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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report under Section 13 or 15(d)of the Securities Exchange Act
of 1934
For the fiscal year ended November 30, 1998
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[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ____________________ to _______________________
Commission file number 1-13484
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COHESANT TECHNOLOGIES INC.
(Exact name of Small Business Issuer in Its charter)
Delaware 34-1775913
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
5845 West 82nd Street, Ste. 102, Indianapolis, Indiana 46278
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (317) 875-5592
Securities registered under to Section 12(b)of the Act: Common Stock, $.001 Par
Value; Common Stock Purchase Warrants, registered on the Boston Stock Exchange
Securities registered under to Section 12(g)of the Act: Common Stock, $.001 Par
Value; Common Stock Purchase Warrants
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 past 90 days. Yes X
No_____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $11,735,872.
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the average bid and asked prices of
such stock, as of February 3, 1999. $4,448,717.
As of February 3, 1999, the Issuer had 2,372,333 shares of Common
Stock, $.001 par value, outstanding.
Documents incorporated by reference: Registrant intends to file with the
Securities and Exchange Commission a definitive Proxy Statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 within 120 days of the
close of its fiscal year ended November 30, 1998, portions of which document
shall be deemed to be incorporated by reference in Part III of this Annual
Report on Form 10-K from the date such document is filed.
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ITEM 1. BUSINESS
(a) General Development of Business
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Cohesant Technologies Inc. ("Company" or "Cohesant") is engaged in the
design, development, manufacture and sale of specialized two component spray
finishing and coating application equipment, replacement parts and supplies
used in the operation of this equipment and specialty two component epoxy
coating and grout products.
The Company's spray finishing and coating application equipment
systems are designed specifically for use with multiple component formulations
such as fiberglass reinforced plastics and polyurethane foam. These equipment
systems commonly are employed in the construction, transportation and marine
industries to apply insulation, protective coating, sealant and anti-corrosive
products and to create packaging and to fill molds for diverse products such as
recreational boat hulls and plumbing fixtures. The Company also maintains an
extensive inventory of replacement parts and supplies.
The Company manufactures the AquataPoxy and Raven lines of epoxy
coating and grout products. These high performance operator and environmentally
safe formulations provide protection from corrosion caused by infiltration,
atmospheric conditions and chemical attack. Although the Company believes there
are many more uses for the AquataPoxy and Raven products, they have most
prevalently been used in the construction, repair, rehabilitation and
maintenance of water and wastewater treatment, distribution and collection
systems, food & beverage, industrial and recreational facilities.
For the years ended November 30, 1998 and 1997, the Company had net
sales of $11,736,000 and $9,831,000, respectively, of which $9,468,000 and
$8,633,000, respectively, were for equipment systems, replacement parts and
supplies and $2,268,000 and $1,198,000, respectively, were for coating and
grout products.
The Company, which was organized in 1994, conducts business through
its subsidiaries, Glas-Craft, Inc. ("GCI"), an Indiana corporation, and Raven
Lining Systems ("Raven"), an Oklahoma corporation. As used herein, the term
"Company" includes the operations of Cohesant, and its wholly-owned
subsidiaries GCI and Raven, unless the context indicates otherwise.
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(b) Narrative Description of Business
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PRODUCTS
Specialized Spray Equipment. The Company designs and manufactures a wide
range of spray and application equipment systems and supplies to spray
multi-component formulations such as fiberglass reinforced plastics and
polyurethane foam. Net sales of spray equipment systems amounted to $4,472,000
and $4,084,000 for the fiscal years ended November 30, 1998 and 1997,
respectively, representing 38.1% and 41.5%, respectively, of net sales.
Fiberglass reinforced plastic spray equipment. The predecessor to GCI
developed spray and applications equipment systems for the modern method of
fiberglass reinforced plastic product manufacturing known as the `spray up'
method. The spray up manufacturing process is quicker and more cost effective
than the `hand layup' and mass production molding methods of reinforced
fiberglass products manufacturing and can be used to manufacture a wide variety
of products, including such diverse products as boat hulls and plumbing and
bathroom fixtures. The spray up method is ideally suited for small quantity and
custom production.
The United States Occupational Safety and Health Administration
("OSHA") and environmental regulatory agencies in the United States and abroad
regulate the use of various volatile organic chemicals such as styrene,
acetone, methylene chloride and organic peroxides. These chemicals are often
used in the application of fiberglass by the spray up method. GCI's spray
equipment systems use air assist containment ("AAC") to reduce spray emissions
and overspray and increase transfer efficiency and spray control. Improved
containment limits emissions of environmentally and occupationally hazardous
chemicals. Greater transfer efficiency results in less waste of product.
Other multi-component spray equipment. The Company also designs and
manufactures spray and applications equipment systems for dispensing
polyurethane and other multi-component materials and foams. Polyurethane is
used for insulation, packaging, flotation devices and many other uses. Foams
are used for insulation and protective coatings and for the manufacture of
formed plastic products such as automobile and aircraft components and marine
products. The Company's technology has many applications in the plastics and
coatings industries. Consequently, the Company continuously seeks and develops
new and different uses for its equipment. The Company, when necessary, will
modify existing equipment designs or will design new equipment to meet the
requirements of new plastics and other
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products as well as changing regulation and manufacturing methods.
Replacement and spare parts. A significant portion of the Company's equipment
business is the sale of replacement and spare parts and supplies for its
current and discontinued spray equipment systems. The Company maintains an
inventory of approximately 5,900 items to enable it to efficiently fill orders
and service repairs. Net sales of replacement and spare parts and supplies
amounted to $4,996,000 and $4,549,000, representing 42.6% and 46.3% of net
sales for the fiscal years ended November 30, 1998 and 1997, respectively.
Raven Lining Systems
Raven produces products under the Raven and AquataPoxy brands.
AquataPoxy and Raven product brands utilize proprietary formulations of and
application methods for solvent-free coatings and grouts that contain no
volatile organic compounds ("VOC's"). As with GCI, Raven benefits significantly
from increasing government regulation of VOC's and the resulting trend towards
low VOC products. Additionally, Raven fulfills specifying engineer's desires
for manufactured certified professional applications.
AquataPoxy Products. The AquataPoxy line of solvent-free epoxy coating and
grout products is designed to extend the life of a structure by protecting it
from corrosion. These products are formulated with higher performance
characteristics compared with competitive products, including excellent
resistance to moisture, corrosion and chemical attack. AquataPoxy products are
used in the construction, repair, rehabilitation and maintenance of food
processing and water storage structures, waste water treatment and collection
systems of municipalities, industrial and recreational facilities. AquataPoxy
products are unique with their high moisture tolerant characteristics that
allow them to be applied to underwater and moisture filled concrete surfaces.
AquataPoxy is ideally suited for the rapidly growing market in underground
rehabilitation of infrastructure. AquataPoxy is therefore being specified for
use by many leading consultants, design engineers and governmental agencies in
connection with the rehabilitation of potable and/or wastewater facilities by
trained applicators. The Company is aggressively demonstrating and testing
AquataPoxy to expand awareness of its unique attributes and the application and
marketing benefits of its certified applicator program.
AquataPoxy products contain no solvents or VOC's. Properly applied,
AquataPoxy products are inert once cured and do not release harmful by-products
into air, water or the environment. Conversely, competitive solvent-borne and
isocyanate-based coatings have the potential to release carcinogens and other
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hazardous substances into the environment and generally are not desirable for
applications that involve contact with food, drinking water, animals or people.
The Company maintains certification under the National Sanitation Foundation
Standard 61 and meets qualifications of the United States Department of
Agriculture for agricultural applications, food processing and potable water
facilities and marine environments.
Raven Products. Raven extends the Company's presence in the protective
coating and lining marketplace. Raven's unique high performance line of
products and network of Certified Applicators provide access to specialty
coating contractors and key end-users in the wastewater, pulp and paper,
petrochemical, power and other industries. Raven's sprayable epoxies were
formulated for ultra high-build (20-250 mils per coat) application on concrete,
masonry and steel surfaces providing protection from atmospheric and chemical
corrosion. The high physical strengths of some Raven formulations permit the
epoxy to enhance the structural integrity of the structure. Raven products can
be quickly applied under harsh environmental conditions providing quick return
to service and substantial savings for industrial facilities by lessening
downtime. The life span of infrastructure exposed to these conditions can
increase dramatically with the use of high performance protective coatings and
linings such as Raven.
Raven coatings and grouts are also solventless, nontoxic, 100% solids
epoxy products, emitting no VOC's. These products offer safe working
environments while complying with the existing United States Environmental
Protection Agency ("EPA") regulations.
Net sales of AquataPoxy and Raven products amounted to $2,268,000 and
$1,198,000, representing 19.3% and 12.2% of net sales for the fiscal years
ended November 30, 1998 and 1997, respectively.
RTM Systems, Inc.
GCI has a one-third interest in RTM Systems, Inc. ("RTM"), an Indiana
corporation organized in 1989. RTM markets equipment which produces injection
molded fiberglass reinforced plastic products. The RTM equipment is designed
for low-pressure injection molding, thereby allowing injection of catalyzed
resin under low pressure into a closed mold containing a pre-cut fiberglass mat
which strengthens the finished product. This method, like most molding
processes, permits the resin to displace all of the air in the mold, completely
saturating the fiberglass mat which is then allowed to cure. Products
manufactured using this process are characterized by the strength enhancing
properties of fiberglass while being cost effectively
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produced. RTM also sells products and equipment used to build molds.
MARKETING
Distributors and Certified Applicators
The Company's products are sold through a growing network of
independent distributors and Certified Applicators in the United States and
overseas.
Generally, the products of GCI are sold through over 100 independent
domestic and foreign equipment distributors. Most of these distributors are
engaged in the sale of polyester resins and gel coats, fiberglass strand and
mat, polyurethane foams and coatings and similar items. Many of the foreign
distributors sell only industrial equipment. For the fiscal years ended
November 30, 1998 and 1997, GCI's ten largest distributors accounted for 46%
and 41%, respectively, of equipment system and replacement and spare parts
sales. Of the foregoing, four of the distributors in fiscal 1998 and five of
the distributors in fiscal 1997 were foreign based. Generally, GCI has written
distribution agreements that are cancelable upon 30 days notice with its
foreign distributors. GCI provides training to the distributors and customers
in the use of its equipment systems and products.
Raven markets its products, application and spray technology through
domestic and foreign independent distributors, manufacture representatives and
Certified Applicators. Raven presently has twenty domestic Certified
Applicators located in seventeen states.
Brochures, Advertising and Trade Shows
The Company supports its marketing with internally prepared brochures,
sales catalogues, direct mailings and media insertions in various trade
publications. In connection with coating and grout products, the Company also
prepares media promotion kits and product demonstration kits for use by
Certified Applicators and distributors. Company personnel, representatives and
distributors attend trade shows in the United States and overseas. Typically,
these shows are attended by potential customers and distributors. In addition,
these shows afford the Company the opportunity to keep abreast of its
competitors' products and developments in the industry. Company personnel also
participate in various industry organizations and work with complimentary
technologies to present educational and technical seminars. These seminars
assist in industry growth and guides prospective customers to the Company's
products and methods.
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MANUFACTURING AND RAW MATERIALS SUPPLY
The Company assembles its equipment system products from commercially
available components and components manufactured to specification by a variety
of vendors. Minimal fabrication of components is performed by the Company. The
Company is not dependent upon any single vendor for the conduct of its
business, and generally has alternative sources for all necessary components.
Similarly, there are a number of alternative sources of the raw
materials used in the manufacture of the coating and grout products of the
Company. The Company maintains good working relationships with all major resin
suppliers. The Company does not believe that it is dependent on any one vendor
of raw materials for its coating and grout products and the Company does not
believe the loss of any one supplier would have a material adverse impact on
the Company.
COMPETITION
The markets for all of the Company's products are highly competitive.
The Company competes with numerous well-established companies, most of which
possess substantially greater financial, marketing, personnel and other
resources than those of the Company.
There are a number of competitive equipment manufacturers, which
include the Binks division of ITW, Inc. and the Venus-Gusmer division of PMC,
Inc. Competitors of the Company's AquataPoxy and Raven products include
Carboline Company, Tnemec Company, Inc. and International Protective Coatings.
The Company competes by continually broadening awareness of its unique products
through engineering, research and development, by continuing to offer its
entire product line on a price competitive basis, and through acquisition or
product line extensions.
The markets for the Company's products are characterized by changing
technology and industry standards. Accordingly, the ability of the Company to
compete is dependent upon the Company's ability to complete development and
effectively market its state-of-the-art equipment and coating products.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company has a research and development program to continually
improve all of its existing products, to develop new products and to custom
engineer equipment and products to meet
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specific customer requests. The Company has thirteen full-time employees
devoted to engineering, research and development. Virtually all of the products
marketed by the Company were developed internally, either by the Company or its
predecessor companies. Research, development and engineering expenses for the
fiscal year ended November 30, 1998 and 1997 were approximately $832,000 and
$848,000 respectively, or 7.1% and 8.6%, respectively, of net sales. The
Company expects this level of research, development and engineering expense to
continue or slightly increase in the future.
GOVERNMENT REGULATION
The Company is subject to regulations administered by the EPA, OSHA,
various state agencies, county and local authorities acting in cooperation with
Federal and state authorities and foreign governmental regulatory agencies.
Among other things, these regulatory bodies impose restrictions to control air,
soil and water pollution, to protect against occupational exposure to
chemicals, including health and safety risks, and to require notification or
reporting of the storage, use and release of certain hazardous chemicals and
substances. The extensive regulatory framework imposes significant compliance
burdens and risks on the Company's operating subsidiaries. Governmental
authorities have the power to enforce compliance with these regulations and to
obtain injunctions or impose civil and criminal fines in the case of
violations.
The Company has in place programs to achieve and maintain substantial
compliance with the currently existing environmental and worker exposure laws
and regulations which materially affect the Company's continuing businesses. As
of the date of this Report, based on its experience and consultations with
environmental consultants, management believes that the Company is taking or
has taken all necessary measures to comply with all applicable Federal, state
and local environmental laws and regulations and worker exposure regulations.
As a product exporter, the Company is subject to regulation by foreign
governments. There can be no assurance that the Company will be in compliance
with or achieve compliance with laws and regulations enacted by foreign
government in the future.
PATENTS, TRADEMARKS AND PROPRIETARY INFORMATION
The Company holds nine U.S. patents and three U.S. patent
applications, of which five patents and one patent application are applicable
to AAC(R) methods and apparatus of the Company. The Company's AAC(R) methods
and apparatus use a flow of compressed air
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to contain and reduce over spray and vapor emissions and increase transfer
efficiency and spray control.
The Company believes that product recognition is an important
competitive factor in the equipment and chemical industries. Accordingly, the
Company promotes the "GLAS-CRAFT" and "RAVEN" trademarks in connection with its
marketing activities and holds a United States trademark registration for
AAC(R).
The Company also relies on proprietary know-how and confidential
information and employs various methods to protect the processes, concepts,
ideas and documentation associated with its products.
EMPLOYEES
As of January 22, 1999, the Company employs approximately 70 full time
persons, 15 of whom are in sales, 9 are in engineering, 7 are in research and
development and service, 4 are in quality control, 22 are in manufacturing and
13 are in accounting and administration. The Company believes its relations
with its employees are good.
ITEM 2. PROPERTIES
The Company's executive offices are located in Indianapolis, Indiana,
with its principal manufacturing, warehouse and distribution facilities located
in Indianapolis, Indiana and Tulsa, Oklahoma. GCI leases approximately 38,400
square feet of office, manufacturing and warehouse space in Indianapolis,
Indiana through January, 2004. Raven leases approximately 10,000 square feet of
combined office and manufacturing space in Tulsa, Oklahoma through February,
2001. The Company believes its facilities are adequate to meet its current and
prospective needs.
The Company owns two adjacent buildings in St. Louis, Missouri which
are being marketed for sale. The St. Louis buildings were utilized by the
discontinued operations of American Chemical Company, a Company subsidiary.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is
subject, nor to the knowledge of the Company are any legal proceedings
threatened, other than for ordinary, routine proceedings incidental to its
business, except as follows:
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The Company is proceeding to investigate and remediate the
environmental condition of its St. Louis property in order that the property
can be marketed and sold. The work includes soil remediation required by the
Missouri Department of Natural Resources in connection with the closure of
underground storage tanks. The Missouri Department of Natural Resources has
also requested that an additional soil and groundwater contamination
investigation plan be submitted for the site to fully define the extent of
groundwater contamination. The Company accrues costs for an estimated
environmental liability when management becomes aware that a liability is
probable and is able to reasonably estimate the Company's cost. Generally, that
occurs no later than when feasibility studies and related cost assessments of
remedial techniques are completed, and the extent to which other potentially
responsible parties (if any), can be expected to contribute is determined.
Outside consultants are being used to perform site investigation work and to
advise management on the findings and remediation alternatives. In management's
opinion, the liabilities for the environmental matter mentioned above which are
probable and reasonably estimable are accrued. As of November 30, 1998, the
environmental reserve was approximately $220,000. The reserve is reflected as
an adjustment to the carrying value of the property held for sale. The actual
costs to be incurred by the Company will be dependent on final delineation of
contamination, final determination of remedial action required, negotiations
with federal and state agencies with respect to cleanup levels, changes in
regulatory requirements, innovations in investigatory and remedial technologies
and effectiveness of remedial technologies employed.
A former employee of ACC has filed a workers' compensation claim
related to injuries incurred in connection with the August 1996 fire at the
facility. In the claim, the employee is requesting payment of an additional 15%
award of compensation, approximately, $150,000, claiming ACC violated a
Missouri safety statute in connection with the occurrence of his injury. As of
November 30, 1998, the Company has not recorded a provision for this matter as
management intends to vigorously defend these allegations and believes the
payment of the penalty is not probable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of the fiscal year ended November 30, 1998.
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ITEM 4.1 EXECUTIVE OFFICERS OF THE REGISTRANT
This information is included in this Report pursuant to Instruction 3
of Item 401(b) of Regulation S-K. The following is a list of the executive
officers of the Company and a brief description of their business experience.
Each executive officer will hold office until his successor is chosen and
qualified.
MORTON A. COHEN has been Chairman of the Board since the Company's
inception in July 1994, and served as the Company's Chief Executive Officer
from July 1994 to January 1998. Mr. Cohen has been Chairman of the Board of
Directors and Chief Executive Officer of Clarion Capital Corporation
("Clarion"), a private, small business investment company, for more than five
years. He is also a director of Sentex Sensing Technologies, Inc., a
manufacturer of instrumentation measuring devices; Zemex Corporation, an
industrial minerals company; Gothic Energy Corporation, a developer and
operator of oil and gas producing properties and DHB Capital Group, Inc., a
holding company with a diversified portfolio. Mr. Cohen is the father-in-law of
Morris H. Wheeler, a director.
DWIGHT D. GOODMAN has been a Director of the Company since its
inception and has been the Chief Executive Officer of the Company since January
1998 and President of the Company since July 1996. From May 1996 until June
1998, Mr. Goodman had been the Chief Financial Officer; from May 1996 until
July 1996, Mr. Goodman had been the Company's Executive Vice President and
Chief Financial Officer. Mr. Goodman had been the President and Chief Executive
Officer of GCI from 1984 to 1996.
RICHARD A. MORDARSKI has been an executive officer of the Company
since June 1998 and has been President of GCI since May 1996. Prior thereto,
Mr. Mordarski served for 15 years as Director of Marketing of GCI.
J. STEWART NANCE has been an executive officer of the Company since
June 1998 and has been President of Raven since December 1995. Mr. Nance was
part owner and President of Raven Management Services Inc., from whom the
Assets of Raven were acquired, from 1992 to 1995.
ROBERT W. PAWLAK has been Vice President-Finance and Chief Financial
Officer of the Company since June 1998, Secretary of the Company since June
1997 and Controller of the Company since October 1996. Mr. Pawlak held various
accounting positions for GCI since March 1994.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Common Stock and Warrants of the Company are quoted on NASDAQ
under the symbols "COHT" and "COHTW", respectively. The Company's Common Stock
and Warrants are also listed on the Boston Stock Exchange.
The following table sets forth the high and low closing bid prices of
the Company's Common Stock and Warrants for each quarter in the two year period
ended November 30, 1998, as reported by NASDAQ. Bid quotations represent high
and low prices quoted between dealers, do not reflect retail mark-up, mark-down
or commission, and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK Bid Price
- ------------ ---------
Year Ended November 30, 1997 High Low
---------------------------- ---- ---
<S> <C> <C>
First Quarter $1.5625 $0.9375
Second Quarter 1.2812 0.8125
Third Quarter 1.8125 0.9375
Fourth Quarter 1.50 1.0625
Year Ended November 30, 1998
----------------------------
First Quarter $1.75 $1.0312
Second Quarter 2.344 1.406
Third Quarter 2.344 1.75
Fourth Quarter 1.922 1.375
WARRANTS
Year Ended November 30, 1997
----------------------------
First Quarter $0.125 $0.0625
Second Quarter 0.0937 0.0312
Third Quarter 0.0937 0.0312
Fourth Quarter 0.125 0.0312
Year Ended November 30, 1998
----------------------------
First Quarter $0.156 $0.0312
Second Quarter 0.281 0.125
Third Quarter 0.25 0.094
Fourth Quarter 0.188 0.063
</TABLE>
In October 1998 the Company announced its plans to purchase up to
400,000 shares of its common stock, or approximately 15% of its outstanding
shares. As of January 31, 1999 the Company has repurchased 375,400 shares. The
Company sold 61,890 shares in December 1998 to the Company sponsored
401(k)plan.
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On January 29, 1999, the Company had approximately 490 beneficial
holders of its Common Stock.
The Company has not paid any cash dividends on its Common Stock to
date and does not anticipate paying any in the foreseeable future. The Board of
Directors intends to retain earnings, if any, to support the growth of the
Company's business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal Year Ended November 30, 1998 as compared to Fiscal Year Ended
November 30, 1997
Net sales for the fiscal year ended November 30, 1998, were
$11,736,000 representing an increase of $1,905,000 or 19.4%, from fiscal 1997
net sales of $9,831,000. The increase consisted of a $1,070,000 or 89.3%
increase in net sales of coating and grout products to $2,268,000 in fiscal
1998. This increase was primarily attributable to increasing acceptance and
specification of AquataPoxy and Raven products. Equipment systems and parts
sales increased to $9,468,000, an $835,000 or 9.7% increase from fiscal 1997
net sales. The increase in equipment systems and parts sales was attributable
to a 22% gain in domestic sales offset by a 3% decrease in foreign sales. The
decrease in foreign sales was primarily due to a 21% drop in sales to the
Asian/Pacific region offset somewhat by increased sales in Europe and South
America.
For the fiscal years ended November 30, 1998 and 1997,respectively,
gross margins as a percentage of net sales were 43.9% and 43.5%, respectively.
The slight increase in gross margin in fiscal 1998 was due to increased sales
volume of the higher margin coating and grout products, offset by a decrease in
equipment margins attributable to competitive pricing primarily in the China
and Spain markets. Also, a product mix consisting of increased sales of OEM
systems with lower margins than standard system sales attributed to a decrease
in equipment gross profit margins.
Research, development and engineering expenses were approximately
$832,000 and $848,000 in the years ended November 30, 1998 and 1997,
respectively. This decrease was attributable to several personnel changes.
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Selling, general and administrative expenses for the fiscal years
ended November 30, 1998 and 1997, were $3,695,000 and $3,167,000, respectively,
representing an increase of approximately 16.7% or $528,000. Approximately
$390,000 of the increase was due to additional marketing expenses at Raven that
contributed directly to the increased sales volume. GCI's increased marketing
costs of $264,000 were attributable to the addition and expenses associated
with outside sales staff and increased advertising. Administrative expenses
decreased approximately $126,000. This decrease was a result of lower expenses
associated with professional services in addition to an adjustment of $45,000
as a result of a final negotiated payment from previously accrued professional
services.
Other income, net of other expenses for the fiscal year ended November 30, 1998
increase approximately $87,000 from the fiscal 1997 period. This increase was
due principally to income derived from amortization of a noncompetition
agreement executed by the Company with the buyer of certain assets of American
Chemicals Company's discontinued operation, offset by increased interest
expense and a decrease in income derived from the unconsolidated affiliate.
DISCONTINUED OPERATIONS
On November 30, 1997, the Company's Board of Directors signed an
agreement to sell certain assets of ACC's adhesive, private label and toll
manufacturing business (the "discontinued operation") and management decided to
discontinue this business. The operating activity performed during fiscal 1998
includes sales through the closing and tolling activities for the buyer
thereafter. Such tolling activity expired in the second quarter. The
discontinued operation recorded sales totaling $722,879 and $5,762,053 for the
fiscal years ended November 30, 1998 and 1997, respectively. Total operating
losses from the discontinued operation were $454,059 and $1,712,136 for the
fiscal years ended November 30, 1998 and 1997, respectively. The 1998 losses
have been reflected as a reduction to the Accrued Liabilities Related to
Discontinued Operations in the accompanying Condensed Consolidated Balance
Sheet.
On January 14, 1998, the Company completed the sale of certain of the assets of
the discontinued operation and signed a three-year agreement not to compete in
this business. The purchase price was approximately $1,350,000, including
$350,000 for the non-compete agreement. The purchase price was paid in cash
except for a $300,000 promissory note bearing 8% interest and due in three
years. The note was prepaid in September 1998 for $250,000 cash, which
approximated the carrying value of the note. The
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$350,000 non-compete agreement is being amortized to income over the three-year
contract period. The Company has disposed of the remaining personal property
and is in the process of making the real property ready for sale or lease while
it continues to investigate and remediate the environmental issues associated
with the property.
LIQUIDITY AND CAPITAL RESOURCES
On May 15, 1998, the Company entered into a revolving line of credit
agreement with a bank. This $3,500,000 credit facility is subject to a
borrowing base and accrues interest at the bank's prime lending (7.75% as of
November 30, 1998). The credit facility is fully secured by a lien on all
assets of the Company and its operating subsidiaries. The credit facility
expires on May 1, 1999. This agreement requires that the Company meets certain
covenants including financial ratios. As of November 30, 1998, the Company is
in compliance with the financial covenants. As of November 30, 1998, the
outstanding balance under this agreement was $868,472.
In October 1998, the Company announced a 400,000 share repurchase
program. Through January 31, 1999, the Company has repurchased 375,400 shares
for approximately $665,000.
As of January 31, 1999, the Company had approximately $1,650,000 in
unused revolving credit borrowings.
The Company has placed $200,000 in short-term U.S. government money
market funds, to secure a continuing contractual payment obligation. The
Company has classified such funds as restricted, temporary investments under
non-current assets in its financial statements.
As of November 30, 1998, the Company's working capital increased to
$3,158,832 from $2,500,151 at November 30, 1997 and includes cash of $119,967.
The Company believes that its existing cash resources and working
capital coupled with its bank line will be adequate to meet its capital needs
for the foreseeable future.
YEAR 2000
The "Year 2000 Issue" refers to the inability of computers and applications to
correctly interpret and process Year 2000 dated transactions. The software
problem results from a memory-saving practice of using two digits instead of
four to denote years in a program. Computer systems that are not Year
15
<PAGE> 16
2000 compliant may not be able to be relied upon to process data accurately for
transactions dated after the year 1999.
The Company has developed a plan to address possible exposures related to the
impact of the Year 2000 Issue. Possible exposures include the Company's ability
to procure and manage inventory, ship product and bill and collect from
customers. The Company is in the process of testing and confirming the
readiness of its mainframe computer system which has recently been upgraded.
Also, the Company has identified other software and systems with potential Year
2000 problems. The Company estimates that costs associated with making internal
information systems Year 2000 compliant will not be material, and thus will not
have a material impact on the Company's financial position.
In addition, the Company has identified and is assessing the readiness of third
parties, primary suppliers and customers. There is no guarantee that the
systems of these third parties will be timely converted, however, the Company
plans to devote the necessary resources to resolve any potentially significant
Year 2000 issues facing it, whether from within its operations or as a result
of its interaction with these third parties, in a timely manner.
NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board (FASB) released a new
accounting standard SFAS No. 131, Disclosure about Segments of an Enterprise,
which is effective for fiscal periods beginning after December 15, 1997. Under
the provisions of this statement, the Company will be required to modify or
expand the financial statement disclosures for operating segments, products and
services, and geographic areas. The implementation of this pronouncement will
not affect the Company's financial position or results of operations.
ITEM 7. FINANCIAL STATEMENTS
This information appears in a separate section of this report
following Part III.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
16
<PAGE> 17
The Company incorporates herein by reference the information appearing
under the caption "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Company's definitive Proxy Statement to
be filed with the Securities and Exchange Commission on or about March 25,
1999. Information with respect to the Company's executive officers appear at
the end of PART I of this Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
The Company incorporates herein by reference the information appearing
under the caption "Executive Compensation" of the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission on or about
March 25, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates herein by reference the information appearing
under the caption "Ownership of Voting Securities" of the Company's definitive
Proxy Statement to be filed with the Securities and Exchange Commission on or
about March 25, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates herein by reference the information
appearing under the caption "Certain Relationships and Related Transactions" of
the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission on or about March 25, 1999.
17
<PAGE> 18
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
#2.1 Asset Purchase Agreement by and among TACC International
Corporation, American Chemcial Company, and Cohesant
Technologies, Inc.
*3.1 Certificate of Incorporation of the Company, as corrected.
**3.2 By-Laws of the Company, as amended.
**4.1 Form of Underwriter's Unit Purchase Option.
**4.2 Form of Public Warrant Agreement.
**4.3 Form of Registration Rights Agreement.
***4.4 Credit and Security Agreement, dated May 15, 1998, by and
between the Company and NBD Bank, N.A.
**10.1 The Company's 1994 Employee Stock Option Plan.
10.2 Lease Agreement between Glas-Craft, Inc. and ProLogis North
Carolina Limited Partnership.
****10.4 Financial Advisory Agreement between Clarion Management Ltd.
and the Company dated June 1, 1996.
21.1 Subsidiaries of the Registrant.
23 Consent of Accountants
27 Financial Data Schedule
# Incorporated herein by reference to the Exhibit to the Company's
Annual Report on Form 10-KSB for the year ended November 30, 1997.
* Incorporated herein by reference to the Exhibit to the Company's
Annual Report on Form 10-KSB for the year ended November 30, 1995.
** Incorporated here in by reference to the Exhibit included to the
Company's Registration Statement on Form SB-2 dated November 29, 1994
(No. 33-82732).
*** Incorporated herein by reference to Exhibit 4.1 included in the
Company's Quarterly report on Form 10-QSB for the quarter ended May
31, 1998.
**** Incorporated herein by reference to the Exhibit to the Company's
Annual Report on Form 10-KSB for the year ended November 30, 1996.
(b) Reports on Form 8-K. - none
18
<PAGE> 19
COHESANT TECHNOLOGIES INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of November 30, 1998 and
1997 F-3
Consolidated Statements of Operations for the Years Ended,
November 30, 1998 and 1997 F-5
Consolidated Statements of Shareholders' Equity
for the Years Ended November 30, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the Years Ended
November 30, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
F - 1
<PAGE> 20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Cohesant Technologies Inc.:
We have audited the accompanying consolidated balance sheets of COHESANT
TECHNOLOGIES INC. (a Delaware corporation) and subsidiaries as of November 30,
1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cohesant Technologies Inc. and
subsidiaries as of November 30, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
December 22, 1998.
F - 2
<PAGE> 21
COHESANT TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
AS OF NOVEMBER 30, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 119,967 $ 59,863
Accounts receivable, net of allowance for doubtful accounts of $85,370 and
$73,948 in 1998 and 1997, respectively 1,947,626 1,533,127
Inventory 3,421,531 3,181,912
Prepaid expenses 152,371 104,684
Deferred tax assets 165,600 165,600
Current assets - discontinued operations - 1,719,047
---------- ----------
Total current assets 5,807,095 6,764,233
Restricted, temporary investments 215,617 205,791
Property, plant and equipment, net of accumulated depreciation of $588,113
and $409,034 in 1998 and 1997, respectively 605,740 627,855
Investment and advances in unconsolidated affiliate 83,120 105,502
Patents and other intangibles, net of accumulated amortization of $
78,571 and $ 81,243 in 1998 and 1997, respectively 123,989 135,082
Goodwill, net of accumulated amortization of $110,628 and $73,752 in 1998
and 1997, respectively 658,644 576,556
Other noncurrent assets 6,039 16,409
Noncurrent assets - discontinued operations, held for sale 71,237 445,396
---------- ----------
Total assets $7,571,481 $8,876,824
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
F - 3
<PAGE> 22
COHESANT TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
AS OF NOVEMBER 30, 1998 AND 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
LIABILITIES:
Revolving line of credit $ 868,472 $ 1,552,280
Current maturities of long-term liabilities 163,335 63,639
Accounts payable 1,057,753 1,567,432
Accrued wages and benefits 28,596 129,488
Accrued liabilities related to discontinued operation 62,890 579,000
Other current liabilities 498,044 372,243
---------- ------------
Total current liabilities 2,679,090 4,264,082
Other noncurrent liabilities 151,735 62,673
---------- ------------
Total liabilities 2,830,825 4,326,755
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
SHAREHOLDERS' EQUITY:
Common stock ($.001 par value; 10,000,000 shares authorized and
2,688,343 shares issued) 2,688 2,688
Additional paid-in capital 6,450,360 6,450,360
Retained deficit (1,206,638) (1,902,979)
Treasury stock at cost, (280,600 shares) (505,754) -
---------- ------------
Total shareholders' equity 4,740,656 4,550,069
---------- ------------
Total liabilities and
shareholders' equity $7,571,481 $ 8,876,824
========== ============
</TABLE>
F - 3
The accompanying notes are an integral part of these consolidated
balance sheets.
<PAGE> 23
COHESANT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED NOVEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
NET SALES $ 11,735,872 $ 9,830,598
COST OF SALES 6,577,665 5,559,342
------------ ------------
Gross profit 5,158,207 4,271,256
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES 831,968 848,266
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,695,061 3,166,579
------------ ------------
Income from operations 631,178 256,411
OTHER INCOME (EXPENSE):
Interest expense (95,407) (82,238)
Interest income 9,826 11,672
Equity in earnings of unconsolidated affiliate 32,334 41,452
Other income, net 118,410 6,862
------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 696,341 234,159
INCOME TAX BENEFIT -- 20,100
------------ ------------
INCOME FROM CONTINUING OPERATIONS 696,341 254,259
DISCONTINUED OPERATIONS:
Loss from discontinued operations -- (1,559,136)
Loss on disposal of discontinued operations -- (153,000)
------------ ------------
-- (1,712,136)
------------ ------------
NET INCOME (LOSS) $ 696,341 $ (1,457,877)
============ ============
NET INCOME (LOSS) PER SHARE (BASIC AND DILUTED)
CONTINUING OPERATIONS $ 0.26 $ 0.10
DISCONTINUED OPERATIONS -- (0.64)
------------ ------------
NET INCOME (LOSS) PER SHARE (BASIC AND DILUTED) $ 0.26 $ (0.54)
============ ============
AVERAGE SHARES OF COMMON STOCK OUTSTANDING 2,655,587 2,688,343
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F - 5
<PAGE> 24
<TABLE>
<CAPTION>
COHESANT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1998 AND 1997
Additional
Paid-in Retained Treasury
Common Stock Capital Deficit Stock Total
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, November 30, 1996 $ 2,688 $ 6,450,360 $ (445,102) $ -- $ 6,007,946
Net loss -- -- (1,457,877) -- (1,457,877)
----------- ----------- ----------- ----------- -----------
BALANCE, November 30, 1997 2,688 6,450,360 (1,902,979) -- 4,550,069
Repurchase of 280,600 shares
of common stock -- (505,754) (505,754)
Net income -- -- 696,341 -- 696,341
----------- ----------- ----------- ----------- -----------
BALANCE, November 30, 1998 $ 2,688 $ 6,450,360 $(1,206,638) $ (505,754) $ 4,740,656
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F - 6
<PAGE> 25
<TABLE>
<CAPTION>
COHESANT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1998 AND 1997
1998 1997
------------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) - 696,341 (1,457,877)
Adjustments to reconcile net income (loss)
to net cash used in continuing operations-
Loss from discontinued operations -- 1,559,136
Loss on disposal of discontinued operations -- 153,000
Depreciation and amortization 266,962 228,102
Deferred tax benefit -- (20,100)
Provision for doubtful accounts 51,161 84,718
Equity in income of unconsolidated affiliate (32,334) (41,452)
Net change in current assets and current liabilities-
Accounts receivable (465,660) (323,469)
Tax refund receivable -- 93,700
Inventories (266,918) (1,001,383)
Prepaid expenses (47,687) 5,508
Accounts payable (509,679) (80,512)
Other current liabilities (489,049) 262,609
Increase in other noncurrent assets (2,792) (8,404)
Increase (decrease) in other noncurrent liabilities 89,062 (12,541)
----------- -----------
Net cash used in continuing operations (710,593) (558,965)
Net cash provided by (used in) discontinued operations 1,916,097 (925,931)
----------- -----------
Net cash provided by (used in) operating activities 1,205,504 (1,484,896)
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES:
Purchase of patents (1,736) (9,518)
Property and equipment additions (164,507) (255,355)
Property and equipment additions of discontinued operations -- (303,499)
Insurance proceeds related to discontinued operations 177,109 200,000
Payments from unconsolidated affiliate 54,716 77,257
----------- -----------
Net cash provided by (used in) investing activities 65,582 (291,115)
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES:
Borrowings (payments) under revolving line of credit (683,808) 1,402,280
Principal payments under capital lease obligations (21,420) (12,705)
Repurchase of common stock (505,754) --
----------- -----------
Net cash provided by (used in) financing activities (1,210,982) 1,389,575
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
60,104 (386,436)
CASH AND CASH EQUIVALENTS, at beginning of period 59,863 446,299
----------- -----------
CASH AND CASH EQUIVALENTS, at end of period $ 119,967 $ 59,863
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for-
Interest $ 95,407 $ 90,795
=========== ===========
Income taxes 0 0
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of
these consolidated statements.
F - 7
<PAGE> 26
COHESANT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
1. NATURE OF BUSINESS
------------------
Cohesant Technologies Inc. and its subsidiaries (the "Company" or "Cohesant")
are engaged in the design, development, manufacture and sale of specialized
spray finishing and coating application equipment, replacement parts and
supplies used in the operation of the equipment and specialty coating and grout
products.
The Company's direct, wholly owned subsidiaries, Glas-Craft Inc. ("GCI") and
Raven Lining Systems Inc. ("Raven") sell their products through a network of
independent distributors and Certified Applicators in the United States and
overseas. Industries served include: construction, transportation and marine.
The Company's executive offices are located in Indianapolis, Indiana with its
principal manufacturing, warehouse and distribution facilities located in
Indianapolis, Indiana and Tulsa, Oklahoma.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
a. Basis of Presentation
---------------------
The consolidated financial statements include the accounts of the Company and
its direct, wholly owned subsidiaries, GCI and Raven. The former adhesives,
private label and toll manufacturing operations of American Chemical Company
("ACC") also have been included in the accompanying financial statements but
are presented as discontinued operations (Note 13). Intercompany accounts and
transactions have been eliminated. The Company's noncontrolling investment in
an affiliate is accounted for under the equity method.
b. Income Taxes
------------
The Company files a consolidated Federal income tax return with its wholly
owned subsidiaries. Income taxes are provided based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards No. 109
(SFAS 109), "Accounting for Income Taxes." The liability method measures the
effective tax impact of future taxable income or deductions resulting from
differences in the tax and financial reporting bases of assets and liabilities
reflected in the consolidated balance sheets and the expected tax impact of
carryforwards for tax purposes.
F - 8
<PAGE> 27
c. Earnings Per Share
------------------
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings per Share in 1998. Basic earnings per share were computed based upon
the weighted average number of shares of common stock outstanding during the
period. The weighted average number of shares used in the computation for 1998
and 1997 were 2,655,587 and 2,688,343, respectively. Diluted earnings per share
was computed based upon the weighted average shares that would have been
outstanding if all dilutive potential common shares would have been converted
into shares at the earliest date possible. After considering outstanding stock
options, the diluted weighted average number of shares used in the computation
for 1998 and 1997 was 2,697,095 and 2,688,343, respectively. In determining
diluted earnings per share, the warrants, the underwriter's purchase option and
related warrants (Note 4) were not included in the calculation of diluted
earnings per share because they would have an antidilutive effect.
d. Statements of Cash Flows
------------------------
For purposes of the Statements of Cash Flows, all highly liquid investments
purchased with an original maturity of 90 days or less are classified as cash
and cash equivalents. Cash equivalents consist of securities of the U.S.
Government and its agencies.
Certain noncash investing activities are described below:
During the fiscal years ended November 30, 1998 and 1997, the Company
transferred $27,300 and $83,642 of inventory to property and equipment,
respectively. During 1998, the Company recorded a payable to the former owners
of Raven and increased goodwill by $118,964 under its contingent purchase price
obligations.
e. Inventories
-----------
Inventories are stated at the lower of cost or market, with cost determined
using the first-in, first-out method. Inventory costs include raw material,
labor (including material handling) and overhead costs. An inventory reserve is
provided for obsolete and slow-moving inventory to reduce the carrying amount
to its estimated net realizable value. The inventory reserve is not material.
At November 30, 1998 and 1997, the net carrying value of inventories consisted
of the following:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Raw materials $2,803,719 $2,676,953
Work-in-process 222,547 73,156
Finished goods 395,265 431,803
---------- ----------
$3,421,531 $3,181,912
========== ==========
</TABLE>
F - 9
<PAGE> 28
f. Property, Plant and Equipment
-----------------------------
Property and equipment are carried at cost. Depreciation of property and
equipment is provided by use of the straight-line method over the estimated
useful lives of the assets as follows:
Machinery and equipment 3-10 years
Furniture and fixtures 5-10 years
Leasehold improvements 3-5 years
Displays, demos and lab equipment 3-5 years
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
Leasehold improvements $ 91,653 $ 79,031
Machinery and equipment 884,278 735,024
Displays, demos and lab equipment 217,922 222,834
----------- -----------
1,193,853 1,036,889
Less accumulated deprecation (588,113) (409,034)
----------- -----------
$ 605,740 $ 627,855
=========== ===========
</TABLE>
g. Intangible Assets
-----------------
The initial purchase price in excess of the fair value of identifiable net
assets acquired of Raven, goodwill, is being amortized on a straight-line basis
over 17 years. Additional goodwill resulting from future contingent purchase
price payments earned will be amortized on a straight-line basis over the
remaining life of the original 17-year period. The earnout agreement provides
for contingent payments, not to exceed $600,000, payable in cash or the
Company's stock, based on the profitability of Raven over a four year period
from the acquisition date.
Legal and related external costs of patents is being amortized using the
straight-line method over their estimated useful lives (approximately 3 to 10
years). Other intangibles consist of the cost of certain product
certifications. Amortization of deferred certification costs is provided by use
of the straight-line method over the estimated future period of benefit
(approximately 5 to 8 years).
h. Impairment of Long-Lived Assets
-------------------------------
The Company accounts for the impairment of long-lived assets and for long-lived
assets to be disposed of in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Under the provisions of the statement, the Company continually evaluates its
long-lived assets in light of events and circumstances that may indicate that
the remaining estimated useful life may warrant revision or that the remaining
value may not be recoverable. When factors indicate that long-lived assets
should be evaluated for possible impairment, the Company uses an estimate of
the related cash flows over the remaining life of the asset in measuring
whether that asset is recoverable. To the extent an impairment has occurred,
the excess of the carrying value of the long-lived assets over their estimated
recoverable value will be charged to operations.
F - 10
<PAGE> 29
i. Research and Development
------------------------
The costs associated with research and development programs for new products
and significant improvements, which totaled approximately $831,968 and $848,266
in 1998 and 1997, respectively, are expensed as incurred.
j. Estimates and Reclassifications
-------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of sales and expenses during the reporting period. Actual
results could differ from those estimates.
Certain reclassifications have been made to the prior year financial statements
to conform to the current year presentation. These reclassifications have no
impact on net operating results previously reported.
k. Stock Options
-------------
In accordance with SFAS No. 123, the Company uses the intrinsic value method to
account for stock options, consistent with the existing rules established by
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees."
No compensation expense has been recognized for stock options granted to
employees.
l. Fair Values of Financial Instruments
------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of fair value information
for certain financial instruments. The carrying amounts of cash and cash
equivalents, temporary investments, accounts receivable, accounts payable and
noncurrent liabilities (excluding capital lease obligations) approximate fair
value because of the short maturity of these instruments.
m. New Accounting Standard
-----------------------
The Financial Accounting Standards Board (FASB) released a new accounting
standard SFAS No. 131, Disclosure about Segments of an Enterprise, which is
effective for fiscal periods beginning after December 15, 1997. Under the
provisions of this statement, the Company will be required to modify or expand
the financial statement disclosures for operating segments, products and
services, and geographic areas. The implementation of this pronouncement will
not affect the Company's financial position or results of operations.
F - 11
<PAGE> 30
3. STOCK OPTION PLAN
-----------------
The Company has adopted a Stock Option Plan (the "Option Plan") to provide for
the grant of options to purchase shares of common stock to qualified employees
(including officers and directors). The exercise price of any options granted
under the plan shall be 100% of the fair market value of the common stock as of
the date of grant (or 110% of the fair market value of the common stock if the
grant is an "incentive stock option," as defined by the Internal Revenue Code,
to an employee who owns more than 10% of the Company's outstanding common
stock). Options may not be exercised more than ten years after the date of
grant (five years if the grant is an incentive stock option to any employee who
owns more than 10% of the Company's outstanding common stock). The Company has
reserved 250,000 shares of common stock for issuance upon exercise of stock
options. At November 30, 1998, there were 68,250 exercisable options and 38,500
options available for grant. There were 113,000 options granted during February
1998 with an exercise price of $1.56. No options were granted during 1997.
The Company accounts for this plan under APB Opinion No. 25, under which no
compensation expense is recognized for options issued at or above the market
price on the date of the grant. Accordingly, no compensation expense has been
recorded. Had compensation expense been determined under the provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation", income from continuing
operations would have been reduced to $663,909 and $240,317 in 1998 and 1997,
respectively. Net income (loss) would have been $663,909 and $(1,471,819) in
1998 and 1997, respectively.
The fair value of options granted during 1998 was $.99 per share. The fair
value of the options granted was estimated on the date of the grant using the
Black-Sholes option pricing model with the following assumptions for 1998:
risk-free interest rate of 5.5%, expected volatility of 72.1%, no expected
dividend yield and an expected life of 5 years for all options granted.
Stock option activity under the plan was as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
OPTIONS SHARES EXERCISE PRICE
- ------- -------- ----------------
<S> <C> <C>
November 30, 1996 192,500 $ 2.57
Canceled (6,000) $ 1.25
Canceled (1,000) $ 5.00
--------
November 30, 1997 185,500 $ 2.32
Granted 113,000 $ 1.56
Canceled (61,000) $ 5.00
Canceled (26,000) $ 1.25
--------
November 30, 1998 211,500 $ 1.52
Shares Exercisable 68,250 $ 1.49
</TABLE>
F - 12
<PAGE> 31
4. WARRANTS
--------
The Company was organized in Delaware in July 1994, and commenced operations on
November 30, 1994. On December 7, 1994, the Company completed its initial
public stock offering ("Offering") of 1,100,000 units ("Units") at $5.00 per
Unit. In January 1995, the underwriter acquired an additional 150,000 Units at
$5.00 per Unit under terms of the Offering's over-allotment option. Each Unit
consists of one share of common stock and one redeemable common stock purchase
warrant ("Warrant"). The Warrants and common stock comprising the Units are
immediately detachable and separately transferable. Each Warrant entitles the
holder to purchase one share of common stock for $5.75 during the four-year
period commencing one year after the Offering. Since the warrant exercise price
exceeded the market value of the common stock when the units were issued, no
value was assigned to the warrants. The Company may call the Warrants for
redemption under certain conditions. The Company also sold to the underwriter
for $100 a purchase option to purchase up to 110,000 Units. The purchase option
is exercisable at $7.75 per Unit (155% of the initial public offering price of
the Units) for a period of four years commencing one year from the Offering.
5. INVESTMENT AND ADVANCES IN UNCONSOLIDATED AFFILIATE
---------------------------------------------------
GCI owns one-third of the common stock of RTM Systems, Inc. (RTM). The Company
is accounting for this investment under the equity method. An additional
reserve is provided when necessary to adjust the Company's investment and
advances in RTM to expected net realizable value.
Certain RTM employees perform services for the benefit of GCI, and GCI pays
certain other general and administrative expenses of RTM. RTM charged GCI fees,
net of RTM costs paid by GCI, totaling $28,297 and $10,100 in fiscal 1998 and
1997, respectively. GCI also sells dispensing systems to RTM. Sales to RTM
totaled $16,558 and $25,068 in fiscal 1998 and 1997, respectively. Included in
these sales are profits to GCI of $1,121 and $3,287 in fiscal 1998 and 1997,
respectively.
6. LIABILITIES
-----------
a. Revolving Line of Credit
------------------------
On May 15, 1998, the Company entered into a revolving line of credit agreement
with a bank. This $3,500,000 credit facility is subject to a borrowing base and
accrues interest at the bank's prime lending rate (7.75% as of November 30,
1998). The credit facility is fully secured by a lien on all the assets of the
Company and its operating subsidiaries. The credit facility expires on May 1,
1999.
This agreement requires that the Company meet certain covenants including
financial ratios. As of November 30, 1998, the Company was in compliance with
the financial covenants. As of November 30, 1998, the outstanding balance under
this agreement was $868,472.
The Company's previous credit facility expired on May 1, 1998, and had an
outstanding balance at November 30, 1997, of $1,552,280.
F - 13
<PAGE> 32
b. Capital Leases
--------------
The Company leases certain machinery and equipment under agreements which are
classified as capital leases. Future minimum payments, by year, under these
noncancellable capital leases consist of the following at November 30, 1998:
<TABLE>
<CAPTION>
Minimum lease payments:
Year 1998 1997
---- ---- ----
<S> <C> <C> <C>
1998 $ - $28,355
1999 29,735 29,735
2000 26,535 26,535
---------------------------------------
Minimum lease payments 56,270 84,625
Less - Amount
representing interest 5,344 12,391
----------------- ------------------
Present value of future
minimum lease payments $50,926 $72,234
================= ==================
</TABLE>
c. Other Noncurrent Liabilities
----------------------------
At November 30, 1998 and 1997, other noncurrent liabilities, including capital
lease obligations, consisted of the following:
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
<S> <C> <C>
Present value of lease payments $50,926 $72,234
Obligation arising from the acquisition
of deferred formula costs and customer
lists, payable in minimum monthly installments
of $2,250, including interest
imputed at 10% through March 1999
This obligation was settled in November 1998 -- $32,992
</TABLE>
F - 14
<PAGE> 33
<TABLE>
<S> <C> <C>
Noninterest bearing deferred compensation
obligation, payable to the wife of
the founder of a predecessor of ACC
in annual installments of approximately
$25,000, including interest imputed at
12% for her lifetime, estimated to be
through 1999; collateralized by a restricted
temporary investment (Note 10) 21,086 21,086
Deferred income being amortized over
contractual period not to compete 243,058 --
-------- --------
315,070 126,312
Less- Current portion 163,335 63,639
-------- --------
Long-term portion $151,735 $ 62,673
======== ========
</TABLE>
7. RETIREMENT PLANS
----------------
During 1998, the Company converted ACC's defined benefit pension plan to a
401(k) (or defined contribution plan). In connection with this conversion,
substantially all of the plans assets totaling approximately $130,000 were
contributed to the new plan in satisfaction of the initial contribution
requirement. No additional contributions by the Company are required under the
new plan.
The Company has defined contribution profit sharing plans for all nonunion
employees meeting minimum eligibility requirements. It is the Company's policy
to contribute up to 3% of total wages for each employee who makes certain
minimum contributions. The amounts contributed by the Company during 1998 and
1997 were $77,169 and $70,399, respectively.
F - 15
<PAGE> 34
8. INCOME TAXES
------------
The provision for income taxes consists of the following components :
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
CURRENT
Federal $ 0 $ 0
State 0 0
-------- --------
Total current 0 0
DEFERRED
Total deferred 0 (20,100)
-------- --------
INCOME TAX (BENEFIT) $ 0 $(20,100)
======== ========
</TABLE>
No income tax liability was payable in 1998 and 1997 due to the utilization of
net operating loss carryforwards and reversal of temporary differences which
represent a reduction of taxable income for which valuation allowances had been
previously provided.
Temporary differences, credits and carryforwards which give rise to the net
deferred tax asset at November 30, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Financial reporting reserves not
yet deductible $ 180,500 $ 430,600
Depreciation and amortization 35,000 (89,800)
Net operating loss carryforwards
attributable to:
ACC 611,300 658,600
Cohesant 151,200 177,500
General business credits 145,600 145,600
AMT credit carryforward 3,500 3,500
----------- -----------
1,127,100 1,326,000
Less- Valuation allowance (961,500) (1,160,400)
----------- -----------
NET DEFERRED TAX ASSET $ 165,600 $ 165,600
=========== ===========
</TABLE>
At November 30, 1998, for Federal income tax purposes, the Company including
Cohesant , Raven and ACC, has net operating loss carryforwards (NOL's) totaling
approximately $2,060,800 which expire through 2012. Included in ACC's NOL's are
$911,000 of separate return limitation year (SRYL) NOL's whose annual
utilization is limited to approximately
F - 16
<PAGE> 35
$4,000. The Company also has general business credits totaling approximately
$145,600 which expire through fiscal 2009.
A valuation allowance reduces deferred tax assets when it is "more likely than
not" that some portion or all of the deferred tax assets will not be realized.
A valuation allowance has been provided for the Company's NOL's, general
business credits and a certain portion of other deferred tax assets.
Realization of deferred tax assets associated with the NOL's and general
business credit carryforwards is dependent upon generating sufficient taxable
income and other factors prior to their expiration. Management believes that
there is risk that these NOL's and credit carryforwards may expire unused and,
accordingly, has established a valuation allowance against them. Although
realization is not assured for the remaining deferred tax assets for which a
valuation allowance has not been provided, management believes it is more
likely than not that they will be realized through the future taxable earnings
or alternative tax strategies.
9. RELATED PARTY TRANSACTIONS
--------------------------
From December 1994 to May 31, 1996, the Company was party to a cost sharing
arrangement ("arrangement"), with Clarion Capital Corporation ("CCC"), the
Company's majority shareholder, that provided for reimbursement by the Company
of certain occupancy, leased equipment, and other administrative costs incurred
by CCC as a result of shared facilities. In April 1996, upon the formation of
Clarion Management Ltd. ("CML"), an affiliate of CCC, the arrangement was
assigned to CML. Commencing June 1, 1996, the arrangement was replaced by a
management agreement ("agreement") which recognized the increased role played
by CML and its managing member in the affairs of the Company following the
resignation of the Company's prior president in May 1996. The agreement
provides that CML will provide management assistance and general administrative
support for the Company and shall be paid $10,500 per fiscal quarter. This
agreement was amended in October 1998, increasing the quarterly payment to
$13,000 effective December 1, 1998. Pursuant to the agreement, CML was paid
$42,000 and $40,900, net of expenses for shared personnel during the fiscal
years ended November 30, 1998 and 1997, respectively.
10. COMMITMENTS
-----------
The Company leases its office, a portion of its manufacturing and warehouse
facilities, computer equipment and Company cars under noncancellable operating
leases expiring at various dates through November 2004. Future minimum rental
payments required under these noncancellable operating leases are summarized as
follows:
<TABLE>
<CAPTION>
Fiscal
Year Amount
---- ------
<S> <C> <C>
1999 277,943
2000 261,210
2001 201,254
2002 171,132
</TABLE>
F - 17
<PAGE> 36
<TABLE>
<S> <C> <C>
2003 165,880
Thereafter 13,824
</TABLE>
Rent expense totaled $321,183 and $429,000 for the years ended November 30,
1998 and 1997, respectively.
The Company holds $200,000 in short-term U.S. government money market funds, to
secure a continuing contractual payment obligation of the Company stemming from
its acquisition of ACC. As a consequence of this agreement, the Company has
classified such funds and the interest earned thereon as Restricted, Temporary
Investments under noncurrent assets on the accompanying Consolidated Balance
Sheet.
11. CONTINGENCIES
-------------
On March 5, 1997, a jury verdict was rendered in a lawsuit ACC filed in 1991
against a customer seeking collection for amounts owed on open account. The
customer filed a counterclaim against ACC alleging damages arising out of a
1988 distributors agreement. The jury awarded ACC $123,000 for amounts owed on
the trade receivable, but also awarded the customer $400,000 in compensatory
damages and $1,500,000 in punitive damages on its counterclaim. On June 25,
1997, the trial judge denied the Company's post trial motions for a judgment
notwithstanding the verdict or, in the alternate, a new trial. To avoid the
expense and disruption of continued protracted litigation, the Company
commenced negotiations to settle the matter during the third quarter of 1997.
In November 1997, a settlement was reached and the Company paid a settlement
amount of $600,000 to the plaintiff.
The Company is proceeding to investigate and remediate the environmental
condition of its St. Louis property in order that the property can be marketed
and sold. The work includes soil remediation required by the Missouri
Department of Natural Resources in connection with the closure of underground
storage tanks. The Missouri Department of Natural Resources has also requested
that an additional soil and groundwater contamination investigation plan be
submitted for the site to fully define the extent of groundwater contamination.
The Company accrues costs for an estimated environmental liability when
management becomes aware that a liability is probable and is able to reasonably
estimate the Company's cost. Generally, that occurs no later than when
feasibility studies and related cost assessments of remedial techniques are
completed, and the extent to which other potentially responsible parties (if
any), can be expected to contribute is determined. Outside consultants are
being used to perform site investigation work and to advise management on the
findings and remediation alternatives. In management's opinion, the liabilities
for the environmental matter mentioned above which are probable and reasonably
estimable are accrued. As of November 30, 1998, the environmental reserve was
approximately $220,000. The reserve is reflected as an adjustment to the
carrying value of the property held for sale. The actual costs to be incurred
by the Company will be dependent on final delineation of contamination, final
determination of remedial action required, negotiations with federal and state
agencies with respect to cleanup levels, changes in regulatory requirements,
innovations in investigatory and remedial technologies and effectiveness of
remedial technologies employed.
F - 18
<PAGE> 37
A former employee of ACC has filed a workers' compensation claim related to
injuries incurred in connection with the August 1996 fire at the St. Louis
facility. In the claim, the employee is requesting payment of an additional 15%
award of compensation, approximately, $150,000, claiming ACC violated a
Missouri safety statute in connection with the occurrence of his injury. As of
November 30, 1998, the Company has not recorded a provision for this matter as
management intends to vigorously defend these allegations and believes the
payment of the penalty is not probable.
The Company is a party to other legal and environmental matters which have
arisen in the ordinary course of business. Management believes the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
12. IMPAIRMENT
----------
As a result of the customer litigation described in Note 11 and continued
operating losses generated, during fiscal 1997, the Company considered several
alternatives for ACC's adhesives, private label and toll manufacturing business
including continuation of the current business, a bankruptcy filing for the
business, a sale of these operations, or a liquidation sale of the operations.
In connection with these considerations, the Company received an offer from a
third party to purchase selected assets of the adhesives, private label and
toll manufacturing business. Although no formal decision was made during the
third quarter of fiscal 1997, the Company concluded that it was unlikely that
the financial benefit, if any, which would inure to the benefit of the
shareholders justified the effort and related costs necessary to turnaround
ACC's operations. All of these factors were indications to management of the
possibility that the assets of ACC were impaired. Management's estimate of
future cashflows resulted in an amount which was less than the carrying value
of ACC assets. Accordingly, during the third quarter of the 1997 fiscal year,
the Company recorded a $324,000 impairment reserve to adjust the long-lived
assets of ACC to an estimate of their net realizable value. The impairment
reserve was based upon the Company's estimate of amounts to be realized upon
sale or possible liquidation of the assets. Management believed that for the
foreseeable future positive cashflow from ACC's operations was unlikely.
13. DISCONTINUED OPERATIONS
-----------------------
On November 30, 1997, the Company's Board of Directors signed an agreement to
sell certain assets of American Chemical Company's ("ACC") adhesive, private
label and toll manufacturing business and decided to account for such business
as a discontinued operation for all periods presented in accordance with
Accounting Principles Board No. 30, "Reporting the Results of Operations -
Reporting the Effects of a Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
On January 14, 1998 the Company, ACC and a third party completed the sale of
certain assets (inventory and certain intangibles) of the discontinued business
and executed a three-year non-compete agreement. The consideration received of
approximately $1,350,000 includes a $300,000 promissory note bearing 8%
interest and due in three years and $350,000, for a three-year non-compete
agreement with the buyer. The cash consideration received in connection with
F - 19
<PAGE> 38
the sale of inventory is reflected in the accompanying Condensed Consolidated
Statement of Cash Flows as Net Cash Provided by (Used in) Discontinued
Operations. The Company negotiated an early payment of the promissory not
during 1998. Cash received of $250,000 approximated the carrying value of the
note. The non-compete agreement is being amortized to income over the
three-year contract period. The unamortized portion of the non-compete
agreement of $116,667 and $126,391 are presented on the accompanying Condensed
Consolidated Balance Sheet as an Other Current and Non-current Liability,
respectively.
Included in the 1997 Loss from Discontinued Operations is the settlement of the
litigation (Note 11), the reserve for impairment of long-lived assets (Note
12), and additional amounts reserved aggregating approximately $425,000 related
to environmental contingencies and other commitments. The 1997 Loss on Disposal
of Discontinued Operations in the accompanying Consolidated Statement of
Operations reflects an estimate of operating losses expected to occur related
to the discontinued segment from the measurement date to the anticipated date
of disposal.
As of November 30, 1998, the remaining assets of the discontinued segment are
reflected as assets held for sale at net realizable value less costs to sell,
in the accompanying Consolidated Balance Sheet as Noncurrent Assets
Discontinued Operations. The operating activity of the discontinued segment
ceased during the second quarter of 1998. Net sales of the discontinued segment
were $722,879 and $5,762,053 for period in 1998 and fiscal 1997, respectively.
The 1998 losses of $454,059 have been reflected as a reduction to the Accrued
Liabilities Related to Discontinued Operations in the accompanying Condensed
Consolidated Balance Sheet. Operating results for this business are consistent
with the Company's prior estimate of these amounts.
F - 20
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: February 12, 1999
COHESANT TECHNOLOGIES INC.
BY: /s/ Morton A. Cohen
---------------------
Morton A. Cohen
Chairman of the Board of Directors
PURSUANT to the requirements of the Securities Exchange Act of 1934,
as amended, this Report has been signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Morton A. Cohen Chairman of the Board of Directors February 12, 1999
- -------------------
Morton A. Cohen
/S/ Dwight D. Goodman President and Chief Executive Officer February 12, 1999
- --------------------- (Principal Executive Officer) and Director
Dwight D. Goodman
/s/ Michael L. Boeckman Director February 12, 1999
- -----------------------
Michael L. Boeckman
/s/ Morris H. Wheeler Director February 12, 1999
- ---------------------
Morris H. Wheeler
/s/ Richard L. Immerman Director February 12, 1999
- -----------------------
Richard L. Immerman
/s/ Robert W. Pawlak Chief Financial Officer February 12, 1999
- -------------------- (Principal Financial and
Robert W. Pawlak Accounting Officer)
</TABLE>
<PAGE> 1
Exhibit 10.2
[Gross Lease with Stops]
LEASE AGREEMENT
THIS LEASE AGREEMENT is made this 6th day of October, 1998, between
ProLogis North Carolina Limited Partnership, ("Landlord"), and the Tenant named
below.
Tenant: Glas-Craft, Inc.
--------------------------------------------
Tenant's representative, Mr. Byron Bradley
address, and phone no.: --------------------------------------------
5845 West 82nd Street
--------------------------------------------
Suite 102
--------------------------------------------
Indianapolis, IN 46278
--------------------------------------------
317-875-5592
--------------------------------------------
Premises: That portion of the Building, containing
approximately 38,400 rentable square feet,
as determined by Landlord, as shown on
Exhibit A.
Project: Park 100 Industrial Center - Building 20
--------------------------------------------
Building: Park 100 Industrial Center - Building 20
--------------------------------------------
Tenant's Proportionate Share
of Project: 40.0%
--------------------------------------------
Tenant's Proportionate Share
of Building: 40.0%
--------------------------------------------
Lease Term: Beginning on the Commencement Date and
ending on the last day of the 60th full
calendar month thereafter.
Commencement Date: February 1, 1999
--------------------------------------------
Initial Monthly Base Rent: $13,824.00
--------------------------------------------
Base Year: 1999
--------------------------------------------
Security Deposit: $0.00
--------------------------------------------
Broker: N/A
--------------------------------------------
Addenda: Addenda A and B, Exhibits A, B, and C.
--------------------------------------------
1. GRANTING CLAUSE. In consideration of the obligation of Tenant to pay
rent as herein provided and in consideration of the other terms, covenants, and
conditions hereof, Landlord leases to Tenant, and Tenant takes from Landlord,
the Premises, to have and to hold for the Lease Term, subject to the terms,
covenants and conditions of this Lease.
2. ACCEPTANCE OF PREMISES. Tenant shall accept the Premises in its
condition as of the Commencement Date, subject to all applicable laws,
ordinances, regulations, covenants and restrictions. Landlord has made no
representation or warranty as to the suitability of the Premises for the conduct
of Tenant's business, and Tenant waives any implied warranty that the Premises
are suitable for Tenant's intended purposes. Except as provided in Paragraph 10,
in no event shall Landlord have any obligation for any defects in the Premises
or any limitation on its use. The taking of possession of the Premises shall be
conclusive evidence that Tenant accepts the Premises and that the Premises were
in good condition at the time possession was taken except for items that are
Landlord's responsibility under Paragraph 10 and any punchlist items agreed to
in writing by Landlord and Tenant.
3. USE. The Premises shall be used only for the purpose of receiving,
storing, shipping and selling (but limited to wholesale sales) products,
materials and merchandise made and/or distributed by Tenant and for such other
lawful purposes as may be incidental thereto; provided, however, with Landlord's
prior written consent, Tenant may also use the Premises for light manufacturing.
Tenant shall not conduct or give notice of any auction, liquidation, or going
out of business sale on the Premises. Tenant will use the Premises in a careful,
safe and proper manner and will not commit waste, overload the floor or
structure of the Premises or subject the Premises to use that would damage the
Premises. Tenant shall not permit any objectionable or unpleasant odors, smoke,
dust, gas, noise, or vibrations to emanate from the Premises, or take any other
action that would constitute a nuisance or would disturb, unreasonably interfere
with, or endanger Landlord or any tenants of the Project. Outside storage,
including without limitation, storage of trucks and other vehicles, is
prohibited without Landlord's prior written consent. Tenant, at its sole
expense, shall use and occupy the Premises in compliance with all laws,
including, without limitation, the Americans With Disabilities Act, orders,
judgments, ordinances, regulations, codes, directives, permits, licenses,
covenants and restrictions now or hereafter applicable to the Premises
(collectively, "Legal Requirements"). The Premises shall not be used as a place
of public accommodation under the Americans With Disabilities Act or similar
<PAGE> 2
state statutes or local ordinances or any regulations promulgated thereunder,
all as may be amended from time to time. Tenant shall, at its expense, make any
alterations or modifications, within or without the Premises, that are required
by Legal Requirements related to Tenant's use or occupation of the Premises.
Tenant will not use or permit the Premises to be used for any purpose or in any
manner that would void Tenant's or Landlord's insurance, increase the insurance
risk, or cause the disallowance of any sprinkler credits. If any increase in the
cost of any insurance on the Premises or the Project is caused by Tenant's use
or occupation of the Premises, or because Tenant vacates the Premises, then
Tenant shall pay the amount of such increase to Landlord. Any occupation of the
Premises by Tenant prior to the Commencement Date shall be subject to all
obligations of Tenant under this Lease.
4. BASE RENT. Tenant shall pay Base Rent in the amount set forth above.
The first month's Base Rent and the Security Deposit shall be due and payable on
the date hereof, and Tenant promises to pay to Landlord in advance, without
demand, deduction or set-off, monthly installments of Base Rent on or before the
first day of each calendar month succeeding the Commencement Date. Payments of
Base Rent for any fractional calendar month shall be prorated. All payments
required to be made by Tenant to Landlord hereunder shall be payable at such
address as Landlord may specify from time to time by written notice delivered in
accordance herewith. The obligation of Tenant to pay Base Rent and other sums to
Landlord and the obligations of Landlord under this Lease are independent
obligations. Tenant shall have no right at any time to abate, reduce, or set-off
any rent due hereunder except as may be expressly provided in this Lease. If
Tenant is delinquent in any monthly installment of Base Rent or of estimated
Excess Operating Expenses (as hereinafter defined) for more than 5 days, Tenant
shall pay to Landlord on demand a late charge equal to 5 percent of such
delinquent sum. The provision for such late charge shall be in addition to all
of Landlord's other rights and remedies hereunder or at law and shall not be
construed as a penalty.
5. SECURITY DEPOSIT. The Security Deposit shall be held by Landlord as
security for the performance of Tenant's obligations under this Lease. The
Security Deposit is not an advance rental deposit or a measure of Landlord's
damages in case of Tenant's default. Upon each occurrence of an Event of Default
(hereinafter defined), Landlord may use all or part of the Security Deposit to
pay delinquent payments due under this Lease, and the cost of any damage,
injury, expense or liability caused by such Event of Default, without prejudice
to any other remedy provided herein or provided by law. Tenant shall pay
Landlord on demand the amount that will restore the Security Deposit to its
original amount. Landlord's obligation respecting the Security Deposit is that
of a debtor, not a trustee; no interest shall accrue thereon. The Security
Deposit shall be the property of Landlord, but shall be paid to Tenant when
Tenant's obligations under this Lease have been completely fulfilled. Landlord
shall be released from any obligation with respect to the Security Deposit upon
transfer of this Lease and the Premises to a person or entity assuming
Landlord's obligations under this Paragraph 5.
6. OPERATING EXPENSE PAYMENTS. During each month of the Lease Term
subsequent to the Base Year, on the same date that Base Rent is due, Tenant
shall pay Landlord an amount equal to 1/12 of the annual cost, as estimated by
Landlord from time to time, of Tenant's Proportionate Share (hereinafter
defined) of Excess Operating Expenses for the Project. Payments thereof for any
fractional calendar month shall be prorated. The term "Excess Operating
Expenses" means Operating Expenses for the applicable year in excess of
Operating Expenses for the Base Year. The term "Operating Expenses" means all
costs and expenses incurred by Landlord with respect to the ownership,
maintenance, and operation of the Project including, but not limited to costs
of: Taxes (hereinafter defined) and fees payable to tax consultants and
attorneys for consultation and contesting taxes; insurance; utilities;
maintenance, repair and replacement of all portions of the Project, including
without limitation, paving and parking areas, roads, roofs, alleys, and
driveways, mowing, landscaping, exterior painting, utility lines, heating,
ventilation and air conditioning systems, lighting, electrical systems and other
mechanical and building systems; amounts paid to contractors and subcontractors
for work or services performed in connection with any of the foregoing; charges
or assessments of any association to which the Project is subject; property
management fees payable to a property manager, including any affiliate of
Landlord, or if there is no property manager, an administration fee of 15
percent of the total amount of Operating Expenses; security services, if any;
trash collection, sweeping and removal; and additions or alterations made by
Landlord to the Project or the Building in order to comply with Legal
Requirements (other than those expressly required herein to be made by Tenant)
or that are appropriate to the continued operation of the Project or the
Building as a bulk warehouse facility in the market area, provided that the cost
of such additions or alterations that are required to be capitalized for federal
income tax purposes shall be amortized on a straight line basis over a period
equal to the lesser of the useful life thereof for federal income tax purposes
or 10 years. Operating Expenses do not include costs, expenses, depreciation or
amortization for capital repairs and capital replacements required to be made by
Landlord under Paragraph 10 of this Lease, debt service under mortgages or
ground rent under ground leases, costs of restoration to the extent of net
insurance proceeds received by Landlord with respect thereto, leasing
commissions, or the costs of renovating space for tenants.
If Tenant's total payments of Operating Expenses for any year are less
than Tenant's Proportionate Share of Excess Operating Expenses for such year,
then Tenant shall pay the difference to Landlord within 30 days after demand
and, if more, then Landlord shall retain such excess and credit it against
Tenant's next payments. For purposes of calculating Tenant's Proportionate Share
of Excess Operating Expenses, a year shall mean a calendar year except the last
year, which shall end on the expiration of this Lease. For purposes of
calculating Excess Operating Expenses for the last year of the Lease Term,
Operating Expenses for the Base Year shall be reduced proportionately based upon
the number of days that this Lease is in effect during such last year. With
respect to Operating Expenses which Landlord allocates to the entire Project,
Tenant's "Proportionate Share" shall be the percentage set forth on the first
page of this Lease as Tenant's Proportionate Share of the Project as reasonably
adjusted by Landlord in the future for changes in the physical size of the
Premises or the Project; and, with respect to Operating Expenses which Landlord
allocates only to the Building, Tenant's "Proportionate Share" shall be the
percentage set forth on the first
-2-
<PAGE> 3
page of this Lease as Tenant's Proportionate Share of the Building as reasonably
adjusted by Landlord in the future for changes in the physical size of the
Premises or the Building. Landlord may equitably increase Tenant's Proportionate
Share for any item of expense or cost reimbursable by Tenant that relates to a
repair, replacement, or service that benefits only the Premises or only a
portion of the Project or Building that includes the Premises or that varies
with occupancy or use.
7. UTILITIES. Tenant shall pay for all water, gas, electricity, heat,
light, power, telephone, sewer, sprinkler services, refuse and trash collection,
and other utilities and services used on the Premises, all maintenance charges
for utilities, and any storm sewer charges or other similar charges for
utilities imposed by any governmental entity or utility provider, together with
any taxes, penalties, surcharges or the like pertaining to Tenant's use of the
Premises. Landlord may cause at Tenant's expense any utilities to be separately
metered or charged directly to Tenant by the provider. Tenant shall pay its
share of all charges for jointly metered utilities based upon consumption, as
reasonably determined by Landlord. No interruption or failure of utilities shall
result in the termination of this Lease or the abatement of rent. Tenant agrees
to limit use of water and sewer for normal restroom use.
8. TAXES. Landlord shall pay all taxes, assessments and governmental
charges (collectively referred to as "Taxes") that accrue against the Project
during the Lease Term, which shall be included as part of the Operating Expenses
charged to Tenant. Landlord may contest by appropriate legal proceedings the
amount, validity, or application of any Taxes or liens thereof. All capital
levies or other taxes assessed or imposed on Landlord upon the rents payable to
Landlord under this Lease and any franchise tax, any excise, transaction, sales
or privilege tax, assessment, levy or charge measured by or based, in whole or
in part, upon such rents from the Premises and/or the Project or any portion
thereof shall be paid by Tenant to Landlord monthly in estimated installments or
upon demand, at the option of Landlord, as additional rent; provided, however,
in no event shall Tenant be liable for any net income taxes imposed on Landlord
unless such net income taxes are in substitution for any Taxes payable
hereunder. If any such tax or excise is levied or assessed directly against
Tenant, then Tenant shall be responsible for and shall pay the same at such
times and in such manner as the taxing authority shall require. Tenant shall be
liable for all taxes levied or assessed against any personal property or
fixtures placed in the Premises, whether levied or assessed against Landlord or
Tenant.
9. INSURANCE. Landlord shall maintain all risk property insurance
covering the full replacement cost of the Building. Landlord may, but is not
obligated to, maintain such other insurance and additional coverages as it may
deem necessary, including, but not limited to, commercial liability insurance
and rent loss insurance. All such insurance shall be included as part of the
Operating Expenses charged to Tenant. The Project or Building may be included in
a blanket policy (in which case the cost of such insurance allocable to the
Project or Building will be determined by Landlord based upon the insurer's cost
calculations). Tenant shall also reimburse Landlord for any increased premiums
or additional insurance which Landlord reasonably deems necessary as a result of
Tenant's use of the Premises.
Tenant, at its expense, shall maintain during the Lease Term: all risk
property insurance covering the full replacement cost of all property and
improvements installed or placed in the Premises by Tenant at Tenant's expense;
worker's compensation insurance with no less than the minimum limits required by
law; employer's liability insurance with such limits as required by law; and
commercial liability insurance, with a minimum limit of $1,000,000 per
occurrence and a minimum umbrella limit of $1,000,000, for a total minimum
combined general liability and umbrella limit of $2,000,000 (together with such
additional umbrella coverage as Landlord may reasonably require) for property
damage, personal injuries, or deaths of persons occurring in or about the
Premises. Landlord may from time to time require reasonable increases in any
such limits. The commercial liability policies shall name Landlord as an
additional insured, insure on an occurrence and not a claims-made basis, be
issued by insurance companies which are reasonably acceptable to Landlord, not
be cancelable unless 30 days prior written notice shall have been given to
Landlord, contain a hostile fire endorsement and a contractual liability
endorsement and provide primary coverage to Landlord (any policy issued to
Landlord providing duplicate or similar coverage shall be deemed excess over
Tenant's policies). Such policies or certificates thereof shall be delivered to
Landlord by Tenant upon commencement of the Lease Term and upon each renewal of
said insurance.
The all risk property insurance obtained by Landlord and Tenant shall
include a waiver of subrogation by the insurers and all rights based upon an
assignment from its insured, against Landlord or Tenant, their officers,
directors, employees, managers, agents, invitees and contractors, in connection
with any loss or damage thereby insured against. Neither party nor its officers,
directors, employees, managers, agents, invitees or contractors shall be liable
to the other for loss or damage caused by any risk coverable by all risk
property insurance, and each party waives any claims against the other party,
and its officers, directors, employees, managers, agents, invitees and
contractors for such loss or damage. The failure of a party to insure its
property shall not void this waiver. Landlord and its agents, employees and
contractors shall not be liable for, and Tenant hereby waives all claims against
such parties for, business interruption and losses occasioned thereby sustained
by Tenant or any person claiming through Tenant resulting from any accident or
occurrence in or upon the Premises or the Project from any cause whatsoever,
including without limitation, damage caused in whole or in part, directly or
indirectly, by the negligence of Landlord or its agents, employees or
contractors.
10. LANDLORD'S REPAIRS. Landlord shall maintain, at its expense, the
structural soundness of the roof, foundation, and exterior walls of the Building
in good repair, reasonable wear and tear and uninsured losses and damages caused
by Tenant, its agents and contractors excluded. The term "walls" as used in this
Paragraph 10 shall not include windows, glass or plate glass, doors or overhead
doors, special store fronts, dock bumpers, dock plates
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or levelers, or office entries. Tenant shall promptly give Landlord written
notice of any repair required by Landlord pursuant to this Paragraph 10, after
which Landlord shall have a reasonable opportunity to repair.
11. TENANT'S REPAIRS. Landlord, at Tenant's expense as provided in
Paragraph 6, shall maintain in good repair and condition the parking areas and
other common areas of the Building, including, but not limited to driveways,
alleys, landscape and grounds surrounding the Premises. Subject to Landlord's
obligation in Paragraph 10, Tenant, at its expense, shall repair, replace and
maintain in good condition all portions of the Premises and all areas,
improvements and systems exclusively serving the Premises including, without
limitation, dock and loading areas, truck doors, plumbing, water, and sewer
lines up to points of common connection, fire sprinklers and fire protection
systems, entries, doors, ceilings and roof membrane, windows, interior walls,
and the interior side of demising walls, and heating, ventilation and air
conditioning systems. Such repair and replacements include capital expenditures
and repairs whose benefit may extend beyond the Term. Heating, ventilation and
air conditioning systems and other mechanical and building systems serving the
Premises shall be maintained at Tenant's expense pursuant to maintenance service
contracts entered into by Tenant or, at Landlord's election, by Landlord. The
scope of services and contractors under such maintenance contracts shall be
reasonably approved by Landlord. At Landlord's request, Tenant shall enter into
a joint maintenance agreement with any railroad that services the Premises. If
Tenant fails to perform any repair or replacement for which it is responsible,
Landlord may perform such work and be reimbursed by Tenant within 10 days after
demand therefor. Subject to Paragraphs 9 and 15, Tenant shall bear the full cost
of any repair or replacement to any part of the Building or Project that results
from damage caused by Tenant, its agents, contractors, or invitees and any
repair that benefits only the Premises.
12. TENANT-MADE ALTERATIONS AND TRADE FIXTURES. Any alterations,
additions, or improvements made by or on behalf of Tenant to the Premises
("Tenant-Made Alterations") shall be subject to Landlord's prior written
consent. Tenant shall cause, at its expense, all Tenant-Made Alterations to
comply with insurance requirements and with Legal Requirements and shall
construct at its expense any alteration or modification required by Legal
Requirements as a result of any Tenant-Made Alterations. All Tenant-Made
Alterations shall be constructed in a good and workmanlike manner by contractors
reasonably acceptable to Landlord and only good grades of materials shall be
used. All plans and specifications for any Tenant-Made Alterations shall be
submitted to Landlord for its approval. Landlord may monitor construction of the
Tenant-Made Alterations. Tenant shall reimburse Landlord for its costs in
reviewing plans and specifications and in monitoring construction. Landlord's
right to review plans and specifications and to monitor construction shall be
solely for its own benefit, and Landlord shall have no duty to see that such
plans and specifications or construction comply with applicable laws, codes,
rules and regulations. Tenant shall provide Landlord with the identities and
mailing addresses of all persons performing work or supplying materials, prior
to beginning such construction, and Landlord may post on and about the Premises
notices of non-responsibility pursuant to applicable law. Tenant shall furnish
security or make other arrangements satisfactory to Landlord to assure payment
for the completion of all work free and clear of liens and shall provide
certificates of insurance for worker's compensation and other coverage in
amounts and from an insurance company satisfactory to Landlord protecting
Landlord against liability for personal injury or property damage during
construction. Upon completion of any Tenant-Made Alterations, Tenant shall
deliver to Landlord sworn statements setting forth the names of all contractors
and subcontractors who did work on the Tenant-Made Alterations and final lien
waivers from all such contractors and subcontractors. Upon surrender of the
Premises, all Tenant-Made Alterations and any leasehold improvements constructed
by Landlord or Tenant shall remain on the Premises as Landlord's property,
except to the extent Landlord's requires removal at Tenant's expense of any such
items or Landlord and Tenant have otherwise agreed in writing in connection with
Landlord's consent to any Tenant-Made Alterations. Tenant shall repair any
damage caused by such removal.
Tenant, at its own cost and expense and without Landlord's prior
approval, may erect such shelves, bins, machinery and trade fixtures
(collectively "Trade Fixtures") in the ordinary course of its business provided
that such items do not alter the basic character of the Premises, do not
overload or damage the Premises, and may be removed without injury to the
Premises, and the construction, erection, and installation thereof complies with
all Legal Requirements and with Landlord's requirements set forth above. Tenant
shall remove its Trade Fixtures and shall repair any damage caused by such
removal.
13. SIGNS. Tenant shall not make any changes to the exterior of the
Premises, install any exterior lights, decorations, balloons, flags, pennants,
banners, or painting, or erect or install any signs, windows or door lettering,
placards, decorations, or advertising media of any type which can be viewed from
the exterior of the Premises, without Landlord's prior written consent. Upon
surrender or vacation of the Premises, Tenant shall have removed all signs and
repair, paint, and/or replace the building facia surface to which its signs are
attached. Tenant shall obtain all applicable governmental permits and approvals
for sign and exterior treatments. All signs, decorations, advertising media,
blinds, draperies and other window treatment or bars or other security
installations visible from outside the Premises shall be subject to Landlord's
approval and conform in all respects to Landlord's requirements.
14. PARKING. Tenant shall be entitled to park in common with other
tenants of the Project in those areas designated for nonreserved parking.
Landlord may allocate parking spaces among Tenant and other tenants in the
Project if Landlord determines that such parking facilities are becoming
crowded. Landlord shall not be responsible for enforcing Tenant's parking rights
against any third parties.
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15. RESTORATION. If at any time during the Lease Term the Premises are
damaged by a fire or other casualty, Landlord shall notify Tenant within 60 days
after such damage as to the amount of time Landlord reasonably estimates it will
take to restore the Premises. If the restoration time is estimated to exceed 6
months, either Landlord or Tenant may elect to terminate this Lease upon notice
to the other party given no later than 30 days after Landlord's notice. If
neither party elects to terminate this Lease or if Landlord estimates that
restoration will take 6 months or less, then, subject to receipt of sufficient
insurance proceeds, Landlord shall promptly restore the Premises excluding the
improvements installed by Tenant or by Landlord and paid by Tenant, subject to
delays arising from the collection of insurance proceeds or from Force Majeure
events. Tenant at Tenant's expense shall promptly perform, subject to delays
arising from the collection of insurance proceeds, or from Force Majeure events,
all repairs or restoration not required to be done by Landlord and shall
promptly re-enter the Premises and commence doing business in accordance with
this Lease. Notwithstanding the foregoing, either party may terminate this Lease
if the Premises are damaged during the last year of the Lease Term and Landlord
reasonably estimates that it will take more than one month to repair such
damage. Tenant shall pay to Landlord with respect to any damage to the Premises
the amount of the commercially reasonable deductible under Landlord's insurance
policy (currently $10,000) within 10 days after presentment of Landlord's
invoice. If the damage involves the premises of other tenants, Tenant shall pay
the portion of the deductible that the cost of the restoration of the Premises
bears to the total cost of restoration, as determined by Landlord. Base Rent and
Operating Expenses shall be abated for the period of repair and restoration in
the proportion which the area of the Premises, if any, which is not usable by
Tenant bears to the total area of the Premises. Such abatement shall be the sole
remedy of Tenant, and except as provided herein, Tenant waives any right to
terminate the Lease by reason of damage or casualty loss.
16. CONDEMNATION. If any part of the Premises or the Project should be
taken for any public or quasi-public use under governmental law, ordinance, or
regulation, or by right of eminent domain, or by private purchase in lieu
thereof (a "Taking" or "Taken"), and the Taking would prevent or materially
interfere with Tenant's use of the Premises or in Landlord's judgment would
materially interfere with or impair its ownership or operation of the Project,
then upon written notice by Landlord this Lease shall terminate and Base Rent
shall be apportioned as of said date. If part of the Premises shall be Taken,
and this Lease is not terminated as provided above, the Base Rent payable
hereunder during the unexpired Lease Term shall be reduced to such extent as may
be fair and reasonable under the circumstances. In the event of any such Taking,
Landlord shall be entitled to receive the entire price or award from any such
Taking without any payment to Tenant, and Tenant hereby assigns to Landlord
Tenant's interest, if any, in such award. Tenant shall have the right, to the
extent that same shall not diminish Landlord's award, to make a separate claim
against the condemning authority (but not Landlord) for such compensation as may
be separately awarded or recoverable by Tenant for moving expenses and damage to
Tenant's Trade Fixtures, if a separate award for such items is made to Tenant.
17. ASSIGNMENT AND SUBLETTING. Without Landlord's prior written
consent, Tenant shall not assign this Lease or sublease the Premises or any part
thereof or mortgage, pledge, or hypothecate its leasehold interest or grant any
concession or license within the Premises and any attempt to do any of the
foregoing shall be void and of no effect. For purposes of this paragraph, a
transfer of the ownership interests controlling Tenant shall be deemed an
assignment of this Lease unless such ownership interests are publicly traded.
Notwithstanding the above, Tenant may assign or sublet the Premises, or any part
thereof, to any entity controlling Tenant, controlled by Tenant or under common
control with Tenant (a "Tenant Affiliate"), without the prior written consent of
Landlord. Tenant shall reimburse Landlord for all of Landlord's reasonable
out-of-pocket expenses in connection with any assignment or sublease. Upon
Landlord's receipt of Tenant's written notice of a desire to assign or sublet
the Premises, or any part thereof (other than to a Tenant Affiliate), Landlord
may, by giving written notice to Tenant within 30 days after receipt of Tenant's
notice, terminate this Lease with respect to the space described in Tenant's
notice, as of the date specified in Tenant's notice for the commencement of the
proposed assignment or sublease.
Notwithstanding any assignment or subletting, Tenant and any guarantor
or surety of Tenant's obligations under this Lease shall at all times remain
fully responsible and liable for the payment of the rent and for compliance with
all of Tenant's other obligations under this Lease (regardless of whether
Landlord's approval has been obtained for any such assignments or sublettings).
In the event that the rent due and payable by a sublessee or assignee (or a
combination of the rental payable under such sublease or assignment plus any
bonus or other consideration therefor or incident thereto) exceeds the rental
payable under this Lease, then Tenant shall be bound and obligated to pay
Landlord as additional rent hereunder all such excess rental and other excess
consideration within 10 days following receipt thereof by Tenant.
If this Lease be assigned or if the Premises be subleased (whether in
whole or in part) or in the event of the mortgage, pledge, or hypothecation of
Tenant's leasehold interest or grant of any concession or license within the
Premises or if the Premises be occupied in whole or in part by anyone other than
Tenant, then upon a default by Tenant hereunder Landlord may collect rent from
the assignee, sublessee, mortgagee, pledgee, party to whom the leasehold
interest was hypothecated, concessionee or licensee or other occupant and,
except to the extent set forth in the preceding paragraph, apply the amount
collected to the next rent payable hereunder; and all such rentals collected by
Tenant shall be held in trust for Landlord and immediately forwarded to
Landlord. No such transaction or collection of rent or application thereof by
Landlord, however, shall be deemed a waiver of these provisions or a release of
Tenant from the further performance by Tenant of its covenants, duties, or
obligations hereunder.
18. INDEMNIFICATION. Except for the negligence of Landlord, its agents,
employees or contractors, and to the extent permitted by law, Tenant agrees to
indemnify, defend and hold harmless Landlord, and Landlord's agents, employees
and contractors, from and against any and all losses, liabilities, damages,
costs and expenses
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(including attorneys' fees) resulting from claims by third parties for injuries
to any person and damage to or theft or misappropriation or loss of property
occurring in or about the Project and arising from the use and occupancy of the
Premises or from any activity, work, or thing done, permitted or suffered by
Tenant in or about the Premises or due to any other act or omission of Tenant,
its subtenants, assignees, invitees, employees, contractors and agents. The
furnishing of insurance required hereunder shall not be deemed to limit Tenant's
obligations under this Paragraph 18.
19. INSPECTION AND ACCESS. Landlord and its agents, representatives,
and contractors may enter the Premises at any reasonable time to inspect the
Premises and to make such repairs as may be required or permitted pursuant to
this Lease and for any other business purpose. Landlord and Landlord's
representatives may enter the Premises during business hours for the purpose of
showing the Premises to prospective purchasers or, during the last year of the
Lease Term, to prospective tenants. Landlord may erect a suitable sign on the
Premises stating the Premises are available to let or that the Project is
available for sale. Landlord may grant easements, make public dedications,
designate common areas and create restrictions on or about the Premises,
provided that no such easement, dedication, designation or restriction
materially interferes with Tenant's use or occupancy of the Premises. At
Landlord's request, Tenant shall execute such instruments as may be necessary
for such easements, dedications or restrictions.
20. QUIET ENJOYMENT. If Tenant shall perform all of the covenants and
agreements herein required to be performed by Tenant, Tenant shall, subject to
the terms of this Lease, at all times during the Lease Term, have peaceful and
quiet enjoyment of the Premises against any person claiming by, through or under
Landlord.
21. SURRENDER. Upon termination of the Lease Term or earlier
termination of Tenant's right of possession, Tenant shall surrender the Premises
to Landlord in the same condition as received, broom clean, ordinary wear and
tear and casualty loss and condemnation covered by Paragraphs 15 and 16
excepted. Any Trade Fixtures, Tenant-Made Alterations and property not so
removed by Tenant as permitted or required herein shall be deemed abandoned and
may be stored, removed, and disposed of by Landlord at Tenant's expense, and
Tenant waives all claims against Landlord for any damages resulting from
Landlord's retention and disposition of such property. All obligations of Tenant
hereunder not fully performed as of the termination of the Lease Term shall
survive the termination of the Lease Term, including without limitation,
indemnity obligations, payment obligations with respect to Excess Operating
Expenses and all obligations concerning the condition and repair of the
Premises.
22. HOLDING OVER. If Tenant retains possession of the Premises after
the termination of the Lease Term, unless otherwise agreed in writing, such
possession shall be subject to immediate termination by Landlord at any time,
and all of the other terms and provisions of this Lease (excluding any expansion
or renewal option or other similar right or option) shall be applicable during
such holdover period, except that Tenant shall pay Landlord from time to time,
upon demand, as Base Rent for the holdover period, an amount equal to double the
Base Rent in effect on the termination date, computed on a monthly basis for
each month or part thereof during such holding over. All other payments shall
continue under the terms of this Lease. In addition, Tenant shall be liable for
all damages incurred by Landlord as a result of such holding over. No holding
over by Tenant, whether with or without consent of Landlord, shall operate to
extend this Lease except as otherwise expressly provided, and this Paragraph 22
shall not be construed as consent for Tenant to retain possession of the
Premises.
23. EVENTS OF DEFAULT. Each of the following events shall be an event
of default ("Event of Default") by Tenant under this Lease:
(i) Tenant shall fail to pay any installment of Base Rent or
any other payment required herein when due, and such failure shall
continue for a period of 5 days from the date such payment was due.
(ii) Tenant or any guarantor or surety of Tenant's obligations
hereunder shall (A) make a general assignment for the benefit of
creditors; (B) commence any case, proceeding or other action seeking to
have an order for relief entered on its behalf as a debtor or to
adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it
or its debts or seeking appointment of a receiver, trustee, custodian
or other similar official for it or for all or of any substantial part
of its property (collectively a "proceeding for relief"); (C) become
the subject of any proceeding for relief which is not dismissed within
60 days of its filing or entry; or (D) die or suffer a legal disability
(if Tenant, guarantor, or surety is an individual) or be dissolved or
otherwise fail to maintain its legal existence (if Tenant, guarantor or
surety is a corporation, partnership or other entity).
(iii) Any insurance required to be maintained by Tenant
pursuant to this Lease shall be cancelled or terminated or shall expire
or shall be reduced or materially changed, except, in each case, as
permitted in this Lease.
(iv) Tenant shall not occupy or shall vacate the Premises or
shall fail to continuously operate its business at the Premises for the
permitted use set forth herein, whether or not Tenant is in monetary or
other default under this Lease.
(v) Tenant shall attempt or there shall occur any assignment,
subleasing or other transfer of Tenant's interest in or with respect to
this Lease except as otherwise permitted in this Lease.
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(vi) Tenant shall fail to discharge any lien placed upon the
Premises in violation of this Lease within 30 days after any such lien
or encumbrance is filed against the Premises.
(vii) Tenant shall fail to comply with any provision of this
Lease other than those specifically referred to in this Paragraph 23,
and except as otherwise expressly provided herein, such default shall
continue for more than 30 days after Landlord shall have given Tenant
written notice of such default.
24. LANDLORD'S REMEDIES. Upon each occurrence of an Event of Default
and so long as such Event of Default shall be continuing, Landlord may at any
time thereafter at its election: terminate this Lease or Tenant's right of
possession, (but Tenant shall remain liable as hereinafter provided) and/or
pursue any other remedies at law or in equity. Upon the termination of this
Lease or termination of Tenant's right of possession, it shall be lawful for
Landlord, without formal demand or notice of any kind, to re-enter the Premises
by summary dispossession proceedings or any other action or proceeding
authorized by law and to remove Tenant and all persons and property therefrom.
If Landlord re-enters the Premises, Landlord shall have the right to keep in
place and use, or remove and store, all of the furniture, fixtures and equipment
at the Premises.
If Landlord terminates this Lease, Landlord may recover from Tenant the
sum of: all Base Rent and all other amounts accrued hereunder to the date of
such termination; the cost of reletting the whole or any part of the Premises,
including without limitation brokerage fees and/or leasing commissions incurred
by Landlord, and costs of removing and storing Tenant's or any other occupant's
property, repairing, altering, remodeling, or otherwise putting the Premises
into condition acceptable to a new tenant or tenants, and all reasonable
expenses incurred by Landlord in pursuing its remedies, including reasonable
attorneys' fees and court costs; and the excess of the then present value of the
Base Rent and other amounts payable by Tenant under this Lease as would
otherwise have been required to be paid by Tenant to Landlord during the period
following the termination of this Lease measured from the date of such
termination to the expiration date stated in this Lease, over the present value
of any net amounts which Tenant establishes Landlord can reasonably expect to
recover by reletting the Premises for such period, taking into consideration the
availability of acceptable tenants and other market conditions affecting
leasing. Such present values shall be calculated at a discount rate equal to the
90-day U.S. Treasury bill rate at the date of such termination.
If Landlord terminates Tenant's right of possession (but not this
Lease), Landlord may, but shall be under no obligation to, relet the Premises
for the account of Tenant for such rent and upon such terms as shall be
satisfactory to Landlord without thereby releasing Tenant from any liability
hereunder and without demand or notice of any kind to Tenant. For the purpose of
such reletting Landlord is authorized to make any repairs, changes, alterations,
or additions in or to the Premises as Landlord deems reasonably necessary or
desirable. If the Premises are not relet, then Tenant shall pay to Landlord as
damages a sum equal to the amount of the rental reserved in this Lease for such
period or periods, plus the cost of recovering possession of the Premises
(including attorneys' fees and costs of suit), the unpaid Base Rent and other
amounts accrued hereunder at the time of repossession, and the costs incurred in
any attempt by Landlord to relet the Premises. If the Premises are relet and a
sufficient sum shall not be realized from such reletting [after first deducting
therefrom, for retention by Landlord, the unpaid Base Rent and other amounts
accrued hereunder at the time of reletting, the cost of recovering possession
(including attorneys' fees and costs of suit), all of the costs and expense of
repairs, changes, alterations, and additions, the expense of such reletting
(including without limitation brokerage fees and leasing commissions) and the
cost of collection of the rent accruing therefrom] to satisfy the rent provided
for in this Lease to be paid, then Tenant shall immediately satisfy and pay any
such deficiency. Any such payments due Landlord shall be made upon demand
therefor from time to time and Tenant agrees that Landlord may file suit to
recover any sums falling due from time to time. Notwithstanding any such
reletting without termination, Landlord may at any time thereafter elect in
writing to terminate this Lease for such previous breach.
Exercise by Landlord of any one or more remedies hereunder granted or
otherwise available shall not be deemed to be an acceptance of surrender of the
Premises and/or a termination of this Lease by Landlord, whether by agreement or
by operation of law, it being understood that such surrender and/or termination
can be effected only by the written agreement of Landlord and Tenant. Any law,
usage, or custom to the contrary notwithstanding, Landlord shall have the right
at all times to enforce the provisions of this Lease in strict accordance with
the terms hereof; and the failure of Landlord at any time to enforce its rights
under this Lease strictly in accordance with same shall not be construed as
having created a custom in any way or manner contrary to the specific terms,
provisions, and covenants of this Lease or as having modified the same. Tenant
and Landlord further agree that forbearance or waiver by Landlord to enforce its
rights pursuant to this Lease or at law or in equity, shall not be a waiver of
Landlord's right to enforce one or more of its rights in connection with any
subsequent default. A receipt by Landlord of rent or other payment with
knowledge of the breach of any covenant hereof shall not be deemed a waiver of
such breach, and no waiver by Landlord of any provision of this Lease shall be
deemed to have been made unless expressed in writing and signed by Landlord. To
the greatest extent permitted by law, Tenant waives the service of notice of
Landlord's intention to re-enter as provided for in any statute, or to institute
legal proceedings to that end, and also waives all right of redemption in case
Tenant shall be dispossessed by a judgment or by warrant of any court or judge.
The terms "enter," "re-enter," "entry" or "re-entry," as used in this Lease, are
not restricted to their technical legal meanings. Any reletting of the Premises
shall be on such terms and conditions as Landlord in its sole discretion may
determine (including without limitation a term different than the remaining
Lease Term, rental concessions, alterations and repair of the Premises, lease of
less than the entire Premises to any tenant and leasing any or all other
portions of the Project before reletting the Premises). Landlord shall not be
liable, nor shall Tenant's obligations hereunder be diminished because of,
Landlord's failure to relet the Premises or collect rent due in respect of such
reletting.
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25. TENANT'S REMEDIES/LIMITATION OF LIABILITY. Landlord shall not be in
default hereunder unless Landlord fails to perform any of its obligations
hereunder within 30 days after written notice from Tenant specifying such
failure (unless such performance will, due to the nature of the obligation,
require a period of time in excess of 30 days, then after such period of time as
is reasonably necessary). All obligations of Landlord hereunder shall be
construed as covenants, not conditions; and, except as may be otherwise
expressly provided in this Lease, Tenant may not terminate this Lease for breach
of Landlord's obligations hereunder. All obligations of Landlord under this
Lease will be binding upon Landlord only during the period of its ownership of
the Premises and not thereafter. The term "Landlord" in this Lease shall mean
only the owner, for the time being of the Premises, and in the event of the
transfer by such owner of its interest in the Premises, such owner shall
thereupon be released and discharged from all obligations of Landlord thereafter
accruing, but such obligations shall be binding during the Lease Term upon each
new owner for the duration of such owner's ownership. Any liability of Landlord
under this Lease shall be limited solely to its interest in the Project, and in
no event shall any personal liability be asserted against Landlord in connection
with this Lease nor shall any recourse be had to any other property or assets of
Landlord.
26. WAIVER OF JURY TRIAL. TENANT AND LANDLORD WAIVE ANY RIGHT TO TRIAL
BY JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING
IN CONTRACT, TORT, OR OTHERWISE, BETWEEN LANDLORD AND TENANT ARISING OUT OF THIS
LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO.
27. SUBORDINATION. This Lease and Tenant's interest and rights
hereunder are and shall be subject and subordinate at all times to the lien of
any first mortgage, now existing or hereafter created on or against the Project
or the Premises, and all amendments, restatements, renewals, modifications,
consolidations, refinancing, assignments and extensions thereof, without the
necessity of any further instrument or act on the part of Tenant. Tenant agrees,
at the election of the holder of any such mortgage, to attorn to any such
holder. Tenant agrees upon demand to execute, acknowledge and deliver such
instruments, confirming such subordination and such instruments of attornment as
shall be requested by any such holder. Tenant hereby appoints Landlord attorney
in fact for Tenant irrevocably (such power of attorney being coupled with an
interest) to execute, acknowledge and deliver any such instrument and
instruments for and in the name of the Tenant and to cause any such instrument
to be recorded. Notwithstanding the foregoing, any such holder may at any time
subordinate its mortgage to this Lease, without Tenant's consent, by notice in
writing to Tenant, and thereupon this Lease shall be deemed prior to such
mortgage without regard to their respective dates of execution, delivery or
recording and in that event such holder shall have the same rights with respect
to this Lease as though this Lease had been executed prior to the execution,
delivery and recording of such mortgage and had been assigned to such holder.
The term "mortgage" whenever used in this Lease shall be deemed to include deeds
of trust, security assignments and any other encumbrances, and any reference to
the "holder" of a mortgage shall be deemed to include the beneficiary under a
deed of trust.
28. MECHANIC'S LIENS. Tenant has no express or implied authority to
create or place any lien or encumbrance of any kind upon, or in any manner to
bind the interest of Landlord or Tenant in, the Premises or to charge the
rentals payable hereunder for any claim in favor of any person dealing with
Tenant, including those who may furnish materials or perform labor for any
construction or repairs. Tenant covenants and agrees that it will pay or cause
to be paid all sums legally due and payable by it on account of any labor
performed or materials furnished in connection with any work performed on the
Premises and that it will save and hold Landlord harmless from all loss, cost or
expense based on or arising out of asserted claims or liens against the
leasehold estate or against the interest of Landlord in the Premises or under
this Lease. Tenant shall give Landlord immediate written notice of the placing
of any lien or encumbrance against the Premises and cause such lien or
encumbrance to be discharged within 30 days of the filing or recording thereof;
provided, however, Tenant may contest such liens or encumbrances as long as such
contest prevents foreclosure of the lien or encumbrance and Tenant causes such
lien or encumbrance to be bonded or insured over in a manner satisfactory to
Landlord within such 30 day period.
29. ESTOPPEL CERTIFICATES. Tenant agrees, from time to time, within 10
days after request of Landlord, to execute and deliver to Landlord, or
Landlord's designee, any estoppel certificate requested by Landlord, stating
that this Lease is in full force and effect, the date to which rent has been
paid, that Landlord is not in default hereunder (or specifying in detail the
nature of Landlord's default), the termination date of this Lease and such other
matters pertaining to this Lease as may be requested by Landlord. Tenant's
obligation to furnish each estoppel certificate in a timely fashion is a
material inducement for Landlord's execution of this Lease. No cure or grace
period provided in this Lease shall apply to Tenant's obligations to timely
deliver an estoppel certificate. Tenant hereby irrevocably appoints Landlord as
its attorney in fact to execute on its behalf and in its name any such estoppel
certificate if Tenant fails to execute and deliver the estoppel certificate
within 10 days after Landlord's written request thereof.
30. ENVIRONMENTAL REQUIREMENTS. Except for Hazardous Material contained
in products used by Tenant in de minimis quantities for ordinary cleaning and
office purposes, Tenant shall not permit or cause any party to bring any
Hazardous Material upon the Premises or transport, store, use, generate,
manufacture or release any Hazardous Material in or about the Premises without
Landlord's prior written consent. Tenant, at its sole cost and expense, shall
operate its business in the Premises in strict compliance with all Environmental
Requirements and shall remediate in a manner satisfactory to Landlord any
Hazardous Materials released on or from the Project by Tenant, its agents,
employees, contractors, subtenants or invitees. Tenant shall complete and
certify to disclosure statements as requested by Landlord from time to time
relating to Tenant's transportation, storage, use, generation, manufacture, or
release of Hazardous Materials on the Premises. The term "Environmental
Requirements" means all applicable
-8-
<PAGE> 9
present and future statutes, regulations, ordinances, rules, codes, judgments,
orders or other similar enactments of any governmental authority or agency
regulating or relating to health, safety, or environmental conditions on, under,
or about the Premises or the environment, including without limitation, the
following: the Comprehensive Environmental Response, Compensation and Liability
Act; the Resource Conservation and Recovery Act; and all state and local
counterparts thereto, and any regulations or policies promulgated or issued
thereunder. The term "Hazardous Materials" means and includes any substance,
material, waste, pollutant, or contaminant listed or defined as hazardous or
toxic, under any Environmental Requirements, asbestos and petroleum, including
crude oil or any fraction thereof, natural gas, or synthetic gas usable for fuel
(or mixtures of natural gas and such synthetic gas). As defined in Environmental
Requirements, Tenant is and shall be deemed to be the "operator" of Tenant's
"facility" and the "owner" of all Hazardous Materials brought on the Premises by
Tenant, its agents, employees, contractors or invitees, and the wastes,
by-products, or residues generated, resulting, or produced therefrom.
Tenant shall indemnify, defend, and hold Landlord harmless from and
against any and all losses (including, without limitation, diminution in value
of the Premises or the Project and loss of rental income from the Project),
claims, demands, actions, suits, damages (including, without limitation,
punitive damages), expenses (including, without limitation, remediation,
removal, repair, corrective action, or cleanup expenses), and costs (including,
without limitation, actual attorneys' fees, consultant fees or expert fees and
including, without limitation, removal or management of any asbestos brought
into the Premises or disturbed in breach of the requirements of this Paragraph
30, regardless of whether such removal or management is required by law) which
are brought or recoverable against, or suffered or incurred by Landlord as a
result of any release of Hazardous Materials for which Tenant is obligated to
remediate as provided above or any other breach of the requirements under this
Paragraph 30 by Tenant, its agents, employees, contractors, subtenants,
assignees or invitees, regardless of whether Tenant had knowledge of such
noncompliance. The obligations of Tenant under this Paragraph 30 shall survive
any termination of this Lease.
Landlord shall have access to, and a right to perform inspections and
tests of, the Premises to determine Tenant's compliance with Environmental
Requirements, its obligations under this Paragraph 30, or the environmental
condition of the Premises. Access shall be granted to Landlord upon Landlord's
prior notice to Tenant and at such times so as to minimize, so far as may be
reasonable under the circumstances, any disturbance to Tenant's operations. Such
inspections and tests shall be conducted at Landlord's expense, unless such
inspections or tests reveal that Tenant has not complied with any Environmental
Requirement, in which case Tenant shall reimburse Landlord for the reasonable
cost of such inspection and tests. Landlord's receipt of or satisfaction with
any environmental assessment in no way waives any rights that Landlord holds
against Tenant.
31. RULES AND REGULATIONS. Tenant shall, at all times during the Lease
Term and any extension thereof, comply with all reasonable rules and regulations
at any time or from time to time established by Landlord covering use of the
Premises and the Project. The current rules and regulations are attached hereto.
In the event of any conflict between said rules and regulations and other
provisions of this Lease, the other terms and provisions of this Lease shall
control. Landlord shall not have any liability or obligation for the breach of
any rules or regulations by other tenants in the Project.
32. SECURITY SERVICE. Tenant acknowledges and agrees that, while
Landlord may patrol the Project, Landlord is not providing any security services
with respect to the Premises and that Landlord shall not he liable to Tenant
for, and Tenant waives any claim against Landlord with respect to, any loss by
theft or any other damage suffered or incurred by Tenant in connection with any
unauthorized entry into the Premises or any other breach of security with
respect to the Premises.
33. FORCE MAJEURE. Landlord shall not be held responsible for delays in
the performance of its obligations hereunder when caused by strikes, lockouts,
labor disputes, acts of God, inability to obtain labor or materials or
reasonable substitutes therefor, governmental restrictions, governmental
regulations, governmental controls, delay in issuance of permits, enemy or
hostile governmental action, civil commotion, fire or other casualty, and other
causes beyond the reasonable control of Landlord ("Force Majeure").
34. ENTIRE AGREEMENT. This Lease constitutes the complete and entire
agreement of Landlord and Tenant with respect to the subject matter hereof. No
representations, inducements, promises or agreements, oral or written, have been
made by Landlord or Tenant, or anyone acting on behalf of Landlord or Tenant,
which are not contained herein, and any prior agreements, promises,
negotiations, or representations are superseded by this Lease. This Lease may
not be amended except by an instrument in writing signed by both parties
hereto.
35. SEVERABILITY. If any clause or provision of this Lease is illegal,
invalid or unenforceable under present or future laws, then and in that event,
it is the intention of the parties hereto that the remainder of this Lease shall
not be affected thereby. It is also the intention of the parties to this Lease
that in lieu of each clause or provision of this Lease that is illegal, invalid
or unenforceable, there be added, as a part of this Lease, a clause or provision
as similar in terms to such illegal, invalid or unenforceable clause or
provision as may be possible and be legal, valid and enforceable.
36. BROKERS. Tenant represents and warrants that it has dealt with no
broker, agent or other person in connection with this transaction and that no
broker, agent or other person brought about this transaction, other than the
broker, if any, set forth on the first page of this Lease, and Tenant agrees to
indemnify and hold Landlord
-9-
<PAGE> 10
harmless from and against any claims by any other broker, agent or other person
claiming a commission or other form of compensation by virtue of having dealt
with Tenant with regard to this leasing transaction.
37. MISCELLANEOUS. (a) Any payments or charges due from Tenant to
Landlord hereunder shall be considered rent for all purposes of this Lease.
(b) If and when included within the term "Tenant," as used in this
instrument, there is more than one person, firm or corporation, each shall be
jointly and severally liable for the obligations of Tenant.
(c) All notices required or permitted to be given under this Lease
shall be in writing and shall be sent by registered or certified mail, return
receipt requested, or by a reputable national overnight courier service, postage
prepaid, or by hand delivery addressed to the parties at their addresses below,
and with a copy sent to Landlord at 14100 EAST 35TH PLACE, AURORA, COLORADO
80011. Either party may by notice given aforesaid change its address for all
subsequent notices. Except where otherwise expressly provided to the contrary,
notice shall be deemed given upon delivery.
(d) Except as otherwise expressly provided in this Lease or as
otherwise required by law, Landlord retains the absolute right to withhold any
consent or approval.
(e) At Landlord's request from time to time Tenant shall furnish
Landlord with true and complete copies of its most recent annual and quarterly
financial statements prepared by Tenant or Tenant's accountants and any other
financial information or summaries that Tenant typically provides to its lenders
or shareholders.
(f) Neither this Lease nor a memorandum of lease shall be filed by or
on behalf of Tenant in any public record. Landlord may prepare and file, and
upon request by Landlord Tenant will execute, a memorandum of lease.
(g) The normal rule of construction to the effect that any ambiguities
are to be resolved against the drafting party shall not be employed in the
interpretation of this Lease or any exhibits or amendments hereto.
(h) The submission by Landlord to Tenant of this Lease shall have no
binding force or effect, shall not constitute an option for the leasing of the
Premises, nor confer any right or impose any obligations upon either party until
execution of this Lease by both parties.
(i) Words of any gender used in this Lease shall be held and construed
to include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires. The captions inserted
in this Lease are for convenience only and in no way define, limit or otherwise
describe the scope or intent of this Lease, or any provision hereof, or in any
way affect the interpretation of this Lease.
(j) Any amount not paid by Tenant within 5 days after its due date in
accordance with the terms of this Lease shall bear interest from such due date
until paid in full at the lesser of the highest rate permitted by applicable law
or 15 percent per year. It is expressly the intent of Landlord and Tenant at all
times to comply with applicable law governing the maximum rate or amount of any
interest payable on or in connection with this Lease. If applicable law is ever
judicially interpreted so as to render usurious any interest called for under
this Lease, or contracted for, charged, taken, reserved, or received with
respect to this Lease, then it is Landlord's and Tenant's express intent that
all excess amounts theretofore collected by Landlord be credited on the
applicable obligation (or, if the obligation has been or would thereby be paid
in full, refunded to Tenant), and the provisions of this Lease immediately shall
be deemed reformed and the amounts thereafter collectible hereunder reduced,
without the necessity of the execution of any new document, so as to comply with
the applicable law, but so as to permit the recovery of the fullest amount
otherwise called for hereunder.
(k) Construction and interpretation of this Lease shall be governed by
the laws of the state in which the Project is located, excluding any principles
of conflicts of laws.
(l) Time is of the essence as to the performance of Tenant's
obligations under this Lease.
(m) All exhibits and addenda attached hereto are hereby incorporated
into this Lease and made a part hereof. In the event of any conflict between
such exhibits or addenda and the terms of this Lease, such exhibits or addenda
shall control.
38. LANDLORD'S LIEN/SECURITY INTEREST. Tenant hereby grants Landlord a
security interest, and this Lease constitutes a security agreement, within the
meaning of and pursuant to the Uniform Commercial Code of the state in which the
Premises are situated as to all of Tenant's property situate in, or upon, or
used in connection with the Premises (except merchandise sold in the ordinary
course of business) as security for all of Tenant's obligations hereunder,
including without limitation, the obligation to pay rent. Such personalty thus
encumbered includes specifically all trade and other fixtures for the purpose of
this Paragraph and inventory, equipment, contract rights, accounts receivable
and the proceeds thereof. In order to perfect such security interest, Tenant
shall execute such financing statements and file the same at Tenant's expense at
the state and county Uniform Commercial Code filing offices as often as Landlord
in its discretion shall require; and Tenant hereby irrevocably appoints Landlord
its agent for the purpose of executing and filing such financing statements on
Tenant's behalf as Landlord shall deem necessary.
-10-
<PAGE> 11
39. LIMITATION OF LIABILITY OF TRUSTEES, SHAREHOLDERS, AND OFFICERS OF PROLOGIS
TRUST. Any obligation or liability whatsoever of ProLogis Trust, a Maryland real
estate investment trust, which may arise at any time under this Lease or any
obligation or liability which may be incurred by it pursuant to any other
instrument, transaction, or undertaking contemplated hereby shall not be
personally binding upon, nor shall resort for the enforcement thereof be had to
the property of, its trustees, directors, shareholders, officers, employees or
agents, regardless of whether such obligation or liability is in the nature of
contract, tort, or otherwise.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the day and year first above written.
TENANT: LANDLORD:
Glas-Craft, Inc. PROLOGIS NORTH CAROLINA LIMITED
- -------------------------------------- PARTNERSHIP
By: By:
------------------------------- --------------------------------
Title: President Title: Managing Director
------------------------------- -------------------------
Address: Address:
5845 West 82nd Street 100 Division Street
- -------------------------------------- -----------------------------------
Suite 102 Suite 101
- -------------------------------------- -----------------------------------
Indianapolis, IN 46278 Bensenville, IL 60106
- -------------------------------------- -----------------------------------
-11-
<PAGE> 12
Rules and Regulations
---------------------
1. The sidewalk, entries, and driveways of the Project shall not be obstructed
by Tenant, or its agents, or used by them for any purpose other than
ingress and egress to and from the Premises.
2. Tenant shall not place any objects, including antennas, outdoor furniture,
etc., in the parking areas, landscaped areas on other areas outside of its
Premises, or on the roof of the Project.
3. Except for seeing-eye dogs, no animals shall be allowed in the offices,
halls, or corridors in the Project.
4. Tenant shall not disturb the occupants of the Project or adjoining
buildings by the use of any radio or musical instrument or by the making of
loud or improper noises.
5. If Tenant desires telegraphic, telephonic or other electric connections in
the Premises, Landlord or its agent will direct the electrician as so where
and how the wires may be introduced; and, without such direction, no boring
or cutting of wires will be permitted. Any such installation or connection
shall be made at Tenant's expense.
6. Tenant shall not install or operate any steam or gas engine or boiler, or
other mechanical apparatus in the Premises, except as specifically
approved in the Lease. The use of oil, gas or inflammable liquids for
heating, lighting or any other purpose is expressly prohibited. Explosives
or other articles deemed extra hazardous shall not be brought into the
Project.
7. Parking any type of recreational vehicles is specifically prohibited on or
about the Project. Except for the overnight parking of operative vehicles,
no vehicle of any type shall be stored in the parking areas at any time. In
the event that a vehicle is disabled, it shall be removed within 48 hours.
There shall be no "For Sale" or other advertising signs on or about any
parked vehicle. All vehicles shall be parked in the designated parking
areas in conformity with all signs and other markings. All parking will be
open parking, and no reserved parking, numbering or lettering of individual
spaces will be permitted except as specified by Landlord.
8. Tenant shall maintain the Premises free from rodents, insects and other
pests.
9. Landlord reserves the rights to exclude or expel from the Project any
person who, in the judgment of Landlord, is intoxicated or under the
influence of liquor or drugs or who shall in any manner do any act in
violation of the Rules and Regulations of the Project.
10. Tenant shall not cause any unnecessary labor by reason of Tenant's
carelessness or indifference in the preservation of good order and
cleanliness. Landlord shall not be responsible to Tenant for any loss of
property on the Premises, however occurring, or for any damage done to
the effects of Tenant by the janitors or any other employee or person.
11. Tenant shall give Landlord prompt notice of any defects in the water, lawn
sprinkler, sewage, gas pipes, electrical lights and fixtures, heating
apparatus, or any other service equipment affecting the Premises.
12. Tenant shall not permit storage outside the Premises, including without
limitation, outside storage of trucks and other vehicles, or dumping of
waste or refuse or permit any harmful materials to be placed in any
drainage system or sanitary system in or about the Premises.
13. All moveable trash receptacles provided by the trash disposal firm for the
Premises must be kept in the trash enclosure areas, if any, provided for
that purpose.
14. No auction, public or private, will be permitted on the Premises or the
Project.
15. No awnings shall be placed over the windows in the Premises except with the
prior written consent of Landlord.
16. The Premises shall not be used for lodging, sleeping or cooking or for any
immoral or illegal purposes or for any purpose other than that specified in
the Lease. No gaming devices shall be operated in the Premises.
17. Tenant shall ascertain from Landlord the maximum amount of electrical
current which can safely be used in the Premises, taking into account the
capacity of the electrical wiring in the Project and the Premises and the
needs of other tenants, and shall not use more than such safe capacity.
Landlord's consent to the installation of electric equipment shall not
relieve Tenant from the obligation not to use more electricity than such
safe capacity.
18. Tenant assumes full responsibility for protecting the Premises from theft,
robbery and pilferage.
19. Tenant shall not install or operate on the Premises any machinery or
mechanical devices of a nature not directly related to Tenant's ordinary
use of the Premises and shall keep all such machinery free of vibration,
noise and air waves which may be transmitted beyond the Premises.
-12-
<PAGE> 13
ADDENDUM A
CONSTRUCTION
------------
(TURNKEY)
ATTACHED TO AND PART OF THE LEASE AGREEMENT
DATED OCTOBER 6, 1998, BETWEEN
PROLOGIS TRUST
--------------
and
GLAS-CRAFT, INC.
----------------
(a) Landlord agrees to furnish or perform at Landlord's sole cost and
expense those items of construction and those improvements (the "TENANT
IMPROVEMENTS") specified below:
1. Install new Landlord standard floorcovering and base molding as
shown on the attached Exhibit B. Tenant shall be responsible for
the removal of all office equipment and personal items from the
areas indicated as being remodeled. Landlord shall be responsible
for the removal/return of all furniture from the areas to be
remodeled.
2. Paint existing ceiling grid white as shown on the attached
Exhibit B.
3. Install new 2' x 4' lay-in acoustical ceiling tiles as shown on
the attached Exhibit B.
4. Items 1-3 above shall begin December 24, 1998 and be completed
on or before January 4, 1999. Tenant must remove all office
equipment and personal items by the December 24th start date.
5. Broom clean the office and warehouse areas in the 6,400 s.f.
commonly known as Suite 106 (the "Expansion Space") as shown on
the attached Exhibit C.
6. Construct a floor to deck demising wall separating the Expansion
Space from contiguous space. The electric and gas service shall
be combined to form one system serving the Premises.
7. Create one (1) opening approximately 12' x 12' to provide access
to the warehouse portion of the Expansion Space. Create one (1)
opening approximately 4' x 7' to provide access to the office
portion of the Expansion Space.
(b) If Tenant shall desire any changes, Tenant shall so advise Landlord
in writing and Landlord shall determine whether such changes can be made in a
reasonable and feasible manner, Any and all costs of reviewing any requested
changes, and any and all costs of making any changes to the Tenant Improvements
which Tenant may request and which Landlord may agree to shall be at Tenant's
sole cost and expense and shall be paid to Landlord upon demand and before
execution of the change order.
(c) Landlord shall proceed with and complete the construction of the
Tenant Improvements. As soon as such improvements have been Substantially
Completed and Landlord has received an occupancy permit, Landlord shall notify
Tenant in writing of the date that the Tenant Improvements were Substantially
Completed. Such date, unless an earlier date is specified as the Commencement
Date in this Lease or otherwise agreed to in writing between Landlord and
Tenant, shall be the "COMMENCEMENT DATE," unless the completion of such
improvements was delayed due to any act or omissions of, or delay caused by,
Tenant including, without limitation, Tenant's failure to approve plans,
complete submittals or obtain permits within the time periods agreed to by the
parties or as reasonably required by Landlord, in which case the Commencement
Date shall be the date such improvements would have been completed but for the
delays caused by Tenant. The Tenant Improvements shall be deemed substantially
completed ("Substantially Completed") when, in the opinion of the construction
manager (whether an employee or agent of Landlord or a third party construction
manager), the Premises are substantially completed except for the punch list
items which do not prevent in any material way the use of the premises for the
purposes for which they were intended. After the Commencement Date Tenant shall,
upon demand, execute and deliver to Landlord a letter of acceptance of delivery
of the Premises.
<PAGE> 14
(d) The failure of Tenant to take possession of or to occupy the
Premises shall not serve to relieve Tenant of obligations arising on the
Commencement Date or delay the payment of rent by Tenant. Subject to applicable
ordinances and building codes governing Tenant's right to occupy or perform in
the Premises, Tenant shall be allowed to install its tenant improvements,
machinery, equipment, fixtures, or other property on the Premises during the
final stages of completion of construction provided that Tenant does not thereby
interfere with the completion of construction or cause any labor dispute as a
result of such installations, and provided further that Tenant does hereby agree
to indemnify, defend and hold Landlord harmless from any loss or damage to such
property, and all liability, loss, or damage arising from any injury to the
Project or the property of Landlord, its contractors, subcontractors, or
materialmen, and any death or personal injury to any person or persons arising
out of such installations, whether or not any such loss, damage, liability,
death, or personal injury was caused by Landlord's negligence. Any such
occupancy or performance in the Premises shall be in accordance with the
provisions governing Tenant-Made Alterations and Trade Fixtures in the Lease,
and shall be subject to Tenant providing to Landlord satisfactory evidence of
insurance for personal injury and property damage related to such installations
and satisfactory payment arrangements with respect to installations permitted
hereunder. Delay in putting Tenant in possession of the Premises shall not serve
to extend the term of this Lease or to make Landlord liable for any damages
arising therefrom.
(e) Except for incomplete punch list items, Tenant upon the
Commencement Date shall have and hold the Premises as the same shall then be
without any liability or obligation on the part of Landlord for making any
further alterations or improvements of any kind in or about the Premises.
<PAGE> 15
ADDENDUM B
CAP ON CONTROLLABLE OPERATING EXPENSES
--------------------------------------
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED OCTOBER 6TH, 1998, BETWEEN
--------------------------------
PROLOGIS NORTH CAROLINA LIMITED PARTNERSHIP
-------------------------------------------
and
GLAS-CRAFT, INC.
----------------
Tenant shall not be obligated to pay for Controllable Operating
Expenses in any year to the extent they have increased by more than EIGHT
percent (8%) per annum, compounded annually on a cumulative basis from the first
calendar year during the Lease term. For purposes of this Addendum, Controllable
Operating Expenses shall mean the following Operating Expenses:
Common area maintenance and property management fees.
Taxes, insurance premiums and utility costs shall not be deemed Controllable
Operating Expenses. Controllable Operating Expenses shall be determined on an
aggregate basis and not on an individual basis, and the cap on Controllable
Operating Expenses shall be determined on Operating Expenses as they have been
adjusted for vacancy or usage pursuant to the terms of the Lease.
<PAGE> 16
EXHIBIT A
[PICTURE OF FLOOR PLANS]
PARK 100 INDUSTRIAL CENTER
BUILDING 20
5845 WEST 82ND STREET
[SECURITY CAPITAL INDUSTRIAL TRUST LOGO]
<PAGE> 17
EXHIBIT B
[PICTURE OF FLOOR PLANS]
PARK 100 INDUSTRIAL CENTER
BUILDING 20
5845 WEST 82ND STREET, SUITE 101
[SECURITY CAPITAL INDUSTRIAL TRUST LOGO]
<PAGE> 18
EXHIBIT C
[PICTURE OF FLOOR PLANS]
PARK 100 INDUSTRIAL CENTER
BUILDING 20
5845 WEST 82ND STREET, SUITE 106
[SECURITY CAPITAL INDUSTRIAL TRUST LOGO]
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary State of Incorporation
------------------ ----------------------
1) Glas-Craft, Inc. Indiana
2) Raven Lining Systems, Inc. Oklahoma
3) Cohesant Export, Inc. Barbados
4) Cohesant of Missouri, Inc. Missouri
(F/K/A American Chemical Company)
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-KSB, into the Company's previously filed
Registration Statements on Form S-8 File No. 333-67127 and File No. 333-47043.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana
December 22, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> NOV-30-1998
<CASH> 119,967
<SECURITIES> 0
<RECEIVABLES> 2,032,996
<ALLOWANCES> 85,370
<INVENTORY> 3,421,531
<CURRENT-ASSETS> 5,807,095
<PP&E> 1,193,853
<DEPRECIATION> 588,113
<TOTAL-ASSETS> 7,571,481
<CURRENT-LIABILITIES> 2,679,090
<BONDS> 0
0
0
<COMMON> 2,688,343
<OTHER-SE> 4,737,968
<TOTAL-LIABILITY-AND-EQUITY> 7,571,481
<SALES> 11,735,872
<TOTAL-REVENUES> 11,735,872
<CGS> 6,577,665
<TOTAL-COSTS> 6,577,665
<OTHER-EXPENSES> 831,968
<LOSS-PROVISION> 51,161
<INTEREST-EXPENSE> 95,407
<INCOME-PRETAX> 696,341
<INCOME-TAX> 0
<INCOME-CONTINUING> 696,341
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 696,341
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
