilities
and duties under this paragraph shall survive the expiration or termination of
this Lease.
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
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, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under
no circumstances be liable for injury to Lessee's business or for any loss of
income or profit therefrom (i) resulting from Lessee's breach of or default or
failure to perform under this Lease or (ii) which is covered by insurance Lessee
maintains or which would have been covered by such insurance if Lessee had
maintained all insurance required to be obtained and maintained by Lessee
hereunder.
9. DAMAGE OR DESTRUCTION.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction
to the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in six (6) months or
less from the date of the damage or destruction. Lessor shall notify Lessee in
writing within thirty (30) days from the date of the damage or destruction as to
whether or not the damage is Partial or Total.
(b) "Premises Total Destruction" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which cannot reasonably be repaired in six (6)
months or less from the date of the damage or destruction. Lessor shall notify
Lessee in writing within thirty (30) days from the date of the damage or
destruction as to whether or not the damage is Partial or Total.
(c) "Insured Loss" shall mean damage or destruction to
improvements on 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 Requirements, 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 Partial Damage - Insured Loss. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect. Notwithstanding the foregoing, if the required insurance
was not in force or the insurance proceeds are not sufficient to effect such
repair, the Insuring Party shall promptly contribute the shortage in proceeds
(except as to the deductible which is Lessee's responsibility) as and when
required to complete said repairs. In the event, however, such shortage was due
to the fact that, by reason of the unique nature of the improvements, 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 thirty (30) days following receipt of written notice of such shortage and
request therefore. If Lessor receives said funds or adequate assurance thereof
within said thirty (30) day period, the party responsible for making the repairs
shall complete them as soon as reasonably possible and this Lease shall remain
in full force and effect. If such funds or assurance are not received, Lessor
may nevertheless elect by written notice to Lessee within ten (10) days
thereafter to (i) 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, or have this Lease terminate sixty (60) days
thereafter. Lessee shall not be entitled to reimbursement of any funds
contributed by Lessee to repair any such damage or destruction. Premises Partial
Damage due to flood or earthquake shall be subject to Paragraph 9.3,
notwithstanding that there may be some insurance coverage, but the net proceeds
of any such insurance shall be made available for the repairs if made by either
Party.
9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may 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) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor or knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice. In the event Lessor elects to terminate this Lease, Lessee shall
have the right within ten (10) days after receipt of the termination notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage without reimbursement from Lessor. Lessee shall provide Lessor with
said funds or satisfactory assurance thereof within thirty (30) days after
making such commitment. In the 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 make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall terminate sixty (60) days
following such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.
9.5 [Intentionally omitted]
9.6 Abatement of Rent; Lessee's Remedies.
(a) Abatement. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which Lessee
is not responsible under this Lease, the Rent payable by Lessee for the period
required for the repair, remediation or restoration of such damage shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired, but not to exceed the proceeds received from the Rental Value
insurance. All other obligations of Lessee hereunder shall be performed by
Lessee, and Lessor shall have no liability for any such damage, destruction,
remediation, repair or restoration except as provided herein.
9.7 Termination - Advance Payments. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, an adjustment, on a per diem basis,
shall be made concerning advance Base Rent and any other advance payments made
by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of
Lessee's Security Deposit as has not been, or is not then required to be, used
by Lessor.
9.8 Waive Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
<PAGE>
10.1 Definition of "Real Property Taxes." As used herein, the term
"Real Property Taxes" shall include any form of assessment; real estate,
general, special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, income or estate taxes); improvement bond; and/or license fee
imposed upon or levied against any legal or equitable interest of Lessor in the
Premises, Lessor's right to other income therefrom, and/or Lessor's business of
leasing the Premises, by any authority having the direct or indirect power to
tax and where the funds are generated with reference to the Building address and
where the proceeds so generated are to be applied by the city, county or other
local taxing authority of a jurisdiction within which the Premises are located.
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 during
the term of this Lease, including but not limited to, a change in the ownership
of the Premises.
10.2 .
(a) Payment of Taxes. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to Paragraph
10.2(b), all such payments shall be made at least ten (10) days prior to any
delinquency date. In the event that Lessee does not receive the original or a
copy of the bill for the Real Property Taxes directly from the taxing authority,
Lessor shall promptly furnish Lessee with the same. Lessee shall promptly
furnish Lessor with satisfactory evidence that such taxes have been paid. If any
such taxes shall cover any period of time prior to or after the expiration or
termination of this Lease, Lessee's share of such taxes shall be prorated to
cover only that portion of the tax bill applicable to the period that this Lease
is in effect, and Lessor shall reimburse Lessee for any overpayment. If Lessee
shall fail to pay any required Real Property Taxes, Lessor shall have the right
to pay the same, and Lessee shall reimburse Lessor therefore upon demand.
(b) Advance Payment. In the event (i) Lessee incurs a late
charge on any Rent payment other than Real Property Taxes twice or more in any
twelve (12) month period or (ii) Lessee incurs or there is otherwise charged a
late charge, fee or delinquency with respect to Real Property Taxes, Lessor may,
at Lessor's option, estimate the current Real Property Taxes, and require that
such taxes be paid in advance to Lessor by Lessee monthly in advance with the
payment of the Base Rent. If Lessor elects to require payment monthly in
advance, the monthly payment shall be an amount equal to the amount of the
estimated installment of taxes divided by the number of months remaining before
the month in which said installment becomes delinquent. When the actual amount
of the applicable tax bill is known, the amount of such equal monthly advance
payments shall be adjusted as required to provide the funds needed to pay the
applicable taxes. If the amount collected by Lessor is insufficient to pay such
Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such
additional sums as are necessary to pay such obligations. All monies paid to
Lessor under this Paragraph may be intermingled with other monies of Lessor and
shall not bear interest.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.
10.4 Personal Property Taxes. Lessee shall pay, prior to delinquency,
all taxes assessed against and levied upon Lessee Owned Alteration, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
reimburse Lessor, if previously paid by Lessor, or pay directly to the taxing
authority the taxes attributable to Lessee's property within ten (10) days after
receipt of a written statement.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. ASSIGNMENT AND SUBLETTING.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law
assign, transfer, mortgage or encumber (collectively, "assign or assignment") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent, which consent shall not be unreasonably
withheld. Notwithstanding the foregoing, however, but subject to the terms and
provisions of Paragraph 12.2 (except Paragraph 12.2(e) thereof), it is expressly
understood and agreed that Lessee may assign, or transfer by operation of law,
its entire interest in this Lease and all of its rights hereunder (including,
without limitation, the Extension Option set forth in Paragraph 56 of this
Lease) to a "successor corporation" of Lessee or to a "parent," "subsidiary" or
"affiliate" of Lessee, as such terms are hereinafter defined, without Lessor's
prior written consent, provided that this Lease is in full force and effect. A
"successor corporation" as used in this Paragraph shall mean (i) a corporation
to which or with which Lessee is merged or consolidated in accordance with
applicable statutory provisions for the merger or consolidation of corporations
or (ii) a corporation to which all or substantially all of Lessee's assets are
transferred, provided that, in either case, by operation of law or by agreements
with Lessor in a commercially reasonable form, the terms, covenants and
conditions of this Lease to be performed by Lessee are assumed by the
corporation to which this Lease is assigned or transferred. A "parent" shall be
deemed an entity owning Lessee, either directly or indirectly; a "subsidiary"
shall be deemed an entity owned by Lessee, either directly or indirectly; and an
"affiliate" shall be deemed an entity having substantially the same ownership as
Lessee.
(b) Subject to the provisos set forth (i) in the second
sentence of Paragraph 12.1(a) and (ii) after the colon in the first sentence of
Paragraph 12.1(c), including without limitation that portion of said proviso set
forth after the semicolon in such first sentence, a change in the control of
Lessee shall constitute an assignment requiring consent. The transfer, on a
cumulative basis, of fifty percent (50%) 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, 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 by an amount
greater than twenty-five percent (25%) of such Net Worth as it was represented
at the time of the execution 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, whichever was or
is greater, shall be considered an assignment of this Lease to which Lessor may
withhold its consent, subject, however, to the following: Lessor acknowledges
that Lessee has advised Lessor that Lessee is a "publicly traded stock company"
and, therefore, Lessor shall not have the right to withhold its consent to an
assignment resulting solely from the transfer of the publicly traded stock of
Lessor in the normal course of business; and this shall be so notwithstanding
the fact that such a transfer may occur in connection with a merger. "Net Worth
of Lessee" shall mean the net worth of Lessee (excluding any guarantors)
established under generally accepted accounting principles.
(d) An assignment or subletting without consent shall, at
Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a noncurable
breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30)
days written notice, increase the monthly Base Rent to one hundred ten percent
(110%) of the Base Rent then in effect. 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 one hundred ten percent
(110%) of the price previously in effect, and (ii) all fixed and non-fixed
rental adjustments scheduled during the remainder of the Lease term shall be
increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.
<PAGE>
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment. (See also Paragraph
55)
(a) Regardless of Lessor's consent, any assignment or
subletting shall not: (i) be effective without the express written assumption by
such assignee or sublessee of the obligations of Lessee under this Lease; (ii)
release Lessee of any obligations hereunder; or (iii) alter the primary
liability of Lessee for the payment of Rent or for the performance of any other
obligations to be performed by Lessee.
(b) Lessor may accept 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 Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor
may proceed directly against Lessee or anyone else responsible for the
performance of Lessee's obligations under this Lease, including any assignee or
sublessee, without first exhausting Lessor's remedies against any other person
or entity responsible therefore to Lessor, or any security held by Lessor.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not limited
to the intended use and/or required modification of the Premises, if any,
together with a fee of $1,000 as consideration for Lessor's considering and
processing said request. Lessee agrees to provide Lessor with such other or
additional information and/or documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed to
have assumed and agreed to conform and comply with each and every term,
covenant, condition and obligation herein to be observed or performed by Lessee
during the term of said assignment or sublease, other than such obligations as
are contrary to or inconsistent with provisions of an assignment or sublease to
which Lessor has specifically consented to in writing.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions (as well as those set forth in Paragraph 55)
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 Rent payable on any sublease, and Lessor may collect
such Rent and apply same toward Lessee's obligations under this Lease; provided,
however, that until a Breach shall occur in the performance of Lessee's
obligations, Lessee may collect said Rent. Lessor shall not, by reason of the
foregoing or any assignment of such sublease, nor by reason of the collection of
Rent, be deemed liable to the sublessee for any failure of Lessee to perform and
comply with any of Lessee's obligations to such sublessee. Lessee hereby
irrevocably authorizes and directs any such sublessee, upon receipt of a written
notice from Lessor stating that a Breach exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor all Rent due and to become due
under the sublease. Sublessee shall rely upon any such notice from Lessor and
shall pay all Rents to Lessor without any obligation or right to inquire as to
whether such Breach exists, notwithstanding any claim from Lessee to the
contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its
option, require 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 prior Defaults or Breaches
of such sublessor.
(c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any
part of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within 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. A "Default" is defined as a failure by the Lessee
to comply with or perform any of the terms, covenants, conditions or rules under
this lease. A "Breach" is defined as the occurrence of one or more of the
following Defaualts, and the failure of Lessee to cure such Default within any
applicable grace period:
(a) The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of security, or where
the coverage of the property insurance described in Paragraph 8.3 is jeopardized
as a result thereof, or without providing reasonable assurances to minimize
potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether to Lessor or
to a third party, when due, to provide reasonable evidence of insurance or
surety bond, or 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 to Lessee.
(c) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service contracts,
(iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) 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 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,
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;
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 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 of any general arrangement or assignment for the benefit of creditors;
(ii) becoming a "debtor" as defined in 11 U.S.C. ss. 101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days; (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph 13.1(e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.
(f) The discovery that any financial statement of Lessee or of
any Guarantor given to Lessor was materially false.
<PAGE>
(g) If the performance of Lessee's obligations under this
Lease is guarantee: (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 basis, and Lessee's failure, within sixty (60) days following
written notice of any such event, to provide written alternative assurance or
security, which, when coupled with the then existing resources of Lessee, equals
or exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any of its affirmative duties
or obligations, within ten (10) days after written notice or such longer period
as is reasonably required, if ten (10) days is insufficient but Lessee commences
performance within such period and, thereafter, diligently prosecutes such
performance to completion (or in case of an emergency, without notice), Lessor
may, at its option, perform such duty or obligation on Lessee's behalf,
including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor, including a commercially
reasonable management fee, shall be due and payable by Lessee upon receipt of
invoice therefor; the parties acknowledge and agree that, so long as the
management fee charged in, for or during any one (1) month period, does not
exceed the lesser of (i) ten percent (10%) of such costs and expenses exclusive
of such management fee or (ii) one and one-half percent (1.5%) of the then
current monthly Base Rent, such management fee shall be deemed commercially
reasonable (see also Paragraph 52). If any check given to Lessor by Lessee shall
not be honored by the bank upon which it is drawn, Lessor, at its option, may
require all future payments to be made by Lessee to be by cashier's check. In
the event of a Breach, Lessor may, 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:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) 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 the District within which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Breach of this Lease shall not waive Lessor's right
to recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any 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. If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or assign,
subject only to reasonable limitations. Acts of maintenance, efforts to relet,
and/or the appointment of a receiver to protect the Lessor's interests, shall
not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under
the laws or judicial decisions of the state wherein the Premises are located.
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. Any agreement for free or abated rent or
other charges, 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. Upon
Breach 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, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of Rent or
the cure of the Breach which initiated the operation of this paragraph shall not
be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee of Rent 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 any Lender. Accordingly, if any Rent
shall not be received by Lessor within five (5) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to five percent (5%) of each 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 such late
payment. 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 the exercise of 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 any
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 Interest. Any monetary payment due Lessor hereunder, other than
late charges, not received by Lessor, when due as to scheduled payments (such as
Base Rent) or within thirty (30) days following the date on which it was due for
non-scheduled payment, shall bear interest from the date when due, as to
scheduled payments, or the thirty-first (31st) day after it was due as to
non-scheduled payments. The interest ("Interest") charged shall be equal to the
prime rate reported in the Wall Street Journal as published closest prior to the
date when due plus four percent (4%), but shall not exceed the maximum rate
allowed by law. Interest is payable in addition to the potential late charge
provided for in Paragraph 13.4. Additionally, except as otherwise specifically
provided herein, Interest shall also be due with respect to any monetary payment
due Lessee hereunder not received by Lessee hereunder within thirty (30) days
following the date on which it was due; in such case, Interest will accrue from
the thirty-first (31st) day after said due date.
13.6 Breach by Lessor.
(a) Notice of Breach. 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, a reasonable
time shall in no event be less than thirty
<PAGE>
(30) days after receipt by Lessor, and any Lender whose name and address shall
have been furnished Lessee in writing for such purpose, of written notice
specifying wherein such obligation of Lessor has not been performed; provided,
however, that if the nature of Lessor's obligation is such that more than thirty
(30) days are reasonably required for its performance, then Lessor shall not be
in breach if performance is commenced within such thirty (30) day period and
thereafter diligently pursued to completion.
(b) Performance by Lessee on Behalf of Lessor. In the event
that neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to one month's Base Rent, and to
pay an excess of such expense under protest, reserving Lessee's right to
reimbursement from Lessor. Lessee shall document the cost of said cure and
supply said documentation to Lessor.
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
(collectively "Condemnation"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building portion of the
Premises, or more than twenty-five percent (25%) of the land area portion of the
Premises not occupied by any building, is taken by Condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance 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 proportion
to the reduction in utility of the Premises caused by such Condemnation.
Condemnation awards and/or payments shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any compensation for Lessee's
relocation expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefor. In the event that this Lease is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.
15. [INTENTIONALLY OMITTED]
16. ESTOPPEL CERTIFICATES. (See also Paragraph 60)
(a) Lessee shall within ten (10) days after written notice
from Lessor execute, acknowledge and deliver to Lessor a statement in writing in
form similar to the then most current "Estoppel Certificate" form published by
the American Industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
Lessor.
(b) If Lessee shall fail to execute or deliver the Estoppel
Certificate within such ten day period, Lessor may execute an Estoppel
Certificate stating and/or Lessee shall be deemed to have certified that: (i)
the Lease is in full force and effect without modification except as may be
represented by Lessor, (ii) there are no uncured defaults in Lessor's
performance, and (iii) Lessor's Estoppel Certificate and/or Lessee's
certification, and Lessee shall be estopped from denying the truth of the facts
contained in said Certificate or such certification. This Paragraph 16(b) shall
not limit Lessor's other rights and remedies as provided by this Lease or
otherwise.
(c) If Lessor desires to finance, refinance, or sell the
Premises, or any part thereof, Lessee and all Guarantors shall deliver to any
potential lender or purchaser designated by Lessor such financial statements 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. DEFINITION OF LESSOR. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, and subject to the provisions of Paragraph
20 below, the original Lessor under this Lease, and all subsequent holders of
the Lessor's interest in this Lease shall remain liable and responsible with
regard to the potential duties and liabilities of Lessor pertaining to Hazardous
Substances as outlined Paragraph 6 above.
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. DAYS. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17 above,
the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor, the individual partners of Lessor or its or their
individual partners, directors, officers or shareholders, and Lessee shall look
to the Premises, and to no other assets of Lessor, for the satisfaction of any
liability of Lessor with respect to this Lease, and shall not seek recourse
against the individual partners of Lessor, or its or their individual partners,
directors, officers or shareholders, or any of their personal assets for such
satisfaction.
21. 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.
22. NO PRIOR OR OTHER AGREEMENTS. 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.
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 courier)
or may be sent by overnight, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, 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 notices. Either Party may by written notice to the other specify a
different address for notice, except that upon Lessee's taking possession of the
Premises, the Premises shall constitute Lessee's address for notice. A copy of
all notices to Lessor shall be concurrently transmitted to such party or parties
at such addresses as Lessor may from time to time hereafter designate in
writing.
23.2 Date of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantee next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the Postal Service or courier. Notices transmitted by
facsimile transmission or similar means shall be deemed delivered upon telephone
confirmation
<PAGE>
of receipt, provided a copy is also delivered via delivery or mail. If notice is
received on a Saturday, Sunday or 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 of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by
Lessee may be accepted by Lessor on account of monies or damages due Lessor,
notwithstanding any qualifying statements or conditions made by Lessee in
connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.
25. RECORDING. Lessee shall, upon request of Lessor, execute, acknowledge and
deliver to Lessor a short form memorandum of this Lease for recording purposes.
Lessor shall be responsible for payment of any recording fees applicable
thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred twenty-five percent (125%) of the Base Rent applicable during the
month immediately preceding the expiration or termination. Nothing contained
herein shall be construed as consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this
Lease to be observed or performed by Lessee are both covenants and conditions.
In construing this Lease, all headings and titles are for the convenience of the
Parties only and shall not be considered a part of this Lease. Whenever required
by the context, the singular shall include the plural and vice versa. This Lease
shall not be construed as if prepared by one of the Parties, but rather
according to its fair meaning as a whole, as if both Parties had prepared it.
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 upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lessor's Lender") shall have no liability or obligation to
perform any of the obligations of Lessor under this Lease. Any Lender may elect
to have this Lease and/or any Option granted hereby superior to the lien of its
Security Device by giving written notice thereof to Lessee, whereupon this Lease
and such Options shall be deemed prior to such Security Device, notwithstanding
the relative dates of the documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership; (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor; or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "Non-Disturbance Agreement") from the Lender for the benefit of
Lessee which Non-Disturbance Agreement provides that Lessee's possession of the
Premises, 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. Further, within sixty (60) days after the
execution of this Lease, Lessor shall use its commercially reasonable efforts to
obtain a Non-Disturbance Agreement from the holder of any pre-existing Security
Device which is secured by the Premises. In the event that Lessor is unable to
provide the Non-Disturbance Agreement within said sixty (60) days, then Lessee
may, at Lessee's option, directly contact Lessor's lender and attempt to
negotiate for the execution and delivery of a Non-Disturbance Agreement.
30.4 Self-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein
and such other agreements as Lender shall reasonably request.
31. ATTORNEYS' FEES. If any Party brings an action or proceeding involving the
Premises to enforce the terms hereof or to declare rights hereunder, the
Prevailing Party (as hereafter defined) in any such proceeding, action, or
appeal thereof, 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 who substantially obtains or
defeats the relief sought, as the case may be, whether by judgment or the
abandonment by the other Party of its claim or defense. The attorneys' fees
award shall not be computed in accordance with any court fee schedule, but shall
be such as to fully reimburse all attorneys' fees reasonable incurred. In
addition, Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in the preparation and service of notices of Default and consultations
in connection therewith, whether or not a legal action is subsequently commenced
in connection with such Default or resulting Breach; provided, however, Lessee
shall be entitled to contest such fees, costs and expenses to the extent there
is not a Default.
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 (with reasonable prior notice to Lessee) for
the purpose of showing the same to prospective purchasers, lenders, or lessees,
and making such alterations, repairs, improvements or additions to the Premises
as Lessor may deem necessary; provided, however, that Lessor shall limit its
access to the Premises, for the purposes of showing the same to prospective
lessees, to the last nine (9) months of the term of this Lease and other
commercially reasonable times (i.e., when Lessee is in default and/or Lessor is
showing the Premises as a part of its effort to mitigate damages caused by
Lessee). All such activities shall be without abatement of rent or liability to
Lessee. Lessor may at any time place on the Premises any ordinary "For Sale"
signs and Lessor may during the last six (6) months of the term hereof place on
the Premises any ordinary "For Lease" signs. Lessee may at any time place on or
about the Premises any ordinary "For Sublease" sign.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any auction
upon the Premises without Lessor's prior written consent. Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether to
permit an auction.
34. SIGNS. Except for (i) existing signs at sign locations which both (a)
pre-date the Start Date and (b) comply with all Applicable Requirements and (ii)
ordinary "For Sublease" signs, Lessee shall not place any sign upon the Premises
without Lessor's prior written consent. All signs must comply with all
Applicable Requirements.
<PAGE>
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. CONSENTS. Except 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, 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 upon receipt of an invoice and supporting
documentation therefor. Lessor's consent to any act, assignment or subletting
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. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given. In the event that either Party disagrees with any determination made by
the other hereunder and reasonably requests the reasons for such determination,
the determining party shall furnish its reasons in writing and in reasonable
detail within ten (10) business days following such request.
37. [INTENTIONALLY OMITTED]
38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.
39. OPTIONS.
39.1 Definition. "Option" shall mean: the right to extend the term of
this Lease as set forth in Paragraph 56.
39.2 Options Personal to Original Lessee. Each Option granted to Lessee
in this Lease is, except as provided in the second sentence of Paragraph
12.1(a), personal to the original Lessee, and cannot be assigned or exercised by
anyone other than said original Lessee and only while the original Lessee is in
full possession of the Premises and, if requested by Lessor, with Lessee
certifying that Lessee has no intention of thereafter assigning or subletting.
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 have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option: (i)
during the period commending with the giving of any notice of Default (so long
as, in fact, there is or was such a Default) and continuing until said Default
is cured, (ii) during the period of time any Rent is unpaid (without regard to
whether notice thereof is given Lessee), (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessee has been given three (3)
or more notices of separate Default (so long as, in fact, such Defaults
occurred), whether or not the Defaults are cured, during the twelve (12) month
period immediately preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) 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 prior to the commencement of the extended term, (i)
Lessee fails to pay Rent for a period of thirty (30) days after such Rent
becomes due (without any necessity of Lessor to give notice thereof), (ii)
Lessor gives to Lessee three (3) or more notices of separate Default (so long
as, in fact, such Defaults occurred) during any twelve (12) month period,
whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of
this Lease.
40. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including the care and cleanliness of the
grounds and including the parking, loading and unloading of vehicles, and that
Lessee will pay its fair share of common expenses incurred in connection
therewith.
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. RESERVATION. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay plus interest from the
thirty-first (31st) day after payment "under protest," in accordance with
Paragraph 13.5.
44. AUTHORITY. If either Party hereto is a corporation, trust, limited liability
company, partnership, or similar entity, 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. Each Party shall, within thirty
(30) days after request, deliver to the other Party satisfactory evidence of
such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. 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. 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 a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. MULTIPLE PARTIES. If not more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation
and/or the Arbitration of all disputes between the Parties and/or Brokers
arising out of this Lease / / is /X/ is not attached to this Lease.
<PAGE>
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.
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVISE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND
THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
<TABLE>
<S> <C>
Executed at: Executed at:
On: On:
By LESSOR By LESSEE:
BIRTCHER CORNERSTONE, L.P., ENCAD, INC.,
a Delaware limited partnership a Delaware limited partnership
By: Birtcher Cornerstone GP L.L.C., By: /s/ Thomas L. Green
a Delaware limited liability company, -------------------
General Partner Name Printed: Thomas L. Green
Title: V.P.
By: Birtcher ENCAD L.L.C., By: /s/ T.W. Schmidt
a Delaware limited liability company, ------------------
its sole Member Name Printed: T.W. Schmidt
Title: V.P. & C.F.O.
Address: 6059 Cornerstone Court, West, San Diego
By: /s/ Robert M. Anderson CA 92121-3734; Attn: General Co
----------------------- Telephone: (858) 452-0882
Name Printed: Robert M. Anderson, Facsimile: 858-452-0991
Title: Member Federal ID No.:95-3672088
Address: 27611 La Paz Road
Laguna Niguel, CA 92677
Telephone: (949) 643-7700
Facsimile: (949) 643-7755
Federal ID No.: 52-2200583
</TABLE>
<PAGE>
ADDENDUM
Addendum to that certain Lease dated October 15, 1999, by and between BIRTCHER
CORNERSTONE, L.P., a Delaware limited partnership, as Lessor, and ENCAD, INC., a
Delaware corporation, as Lessee, for that certain property commonly known as
6059 and 5959 Cornerstone Court, West in the City of San Diego, County of San
Diego, State of California (i.e., the Premises).
This Addendum is incorporated into the Lease. If there is a conflict between the
Lease (exclusive of this Addendum) and this Addendum, this Addendum shall
control. Defined terms in this Addendum are indicated by initial capital
letters. Except as otherwise provided in this Addendum, defined terms herein
shall have the same meaning as such terms have in the body of the Lease (i.e.,
Paragraphs 1-49, inclusive, of the Lease).
50. ADDITIONAL TERMS RELATING TO THE PREMISES:
50.1 VEHICLE PARKING. Lessee shall, in accordance with the terms of
this Lease, in general, and this Paragraph 50, in particular,
as well as all Applicable Requirements, be entitled to use
those portions of the Common Areas designated for parking. In
the event Lessee (including any permitted sublessee or
assignee) occupies less than one-hundred percent (100%) of the
Premises and the Premises is or may become a multi-tenant
facility, Lessor may regulate the loading and unloading of
vehicles by adopting Rules and Regulations as provided in
Paragraph 50.4; provided, however, that, so long as Lessee
(including any permitted sublessee or assignee) occupies
one-hundred percent (100%) of at least one (1) of the two (2)
buildings at the Premises, such Rules and Regulations shall
not apply to that portion of the Common Areas which are
located exclusively on the parcel with respect to which Lessee
continues its one-hundred percent (100%) occupancy. Lessee
shall not service or store any vehicles in the Common Areas.
50.2 COMMON AREAS - DEFINITION. The term "Common Areas" is defined
as all areas and facilities outside the Building and within
the exterior boundary line of the Premises and that are
provided from time to time for the general use of Lessor and
Lessee and their respective employees, suppliers, shippers,
customers, contractors and invitees, including parking areas,
loading and unloading areas, trash areas, roadways, walkways,
driveways and landscaped areas. Except as is otherwise
specifically provided in this Lease, there shall be no cost to
Lessee for Lessee's parking usage during the term of this
Lease.
50.3 COMMON AREAS - LESSEE'S RIGHTS. So long as Lessee leases 100%
of the Premises, Lessor grants to Lessee, for the benefit of
Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the
exclusive right to 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 commercially reasonable rules and regulations or
restrictions governing the use of the Project. Lessee's rights
hereunder shall be reduced, prorata (based upon square footage
leased), to the extent other tenants lease any portion of the
Premises.
50.4 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other
person(s) as Lessor may appoint shall have the right, from
time to time, to establish, modify, amend and enforce
commercially reasonable rules and regulations ("Rules and
Regulations") 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 tenants of the Premises, if and when
there are any such other tenants, and their invitees. 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
tenants. However, Lessor shall use good faith reasonable
efforts to apply and enforce the Rules and Regulations the
same as to all tenants.
50.5 COMMON AREAS - CHANGES. Lessor shall have the right, in
Lessor's sole discretion, from time to time:
a) If the Premises is or may become a multi-tenant
facility, 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) If the Premises is or may become a multi-tenant
facility, to add additional buildings and
improvements to the Common Areas; provided, however,
that so long as Lessee (including any permitted
sublessee or assignee) occupies one-hundred percent
(100%) of at least one (1) of the two (2) buildings
at the Premises, such additional buildings and
improvements to the Common Areas shall only be added
with respect to that portion of such Common Areas
which are located exclusively upon the parcel where
such one-hundred percent (100%) occupancy does not
exist;
d) To use the Common Areas while engaged in making
improvements, repairs or alterations to the Premises,
or any portion thereof;
e) To make any legally required changes in, to or with
respect to the Common Areas and Premises;
f) To do and perform such other acts and make such other
reasonably desired changes in, to or with respect to
the Common Areas and Premises as Lessor may, in the
exercise of sound business judgment, deem to be
appropriate; provided, however, that, so long as
Lessee (including any permitted sublessee or
assignee) occupies one-hundred percent (100%) of at
least one (1) of the two (2) buildings at the
Premises, such changes may not materially interfere
with Lessee's business conducted (i) in the building
which continues to be one-hundred percent (100%)
occupied or (ii) in the Common Areas which are
located exclusively on the parcel where such
one-hundred percent (100%) occupancy exists.
<PAGE>
51. BASE RENT ADJUSTMENT: The Base Rent described in Basic Provisions (i.e.,
Paragraph 1.5) and Paragraph 4 of the Lease shall be the amounts shown below for
the periods shown below:
<TABLE>
<CAPTION>
Period Months Rent
------ ------ ----
<S> <C> <C>
1 1-12 $101,862.80/month
2 13-24 $110,677.85/month
3 25-36 $118,513.45/month
4 37-48 $122,431.25/month
5 49-60 $127,328.50*/month
6 61-72 $131,246.30/month
7 73-84 $135,164.10/month
</TABLE>
*Notwithstanding the foregoing, at the commencement of Month 49, the
Base Rent shall be increased to (i) the stipulated amount (as set forth
in the appropriate line of the appropriate column above) or (ii) the
Base Rent for Month 36, plus the increase in the Consumer Price Index
from Months 25 through 48, whichever is greater. Thereafter, the rental
rates shall be increased (i) as stipulated or (ii) by three percent
(3%) each period, whichever is greater. The term "Consumer Price Index"
shall mean the Consumer Price Index for All Urban Consumers U.S. City
Average, All Items (Base Years 1982-1984=100), published by the United
States Department of Labor, Bureau of Labor Statistics for the months
indicated hereinabove. Lessor shall calculate the amount of any
increase in Base Rent after the United States Department of Labor
publishes the statistics on which the amount of the increase may be
based. Lessor shall give written notice of the amount of the increase.
Lessee shall pay this amount, together with the monthly Base Rent next
becoming due under this Lease, and shall thereafter pay the monthly
Base Rent under this Lease at the increased rate, which shall
constitute the Base Rent until any subsequent increase. Lessor's
failure to make the required calculations promptly shall not be
considered a waiver of Lessor's right to adjust the monthly Base Rent
due, nor shall it affect Lessee's obligation to pay the increased Base
Rent. If the Consumer Price Index is changed so that the Base Year(s)
differ(s) from that in effect on the Commencement Date, the Consumer
Price Index shall be converted in accordance with the conversion factor
published by the United States Department of Labor, Bureau of Labor
Statistics. If the Consumer Price Index is discontinued or revised
during the term of this Lease, the government index of computation with
which it is replaced shall be used to obtain substantially the same
result as if the Consumer Price Index has not been discontinued.
52. OPERATING EXPENSES: Except as is otherwise specifically provided in
this Lease, it is intended by the parties that, in accordance with
Paragraph 7.2 of this Lease, Lessor shall have no obligation, in any
manner whatsoever, to repair or maintain the Premises and, therefore,
there shall be no Operating Expenses to be reimbursed pursuant to this
Paragraph 52. However, (i) in the event that Lessee shall fail to
perform any of its affirmative duties or obligations under Paragraph
7.1 or any other provision of this Lease relating to the maintenance
and/or repair of the Premises or keeping the same in good order,
condition and repair, within ten (10) days after written notice (or
such longer period as is reasonably required, if ten (10) days is
insufficient, so long as Lessee commences performance within such ten
(10) day period and, thereafter, diligently prosecute such performance
to completion), three (3) or more times within any twelve (12) month
period during the term of this Lease, or (ii), subject to the terms and
provisions of Paragraph 52.5, in the event that Lessee (including any
permitted sublessee or assignee) occupies less than one-hundred percent
(100%) of the Premises, then Lessor may, at its option, elect, at any
time thereafter in a written notice directed to Lessee, to perform such
duties or obligations (or such portion(s) of them as Lessor shall
elect) on Lessee's behalf until further notice (as provided in
Paragraph 52.2) or the expiration or termination of this Lease,
whichever shall occur first, and in such event the cost and expense of
any such performance by Lessor shall, if Lessor so elects, be
reimbursed as follows rather than pursuant to Paragraph 13.2 of the
Lease or otherwise: Lessee shall pay to Lessor during the term hereof,
in addition to the Base Rent, one hundred percent (100%) of all
Operating Expenses, as hereinafter defined, during each calendar year
of the term of this Lease, in accordance with the following provisions:
52.1 "OPERATING EXPENSES" are defined, for purposes of this Lease,
as all costs incurred by Lessor relating to the ownership
and/or operation of the Premises which costs and expenses
would not have been incurred had Lessee performed and/or
continued to perform its obligations under this Lease with
respect to the operations, maintenance and repair of the
Premises and the payment of and/or for insurance, taxes and
utilities, including, but not limited to, those set forth
Paragraphs 7.1, 8, 10 and 54. Operating Expenses shall also
include a property management fee consistent with Paragraph
13.2.
52.2 The inclusion of the improvements, facilities and services set
forth in Paragraph 52.1 shall not be deemed to impose an
obligation upon Lessor to either have said improvements or
facilities or to provide those services; in fact, in any
event, Lessor's right to perform or provide any of such
improvements, facilities and/or services shall be elective
(e.g., after Lessee's three (3) time failure of performance in
any twelve (12) month period as described hereinabove), from
time to time, and, therefore, Lessor may also elect, on not
less than thirty (30) days prior written notice to Lessee (but
not more often than twice (i.e., two (2) times) in any twelve
(12) month period), that, until further notice of at least ten
(10) days, any such obligation, liability or duty shall again
be the responsibility of Lessee.
52.3 The Operating Expenses shall be payable by Lessee within 10
days after a reasonably detailed statement of actual expenses
is presented to Lessee. At Lessor's (or, if Lessee is then
current in paying for and or reimbursing the same, Lessee's)
option, however, an amount may (and, if Lessee is entitled to
and does so elect, shall) be estimated by Lessor from time to
time of the annual Operating Expenses and the same shall be
payable monthly, as Lessor shall designate, during each 12
month period of the Lease term (as extended), on the same day
as the Base Rent is due hereunder. Lessor shall deliver to
Lessee, within 60 days after the expiration of each calendar
year, a reasonably detailed statement showing the actual
Operating Expenses incurred during the preceding year. If
Lessee's payments under this Paragraph 52.3 during the
preceding year exceed the total amount of such Operating
Expenses as indicated on such statement, Lessor shall be
credited the amount of such over-payment against the Operating
Expenses next becoming due. If Lessee's payments under this
Paragraph 52.3 during the preceding year were less than the
total amount of such Operating Expenses as indicated on such
statement, Lessee shall pay to Lessor the amount of the
deficiency within 10 days after delivery by Lessor to Lessee
of the statement.
<PAGE>
52.4 LESSEE'S RIGHT TO AUDIT. Lessee may, upon at least five days
advance written notice to Lessor and during business hours, at
an office reasonably designated by Lessor, examine Lessor's
records relating to the Operating Expenses; provided, however,
that Lessee shall only be entitled to such an examination once
in each calendar year, and the examination shall not be
conducted by anyone who is engaged on a contingent fee basis
to represent Lessee or who is a competitor of Lessor. Property
managers and commercial building owners shall be deemed
competitors of Lessor. The person conducting the examination
on behalf of Lessee shall enter into a confidentiality
agreement in form and substance reasonably satisfactory to
Lessor. In the event the examination discovers an overcharge
in excess of four and one half percent (4.5%) of the Operating
Expenses paid by Lessee during the year covered by the
examination, Lessor shall reimburse Lessee for the actual
reasonable cost incurred by Lessee due to the examination plus
the overcharge, within thirty (30) days of receipt of demand
therefor. In the event the examination fails to discover an
overcharge in excess of four and one-half percent (4.5%) of
the Operating Expenses covered by the examination, Lessee
shall not reimburse Lessor for the any costs incurred by
Lessor due to the examination or for any overcharge.
52.5 ONE BUILDING. Notwithstanding anything contained herein to the
contrary, in the event that Lessor is proceeding under
provision (ii) rather than provision (i) of Paragraph 52
above, then, so long as Lessee (including any permitted
sublessee or assignee) occupies one-hundred percent (100%) of
at least one (1) of the two (2) buildings at the Premises,
then Lessor's option to elect to perform Lessee's duties and
obligations shall be limited to those obligations and duties
which relate exclusively to or which can be performed
exclusively on the other parcel (i.e., the parcel on which the
building which Lessee occupies less than one-hundred percent
(100%) of the building is located).
53. SECURITY DEPOSIT:
53.1 DELIVERY OF LETTER OF CREDIT. In lieu of depositing a Security
Deposit under Paragraph 5 with Lessor, Lessee shall, on
execution of this Lease, deliver to Lessor and cause to be in
effect during the Lease term (as extended) and thereafter for
a period of at least thirty (30) days (except as otherwise
provided in this Paragraph 53) an unconditional, irrevocable
standby letter of credit ("LOC") in the amount equal to the
aggregate Base Rent payable during the first twelve (12)
months of the Lease term (the "LOC Amount"), subject, however,
to the following: For each fiscal year following the calendar
year 2001 that Lessee's audited financial statements reflect a
net income exceeding $1,000,000, the LOC Amount may be reduced
by 20% of the original LOC Amount. Conversely, for each fiscal
year that Lessee's audited financial statements reflect a net
loss exceeding $500,000, the LOC shall be increased by 20% of
the original LOC Amount; provided, however, that the total
amount of the LOC need never exceed the original LOC Amount.
Each LOC shall (a) reflect the form and content of Exhibit "C"
attached hereto and incorporated herein by this reference and
otherwise be in form and content reasonably acceptable to
Lessor's Lender(s) or mortgagee(s), (b) be issued by an LOC
Bank selected by Lessee and reasonably acceptable to Lessor,
and (c) be confirmed by a bank selected by Lessor that has a
local office in Orange County, California. An "LOC Bank" is a
bank that accepts deposits, maintains accounts, has a local
San Diego, California office that will negotiate a letter of
credit, and the deposits of which are insured by the Federal
Deposit Insurance Corporation. Lessee shall pay all costs,
expenses, points, or fees, including without limitation
reasonable attorneys' fees, (i) incurred by Lessee in
obtaining and/or confirming, and/or (ii) incurred by Lessor in
transferring, confirming, drawing on and/or enforcing, any
LOC.
53.1.1 REPLACEMENT OF LETTER OF CREDIT. Lessee may, from
time to time, and shall, at least thirty (30) days
prior to any LOC expiration date which occurs prior
to thirty (30) days after the expiration of the Lease
term (as extended), replace any existing LOC with a
new LOC which new LOC (a) becomes effective on or
before the day after the expiration of the LOC that
it replaces, (b) is in the required LOC Amount, (c)
is issued by an LOC Bank reasonably acceptable to
Lessor, and (d) otherwise complies with the
requirements of this Paragraph 53.
53.1.2 LESSOR'S RIGHT TO DRAW ON LETTER OF CREDIT.
53.1.2.1 Lessor shall hold the LOC as security for
the performance of Lessee's obligations under this
Lease. If, after notice (as stated in this Lease) and
failure to cure within the applicable period, if any,
stated in this Lease, Lessee is in Default or Breach
of any provision of this Lease, Lessor may, without
prejudice to any other remedy it has, draw on that
portion of the LOC necessary to (a) pay any Rent or
other sum in default, (b) pay or reimburse Lessor for
any amount that Lessor may spend or become obligated
to spend in exercising Lessor's rights under this
Lease, or (c) compensate Lessor for any expense,
loss, or damage that Lessor may suffer or incur
because Lessee Defaults on or Breaches any provision
of this Lease.
53.1.2.2 Other than an LOC which can only expire at
least thirty (30) days after the end of the Lease
term (as extended) and notwithstanding anything
contained in this Lease to the contrary, if Lessee
fails to renew or replace any LOC at least thirty
(30) days before its expiration, Lessor may
immediately, without notice and without prejudice to
any other remedy it has, draw on all of the LOC.
Further, notwithstanding anything contained in this
Lease to the contrary, Lessor may immediately,
without notice and without prejudice to any other
remedy it has, draw on all of the LOC in the event
that Lessor does not receive possession of the
Premises upon the expiration of the Lease term (as
extended) or any earlier termination of this Lease.
53.1.2.3 Within ten (10) days of Lessee's receipt of
notice from Lessor indicating that Lessor has drawn
on an LOC in accordance with Subparagraph 53.1.2.1
above, Lessee shall provide to Lessor an amendment to
the then current LOC (i) confirming that,
notwithstanding any previous draws upon the same, the
LOC Amount has been increased and replenished to the
then required LOC Amount without any reduction as a
result of any previous draw(s) thereon and (ii)
otherwise in form and substance reasonably
satisfactory to Lessor.
53.1.3 LOC SECURITY DEPOSIT. Any amount of the LOC that is
drawn on by Lessor but not applied by Lessor pursuant
to Subparagraph 53.1.2.2, as well as additions
thereto pursuant to Paragraph 53.1.4, shall be held
by Lessor as a security deposit ("LOC SECURITY
DEPOSIT"), which may be applied by Lessor for the
purposes described in provisions (a), (b), or (c) of
Subparagraph 53.1.2.1.
<PAGE>
53.1.4 CASH SECURITY DEPOSIT. Except as provided in
Subparagraph 53.1.2.3 above, once an LOC (or any
portion of it) has been drawn on and converted from
the LOC to cash, thereafter it (or such portion of
it) shall always be and remain a cash security
deposit and a part of the LOC Security Deposit
referred to in Paragraph 53.1.3. Lessee shall be
required to replenish (and/or fund), in cash, any
portion of the LOC Security Deposit used or applied
in accordance with provisions (a), (b) or (c) of
Subparagraph 53.1.2.1 (including without limitation
all or any part of the LOC Amount initially drawn on
the LOC and applied in accordance with said
provisions (a), (b) or (c) of Subparagraph 53.1.2.1
which is not timely replenished in accordance with
Subparagraph 5.3.1.2.3) immediately and, in any
event, within ten (10) days of Lessee's receipt of
Lessor's demand therefor.
53.1.5 EXCESS FUNDS. So long as Lessee is in compliance with
all provisions of this Lease, if at any time the
total amount available for draw under the LOC plus
the amount of the LOC Security Deposit is greater
than the LOC Amount as required in this Paragraph
53.1, then Lessor shall, immediately and, in any
event, within ten (10) days of Lessor's receipt of
Lessee's demand therefore, reduce the LOC Security
Deposit and pay to Lessee a portion of or all, but
not more than all, of the LOC Security Deposit such
that after such payment the amount remaining for draw
under the LOC plus the remaining LOC Security
Deposit, if any, is equal to the required LOC Amount
or such greater amount as remains available for draw
under the LOC because Lessee has failed to reduce the
LOC Amount as permitted by this Paragraph 53.1.
53.1.6 COMMINGLING OF FUNDS. Lessor shall not be required to
keep the LOC Security Deposit separate from its
general funds, and Lessee shall not be entitled to
receive interest on the LOC Security Deposit.
53.1.7 RETURN OF FUNDS. Unless otherwise required by law, if
Lessee complies with all the provisions of this
Lease, the unused and unapplied portion of the LOC
Security Deposit, if any, shall be returned to Lessee
within thirty (30) days after the expiration of the
Lease term (as extended) or sooner termination of
this Lease and the surrender of possession of the
Premises to Lessor in the condition required by this
Lease.
53.2 LESSOR'S TRANSFER OF LOC ON TRANSFER OF REAL PROPERTY. If
Lessor transfers or mortgages its interest in the Premises,
Lessor may transfer or assign the LOC and/or the LOC Security
Deposit to Lessor's mortgagee or Lender or other transferee
and thereupon be relieved of further responsibility and
liability with respect to the LOC or the LOC Security Deposit,
as long as the transferee agrees in writing to hold the LOC
and/or LOC Security Deposit, as appropriate, under the
provisions of this Paragraph 53. Additionally in this regard,
Lessee acknowledges and agrees that the initial LOC, as well
as any replacements to the same, shall, for so long as
Lessor's mortgagee or Lender shall require, name such
mortgagee(s) or Lender(s) as the beneficiary in lieu of
Lessor. If Lessor fails to transfer or assign the LOC, Lessee
shall not be required to replace the LOC until expiration of
the LOC. If Lessor draws on the LOC after a transfer or an
assignment, the mortgagee or the transferee shall pay to
Lessee, within thirty (30) days from the date of the draw, the
amount of the LOC. In accordance with Paragraph 53.1 above,
any expense of transferring an LOC hereunder shall be borne
solely by Lessee.
54. ADDITIONAL MAINTENANCE AND REPAIR PROVISIONS:
54.1 LESSEE'S OBLIGATIONS - IN GENERAL. Lessee acknowledges and
understands that, pursuant to agreements with Lessor's
lenders, financial partners or otherwise, Lessor is to be
responsible for managing all aspects of the operations at the
Premises, including without limitation leasing, management,
maintenance (which maintenance, except as otherwise provided
in this Lease, in general, and Paragraph 55, in particular,
shall be limited to review, oversight and/or supervision
Lessee's maintenance obligations and duties), accounting and
tenant improvement work, in a professional and cost effective
manner. Lessee further acknowledges and understands that, in
connection with the foregoing, Lessor shall be required to
prepare monthly reports of property operations for the
Premises in sufficient detail for Lessor's lenders, financial
partners and/or others to monitor the performance of the
Premises. Therefore, monthly and at such other times as Lessor
shall reasonably request, within thirty (30) days of Lessee's
receipt of such request, Lessee shall, at no cost to Lessor,
provide any and all information reasonably requested or needed
in order to allow Lessor to perform its obligations and duties
as well as comply with the requirements as described in this
Paragraph 54.1.
54.2 MAJOR CONTRACTS. Lessee acknowledges and agrees that, as a
result of Lessor's agreements with its financial partners,
lenders and/or otherwise, Lessor must have the right to
approve Major Contracts. "Major Contracts" are defined as
contracts that have material effect on the value of the
Premises. Examples of Major Contracts include any contract to
perform significant renovation or tenant improvement work as
well as certain of the contracts to be obtained by Lessee
pursuant to the terms of Paragraph 7.1(b). Therefore, prior to
entering into any such contract, Lessee shall provide a copy
of the same to Lessor for Lessor's prior written approval,
which approval shall not be unreasonably withheld or delayed.
54.3 FURTHER ASSURANCES. In addition to the acts and deeds recited
in this Paragraph 54 and contemplated to be performed,
executed and/or delivered by Lessee to Lessor in connection
therewith, Lessee agrees to perform, execute and/or deliver,
from time to time, in any event within thirty (30) days of
Lessor's written request therefor (and monthly thereafter, if
Lessor and for so long as shall request but not beyond the
expiration or termination of this Lease), any further
deliveries and assurances and take such further actions as may
be reasonably necessary to consummate the transactions
contemplated by and/or satisfy the requirements of this
Paragraph 54.
55. ASSIGNMENT AND SUBLETTING:
55.1 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND
SUBLETTING. Upon any request by Lessee to transfer all or any
part of the Premises, Lessor shall have the right to either
(a) permit the transfer on the conditions set forth in
Paragraph 12 and any other commercially reasonable conditions
Lessor may impose, or (b), if reasonable, deny Lessee's
request, in which event this Lease shall continue in full
force and effect and unmodified.
<PAGE>
55.2 CONDITIONS OF LESSOR'S CONSENT. As a condition to Lessor's
prior written consent as provided in Paragraphs 12 and 55.1,
(a) Lessee shall, in addition to the fee set forth in
Paragraph 12.2(e) of this Lease, pay, within ten (10) days of
receipt of demand, Lessor's reasonable legal fees and costs
incurred due to the transfer, (b) the transferee(s) shall
agree in writing to comply with and be bound by all of the
terms, covenants, conditions, provisions and agreements of
this Lease, and (c) Lessee shall deliver to Lessor, promptly
after execution, an executed copy of each transfer instrument
and an agreement of said compliance by each transferee. As an
additional condition of granting consent to a transfer, Lessee
shall pay to Lessor 50% of all profits from the transfer.
Profits are to be determined by deducting (from the total
consideration paid directly or indirectly to or for the
benefit of Lessee or its designee for the transferred
interest) the reasonable costs of the transfer incurred by
Lessee and subtracting the remaining rent obligation of Lessee
at such time under this Lease. For purposes of determining all
profits from the transfer, substance shall control over form
such that Lessor may ignore any attempt by Lessee to inflate
the purchase price of any other assets transferred in an
attempt to conceal the profit on the transfer of the Lessee's
interest in this Lease or otherwise. Sums payable hereunder
shall be paid to Lessor as Rent as and when paid by the
transferee to Lessee. Reasonable costs of a transfer shall
include the actual, reasonable out-of-pocket costs and
expenses, incurred solely by Lessee, in connection with the
following: (i) tenant improvements to that portion of the
Premises to be transferred to the transferee, to the extent
such tenant improvements are for the transferee; (ii) rental
abatement during the term of the sublease or assignment; (iii)
brokerage commissions; (iv) plans, permits and processing
costs relating to the transferee's tenant improvements in the
Premises paid for by Lessee; (v) the outside counsel legal
fees incurred by Lessee in documenting the transfer
transaction; (vi) fees paid to Lessor or Lessor's agents in
connection with the review and/or approval (or disapproval) of
the sublease or assignment transaction; and (vii) and such
other costs as are customarily incurred in such a transaction.
Notwithstanding the foregoing, the parties acknowledge and
agree that this Paragraph 55.2 shall not apply to an
assignment or transfer with respect to which Lessor's prior
written consent is not required as described in the second
sentence of Paragraph 12.1(a).
56. OPTION TO EXTEND TERM: Subject to Paragraph 39, Lessor grants to Lessee
one (1) option to extend the term of this Lease ("Extension Option")
for a period of five (5) years ("Option Term"), subject to the
conditions described in this Paragraph 56. Lessee shall have no other
right to extend the term beyond the Option Term.
56.1 CONDITIONS OF OPTION. The Extension Option is subject to the
following conditions:
(a) The Extension Option may be exercised only by written notice
delivered by Lessee to Lessor as provided in this Paragraph 56
and only if and to the extent permitted by Paragraph 39 (see,
for example, the limitations in Paragraph 39.4(a)).
(b) Except as provided in the second sentence of Paragraph
12.1(a), the rights contained in this Paragraph 56 shall be
personal to the originally named Lessee, and may (except as is
otherwise specifically provided in the second sentence of
Paragraph 12.1(a)) be exercised only by such originally named
Lessee (and not any other assignee, sublessee, or other
transferee of Lessee's interest in this Lease, except as is
provided in the second sentence of Paragraph 12.1(a)) and only
if such originally named Lessee (or an assignee or transferee
identified in the second sentence of Paragraph 12.1(a))
occupies the entire Premises as of the date it exercises the
Extension Option in accordance with the terms of this
Paragraph 56.
(c) Subject to the terms and provisions of Paragraph 39, if Lessee
properly exercises the Extension Option, the term of this
Lease, as it applies to the entire Premises then leased by
Lessee, shall be extended for the Option Term.
56.2 OPTION RENT. The Rent payable by Lessee during the Option Term
("Option Rent") shall be equal to the Fair Market Rental Value of the
Premises as of the commencement date of the Option Term.
56.2.1 FAIR MARKET RENTAL VALUE. For purposes of this
Paragraph 56, "Fair Market Rental Value" of the
Premises shall be the rental rate, determined in
accordance with this Paragraph 56.2, for Comparable
Space as of the commencement of the Option Term. For
this purpose, "Comparable Space" shall be space that
is:
(a) Not subleased;
(b) Not leased to an entity related to the
Landlord;
(c) Not subject to another tenant's expansion
rights;
(d) Comparable in size, location, and quality to
the Premises;
(e) Leased for a term comparable to the Option
Term; and
(f) Located in Comparable Buildings. For this
purpose, "Comparable Buildings" shall be R&D
and other similar buildings, that are
comparable in age, location, quality of
construction and amenities, located in the
Sorrento Mesa area of the City of San Diego.
56.2.2 RENTAL RATE OF COMPARABLE SPACE. In determining the
rental rate of Comparable Space, the parties shall include all
escalations and take into consideration the following
concessions:
(a) Rental abatement concessions, if any, being
granted to tenants in connection with the
Comparable Space;
(b) Tenant improvements or allowances provided
or to be provided for the Comparable Space,
taking into account the value of the
existing improvements in the Premises, based
on the age, quality, and layout of the
improvements; and
<PAGE>
(c) All other monetary and non-monetary
concessions, if any, generally being granted
to tenants in connection with the Comparable
Space.
56.2.3. ADJUSTMENT FOR TENANT IMPROVEMENT ALLOWANCE. If in
determining the Fair Market Rental Value the parties determine
that the economic terms of leases of Comparable Space include
a tenant improvement allowance and/or other concessions,
Lessor may, at Lessor's sole option, elect to do the
following:
(a) Grant some or all of the value of the tenant
improvement allowance and/or other concessions as an allowance for the
refurbishment of the Premises and/or other concessions; and/or
(b) Reduce the base rent component of the Fair Market
Rental Value to be an effective rental rate that takes into consideration the
total dollar value of that portion of the tenant improvement allowance and/or
other concessions that Lessor has elected not to grant to Lessee (in which case
that portion of the tenant improvement allowance and/or other concessions
evidenced in the effective rental rate shall not be granted to Lessee).
56.3 EXERCISE OF OPTION. The Extension Option must be exercised by
Lessee, if at all, only at the time and in the manner provided in this
Section 56.3.
56.3.1 INTEREST NOTICE. If Lessee wishes to exercise the
Extension Option, Lessee shall deliver written notice
("Interest Notice") to Lessor no less than nine (9) months
before the expiration of the Original Term.
56.3.2 OPTION RENT NOTICE. After receipt of Tenant's Interest
Notice, Lessor shall deliver notice ("Option Rent Notice") to
Lessee no less than eight (8) months before the expiration of
the Original Term, stating the Option Rent, based on Lessor's
determination of the Fair Market Rental Value of the Premises
as of the commencement date of (as well as thereafter
throughout) the Option Term.
56.3.3 EXERCISE NOTICE. If Lessee wishes to exercise the
Extension Option, Lessee must, on or before the earlier of (a)
the date occurring seven (7) months before the expiration of
the Original Term or (b) the date occurring fifteen (15) days
after Lessee's receipt of the Option Rent Notice, exercise the
Extension Option by delivering written notice ("Exercise
Notice") to Lessor.
56.3.4 OBJECTION TO OPTION RENT. If Lessee wishes to contest
the Option Rent stated in an Option Rent Notice, Lessee must
provide, with the Exercise Notice, written notice to Lessor
that Lessee objects to the stated Option Rent. If Lessee
provides such written objection, the parties shall follow the
procedure described in Paragraph 56.5, and the Option Rent
shall be determined as set forth in that paragraph.
56.3.5 FAILURE TO DELIVER TIMELY NOTICE. If Lessee fails to
deliver a timely Interest Notice or Exercise Notice, Lessee
shall be considered to have elected not to exercise the
Extension Option.
56.4 AMENDMENT TO LEASE. Subject to Paragraph 56.5.2 below, if Lessee
timely exercises the Extension Option, Lessor and Lessee shall, within
fifteen (15) days after the Option Rent is determined under this
Paragraph 56, including without limitation Paragraph 56.5, execute an
amendment to this Lease extending the term of this Lease, for the First
Option Term on the terms and conditions set forth in this Paragraph 56.
56.5 RESOLVING DISAGREEMENT OVER FAIR MARKET RENTAL VALUE. If Lessee
timely and effectively objects to Lessor's determination of Fair Market
Rental Value under Paragraph 56.3.4, the disagreement shall be resolved
under this Paragraph 56.5.
56.5.1 NEGOTIATED AGREEMENT. Lessor and Lessee shall
diligently attempt in good faith to agree on the Fair Market
Rental Value on or before the tenth (10th) business day after
Lessee's objection to the Fair Market Rental Value ("Outside
Agreement Date").
56.5.2 PARTIES' SEPARATE DETERMINATIONS OR RESCISSION. If
Lessor and Lessee fail to reach agreement on or before the
Outside Agreement Date, Lessor and Lessee shall each make a
separate determination of the Fair Market Rental Value and
notify the other party of this determination (which, if
necessary, shall be the determination used in Paragraph
56.5.2.1) within five (5) business days after the Outside
Agreement Date or Lessee may, instead, elect to rescind its
exercise of the Option by notifying Lessor of its election to
rescind within said five (5) business day period.
56.5.2.1 TWO DETERMINATIONS. If each party makes a
timely determination of the Fair Market Rental Value,
those determinations shall be submitted to
arbitration in accordance with Paragraph 56.5.3.
56.5.2.2 ONE DETERMINATION. If Lessor or Lessee fails
to make a determination of the Fair Market Rental
Value within the five (5) business day period, that
failure shall be conclusively considered to be that
party's approval of the Fair Market Rental Value
submitted within the five (5) business day period by
the other party.
56.5.2.3 RESCISSION. If Lessee timely rescinds its
exercise of the Extension Option, the Extension
Option shall then lapse, expire and, therefore, be of
no further force or effect.
56.5.3 ARBITRATION. If both parties make timely individual
determinations of the Fair Market Rental Value under Paragraph
56.5.2, the Fair Market Rental Value shall be determined by
arbitration under this Paragraph 56.5.3.
56.5.3.1. SCOPE OF ARBITRATION. The determination of
the arbitrator(s) shall be limited to the sole issue
of the amount of the Fair Market Rental Value, taking
into account the requirements of Paragraph 56.2.
<PAGE>
56.5.3.2 QUALIFICATIONS OF ARBITRATOR(S). Each
arbitrator must be a licensed MAI Certified real
estate appraiser who has been active in the appraisal
of commercial properties in the San Diego area over
the five-year (5-year) period ending on the date of
his or her appointment as arbitrator.
56.5.3.3 PARTIES' APPOINTMENT OF ARBITRATORS. Within
fifteen (15) days after the Outside Agreement Date,
Lessor and Lessee shall each appoint one arbitrator
and notify the other party of the arbitrator's name
and business address.
56.5.3.4 APPOINTMENT OF THIRD ARBITRATOR. If each
party timely appoints an arbitrator, the two (2)
arbitrators shall, within ten (10) days after the
appointment of the second arbitrator, agree on and
appoint a third arbitrator (who shall be qualified
under the same criteria set forth above for
qualification of the initial two (2) arbitrators)
and provide notice to Lessor and Lessee of the
arbitrator's name and business address.
56.5.3.5 ARBITRATORS' DECISION. Within thirty (30)
days after the Outside Agreement Date, the three (3)
arbitrators shall decide on the amount of the Fair
Market Rental Value and, if the majority of the three
(3) arbitrators cannot timely agree, then, within
thirty (30) days after the appointment of the third
arbitrator, the third arbitrator alone shall
determine the Fair Market Rental Value and the three
(3) arbitrators or the third arbitrator, as
appropriate, shall notify Lessor and Lessee of their
or his or her decision. The decision of the majority
of the three (3) arbitrators timely made shall be
binding on Lessor and Lessee; otherwise, the decision
of the third arbitrator above shall be binding on the
parties.
56.5.3.6 IF ONLY ONE ARBITRATOR IS APPOINTED. If
either Lessor or Lessee fails to appoint an
arbitrator within fifteen (15) days after the Outside
Agreement Date (and Lessee has not elected to rescind
its exercise of the Extension Option), the arbitrator
timely appointed by one of them shall reach a
decision as to the amount of the Fair Market Rental
Value and notify Lessor and Lessee of that decision
within thirty (30) days after the arbitrator's
appointment and, therefore, the same shall be the
Fair Market Rental Value. The arbitrator's decision
shall be binding on Lessor and Lessee.
56.5.3.7 IF ONLY TWO ARBITRATORS ARE APPOINTED. If
each party appoints an arbitrator in a timely manner,
but the two (2) arbitrators fail to agree on and
appoint a third arbitrator within the required
period, the arbitrators shall be dismissed without
delay and the issue of Fair Market Rental Value shall
be submitted to binding arbitration under the
commercial arbitration rules of American Arbitration
Association; provided, however, that in the event of
any inconsistency between such arbitration rules and
the terms and conditions of this Paragraph 56, the
terms and conditions of this Paragraph 56 shall
govern.
56.5.3.8 IF NO ARBITRATOR IS APPOINTED. If Lessor and
Lessee each fail to appoint an arbitrator in a timely
manner (and Lessee does not elect to rescind its
exercise of the Extension Option), the matter to be
decided shall be submitted without delay to binding
arbitration under the commercial arbitration rules of
American Arbitration Association, subject to the
provisions of this Paragraph 56.5 other than those
provisions requiring the selection of one or the
other of Lessor's or Lessee's determination of the
Fair Market Rental Value as closest to the Fair
Market Rental Value and, therefore, using the same as
the Fair Market Rental Value.
56.5.3.9 COST OF ARBITRATION. The cost of the
arbitration shall be paid and borne as follows:
Except as otherwise provided herein, each party shall
bear its own costs and expenses, including without
limitation any fees to be paid to the arbitrator
selected by the party; the fee of the third
arbitrator, if any, shall be split equally between
the parties; and all costs and expenses of and fees
charged by the American Arbitrator Association, if
any, shall be split equally between the parties.
57. SUBDIVISION: The Premises, as shown on Exhibit "A," are part of a
"Subdivision." The Subdivision totals approximately 36.2 net acres, as
shown on Exhibit "B" (See lots 1-11); the Premises are lots 6 and 7.
The Subdivision is governed by, among other instruments, covenants,
conditions and restrictions ("CC&R's"). The owner of each lot is
responsible for its pro rata share of expenses applicable to the
Subdivision. Lessor (if Lessor is responsible under the CC&R's) or the
developer of the Subdivision (if the developer is responsible) or such
other third party who is responsible under the CC&R's or other
operative documents (collectively, "Responsible Party") is to maintain
the common areas of the Subdivision in good order, condition and
repair. Lessee shall pay, as additional Rent, within ten (10) days of
Lessee's receipt of Lessor's written demand, all costs and expenses
incurred by Lessor or for which Lessor is legally responsible in
connection with the operation, maintenance and/or repair of the common
areas of the Subdivision. Additionally, in the event that Lessor shall
so elect, in a written notice directed to Lessee, Lessee shall,
commencing not sooner than ten (10) days after the Lessee's receipt of
such notice, perform and be responsible for any and all obligations,
liabilities and duties of Lessor under the CC&Rs and other operative
documents, from time to time, to the extent directed to do so by and
until further notice from Lessor or the sooner expiration or
termination of this Lease.
58. NOTICE OF SALE: In the event that Lessor shall elect to market the
Premises for sale, Lessor shall endeavor to notify Lessee of the same
not less than thirty (30) days prior to publicly beginning such
marketing efforts. However, in the event that Lessor shall, for any
reason, fail to give the notice contemplated by this Paragraph 58,
Lessee shall have no right or remedy therefor, Lessor shall not be
default under this Lease and, therefore, Lessor shall have no
additional obligation, liability or duty. In the event Lessor does
notify Lessee pursuant to this Paragraph 58, Lessee shall keep any and
all marketing information, including without limitation any proposed
purchase price or other financial data, provided by Lessor
confidential.
59. TERM: The Original Term is defined in the Basic Provisions (see
Paragraph 1.3). Paragraph 1.3 refers to this Paragraph for the purposes
of establishing the Commencement Date and the Expiration Date. The
parties acknowledge and agree that the Commencement Date shall be the
day that title to the Premises is transferred of record by Lessee to
Lessor and that the Expiration Date shall be the day before the seventh
anniversary of the Commencement Date. Upon Lessor's or Lessee's
request, Lessee and Lessor
<PAGE>
shall execute an amendment to this Lease or other appropriate
instrument confirming and setting forth the Commencement Date and the
Expiration Date.
60. LANDLORD'S STATEMENT. Lessor shall, within ten (10) days after receipt
of written request from Lessee, execute a statement certifying (i)
that, to Lessor's knowledge without any duty of inquiry or
investigation, the Lease, as modified, if modified, is in full force
and effect, and (ii) the date to which Base Rent has been paid in
advance.
<PAGE>
EXHIBIT "A"
THE PREMISES
[ATTACHED]
MAP
<PAGE>
EXHIBIT "B"
THE PROJECT
[ATTACHED]
MAP
<PAGE>
EXHIBIT "C"
FORM OF LETTER OF CREDIT
[ATTACHED]
<PAGE>
Draft for discussion purposes only
TRADE SERVICES DIVISION, NORTHERN CALIFORNIA
525 Market Street, 25th Floor
San Francisco, California 94105
IRREVOCABLE LETTER OF CREDIT
BENEFICIARY:
________________________ Letter of Credit No. NZS__________
________________________ Date:_____________, 1999
Ladies and Gentlemen:
At the request and for the account of
_________________________________________, we hereby establish our irrevocable
Letter of Credit in your favor in the amount of _______________________ United
States Dollars (US $____.00). This Letter of Credit may be drawn at our above
office by presentation to us at sight of your signed and dated statement worded
as follows (with instructions therein brackets complied with):
"The undersigned, an authorized representative of [insert name of
lessor] (the "Lessor"), hereby certifies that the amount of the draft
drawn on Wells Fargo Bank, N.A. is the amount due us under that certain
Lease Agreement signed by and between ______________________ (the
"Lessee") and the Lessor."
Partial and multiple drawings are permitted under this Letter of
Credit.
Each draft must be marked "DRAWN UNDER WELLS FARGO BANK, N.A. LETTER OF
CREDIT NO. NZS ___________.
This Letter of Credit expires at our above office on July 20, 1999 but
shall be automatically extended, without written amendment, to July 20 in each
succeeding calendar year unless we have sent written notice to you at your
address above by registered mail or express courier that we elect not to renew
this Letter of Credit beyond the date specified in such notice, which expiration
date will be July 20, 1999 or any subsequent July 20, and be at least thirty
(30) calendar days after the date we send you such notice.
Upon our sending you such notice of non-renewal of the expiration date
of this letter of credit, you may also draw under this Letter of Credit by
presentation to us at our above address, on or before the expiration date
specified in such notice, of your draft drawn on us at sight accompanied by your
signed and dated statement worded as follows:
THIS IS AN INTEGRAL PART OF THIS LETTER OF CREDIT NO. NZS ________
"The undersigned, an authorized representative of [insert name of
lessor] (the "Lessor"), hereby certifies that (a) we have received
notice from Wells Fargo Bank, N.A. that Letter of Credit Number
NZS_______ will not be renewed and (B) ______________ (the "Lessee"),
has failed to secure and deliver to the Lessor a replacement Letter of
Credit in form and substance satisfactory to the Lessor."
This Letter of Credit is transferable. Transfer may be effected only
through ourselves and only upon payment of our usual transfer fee and upon
presentation to us at our above-specified office of a duly executed instrument
of transfer in form and substance acceptable to us together with the original of
this Letter of Credit. Transfer of this Letter of Credit may not change the
place of expiration of this Letter of Credit from our above-specified office.
If any instructions accompanying a drawing under this Letter of Credit
request that payment is to be made by transfer to an account with us or at
another bank, we and/or such other bank may rely on an account number specified
in such instructions.
<PAGE>
Except as expressly stated herein, the obligation under this Letter of
Credit is the obligation of the bank and is not subject to any condition or
qualification and is not contingent on the ability of the bank to perfect a
lien, security interest or obtain any other reimbursement.
This Letter of Credit is subject to the Uniform Customs and Practice
For Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No. 500 ("UCP") and the laws of the State of California, and, in the
case of any conflict between such laws and the UCP, the laws of the State of
California will control.
We hereby engage with you that each draft drawn and presented to us in
compliance with the terms and provisions of this Letter of Credit will be duly
honored by payment to you of the amount requested.
Very truly yours,
WELLS FARGO BANK, N.A.
By:
--------------------------------
(Authorized Signature)
<PAGE>
EXHIBIT 10.46
OFFER OF EMPLOYMENT LETTER FROM THE COMPANY
TO MICHAEL LIESS
September 8, 1998
Mr. Michael Liess
12050 South Riviera
Tustin, CA 92782
Dear Mike,
We are very pleased to offer you the position of Vice President, Sales and Field
Marketing of our Digital Imaging Solutions SBU, reporting to Michael Steep, Sr.
VP/GM pending successful completion of a background check.
We are pleased to offer you the following:
- A base salary of ** bi-weekly (** annually.)
- A start date of Monday, October 5, 1998.
- Stock options in the amount of ** shares. The price per share of
these options will be determined by the fair market value on the date
of grant under the terms of ENCAD's Stock Option Plan. A meeting to
explain your stock option plan will be held shortly after you begin
work. Key employees who participate in the stock option plan will be
expected to give their full professional effort to the Company.
Outside consulting is discouraged except when done through ENCAD.
- A car allowance of ** (gross) per month.
- 3 weeks vacation per year.
- Participation in ENCAD's Executive bonus program. This program
provides for a range of bonus from ** to ** of your base annual
salary with a 100% target of 30%. Bonus payouts are based on your
achievement of your assigned worldwide revenue plan, your individual
performance against pre-established objectives, and company
profitability. Your bonus for 1998 will be pro-rated based on your
start date, with a guarantee of ** for 1998 based on achievement
of personal objectives. Details of the plan will be provided to you
upon hire.
- A recoverable draw of ** per annum (** bi-weekly), against your
annual bonus, is authorized.
** CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
- Participation in ENCAD's semi-annual Employee Profit Sharing Plan.
Please note that ENCAD's profit sharing payout in previous years has
been around ** of base salary.
- Relocation Assistance: To assist you with your move to San Diego,
ENCAD will reimburse you for the following relocation expenses, in
accordance with company practices:
- Movement of household goods
- Relocation allowance in the amount of ** to cover any
miscellaneous expenses. This allowance is designed to give
you greater flexibility in managing your relocation expenses
and focusing ENCAD's financial assistance in the areas of
your special needs.
- Home purchase assistance - reimbursement of customary,
non-negotiable, non recurring and legally required closing
costs when purchasing a home in San Diego.
- Home sale assistance - reimbursement of customary,
non-negotiable, non recurring legally required closing costs
associated with the sale of your home. In addition, ENCAD
will reimburse the actual incurred real estate commission,
not to exceed 6%.
- Tax gross-up on eligible relocation expenses.
Upon acceptance, and when ready to relocate to San Diego, the
above package must be coordinated through ENCAD's relocation
service, PRC (Professional Relocation & Consulting Services).
Your contact is Lucy Donaldson who can be reached at
**. Ms. Donaldson will explain ENCAD's relocation expense
guidelines and coordinate the various aspects of your
relocation. Relocation must be completed and reimbursed no later
than end of year 1999.
Please note that if you voluntarily terminate or are terminated for
cause within 12 months of your relocation, you will be required to
reimburse ENCAD all relocation expenses that were paid by the company.
Your signed acceptance of our offer indicates compliance with this
provision of ENCAD's policy.
- Eligibility to participate in ENCAD's benefit plans. Coverage includes
medical, dental, life and disability insurance. Associated costs are
attached. Additionally, ENCAD offers an on-site fitness center, health
club membership, an attractive Employee Stock Purchase Plan, tuition
reimbursement program, and 401(k) plan.
- A sign-on bonus in the amount of ** (net) paid in your first
paycheck. (Please note, if you voluntarily terminate or are
terminated for cause within one year of employment, you will
be required to reimburse this bonus to ENCAD.)
- Severance package of 12 months base pay and earned bonus in the event
that your employment is terminated with ENCAD within the first year of
employment for any reason other than poor performance or "for cause."
** CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
- Bridge loan in the amount of ** (interest free). It is agreed that
this loan will be deducted from your 1999 performance bonus. If any
balance still remains, it is agreed that you will repay ENCAD at that
time (loan agreement will be executed upon your hire.)
Due to the enactment of the Immigration Reform and Control Act of 1986, this
offer is contingent on your ability to produce acceptable documentation
verifying your eligibility to work in the United States. Please review the
enclosed INS I-9 form; it specifies which documents are acceptable. You will be
required to complete this form and present the necessary documents on the day
you begin work at ENCAD.
If you wish to accept our offer of employment, please sign and date this offer
and return it to me. Your signature below will indicate your understanding that
no other promises or representations have been made and that you will be
considered an at-will employee; either party may end the relationship at any
time. This offer is not a contract of employment, and the terms of employment
are subject to change.
Mike, this letter describes the "tangible" components of our offer; just as
important are the "intangible" we can offer you in terms of becoming a member of
our executive team. I sincerely believe that we can provide you the personal
challenges, professional support, and job satisfaction you are seeking!
We look forward to having you join us at ENCAD and a productive and mutually
rewarding working relationship. If you have any questions, please call me at
**.
Sincerely,
/s/ Sheryl Roland
- ---------------------------
Sheryl Roland
Director of Human Resources
Cc: Mike Steep
Approved and accepted:
/s/ Michael Liess 9/14/98
- --------------------------------- ------------------
Michael Liess Date
** CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
EXHIBIT 10.47
OFFER OF EMPLOYMENT LETTER FROM THE COMPANY
TO CHARLES SHARP
September 24, 1999
Charles Sharp
3 Thomas Rice Drive
Westboro, MA 01581
Dear Chuck:
All of us here at ENCAD are pleased to offer you the position of Vice
President, Supplies Operations, reporting to Michael Steep, Executive Vice
President and Chief Operating Officer. This is an exempt position which pays
** bi-weekly (** annually). Other parameters of the offer are as follows:
- - Participation in the 1999 Sales Incentive Plan: Annual Target $50,000. This
amount will be prorated based on your start date.
- - A non-recoverable draw against your 1999/2000 Sales Incentive Plan for a
period of six months in the amount of ** per month. After the expiration
of this six month period, you will receive a recoverable draw against the
remainder of your 2000 Sales Incentive Plan in the amount of ** per month.
- - ENCAD will grant you Stock Options in the amount of ** shares. The price
per share of these options will be determined by the fair market value on
the date of grant under the terms of ENCAD's Stock Option Plan. The Stock
Option Plan has been approved by the Board of Directors and shareholders.
A meeting to explain your stock option will be held shortly after you begin
work. Key employees who participate in the stock option plan will be
expected to give their full professional effort to the Company. Any outside
consulting is discouraged except when done through ENCAD.
- - One-time sign on bonus in the gross amount of **. The sign on bonus paid
by the company to you will be refunded by you if you elect to terminate
your employment with ENCAD, or if you are terminated for cause or poor
performance before you have been employed with the company for a period of
one year. Refunds shall be calculated on a prorated basis.
- - Severance package of 6 months base pay only during your first year of
employment in the event that your employment should terminate other than
voluntarily or for cause. Termination of your employment based on the
"at-will" status will not abrogate payment of severance benefits to you.
- - You will receive a monthly car allowance of **. This will be included on
your W-2 and is taxable. Miles driven for ENCAD business will be reimbursed
at the rate of $.15 per mile.
** CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Charles Sharp
Page 2 of 3
- - Relocation Assistance: To assist you with your move to San Diego, ENCAD
will assist you with the following relocation expenses, in accordance with
the company relocation policies:
- House hunting trip for up to 3 days, including spouse/partner. This
includes coach airfare, lodging, car rental, meals at $30 per person
per day with receipts.
- Shipment of household goods and personal effects, including two autos
and storage costs for up to 30 days. o Temporary Housing for up to 3
months in the new location not to exceed **.
- Travel for employee and family to final destination.
- Home Purchase Assistance - Reimbursement of home purchase
non-recurring closing costs and 1% loan origination fee.
- Home Sale Assistance - Reimbursement of commissions and non-recurring
closing costs. All home sale activity must be coordinated through PRC
Relocation to avoid taxable reimbursements.
- Relocation allowance of ** (gross) to assist with incidental expenses
incurred during the relocation.
- One time tax gross-up for home purchase, house hunting trip and
temporary living expenses.
- - This offer of employment expires at 5:00pm PST on Friday, September 24,
1999.
The relocation benefit has tax implications and you should consult with your
tax accountant about these. Upon acceptance, and when ready to relocate to
San Diego, the ABOVE PACKAGE MUST BE COORDINATED THROUGH ENCAD'S RELOCATION
SERVICE, PRC (Professional Relocation & Consulting Services). Your contact is
Lucy Donaldson who can be reached at **. Ms. Donaldson will explain ENCAD's
relocation expense guidelines and coordinate the various aspects of your
relocation.
Please note that if you voluntarily terminate or are terminated for cause (as
supported by appropriate California or Federal laws, rules, statutes or case
precedence) or poor performance within 12 months of your relocation, you will be
required to reimburse ENCAD all relocation expenses that were paid by the
company. Your signed acceptance of this offer indicates your agreement with this
provision.
ENCAD currently extends a medical, dental, life, disability and additional
health benefits to all employees as well as three weeks of annual VIP time
(Vacation, Illness and Personal time) in accordance with the specific provisions
of the policy. ENCAD also offers an attractive Employee Stock Purchase Plan
(ESPP), and a 401(k) Savings/Investment Plan. You are eligible to enroll in the
ESPP and 401(k) plans the first calendar quarter following your hire date. You
will receive details of these plans during your Orientation Program.
Due to the enactment of the Immigration Reform and Control Act of 1986, this
offer is contingent on your ability to produce acceptable documentation
verifying your eligibility to work in the United States. You will be required to
present the necessary documents on the day you begin work at ENCAD.
** CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Charles Sharp
Page 3 of 3
As confirmation of acceptance, please sign and return the enclosed copy of this
letter in the enclosed envelope. Your orientation program will be conducted
shortly after you begin work, and we will be in contact with you prior to this
day.
Chuck, this letter describes the "tangible" components of our offer, just as
important are the "intangibles" we can offer you in terms of becoming a member
of our team. I sincerely believe that we can provide you with the personal
challenges, professional support and job satisfaction you are seeking.
Your signature below will also indicate your understanding that no other
promises or representations have been made and that you will be considered an
"at-will" employee; either party may end the relationship at any time. This
offer is not a contract of employment, and the general terms of employment not
addressed herein are subject to change. I will be happy to discuss any questions
you might have. We look forward to a mutually rewarding relationship and are
pleased that you will be joining us.
Sincerely,
/s/ Sheryl Roland
- -------------------------------
Sheryl Roland
Vice President, Human Resources
Accepted:
/s/ Charles L. Sharp
- ------------------------------------- Start Date 10/11/99
Charles Sharp -----------------
<PAGE>
RELOCATION AGREEMENT
(Must be signed in order to receive relocation benefits.)
In order to conduct business at ENCAD you have been asked to relocate to San
Diego. ENCAD will directly pay or reimburse you for certain relocation expenses
in accordance with the provisions of your offer of employment.
If you receive reimbursements or payments from ENCAD related to this relocation,
you are expected to remain an employee of ENCAD for at least twelve months
following your date of hire. If you are terminated from employment with ENCAD
for cause or choose to voluntarily leave ENCAD within that twelve-month period,
you must repay the amounts paid to you under this Agreement.
In order to insure such repayment, your signature below will authorize ENCAD, at
its option, to withhold from final payment of any amounts due you (other than
those covered by applicable laws) the full amount of payments made on your
behalf under this Relocation Agreement. If the amounts due you do not cover this
repayment, you must make arrangements that are acceptable to ENCAD before your
final scheduled workday, and such excess repayment will not be excused.
I understand and agree with the terms listed above.
/s/ Charles L. Sharp
- --------------------------------------- Date 9/24/99
Charles Sharp ----------------
<PAGE>
EXHIBIT 10.48
OFFER OF EMPLOYMENT LETTER FROM THE COMPANY
TO GURI STARK
September 4, 1998
Mr. Guri Stark
50 Aaron Drive
Novato, CA 94949
Dear Guri,
We are very pleased to offer you the position of Vice President, Vice President,
Marketing of our Digital Imaging Solutions SBU, reporting to Michael Steep, Sr.
VP/GM pending successful completion of a background check.
ENCAD's goal is to provide its executive team with a competitive compensation
program that rewards the team on performance and contribution to the growth and
success of our organization. The Board of Directors has set forth an executive
compensation philosophy that provides:
- Base salary compensation at the 50th - 60th percentile of salaries at
high tech companies of comparable size.
- An annual incentive plan that is leverage so performance substantially
above targeted financial levels will result in total annual cash
compensation above competitive levels.
In the spirit of our executive compensation philosophy, we are pleased to offer
you the following:
- A base salary of ** bi-weekly **.
- A start date of October 5, 1998.
- Stock options in the amount of ** shares. The price per share of
these options will be determined by the fair market value on the date
of grant under the terms of ENCAD's Stock Option Plan. A meeting to
explain your stock option plan will be held shortly after you begin
work. Key employees who participate in the stock option plan will be
expected to give their full professional effort to the Company.
Outside consulting is discouraged except when done through ENCAD.
- A car allowance of ** (gross) per month.
- 3 weeks vacation per year.
- Participation in ENCAD's Executive bonus program. This program
provides for a range of bonus from ** to ** of your base annual
salary with a 100% target of 30%. Bonus payouts are based on the
Company's operating profit before taxes and your individual
performance against pre-established objectives. Your bonus for 1998
will be pro-rated based on your start date, with a guarantee of **
provided
** CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
successful completion of your 1998 personal objectives. Details of the
plan will be provided to you upon hire.
- Participation in ENCAD's semi-annual Employee Profit Sharing Plan.
Historically, ENCAD's profit sharing plan has paid out at
approximately ** of base pay.
- Relocation Assistance: To assist you with your move to San Diego,
ENCAD will reimburse you for the following relocation expenses, in
accordance with company practices:
- Movement of household goods.
- Househunting trip for your family.
- Relocation allowance in the amount of ** (gross) to offset
any miscellaneous T&E expense incurred during the temporary
transition period prior to relocation of your family and
home. This allowance is designed to give you greater
flexibility in managing your relocation expenses and
focusing ENCAD's financial assistance in the areas of your
special needs.
- Home purchase assistance - reimbursement of customary,
non-negotiable, non recurring and legally required closing
costs when purchasing a home in San Diego.
- Home sale assistance - reimbursement of customary,
non-negotiable, non recurring legally required closing costs
associated with the sale of your home. In addition, ENCAD
will reimburse the actual incurred real estate commission,
not to exceed 6%.
- Tax gross-up on eligible relocation expenses.
- Temporary living (air/hotel) reimbursement for a period not
to exceed 6 months.
Upon acceptance, and when ready to relocate to San Diego, the
above package must be coordinated through ENCAD's relocation
service, PRC (Professional Relocation & Consulting Services).
Your contact is Lucy Donaldson who can be reached at
**. Ms. Donaldson will explain ENCAD's relocation expense
guidelines and coordinate the various aspects of your relocation.
RELOCATION MUST BE COMPLETED AND REIMBURSED NO LATER THAN END OF
YEAR 1999.
Please note that if you voluntarily terminate or are terminated
for cause within 12 months of your relocation, you will be
required to reimburse ENCAD all relocation expenses that were paid
by the company. Your signed acceptance of our offer indicates
compliance with this provision of ENCAD's policy.
- - Eligibility to participate in ENCAD's benefit plans. Coverage
includes medical, dental, life and disability insurance.
Associated costs are attached. Additionally, ENCAD offers an
on-site fitness center, health club membership, an attractive
Employee Stock Purchase Plan, tuition reimbursement program, and
401(k) plan.
- - A sign-on bonus in the amount of ** (net) paid in your first
paycheck. (Please note, if you leave ENCAD within one year of
employment, you will be required to reimburse this bonus to
ENCAD.)
- - Severance package of 6 months base pay in the event that your
employment is terminated with ENCAD within the first year of
employment for any reason other than poor performance or "for
cause."
** CONFINDENTIAL TREATMENT REQUESTED
<PAGE>
Due to the enactment of the Immigration Reform and Control Act of 1986, this
offer is contingent on your ability to produce acceptable documentation
verifying your eligibility to work in the United States. Please review the
enclosed INS I-9 form; it specifies which documents are acceptable. You will be
required to complete this form and present the necessary documents on the day
you begin work at ENCAD.
If you wish to accept our offer of employment, please sign and date this offer
and return it to me. Your signature below will indicate your understanding that
no other promises or representations have been made and that you will be
considered an at-will employee; either party may end the relationship at any
time. This offer is not a contract of employment, and the terms of employment
are subject to change.
Guri, this letter describes the "tangible" components of our offer; just as
important are the "intangible" we can offer you in terms of becoming a member of
our executive team. I sincerely believe that we can provide you the personal
challenges, professional support, and job satisfaction you are seeking!
We look forward to having you join us at ENCAD and a productive and mutually
rewarding working relationship. If you have any questions, please call me at
**.
Sincerely,
/s/ Sheryl Roland
- ---------------------------
Sheryl Roland
Director of Human Resources
Cc: Mike Steep
Approved and accepted:
/s/ Guri Stark
- --------------------------------- Date 9/8/98
Guri Stark ------------------
** CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
ENCAD INTERNATIONAL INCORPORATED
(FOREIGN SALES CORPORATION IN U.S. VIRGIN ISLANDS)
ENCAD EUROPE, S.A.
(SALES OFFICE)
ENCAD, Ltd.
(SALES OFFICE)
ENCAD GmbH
(SALES OFFICE)
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
No. 333-24695, No. 333-44923, No. 333-45327, No. 333-59779, and No. 333-85143
of Encad, Inc. on Form S-8 of our report dated February 18, 2000, appearing in
this Annual Report on Form 10-K of Encad, Inc. for the year ended December
31, 1999.
DELOITTE & TOUCHE LLP
San Diego, California
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ENCAD,
INC. DECEMBER 31, 1999 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,953
<SECURITIES> 0
<RECEIVABLES> 30,546
<ALLOWANCES> 0
<INVENTORY> 11,992
<CURRENT-ASSETS> 51,794
<PP&E> 28,709
<DEPRECIATION> (14,445)
<TOTAL-ASSETS> 68,479
<CURRENT-LIABILITIES> 15,972
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 51,232
<TOTAL-LIABILITY-AND-EQUITY> 68,479
<SALES> 117,712
<TOTAL-REVENUES> 117,712
<CGS> 66,171
<TOTAL-COSTS> 66,171
<OTHER-EXPENSES> 47,357
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 203
<INCOME-PRETAX> 3,981
<INCOME-TAX> 917
<INCOME-CONTINUING> 3,064
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,064
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.26
</TABLE>
