<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
--------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-23562
---------------------------
MICROELECTRONIC PACKAGING, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3142624
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9350 TRADE PLACE, SAN DIEGO, CALIFORNIA 92126
- ------------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 530-1660
-----------------------------
Indicate by check 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 [_]
As of November 7, 1997, there were 10,793,279 shares outstanding of the
---------------- ----------
Registrant's Common Stock, no par value per share.
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<PAGE>
<TABLE>
<CAPTION>
Index Page No.
- --------- --------
<C> <S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets................. 3
Condensed Consolidated Statements of Operations....... 4
Condensed Consolidated Statements of Cash Flows....... 5
Condensed Consolidated Statement of
Changes in Shareholders' Deficit.................... 6
Notes to Condensed Consolidated Financial Statements.. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................... 33
Item 2. Changes in Securities................................. 33
Item 3. Defaults Upon Senior Securities....................... 33
Item 4. Submission of Matters to a Vote of Security Holders... 33
Item 5. Other Information..................................... 34
Item 6. Exhibits and Reports on Form 8-K...................... 35
SIGNATURES............................................................. 36
EXHIBIT INDEX.......................................................... 37
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------------ ------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,623,000 $ 2,954,000
Accounts receivable, net 2,708,000 5,849,000
Inventories 3,824,000 10,072,000
Other current assets 131,000 1,836,000
------------ ------------
Total current assets 8,286,000 20,711,000
Property, plant and equipment, net 757,000 3,479,000
Other non-current assets 330,000 704,000
------------ ------------
$ 9,373,000 $ 24,894,000
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Debt in default, due on demand $ 14,833,000 $ 19,052,000
Line of credit borrowings, due on demand - 5,201,000
Current portion of long-term debt 3,226,000 2,527,000
Accounts payable 8,341,000 12,522,000
Accrued liabilities 3,008,000 3,656,000
Deferred revenue 295,000 503,000
Current liabilities of discontinued operations, net 13,610,000 7,265,000
------------ ------------
Total current liabilities 43,313,000 50,726,000
Long-term debt, less current portion 4,265,000 4,782,000
Commitments and contingencies
Shareholders' deficit:
Common stock, no par value 39,839,000 38,138,000
Accumulated deficit (78,044,000) (68,752,000)
------------ ------------
Total shareholders' deficit (38,205,000) (30,614,000)
------------ ------------
$ 9,373,000 $ 24,894,000
============ ============
</TABLE>
3
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales:
Product sales $ 5,655,000 $3,030,000 $22,117,000 $13,808,000
Other sales - 711,000 90,000 1,527,000
----------- ---------- ----------- -----------
5,655,000 3,741,000 22,207,000 15,335,000
Cost of goods sold:
Product sales 4,019,000 2,570,000 19,059,000 11,319,000
Other sales - 597,000 43,000 1,326,000
----------- ---------- ----------- -----------
4,019,000 3,167,000 19,102,000 12,645,000
----------- ---------- ----------- -----------
Gross profit 1,636,000 574,000 3,105,000 2,690,000
Selling, general and administrative 1,008,000 841,000 3,587,000 2,706,000
Engineering and product development 79,000 148,000 275,000 423,000
----------- ---------- ----------- -----------
Income (loss) from operations 549,000 (415,000) (757,000) (439,000)
Other income (expense):
Interest (expense), net (436,000) (439,000) (869,000) (1,105,000)
Other income, net 27,000 325,000 301,000 409,000
----------- ---------- ----------- -----------
Income (loss) from continuing
operations before provision for
income taxes 140,000 (529,000) (1,325,000) (1,135,000)
Provision for income taxes - - - 47,000
----------- ---------- ----------- -----------
Income (loss) from
continuing operations 140,000 (529,000) (1,325,000) (1,182,000)
Discontinued operations:
Income (loss) from operations - (193,000) (4,116,000) 1,635,000
Estimated loss on disposal of
pressed ceramics operations - - (3,851,000) -
----------- ---------- ----------- -----------
Net income (loss) $ 140,000 $ (722,000) $(9,292,000) $ 453,000
=========== ========== =========== ===========
Weighted average shares used
in per share calculations 10,986,000 5,622,000 10,215,000 5,493,000
Net income (loss) per common share:
Income (loss) from continuing
operations $ 0.01 $ (0.10) $ (0.13) $ (0.22)
Income (loss) from discontinued
operations - (0.03) (0.78) 0.30
----------- ---------- ----------- -----------
Net income (loss) per common share $ 0.01 $ (0.13) $ (0.91) $ 0.08
=========== ========== =========== ===========
</TABLE>
4
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------------------------------
1997 1996
------------------ -----------------
<S> <C> <C>
Net cash provided (used) by operating activities of:
Continuing operations $ 512,000 $(4,203,000)
Discontinued operations 2,719,000 -
----------- -----------
Net cash provided (used) by operating activities 3,231,000 (4,203,000)
----------- -----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (396,000) (9,290,000)
Proceeds from sale of fixed assets
Continuing operations 25,000 -
Discontinued operations 236,000 -
Realized gain from forward foreign currency contracts - 318,000
----------- -----------
Net cash provided (used) by investing activities (135,000) (8,972,000)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in short-term notes payable
Continuing operations - (172,000)
Discontinued operations (3,612,000) -
Borrowings under long-term debt and promissory notes
Continuing operations 205,000 12,058,000
Principal payments on long-term debt and promissory notes
Continuing operations (512,000) (1,069,000)
Discontinued operations (508,000) -
Issuance of common stock - 1,994,000
----------- -----------
Net cash provided (used) by financing activities (4,427,000) 12,811,000
----------- -----------
Net increase (decrease) in cash (1,331,000) (364,000)
Cash at beginning of period 2,954,000 2,923,000
----------- -----------
Cash at end of period $ 1,623,000 $ 2,559,000
=========== ===========
</TABLE>
5
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' DEFICIT
(unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------------------------ Accumulated
Shares Amount Deficit Total
----------------- ----------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 6,991,493 $38,138,000 $(68,752,000) $(30,614,000)
Issuance of common stock 3,801,786 1,701,000 - 1,701,000
Net loss - - (9,292,000) (9,292,000)
---------- ----------- ------------ ------------
Balance at September 30, 1997 10,793,279 $39,839,000 $(78,044,000) $(38,205,000)
========== =========== ============ ============
</TABLE>
6
<PAGE>
Microelectronic Packaging, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Quarterly Financial Statements
The accompanying condensed consolidated financial statements and related
notes as of September 30, 1997 and for the three and nine month periods ended
September 30, 1997 and 1996 are unaudited but include all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of financial position and results
of operations of the Company for the interim periods. Certain prior year
amounts have been reclassified to conform to the current year presentation.
The results of operations for the three and nine month periods ended
September 30, 1997 are not necessarily indicative of the operating results to
be expected for the full fiscal year. The information included in this
report should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto and the other information, including
risk factors, set forth for the year ended December 31, 1996 in the Company's
Annual Report on Form 10-K and the Quarterly Report on Form 10-Q for quarter
ended June 30, 1997. Readers of this Quarterly Report on Form 10-Q are
strongly encouraged to review the Company's Annual Report on Form 10-K.
Copies are available from the Chief Financial Officer of the Company at 9350
Trade Place, San Diego, California 92126.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
Raw materials....................... $2,594,000 $ 5,797,000
Work-in-progress.................... 1,786,000 2,977,000
Finished goods...................... 115,000 2,622,000
Obsolescence reserve................ (671,000) (1,324,000)
---------- -----------
$3,824,000 $10,072,000
========== ===========
</TABLE>
3. Effects of Income Taxes
The Company has not recorded provisions for any income taxes for the three
and nine month periods ended September 30, 1997, since the Company's domestic
and Singapore operations have generated operating losses for both financial
reporting and income tax purposes. A 100% valuation allowance has been
provided on the total deferred income tax assets as they are not more likely
than not to be realized.
The Company believes that it has incurred an ownership change pursuant to
Section 382 of the Internal Revenue Code and, as a result, the Company
believes that its ability to utilize its current net operating loss and
credit carryforwards in subsequent periods will be subject to annual
limitations.
7
<PAGE>
Microelectronic Packaging, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
4. Net Income (Loss) Per Share
The computation of primary net income (loss) per share is based upon the
weighted average number of outstanding common shares during the period plus,
when their effect is dilutive, common stock equivalents from the assumed
exercise of stock options (using the treasury stock method). Fully diluted
net income (loss) per share has not been presented as it is not materially
different from primary net income (loss) per share.
5. Commitments and Contingencies
The Company is involved in various claims and litigation arising in and
outside of the ordinary course of business. In addition, given the current
state of the Company and its subsidiaries, numerous creditors and parties to
contracts have threatened or initiated litigation to recoup their loans and
investments. If these claims are not favorably resolved, they will have a
material adverse effect on the Company's financial condition, results of
operations and ability to continue as a going-concern.
The Company has entered into a lease for new manufacturing facilities and
corporate offices. This lease commenced September 1, 1997, and extends to
October 31, 2002. Minimum monthly rental payments of $16,000 begin on
November 1, 1997, with scheduled annual increases of 6% to 7% per year
beginning November 1, 1998.
6. Customer Supplied Inventory
The Company's CTM Electronics, Inc. subsidiary has purchased certain chips
("die") used in the assembly of multichip modules ("MCM's") sold to one of
the Company's significant customers from that same customer. Effective July
25, 1997, this customer notified the Company that it will no longer sell die
to the Company and instead is providing the die on consignment. The pro
forma presentation below gives effect to this change in operations on
selected line items from the Company's Condensed Consolidated Statements of
Operations for the three and nine month periods ended September 30, 1997, as
if this change had been put into effect on January 1, 1997.
<TABLE>
<CAPTION>
======================================================================================================
Historical Pro Forma
Three Months Ended Pro Forma Three Months Ended
September 30, 1997 Adjustments September 30, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 5,655,000 $ (965,000) (1) $ 4,690,000
Cost of goods sold 4,019,000 (995,000) (2) 3,024,000
Gross profit 1,636,000 30,000 1,666,000
Net income $ 140,000 30,000 $ 170,000
======================================================================================================
Net income per
common share $ 0.01 $ -- $ 0.01
======================================================================================================
</TABLE>
8
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
________________________________________________________________________________
<TABLE>
<CAPTION>
Historical Pro Forma
Nine months Ended Pro Forma Nine months Ended
September 30, 1997 Adjustments September 30, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $22,207,000 $(10,626,000) (1) $11,581,000
Cost of goods sold 19,102,000 (10,942,000) (2) 8,160,000
Gross profit 3,105,000 316,000 3,421,000
Net income (loss) $(9,292,000) 316,000 $(8,976,000)
======================================================================================================
Net income (loss) per
common share $ (0.91) $ 0.03 $ (0.88)
======================================================================================================
</TABLE>
(1) The cost of the die to be provided on consignment will be removed from
the selling price of the MCM's. The amount of the 2% prompt payment
discount offered to the customer, which is included in revenues, will be
reduced by the lower selling prices for these MCM's.
(2) The cost of the die to be provided on consignment will be removed from
the cost of goods sold, corresponding to the reduction in selling prices
of the MCM's.
7. Liquidation of Subsidiary
On July 10, 1997, The Development Bank of Singapore Limited, one of the
Company's and its subsidiaries largest creditors ("DBS"), appointed a
Receiver and Manager to liquidate the assets of Microelectronic Packaging (S)
Pte. Ltd. ("MPS"), which had been a wholly owned subsidiary of the Company
that manufactured primarily pressed ceramics products. DBS exercised its
option to appoint a Receiver and Manager under the terms of a Deed of
Debenture dated November 27, 1984 (as amended) between DBS and MPS. On
September 26, 1997, a trade creditor of MPS filed a petition to liquidate
MPS, which placed MPS into liquidation with the Court in Singapore. As of
November 7, 1997, the Company has not received any communication from the
Singapore Court which would indicate how long the liquidation process may
take. The Company has guaranteed all of MPS's obligations to DBS.
There were approximately $5.3 million of such loans outstanding as of
September 30, 1997, which are included in the caption "Current liabilities of
discontinued operations, net" in the Condensed Consolidated Balance Sheet.
There can be no assurance that such debt will be fully paid through the
liquidation of the assets of MPS. If insufficient, DBS could demand repayment
of the shortfall from the Company through the guarantee. The Company does not
have adequate resources to repay such debt if the guarantee is called.
The Company recorded the effect of the receivership as of June 30, 1997, and
the results of operations of MPS have been classified as "Loss from
discontinued operations" on the Condensed Consolidated Statement of
Operations for the three and nine month periods ended September 30, 1997 and
1996. As a result of the appointment of a Receiver and Manager, MPS is no
longer able to manufacture its pressed ceramic products and has ceased to
generate revenue as of July 10, 1997.
9
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
________________________________________________________________________________
The Company has also evaluated the net realizable value of the assets of its
MPS subsidiary. The effect of this is to reduce the carrying value of
certain assets as of June 30, 1997. A charge to "Estimated loss on disposal
of pressed ceramics operations" is included on the Condensed Consolidated
Statement of Operations for the three and nine month periods ended September
30, 1997.
On March 18, 1997, a Receiver was appointed to handle the liquidation of the
multilayer ceramics operations of MPM (S) Pte. Ltd. As of September 30,
1997, most of the assets of MPM have been sold. Final resolution of the
remaining liabilities will come only after the liquidation of MPS, since MPS
has guaranteed the DBS bank loan and the equipment leases belonging to MPM.
The portion of these liabilities remaining after any reduction available from
the sale of MPS and MPM assets will then be transferred to MPI, as MPI also
guaranteed these loans and leases. As of October 8, 1997, the Company (as
guarantor) reached an agreement with MPM's lessor for the repayment of the
balance remaining after the sale of the leased equipment, over a five-year
term (interest only during the first year, with principal due quarterly
thereafter). The loan balance will be reduced by excess funds available from
the liquidation of MPS, in the event any funds are available. The holders of
the debentures issued to Transpac and related parties still retain $9.0
million of debt securities issued by MPM which are guaranteed by the Company.
The Company and MPM are in default thereunder.
8. Loss of Business
The Company's MPC subsidiary was informed in April 1997 that Carborundum
Corporation ("Carborundum"), its sole customer, was immediately cancelling
the manufacturing and related agreements with MPC as a result of
Carborundum's sale of its assets to a third party.
On April 5, 1997, a fire at the Company's MPC facility caused damage to the
building and certain equipment. The Company is insured against the fire, and
believes that it will incur minimal losses from the fire. The Company has
closed the MPC operation and has terminated all of its MPC employees. MPC
represented approximately 6% of consolidated net sales of the Company in the
year ended December 31, 1996, and comprised less than 1% of the Company's
consolidated total assets. The Company expects that there will be minimal
impact from the disposition of the assets of MPC.
Most costs of closure of the MPC operations will be borne by the former
customer or the Company's business interruption insurance.
The Company has recorded the effect of the closure of this business as of
June 30, 1997, and the results of operations of MPC have been classified as
"Loss from discontinued operations" on the Condensed Consolidated Statement
of Operations for the three and nine month periods ended September 30, 1997
and 1996.
10
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
________________________________________________________________________________
9. Discontinued Operations
Based on the information included in Notes 7 and 8, the results of operations
of the MPS, MPC and MPM segments have been reported separately as
discontinued operations as of September 30, 1997, and for the three and nine
month periods then ended. Consolidated Statements of Operations for the
three and nine month periods ended September 30, 1996 have been restated to
present MPS, MPC and MPM segments as discontinued operations. Certain items
in the Condensed Consolidated Balance Sheet as of December 31, 1996 have been
restated to conform to the current period's presentation.
Discontinued operations include management's best estimates of the amounts
expected to be realized on the sale of its assets associated with these
discontinued operations and the expenses to be incurred through the disposal
date. The amounts the Company will ultimately realize and incur could differ
materially in the near term from the amounts assumed in arriving at the loss
on disposal of the discontinued operations.
The components of "Current liabilities of discontinued operations, net"
included in the Condensed Consolidated Balance Sheets are as follows (only
MPM was included in net liabilities of discontinued operations as of December
31, 1996 - MPS and MPC are included, along with MPM, as of September 30,
1997):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Cash........................................ $ 189,000 $ 391,000
Other current assets........................ 1,903,000 225,000
Property, net............................... 1,713,000 1,500,000
Other non-current assets.................... 308,000 --
Debt in default and line of
credit borrowings, due on demand.......... (5,505,000) (3,298,000)
Accounts payable and accrued liabilities.... (12,218,000) (6,083,000)
------------ -----------
Current liabilities of
discontinued operations, net.............. $(13,610,000) $(7,265,000)
============ ===========
</TABLE>
The Condensed Consolidated Statements of Operations relating to the
discontinued operations for the three and nine month periods ended September
30, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales....................... $ - $8,217,000 $ 9,972,000 $30,197,000
Costs and expenses.............. - 8,410,000 14,088,000 28,562,000
---------- ---------- ----------- -----------
Income (loss) from
discontinued operations......... $ - $ (193,000) $(4,116,000) $ 1,635,000
========= ========== =========== ===========
</TABLE>
11
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
________________________________________________________________________________
10. Supplemental Information To Condensed Consolidated Statements of Cash Flows
Holders of $1,900,000 of convertible debentures issued in October 1996,
elected to convert their debentures into 3,801,786 shares of Common Stock
during January and February, 1997.
11. New Accounting Standards
In June, 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
(SFAS 131). This pronouncement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This
pronouncement is effective for fiscal years and interim periods beginning
after December 15, 1997. The Company has not determined the effect, if any,
of adoption on its financial reporting.
In June, 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130 establishes
standards for reporting and display of comprehensive income, which includes
certain items which have historically been excluded from the income
statement, and instead charged directly to equity. The Company has not
incurred any of the specific items addressed in this pronouncement. As a
result, management does not believe that this pronouncement will have any
impact on the Company's financial reporting. This pronouncement is effective
for fiscal years beginning after December 15, 1997.
In February, 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, Disclosure of Information about Capital Structure (SFAS
129). This pronouncement establishes standards for disclosing information
about an entity's capital structure for nonpublic entities which were
previously exempt from certain disclosure requirements. This pronouncement
is effective for fiscal years ending after December 15, 1997. Management
does not believe that this pronouncement will have any effect on the
Company's financial reporting.
In February, 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, Earnings per Share (SFAS 128). This pronouncement
provides a different method of calculating earnings per share than is
currently used in accordance with APB 15, Earnings per Share. SFAS 128
provides for the calculation of Basic and Diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share. This pronouncement is
effective for fiscal years and interim periods ending after December 15,
1997; early adoption is not permitted. The Company has not determined the
effect, if any, of adoption on its EPS computation(s).
12
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
________________________________________________________________________________
12. Going Concern
The accompanying financial statements have been prepared assuming the
Company (including subsidiaries except MPS, MPC and MPM) will continue as a
going concern. A number of factors, including the Company's history of
significant losses, the debt service costs associated with the Company's
high level of existing indebtedness (direct and guaranteed), the need to
restructure debt which is currently in default, various claims and lawsuits,
the economic dependency upon a limited number of customers and MPS and MPM
being in receivership raise substantial doubts about the Company's ability
to continue as a going concern. The Company currently has a total of $16.1
million of indebtedness in default and thereby due upon demand ($1.3 million
of which is included in "Current liabilities of discontinued operations,
net"), as well as $4.2 million line of credit borrowings that are also due
upon demand (all of which are included in "Current liabilities of
discontinued operations, net"). The Company does not possess sufficient cash
resources to repay these obligations, and the Company would be unable to
repay these loans in the event that any demand was made by the Company's
creditors.
As a result of the events described above, the new executive management team
is restructuring the Company's remaining operations with the goal of
producing profits and positive cash flow. Management has been successful in
restructuring three of the Company's customer loans (TI, NS Electronics and
Citibank), and the balance of the Orix leases from MPM; principal will be
repaid over three to four years with the commencement of principal payments
deferred until 1998. The Company believes that it may be able to restructure
the majority of its remaining customer loans on similar terms, although
there can be no assurances that the Company will be able to renegotiate
these loans on favorable terms, or at all.
13. Forward Looking Statements
These Condensed Consolidated Financial Statements contain forward-looking
statements which involve substantial risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including the
effects of debt restructuring.
13
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE SUBSTANTIAL RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH IN THIS SECTION AND ELSEWHERE IN THIS
QUARTERLY REPORT ON FORM 10-Q.
RESULTS OF OPERATIONS
Net Sales
For the three months ended September 30, 1997 ("the third quarter"), net sales
were $5,655,000, representing an increase of $1,914,000 or 51.2% over net sales
of $3,741,000 for the third quarter of 1996. The increase in net sales was
primarily attributable to a $2,692,000 increase in revenues from the sale of MCM
products at the Company's CTM Electronics, Inc. ("CTM") subsidiary, partially
offset by a $66,000 reduction in revenues from the Company's Microelectronic
Packaging America ("MPA") subsidiary and a reduction of $711,000 in revenues
derived under the equipment and technology transfer agreement discussed below.
The increase in sales of MCM's for the third quarter resulted from a 310.2%
increase in the number of units sold over the corresponding period of 1996,
partially offset by a 52.1% decrease in average selling prices. The primary
reason for the decrease in average selling prices resulted from CTM's primary
customer deciding, effective July 25, 1997, to provide certain chips ("die") on
consignment, rather than selling them to the Company (see Note 6 to the
Condensed Consolidated Financial Statements). This change ("consigned die") has
resulted in a permanent reduction in selling prices for products sold to this
customer. The balance of the reduction was caused by a change in product mix.
The reduction in net sales from MPA came as a result of the Company's sale of
the assets and closure of that business on September 30, 1996.
For the nine months ended September 30, 1997, net sales were $22,207,000,
representing an increase of $6,872,000 or 44.8% over net sales of $15,335,000
for the corresponding period of 1996. The increase in net sales was primarily
attributable to a $8,652,000 increase in revenues from the sale of MCM products
by CTM, partially offset by a reductions of $342,000 in revenues from MPA and
$1,527,000 in revenues derived under the equipment and technology transfer
agreement discussed below. The increase in sales of MCM's for the nine months
ended September 30, 1997 resulted principally from a 108.3% increase the number
of units sold over the corresponding period of 1996, partially offset by a 19.4%
decrease in average selling prices. Approximately one-half of the reduction in
average selling prices is the result of the change to consigned die discussed
above. The balance of the reduction was caused by a change in product mix. The
reduction in net sales from MPA came as a result of the Company's sale of the
assets and closure of that business on September 30, 1996.
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Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
Revenues reported in this Quarterly Report on Form 10-Q reflect the
reclassification of revenues from the Company's Singapore subsidiaries for all
periods presented (MPS, MPC and MPM) to "Income (loss) from discontinued
operations" (see Note 9 to the Condensed Consolidated Financial Statements).
Net sales for the three and nine month periods ended September 30, 1996 includes
$711,000 and $1,527,000 of revenues derived under an agreement with a government
factory in Yixing, China. Such revenues have been included in "Other Sales" in
the Condensed Consolidated Statement of Operations. The contract was completed
in the second quarter of 1997 and the last $90,000 of revenues under this
contract were recorded at that time.
Cost of Goods Sold
For the third quarter of 1997, cost of goods sold were $4,019,000, representing
an increase of $852,000 or 26.9% over cost of goods sold of $3,167,000 for the
third quarter of 1996. The increase in cost of goods sold resulted from a
$1,741,000 increase in the cost of goods sold for MCM products by CTM, which was
partially offset by a $291,000 reduction in the cost of goods sold by MPA and by
a $597,000 decrease in "Other costs" incurred in connection with the equipment
and technology transfer agreement discussed below. The increase in cost of
goods sold of MCM's for the third quarter resulted from a 310.2% increase in the
number of units sold over the corresponding period of 1996, partially offset by
a 81.2% decrease in the average per unit cost of the major components used in
MCM's. The decrease in the average per unit cost in MCM's is almost entirely
due to the change to consigned die, effective July 25, 1997, discussed under
"Net Sales" (see Note 6 to the Condensed Consolidated Financial Statements).
This represents a permanent change to the cost structure of CTM. The reduction
in cost of goods sold from MPA came as a result of the Company's sale of the
assets and closure of that business on September 30, 1996. The reduction in
"Other costs" resulted from the completion of the equipment and technology
transfer agreement (discussed below) during the second quarter of 1997.
For the nine months ended September 30, 1997, cost of goods sold were
$19,102,000, representing an increase of $6,457,000 or 51.1% over cost of goods
sold of $12,645,000 for the corresponding period of 1996. The increase in cost
of goods sold resulted from a $8,799,000 increase in the cost of goods sold for
MCM products by CTM, which was partially offset by a $1,059,000 reduction in the
cost of goods sold by MPA and by a $1,283,000 decrease in "Other costs" incurred
in connection with the equipment and technology transfer agreement discussed
below. The increase in cost of goods sold of MCM's for the nine months ended
September 30, 1997 resulted from a 108.3% increase in the number of units sold
over the corresponding period of 1996, partially offset by a 19.6% decrease in
the average per unit cost of the major components used in MCM's. Approximately
one-half of the decrease in the average per unit cost in MCM's is due to the
change to consigned die, effective July 25, 1997, discussed under "Net Sales"
(see Note 6 to the Condensed Consolidated Financial Statements). The balance of
the reduction was caused by a change in product mix. The reduction in cost of
goods sold from MPA came as a result of the Company's sale of the assets and
closure of that business on September 30, 1996. The reduction in "Other costs"
resulted from the completion of the equipment and technology transfer agreement
(discussed below) during the second quarter of 1997.
15
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Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
Cost of goods sold reported in this Quarterly Report on Form 10-Q reflect the
reclassification of cost of goods sold from the Company's Singapore subsidiaries
for all periods presented (MPS, MPC and MPM) to "Income (loss) from discontinued
operations" (see Note 9 to Condensed Consolidated Financial Statements).
Cost of goods sold for the three and nine month periods ended September 30, 1996
includes $597,000 and $1,326,000 of expenses incurred in connection with the
equipment and technology transfer agreement with a government factory in Yixing,
China. Such expenses have been included in "Other sales" under "Cost of goods
sold" in the Condensed Consolidated Statement of Operations. As discussed
above, the contract was completed during the second quarter of 1997, and the
final $43,000 of expenses under this contract were recorded at that time.
Gross Profit
Gross profit was $1,636,000 (28.9% of net sales) for the third quarter of 1997
as compared to $574,000 (15.3% of net sales) for the third quarter of 1996. The
gross profit for the third quarter of 1996 would have been 23.1% without (1) the
lower gross profit (16.0%) on the equipment and technology transfer agreement
and (2) the loss ($225,000) incurred by MPA (both of which will not be recurring
in the future). There were no net sales or cost of goods sold relating to these
two items in the third quarter of 1997. Furthermore, eliminating the cost of
die from both revenues and expenses, gross profit would have been 35.1% for the
third quarter of 1997 and 40.9% for the corresponding period of 1996. This
decrease in gross profit is attributable to a change in product mix to products
with higher selling prices, but having lower margins.
For the nine months ended September 30, 1997, gross profit was $3,105,000 (14.0%
of net sales) as compared to $2,690,000 (17.5% of net sales) for the
corresponding period of 1996. The gross profit for the nine months ended
September 30, 1996 would have been 23.8% without (1) the lower gross profit
(13.2%) on the equipment and technology transfer agreement and (2) the loss
($717,000) incurred by MPA (both of which will not be recurring in the future).
Net sales and cost of goods sold relating to these two items were negligible in
the nine months ended September 30, 1997. Furthermore, eliminating the cost of
die from both revenues and expenses, gross profit would have been 27.4% for the
nine months ended September 30, 1997 and 46.3% for the corresponding period of
1996. This decrease in gross profit is attributable to a change in product mix
to products with higher selling prices, but having lower margins.
With the combination of increasing demand for newer, lower-margin products, and
the increase in margins which results from the effect of eliminating die cost
from net sales and cost of goods sold (resulting from the change to consigned
die), it is difficult for the Company to predict gross profit levels for the
remainder of 1997 and beyond.
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Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
Selling, General and Administrative
Selling, general and administrative expenses were $1,008,000 for the third
quarter and $3,587,000 for the nine months ended September 30, 1997,
representing increases of $167,000 or 19.9% and $881,000 or 32.6%, respectively,
from the comparable periods of 1996. These increases are primarily caused by
additional legal and consulting fees incurred in connection with the
restructuring of the Company's U.S. operations and the winding up of its
Singapore operations. The Company anticipates selling, general and
administrative expenses, in absolute dollars, to increase year over year through
the end of the fiscal year ending December 31, 1997.
Selling, general and administrative expenses reported in this Quarterly Report
on Form 10-Q reflect the reclassification of these costs from the Company's
Singapore subsidiaries for all periods presented (MPS, MPC and MPM) to "Income
(loss) from discontinued operations" (see Note 9 to Condensed Consolidated
Financial Statements).
Engineering and Product Development
Engineering and product development expenses were $79,000 for the third quarter
and $275,000 for the nine months ended September 30, 1997, representing
decreases of $69,000 or 46.6% and $148,000 or 35.0% from the corresponding
periods of 1996. The reduction in engineering and product development costs
result primarily from the closure of MPA business on September 30, 1996. The
Company anticipates that engineering and product development expenses, in
absolute dollars, will increase over the remainder of the fiscal year ending
December 31, 1997.
Engineering and product development expenses reported in this Quarterly Report
on Form 10-Q reflect the reclassification of these expenses from the Company's
Singapore subsidiaries for all periods presented (MPS, MPC and MPM) to "Income
(loss) from discontinued operations" (see Note 9 to Condensed Consolidated
Financial Statements).
Interest Expense
Interest expense was $436,000 for the third quarter and $869,000 for the nine
months ended September 30, 1997, representing decreases of $3,000 or 0.7% and
$236,000 or 21.4% from the corresponding periods of 1996. The decrease for the
nine months ended September 30, 1997 was caused by the accrual at December 31,
1996 of interest expense on the Transpac debentures through June 30, 1997, as
part of the discontinued operations of MPM.
Other Income
Other income was $27,000 for the third quarter and $301,000 for the nine months
ended September 30, 1997, as compared to $325,000 and $409,000 for the
corresponding periods of 1996. These decreases came as a result of the gain on
the sale of the MPA assets which was recorded in the third quarter of 1996.
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<PAGE>
Effects of Income Taxes
The Company has not recorded provisions for any income taxes for the three and
nine month periods ended September 30, 1997, since the Company's domestic and
Singapore operations have generated operating losses for both financial
reporting and income tax purposes. A 100% valuation allowance has been provided
on the total deferred income tax assets as they are not more likely than not to
be realized.
The Company believes that it has incurred an ownership change pursuant to
Section 382 of the Internal Revenue Code and, as a result, the Company believes
that its ability to utilize its current net operating loss and credit
carryforwards in subsequent periods will be subject to annual limitations.
Liquidity and Capital Resources
The Company's independent certified public accountants have included an
explanatory paragraph in their audit report with respect to the Company's
December 31, 1994, 1995 and 1996 consolidated financial statements related to a
substantial doubt with respect to the Company's ability to continue as a going
concern. There can be no assurance that the Company will operate profitably in
the future and that the Company will not continue to sustain significant losses.
Absent outside debt or equity financing, and excluding significant expenditures
required for the Company's major projects and assuming the Company is successful
in restructuring its debt, the Company currently anticipates that cash on hand
and anticipated cash flow from operations may be adequate to fund its operations
in the ordinary course throughout the remainder of 1997. Any significant
increase in planned capital expenditures or other costs or any decrease in, or
elimination of, anticipated sources of revenue or the inability of the Company
to restructure its debt, among many factors, could cause the Company to restrict
its business and product development efforts. There can be no assurance that
the Company will be successful in restructuring its debt on acceptable terms, or
at all. If adequate revenues are not available, the Company will be unable to
execute its business development efforts and has already been required to delay,
scale back and eliminate programs and may be unable to continue as a going
concern.
During the third quarter and first nine months of 1997, the Company financed its
operations primarily through cash flows from its operating units. The Company's
principal source of liquidity as of September 30, 1997 consisted of its U.S.
cash balance of $1,623,000.
The Company is currently in default on substantially all of its debt obligations
and numerous trade and other creditors are requesting repayment of their amounts
due.
On July 10, 1997, DBS appointed a Receiver and Manager to liquidate the assets
of MPS. On March 1, 1997, the Board of Directors of the Company voted to
liquidate MPM. As a result, the credit facilities discussed below are no longer
available to MPS and MPM. In addition, all production and sales of products by
MPS ceased as of July 10, 1997, all employees were terminated, and the Receiver
and Manager commenced the liquidation of MPS assets.
MPS had a S$9.5 million (US$6.2 million) borrowing arrangement with DBS,
guaranteed by MPI, consisting of a working capital line of credit facility and
an overdraft facility. Borrowings under this arrangement are due on demand and
are secured by substantially all of
18
<PAGE>
the assets of MPS. Borrowings under the working capital line and the overdraft
facility bear interest at the Singapore prime rate plus 1/2% and 3/4%,
respectively. At June 30, 1997, MPS had outstanding borrowings under this
arrangement of US$1.6 million. As of July 10, 1997, DBS appointed a Receiver and
Manager to dispose of the assets of MPS which comprise part of DBS's security.
The Company anticipates that the disposition of the MPS assets will partially
repay the outstanding borrowings. Should the liquidation of the MPS assets be
insufficient to repay the balance outstanding under this agreement, MPI will be
required to pay the balance under a guarantee by MPI. The Company will attempt
to negotiate favorable repayment terms. The failure by the Company to obtain
favorable repayment terms will materially adversely affect the Company's
prospects and financial condition and ability to continue as a going concern.
MPS has a $1.0 million loan outstanding with DBS, guaranteed by Samsung Corning
Co. Ltd. ("Samsung"). MPS has not made a payment on this loan since March 1997.
As of September 30, 1997, the balance owing to DBS is $583,000, and is
classified as debt in default, due on demand. On October 15, 1997, DBS made a
claim against Samsung's guarantee. As of November 7, 1997, Samsung has not paid
the balance to DBS, nor have they made any demand upon MPI, which has also
guaranteed the loan.
By the end of the first quarter of 1997, MPS had failed to make timely principal
payments under its loan obligations to TI, SGS-Thomson and a note to Citibank
N.A. guaranteed by Motorola. The principal outstanding under these loans on
September 30, 1997 totaled $9.8 million, with interest rates ranging from 3.5%
to 7.25%. Remedies available to the note holders include acceleration of the
principal balance of the notes, attachment and/or foreclosure of assets of MPS,
CTM, MPA and MPI pledged as security, and perfection of guarantees issued by
MPI. No lender to date has either declared a default or has exercised any such
remedies under these notes. MPS entered into an Amended Loan and Security
Agreement with TI on April 2, 1997 pursuant to which TI agreed to (i) waive its
right to pursue a default remedy under the original loan agreement, (ii) a lower
interest rate of 3.5% per annum on the outstanding balance and (iii) a revised
(and extended) payment schedule for the outstanding balance owed by MPS. Due to
the financial condition of MPS, and based on MPI's guarantee, MPI issued a new
note to TI to replace the obligation owing by MPS on May 13, 1997. As of
November 12, 1997, MPI is in compliance with the terms and conditions of the new
note. On May 13, 1997, MPI issued a promissory note to Citicorp USA, Inc.
("Citicorp") to replace the note between MPS and Citibank, N.A., Singapore
Branch, referred to above. This note bore interest at 6.75% per annum and
principal and interest were due on July 11, 1997. MPI and Citicorp entered into
an Amendment on July 11, 1997, which reduced the interest rate to 6.72% per
annum as of July 11, 1997, and extended the due date for the principal and
interest to September 9, 1997. On September 9, 1997, MPI paid the accrued
interest due and entered into a second Amendment which extends the due date for
the principal to December 8, 1997, with the interest rate remaining at 6.72%.
The Company is currently attempting to renegotiate the terms and conditions of
its notes with SGS-Thomson to waive any current defaults and to restructure the
loan to provide more favorable terms to the Company. There can be no assurance
that the Company will be successful in this negotiation or that SGS-Thomson will
not avail itself of the remedies available, which include acceleration of the
principal balance of the notes, attachment and/or foreclosure of assets of MPS
pledged as security, and perfection of guarantee issued by MPI. To date, SGS-
Thomson has not declared a default nor has exercised any such remedies under its
note.
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<PAGE>
MPC had a S$500,000 (US$327,000 at September 30, 1997) borrowing arrangement
with DBS, guaranteed by both MPI and MPS, consisting of a working capital line
and an overdraft facility. Borrowings under this arrangement are also due on
demand and are secured by all of the assets of MPC. Borrowings under the
working capital line of credit facility and the overdraft facility bear interest
at the Singapore prime rate plus 1/2% and 3/4% respectively. MPC was notified
by DBS on April 16, 1997 that this banking facility was canceled. As of
September 30, 1997, MPC had repaid this loan in full.
MPM had a $3.5 million borrowing facility with DBS, which is guaranteed by both
MPI and MPS. This facility consisted of a $3.2 million short-term advance
facility and a $300,000 import/export bills facility. Advances under this
credit facility are secured by substantially all of the assets of MPM and bear
interest at the bank's prime lending rate plus 2.5%. This facility
automatically terminates in the event of the termination of the Company's
technology transfer agreement with IBM. The Company informed DBS in March 1997
that MPM would be unable to repay its borrowings with DBS as part of the
liquidation of MPM. On April 10, 1997, DBS sent to MPS a written demand for
payment of the entire $3,298,000 currently due under the MPM loan. In addition
to demanding payment, DBS imposed the default interest rate (an additional 3%)
on the outstanding debt. Since MPM has insufficient resources to repay DBS,
with the agreement of the Company, DBS has appointed a Receiver and Manager to
dispose of the assets of MPM which comprise part of DBS's security. The Company
anticipates that the disposition of the MPM assets may partially repay the
outstanding borrowings. As of June 30, 1997, the balance owing under this
arrangement was approximately $2.6 million. The Company anticipates that the
liquidation of assets by the Receiver and Manager for MPS may provide sufficient
funds for this obligation to be repaid through the MPS guarantee. Should the
liquidation of MPM and MPS assets be insufficient to repay the balance
outstanding under this agreement, MPI will be required to pay the balance under
a guarantee by MPI. The Company will attempt to negotiate favorable repayment
terms. The failure by the Company to obtain favorable repayment terms will
materially adversely affect the Company's prospects and financial condition and
ability to continue as a going concern.
MPM has additionally ceased lease payments due in February 1997 to lessors for
certain equipment in the MPM facility, and the lessors have declared the leases
to be in default. The Company believes the disposal of MPM's remaining assets
will be insufficient to fully repay these lease obligations, which have been
fully guaranteed by MPI. As of October 8, 1997, MPI reached an agreement with
MPM's lessor to a repayment schedule for the $1.6 million balance remaining as
of September 30, 1997 after the sale of most of the leased equipment. Interest
is due quarterly at 7.5% per annum, with the principal being repaid over a four-
year term which begins September 30, 1998.
MPM is obligated, pursuant to its real property lease in Singapore with Jurong
Town Corporation ("JTC"), to return the facilities which it has been leasing to
their original state before returning the facilities to JTC. Returning the
facilities to their original state would require the expenditure of
approximately $800,000. There can be no assurance that JTC will not enforce
this lease provision. If MPM were forced to return the facilities to their
original state or pay the overdue lease payments, such actions could materially
adversely affect any plans to restructure MPM's debt obligations. MPM is
currently delinquent on lease payments due under the real property lease. DBS
has guaranteed the payment of MPM's lease obligation to JTC through September
1997. MPI will be required to reimburse DBS for any lease payments made.
20
<PAGE>
At September 30, 1997, the Company also had borrowings of $9.0 million under the
Transpac debentures, which bear interest at 8.5% and are guaranteed by MPI. As
a result of MPI's failure to make the interest payment which was due on December
31, 1996, the Company is in default under the terms of the Debentures. The
Company believes that the disposal of MPM's assets will be fully applied toward
the DBS obligation, leaving no funds available to reduce the balance owing to
Transpac.
In addition, the Company anticipates that the liquidation of MPM will not
provide sufficient resources to repay the trade creditors of MPM. Indebtedness
to IBM for equipment rental totaling $704,000 is a direct obligation of MPI, and
accordingly will not be discharged by the liquidation of MPM. Additionally,
certain vendors of MPM provided goods or services to MPM under purchase orders
issued by MPS. Under Singapore law, these obligations, totaling $2.3 million
may also be deemed obligations of MPS and may not be discharged by the
liquidation of MPM. The Company has reflected these anticipated obligations in
its Condensed Consolidated Balance Sheets as of December 31, 1996 and September
30, 1997.
The financial resources of MPS are insufficient for it to repay the MPM trade
creditors. DBS informed the Company on July 10, 1997, that it appointed a
Receiver and Manager to liquidate the assets of MPS. As a result of the
appointment of a Receiver and Manager, MPS is unable to manufacture its pressed
ceramic products and has ceased to generate revenue. On September 26, 1997, a
trade creditor of MPS filed a petition to liquidate MPS, which placed MPS into
liquidation with the Court in Singapore.
MPI failed to make a principal payment under a note with NSEB which was due in
January, 1997. In March 1997, the Company entered into an Amended Loan and
Security Agreement and a Second Secured Promissory Note with NSEB pursuant to
which NSEB agreed to waive any breach of the covenants, terms and conditions of
the original Loan and Security Agreement and the original Secured Promissory
Note (both dated May 30, 1995) and agreed to a revised payment schedule. The
interest rate on the outstanding balance, however, was raised from 14% per annum
to 18% per annum. The principal balance owing under this obligation was
$1,250,000 as of September 30, 1997. The Company withheld interest payments of
$57,000 and $58,000 which were due on June 30, 1997 and September 30, 1997, due
to the failure of two of NSEB's affiliates to pay the $2,600,000 currently owed
in trade payables to the Company's MPS subsidiary.
As of September 30, 1997 the Company also had borrowings of $583,000 under a
note payable to a customer bearing interest at 7.5% per annum, $1.1 million
under mortgage notes bearing interest at rates ranging from 7.5% to 10.75%, and
$307,000 under capital lease obligations, consisting of various machinery and
equipment financing agreements, bearing interest at 4% to 11.9%. Borrowings
under the above arrangements are secured by substantially all of the assets of
the Company.
CTM purchases certain chips ("die") used in the assembly of MCM's sold to one of
the Company's significant customers from that same customer. This customer
notified the Company that, effective July 25, 1997, it will no longer sell die
to the Company and instead is providing the die on consignment. This change
will result in a significant reduction in revenues and cost of goods sold (see
Note 6 to the Condensed Consolidated Financial Statements).
21
<PAGE>
FUTURE OPERATING RESULTS
Significant Customer Concentration. Historically, the Company has sold its
products to a very limited number of customers. Any reduction in orders by any
of these customers, including reductions due to market, economic or competitive
conditions in the semiconductor, personal computer or electronic industries or
in other industries that manufacture products utilizing semiconductors or MCM's,
could materially adversely affect the Company's business, financial condition
and results of operations. Sales to one customer, Schlumberger, accounted for
90% of the Company's reported net sales for the nine months ended September 30,
1997 (which are almost entirely MCM sales) and is expected to continue to
account for most of the Company's MCM sales. In light of the termination of all
of the Company's business operations in Singapore, the Company's continued
increasing reliance on its MCM business for substantially all of its overall net
sales, the failure to meet Schlumberger's requirements will materially adversely
affect the Company's ability to continue as a going concern. The Company's
ability to increase its sales in the future will also depend in part upon its
ability to obtain orders from new customers. There can be no assurance that the
Company's sales will increase in the future or that the Company will be able to
retain existing customers or to attract new ones. There can also be no
assurance that the Company's CTM subsidiary will be able to diversify or enhance
its customer base. Failure to develop new customer relationships could
materially adversely affect the Company's business, financial condition and
results of operations.
The financial performance of the Company is dependent in large part upon the
current and anticipated market demand for semiconductors and products such as
personal computers that incorporate semiconductors. The semiconductor industry
is highly cyclical and historically has experienced recurring periods of
oversupply. The Company believes that the markets for new generations of
semiconductors will also be subject to similar fluctuations. A continued
reduced rate of growth in the demand for semiconductor component parts due, for
example, to competitive factors, technological change or otherwise, may
materially adversely affect the markets for the Company's products. From time
to time, the personal computer industry, like the semiconductor industry, has
experienced significant downturns, often in connection with, or in anticipation
of, declines in general economic conditions. Accordingly, any factor adversely
affecting the semiconductor or the personal computer industry or particular
segments within the semiconductor or personal computer industry may materially
adversely affect the Company's business, financial condition and results of
operations. There can be no assurance that the Company's net sales and results
of operations will not be materially adversely affected if downturns or
slowdowns in the semiconductor, personal computer industry or other industries
utilizing the Company's products continue or again occur in the future.
Discontinuation of MPS Operations. On July 10, 1997, DBS appointed a Receiver
and Manager for MPS. The appointment of a Receiver and Manager is allowed by
the terms of the loan agreements between MPS and DBS, since MPS is in default of
certain covenants under loans granted by DBS to MPS. The Receiver and Manager
has commenced the liquidation of the assets of MPS, which has caused the
cessation of MPS's operations and sales. On September 26, 1997, a trade creditor
of MPS filed a petition to liquidate MPS, which placed MPS into liquidation with
the Court in Singapore. As of November 7, 1997, the Company has not received any
communication from the Singapore Court which would indicate how long the
liquidation process may take.
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Status as a Going Concern. The Company's independent certified public
accountants have included an explanatory paragraph in their audit report with
respect to the Company's December 31, 1994, 1995 and 1996 consolidated financial
statements related to a substantial doubt with respect to the Company's ability
to continue as a going concern. There can be no assurance that the Company will
operate profitably in the future and that the Company will not continue to
sustain significant losses. Absent outside debt or equity financing, and
excluding significant expenditures required for the Company's major projects and
assuming the Company is successful in restructuring its debt, the Company
currently anticipates that cash on hand and anticipated cash flow from
operations may be adequate to fund its operations in the ordinary course
throughout the remainder of 1997 and 1998. Any significant increase in planned
capital expenditures or other costs, or any decrease in, or elimination of,
anticipated sources of revenue or the inability of the Company to restructure
its debt, among many factors, could cause the Company to restrict its business
and product development efforts. There can be no assurance that the Company will
be successful in restructuring its debt on acceptable terms, or at all. If
adequate revenues are not available, the Company will be unable to execute its
business development efforts and will be required to delay, scale back or
eliminate programs and will be unable to continue as a going concern. There can
be no assurance that the Company's future consolidated financial statements will
not include another going concern explanatory paragraph if the Company is unable
to restructure its debt and become profitable. The factors leading to and the
existence of the explanatory paragraph will continue to have a material adverse
effect on the Company's ability to obtain additional financing.
Risk of Bankruptcy. The Company may need to be reorganized under Chapter 11 of
Title 11 of the United States Code or liquidated under Chapter 7 of Title 11 of
the United States Code. There can be no assurance that if the Company decides
to reorganize under the applicable laws of the United States that such
reorganizational efforts would be successful or that shareholders would receive
any distribution on account of their ownership of shares of the Company's stock.
If the Company were to be reorganized or liquidated under the applicable laws of
the United States, the bankruptcy laws would require (with limited exceptions)
that the creditors of the Company be paid before any distribution is made to the
shareholders.
Future Capital Needs; Need for Additional Financing. The Company's future
capital requirements will depend upon many factors, including the extent and
timing of acceptance of the Company's products in the market, requirements to
restructure and retire its substantial debt, requirements to construct,
transition and maintain existing or new manufacturing facilities, commitments to
third parties to develop, manufacture, license and sell products, the progress
of the Company's design and development efforts, the Company's operating results
and the status of competitive products. If the Company is successful in
restructuring its debt obligations, absent debt or equity financing and
excluding significant expenditures required for the Company's major projects,
the Company anticipates that cash on hand and anticipated cash flow from
operations may be adequate to fund its operations throughout the remainder of
1997 and 1998. There can be no assurance, however, that the Company will not
require additional financing prior to such date to fund its operations. In
addition, the Company will require substantial additional financing to fund its
operations if the Company is unable to restructure its debt obligations.
Furthermore, the Company may require additional financing to fund the
acquisition of selected assets needed in its production facilities and to
complete certain programs. There can be no assurance that the Company will be
able to obtain such additional financing on terms acceptable to the Company, or
at all.
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The DBS line of credit that was available to MPS, which is guaranteed by MPI,
contains numerous restrictive covenants on the ability of such subsidiary to
provide funds to MPI or to other subsidiaries and on the use of proceeds. The
credit facilities at MPC and MPM and the Transpac agreements also contain
similar restrictions. The Company is in breach of each of such agreements and
is in default under each of such agreements. The MPM $3.5 million borrowing
facility with DBS has been declared in default, DBS has appointed a Receiver and
Manager to liquidate MPM's assets, which liquidation is anticipated to be
completed during the next twelve months, and DBS had called upon MPS to repay
the MPM borrowing under MPS's guarantee. DBS has also appointed a Receiver and
Manager for MPS. If the Company cannot reach an agreement with its creditors to
repay its obligations, the Company will not be able to continue as a going
concern. The Company's high level of outstanding indebtedness and the numerous
restrictive covenants set forth in the agreements covering this indebtedness and
its default position prohibit the Company from obtaining additional bank lines
of credit and from raising funds through the issuance of debt or other
securities without the prior consent of DBS, Transpac and other creditors and
Receivers and Managers for the liquidated estates. The Company is currently in
default on its guarantees and loan obligations to DBS and other parties as a
result of the Company's decision to cease its multilayer operations and to
liquidate MPM's assets. The liquidation of MPM and MPS has also resulted in the
Company's default under a number of other agreements. There can be no assurance
that other creditors of the Company will not choose to accelerate the Company's
debt obligations and the Company will not be able to repay such accelerated
obligations as they become due and immediately payable. If either a sufficient
number of creditors or any of the substantial creditors choose to accelerate
payments or to place MPI under judicial reorganization, the Company may be
forced to seek protection under Chapter 11 of Title 11 of the United States
Code. If the Company were to seek additional financing, it is not likely that
additional financing will be available to the Company on acceptable terms, or at
all. If additional funds are raised by issuing equity or convertible securities,
further dilution to the existing shareholders will result. Since adequate funds
are not currently available, the Company has been required to delay, scale back
and eliminate programs, which could continue to have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations. In addition, the Company has been forced to delay, downsize or
eliminate other design and development, manufacturing, construction or
transitioning programs or alliances and obtain funds through arrangements with
third parties pursuant to which the Company has been forced to relinquish rights
to certain of its technologies or to other assets that the Company would not
otherwise relinquish. The delay, scaling back or elimination of any such
programs or the relinquishment of any such rights could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
Possible Future Adverse Operating Results. The Company's operating results have
fluctuated significantly in the past and will continue to fluctuate
significantly in the future depending upon a variety of factors, including
corporate and debt restructurings, creditor relationships, conversions of
significant amounts of debt into a significant amount of equity, downward
pressure in gross margins, continued losses due to low shipping volume, delayed
market acceptance, if any, of new and enhanced versions of the Company's
products, delays, cancellations or reschedulings of orders, delays in product
development, defects in products,
24
<PAGE>
political and economic instability, natural disasters, outbreaks of hostilities,
variations in manufacturing yields, changes in manufacturing capacity and
variations in the utilization of such capacity, changes in the length of the
design-to-production cycle, relationships with and conditions of customers,
subcontractors, and suppliers, receipt of raw materials, including consigned
materials, customer concentration, price competition, cyclicality in the
semiconductor industry and conditions in the personal computer industries. In
addition, operating results will fluctuate significantly based upon several
other factors, including the Company's ability to attract new customers, changes
in pricing by the Company and its competitors, subcontractors, customers or
suppliers. The absence of significant backlog for an extended period of time
will also limit the Company's ability to plan production and inventory levels,
which could lead to substantial fluctuations in operating results. Accordingly,
the failure to receive anticipated orders or delays in shipments due, for
example, to unanticipated shipment reschedulings or defects, chip defects,
customer difficulties, or to cancellations by customers, or to unexpected
manufacturing problems may cause net sales in a particular quarter to fall
significantly below the Company's expectations, which would materially adversely
affect the Company's operating results for such quarter. The impact of these and
other factors on the Company's net sales and operating results in any future
period cannot be forecasted with certainty. In addition, the significant fixed
overhead costs at the Company's facilities, the need for continued expenditures
for design and development, capital equipment and other commitments of the
Company, among other factors, will make it difficult for the Company to reduce
its expenses in a particular period if the Company's sales goals for such period
are not met. A large portion of the Company's operating expenses are fixed and
are difficult to reduce or modify should revenues not meet the Company's
expectations, thus magnifying the material adverse impact of any such revenue
shortfall. Accordingly, there can be no assurance that the Company will not
continue to sustain losses in the future or that such losses will not have a
material adverse effect on the Company's business, properties, financial
condition and results of operations.
Repayment of Debt Obligations by MPM. As of December 31, 1996, MPM had
outstanding borrowings of approximately $3,298,000 under its borrowing
arrangement with DBS. MPM informed DBS in March 1997 that it would be unable to
repay its outstanding debts. DBS subsequently accelerated the entire amount of
the borrowings currently due and appointed a Receiver and Manager for MPM to
liquidate MPM's assets, which were pledged to DBS as security. The subsequent
liquidation of most of MPM's assets has reduced the outstanding balance to
approximately $2,663,000 as of June 30, 1997. The Company currently anticipates
that the proceeds from the liquidation of MPM's assets will not be sufficient to
repay the debt obligations due to DBS. The Company also believes the disposal
of assets will be insufficient to repay its indebtedness to Transpac. Since
these borrowings have been fully guaranteed by MPI, the Company is currently
attempting to negotiate repayment terms with these creditors for the anticipated
shortfall. The failure by the Company to obtain favorable repayment terms will
materially adversely affect the Company's prospects and financial condition and
ability to continue as a going concern.
25
<PAGE>
As of December 31, 1996 MPM had equipment lease obligations totaling $1.9
million. MPM failed to make lease payments due in February 1997, and the lessor
declared the leases to be in default. The Company believes the disposal of
MPM's remaining assets will be insufficient to fully repay these lease
obligations, which have been fully guaranteed by MPI. As of October 8, 1997,
MPI reached an agreement with MPM's lessor to a repayment schedule for the $1.6
million balance remaining as of September 30, 1997 after the sale of most of the
leased equipment. Interest is due quarterly at 7.5% per annum, with the
principal being repaid over a four-year term which begins September 30, 1998.
MPM is also currently in possession of certain inventory that MPM had ordered
from IBM. IBM has not yet been paid for such inventory. The outstanding debt
from the inventory is less than $150,000.
The Company is currently in default under the Transpac debentures due to the
non-payment of interest when due. Should Transpac elect to pursue MPI's
guarantee, MPI would be unable to repay the principal or interest due. This
would materially adversely affect the Company's financial condition and ability
to continue as a going concern, and could, as is the case with other debt
defaults and failures to repay, require that the Company seek bankruptcy
protection under Chapter 11 or Chapter 7 of Title 11 of the United States Code.
MPM is obligated, pursuant to its real property lease in Singapore with Jurong
Town Corporation ("JTC"), to return the facilities which it has been leasing to
their original state before returning the facilities to JTC. Returning the
facilities to their original state would require the expenditure of
approximately $800,000. There can be no assurance that JTC will not enforce this
lease provision. If MPM were forced to return the facilities to their original
state or pay the overdue lease payments, such actions could materially adversely
affect any plans to restructure MPM's debt obligations. MPM is currently
delinquent on lease payments due under the real property lease. DBS has
guaranteed the payment of MPM's lease obligation to JTC through September 1997.
MPI will be required to reimburse DBS for any lease payments made.
Adverse Impact of MPM Liquidation on MPS. Approximately $2.3 million of
invoices from MPM's trade creditors were incurred under purchase orders issued
by MPS. Under Singapore law, MPS may be liable for these invoices. The Company
currently anticipates that the proceeds from the liquidation of MPM and MPS
assets will be insufficient to fully repay these MPM invoices. DBS, as the
primary secured creditor of MPS, has informed the Company that it has elected to
appoint a Receiver and Manager over MPS. The Receiver and Manager appointed by
DBS has commenced the liquidation of MPS's assets currently pledged as security
to DBS. On September 26, 1997, a trade creditor of MPS filed a petition to
liquidate MPS, which placed MPS into liquidation with the Court in Singapore. As
a result, MPS is unable to continue its operations. Additionally, if the
liquidation of MPS assets generates proceeds less than the outstanding
obligations due, MPI may be forced to repay certain outstanding debts because of
its role as guarantor of such debts. If MPI were unable to repay these debts,
the Company may be forced to seek bankruptcy protection under Chapter 11 or
Chapter 7 of Title 11 of the United States Code.
26
<PAGE>
Repayment of Bank Obligations by MPS. At September 30, 1997, MPS had
outstanding borrowings of approximately $1.6 million with DBS and had borrowed
an aggregate of approximately $10.4 million from a consortium of customers (the
"Consortium") to fund its purchase of certain CERDIP manufacturing and alumina
powder equipment from Samsung Corning. As previously discussed, one of these
loans ($3.5 million) has been successfully renegotiated by MPI, and a second
loan ($2.2 million) has been converted into a short-term note pending
finalization of a four to five year repayment schedule. MPM's defaults on its
obligations under its DBS facility agreement has resulted in a demand by DBS
that MPS pay MPM's outstanding debts. DBS's action may have resulted in
defaults under MPS's loan agreements pursuant to which it borrowed funds from
the Consortium, among other lenders. Such accelerations will materially
adversely affect the Company's ability to continue as an ongoing concern and may
force the Company to seek bankruptcy protection under Chapter 7 or Chapter 11 of
Title 11 of the United States Code. As a part of the Consortium, Motorola
guaranteed MPS' repayment of $2.0 million in borrowings from a certain bank
lender. Under the terms of the agreement relating to Motorola's guarantee, MPI
granted Motorola a security interest in all of the issued and outstanding
capital stock of MPS, CTM and MPA. Since MPS has defaulted under its obligations
to this bank lender and so long as such event of default continues, Motorola may
have the right to vote and give consents with respect to all of the issued and
outstanding capital of MPS, CTM and MPA (the "Subsidiary Voting Rights"). As a
result, during the continuation of any such event of default, MPI may be unable
to control, at the shareholder level, the direction of the subsidiaries that
generate all of the Company's revenues and hold all of the Company's assets. Any
such loss of control would have a material adverse effect on the Company's
business, prospects, financial condition, results of operations and status as an
ongoing concern and could force the Company to seek protection under Chapter 7
or Chapter 11 of Title 11 of the United States Code. The agreements covering the
Transpac financing, including the convertible debenture and MPI's guarantee of
such MPM indebtedness, contain numerous restrictions and events of default that
have been triggered by the aforementioned actions and would, if they became
effective and operative, materially adversely affect the Company's business,
prospects, results of operations, condition and status as an ongoing concern and
could force the Company to seek protection under Chapter 7 or Chapter 11 of
Title 11 of the United States Code.
High Leverage. The Company is highly leveraged and has substantial debt service
requirements. The Company has $27.8 million in debt obligations as of September
30, 1997. On September 30, 1997, the Company had a total shareholders' deficit
of approximately $38.2 million. The Company's ability to meet its debt service
requirements will be dependent upon the Company's future performance, which will
be subject to financial, business and other factors affecting the operation of
the Company, many of which are beyond its control and depend on the willingness
of the Company's creditors to participate in restructuring the Company's debt.
There can be no assurance that the Company will be able to meet the capital
requirements described above or, if the Company is able to meet such
requirements, that the terms available will be favorable to the Company.
Highly Competitive Industry; Significant Price Competition. The electronic
interconnection technology industry is intensely competitive. The Company
experiences intense competition
27
<PAGE>
worldwide from a number of manufacturers, including Maxtek Components
Corporation, Raytheon Electronic Systems, Hewlett-Packard Company, Advanced
Packaging Technology of America, and MicroModule Systems, all of which have
substantially greater financial resources and production, marketing and other
capabilities than the Company with which to develop, manufacture, market and
sell their products. The Company faces competition from certain of its customers
that have the internal capability to produce products competitive with the
Company's products and may face competition from new market entrants in the
future. In addition, corporations with which the Company has agreements are
conducting independent research and development efforts in areas which are or
may be competitive with the Company. The Company expects its competitors to
continue to improve the performance of their current products and to introduce
new products or new technologies that provide improved performance
characteristics. New product introductions by the Company's competitors could
cause a significant decline in sales or loss of market acceptance of the
Company's existing products which could materially adversely affect the
Company's business, financial condition and results of operations. The Company
is also experiencing significant price competition, which may materially
adversely affect the Company's business, financial condition and results of
operations. The Company believes that to remain competitive in the future it
will need to continue to develop new products and to invest significant
financial resources in new product development. There can be no assurance that
such new products will be developed or that sales of such new products will be
achieved. There can be no assurance that the Company will be able to compete
successfully in the future.
Foreign Currency Fluctuations. The Company has a significant number of assets
located in Singapore, which will likely be liquidated in Singapore dollars. A
substantial portion of the debt obligations in Singapore are also denominated in
the Singapore dollar. Any deficiency balances remaining which are guaranteed by
MPI will be repaid with United States dollars. As a result, the Company's
operating results have been and may continue to be materially adversely affected
by changes in the United States dollar relative to these currencies. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Any appreciation of such currencies relative to the United States
dollar would result in exchange losses for the Company and could have the effect
of increasing the outstanding balance of certain obligations which are
denominated in Singapore dollars (which are guaranteed by MPI). Accordingly,
such effects have had and will continue to have a material adverse effect upon
the business, financial condition and results of operations of the Company.
Technological Change; Importance of Timely Product Introduction; Uncertainty of
Market Acceptance and Emerging Markets. The markets for the Company's products
are subject to technological change and new product introductions and
enhancements. Customers in the Company's markets require products embodying
increasingly advanced electronics interconnection technology. Accordingly, the
Company must anticipate changes in technology and define, develop and
manufacture or acquire new products that meet its customers' needs on a timely
basis. There can be no assurance that the Company will be able to identify,
develop,
28
<PAGE>
manufacture, market, support or acquire new products successfully, that any such
new products will gain market acceptance, or that the Company will be able to
respond effectively to technological changes. If the Company is unable for
technological or other reasons to develop products in a timely manner in
response to changes in technology, the Company's business, financial condition
and results of operations will be materially adversely affected. There can be no
assurance that the Company will not encounter technical or other difficulties
that could in the future delay the introduction of new products or product
enhancements. In addition, new product introductions by the Company's
competitors could cause a decline in sales or loss of market acceptance of the
Company's products, which could materially adversely affect the Company's
business, financial condition and results of operations. Even if the Company
develops and introduces new products, such products must gain market acceptance
and significant sales in order for the Company to achieve its growth objectives.
Furthermore, it is essential that the Company develop business relationships
with and supply products to customers whose end-user products achieve and
sustain market penetration. There can be no assurance that the Company's
products will achieve widespread market acceptance or that the Company will
successfully develop such customer relationships. The Company relies heavily on
one supplier for certain chips ("die") used in the assembly of its MCM's. The
manufacturer of these die has not been able to maintain a consistent supply of
die meeting the customer's quality specifications, nor has this manufacturer
been able to predict with any accuracy its ability to deliver die. Since these
die are engineered by and custom-produced for the Company's customer, the
Company is not in a position to seek other sources of supply. The Company has
been working diligently with its customer and the customer's supplier to seek a
resolution to this issue. Failure by the Company to develop products that gain
widespread market acceptance and significant sales, to develop relationships
with customers whose end-user products achieve and sustain market penetration,
or to favorably resolve the die availability problem, will materially adversely
affect the Company's business, financial condition and results of operations.
The Company's financial performance will depend in significant part on the
continued development of new and emerging markets such as the market for MCM's.
The Company is unable to predict with any certainty any growth rate and
potential size of emerging markets. Accordingly, there can be no assurance that
emerging markets targeted by the Company, such as the market for MCM's, will
develop or that the Company's products will achieve market acceptance in such
markets. The failure of emerging markets targeted by the Company to develop or
the failure by the Company's products to achieve acceptance in such markets
could materially adversely affect the Company's business, financial condition
and results of operations.
Sole or Limited Sources of Supply. Certain raw materials essential for the
manufacture of the Company's products are obtained from a sole supplier or a
limited group of suppliers. In addition, there are a limited number of
qualified suppliers of laminate substrates which are of critical importance to
the production of the Company's MCM products. In the manufacturing process, the
Company also utilizes consigned materials supplied by certain of its customers.
The Company's reliance on sole or a limited group of suppliers and certain
customers for consigned materials involves several risks, including a potential
inability to obtain an adequate supply of required materials and reduced control
over the price, timely delivery, and quality of raw materials. There can be no
assurance that problems with respect to yield and quality of
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<PAGE>
such materials and timeliness of deliveries will not continue to occur.
Disruption or termination of these sources could delay shipments of the
Company's products and could have a material adverse effect on the Company's
business, financial condition and operating results. Such delays could also
damage relationships with current and prospective customers, including customers
that supply consigned materials.
Product Quality and Reliability; Need to Increase Production. The Company's
customers establish demanding and time-consuming specifications for quality and
reliability that must be met by the Company's products. From initial customer
contact to actual qualification for production, which may take as long as three
years, the Company typically expends significant resources. Although the Company
has generally met its customers' quality and reliability product specifications,
the Company has in the past experienced and is currently experiencing
difficulties in meeting some of these standards. Although the recent Company has
addressed past concerns and has resolved a number of quality and reliability
problems, there can be no assurance that such problems will not continue or
recur in the future. If such problems did continue or recur, the Company could
experience delays in shipments, increased costs, delays in or cancellation of
orders and product returns, any of which would have a material adverse effect on
the Company's business, financial condition or results of operations. The
manufacture of the Company's products is complex and subject to a wide variety
of factors, including the level of contaminants in the manufacturing environment
and the materials used and the performance of personnel and equipment. The
Company has in the past experienced lower than anticipated production yields and
written off defective inventory as a result of such factors. The Company must
also successfully increase production to support anticipated sales volumes.
There can be no assurance that the Company will be able to do so or that it will
not experience problems in increasing production in the future. The Company's
failure to adequately increase production or to maintain high quality production
standards would have a material adverse effect on the Company's business,
financial condition and results of operations.
Expansion of Operations. In order to be competitive, the Company must implement
a variety of systems, procedures and controls. The Company expects its
operating expenses to continue to increase. If orders received by the Company
do not result in sales or if the Company is unable to sustain net sales at
anticipated levels, the Company's operating results will be materially adversely
affected until operating expenses can be reduced. The Company's expansion will
also continue to cause a significant strain on the Company's management,
financial and other resources. If the Company is to grow, it must expand its
accounting and other internal management systems, and there can be no assurance
that the Company will be successful in effecting such expansion. Any failure to
expand these areas in an efficient manner at a pace consistent with the
Company's business could have a material adverse effect on the Company's results
of operations. Moreover, there can be no assurance that net sales will increase
or remain at or above recent levels or that the Company's systems, procedures
and controls will be adequate to support the Company's operations. The
Company's financial performance will depend in part on its ability to continue
to improve its systems, procedures and controls.
Environmental Regulations. The Company is subject to a variety of local, state,
federal and foreign governmental regulations relating to the storage, discharge,
handling, emission,
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<PAGE>
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture the Company's products. The Company believes that it is currently
in compliance in all material respects with such regulations and that it has
obtained all necessary environmental permits to conduct its business.
Nevertheless, the failure to comply with current or future regulations could
result in the imposition of substantial fines on the Company, suspension of
production, alteration of its manufacturing processes or cessation of
operations. Compliance with such regulations could require the Company to
acquire expensive remediation equipment or to incur substantial expenses. Any
failure by the Company to control the use, disposal, removal or storage of, or
to adequately restrict the discharge of, or assist in the cleanup of, hazardous
or toxic substances, could subject to the Company to significant liabilities,
including joint and several liability under certain statutes. The imposition of
such liabilities could materially adversely affect the Company's business,
financial condition or results of operations.
In September 1997, an employee of the Company's CTM subsidiary was found pouring
a chemical (10 gallons, which had been diluted with water) into a storm drain
behind CTM's San Diego manufacturing facility. The County of San Diego
conducted an investigation which resulted in a requirement that the Company
perform the following: (1) show technically that the material can safely be
dumped in the sewer system; (2) present a training program for all employees
that handle hazardous materials; and (3) develop a business policy statement
regarding the management of hazardous materials. The Company has met the
County's requirements noted above. As of November 12, 1997, the County has not
imposed, nor has it indicated that it will impose any fines or penalties for
this incident.
Growth Strategy Through Acquisitions. As part of its growth strategy, the
Company has in the past sought and may in the future continue to seek to
increase sales and achieve growth through the acquisition of comparable or
complementary businesses or technologies. The implementation of this strategy
will depend on many factors, including the availability of acquisitions at
attractive prices and the ability of the Company to make acquisitions, the
integration of acquired businesses into existing operations, the expansion of
the Company's customer base and the availability of required capital.
Acquisitions by the Company may result in dilutive issuances of equity
securities, and in the incurrence of debt and the amortization of goodwill and
other intangible assets that could adversely affect the Company's profitability.
Any inability to control and manage growth effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will successfully expand
or that growth and expansion will result in profitability or that the Company's
growth plans through acquisitions will not be inhibited by the Company's current
lack of resources.
Dependence on Key Personnel. The Company's financial performance depends in
part upon its ability to attract and retain qualified management, technical, and
sales and support personnel for its operations. Competition for such personnel
is intense, and there can be no assurance that the Company will be successful in
attracting or retaining such personnel. The loss of any key employee, the
failure of any key employee to perform in his current position or the Company's
inability to attract and retain skilled employees, as needed, could materially
adversely affect the Company's business, financial condition and results of
operations.
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<PAGE>
Nasdaq Electronic Bulletin Board Listing Requirements. The Company was delisted
from the Nasdaq National Market on March 13, 1997, at which date the Company's
Common Stock began trading on the Nasdaq Electronic Bulletin Board. The Company
will be subject to continuing requirements to be listed on the Nasdaq Electronic
Bulletin Board. There can be no assurance that the Company can continue to meet
such requirements. The price and liquidity of the Common Stock may be
materially adversely affected if the Company is unable to meet such requirements
in the future. There can be no assurance that the Company will be able to
requalify for listing on the Nasdaq National Market.
Volatility of Stock Price. The Company believes that factors such as
announcements of developments related to the Company's business, fluctuations in
the Company's financial results, general conditions or developments in the
semiconductor and personal computer industry and the general economy,
relationships with creditors, sales of the Company's Common Stock into the
marketplace, the ability of the Company to sell its stock on an exchange or
over-the-counter, an outbreak of hostilities, natural disasters, announcements
of technological innovations or new products or enhancements by the Company or
its competitors, developments in the Company's relationships with its customers
and suppliers, or a shortfall or changes in revenue, gross margins or earnings
or other financial results from analysts' expectations could cause the price of
the Company's Common Stock to fluctuate, perhaps substantially. In recent years
the stock market in general, and the market for shares of small capitalization
stocks in particular, including the Company, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. There can be no assurance that the market price of the
Company's Common Stock will not continue to experience significant fluctuations
in the future, including fluctuations that are unrelated to the Company's
performance.
Net Operating Loss. The Company's decision to discontinue its multilayer
ceramic operations was the principal factor contributing to its 1996 net loss of
$41.8 million. The Company has incurred further losses in the liquidation of
its pressed ceramic operations of $8.0 million. As of September 30, 1997, the
Company had a working capital deficiency of $35.0 million, which included debt
obligations which are in default and due on demand of $14.8 million, the current
portion of long-term debt of $3.2 million, plus the net current liabilities of
discontinued operations of $13.6 million (this latter figure includes $4.2
million line of credit borrowings which are due on demand and $1.2 million of
debt obligations which are in default and thus, due on demand).
Risk of Limitation of Use of Net Operating Loss Carryforwards. As of December
31, 1996, the Company had net operating loss carryforwards of approximately
$11,840,000 for federal income tax purposes, which may be utilized through 2000
to 2011, and approximately $836,000 for state income tax purposes, which may be
utilized through 2000 to 2011 (subject to certain limitations). As of December
31, 1996, the Company's deferred tax assets, consisting primarily of the net
operating loss carryforwards, have been fully reserved since the assets are not
more likely than not realizable. The conversion of the $2.8 million of
convertible debentures issued in October, 1996 and certain other equity
transactions resulted in an "ownership change" as defined in Section 382 of the
Internal Revenue Code of 1986, as amended. As a result, the Company's use of
its net operating loss carryforwards to offset taxable income in any post-change
period is subject to certain specified annual limitations. There can be no
assurance as to the specific amount of the net operating loss carryforwards, if
any, available in any post-change year since the calculation is based upon fact
dependent formula.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Due to the closure of the Company's Singapore operations, various
creditors have instituted legal actions against the Company and its
subsidiaries in order to recover amounts due. In addition, numerous
other creditors and parties to contracts have threatened or initiated
litigation to recoup their loans and/or investments. These claims will
not be fully satisfied through the liquidation of assets in Singapore.
If these claims are not favorably resolved, they will have a material
adverse effect on the Company's financial condition, results of
operations and ability to continue as a going concern because the
Company has guaranteed substantially all of these debts.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
As of September 30, 1997, the Company and its subsidiaries were in
default on most of their debt obligations, which total $20.3 million
due to non-payment of principal or interest payments due. The amount
above includes MPM's $9.0 million in debentures owing to Transpac,
which are in default under the terms of the debentures in part due to
non-payment of interest which was due on December 31, 1996. The
repayment of the debentures and other debt in default have been
guaranteed by MPI.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on August
21, 1997. The following items were voted upon by the shareholders with
items 1, 2 and 4 being approved and item 3 being not approved.
<TABLE>
<CAPTION>
Votes
Against or Votes Broker
Votes For Withheld Abstained Non-Votes
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
(1) Election of the following persons, who were
the only nominees, as Directors to hold
office until the next Annual Meeting or
until their successors are elected and
qualified:
Lewis Solomon 8,870,047 258,408
Frank L. Howland 8,889,047 239,408
Gary S. Stein 8,889,047 239,408
Anthony J. A. Bryan 8,889,047 239,408
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Votes
Against or Votes Broker
Votes For Withheld Abstained Non-Votes
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
(2) Amendment to the Company's 1993 Stock
Option/Stock Issuance Plan including:
(i) increase the number of shares of
Common Stock authorized for issuance
over the term of such plan by an additional
4,000,000 shares; (ii) amend the
eligibility provisions of the Discretionary
Option Grant and Stock Issuance Programs
to make non-employee Board members
eligible to receive option grants and
direct stock issuances pursuant to such
programs; and (iii) amend the Automatic
Option Grant Program to among other things
(a) provide for special one-time options
grants to be made to those individuals
then serving or newly-appointed as non-employee
Board members on November 21, 1996, and
(b) increase the number of shares of Common
Stock subject to automatic option grants to
be made to new and continuing non-employee
Board members on and after November 21, 1996. 4,232,342 508,321 71,360
(3) Approval of an increase in the Company's
authorized but unissued shares of capital
stock to consist of 35,000,000 additional
shares of Common Stock for a total of
50,000,000 shares of Common Stock and
10,000,000 shares of undesignated Preferred
Stock. 4,211,517 525,596 75,360 4,315,832
(4) Ratification of BDO Seidman, LLP as the
Company's independent accountants for the
fiscal year ending December 31, 1996 8,998,372 78,983 51,100
</TABLE>
Item 5. Other Information
On October 14, 1997, the Company announced the appointment of Andrew K.
Wrobel to the position of President and Chief Executive Officer. Mr.
Wrobel was elected to the Board of Directors on November 4, 1997. Mr.
Wrobel replaced Alfred Jay Moran, Jr., who has served as interim
President and Chief Executive Officer since November 14, 1996.
34
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
The following report on Form 8-K was filed during the quarter ended
September 30, 1997:
Report on Form 8-K dated July 10, 1997 was filed with the Securities
and Exchange Commission on July 18, 1997, to report that The
Development Bank of Singapore appointed a Receiver and Manager to
liquidate the assets of Microelectronic Packaging (S) Pte. Ltd.,
which is a wholly owned subsidiary of the Registrant, on July 10,
1997.
The Exhibits filed as part of this report are listed below.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.101 Amendment dated July 11, 1997 to that certain Promissory
Note dated May 13, 1997 between Microelectronic Packaging
America (borrower) and Citicorp USA, Inc. (lender).
10.102 Standard Lease By and Between John Hancock Mutual Life
Insurance Company, as Lessor, and Microelectronic
Packaging, Inc., as Lessee, dated September 2, 1997.
10.103 Second Amendment dated September 9, 1997 to that certain
Promissory Note dated May 13, 1997, as amended by
Amendment dated July 11, 1997, between Microelectronic
Packaging America (borrower) and Citicorp USA, Inc.
(lender).
10.104 Employment agreement dated October 6, 1997, between
Microelectronic Packaging, Inc. and Andrew Wrobel.
10.105 Agreement dated October 8, 1197 between ORIX Leasing
Singapore Limited and Microelectronic Packaging, Inc.
11.1 Computation of Net Income (Loss) per Common Share
27.1 Financial Data Schedule
</TABLE>
35
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
MICROELECTRONIC PACKAGING, INC.
-------------------------------
(Registrant)
Date: November 11, 1997 By: /s/ ANDREW K. WROBEL
----------------- -------------------------------------
ANDREW K. WROBEL
PRESIDENT & CHIEF EXECUTIVE OFFICER
DATE: November 11, 1997 BY: /s/ DENIS J. TRAFECANTY
----------------- -------------------------------------
DENIS J. TRAFECANTY
SENIOR VICE PRESIDENT &
CHIEF FINANCIAL OFFICER
36
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<C> <S>
10.101 Amendment dated July 11, 1997 to that certain Promissory Note dated
May 13, 1997 between Microelectronic Packaging America (borrower)
and Citicorp USA, Inc. (lender).
10.102 Standard Lease By and Between John Hancock Mutual Life Insurance
Company, as Lessor, and Microelectronic Packaging, Inc., as Lessee,
dated September 2, 1997.
10.103 Second Amendment dated September 9, 1997 to that certain Promissory
Note dated May 13, 1997, as amended by Amendment dated July 11,
1997, between Microelectronic Packaging America (borrower) and
Citicorp USA, Inc. (lender).
10.104 Employment agreement dated October 6, 1997, between Microelectronic
Packaging, Inc. and Andrew Wrobel.
10.105 Agreement dated October 8, 1197 between ORIX Leasing Singapore
Limited and Microelectronic Packaging, Inc.
11.1 Computation of Net Income (Loss) per Common Share
27.1 Financial Data Schedule
</TABLE>
37
<PAGE>
EXHIBIT 10.101
AMENDMENT
---------
This Amendment, dated as of July 11, 1997, is made and entered into between
Microelectronic Packaging America (the "Borrower") and Citicorp USA, Inc. (the
"Lender").
AMENDMENT
---------
WHEREAS, the Borrower has executed that certain Promissory Note dated May
13,1997 (the "Note"); and
WHEREAS, the Borrower and Lender desire to amend the Note in certain
respects;
NOW THEREFORE, in consideration of the premises and of the mutual
agreements, representations and warranties herein set forth, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Amendments. As of July 11, 1997, the Note is amended as
----------
follows:
(a) The third line of the first paragraph of the Note is amended by
deleting the date "July 11, 1997" and substituting therefore the date "September
9, 1997".
(b) The seventh line of the first paragraph of the Note is amended by
deleting the interest rate "6.75%" and substituting therefor the interest rate
"6.72%".
(c) The penultimate line of the first paragraph of the Note is amended by
deleting the interest rate "8.75%" and substituting therefor the interest rate
"8.72%".
SECTION 2. Legal Obligation. The Borrower represents and warrants to the
----------------
Lender that this Amendment has been duly authorized, executed and delivered on
its behalf, and that the Note, as amended hereby, constitutes a legal, valid and
binding obligation of the Borrower, enforceable against the Borrower in
accordance with its terms.
SECTION 5. Ratification. Except as expressly amended hereby, the Note
------------
shall remain in full force and effect. The Note, as amended hereby, and all
rights and powers created thereby or thereunder, are in all respects ratified
and confirmed.
SECTION 6. Miscellaneous.
-------------
(a) The Note and this Amendment shall be read, taken and
1
<PAGE>
construed as one and the same instrument.
(b) This Amendment shall be governed by, and construed in accordance with,
the laws of the State of New York.
(c) Any references in the Note to "this Promissory Note", "hereunder",
"herein" or words of like import referring to the Note, shall mean and be a
reference to the Note as amended hereby.
(d) This Amendment may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed shall be deemed an original and all of which taken together shall
constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
MICROELECTRONIC PACKAGING AMERICA
By /s/ Denis J. Trafecanty
------------------------------
Title: Chief Financial Officer
CITICORP USA, INC.
By
------------------------------
Title: Vice President
2
<PAGE>
EXHIBIT 10.102
STANDARD LEASE
9577 CHESAPEAKE DRIVE
By and Between
John Hancock Mutual Life Insurance Company,
a Massachusetts corporation, as Lessor
and
Microelectronic Packaging, Inc.
a California corporation, as Lessee
Dated: September 2, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Basic Lease Provisions....................................... 1
2. Premises, Parking and Common Areas........................... 1
3. Term......................................................... 2
4. Rent......................................................... 2
5. Security Deposit............................................. 5
6. Permitted Use................................................ 5
7. Maintenance, Repairs, Alterations and Common Area Services... 6
8. Insurance; Indemnity......................................... 7
9. Damage or Destruction........................................ 9
10. Real Property Taxes.......................................... 10
11. Utilities.................................................... 11
12. Assignment and Subletting.................................... 11
13. Default; Remedies............................................ 13
14. Condemnation................................................. 15
15. Broker's Fee................................................. 15
16. Estoppel Certificate......................................... 15
17. Lessor's Liability........................................... 16
18. Severability................................................. 16
19. Interest on Past-due Obligations............................. 16
20. Time of Essence.............................................. 16
21. Additional Rent.............................................. 16
22. Incorporation of Prior Agreements; Amendments................ 16
23. Notices...................................................... 16
24. Waivers...................................................... 16
25. Recording.................................................... 16
26. Holding Over................................................. 16
27. Covenants and Conditions..................................... 16
28. Binding Effect; Choice of Law................................ 16
29. Subordination................................................ 17
30. Attorneys' Fees.............................................. 17
31. Lessor's Access.............................................. 17
32. Auctions..................................................... 18
33. Signs........................................................ 18
34. Merger....................................................... 18
35. Consents..................................................... 18
36. Guarantor.................................................... 18
37. Quiet Possession............................................. 18
38. Options...................................................... 18
39. Security Measures--Lessor's Reservations..................... 19
40. Easements.................................................... 19
41. [INTENTIONALLY DELETED]...................................... 19
42. Lessor's Right to Perform.................................... 19
43. Limitation on Lessor's Liability............................. 20
44. Toxic Materials.............................................. 20
45. Authority.................................................... 21
46. Conflict..................................................... 22
47. No Offer..................................................... 22
48. Lender Modification.......................................... 22
49. Multiple Parties............................................. 22
50. Tenant Improvements.......................................... 22
51. Option To Extend............................................. 22
52. Attachments.................................................. 23
</TABLE>
<PAGE>
STANDARD LEASE
1. Basic Lease Provisions ("Basic Lease Provisions").
1.1 Parties. This Lease, dated, for reference purposes only, September 2,
1997 (this "Lease"), is made by and between John Hancock Mutual Life Insurance
Company, a Massachusetts corporation, (herein called "Lessor"), and
Microelectronic Packaging, Inc., a California corporation (herein called
"Lessee").
1.2 Premises. A total of approximately Twenty-Four Thousand Eight Hundred
Thirty-Eight (24,838) rentable square feet, more or less, as defined further in
paragraph 2 and as shown on Exhibit A hereto (the "Premises").
1.3 Building. Commonly described as being located at 9577 Chesapeake Drive
in the City of San Diego, County of San Diego, State of California, more
particularly described on Exhibit B hereto, and as defined in paragraph 2.
1.4 Permitted Use. Computer microchip module and electronic component
assembly and test use, and ceramic thick film electronic circuit fabrication,
consistent with the character of a first class industrial/office building,
subject to paragraph 6.
1.5 Term. Five (5) years and two (2) months, commencing as set forth in
paragraph 3.1.
1.6 Base Rent. Sixteen Thousand One Hundred Forty-Four and 70/100 Dollars
($16,144.70) per month, payable on the 1st day of each month, in advance, per
paragraph 4.1.
1.7 Base Rent Increase. The monthly Base Rent payable under paragraph 1.6
above shall be adjusted as provided in paragraph 4.1 below.
1.8 Rent Paid Upon Execution. Sixteen Thousand One Hundred Forty-Four and
70/100 Dollars ($16,144.70), an amount to be applied to the first month's Base
Rent.
1.9 Security Deposit. Sixteen Thousand One Hundred Forty-Four and 70/100
Dollars ($16,144.70).
1.10 Lessee's Share of Operating Expenses and Lessee's Tax Share. Forty-
eight and fifty-eight hundredths percent (48.58%), subject to paragraph 4.2.
2. Premises, Parking and Common Areas.
2.1 Premises. The Premises are a portion of a building, herein sometimes
referred to as the "Building" identified in paragraph 1.3 of the Basic Lease
Provisions. "Building" shall include adjacent parking structures used in
connection therewith. The Premises, the Building, the Common Areas, the land
upon which the same are located, along with all other buildings and improvements
thereon or thereunder, are herein collectively referred to as the "Building
Project." Lessor hereby leases to Lessee and Lessee leases from Lessor for the
term, at the rental, and upon all of the conditions set forth herein, the real
property referred to in the Basic Lease Provisions, paragraph 1.2, as the
"Premises," including rights to the Common Areas as hereinafter specified.
2.2 Vehicle Parking. So long as Lessee is not in default, and subject to
the rules and regulations attached hereto as Exhibit C, and as established by
Lessor from time to time, provided that such amended rules and regulations are
not discriminatory and do not contravene or contradict the terms of this Lease,
Lessee shall be entitled to use at no charge seventy-two (72) parking spaces,
which shall be reserved spaces, as indicated on Exhibit D hereto. If Lessee
commits, permits or allows any of the prohibited activities described in the
Lease or the rules then in effect with regard to the use of parking, then Lessor
shall have the right, without notice, in addition to such other rights and
remedies that it may have, to remove or tow away the vehicle involved and charge
the cost to Lessee, which cost shall be immediately payable upon demand by
Lessor. Lessor shall, as an Operating Expense, cause the asphalt parking areas
to be re-slurry sealed within the first six months of the Lease term.
2.3 Common Areas - Definition. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Building Project that are provided and designated by the Lessor from time
to time for the general non-exclusive use of Lessor, Lessee and of other lessees
of the Building Project and their respective employees, suppliers, shippers,
customers and invitees, including, but not limited to, any and all common
entrances, lobbies, corridors, stairways and stairwells, public restrooms,
elevators, escalators, parking areas to the extent not otherwise prohibited by
this Lease, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, ramps, driveways, landscaped areas and decorative walls.
2.4 Common Areas - Rules and Regulations. Lessee agrees to abide by and
conform to the rules and regulations attached hereto as Exhibit C with respect
to the Building Project and Common Areas, and to cause its employees, suppliers,
shippers, customers, and invitees to so abide and conform. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and management
of the Common Areas and shall have the right, from time to time, to modify,
amend and enforce said rules and regulations; provided, however, that such
amended rules and regulations are not discriminatory and do not contravene or
contradict the terms of this Lease. Lessor shall not be responsible to Lessee
for the non-compliance with said rules and regulations by other lessees, their
agents, employees and invitees of the Building Project.
<PAGE>
2.5 Common Areas - Changes. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
2.5.1 To make changes to the Building interior (but not to the interior
of the Premises) and exterior and Common Areas, including, without limitation,
changes in the location, size, shape, number and appearance thereof, including
but not limited to any and all lobbies, windows, stairways, air shafts,
elevators, escalators, restrooms, driveways, entrances, parking spaces, parking
areas, loading and unloading areas, ingress, egress, discretion of traffic,
decorative walls, landscaped areas and walkways; provided, however, Lessor shall
at all times provide the parking facilities required by applicable law;
2.5.2 To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
2.5.3 To designate other land and improvements outside the boundaries
of the Building Project to be a part of the Common Areas, provided that such
other land and improvements have a reasonable and functional relationship to the
Building Project;
2.5.4 To add additional buildings and improvements to the Common Areas;
2.5.5 To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Building Project, or any portion
hereof;
2.5.6 To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Building Project as Lessor may, in
the exercise of sound business judgment, deem to be appropriate.
2.5.7 Lessor shall use commercially reasonable efforts to conduct all
of Lessor's activities in the Premises in a manner designed to minimize
interference to Lessee and Lessee's use of the Premises.
3. Term.
3.1 Term; Free Rent. The term of this Lease shall be five (5) years and two
(2) months, commencing upon the Commencement Date. The "Commencement Date" of
this Lease shall be September 1, 1997.
3.2 Delay in Possession. Notwithstanding said Commencement Date, if for any
reason Lessor cannot deliver possession of the Premises to Lessee, Lessor shall
not be subject to any liability therefor, nor shall such failure affect the
validity of this Lease or the obligations of Lessee hereunder or extend the term
hereof; in such case, Lessee shall not be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease, except as may be
otherwise provided in this Lease, until possession of the Premises is tendered
to Lessee, as hereinafter defined. Notwithstanding the foregoing, Lessor will
diligently attempt to deliver the Premises immediately upon full execution and
delivery of the Lease. Notwithstanding the foregoing, in the event that Lessor
fails to give possession of the Premises to Lessee by the sixtieth (60th) day
following the Commencement Date (the "Delay Date"), Lessee, at its election and
without waiving any other rights it may have, may as its sole remedy, in
Lessee's sole determination, terminate this Lease upon unconditional written
notice to Lessor within ten (10) days after such 60-day period, in which event
Lessor shall return any payments made by Lessee to Lessor within five (5)
business days of such termination.
4. Rent.
4.1 Base Rent. Except as may be otherwise expressly provided in this Lease,
Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph
1.6 of the Basic Lease Provisions as adjusted, without offset or deduction.
Lessee shall pay Lessor upon execution hereof the advance Base Rent described in
paragraph 1.8 of the Basic Lease Provisions. Rent for any period during the
term hereof which is for less than one month shall be prorated based upon the
actual number of days of the calendar month involved. Notwithstanding any
provision to the contrary in this Lease, during the months of September and
October 1997, Lessee shall not be responsible to pay any Base Rent, Operating
Expenses, or Applicable Taxes. Base Rent shall be adjusted each November 1, as
follows:
<TABLE>
<CAPTION>
Lease Year Base Rent
---------- ---------
<S> <C>
November 1, 1997-October 31, 1998 $16,144.70
November 1, 1998-October 31, 1999 $17,386.60
November 1, 1999-October 31, 2000 $18,628.50
November 1, 2000-October 31, 2001 $19,870.40
November 1, 2001-October 31, 2002 $21,112.30
</TABLE>
-2-
<PAGE>
4.2 Definitions. The following definitions shall apply to this Article 4:
4.2.1 "Lessee's Share" is defined, for purposes of this Lease, as the
percentage set forth in paragraph 1.10 of the Basic Lease Provisions, which
percentage has been determined by dividing the approximate rentable square
footage of the Premises by the total approximate square footage of the rentable
space contained in the Building Project. It is understood and agreed that the
square footage figures set forth in the Basic Lease Provisions are
approximations which Lessor and Lessee agree are reasonable and shall not be
subject to revision except in connection with an actual change in the size of
the Premises or a change in the space available for lease in the Building
Project, provided, however, that if Lessor elects, in its discretion, to
remeasure the Premises, such remeasurement shall be performed by a qualified
architect selected by Lessor in accordance with the then applicable standards of
the Building Owners and Managers Association. If such remeasurement indicates
that the rentable square footage of the Premises is other than 24,838 square
feet, then the Base Rent and Lessee's Share will be adjusted proportionately.
It is further agreed that Lessee shall in no event be entitled to a credit to or
adjustment of Lessee's Share of Operating Expenses payable hereunder, even if
the ratio of Operating Expenses actually paid by Lessee compared to total
Operating Expenses actually paid by all lessees of the Building Project exceeds
Lessee's Share (as it might, by way of example only and not limitation, if some
leases of the Building Project are made on a "full gross" basis, in which case
the lessees under such leases would not directly pay any portion of the
Operating Expenses or increase therein).
4.2.2 "Operating Expenses" is defined, for purposes of this Lease, to
include all costs, if any, incurred by Lessor in the exercise of its reasonable
discretion, for:
4.2.2.1 The operation, repair, maintenance, and replacement, in neat,
clean, safe, good order and condition, of the Building Project, including, but
not limited to, the following:
4.2.2.1.1 The Common Areas, including their surfaces, coverings,
decorative items, carpets, drapes and window coverings, and including parking
areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways,
stairways, parkways, driveways, landscaped areas, striping bumpers, irrigation
systems, Common Area lighting facilities, building exteriors and roofs, fences
and gates;
4.2.2.1.2 Any and all heating, air conditioning, plumbing,
electrical systems, life safety equipment, telecommunication and other equipment
used in common by, or for the benefit of, lessees or occupants of the Building
Project, including elevators and escalators, lessee directories, fire detection
systems including sprinkler system maintenance and repair.
4.2.2.2 Trash disposal, janitorial and security services;
4.2.2.3 Any other service to be provided by Lessor that is elsewhere
in this Lease stated to be an "Operating Expense";
4.2.2.4 The cost of the premiums for the liability and property
insurance policies to be maintained by Lessor under paragraph 8 hereof;
4.2.2.5 The amount of the real property taxes to be paid by Lessor
under paragraph 10.1 hereof;
4.2.2.6 The cost of water, sewer, gas, electricity, and other publicly
mandated services to the Common Areas;
4.2.2.7 Labor, salaries and applicable fringe benefits and costs,
materials, supplies and tools, used in maintaining and/or cleaning the Building
Project and accounting and a management fee attributable to the operation of the
Building Project.
4.2.2.8 Replacing and/or adding improvements mandated by any
governmental agency and any repairs or removals necessitated thereby, including
without limitation, for seismic safety or compliance with the American
Disabilities Act, such costs to be amortized over the useful life of the
applicable equipment or capital improvements according to Federal income tax
regulations or guidelines for depreciation thereof (including interest on the
unamortized balance as is then reasonable in the judgment of Lessor's
accountants);
4.2.2.9 Replacements of equipment or capital improvements, as
amortized over such equipment or improvement's useful life for depreciation
purposes according to federal income tax guidelines;
For purposes of this Lease, Operating Expenses shall not include taxes
covered under paragraph 4.2.3 below, interest expense (except as provided in
paragraph 4.2.2.8 above), leasing commissions, depreciation on the improvements
contained in the Building (except as provided in paragraph 4.2.2.8 above), the
cost of capital expenditures not included within paragraphs 4.2.7.8 or 4.2.2.9
above, any costs which are paid by any tenant directly to third parties or as to
which Lessor is otherwise reimbursed by any other tenant, third party or by
insurance proceeds, legal fees, brokerage commissions, advertising costs and
other related expenses incurred in connection with the leasing of the Building,
repairs, alterations, additions, improvements or replacements made to comply
with any requirements of any governmental authority in effect as of the
Commencement Date; damage and repairs attributable to condemnation, fire or
other casualty covered under any insurance policy (above any "deductible"
portion thereof) carried by Lessor in connection with the Building, damage and
repairs covered under any warranty or insurance policy carried by Lessor in
connection with the Building or the Premises, damage and repairs necessitated by
the gross negligence or willful misconduct of Lessor or Lessor's employees,
contractors or agents, executive salaries of Lessor, salaries of service
personnel to the extent that such service personnel perform services not in
connection with the management, operation,
-3-
<PAGE>
repair or maintenance of the Building, Lessor general overhead expenses not
related to the Building or the Common Areas, payments of principal or interest
on any mortgage or other encumbrance including ground lease payments and points,
commissions and legal fees associated with financing, legal fees, accountants'
fees and other expenses incurred in connection with disputes with Lessee or
other tenants or occupants of the Building or associated with the enforcement of
any leases or defense of Lessor's title to or interest in the Building or any
part thereof, costs (including permit, license and inspection fees) incurred in
renovating or otherwise improving, decorating, painting or altering space for
other tenants or other occupants or vacant space in the Building, costs incurred
due to violation by Lessor or any other tenant in the Building of the terms and
conditions of any lease, charitable or political contributions, any cost or
expense related to the testing for, removal, transportation or storage of
Hazardous Materials from the Building, the underlying property or Premises which
are caused by Lessor or a tenant of the Building, interest, penalties or other
costs arising out of Lessor's failure to make timely payments of its
obligations, and overhead and profit paid to subsidiaries or affiliates of
Lessor for management or other services for the Premises to the extent that the
costs of the services, supplies or materials exceed the competitive costs of the
services, supplies or materials if they were not provided by a subsidiary or an
affiliate. The computation of Operating Expenses shall be made in accordance
with fair and reasonable accounting principles customarily applied by owners of
similar properties in San Diego, California.
4.2.3 "Applicable Taxes" shall mean all taxes, assessments and charges
levied on or with respect to the Building, the Building Project, or any personal
property of Lessor used in the operation thereof and payable by Lessor.
Applicable Taxes shall include, without limitation, all general real property
taxes and general and special assessments, fees, assessments or charges for
transit, police, fire, housing, other governmental services, or purported
benefits of the Building, service payments in lieu of taxes, and any tax, fee or
excise on the act of entering into this Lease or on the use or occupancy of the
Building or any part thereof, or on the rent payable under any lease or in
connection with the business of renting space in the Building, that are now or
hereafter levied on or assessed against Lessor by, or payable by Lessor as a
result of, the requirements of the United States of America, the State of
California, or any political subdivision, public corporation, district or other
political or public entity, and shall also include any other tax, fee or other
excise, however described, that may be levied or assessed as a substitute for,
or as an addition to, in whole or in part, any other taxes. Applicable Taxes
shall not include the following: (i) any state, local, federal, personal,
franchise, capital stock, inheritance, estate, gift or corporate income tax, or
any other tax measured by the income of Lessor; (ii) any transfer taxes; (iii)
interest on taxes or penalties resulting from Lessor's failure to pay taxes,
except to the extent such failure is due to Lessee's failure to pay such taxes
to Lessor when provided under the Lease; (iv) any increases in taxes
attributable to additional improvements to the Building unless such improvements
are constructed for the benefit of all the tenants of the Building; (v) any
assessments for public improvements or any taxes which are essentially payments
to a governmental agency for the right to make improvements to the building or
surrounding area, to the extent such assessments are not in effect as of the
date of the lease and have not received the prior written consent of Lessee; or
(vi) any environmental tax, surcharge or other fee affecting the premises due to
Lessor's activities with respect to Hazardous Materials, as opposed to general,
area-wide taxes or surcharges with respect to the remediation or testing for
Hazardous Materials). Applicable Taxes shall also include reasonable legal
fees, costs and disbursements incurred in connection with proceedings to
contest, determine or reduce Applicable Taxes. Notwithstanding, anything to the
contrary in this Lease, in the event that any Applicable Taxes are payable, or
may at the option of the taxpayer be paid in installments, such Applicable Taxes
shall be deemed to have been paid in installments, regardless of the method of
actual payment by Lessor, and Lessee's Share of such Applicable Taxes shall only
include those installments which would become due and payable during the Term.
4.3 Payment of Lessee's Share. Lessee shall pay to Lessor during the term
hereof, in addition to the Base Rent, Lessee's Share, as herein defined, of all
Operating Expenses and Applicable Taxes, as herein defined, during each calendar
year of the term of this Lease.
4.4 Time for Payment. The payments contemplated under paragraph 4.3 shall be
made as follows:
4.4.1 During each month of each calendar year of the Lease, Lessee shall
pay to Lessor, with each installments of Base Rent, such amounts are estimated
by Lessor to be one-twelfth (1/12th) of the amounts payable pursuant to
paragraph 4.3 with respect to such year; provided, however, that Lessor may, by
written notice to Lessee, revise its estimates, no more than two (2) times per
calendar year, for such year and subsequent payments during the remainder of the
year shall be based upon such revised estimate.
4.4.2 With reasonable promptness after the end of each calendar year,
Lessor shall deliver to Lessee a statement setting forth the actual Operating
Expenses and Applicable Taxes for such calendar year and a comparison of any
amounts payable under paragraph 4.3 with the estimated payments made by Lessee.
If the amounts payable under paragraph 4.3 are less than the estimated payments
made by Lessee with respect to a given lease year, the statement shall be
accompanied by a refund of the excess by Lessor, or, at Lessor's election, and
provided that the Lease has not expired or otherwise terminated, a notice that
Lessor shall credit the excess to the next succeeding monthly installments of
the Base Rent. If the amounts payable under paragraph 4.3 are more than the
estimated payments made by Lessee with respect to such year, Lessee shall pay
the deficiency to Lessor within thirty (30) days after delivery of such
statement. Statements provided by Lessor shall be final and binding upon
Lessee, if Lessee fails to contest the same within ninety (90) days after the
date of delivery to Lessee.
4.5 Partial Year. If the Commencement or Expiration Date shall occur on a
date other than the first or last day of a calendar year, Lessee's Share of
Operating Expenses and Applicable Taxes for such year shall be prorated
according to the ratio that the number of days during said year that the Lease
was in effect bears to 365.
4.6 Vacancy Adjustment. Notwithstanding anything to the contrary in the
Lease, if during any year of the Lease the Building is less than 95% occupied,
for the purposes of computing Lessee's Share of Operating Expenses for said
year, those Operating Expenses which vary based upon occupancy levels shall be
adjusted as though the Building were 95% occupied; provided, however, in no
event shall the aggregate amount collected by Lessor from all tenants in
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the Building exceed the actual Operating Expenses for said year.
4.7 Lessee's Right to Audit. If, within ninety (90) days of Lessee's receipt
of Lessor's annual statement of Operating Expenses, Lessee notifies Lessor that
Lessee desires to audit or review Lessor's statement, Lessor shall cooperate
with Lessee to permit such audit or review during normal business hours and at
Lessee's sole cost and expense, unless such audit reveals a discrepancy of at
least five percent (5%) of Lessee's Share of Operating Expenses and Applicable
Taxes, in which event Lessor shall pay the costs and expenses of such audit. In
the event that such audit reveals discrepancy in Lessee's favor, Lessor shall
credit the amount of such discrepancy to the next payment(s) of Base Rent
falling due under the terms of this Lease. If the Term of this Lease has
expired or otherwise terminated, Lessor shall pay Lessee the amount of such
discrepancy within ten (10) days of the completion of the audit.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the
Security Deposit set forth in paragraph 1.9 of the Basic Lease Provisions as
security for Lessee's faithful performance of Lessee's obligations hereunder. If
Lessee fails to pay rent or other charges due hereunder beyond any applicable
cure period, or otherwise defaults with respect to any provision of this Lease
beyond any applicable cure period, Lessor may use, apply or retain all or any
portion of said deposit for the payment of any rent or other charge or default
for the payment of any other sum to which Lessor may become obligated by reason
of Lessee's default, or to compensate Lessor for any loss or damage which Lessor
may suffer thereby. If Lessor so uses or applies all or any portion of said
deposit, Lessee shall within ten (10) days after written demand therefor deposit
cash with Lessor in an amount sufficient to restore said deposit to the full
amount then required of Lessee. Lessor shall not be required to keep said
security deposit separate from its general accounts. If Lessee performs all of
the Lessee's obligations hereunder, said deposit, or so much thereof as has not
heretofore been applied by Lessor, shall be returned, without payment of
interest or other increment for its use, to Lessee (or, at Lessor's option, to
the last assignee, if any, of Lessee's interest hereunder) at the expiration of
the term hereof or earlier termination of this Lease, and after Lessee has
vacated the Premises. No trust relationship is created herein between Lessor and
Lessee with respect to said Security Deposit, and under no circumstances shall
Lessor be required to keep the Security Deposit separate from its other funds or
in an interest-bearing account, nor shall Lessee be entitled to any interest on
such amounts regardless of whether or not the Security Deposit is deposited in
an interest-bearing account.
6. Permitted Use.
6.1 Permitted Use. The Premises shall be used and occupied only for the
purpose set forth in paragraph 1.4 of the Basic Lease Provisions and for no
other purpose.
6.2 Compliance with Law.
6.2.1 Lessor makes no representation or warranty to Lessee regarding the
condition of the Premises or with respect to whether or not the Premises, or the
use for which Lessee will occupy the Premises, will violate any covenants or
restrictions of record, or any applicable building code, regulation, law or
ordinance in effect on the Lease term Commencement Date or at any other time.
6.2.2 Lessee shall, at Lessee's expense, promptly comply with all
applicable statutes, ordinances, rules, regulations, orders, covenants,
conditions and restrictions of record and requirements of any fire insurance
underwriters or rating bureaus, now in effect or which may hereafter come into
effect, whether or not they reflect a change in policy from that now existing,
during the term or any part of the term hereof, relating in any manner to the
Premises and the occupation and use by Lessee of the Premises. Lessee shall
conduct its business in a lawful manner and shall not use or permit the use of
the Premises or the Common Areas in any manner that will tend to create waste or
a nuisance or shall tend to disturb other occupants of the Building Project.
Without limiting the foregoing, Lessee shall not allow the emission from the
Premises of odors or noise inconsistent with the operation of a first-class
office building, as reasonably determined by Lessor.
6.3 Condition of Premises.
6.3.1 Lessor shall deliver the Premises to Lessee on the Lease
Commencement Date (unless Lessee is already in possession) in their current
condition, AS-IS, but makes no representation or warranty regarding the
condition of the Premises, except that Lessor represents and warrants that, as
of the Commencement Date, the roof of the Building and all HVAC, electrical and
plumbing systems are in good working condition. Lessor shall not be responsible
to construct any tenant improvements in the Premises.
6.3.2 Except as otherwise provided in this Lease, Lessee hereby accepts
the Premises and the Building Project in their condition existing as of the
Lease Commencement Date or the date that Lessee takes possession of the
Premises, whichever is earlier, subject to all applicable zoning, municipal,
county and state laws, ordinances and regulations governing and regulating the
use of the Premises, and any easements, covenants or restrictions of record, and
accepts this Lease subject thereto and to all matters disclosed thereby and by
any exhibits attached hereto. Lessee acknowledges that it has satisfied itself
by its own independent investigation that the Premises are suitable for its
intended use, and that neither Lessor nor Lessor's agent or agents has made any
representation or warranty as to the present or future suitability of the
Premises, Common Areas, or Building Project for the conduct of Lessee's
business. Notwithstanding the foregoing, if, during the first twenty (20) days
of the term hereof, Lessee notifies Lessor of any matters which Lessor
reasonably agrees constitute defects in the condition of the Premises, Lessee
shall have no obligation to repair such defects upon the expiration or earlier
termination of this Lease.
7. Maintenance, Repairs, Alterations and Common Area Services.
7.1 Lessor's Obligations. Lessor shall keep the Building Project, including
the Premises, interior and
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exterior walls, roof, and common areas, in good condition and repair; provided,
however, Lessor shall not be obligated to paint, repair or replace wall
coverings, or to repair or replace any improvements that are not ordinarily a
part of the Building or are above current Building standards. Except as provided
in paragraph 9.5, there shall be no abatement of rent or liability of Lessee on
account of any injury or interference with Lessee's business with respect to any
improvements, alterations or repairs made by Lessor to the Building Project or
any part thereof, or on account of any interruption of services or of access to
the Premises, Building or Building Project. Lessee expressly waives the benefits
of any statute now or hereafter in effect which would otherwise afford Lessee
the right to make repairs at Lessor's expense or to terminate this Lease because
of Lessor's failure to keep the Premises in good order, condition and repair.
7.2 Lessee's Obligations.
7.2.1 Notwithstanding Lessor's obligation to keep the Premises in good
condition and repair, Lessee shall be responsible for payment of the cost
thereof to Lessor as additional rent for that portion of the cost of any
maintenance and repair of the Premises, or any equipment (wherever located) that
serves only Lessee or the Premises, to the extent such cost is attributable to
causes beyond normal wear and tear. Lessee shall be responsible for the cost of
painting, repairing or replacing wall coverings, and to repair or replace any
Premises improvements that are not ordinarily a part of the Building or that are
above current Building standards. Lessor may, at its option, upon reasonable
notice, elect to have Lessee perform any particular such maintenance or repairs
the cost of which is otherwise Lessee's responsibility hereunder.
7.2.2 On the last day of the term hereof, or on any sooner termination,
Lessee shall surrender the Premises to Lessor in the same condition as received,
ordinary wear and tear excepted, clean and free of debris. Any damage or
deterioration of the Premises shall not be deemed ordinary wear and tear if the
same could have been prevented by good maintenance practices by Lessee. Lessee
shall repair any damage to the Premises occasioned by the installation or
removal of Lessee's trade fixtures, alterations, furnishings and equipment.
Except as otherwise stated in this Lease, Lessee shall leave the air lines,
power panels, electrical distribution systems, lighting fixtures, air
conditioning, window coverings, wall coverings, carpets, wall paneling, ceilings
and plumbing on the Premises and in good operating condition.
7.3 Alterations and Additions.
7.3.1 Lessee shall not, without Lessor's prior written consent, which
consent shall not be unreasonably withheld, conditioned or delayed, make any
alterations, improvements additions, Utility Installations or repairs in, on or
about the Premises, or the Building Project. As used in this paragraph 7.3 the
term "Utility Installation" shall mean carpeting, window and wall coverings,
power panels, electrical distribution systems, lighting fixtures, air
conditioning, plumbing, and telephone and telecommunication wiring and
equipment. Lessor shall inform Lessee, at the time Lessor provides consent to
any alteration or improvement, whether Lessee shall be responsible for the
removal of such alteration or improvement, and the return of the Premises to
their prior condition upon the expiration or earlier termination of this Lease.
Notwithstanding the foregoing, Lessee shall not be required to remove the
initial tenant improvements to the Premises the construction of which has
commenced prior to November 1, 1997. Notwithstanding anything to the contrary
herein, Lessee shall have the right to make non-structural alterations to the
Premises which do not affect the Building systems and which cost less than Five
Thousand Dollars ($5,000) in the aggregate over any twelve (12) month period
without the prior written consent of Lessor, provided that such alterations are
otherwise made in compliance with the terms of this Lease. Lessee shall notify
Lessor in writing of such alterations, additions or improvements and Lessor
shall within ten (10) days, inform Lessee in writing whether Lessee is
responsible for the removal of such alterations, addition or improvements at the
expiration or earlier termination of the term of this Lease. Should Lessor
permit Lessee to make its own alterations, improvements, additions or Utility
Installations, Lessee shall use only such contractor as has been expressly and
reasonably approved by Lessor, and Lessor may require Lessee to provide Lessor,
at Lessee's sole cost and expense, a lien and completion bond in an amount equal
to one and one-half times the estimated cost of such improvements, to insure
Lessor against any liability for mechanic's and materialmen's liens and to
insure completion of the work. Should Lessee make any alterations,
improvements, additions or Utility Installations without the prior approval of
Lessor, or use a contractor not expressly approved by Lessor, Lessor may, at any
time during the term of this Lease, require that Lessee remove any part or all
of the same.
7.3.2 Any alterations, improvements, additions or Utility Installations
in or about the Premises or the Building Project that Lessee shall desire to
make shall be presented to Lessor in written form, with proposed detailed plans.
If Lessor shall give its consent to Lessee's making such alteration,
improvement, addition or Utility Installation, the consent shall be deemed
conditioned upon Lessee acquiring a permit to do so from the applicable
governmental agencies, furnishing a copy thereof to Lessor prior to the
commencement of the work, and compliance by Lessee with all conditions of said
permit in a prompt and expeditious manner. Such consent will not be
unreasonably withheld.
7.3.3 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 in
the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises, the Building or the Building Project,
or any interest therein.
7.3.4 Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in the Premises by Lessee, and Lessor shall have
the right to post notices of non-responsibility in or on the Premises or the
Building as provided by law. Lessee shall at all times keep the Premises, the
Building and the Building Project free and clear of liens attributable in any
way to a work of improvement commissioned by Lessee, or to the acts or omissions
of Lessee, any of Lessee's employees, agents, or contractors, or any of their
employees, agents or sub-contractors. If Lessee shall, in good faith, contest
the validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend itself and Lessor against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof against Lessor or the Premises, the Building or the Building Project,
upon the condition that if Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor in an amount
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not less than one hundred fifty percent (150%) of the amount of such contested
lien claim or demand indemnifying Lessor against liability for the same and
holding the Premises, the Building and the Building Project free from the effect
of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's
reasonable attorneys' fees and costs in participating in such action if Lessor
shall reasonably determine that such participation is necessary to protect
Lessor's interest in the Building Project.
7.3.5 All alterations, improvements, additions and Utility installations
(whether or not such Utility Installations constitute trade fixtures of Lessee),
which may be made to the Premises by Lessee, including but not limited to, floor
coverings, panelings, doors, drapes, built-ins, moldings, sound attenuation, and
lighting and telephone or communication systems, conduit, wiring and outlets,
shall be made and done in a good and workmanlike manner and of good and
sufficient quality and materials and shall be the property of Lessor and remain
upon and be surrendered with the Premises at the expiration of the lease term,
unless Lessor requires their removal pursuant to paragraph 7.3.1. Provided
Lessee is not in default, notwithstanding the provisions of this paragraph
7.3.5, Lessee's personal property and equipment, other than that which is
affixed to the Premises so that it cannot be removed without material damage to
the Premises or the Building, and other than Utility Installations, shall remain
the property of Lessee and may be removed by Lessee subject to the provisions of
paragraph 7.2.
7.3.6 Lessee shall provide Lessor with as-built plans and specifications
for any alterations, improvements, additions or Utility Installations, to the
extent Lessee obtains such plans and specifications.
7.4 Utility Additions. Lessor reserves the right to install new or
additional utility facilities throughout the Building Project for the benefit of
Lessor or Lessee, or any other lessee of the Building Project, including, but
not by way of limitation, such utilities as plumbing, electrical systems,
security systems, communication systems, and fire protection and detection
systems, so long as such installations do not unreasonably interfere with
Lessee's use of the Premises.
8. Insurance; Indemnity.
8.1 Liability Insurance-Lessee. Lessee shall, at Lessee's expense, obtain
and keep in force during the term of this Lease a policy of broad form
Commercial General Liability insurance on an occurrence basis, in an amount of
not less than One Million Dollars ($1,000,000) per occurrence of bodily injury
and property damage combined or in a greater amount as reasonably determined by
Lessor and shall insure Lessee with Lessor as an additional insured against
liability arising out of the use, occupancy or maintenance of the Premises.
Compliance with the above requirement shall not, however, limit the liability of
Lessee hereunder.
8.2 Liability Insurance-Lessor. Although Lessor shall not be required to
maintain any liability insurance, any premiums for liability insurance
maintained by Lessor relating to the Premises, the Building or the Building
Project shall be Operating Expenses hereunder.
8.3 Property Insurance-Lessee. Lessee shall, at Lessee's expense, obtain and
keep in force during the term of this Lease for the benefit of Lessee,
replacement cost all-risks insurance, including without limitation fire and
extended coverage insurance, with vandalism and malicious mischief, sprinkler
leakage and earthquake sprinkler leakage endorsements, in an amount sufficient
to cover not less than 100% of the full replacement costs, as the same may exist
from time to time, of all of Lessee's personal property, fixtures, equipment and
tenant improvements.
8.4 Property Insurance-Lessor. Lessor shall obtain and keep in force during
the term of this Lease a policy or policies of insurance covering loss or damage
to the Building Project improvements, but not Lessee's personal property,
fixtures, equipment or tenant improvements, in the amount of the full
replacement cost thereof, as the same may exist from time to time, utilizing
Insurance Services Office standard form, or equivalent providing protection
against all perils included within the classification of fire, extended
coverage, vandalism, malicious mischief, plate glass, and such other perils as
Lessor deems advisable or may be required by a lender having a lien on the
Building Project. In addition, Lessor shall obtain and keep in force, during
the term of this Lease, a policy of rental value insurance covering a period of
one year, with loss payable to Lessor, which insurance shall also cover all
Operating Expenses for said period. Lessee will not be named in any such
policies carried by Lessor and shall have no right to any proceeds therefrom;
however, Lessor's receipt of any payment from a claim under such policy shall
relieve Lessee from the obligation, if any, of making such payment under the
terms of this Lease. The policies required by these paragraphs 8.2 and 8.4
shall contain such deductibles as Lessor or the aforesaid lender may determine.
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies carried by Lessor. Lessee shall pay the entirety of any
increase in the property insurance premium for the Building Project over what it
was immediately prior to the commencement of the term of this Lease if the
increase is specified by Lessor's insurance carrier as being caused by the
nature of Lessee's occupancy or any act or omission of Lessee.
8.5 Insurance Policies. Lessee shall deliver to Lessor certificates
evidencing the existence and amounts of the liability insurance policies
required under paragraphs 8.1 and 8.3 within seven (7) days after the
Commencement Date of this Lease.
Each policy required to be obtained by Lessee hereunder shall: (a) be issued
by insurers authorized to do business in the state of California and rated not
less than financial class X, and not less than policyholder rating A, in the
most recent version of Best's Key Rating Guide, or the equivalent rating in any
other comparable guide selected by Lessor (provided that, in any event, the same
insurance company shall provide the coverages described in paragraphs 8.1 and
8.3 above); (b) be in form reasonably satisfactory from time to time to Lessor;
(c) name Lessee as named insured thereunder and shall name Lessor and, at
Lessor's request, Lessor's mortgagees and ground lessors of which Lessee has
been informed in writing, as additional insureds (d) not have a deductible
amount exceeding Five Thousand Dollars ($5,000.00); (e) specifically provide
that the insurance afforded by such policy for the benefit of Lessor and
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Lessor's mortgagees and ground lessors shall be primary, and any insurance
carried by Lessor or Lessor's mortgagees and ground lessors shall be excess and
non-contributing; (f) except for worker's compensation insurance, contain an
endorsement that the insurer waives its right to subrogation as described in
paragraph 8.6 below: and (g) contain an undertaking by the insurer to notify
Lessor (and the mortgagees and ground lessors of Lessor who are named as
additional insureds) in writing not less than thirty (30) days prior to
reduction in coverage, cancellation or other termination thereof. Lessee agrees
to deliver to Lessor, as soon as practicable after the placing of the required
insurance, but in no event later than ten (10) days after the date Lessee takes
possession of all or any part of the Premises, certificates from the insurance
company evidencing the existence of such insurance and Lessee's compliance with
the foregoing provisions of this paragraph 8. Lessee shall cause certificates
of replacement policies to be delivered to Lessor not less than thirty (30) days
prior to the expiration of any such policy or policies. If any such initial or
replacement certificates are not furnished within the time(s) specified herein,
and after Lessor's written notice to Lessee of such failure and Lessee's
subsequent failure to timely cure within fifteen (15) business days, Lessee
shall be deemed to be in material default under this Lease without the benefit
of any additional notice or cure period provided herein, and Lessor shall have
the right, but not the obligation, to procure such policies and certificates at
Lessee's expense.
8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and relieve
the other, and waive their entire right of recovery against the other, for
direct or consequential loss or damage arising out of or incident to the perils
covered by property insurance carried by such party, whether due to the
negligence of Lessor or Lessee or their agents, employees, contractors and/or
invitees. If necessary all property insurance policies required under this
Lease shall be endorsed to so provide.
8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor and its
agents, shareholders, directors, employees, partners and lenders, from and
against any and all claims for damage to the person or property of anyone or any
entity arising from Lessee's use of the Building Project, or from the conduct of
Lessee's business or from any activity, work or things done, permitted or
suffered by Lessee in or about the Premises or elsewhere and shall further
indemnify and hold harmless Lessor from and against any and all claims, costs
and expenses arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any act or omission of Lessee, or any of Lessee's agents,
contractors, employees or invitees and from and against all costs, attorneys'
fees, expenses and liabilities incurred by Lessor as the result of any such use,
conduct, activity, work, things done, permitted or suffered, breach, default or
negligence, and in dealing reasonably therewith, including but not limited to
the defense or pursuit of any claim or any action or proceeding involved
therein; and in case any action or proceeding be brought against Lessor by
reason of any such matter, Lessee upon notice from Lessor shall defend the same
at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid
any such claim in order to be so indemnified. Lessee, as a material part of the
consideration to Lessor, hereby assumes all risk of damage to property of Lessee
or injury to persons, in, upon or about the Building Project arising from any
cause and Lessee hereby waives all claims in respect thereof against Lessor.
Notwithstanding the foregoing, Lessee shall not be required to indemnify Lessor
for any claims, losses, liabilities, costs or expenses to the extent caused by
Lessor's, or Lessor's agents', employees' or invitees', negligence or willful
misconduct.
8.8 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor
shall not be liable for injury to Lessee's business or any loss of income
therefrom or for loss of or damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other person
in or about the Premises or the Building Project, nor shall Lessor be liable for
injury to the person of Lessee, Lessee's employees, agents or contractors,
whether such damage or injury is caused by or results from theft, fire, steam,
electricity, gas, water or rain, or from the breakage, leakage, obstruction or
other defects of pipes, sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures, or from any other cause, whether said damage
or injury results from conditions arising upon the Premises or upon other
portions of the Building Project, or from other sources or places, or from new
construction or the repair, alteration or improvement of any part of the
Building Project, or of the equipment, fixtures or appurtenances applicable
thereto except to the extent such damage is caused by Lessor's negligence or
willful misconduct, and regardless of whether the cause of such damage or injury
or the means of repairing the same is inaccessible, Lessor shall not be liable
for any damages arising from any act or neglect of any other lessee, occupant or
user of the Building Project, nor from the failure of Lessor to enforce the
provisions of any other lease of any other lessee of the Building Project.
8.9 No Representation of Adequate Coverage. Lessor makes no representation
that the limits or forms of coverage of insurance specified in this paragraph 8
are adequate to cover Lessee's property or obligations under this Lease.
9. Damage or Destruction.
9.1 Definitions.
9.1.1 "Premises Damage" shall mean if the Premises are damaged or
destroyed to any extent.
9.1.2 "Premises Building Partial Damage" shall mean if the Building of
which the Premises are a part is damaged or destroyed to the extent that the
cost to repair is less than fifty percent (50%) of the then Replacement Cost of
the Building.
9.1.3 "Premises Building Total Destruction" shall mean if the Building
of which the Premises are a part is damaged or destroyed to the extent that the
cost to repair is fifty percent (50%) or more of the then Replacement Cost of
the Building.
9.1.4 "Building Project Buildings" shall mean all of the buildings on
the Building Project site.
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9.1.5 "Building Project Buildings Total Destruction" shall mean if the
Building Project Buildings are damaged or destroyed to the extent that the cost
of repair is fifty percent (50%) or more of the then Replacement Cost of the
Building Project Buildings.
9.1.6 "Insured Loss" shall mean damage or destruction which was caused
by an event required to be covered by the insurance described in paragraph 8.
The fact that an Insured Loss has a deductible amount shall not make the loss an
uninsured loss.
9.1.7 "Replacement Cost" shall mean the amount of money necessary to be
spent in order to repair or rebuild the damaged area to the condition that
existed immediately prior to the damage occurring, excluding all improvements
made by lessees, other than those installed by Lessor at Lessee's expense.
9.2 Premises Damage; Premises Building Partial Damage.
9.2.1 Insured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which is an
Insured Loss and which falls into the classification of either Premises Damage
or Premises Building Partial Damage, then Lessor shall, as soon as reasonably
possible and to the extent insurance proceeds are available and the required
materials and labor are readily available through usual commercial channels, at
Lessor's expense, repair such damage (but not Lessee's fixtures, equipment or
tenant improvements originally paid for by Lessee) to its condition existing
immediately prior to the time of the damage, and this Lease shall continue in
full force and effect.
9.2.2 Uninsured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which is not
an Insured Loss and which falls within the classification of Premises Damage or
Premises Building Partial Damage, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense), which
damage prevents Lessee from using the Premises as provided in Paragraph 1.4,
Lessor may at Lessor's option either (i) provided that Lessor reasonably
believes that such repair work shall be completed within one hundred eighty
(180) days, repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect; in
the event that Lessor reasonably believes such repair work shall not be
completed within one hundred eighty (180) days, Lessee shall, in Lessee's sole
discretion, have the option to terminate this Lease, or (ii) give written notice
to Lessee within thirty (30) days after the date of the occurrence of such
damage of Lessor's intention to cancel and terminate this Lease as of the date
of the occurrence of such damage, in which event this Lease shall terminate as
of the date of the occurrence of such damage.
9.3 Premises Building Total Destruction; Building Project Total Destruction.
Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the
term of this Lease there is damage, whether or not it is an Insured Loss, which
falls into the classifications of either (a) Premises Building Total
Destruction, or (b) Building Project Total Destruction, then Lessor may at
Lessor's option either (i) provided that Lessor reasonably believes that such
repair work shall be completed within one hundred eighty (180) days, repair such
damage or destruction as soon as reasonably possible at Lessor's expense (to the
extent the required materials are readily available through usual commercial
channels) to its condition existing at the time of the damage, but not Lessee's
fixtures, equipment or tenant improvements, and this Lease shall continue in
full force and effect; in the event that Lessor reasonably believes such repair
work shall not be completed within one hundred eighty (180) days, Lessee shall,
in Lessee's sole discretion, have the option to terminate this Lease, or (ii)
give written notice to Lessee within thirty (30) days after the date of
occurrence of such damage of Lessor's intention to cancel and terminate this
Lease, in which case this Lease shall terminate as of the date of the occurrence
of such damage.
9.4 Damage Near End of Term.
9.4.1 Subject to paragraph 9.4.2, if at any time during the last twelve
(12) months of the term of this Lease there is substantial damage to the
Premises, Lessor may at Lessor's option cancel and terminate this Lease as of
the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within 30 days after the date of occurrence of such
damage.
9.4.2 Notwithstanding paragraph 9.4.1, in the event that Lessee has an
option to extend or renew this Lease, and the time within which said option may
be exercised has not yet expired, Lessee shall exercise such option, if it is to
be exercised at all, no later than twenty (20) days after the occurrence of an
Insured Loss falling within the classification of Premises Damage during the
last twelve (12) months of the term of this Lease. If Lessee duly exercises
such option during said twenty (20) day period, Lessor shall, at Lessor's
expense, repair such damage, but not Lessee's fixtures, equipment or tenant
improvements, as soon as reasonably possible and this Lease shall continue in
full force and effect. If Lessee fails to exercise such option during said
twenty (20) day period, then Lessor may at Lessor's option terminate and cancel
this Lease as of the expiration of said twenty (20) day period by giving written
notice to Lessee of Lessor's election to do so within ten (10) days after the
expiration of said twenty (20) day period, notwithstanding any term or provision
in the grant of option to the contrary.
9.5 Abatement of Rent; Lessee's Remedies.
9.5.1 If, in the event of Premises Damages, Lessor repairs or restores
the Building or Premises pursuant to the provisions of this paragraph 9, and any
part of the Premises are not usable for the Permitted Use as defined herein
(including loss of use due to loss of access or essential services), the rent
payable hereunder (including Lessee's Share of Operating Expenses) for the
period during which such damage, repair or restoration continues shall be
abated, provided (1) the damage was not the result of the negligence of Lessee,
and (2) such abatement shall be equal to the proportion of the Premises that is
usable bears to the total area of the Premises. Except for said abatement of
rent, if
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any, Lessee shall have no claim against Lessor for any damage suffered by reason
of any such damage, destruction, repair or restoration.
9.5.2 If Lessor shall be obligated to repair or restore the Premises
or the Building under the provisions of this paragraph 9 and shall not commence
such repair or restoration within thirty (30) days after such occurrence, or if
Lessor shall not complete the restoration and repair within six (6) months after
such occurrence, Lessee may at Lessee's option cancel and terminate this Lease
by giving Lessor written notice of Lessee's election to do so at any time prior
to the commencement or completion, respectively, of such repair or restoration.
In such event this Lease shall terminate as of the date of such notice.
9.5.3 Lessee agrees to cooperate with Lessor in connection with any
such restoration and repair, including but not limited to the approval and/or
execution of plans and specifications required.
9.6 Termination-Advance Payments. Upon termination of this Lease pursuant
to this paragraph 9, an equitable adjustment shall be made concerning advance
rent and any advance payments made by Lessee to Lessor. Lessor shall within
fourteen (14) days after the termination of this Lease, return to Lessee so much
of Lessee's security deposit as has not theretofore been applied by Lessor.
9.7 Waiver. Lessor and Lessee waive the provisions of any statute which
relates to termination of leases when leased property is destroyed, including
without limitation California Civil Code Section 1932, Subsection 2 and Section
1933, Subsection 4, and agree that such event shall be governed by the terms of
this Lease.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the real property tax, as defined
in paragraph 10.3, applicable to the Building Project, except as otherwise
provided in paragraph 10.2.
10.2 Additional Improvements. Lessee shall not be responsible for paying
any increase in real property tax specified in the tax assessor's records and
work sheets as being caused by additional improvements placed upon the Building
Project by other lessees or by Lessor for the exclusive enjoyment of any other
lessee. Lessee shall, however, pay to Lessor, at the time that Operating
Expenses are payable under paragraph 4.3, the next scheduled rental payment
comes due, the entirety of any increase in real property tax if assessed solely
by reason of additional improvements placed upon the Premises by Lessee or at
Lessee's request.
10.3 Definition of "Real Property Tax." As used herein, the term "real
property tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Building Project or any portion thereof by any
authority having the direct or indirect power to tax, including any city,
county, state or federal government, or any school, agricultural, sanitary,
fire, street, drainage or other improvement district thereof, as against any
legal or equitable interest of Lessor in the Building Project or in any portion
thereof, as against Lessor's right to rent or other income therefrom, and as
against Lessor's business of leasing the Building Project. The term "real
property tax" shall also include any tax, fee, levy, assessment or charge (i) in
substitution of, partially or totally, any tax, fee, levy, assessment or charge
hereinabove included within the definition of "real property tax," or (ii) the
nature of which was hereinabove included within the definition of "real property
tax," or (iii) which is imposed for a service or right not charged prior to June
1, 1978, or, if previously charged, has been increased since June 1, 1978, or
(iv) which is imposed as a result of a change in ownership, as defined by
applicable local statutes for property tax purposes, of the Building Project or
which is added to a tax or charge hereinbefore included within the definition of
real property tax by reason of such change of ownership, or (v) which is imposed
by reason of this transaction, any modifications or changes hereto, or any
transfers hereof. If any assessments affecting the Premises are payable in
installments and Lessor should prepay such assessments in advance of the date
such installments would become due, Lessee shall be solely responsible for the
portion of such assessment that would have normally come due as an installment,
unless consented to by Lessee in writing.
10.4 Joint Assessment. If the improvements or property, the taxes for
which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not
separately assessed, Lessee's portion of that tax shall be equitably determined
by Lessor from the respective valuations assigned in the assessor's work sheets
or such other information (which may include the cost of construction) as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.5 Personal Property Taxes.
10.5.1 Lessee shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Premises or elsewhere.
10.5.2 If any of Lessee's said personal property shall be assessed
with Lessor's real property, Lessee shall pay to Lessor the taxes attributable
to Lessee within ten (10) days after receipt of a written statement setting
forth the taxes applicable to Lessee's property.
11. Utilities.
11.1 Services Provided by Lessor. Lessor shall provide such services and
utilities as Lessor determines to be appropriate for operation and maintenance
of the Common Areas.
11.2 Services Exclusive to Lessee. Lessee shall provide for an pay for all
water, gas, heat, light, power,
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telephone and other utilities and services for the Premises, which shall be
specially or exclusively supplied and/or metered to the Premises or to Lessee,
together with any taxes thereon.
11.3 Interruptions. There shall be no abatement of rent and Lessor shall
not be liable in any respect whatsoever for the inadequacy, stoppage,
interruption or discontinuance of any utility or service, regardless of whether
or not the cause thereof was within Lessor's control.
12. Assignment and Subletting.
12.1 Lessor's Consent Required. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in the Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a material
default and breach of this Lease without the need for notice to Lessee under
paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall
include the transfer or transfers aggregating: (a) if Lessee is a corporation,
more than twenty-five percent (25%) of the voting stock of such corporation or
more than twenty-five (25%) of the voting stock of Lessee's parent or (b) if
Lessee is a partnership, more than twenty-five percent (25%) of the profit and
loss participation in such partnership. Notwithstanding the foregoing, Lessee
may assign all of its interest in the Lease, without obtaining the consent of
Lessor, to any entity which controls, is controlled by or is under common
control with the original Lessee to this Lease by means of an ownership interest
of more than fifty percent (50%). For purposes of this Section 12.1, the term
"ownership interest" means possession, directly or indirectly, of the power to
direct or cause the direction of the management, affairs and policies of anyone,
whether through the ownership of voting securities, by contract or otherwise.
Notwithstanding the foregoing, Lessee may assign this Lease or sublet any
portion of the Premises without Lessor's consent to any of the following: (i)
any corporation which controls, is controlled by or under common control with
Lessee; (ii) any corporation resulting from the merger or consolidation of
Lessee and has a net worth equal to that of Lessee; and (iii) any person or
entity which acquires all of the assets of Lessee as a going concern of the
business that is being conducted on the Premises (collectively, "Lessee
Affiliate"), provided that such assignee assumes in full the obligations of
Lessee under the Lease. Lessor's right to terminate the Lease in response to a
requested assignment or subletting shall not apply to an assignment of the
Lease or a subletting of the Premises to a Lessee Affiliate. Notwithstanding
anything to the contrary in the Lease, the terms of this Article 12 shall not
apply to Lessee if Lessee if a publicly traded company. Further, an initial
public trading of Lessee's stock shall not constitute an assignment or transfer
for purposes of this Article 12. With respect to any proposed assignment or
sublease requiring Lessor's consent, Lessor shall have the right, at its
election, to recapture the Premises or a portion thereof, as applicable, for the
purpose of directly marketing the Premises or a portion thereof to any third
party selected by Lessor, for the length of time, in the case of a sublease,
offered by Lessee. Such recapture shall be effective as of the date specified
by Lessee in its request for consent of Lessor as the proposed commencement date
for the assignment or sublease or, if no date is so specified, on the date
selected by Lessor. In the event of such recapture by Lessor, the Lease shall
be amended to document the elimination of the applicable portion of the
Premises. Any necessary documents in connection with such recapture shall be
prepared and paid for by Lessor.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
12.2.1 Regardless of Lessor's consent, no assignment or subletting
shall release Lessee of Lessee's obligations hereunder or after the primary
liability of Lessee to pay the rent and other sums due Lessor hereunder
including Lessee's Share of Operating Expenses, and to perform all other
obligations to be performed by Lessee hereunder.
12.2.2 Lessor may accept rent from any person other than Lessee
pending approval or disapproval of such assignment without being deemed to have
consented thereto.
12.2.3 Neither a delay in the approval or disapproval of such
assignment or subletting, nor the acceptance of rent, shall constitute a waiver
or estoppel of Lessor's right to exercise its remedies for the breach of any of
the terms or conditions of this paragraph 12 or this Lease.
12.2.4 If Lessee's obligations under this Lease have been guaranteed
by third parties, then an assignment or sublease, and Lessor's consent thereto,
shall not be effective unless said guarantors give their written consent to such
sublease and the terms thereof.
12.2.5 The consent by Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee.
However, Lessor may consent to subsequent sublettings and assignments of the
sublease or any amendments or modifications thereto without notifying Lessee or
anyone else liable on the Lease or sublease and without obtaining their consent
and such action shall not relieve such persons from liability under this Lease
or said sublease; provided, however, such persons shall not be responsible to
the extent any such amendment or modification enlarges or increases the
obligations of the Lessee or sublessee under this Lease or such sublease.
12.2.6 In the event of any default under this Lease after any
applicable cure period, Lessor may proceed directly against Lessee, any
guarantors or anyone else responsible for the performance of this Lease,
including the sublessee, without first exhausting Lessor's remedies against any
other person or entity responsible therefor to Lessor, or any security held by
Lessor or Lessee.
12.2.7 Lessor's written consent to any assignment or subletting of the
Premises by Lessee shall not constitute an acknowledgment that no default then
exists under this Lease of the obligations to be performed by Lessee
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nor shall such consent be deemed a waiver of any then existing default, except
as may be otherwise stated by Lessor at the time.
12.2.8 The discovery of the fact that any financial statement relied
upon by Lessor in giving its consent to an assignment or subletting was
materially false shall, at Lessor's election, render Lessor's said consent null
and void. Lessor acknowledges that it has received and reviewed financial
statements provided by Lessee.
12.2.9 Any disapproval by Lessor of any proposed assignee or sublessee
based on the fact that such party is an existing tenant of the Building Project
shall be deemed to be reasonable.
12.3 Additional Terms and Conditions Applicable to Subletting. Regardless
of Lessor's consent, the following terms and conditions shall apply to any
subletting by Lessee of all or any part of the Premises and shall be deemed
included in all subleases under this Lease whether or not expressly incorporated
therein:
12.3.1 Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease heretofore or
hereafter made by Lessee, and Lessor may collect such rent and income and apply
same toward Lessee's obligations under this Lease; provided, however, that until
a default shall occur in the performance of Lessee's obligations under this
Lease, Lessee may receive, collect and enjoy the rents accruing under such
sublease. Lessor shall not, by reason of this or any other assignment of such
sublease to Lessor nor by reason of the collection of the rents from a
sublessee, be deemed liable to the sublessee for any failure of Lessee to
perform and comply with any of Lessee's obligations to such sublessee under such
sublease. Lessee hereby irrevocably authorizes and directs any such sublessee,
upon receipt of a written notice from Lessor stating that a default exists in
the performance of Lessee's obligations under this Lease, to pay to Lessor the
rents due and to become due under the sublease. Lessee agrees that such
sublessee shall have the right to rely upon any such statement and request from
Lessor, and that such sublessee shall pay such rents to Lessor without any
obligation or right to inquire as to whether such default exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against said sublessee or Lessor for any such rents
so paid by said sublessee to Lessor.
12.3.2 No sublease entered into by Lessee shall be effective unless
and until it has been approved in writing by Lessor. In entering into any
sublease, Lessee shall use only such form of sublease as is reasonably
satisfactory to Lessor, and once approved by Lessor, such sublease shall not be
changed or modified without Lessor's prior written consent. Any sublessee shall,
by reason of entering into a sublease under this Lease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every obligation herein to be performed by Lessee other than such
obligations as are contrary to or inconsistent with provisions contained in a
sublease to which Lessor has expressly consented in writing.
12.3.3 In the event Lessee shall default in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of Lessee under such sublease from the time of
the exercise of said option to the termination of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to Lessee or for any other prior defaults of Lessee under
such sublease.
12.3.4 No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
12.3.5 With respect to any subletting to which Lessor has consented,
Lessor agrees to deliver a copy of any notice of default by Lessee to the
sublessee. Such sublessee shall have the right to cure a default of Lessee
within three (3) days after service of said notice of default upon such
sublessee, and the sublessee shall have a right of reimbursement and offset from
and against Lessee for any such defaults cured by the sublessee.
12.3.6 Notwithstanding anything to the contrary in the foregoing,
fifty percent (50%) of any rent or other economic consideration received by
Lessee as a result of an assignment or subletting which exceeds, on a square
foot basis, in the aggregate, (i) the total rent which Lessee is obligated to
pay to Lessor under the Lease (prorated to reflect obligations allocable to any
portion of the Premises subleased), plus (ii) any reasonable and customary
brokerage commissions (not to exceed three percent (3%) of base rent payable
under the assignment or sublease) actually paid by Lessee in connection with
such assignment or subletting, shall be paid to Lessor within ten (10) days
after receipt thereof as additional rent hereunder, without altering or reducing
any other obligations of Lessee hereunder.
12.4 Lessor's Expenses. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable costs and expenses incurred in
connection therewith, including without limitation attorneys', architects',
engineers' and other consultants' fees.
12.5 Conditions to Consent. Lessor reserves the right to condition any
approval to assign or sublet upon Lessor's determination that (a) the proposed
assignee or sublessee shall conduct a business on the Premises of a quality
substantially equal to that of Lessee and consistent with the general character
of the other occupants of the Building Project and not in violation of any
exclusives or rights then held by other tenants, and (b) the proposed assignee
or sublessee be at least as financially responsible as Lessee was expected to be
at the time of the execution of this Lease or of such assignment or subletting,
whichever is greater.
13. Default; Remedies.
13.1 Default. The occurrence of any one or more of the following events
shall constitute a material default of
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this Lease by Lessee:
13.1.1 The abandonment of the Premises by Lessee.
13.1.2 The breach by Lessee of any of the covenants, conditions or
provisions of paragraphs 12.1 (assignment or subletting), 13.1.1 (abandonment),
13.1.5 (insolvency), 13.1.6 (false statement), 16.1 (estoppel certificate), 29
(subordination), 32 (auctions), or 40.1 (easements), all of which are hereby
deemed to be material, non-curable defaults without the necessity of any notice
by Lessor to Lessee thereof.
13.1.3 The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of five (5) business days after written
notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee
with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer
statutes, such Notice to Pay Rent or Quit shall also constitute the notice
required by this subparagraph.
13.1.4 The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
Lessee other than those referenced in subparagraphs (b) and (c), above, where
such failure shall continue for a period of thirty (30) days after written
notice thereof from Lessor to Lessee; provided, however, that if the nature of
Lessee's noncompliance is such that more than thirty (30) days are reasonably
required for its cure, then Lessee shall not be deemed to be in default if
Lessee commenced such cure within said thirty (30) day period and thereafter
diligently pursues such cure to completion. To the extent permitted by law, such
thirty (30) day notice shall constitute the sole and exclusive notice required
to be given to Lessee under applicable Unlawful Detainer statutes.
13.1.5 (i) The making by Lessee of any general arrangement or general
assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as
defined in 11 U.S.C. (S) 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 sixty
(60) 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 sixty (60)
days. In the event that any provision of this paragraph 13.1.5 is contrary to
any applicable law, such provision shall be of no force or effect.
13.1.6 The discovery by Lessor that any financial statement given to
Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's
obligation hereunder, was materially false.
13.2 Lessor's Remedies.
13.2.1 Termination. In the event of any default by Lessee, in addition
to any other remedies available to Lessor under this Lease, at law or in equity,
Lessor shall have the immediate option to terminate this Lease and all rights of
Lessee hereunder. In the event that Lessor shall elect to so terminate this
Lease, then Lessor may recover from Lessee:
13.2.1.1 the worth at the time of award of any unpaid rent which
had been earned at the time of such termination; plus
13.2.1.2 the worth at the time of the 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 Lessee proves could have been
reasonably avoided; plus
13.2.1.3 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 Lessee proves could be reasonable avoided; plus
13.2.1.4 any other amount necessary to compensate Lessor for all
the detriment proximately caused by 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: "Unreimbursed Leasehold
Improvement Costs" (as defined below); attorneys' fees; brokers' commissions;
the costs of refurbishment, alterations, renovation and repair of the Premises;
and removal (including the repair of damage caused by such removal) and storage
(or disposal) of Lessee's personal property, equipment, fixtures, Lessee's
alterations, additions, leasehold improvements and any other items which Lessee
is required under this Lease to remove but does not remove. As used herein, the
term "Unreimbursed Leasehold Improvement Costs" shall mean the product when
multiplying (i) the sum of any leasehold improvement allowance plus any other
costs provided, paid or incurred by Lessor in connection with the design and
construction of the initial leasehold improvements installed in the Premises on
or prior to the Commencement Date, by (ii) the fraction, the numerator of which
is the number of months of the term of this Lease not yet elapsed as of the date
on which this Lease is terminated (excluding any unexercised renewal options),
and the denomination of which is the total number of months of the term of this
Lease (excluding any unsecured renewal options). For example, if the total costs
paid or incurred by Lessor with respect to the initial leasehold improvements
was $100,000.00, the Lease term was sixty (60) months, and the Lease was
terminated by reason of Lessee's default at the end of twelve (12) months, the
Unreimbursed Leasehold Improvement Costs would be equal to $80,000.00 (i.e.,
$80,000.00 equals $100,000.00 x 48/60).
As used in subparagraphs (i) and (ii), above, the "worth at the time of
award" is computed by allowing interest at the maximum interest rate which
Lessor is permitted by law to charge Lessee (the "Lease Rate"). As used in
subparagraph (iii), above, the "worth at the time of award" is computed by
discounting such amount at the discount rate
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of the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%).
13.2.2 Re-Entry Rights. In the event of any default by Lessee, in
addition to any other remedies available to Lessor under this Lease, at law or
in equity, Lessor shall also have the right, with or without terminating this
Lease, to re-enter the Premises and remove all persons and property from the
Premises; such property may be removed, stored and/or disposed of pursuant to
this Lease or any other procedures permitted by applicable law. No re-entry or
taking possession of the Premises by Lessor pursuant to this paragraph 13.2.2,
and no acceptance of surrender of the Premises or other action on Lessor's part,
shall be construed as an election to terminate this Lease unless a written
notice of such intention be given to Lessee or unless the termination thereof be
decreed by a court of competent jurisdiction.
13.2.3 Continuation of Lease. In the event of any default by Lessee,
in addition to any other remedies available to Lessor under this Lease, at law
or in equity, Lessor shall have the right to continue this Lease in full force
and effect, whether or not Lessee shall have abandoned the Premises. The
foregoing remedy shall also be available to Lessor pursuant to California Civil
Code Section 1951.4 and any successor statute thereof in the event Tenant has
abandoned the Premises. In the event Lessor elects to continue this Lease in
full force and effect pursuant to this paragraph 13.2.3, then Lessor shall be
entitled to enforce all of its rights and remedies under this Lease, including
the right to recover rent as it becomes due. Lessor's election not to terminate
this Lease pursuant to this paragraph 13.2.3 or pursuant to any other provision
of this Lease, at law or in equity, shall not preclude Lessor from subsequently
electing to terminate this Lease or pursuing any of its other remedies.
13.2.4 Rights and Remedies Cumulative. All rights, options and
remedies of Lessor contained in this paragraph 13.2 and elsewhere in this Lease
shall be construed and held to be cumulative, and no one of them shall be
exclusive of the other, and Lessor shall have the right to pursue any one or all
of such remedies or any other remedy or relief which may be provided by law or
in equity, whether or not stated in this Lease. Nothing in this paragraph 13.2
shall be deemed to limit or otherwise affect Lessee's indemnification of Lessor
pursuant to any provision of this Lease.
13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails
to perform obligations required of Lessor within a reasonable time, but in no
event later than thirty (30) days after written notice by Lessee to Lessor and
to the holder of any first Mortgage or deed of trust covering the Premises whose
name and address shall have theretofore been furnished to Lessee in writing,
specifying wherein Lessor has failed to perform such obligation; provided,
however, that if the nature of Lessor's obligation is such that more than thirty
(30) days are required for performance then Lessor shall not be in default if
Lessor commences performance within such 30-day period and thereafter diligently
pursues the same to completion.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
to Lessor of Base Rent, Lessee's Share of Operating Expenses or other sums due
hereunder will cause Lessor to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed on Lessor by the terms of any mortgage or trust
deed covering the Building Project. Accordingly, if any installment of Base
Rent, Operating Expenses, or any other sum due from Lessee shall not be received
by Lessor or Lessor's designee within five (5) business days after such amount
shall be due, then, without any requirement for notice to Lessee, Lessee shall
pay to Lessor a late charge equal to 6% of such overdue amount. The parties
hereby agree that such late charge represents a fair and reasonable estimate of
the costs Lessor will incur by reason of late payment by Lessee. Acceptance of
such late charge by Lessor shall in no event constitute a waiver of Lessee's
default with respect to such overdue amount, nor prevent Lessor from exercising
any of the other rights and remedies granted hereunder.
14. Condemnation. If the Premises or any portion thereof or the Building
Project are taken under the power of eminent domain, or sold under the threat of
the exercise of said power (all of which are herein called "condemnation"), this
Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession, whichever first occurs; provided that if so
much of the Premises or the Building Project are taken by such condemnation as
would substantially and adversely affect the operation and profitability of
Lessee's business conducted from the Premises, either party shall have the
option, to be exercised only in writing within thirty (30) days after receipt of
written notice of such taking (or in the absence of such notice, within thirty
(30) days after the condemning authority shall have taken possession), to
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 rent and Lessee's Share of Operating
Expenses shall be reduced in the proportion that the floor area of the Premises
taken bears to the total floor area of the Premises. Common Areas taken shall be
excluded from the Common Areas usable by Lessee and no reduction of rent shall
occur with respect thereto or by reason thereof. Lessor shall have the option in
its sole discretion to terminate this Lease as of the taking of possession by
the condemning authority, by giving written notice to Lessee of such election
within thirty (30) days after receipt of notice of a taking by condemnation of
any part of the Premises or the Building Project. Any award for the taking of
all or any part of the Premises or the Building Project under the power of
eminent domain or any payment made under threat of the exercise of such power
shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any separate award for loss of or damage to Lessee's trade fixtures,
removable personal property and unamortized tenant improvements that have been
paid for by Lessee, unless and to the extent such award results in a reduction
of Lessor's award. For that purpose the cost of such improvements shall be
amortized on a straight-line base over the applicable recovery period in
accordance with the Internal Revenue Code. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of
severance damages received by Lessor in connection with such condemnation,
repair any damage to the Premises caused by such condemnation except to the
extent that Lessee has been reimbursed therefor by the condemning authority.
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15. Broker's Fee.
15.1 The brokers involved in this transaction are John Burnham Company, as
"listing broker" and CB Commercial, as "cooperating broker," licensed real
estate broker(s). A "cooperating broker" is defined as any broker other than
the listing broker entitled to a share of any commission arising under this
Lease. Lessor shall pay a fee to each of said brokers equal to two and one-half
percent (2 1/2%) of the total Base Rent which is payable over the initial term
of the Lease. All brokerage fees hereunder shall be payable by Lessor in four
(4) equal installments, the first being within five (5) business days after the
full execution and delivery of the Lease, and the others being on the first day
of each of the following months: December 1997, January 1998 and February 1998;
provided, however, that said payments shall only be owed only if and when Lessor
has received from Lessee the monthly Base Rent for the applicable month.
15.2 Lessor agrees to pay said fee not only on behalf of Lessor but also on
behalf of any person, corporation, association, or other entity having an
ownership interest in said real property or any part thereof, when such fee is
due hereunder. Any transferee of Lessor's interest in this Lease, whether such
transfer is by agreement or by operation of law, shall be deemed to have assumed
Lessor's obligation under this paragraph 15. Subject to paragraph 15.3, Lessor
shall indemnify, defend and hold Lessee harmless with respect to claims or
judgments for such fee.
15.3 Lessee and Lessor each represents and warrants to the other that
neither has had any dealings with any person, firm, broker or finder other than
the broker whose name is set forth in paragraph 15.1, above in connection with
the negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and no other broker or other person, firm or entity is
entitled to any commission or finder's fee in connection with said transaction
and Lessee and Lessor do each hereby indemnify and hold the other harmless from
and against any costs, expenses, attorneys' fees or liability for compensation
or charges which may be claimed by any such unnamed broker, finder or other
similar party by reason of any dealings or actions of the indemnifying party.
16. Estoppel Certificate.
16.1 Each party (as "responding party") shall at any time upon not less
than ten (10) days' prior written notice from the other party ("requesting
party") execute, acknowledge and deliver to the requesting party a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and certifying
that this Lease, as so modified, is in full force and effect) and the date to
which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to the responding party's knowledge, any
uncured defaults on the part of the requesting party, or specifying such
defaults if any are claimed, and (iii) in the case of Lessee, certify as to such
other matters as may be requested by Lessor or by a prospective purchaser or
encumbrancer of all or any part of the Building Project. Any such statement may
be conclusively relied upon by any prospective purchaser or encumbrancer of the
Building Project or of the business of Lessee.
16.2 At the requesting party's option, the failure to deliver such
statement within such time shall be a material default of this Lease by the
party who is to respond.
17. Lessor's Liability. The term "Lessor" as used herein shall mean only the
owner or owners, at the time in question, of the fee title or a Lessee's
interest in a ground lease of the Building Project and the income therefrom, and
except as expressly provided in paragraph 15, in the event of any transfer of
such title or interest, Lessor herein named (and in case of any subsequent
transfers then the grantor) shall be relieved from and after the date of such
transfer of all liability as respects Lessor's obligations thereafter to be
performed, provided that any funds in the hands of Lessor or the then grantor at
the time of such transfer, in which Lessee has an interest, shall be delivered
to the grantee. The obligations contained in this Lease to be performed by
Lessor shall, subject as aforesaid, be binding on Lessor's successors and
assigns, only during their respective periods of ownership.
18. Severability. The invalidity of any provision of this Lease as determined
by a court of competent jurisdiction shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-due Obligations. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the maximum rate
then allowable by law or judgments from the date due. Payment of such interest
shall not excuse or cure any default by Lessee under this Lease; provided,
however, that interest shall not be payable on late charges incurred by Lessee
nor on any amounts upon which late charges are paid by Lessee.
20. Time of Essence. Time is of the essence with respect to the obligations to
be performed under this Lease.
21. Additional Rent. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including expenses payable by Lessee hereunder shall be
deemed to be rent.
22. Incorporation of Prior Agreements; Amendments. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. This Lease may be modified in writing only, signed by the
parties in interest at the time of the modification. Except as otherwise stated
in this Lease, Lessee hereby acknowledges that neither the real estate brokers
listed in paragraph 15 hereof nor the Lessor or any employee or agents of any of
said persons has made any oral or written warranties or representations to
Lessee relative to the condition or use by Lessee of the Premises or the
Building Project and Lessee acknowledges that Lessee assumes all responsibility
regarding the Occupational Safety Health Act, the legal use and adaptability of
the Premises and the compliance thereof with all applicable laws and regulations
in effect during the term of this Lease. Notwithstanding the foregoing, Lessee
shall have no obligation to perform alterations that are of a capital or
structural nature and are required by law unless such alterations are a result
of alterations voluntarily made to the Premises by Lessee or Lessee's particular
use of the Premises other than the
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Permitted Use.
23. Notices. Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery or by certified or registered
mail, and shall be deemed sufficiently given if delivered or addressed to Lessee
or to Lessor at the address noted below or adjacent to the signature of the
respective parties, as the case may be. Mailed notices shall be deemed given
upon actual receipt at the address required, or forty-eight hours following
deposit in the mail, postage prepaid, whichever first occurs. Either party may
by notice to the other specify a different address for notice purposes except
that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice purposes. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice to Lessee.
24. Waivers. No waiver by Lessor of any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. 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 act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
25. Recording. Lessor and Lessee shall, upon request of Lessor, execute,
acknowledge and deliver to the other a "short form" memorandum of this Lease for
recording purposes.
26. Holding Over. If Lessee, with Lessor's consent, remains in possession of
the Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, except that the rent payable
shall be one hundred fifty percent (150%) of the rent payable immediately
preceding the termination date of this Lease, and all Options, if any, granted
under the terms of this Lease shall be deemed terminated and be of no further
effect during said month to month tenancy.
27. Covenants and Conditions. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
28. Binding Effect; Choice of Law. Subject to any provisions hereof restricting
assignment or subletting by Lessee and subject to the provisions of paragraph
17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State of
California applicable to contracts to be wholly performed within such State.
29. Subordination.
29.1 Lessor shall have the right to subordinate this Lease, and Lessee
shall, at Lessor's request, subordinate its rights under this Lease, to any
existing or future ground lease, covenants, conditions and restrictions,
easements, rights of way or any construction, operation and reciprocal easement
agreements, deeds of trust or mortgages encumbering the Building Project, any
advances made on the security thereof and any renewals, modifications,
consolidations, replacements or extensions thereof, whenever made or recorded.
However, Lessee's right to quiet possession of the Premises during the Term
shall not be disturbed if Lessee pays the rent and performs all of Lessee's
obligations under this Lease and is not otherwise in default. If any ground
lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of
its ground lease, deed of trust or mortgage, and gives written notice thereof to
Lessee, then this Lease shall be deemed prior to such ground lease, deed of
trust or mortgage, whether this Lease is dated prior or subsequent to the date
of said ground lease, deed of trust or mortgage or the date of recording
thereof.
29.2 If Lessor's interest in the Premises is acquired by any ground lessor,
beneficiary under a deed of trust, mortgagee or purchaser at a foreclosure sale,
Lessee shall attorn to the transferee of or successor to Lessor's interest in
the Premises and recognize such transferee of or successor as Lessor under this
Lease, provided that the purchaser or lessor shall acquire and accept the
Premises subject to this Lease. Lessee waives the protection of any statute or
rule of law which gives or purports to give Lessee any right to terminate this
Lease or surrender possession of the Premises upon the transfer of Lessor's
interest.
29.3 The effective subordination of this Lease to any future mortgages,
deeds of trust, other security interest or leases shall be subject to the
fulfillment of the conditions precedent that the holder of such mortgage or
other lien on the Building shall first have agreed in writing that so long as
Lessee is not in default, the Lease shall not be terminated by foreclosure or
sale pursuant to the terms of such mortgage or lien and such subordination shall
not otherwise materially restrict or limit the rights or increase the
obligations of Lessee under this Lease. Lessee shall sign and deliver an
instrument or documents necessary or appropriate to evidence any such attornment
or subordination or agreement to do so, including such reasonable conditions as
the prospective lender or ground lessor may require, provided that such
interests or documents recognize that Lessee's right to quiet possession of the
Premises shall not be disturbed so long as Lessee is not in default of its
obligations pursuant to this Lease beyond any applicable notice and cure period.
29.4 Notwithstanding anything to be contrary herein, Lessor hereby
represents and warrants to Lessee that the Premises are not currently subject to
the lien of any deed of trust, and that Lessee shall not be requested to
subordinate to the lien of a deed of trust during the initial term hereof.
30. Attorneys' Fees.
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30.1 If either party named herein bring an action to enforce the terms
hereof or declare rights hereunder, the prevailing party in any such action,
trial or appeal thereon, shall be entitled to his reasonable attorneys' fees to
be paid by the losing party as fixed by the court in the same or a separate
suit, and whether or not such action is pursued to decision or judgment. The
provisions of this paragraph shall inure to the benefit of the broker named
herein who seeks to enforce a right hereunder.
30.2 The attorneys' fee award shall not be computed in accordance with any
court fee schedule, but shall be such as to fully reimburse all attorneys' fees
reasonably incurred in good faith.
30.3 Lessor shall be entitled to reasonable attorneys' fees and all other
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.
31. Lessor's Access.
31.1 Lessor and Lessor's agents all have the right to enter the Premises at
reasonable times upon reasonable notice for the purpose of inspecting the same,
performing any services required of Lessor, showing the same to prospective
purchasers, lenders, or lessees, taking such safety measures, erecting such
scaffolding or other necessary structures, making such alterations, repairs,
improvements or additions to the Premises or to the Building Project as Lessor
may reasonably deem necessary or desirable and the erecting, using and
maintaining of utilities, services, pipes and conduits through the Premises
and/or other premises as long as there is no material adverse effect to Lessee's
use of the Premises. Notwithstanding the foregoing, Lessor shall use
commercially reasonable efforts to conduct all of Lessor's activities in the
Premises in a manner designed to minimize interference to Lessee and Lessee's
use of the Premises. Lessor may at any time place on or about the Premises or
the Building any ordinary "For Sale" signs and Lessor may at any time during the
last one hundred eighty (180) days of the term hereof place on or about the
Premises any ordinary "For Lease" signs.
31.2 All activities of Lessor pursuant to this paragraph shall be without
abatement of rent, nor shall Lessor have any liability to Lessee for the same.
Notwithstanding the foregoing, Lessor shall use commercially reasonable efforts
to conduct all of Lessor's activities in the Premises in a manner designed to
minimize interference to Lessee and Lessee's use of the Premises.
31.3 Lessor shall have the right to retain keys to the Premises and upon
reasonable notice to unlock all doors in or upon the Premises other than to
files, vaults and safes, and in the case of emergency to enter the Premises by
any reasonably appropriate means, and any such entry shall not be deemed a
forcible or unlawful entry or detainer of the Premises or an eviction. Lessee
waives any charges for damages or injuries or interference with Lessee's
property or business in connection therewith, except in the case that any such
damage is caused by Lessor's negligence or willful misconduct.
32. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common Areas
without first having obtained Lessor's prior written consent. Notwithstanding
anything to the contrary in this Lease, Lessor shall not be obligated to
exercise any standard of reasonableness in determining whether to grant such
consent. The holding of any auction on the Premises or Common Areas in violation
of this paragraph shall constitute a material default of this Lease.
33. Signs. Lessee shall not place any sign upon the Premises or the Building
Project without Lessor's prior written consent. Lessee shall be entitled to
suite entry signage and directory signage, as agreed upon by Lessor, at Lessor's
cost and expense, and in accordance with all applicable laws, regulations,
ordinances and recorded covenants, conditions and restrictions.
34. Merger. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
35. Consents. Except for paragraphs 32 (auctions) and 33 (signs) hereof,
wherever in this Lease the consent of one party is required to an act of the
other party such consent shall not be unreasonably withheld or delayed.
36. Guarantor. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
37. Quiet Possession. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Building Project.
38. Options.
38.1 Definitions. As used in this paragraph the word "Option" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor or to terminate this Lease prior to the end of the third
(3rd) year of the term; (2) the option, right of first refusal or right of first
opportunity to lease the Premises or the right of first offer to lease the
Premises or the right of first refusal or right of first opportunity to lease
other space within the Building Project or other property of Lessor
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or the right of first offer to lease other space within the Building Project or
other property of Lessor; (3) the right or option to purchase the Premises or
the Building Project, or the right of first refusal to purchase the Premises or
the Building Project or the right or first offer to purchase the Premises or the
Building Project, or the right or option to purchase other property of Lessor,
or the right of first refusal to purchase other property of Lessor or the right
of first offer to purchase other property of Lessor. As used in this paragraph,
the words "Lessee Affiliate" have the following meaning: any entity which shares
a common ownership interest with Lessee of twenty-five percent (25%) or more.
38.2 Options Personal. Each Option granted to Lessee in this Lease is
personal to the original Lessee and may be exercised only by the original Lessee
while occupying the Premises who does so without the intent of thereafter
assigning this Lease or subletting the Premises or any portion thereof, and may
not be exercised or be assigned, voluntarily or involuntarily, by or to any
person or entity other than Lessee; provided, however, that an Option may be
exercised by or assigned to any Lessee Affiliate. The Options, if any, herein
granted to Lessee are not assignable separate and apart from this Lease, nor may
any Option be separated from this Lease in any manner, either by reservation or
otherwise.
38.3 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 option to extend or renew this Lease has been so exercised.
38.4 Effect of Default on Options.
38.4.1 Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary, (i) during
the time commencing from the date Lessor gives to Lessee a notice of default
pursuant to paragraph 13.1.3 or 13.1.4 and continuing until the noncompliance
alleged in said notice of default is cured, or (ii) during the period of time
commencing on the day after a monetary obligation to Lessor is due from Lessee
and unpaid (without any necessity for notice thereof to Lessee) and continuing
until the obligation is paid, or (iii) in the event that Lessor has given to
Lessee three or more notices of default under paragraph 13.1.3, or paragraph
13.1.4, whether or not the defaults are cured, during the 12-month period of
time immediately prior to the time that Lessee attempts to exercise the subject
Option, (iv) if Lessee has committed any non-curable breach, including without
limitation those described in paragraph 13.1.2, or is otherwise in default of
any of the terms, covenants or conditions of this Lease.
38.4.2 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 38.4.1.
38.4.3 All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to
commence to cure a default specified in paragraph 13.1.4 within thirty (30) days
after the date that Lessor gives notice to Lessee of such default and/or Lessee
fails thereafter to diligently prosecute said cure to completion, (iii) Lessor
gives to Lessee three or more notices of default under paragraph 13.1.3, or
paragraph 13.1.4, whether or not the defaults are cured, or (iv) if Lessee has
committed any non-curable breach, including without limitation those described
in paragraph 13.1.2, or is otherwise in default of any of the terms, covenants
and conditions of this Lease.
39. Security Measures--Lessor's Reservations.
39.1 Lessee hereby acknowledges that Lessor shall have no obligation
whatsoever to provide guard service or other security measures for the benefit
of the Premises or the Building Project. Lessee assumes all responsibility for
the protection of Lessee, its agents, and invitees and the property of Lessee
and of Lessee's agents and invitees from acts of third parties. Nothing herein
contained shall prevent Lessor, at Lessor's sole option, from providing security
protection for the Building Project or any part thereof, in which event the cost
thereof shall be included within the definition of Operating Expenses, as set
forth in paragraph 4.2.7.
39.2 Without limiting its rights at law or elsewhere under this Lease,
Lessor shall have the following rights:
39.2.1 To change the name, address or title of the Building Project or
building in which the Premises are located upon not less than 90 days' prior
written notice;
39.2.2 To permit any lessee the exclusive right to conduct any
business as long as such exclusive does not conflict with any rights expressly
given herein;
39.2.3 To place such signs, notices or displays as Lessor reasonably
deems necessary or advisable upon the roof, exterior of the buildings or the
Building Project or on pole signs in the Common Areas.
39.3 Lessee shall not:
39.3.1 Use a representation (photographic or otherwise) of the
Building or the Building Project or their name(s) in connection with Lessee's
business without Lessor's prior written reasonable consent (Lessor hereby
consents to Lessee's distribution of a photograph of the Building to Lessee's
primary customer, Schlumberger, and/or Schlumberger's customer, Intel);
39.3.2 Suffer or permit anyone, except in emergency, to go upon the
roof of the Building without Lessor's prior written reasonable consent.
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40. Easements.
40.1 Lessor reserves to itself the right, from time to time, to grant such
easements, rights and dedications that Lessor deems necessary or desirable, and
to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, Parcel Maps and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material default of this Lease by Lessee without the need for
further notice to Lessee.
40.2 The obstruction of Lessee's view, air, or light by any structure
erected in the vicinity of the Building, whether by Lessor or third parties,
shall in no way affect this Lease or impose any liability upon Lessor.
41. [INTENTIONALLY DELETED]
42. Lessor's Right to Perform. Except as specifically provided otherwise in
this Lease, all covenants and agreements by Lessee under this Lease shall be
performed by Lessee at Lessee's sole cost and expense and without any abatement
or offset of rent. If Lessee shall fail to pay any sum of money (other than
Basic Rent) or perform any other act on its part to be paid or performed
hereunder and such failure shall continue for five (5) days with respect to
monetary obligations (or ten (10) days with respect to non-monetary obligations)
then, notwithstanding anything to the contrary provided elsewhere herein, after
Lessee's receipt of written notice thereof from Lessor, Lessor may, without
waiving or releasing Lessee from any of Lessee's obligations, make such payment
or perform such other act on behalf of Lessee. All sums so paid by Lessor and
all necessary incidental costs incurred by Lessor in performing such other acts,
together with interest at the Lease Rate (as defined in paragraph 13.2.1), shall
be payable by Lessee to Lessor within five (5) days after demand therefor as
additional rent. The foregoing rights are in addition to any and all remedies
available to Lessor upon Lessee's default as described in paragraph 13.2.
43. Limitation on Lessor's Liability. Notwithstanding anything contained in
this Lease to the contrary, the obligations of Lessor under this Lease
(including any actual or alleged breach or default by Lessor) do not constitute
personal obligations of the individual partners, directors, officers or
shareholders of Lessor or Lessor's partners, and Lessee shall not seek recourse
against the individual partners, directors, officers or shareholders of Lessor
or Lessor's partners, or any of their personal assets for satisfaction of any
liability with respect to this Lease. In addition, in consideration of the
benefits accruing hereunder to Lessee and notwithstanding anything contained in
this Lease to the contrary, Lessee hereby covenants and agrees for itself and
all of its successor and assigns that the liability of Lessor for its
obligations under this Lease (including any liability as a result of any actual
or alleged failure, breach or default hereunder by Lessor), shall be limited
solely to, and Lessee's and its successors' and assigns' sole and exclusive
remedy shall be against, Lessor's interest in the Building Project and proceeds
therefrom, and no other assets of Lessor.
44. Toxic Materials.
44.1 Definitions.
For purposes of this paragraph 44, "Hazardous Material" shall mean any
substance:
(i) the presence of which requires investigation or remediation
under any federal, state or local statute, regulation, ordinance, order, action
or policy; or
(ii) which is or becomes defined as a "hazardous waste" or "hazardous
substance" under any federal, state or local statute, regulation, ordinance or
amendments thereto including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. section 9601
et seq.) and or the Resource Conservation and Recovery Act (42 U.S.C. section
6901 et seq.); or
(iii) which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic, or otherwise hazardous and is or becomes
regulated by any governmental authority, agency, department, commission, board,
agency or instrumentality of the United States, the State of California or any
political subdivision thereof; or
(iv) the presence of which on the Premises, Building or Building
Project causes or threatens to cause a nuisance upon the Premises, Building or
Building Project or to adjacent properties or poses or threatens to pose a
hazard to the Premises, Building or Building Project or to the health or safety
of persons on or about the Premises, Building or Building Project; or
(v) without limitation which contains gasoline, diesel fuel or other
petroleum hydrocarbons; or
(vi) without limitation which contains polychlorinated biphenyls
(PCBs), asbestos or urea formaldehyde foam insulation; or
(vii) which is or becomes defined as "medical waste" under the Medical
Waste Management Act (Health & Safety Code Sections 25015-25099.3).
For purposes of this paragraph 44, "Environmental Requirements" means all
applicable present and future statutes, regulations, rules, ordinances, codes,
licenses, permits, orders, approvals, plans, authorizations, concessions,
franchises and similar items, of all governmental agencies, departments,
commissions, boards, bureaus or instrumentalities of the United States, states
and political subdivisions thereof and all applicable judicial and
administrative and regulatory decrees, judgments and orders relating to the
protection of human health or the environment, including without limitation:
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(i) all requirements, including but not limited to those pertaining to
reporting, licensing, permitting, investigation and remediation of emissions,
discharges, releases or threatened releases of Hazardous Materials, chemical
substances, pollutants, contaminants or hazardous or toxic substances, materials
or wastes whether solid, liquid or gaseous in nature, into the air, surface
water, groundwater or land, or relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
chemical substances, pollutants, contaminants or hazardous or toxic substances,
materials, or wastes, whether solid, liquid or gaseous in nature; and
(ii) all requirements pertaining to the protection of the health and
safety of employees or the public.
For purposes of this paragraph 44, "Environmental Damages" means all claims,
judgments, damages, losses, penalties, fines, liabilities (including strict
liability), encumbrances, liens, costs and expenses of investigation and defense
of any claim, whether or not such claim is ultimately defeated, and of any good
faith settlement of judgment, of whatever kind or nature, contingent or
otherwise, matured or unmatured, foreseeable or unforeseeable, including without
limitation reasonable attorneys' fees and disbursements and consultants' fees,
any of which are incurred at any time as a result of the existence on or after
the date upon which Lessee takes possession of the Premises (the "Possession
Date") of Hazardous Material upon, about, beneath the Premises, Building or
Building Project or migrating or threatening to migrate to or from the Premises,
Building or Building Project or the existence of a violation of Environmental
Requirements pertaining to the Premises, Building or Building Project,
regardless of whether the existence of such Hazardous Material or the violation
of Environmental Requirements arose prior to the present ownership or operation
of the Premises, Building or Building Project, and including without limitation:
(i) damages for personal injury, or injury to property or natural
resources occurring upon or off of the Premises, Building or Building Project,
foreseeable or unforeseeable, including, without limitation, lost profits,
consequential damages, the cost of demolition and rebuilding of any improvements
on real property, interest and penalties including but not limited to claims
brought by or on behalf of employees of Lessee, with respect to which Lessee
waives any immunity to which it may be entitled under any industrial or worker's
compensation laws;
(ii) fees incurred for the service of attorneys, consultants,
contractors, experts, laboratories and all other costs incurred in connection
with the investigation or remediation of such Hazardous Materials or violation
of Environmental Requirements including, but not limited to, the preparation of
any feasibility studies or reports or the performance of any cleanup, remedial,
removal, response, abatement, containment, closure, restoration or monitoring
work required by any federal, state or local governmental agency or political
subdivision, or reasonably necessary to make full economic use of the Premises,
Building or Building Project or any other property or otherwise expended in
connection with such conditions, and including without limitation any attorneys'
fees, costs and expenses incurred in enforcing this Lease or collection of any
sums due hereunder;
(iii) liability to any third person or governmental agency to
indemnify such person or agency for costs expended in connection with the items
referenced in subparagraph (ii) herein; and
(iv) diminution in the value of the Premises, Building or Building
Project, and damages for the loss of business and restriction on the use of or
adverse impact on the marketing of rentable or usable space or of any amenity of
the Premises, Building or Building Project.
-20-
<PAGE>
44.2 Lessee's Obligations.
Lessee, at its sole cost and expense, shall comply with all Environmental
Requirements relating to the storage, use and disposal of all Hazardous
Materials, including those materials identified in Sections 66680 through 66685
of Title 22 of the California Administrative Code, Division 4, Chapter 30
("Title 22") as the same may be amended from time to time. Lessee shall be
solely responsible for and shall protect, defend, indemnify, and hold Lessor,
its agents and contractors harmless from and against all Environmental Damages
arising out of or in connection with the storage, use and disposal of Hazardous
Materials by Lessee, its officers, employees, agents, representatives, servants,
subtenants, concessionaires, licensees, contractors, invitees or permittees. If
the presence of Hazardous Materials on the Premises, Building or Building
Project caused or permitted by Lessee results in contamination or deterioration
of water or soil resulting in a level of contamination greater than the levels
established by any governmental agency having jurisdiction over such
contamination, then Lessee shall, at its sole cost and expense, promptly take
any and all action necessary to clean up such contamination if required by law
or as a condition to the issuance or continuing effectiveness of any
governmental approval which relates to the use of the Premises, Building or
Building Project. If at any time prior to the expiration of the Lease term,
Lessor shall reach a reasonable good faith determination that Lessee or its
officers, employees, agents, representatives, servants, subtenants,
concessionaires, licensees, contractors, invitees or permittees have at any time
violated any Environmental Requirements, discharged any Hazardous Material onto
the Premises, Building or Building Project, or surrounding areas or otherwise
subjected Lessor or the Building Project to liability for Environmental Damages,
then Lessor shall have the right to require Lessee at Lessor's sole cost and
expense to conduct appropriate tests of water and soil and to deliver to Lessor
the result of such tests to demonstrate that no contamination in excess of
legally permitted levels has occurred as a result of Lessee's use of the
Premises, Building or Building Project. If it is determined that Lessee is
responsible for the presence of Hazardous Materials on the Premises or Building
in excess of legally permitted levels, Lessee shall pay for such tests. If the
presence of Hazardous Materials on the Premises, Building or office Building
Project is caused or permitted by Lessee or its officers, employees, agents,
representatives, servants, subtenants, concessionaires, licensees, contractors,
invitees or permittees such that Lessor or Lessee becomes obligated to conduct
the necessary clean-up of such contamination as required above, then, Lessee
shall further be solely responsible for, and shall protect, defend, indemnify
and hold Lessor, its agents and contractors harmless from and against all
claims, costs and liabilities, including actual attorneys' fees, expert witness
fees and costs, arising out of or in connection with any removal, cleanup and
restoration work and materials required hereunder to return the Premises,
Building or office Building Project and any other property of whatever nature to
conditions which existed prior to Lessee's use thereof and which are within
acceptable levels according to all Environmental Requirements or any other
Federal, State or local governmental requirements. Lessee's obligations
hereunder shall survive the termination of this Lease. Lessor shall indemnify,
defend by counsel reasonably acceptable to Lessee, protect and hold Lessee
harmless from and against all liabilities, losses, costs and expenses, demands,
causes of action, claims or judgments directly or indirectly arising out of the
use, generation, storage or disposal of Hazardous Materials on the Premises,
Building, or Building Project by Lessor or any of Lessor's agents, employees or
contractors. Lessor's obligations pursuant to the foregoing indemnity shall
survive the termination of this Lease.
45. Authority. If Lessee is a corporation, trust or partnership, Lessee shall,
within thirty (30) days after execution of this Lease, deliver to Lessor
evidence of such authority satisfactory to Lessor. If Lessor and/or Lessee is a
corporation (or partnership), each individual executing this Lease on behalf
thereof represents and warrants that he is duly authorized to execute and
deliver this Lease on behalf of such corporation in accordance with the by-laws
of such corporation (or partnership in accordance with the partnership agreement
of such partnership) and that this Lease is binding upon such corporation (or
partnership) in accordance with its terms. Each of the persons executing this
Lease on behalf of a corporation does hereby covenant and warrant that the party
for whom it is executing this Lease is a duly authorized and existing
corporation, that it is qualified to do business in California, and that the
corporation has full right and authority to enter into this Lease.
46. Conflict. Any conflict between the printed provisions, Exhibits or Addenda
of this Lease and the computer-generated, typewritten or handwritten provisions,
if any, shall be controlled by the computer-generated, typewritten or
handwritten provisions.
47. No Offer. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to Lessee to lease.
This Lease shall become binding upon Lessor and Lessee only when fully executed
by both parties.
48. Lender Modification. Lessee agrees to make such reasonable modifications to
this Lease as may be reasonably required by an institutional lender in
connection with the obtaining of normal financing or refinancing of the Building
Project.
49. Multiple Parties. If more than one person or entity is named as either
Lessor or Lessee herein, except as otherwise expressly provided herein, the
obligations of the Lessor or Lessee herein shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee,
respectively.
50. Tenant Improvements. Lessee shall, at its sole cost and expense, cause such
tenant improvements ("Improvements") as Lessee desires to be constructed in the
Premises. All Improvements shall be constructed by a general contractor
reasonably approved in writing by Lessor, in accordance with plans and
specifications reasonably approved in advance by Lessor, and otherwise in
accordance with the provisions of paragraph 7.3 (Alterations and Additions);
provided, however, that with respect to the Improvements Lessee shall not be
obligated to obtain the lien and completion bond otherwise required thereunder.
51. Option To Extend. Provided that (i) Lessee is not in default under the
terms of this Lease at the time the Renewal Option (as defined below), and (ii)
Lessee provides Lessor with written notice thereof at least nine (9) months
-21-
<PAGE>
in advance, Lessee shall have the option (the "Renewal Option") to renew this
Lease for one (1) period of five (5) years each (the "Renewal Term"), commencing
upon the last day of the initial Term of this Lease (the "Termination Date").
Such Renewal Term shall be on all the terms and conditions of this Lease, except
that Base Rent due hereunder shall be adjusted based upon the Market Rent for
the Premises as of the commencement of the Renewal Term.
The term "Market Rent" shall mean the monthly amount per rentable square
foot in the Premises that a willing, non-equity, non-renewal, non-expansion new
tenant would pay and a willing landlord would accept at arm's length for space
in a comparable building or buildings, with comparable tenant improvements, in a
comparable location, giving appropriate consideration to monthly rental rates
per rentable square foot, the presence or absence of rent escalation clauses
such as operating expense and tax pass-throughs, length of lease term, size and
location of premises being leased, if any, and other generally applicable terms
and conditions of tenancy for a similar building or buildings.
No later than eight (8) months prior to the Termination Date, Lessor and
Lessee, upon notice from Lessor, shall have a period of thirty (30) days in
which to agree on the Market Rent. If they agree within that period, they shall
immediately execute an amendment to this Lease stating the Base Rent for such
period.
If Lessor and Lessee are unable to agree upon the Market Rent within such
thirty (30) day period, then the dispute shall proceed to arbitration conducted
pursuant to the located and the Real Estate Arbitration Rules of the American
Arbitration Association or its successor insofar as said rules do not conflict
with said laws or this paragraph. Within ten (10) days of the expiration of the
aforesaid thirty (30) day period, Lessor and Lessee shall select one joint
arbitrator or, if they cannot agree on one joint arbitrator, then each shall
select an arbitrator within fifteen (15) days of the expiration of the aforesaid
thirty (30) day period and notify the other party of its selection. On or
before the selection of such arbitrators, Lessor and Lessee shall exchange, in
writing, their respective determinations of Market Rent. The two arbitrators
selected shall designate the thirty arbitrator forthwith. Each arbitrator
selectee shall be a real estate appraiser with an MAI certification or a real
estate broker, with at least five (5) years of experience appraising or leasing
building space comparable to the Premises in the city and county where the
Premises is located. The arbitrators shall convene in the city or county in
which the Premises are located as soon as practicable and offer Lessor and
Lessee the opportunity to present their cases. If any party fails to appear,
participate or produce evidence in an arbitration proceeding, the arbitrators
may make their decision based solely on the evidence actually presented. The
arbitrators shall make their determinations of Market Rent based on the factors
referenced above, and based only upon whether the Market Rent submitted by
Lessor or that submitted by Lessee is closest to actual Market Rate, and not on
the basis of a compromise or average of the submitted figures. Such decision
shall be binding upon Lessor and Lessee and enforceable in a court of law. The
costs, charges and fees of the arbitrators shall be paid by the party whose
submitted determination of Market Rent is not selected. In the event either
party fails to appoint an arbitrator or the two arbitrators fail to select a
third arbitrator within the time required by this section, upon application of
either party, the arbitrator shall be appointed by the American Arbitration
Association, or if there is no American Arbitration Association or it shall
refuse to perform this function, then by the then Presiding Judge of the
Superior Court and/or presiding trial court of the State and County in which the
Premises is located.
-22-
<PAGE>
52. Attachments. Attached hereto are the following documents which constitute a
part of this Lease:
Exhibit A - Premises
Exhibit B - Building Project
Exhibit C - Rules and Regulations
Exhibit D - Location of Reserved Parking
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
LESSOR, ITS COUNSEL, ANY REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE
LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF
THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
<TABLE>
<CAPTION>
LESSOR: LESSEE:
<S> <C>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a MICROELECTRONIC PACKAGING, INC., a California
Massachusetts corporation corporation
By: /s/ JOHN NAGLE By: /s/ DENIS J. TRAFECANTY
--------------------------------------------- ----------------------------------------------
John Nagle Name: Denis J. Trafecanty
Senior Investment Officer --------------------------------------------
Title: SVP Chief Financial Officer
-------------------------------------------
Date: September 18, 1997 Date: Sept. 16, 1997
------------------------------------------- --------------------------------------------
Lessor's Notice Address: By: _____________________________________________
Name: ___________________________________________
John Hancock Mutual Life Insurance Company Title: __________________________________________
200 Clarendon Street, Floor T-52
Boston, Massachusetts 02117
Attn: Asset Management Date: ___________________________________________
Copies to: Lessee's Notice Address:
SENTRE Partners Microelectronic Packaging, Inc.
225 Broadway, Suite 1700 9350 Trade Place
San Diego, CA 92101 San Diego, CA 92126
Attn: Michael P. Peckham
</TABLE>
-23-
<PAGE>
EXHIBIT A
PREMISES
[Drawing depicting first and second floors of building. Portion subject to the
lease is approximately one-half of the total.]
A-1
<PAGE>
EXHIBIT B
Building Project
Legal Description:
Parcel 1:
Lot 40 of Hazard Commercial Park in the City of San Diego, County of San
Diego, State of California, according to Map thereof No. 8503, filed in the
Office of the County recorder of San Diego County, February 25, 1977.
Parcel 2:
An easement for parking access, ingress and egress over that portion of Lot
41 of Hazard commercial Park in the City of San Diego, County of San Diego,
State of California, according to Map thereof No. 8503, filed in the Office
of the County Recorder of San Diego County, February 25, 1077, as described
as follows:
B-1
<PAGE>
EXHIBIT C
RULES AND REGULATIONS
STANDARD LEASE
GENERAL RULES
1. Lessee shall not suffer or permit the obstruction of any Common Areas,
including driveways, walkways and stairways.
2. Lessor reserves the right to refuse access to any persons Lessor in good
faith judges to be a threat to the safety, reputation, or property of the
Building Project and its occupants.
3. Lessee shall not make or permit any unreasonable noise or odors that
annoy or interfere with other lessees or persons having business within the
Building Project.
4. Lessee shall not keep animals or birds within the Building Project, and
shall not bring bicycles, motorcycles or other vehicles into areas not
designated as authorized for same.
5. Lessee shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.
6. No sign, advertisement of notice shall be displayed, printed or affixed
on or to the Premises or to the outside or inside of the Building or so as to be
visible from outside the Premises or Building without Lessor's prior written
consent. Lessor shall have the right to remove any non-approved sign,
advertisement or notice, without notice to and at the expense of Lessee, and
Lessor shall not be liable in damages for such removal. All approved signs or
lettering on doors and walls shall be printed, painted, affixed or inscribed at
the expense of Lessee by Lessor or by a person selected by Lessor and in a
manner and style acceptable to Lessor.
7. The sidewalks, halls, passages, exits, entrances, elevators and stairways
and other portions of the common areas shall not be obstructed by Lessee or used
for any purpose other than for ingress and egress from Lessee's Premises.
8. Toilet rooms, toilets, urinals, wash bowls and other apparatus shall not
be used for any purpose other than for which they were constructed and no
foreign substance of any kind whatsoever shall be thrown therein.
9. Lessee shall not overload the floor of the Premises or, except as
required for the normal hanging of wall art, mark, drive nails, screw or drill
into the partitions, ceilings or floor or in any way deface the Premises nor
shall Lessee suffer or permit any thing in or around the Premises or Building
that causes excessive vibration or floor loading in any part of the Building
Project.
10. Lessor shall have the right to prescribe the weight, size and position of
all safes and other heavy equipment brought into the Building. The times and
manner of moving the same in and out of the Building shall be prescribed by
Lessor, and all such moving must be done under the supervision of Lessor.
Lessor may exclude from the Building any such heavy or bulky equipment or
articles, the weight of which may exceed the floor load for which the Building
is designed, or such equipment or articles as may violate any provisions of the
Lease of which these rules and regulations are a part. Lessee shall not use any
machinery or other bulky articles on the Premises, even though its installation
may have been permitted, which may cause any noise, or jar, or tremor in the
floors or walls, or which by its weight might injure the floor of the Building.
Safes or other heavy equipment shall, as considered necessary by Lessor, stand
on a platform of such thickness as is necessary to properly distribute the
weight.
11. Lessee shall not use or keep in the Premises, Building or Building
Project any kerosene, gasoline or inflammable, explosive or combustible fluid or
material, unless in approved containers and in compliance with applicable laws.
12. Lessee shall not lay linoleum, tile, carpet or other similar floor
covering so that the same shall be affixed to the floor of the Premises in any
manner except as approved by Lessor.
13. Lessee shall not, without Lessor's prior written consent, occupy or
permit any portion of the Premises to be occupied or used for the manufacture or
sale of liquor or tobacco in any form, or as a barber or manicure shop, or as an
employment bureau. The Premises shall not be used for lodging or sleeping or
for any improper, objectionable or immoral purpose. No auction shall be
conducted on the Premises without Lessor's prior consent.
14. Lessee shall not make, or permit to be made, any unseemly or disturbing
noises, or disturb or
C-1
<PAGE>
interfere with occupants of the Building, the Building Project or neighboring
buildings or premises or those having business with it by the use of any musical
instrument, radio, phonographs or unusual noise, or in any other way.
15. No vehicles or animals of any kind shall be brought into or kept in or
about the Premises, and no cooking shall be done or permitted by any lessee in
the Premises, except that the preparation of coffee, tea, hot chocolate,
microwavable foods and similar items for lessees, their employees and visitors
shall be permitted. No lessee shall cause or permit any unusual or
objectionable odors to be produced in or permeate from or throughout the
Premises.
16. The sashes, sash doors, skylights, windows and doors that reflect or
admit light and air into the halls, passageways or other public places in the
Building shall not be covered or obstructed by any lessee, nor shall any
bottles, parcels or other articles be placed on the window sills.
17. No additional locks or bolts of any kind shall be placed upon any of the
doors or windows by any lessee, nor shall any changes be made in existing locks
or the mechanisms thereof unless Lessor is first notified thereof, gives written
approval, and is furnished a key therefor. Each lessee must, upon the
termination of its tenancy, give the Lessor all keys of stores, offices, or
toilets and toilet rooms, either furnished to, or otherwise procured by, such
lessee, and in the event of the loss of any keys so furnished, such lessee shall
pay Lessor the cost of replacing the same or of changing the lock or locks
opened by such key if Lessor shall deem it necessary to make such change.
18. Lessor shall have the right to prohibit any advertising by any lessee
which, in Lessor's opinion, tends to impair the reputation or desirability of
the Building or the Building Project or its desirability as an office building
and upon written notice from Lessor any lessee shall refrain from and
discontinue such advertising.
19. Any person employed by any lessee to do janitorial work shall, while in
the Building or the Building Project and outside of the Premises, be subject to
and under the control and direction of the office of the Building Project (but
not as an agent or servant of Lessor, and such lessee shall be responsible for
all acts of such persons).
20. There shall not be used in any space, or in the public halls of the
Building, either by any lessee or others, any hand trucks except those equipped
with rubber tires and side guards.
21. Lessee shall be responsible for the inappropriate use of any toilet
rooms, plumbing or other utilities by Lessee or its employees, agents, licensees
or invitees. No foreign substances of any kind are to be inserted therein.
22. Lessee shall not deface the walls, partitions or other surfaces of the
Premises or Building Project.
23. Lessee shall be responsible for any damage to the Building Project
arising from Lessee's moving any furniture, freight or equipment into or out of
the Premises.
24. No window coverings, shades or awnings shall be installed or used by
Lessee without the prior, written reasonable approval of Lessor.
25. No Lessee, employee or invitee shall go upon the roof of the Building
without the prior, written reasonable approval of Lessor.
26. Lessee shall not suffer or permit smoking or carrying of lighted cigars
or cigarettes in areas reasonably designated by Lessor or by applicable
governmental agencies as non-smoking areas.
27. Lessee shall not install, maintain or operate any vending machines upon
the Premises without Lessor's written consent, which consent shall not be
unreasonably withheld, conditioned or delayed.
28. Lessee shall comply with all safety, fire protection and evacuation
regulations established by Lessor or any applicable governmental agency.
29. Lessor reserves the right to waive any one of these rules or regulations,
and/or as to any particular Lessee, and any such waiver shall not constitute a
waiver of any other rule or regulation or any subsequent application thereof to
such Lessee.
30. Lessee assumes all risks from theft or vandalism and agrees to keep its
Premises locked as may be required.
31. Lessor reserves the right to make such other reasonable rules and
regulations as it may from
C-2
<PAGE>
time to time deem necessary for the appropriate operation and safety of the
Building Project and its occupants. Lessee agrees to abide by these and such
rules and regulations.
32. Canvassing, soliciting and peddling in the Building are prohibited and
each lessee shall cooperate to prevent the same.
PARKING RULES
1. Parking areas shall be used only for parking by vehicles no longer than
full size, passenger automobiles.
2. Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or
invitees to be loaded, unloaded, or parked in areas other than those designated
by Lessor for such activities.
3. Parking stickers or identification devices shall be the property of
Lessor and be returned to Lessor by the holder thereof upon termination of the
holder's parking privileges. Lessee will pay such replacement charge as is
reasonably established by Lessor for the loss of such devices.
4. Lessor reserves the right to refuse the sale of monthly identification
devices to any person or entity that willfully refuses to comply with the
applicable rules, regulations, laws and/or agreements.
5. Lessor reserves the right to reasonably allocate parking spaces between
compact and standard size spaces handicapped and non-handicapped, as long as the
same complies with applicable laws, ordinances and regulations.
6. Users of the parking area will obey all posted signs and park only in the
areas designated for vehicle parking.
7. Unless otherwise instructed, every person using the parking area is
required to park and lock his own vehicle. Lessor will not be responsible for
any damage to vehicles, injury to persons or loss of property, all of which
risks are assumed by the party using the parking area.
8. The maintenance, washing, waxing or cleaning of vehicles in the parking
structure or Common Areas is prohibited.
9. Lessee shall be responsible for seeing that all of its employees, agents
and invitees comply with the applicable parking rules, regulations, laws and
agreements.
10. Lessor reserves the right to modify these rules and/or adopt such other
reasonable and non-discriminatory rules and regulations as it may deem necessary
for the proper operation of the parking area.
11. Such parking use as is herein provided is intended merely as a license
only and no bailment is intended or shall be created hereby.
12. Lessor or its agent may tow or otherwise remove any vehicles which are
parked illegally in the parking areas, which are parked in the parking areas for
more than seventy-two (72) consecutive hours without Lessor's prior written
consent or which constitute a nuisance or annoyance to other users of the
Building Project or parking areas. Such towing shall be at the sole cost and
expense of the lessee which is in any way responsible for the presence of such
vehicle in the parking area (for example, if the vehicle is parked by any
particular lessee's invitee, customer or employee, such lessee shall be
responsible for the cost of towing such vehicle).
C-3
<PAGE>
EXHIBIT D
LOCATION OF RESERVED PARKING
[A two-dimensional drawing depicting the building and parking lot, with the
reserved parking appearing open, while parking reserved for others is
crossed-out]
D-1
<PAGE>
EXHIBIT 10.103
SECOND AMENDMENT
----------------
This Second Amendment, dated as of September 9, 1997, is made and entered
into between Microelectronic Packaging America (the "Borrower") and Citicorp
USA, Inc. (the "Lender").
AMENDMENT
---------
WHEREAS, the Borrower has executed that certain Promissory Note dated May
13,1997, as amended by Amendment dated July 11, 1997 (as so amended, the
"Note"); and
WHEREAS, the Borrower and Lender desire to amend the Note in certain
respects;
NOW THEREFORE, in consideration of the premises and of the mutual
agreements, representations and warranties herein set forth, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Amendments. As of July 11, 1997, the Note is amended as follows:
----------
(a) The third line of the first paragraph of the Note is amended by
deleting the date "September 9, 1997" and substituting therefore the date
"December 8, 1997".
(b) The sixth line of the first paragraph of the Note is amended by adding
the words "September 9, 1997 and on" immediately after the words "payable on".
(c) The seventh line of the first paragraph of the Note is amended by
deleting the interest rate "6.72%" and substituting therefor the interest rate
"6.71875%".
(d) The penultimate line of the first paragraph of the Note is amended by
deleting the interest rate "8.72%" and substituting therefor the interest rate
"8.71875%".
SECTION 2. Legal Obligation. The Borrower represents and warrants to the
----------------
Lender that this Amendment has been duly authorized, executed and delivered on
its behalf, and that the Note, as amended hereby, constitutes a legal, valid and
binding obligation of the Borrower, enforceable against the Borrower in
accordance with its terms.
SECTION 5. Ratification. Except as expressly amended hereby, the Note
------------
shall remain in full force and effect. The Note, as amended hereby, and all
rights and powers created thereby or thereunder, are in all respects ratified
and
1
<PAGE>
confirmed.
SECTION 6. Miscellaneous.
-------------
(a) The Note and this Second Amendment shall be read, taken and construed
as one and the same instrument.
(b) This Second Amendment shall be governed by, and construed in accordance
with, the laws of the State of New York.
(c) Any references in the Note to "this Promissory Note", "hereunder",
"herein" or words of like import referring to the Note, shall mean and be a
reference to the Note as amended hereby.
(d) This Second Amendment may be executed in any number of counterparts and
by different parties hereto in separate counterparts, each of which when so
executed shall be deemed an original and all of which taken together shall
constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
MICROELECTRONIC PACKAGING AMERICA
By /s/ Denis J. Trafecanty
---------------------------------
Title: Chief Financial Officer
CITICORP USA, INC.
By /s/ James J. Sheridan
---------------------------------
Title: Vice President
2
<PAGE>
Exhibit 10.104
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into effective
as of the 6th day of October, 1997 ("Effective Date") by and between
Microelectronic Packaging, Inc. a California corporation ("Company"), and Andrew
Wrobel ("Employee").
WHEREAS, the Company desires to employ Employee and Employee desires to be
employed by Company upon all the terms and conditions contained in this
Agreement.
NOW THEREFORE, in consideration of the mutual agreement herein contained,
the parties hereto hereby agree as follows:
1. Employment: Subject to the terms and conditions of this Agreement, the
Company hereby employs Employee as President and Chief Executive
Officer and in such capacity Employee shall serve as the Company's
chief executive officer with full authority and responsibility for the
general supervision and management of all the Company's business.
Employee will have the responsibilities and duties commensurate with
the position of President and Chief Executive Officer of a public
company on an on-0going basis. Employee hereby accepts such employment
ang agrees to perform the services specified herein, all upon the
terms and conditions herein contained. Employee agrees to perform in
good faith and to the best of his ability all services which may be
required of him hereunder, and to be available to render services at
all reasonable times and places in accordance with such reasonable
directions, requests, rules and regulations made by the Company in
connection with his employment. Employee will be reporting directly to
the Board of Directors of the Company.
1.1 Title: Employee title will be President and Chief Executive
-----
Officer. Employee will also be elected as a member of the Board
of Directors of the Company (the "Board") at the next meeting of
the Board.
2. Term:
----
2.1 Initial Term: The term of this Agreement and Employee's
------------
employment hereunder shall commence on Effective Date and,
subject to earlier termination as provided in Section 11 hereof,
continue for a period of one (1) year ("Employment Period").
2.2 Extension of term: The term of this Agreement shall
-----------------
automatically be extended, unless not less than one (1) year
prior to the expiration date, the Company shall have delivered
written notice to Employee that the term of this Agreement shall
terminate on the expiration date; or Employee, not less than
thirty (30) days prior to the expiration date, elects to
terminate this Agreement by delivering written notice of such
desire to terminate to
1
Company Initials: /s/ AJM / Employees Initials: /s/ A.W.
---------- ----------
<PAGE>
the Company. The extension period hereunder shall be referred to
herein as an "Option Period".
3. Compensation:
------------
3.1 Salary: Subject to the other terms of this Agreement, Company
------
shall pay and Employee shall be entitled to receive from the
Company an annual salary ("Base Salary") of not less than
$220,000 for services rendered, paid in equal twice monthly
installments. The twice-monthly payment periods are referred to
herein as the "Payment Periods". The salary due under this
Section 3.1 during any Payment Period is referred to herein as
the "Installment Amount".
3.2 Annual Salary Increase: On each anniversary of the effective
----------------------
date of this Agreement, the Employee shall receive an increase
of no less than six (6) percent of his annual base salary.
3.3 Bonus: Employee shall be entitled to the following bonus,
-----
payable in cash within ten (10) days after the end of the
quarter:
. Target Bonus: A target bonus equal to sixty percent (60%) of
------------
Employee's then existing base salary. That bonus will become
payable quarterly pro rata upon the Company's achievement of
the performance criteria set forth in the business plan to be
prepared by Employee for the Company and approved by the
Board. However, payment of $25,000 of the target bonus will
be paid at the end of the first three (3) months of your
employment with the Company, provided that by such date, you
have completed the business plan and such plan has been
approved by the board.
3.4 Equity: Employee will be granted a stock option to purchase
------
500,000 shares of the Company's common stock (the "Option"). The
exercise price of the Option will be the fair market value of
the Company's stock on the date of grant, which is the Effective
Date of employment, as determined with reference to the trading
price of the common stock.
The option shares will vest over a three (3) year period
measured from the Effective Date, with such stock vesting
monthly pro rata over the course of three (3) years. Such
options to be exercised within ten (10) years of grant. Upon
merger, acquisition, termination of Employment other than for
cause, or voluntary termination by Employee, all stock options
will vest immediately.
3.5 Reimbursement of Expenses: During the Term of the Employment
-------------------------
Period and each Option Period, if any, employee shall be
authorized to incur
2
Company Initials: /s/ AJM / Employees Initials: /s/ A.W.
---------- ----------
<PAGE>
reasonable and necessary expenses according to the Company's
policy for the purpose of promoting the business of the Company,
including, without limitation, expenses for entertainment,
travel and similar items, provided such expenses are reasonable
and have a business purpose. The company shall reimburse
Employee for such expenses upon the presentment by Employee of
an itemized accounting of such expenses, including receipts
where required by federal tax regulations. Such accounting shall
be promptly forwarded to the company.
4. Additional Benefits: Throughout the term of the Employment Period and
-------------------
each Option Period, if any, Employee shall be entitled to receive
executive benefits that are currently provided to executive officers
of the Company (i) such benefits or rights as may be provided under
any Employee benefit plan approved by the Company from time to time,
and (ii) such other benefits and perquisites of employment as a
generally made available to other members of management of the
Company, including, without limitations, participation in life,
medical, disability, retirement and dental insurance plans, and
participation in equity incentive and stock plans of the Company.
5. Vacation, Sick Leave and Holidays: Employee shall have the right
---------------------------------
during each year of the Employment Period and Option Period, if any,
of this Agreement to take an aggregate of fifteen (15) business days
of vacation with pay at such time as may be mutually agreed upon by
the Company and Employee. In addition, Employee shall be entitled to
paid time off for personal illness and for observance of holidays in
accordance with the Company's policy as may exist from time to time.
6. Devotion of Time: During the term of the Employment Period and each
----------------
Option Period, if any, Employee shall devote full time attention and
energies to the business of the Company in order that he may
satisfactorily and completely perform his duties hereunder. Except as
may be specifically permitted by the Company in writing, Employee
shall not be engaged in any other business activity while in the
employ of the Company; provided, however, Employee may serve on the
Board of directors of other companies without the Company's written
consent. The foregoing shall not be construed as preventing Employee
from making passive investments in other businesses or enterprises;
provided, however, that such investments will not require services on
the part of Employee which would in any way impair the performances of
his duties under this Agreement and, provided further, that such other
businesses or enterprises are not engaged in any business competitive
with the business of the Company as of the time at which such
investments made, or shall the foregoing be construed as requiring the
divestiture of any investment made, or shall the foregoing be
construed as requiring the divestiture of any investment made by
Employee prior to the date hereof. The foregoing shall in no way limit
the application of corporate policy generally applicable to employees
in comparable positions.
3
Company Initials: /s/ AJM / Employees Initials: /s/ A.W.
---------- ----------
<PAGE>
7. Directors and Officer Liability Insurance: The Company and Employee
-----------------------------------------
understand and agree that it is the mutual intent of the parties that the
Company agrees to use its best effort to obtain directors and officers
liability insurance in a form acceptable to Employee at the earliest
practicable time.
8. Disclosure to Company Inventions as Sole Property of Company: Employee
------------------------------------------------------------
agrees promptly to disclose to Company all inventions, ideas, discoveries,
improvements, trade secrets, formulae, techniques, processes' developments,
know-how, writings, computer programs, and other intellectual property
(hereinafter collectively referred to as the "Inventions"), whether or not
patentable or copyrightable and whether or not reduced to practice,
conceived, made or learned by Employee during the period of his employment,
whether alone or jointly with others, which relate to or result from the
actual or anticipated business, work, research, or investigations of
Company or which result to any extent from use of Company's premises,
resources, property or facilities.
Employee acknowledges and agrees that all inventions (including all patents
rights and rights of copyright therein) shall be the sole property of
Company or such other person or entity as may be designated by Company, and
Employee hereby assigns and agrees to take all reasonable steps to assign
to company Employee's entire right and interest in and to all the
Inventions provided that any such assignment or agreement to assign
complies with the provisions of Section 2870 of the California Labor Code.
Further, Company or its designee shall be the sole owner of all domestic
and foreign rights pertaining to the Inventions. Employee agrees to assist
Company in every reasonable way (at Company's expense) to obtain, register
and enforce patents and copyrights on the Inventions in any and all
countries, and to execute all documents and do all other things reasonably
---------
necessary and appropriate to vest more fully in Company all right, title,
and interest, including copyrights and patent rights, in and to the
Inventions. Employee's obligation to assist Company in obtaining,
registering and enforcing patents and copyrights shall survive termination
of Employee's employment, but Company shall compensate Employee at
reasonable rate after such termination for the time actually spent by
Employee at Company's request for such assistance.
9. Key Man Life Insurance: Employee agrees that key man life insurance may be
----------------------
required by a future investor, Employee will cooperate with Company in
obtaining said insurance.
10. Restrictive Covenants:
---------------------
10.1 Non-Competition: During the term of the Employment Period and each
---------------
Option Period, if any, Employee shall not, directly or indirectly,
carry on or
4
Company Initials: /s/ AJM / Employees Initials: /s/ A.W.
---------- ----------
<PAGE>
be engaged or otherwise take part in or render service to any person
(other than the Company, its officers, directors, shareholders, employees,
and affiliates or any subsidiary of the Company or such persons) who or
which is engaged in any business of a type now or hereafter (but during
the Employment Period, and each Option Period), in competition with the
Company. Without limiting the generality of the foregoing provisions of
this Section 8.1, Employee shall be deemed to be engaged in a particular
business if he is an owner, proprietor partner, stockholder, officer,
employee, independent contractor, director or joint venture of, or a
consultant to, any person who or which is directly or indirectly engaged
in such a business. The restrictions of this Section 10.0 prohibit
ownership in a competitive business shall not apply to (i) any ownership
or interest held by Employee at the time of execution of this Agreement,
(ii) any ownership, directly or indirectly, of not more than five percent
(5%) of any class of equity securities of a corporation, provided such
class of equity security is registered under the Securities Exchange Act
of 1934, or (iii) any investment in real property (whether made directly
or through the vehicle of partnership, corporation, investment trust or
other entity), provided that no entity in competition with the Company may
be a lessee of some or all of such real property. For the purpose of this
Section 10.1, the Business of the Company shall include only any business
involved in the development and/or manufacture of interconnect components.
10.2 Delivery of Records: Upon demand and/or termination of Employee's
-------------------
employment with the Company, whichever occurs first, Employee shall
deliver to the Company all papers, documents, writing, books, records,
lists of customers and investors, brochures and other property belonging
to the Company or produced by him or coming into his possession by or
through his employment or relating to the confidential knowledge,
information or facts described in Section 10.3 hereof and Employee agrees
that all such materials will at all times remain the property of the
Company. The provisions of this Section 10.2 shall survive the termination
of this Agreement.
10.3 Confidentiality: Except in the course of the Company's business, Employee
---------------
shall not at any time during or after his employment with the Company,
reveal, divulge or make known to any person, firm or corporation outside
Company, any confidential knowledge or information or any confidential
facts concerning any customers, methods, developments, schedules, lists,
plans or other confidential information, knowledge or facts of or relating
to the business of the Company and will retain all confidential knowledge
and information which he has acquired or which he will acquire during his
employment therewith relating to such costumers, method, developments,
schedules, lists or plans and the business of the Company for the sole
benefit of the Company, its successor and assigns, provided,
5
Company Initials: /s/ AJM / Employees Initials: /s/ A.W.
---------- ----------
<PAGE>
however, that this restriction shall not apply to any knowledge,
information or fact held by or known to Employee which is generally
available from sources other than Employee for a period of five (5)
years. The provisions of Section 10.3 shall survive the termination
of this Agreement.
10.4 Specific Performance: Employee acknowledges that a remedy at low for
--------------------
any breach or attempted breach of Section 10.2 and 10.3 of this
Agreement may be inadequate and agrees that Company shall be entitled
to specific performance and injunctive and other equitable relief in
case of any such breach or attempted breach, and further agrees to
waive any requirement for the securing or posting of any bond in
connection with the obtaining of any such injunctive or any other
equitable relief. Nothing herein shall be construed as prohibiting
the Company from pursuing any other remedies available to the Company
for such breach or threatened breach, including recovery of damages
from Employee. In the event the Company brings action to enforce its
rights hereunder, Employee shall pay all the Company's court costs
and legal fees and expenses arising out of such action if the Company
prevails in such action, and the Company shall pay all of Employee's
court costs and legal fees and expenses arising out of such action if
Employee prevails in such action.
10.5 Reasonableness: In the event any court shall finally hold that the
--------------
time or territory or any other provision of this Section 10
constitutes an unreasonable restriction against Employee, the
provisions hereof shall not be rendered void but shall apply as to
such time, territory and other provisions to such extent as such
court may judicially determine or indicate constitutes a reasonable
restriction under the circumstances involved.
11. Termination:
-----------
11.1 Termination by the Company or Employee: This Agreement may be
--------------------------------------
terminated for any reason at any time by either party during the
Employment Period or Option Period, if any, upon thirty (30) days
written notice to the other party, provided, however, that unless
Employee is terminated "for cause", as set forth below, or Employee
voluntarily terminates this Agreement other than for "good reason",
and except as provided in Sections 11.2 and 11.3 hereof, Employee
shall be entitled to be paid for one (1) year his aggregate salary
within five business days of Employee's termination. For purposes of
determining Employee's aggregate salary, Employee shall receive
payment of his Base Salary at the highest annual salary level plus
any accrued, but unpaid bonus amounts already earned as of the
termination date.
Severance: In case of termination by the Company for reasons other
---------
than "cause" or if Employee voluntarily terminates this Agreement for
"good
6
Company Initials: /s/ AJM / Employees Initials: /s/ A.W.
---------- ----------
<PAGE>
reason", the Company agrees to pay Employee on (1) year continuation
of Employee aggregate salary within five (5) business days of
termination. The Company will make Employee's COBRA payments for
twelve (12) months following such termination.
In the event, however, that Employee is terminated "for cause", he
shall be entitled to no further compensation.
(a) For purposes of this Agreement, "for causes" shall mean (i) the
willful and continued failure by Employee to substantially
perform his duties hereunder (other than such failure resulting
from Employee's incapacity due to physical or mental illness)
after written demand for substantial performance is approved by
the Board of Directors and delivered by the Company that
specifically identifies the manner in which the Company
believes Employee has not substantially performed his duties;
or (ii) the conviction of Employee of any felony. For purposes
of this Agreement, no act, or failure to act, on Employee's
part shall be considered "willful" unless done, or omitted to
be done, by Employee not in good faith and without reasonable
belief that such action or omission was in the best interest of
the Company. Notwithstanding anything to the contrary in the
foregoing, no termination or other action shall be considered
to be for cause under this agreement unless (x) Employee first
shall have received notice setting for the reasons for the
Company's intention to terminate or take other action and (y)
within fifteen (15) days after delivery of such notice,
Employee has not remedied the circumstances constituting the
basis for the proposed "for cause" termination, provided,
however, if more than fifteen (15) days are reasonably needed
to remedy such circumstances, Employee shall have the number of
additional days as, are reasonable to effectuate such remedy
but in no case greater than thirty (30) additional days and (z)
within thirty (30) days after the expiration of the period
during which Executive may remedy such circumstances Employee
shall have been provided an opportunity to appear, accompanied
by counsel, and be heard before the Board, and the Board shall
have duly adopted by an authorized action of the Board, and
provided to Employee, a resolution finding that in the good
faith option of the Board, Employee was guilty of conduct
constituting "cause", as set forth above, and specifying the
particulars thereof in detail.
(b) For purposes of this Agreement, "good reason" shall mean (i)
without Employee's written consent (A) the failure of the
Company to vest Employee with the powers and authority of the
Company's President and Chief Executive Officer, (B) and
removal of
7
Company Initials: /s/ AJM / Employees Initials: /s/ A.W.
---------- ----------
<PAGE>
Employee from or failure to re-elect Employee to such offices
other than for cause or (C) the assignment to Employee of any
duties substantially inconsistent with those customarily
performed by a company's President and Chief Executive Officer,
(ii) the failure of the Employee to serve as a member of the
Board for any reason other than a voluntary resignation by
Employee or his removal for cause, (iii) the failure of the
Company to nominate Employee for election as a director of the
Company at any election unless Employee declines to stand for
election, (iv) the failure by the Company, without Employee's
written consent, to include Employee as a participant in any
bonus plans as provided in this Agreement, (v) the failure of
the Company to obtain from any successor or assignee of all or
substantially all of the business of the Company, before the
succession or assignment takes place, an agreement to assume
and perform this Agreement, (vi) any purported termination of
Employee's employment for cause which is not effected pursuant
to a notice described in this Agreement, or (vii) the failure
of the Company to comply with any material provision of this
Agreement.
11.2 Termination by Employee: In the event that Employee voluntarily
-----------------------
terminates this Agreement other than for "good reason", he shall be
entitled to the following compensation:
(a) Employee shall be entitled to the Base Salary due under Section
3.1 and any accrued but unpaid bonus payments and Equity
provided for in Sections 3.2, 3.3, and 3.4 of this Agreement.
11.3 Termination by Death or Disability: The parties hereto mutually agree
----------------------------------
that although, pursuant to Section 4, Employee will be offered
participation in any disability plan the Company might enter,
providing, for the security of one's family in the event of one's
demise or disability ultimately is a personal responsibility.
Accordingly, this Agreement and the Company's obligations to
Employee and Employee's heirs hereunder shall terminate upon the
death or disability of Employee, other than to pay unpaid salary and
bonus, if any, that shall have accrued as of the date of said death
or disability, subject to the following provisions:
(a) Death: To the extent that any future investor might require the
Company to purchase a key man life insurance policy under
Section 9 above, Company shall make available to Employee the
opportunity to purchase a rider under said policy for the
benefit of Employee's designee(s).
8
Company Initials: /s/ AJM / Employees Initials: /s/ A.W.
---------- ----------
<PAGE>
(b) Disability: If and only if Company obtains disability insurance
covering Employee, Company agrees to pay to Employee Employee's
Base Salary from the date of Employee's disability until such time
as the disability insurance payments commence, for a period not to
exceed three months.
12. Notices: All notices or other communications required or permitted by this
-------
Agreement or by law to be given by any party hereto shall be in writing.
All such notices and communications shall be deemed duly served and given
to the other party when delivered by hand, if personally delivered, when
answered back, if telexed, when receipt is acknowledged, if telecopied; and
five (5) calendar days after mailed, if sent by registered or certified
mail with return receipt. For purposes hereof, notices and other
communications hereunder shall be directed to the parties hereto at the
following address:
(a) To the Company:
Microelectronic Packaging, Inc.
9350 Trade Place
San Diego, CA 92126
(b) To Employee:
Andrew Wrobel
2241 Calle Tiara
La Jolla, California 92037
Any party hereto may change its address for the purpose of receiving
notices and other communications as herein provided by a written notice
given in the manner aforesaid to the other party or parties hereto.
13. Applicable Law: This Agreement shall, in all respects, be construed,
--------------
interpreted and enforced in accordance with and governed by the internal
substantive laws of the State of California applicable to agreements
executed and to be wholly performed within the State of California, without
regard to choice of law rules thereof.
14. Severability: Any provision in this Agreement which is illegal, invalid or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent to such illegality, invalidity or
unenforceability without invalidating the remaining provisions hereof or
affecting the legality, validity or enforceability of such provision in any
other jurisdiction. The parties hereto agree to negotiate in good faith to
replace any illegal, invalid or unenforceable provision of this Agreement
with a legal, valid and enforceable provision that, to the extent possible,
will preserve the economic bargain of this Agreement, or otherwise to
9
Company Initials: /s/ AJM / Employees Initials: /s/ A.W.
---------- ----------
<PAGE>
amend this Agreement, including the provision relating to choice of law, to
achieve such result.
15. Modification or Amendment. No amendment, change or modification of this
-------------------------
Agreement shall be valid unless in writing and signed by all the parties
hereto.
16. Successors and Assigns: This Agreement and the rights, interests and
----------------------
obligations hereunder may not be assigned by Employee. Neither Employee nor
his spouse shall have any right to commute, encumber or dispose of any
right to revive payments hereunder, it being the intention of the parties
that such payments and the right hereto are non-assignable and non-
transferable. All of the terms and provisions contained herein shall inure
to the benefit of and shall be binding upon the parties hereto, their
respective heirs, personal representatives, permitted assigns and
successors in interest.
17. Time of the Essence: Time of the essence of this Agreement and all of the
-------------------
terms, provisions, covenants and conditions hereof.
18. Entire Agreement: This document constitutes the entire understanding and
----------------
agreement of the parties with respect to the subject matter of this
Agreement, and any and all prior agreements, understand or representations
are hereby terminated and canceled in their entirety and are of not further
force or effect.
19. Captions: The captions set forth in this Agreement are for convenience
--------
only and shall not be considered as part of this agreement or as in any way
limiting or amplifying the terms and provisions hereof.
20. Counterparts: This Agreement may be executed in multiple original
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Company:
Microelectronic Packaging, Inc.
By: /s/ Alfred Jay Moran, Jr.
-----------------------------------
Alfred J. Moran, Jr.
President & Chief Executive Officer
Employee:
/s/ Andrew Wrobel
-----------------------------------
Andrew Wrobel 10/7/97
10
Company Initials: /s/ AJM / Employees Initials: /s/ A.W.
---------- ----------
<PAGE>
EXHIBIT 10.105
[LETTERHEAD OF MICROELECTRONIC PACKAGING, INC.]
October 8, 1997
Vincent Woo
Assistant General Manager
ORIX Leasing Singapore Limited
331 North Bridge Road
#19-01/06 Odeon Towers
Singapore 188720
RE: HIRE PURCHASE AGREEMENTS: H/1875/95-9264, H/1874/95-9263, H/1876/95-9265,
H/2212/95-9668, H/0459/96-1061, H0957/96-1329, H0959/96-1331, H/0958/96-
1330, H0069/96-0179 AND H/1751/96-2298
- --------------------------------------------------------------------------------
Dear Mr. Woo:
Thank you for your letter of September 15, 1997 regarding the settlement
arrangement for the liabilities of MPM (S) Pte Ltd. We would like to take this
opportunity to incorporate your recommended changes into a final repayment plan.
1) The above-referenced-leases were entered into between Orix Leasing
Singapore Limited ("Orix") and MPM (S), Pte., Ltd. ("MPM") and were
guaranteed by Microelectronic Packaging Singapore ("MPS") and
Microelectronic Packaging, Inc. ("MPI").
2) Due to MPM being in default under the terms of these leases, Orix has taken
possession of the leased equipment and has sold some of this equipment.
3) Orix has called upon MPI's guarantee of the MPM leases. MPS, also a
guarantor, was placed into receivership on July 10, 1997 by DBS Bank.
4) The balance remaining on these leases, according to Orix's analysis is
S$2,406,065.40, which is equal to US$1,666,250 using the exchange rate of
S$1.44/US$1 on July 15, 1997. The amount above has been further reduced by
the subsequent recovery of S$84,095.14 (effective September 30, 1997) from
the sale of additional equipment. At the prevailing exchange rate of
S$1.50/US$1.00, the recovery is equal to US$56,063. This balance may be
further reduced as a result of proceeds from:
. The sale of additional leased equipment which was repossessed by Orix, and
. Cash which may be available from the liquidation of MPS assets.
<PAGE>
Vincent Woo
Orix Leasing Singapore Limited
October 8, 1997
Page 2
5) MPI will repay the balance on this loan of US$1,666,250 over a five-year
period, with interest-only payments in the first year, in accordance with
the attached schedule. Interest shall be paid at the rate of 7.25% per
annum (based on a 360 day year). The recovery of US$56,063 noted in (4)
above will be used to reduce the principal balance as of September 30,
1997. The remaining principal payments have been reduced accordingly.
6) Any additional proceeds received by Orix Leasing as described in (4) above
shall be used to reduce the principal balance outstanding. The remaining
principal payments shall be reduced to repay the remaining principal
balance ratably over the remaining number of principal payments originally
scheduled. Orix Leasing shall promptly notify (within 5 days of receipt)
MPI of any such proceeds received by Orix. All recoveries shall reduce the
principal balance due using the prevailing exchange rate as of the date of
the recovery.
7) Acceptance of this settlement agreement is subject to Orix reserving its
rights and remedies under the various hire purchase agreements and the
respective guarantees of MPS and Microelectronic Packaging, Inc., except as
otherwise modified by this settlement agreement.
Please indicate your acceptance of the above terms by signing in the space
provided below.
Most sincerely,
/s/ DENIS J. TRAFECANTY
- -----------------------
Denis J. Trafecanty
Senior Vice President and Chief Financial Officer
AGREED AND ACCEPTED:
Orix Leasing Singapore Limited
by: /s/ C.T. KWEK
--------------
C.T. Kwek
Title: Managing Director
-----------------
Date: 15 OCT 1997
-----------
<PAGE>
Microelectronic Packaging, Inc.
Deficiency Balance Owed to Orix
Amortization Schedule
================================================================================
Principal = $1,666,250
Interest Rate = 7.25% (based on a 360 day year)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Beginning Days Interest Principal Ending
Date Balance O/S Payment Payment Balance
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
30-Jun-97 $1,666,250 $1,666,250
30-Sep-97 1,666,250 92 30,872 56,063 1,610,187
31-Dec-97 1,610,187 92 29,833 0 1,610,187
31-Mar-98 1,610,187 90 29,185 0 1,610,187
30-Jun-98 1,610,187 91 29,509 0 1,610,187
30-Sep-98 1,610,187 92 29,833 100,637 1,509,550
31-Dec-98 1,509,550 92 27,969 100,637 1,408,913
31-Mar-99 1,408,913 90 25,537 100,637 1,308,276
30-Jun-99 1,308,276 91 23,976 100,637 1,207,639
30-Sep-99 1,207,639 92 22,375 100,637 1,107,002
31-Dec-99 1,107,002 92 20,510 100,637 1,006,365
31-Mar-00 1,006,365 91 18,443 100,637 905,728
30-Jun-00 905,728 91 16,599 100,637 805,091
30-Sep-00 805,091 92 14,917 100,637 704,454
31-Dec-00 704,454 92 13,052 100,637 603,817
31-Mar-01 603,817 90 10,944 100,637 503,180
30-Jun-01 503,180 91 9,221 100,637 402,543
30-Sep-01 402,543 92 7,458 100,637 301,906
31-Dec-01 301,906 92 5,594 100,637 201,269
31-Mar-02 201,269 90 3,648 100,637 100,632
30-Jun-02 100,632 91 1,844 100,632 0
-----------------------------------------------
TOTALS $371,319 $1,666,250
===============================================
</TABLE>
===============================================================================
<PAGE>
EXHIBIT 11.1
MICROELECTRONIC PACKAGING, INC.
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
PRIMARY NET INCOME (LOSS) PER SHARE:
Net income (loss) $ 140,000 $ (722,000) $(9,292,000) $ 453,000
----------- ---------- ----------- ----------
Weighted average shares outstanding:
Shares outstanding from beginning of period 10,793,000 5,559,000 6,991,000 4,660,000
Conversion of $1.9 million of debentures
into 3,801,786 shares of common stock 3,224,000
Sale of 842,058 shares to Transpac 581,000
Other shares issued during the period 63,000 46,097
Common equivalents - options to directors,
officers and employees, net of treasury
shares 193,000 206,000
----------- ---------- ----------- ----------
Weighted average common and common
equivalent shares outstanding 10,986,000 5,622,000 10,215,000 5,493,000
=========== ========== =========== ==========
Primary net income (loss) per common share $ 0.01 $ (0.13) $ (0.91) $ 0.08
=========== ========== =========== ==========
FULLY DILUTED NET INCOME (LOSS) PER SHARE:
Net income (loss) $ 140,000 $ (722,000) $(9,292,000) $ 453,000
----------- ---------- ----------- ----------
Weighted average shares outstanding:
Shares outstanding from beginning of period 10,793,279 5,559,000 6,991,493 4,660,093
Conversion of $1.9 million of debentures
into 3,801,786 shares of common stock 3,224,000
Sale of 842,058 shares to Transpac 581,000
Other shares issued during the period 63,000 46,097
Common equivalents - options to directors,
officers and employees, net of treasury
shares 246,441 208,000
----------- ---------- ----------- ----------
Weighted average common and common
equivalent shares outstanding 11,039,720 5,622,000 10,215,000 5,495,000
=========== ========== =========== ==========
Fully diluted net income (loss) per common
share $ 0.01 $ (0.13) $ (0.91) $ 0.08
=========== ========== =========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from balance
sheet as of September 30, 1997 and the statements of operations, cash flows and
shareholders equity for the period ended September 30, 1997 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,623
<SECURITIES> 0
<RECEIVABLES> 2,708
<ALLOWANCES> 0
<INVENTORY> 3,824
<CURRENT-ASSETS> 8,286
<PP&E> 757
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,373
<CURRENT-LIABILITIES> 43,313
<BONDS> 4,265
0
0
<COMMON> 39,839
<OTHER-SE> (78,044)
<TOTAL-LIABILITY-AND-EQUITY> (38,205)
<SALES> 22,117
<TOTAL-REVENUES> 22,207
<CGS> 19,059
<TOTAL-COSTS> 19,102
<OTHER-EXPENSES> 3,863
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 869
<INCOME-PRETAX> (1,325)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,325)
<DISCONTINUED> (7,967)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,292)
<EPS-PRIMARY> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
