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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________.
COMMISSION FILE NUMBER 0-24900
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ITI TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 06-1340453
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2266 NORTH SECOND STREET 55109
NORTH ST. PAUL, MINNESOTA (Zip Code)
(Address of principal executive offices)
(651) 777-2690
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(Title of class)
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Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by Reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Aggregate market value of Common Stock held by non-affiliates of
Registrant, based on the closing sale price of $31.50 per share as reported on
The Nasdaq National Market on February 25, 1999: $265,502,223.
Number of shares of Common Stock outstanding as of February 25,
1999: 8,428,642.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement are incorporated
by reference into Part III.
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ITI TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
INDEX
Page
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Documents Incorporated by Reference.......................................... 3
Cross Reference Sheet........................................................ 4
PART I
Item 1. Business........................................................... 5
Item 2. Properties......................................................... 14
Item 3. Legal Proceedings.................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders................ 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................ 16
Item 6. Selected Consolidated Financial Data............................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 19
Item 8. Financial Statements and Supplementary Data........................ 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................... 24
PART III
Item 10 through Item 12. Also see "Documents Incorporated by Reference"
(Page 3)........................................................... 25
Item 13. Certain Relationships and Related Transactions..................... 25
PART III
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.... 25
Index to Consolidated Financial Statements...................................F-1
Report of Independent Accountants on Financial Statement Schedule............S-1
Financial Statement Schedule.................................................S-2
Signatures...................................................................S-3
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference to the parts
indicated of this Annual Report on Form 10-K:
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PARTS OF ANNUAL REPORT ON FORM 10-K DOCUMENTS INCORPORATED BY REFERENCE
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PART III
Item 10. Directors and Executive Officers of Reference is made to the Registrant's definitive
the Registrant proxy statement, which will be filed with the
Securities and Exchange Commission
(the "Commission") within 120 days after
December 31, 1998 (the "Proxy Statement").
Item 11. Executive Compensation Reference is made to the Registrant's Proxy
Statement.
Item 12. Security Ownership of Certain Reference is made to the Registrant's Proxy
Beneficial Owners and Management Statement.
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CROSS REFERENCE SHEET
BETWEEN ITEMS IN PART III
OF FORM 10-K AND
PROXY STATEMENT
PURSUANT TO PARAGRAPH G-4 OF GENERAL INSTRUCTIONS TO FORM 10-K
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ITEM NUMBER AND CAPTION SUBJECT HEADINGS IN PROXY STATEMENT
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Item 10. Directors and Executive Officers of the Registrant Election of Directors/Executive
Compensation
Item 11. Executive Compensation Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners Security Ownership of Management
and Management and Certain Beneficial Owners
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PART I
ITEM 1. BUSINESS
When used in this document, the words "believes," "anticipates" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no obligation to publish revised
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. Readers are also
urged to carefully review and consider the various disclosures made by the
Company which attempt to advise interested parties of the factors which affect
the Company's business, not only in this report, but also in the Company's
reports on Forms 10-Q and 8-K filed with the Commission.
GENERAL
ITI Technologies, Inc. and its wholly owned subsidiaries
(collectively, the "Company") design, manufacture and market electronic security
systems (both intrusion and fire protection) as well as electronic access
control systems. Electronic security systems account for approximately 98% of
the Company's sales.
The Company's wholly owned subsidiary, Interactive Technologies,
Inc. ("ITI"), was incorporated in January 1980 under the laws of the State of
Minnesota. In January 1985, ITI incorporated a foreign international sales
corporation, ITI International, Inc., as a wholly owned subsidiary under the
laws of the United States Virgin Islands.
ITI Technologies, Inc. was incorporated in February 1992 under the
laws of the State of Delaware for the purpose of acquiring ITI. On May 11, 1992,
the Company acquired ITI from a United States holding company controlled by ADIA
S.A. of Switzerland and certain members of ITI's management.
In November 1994, the Company completed a public offering of
1,900,000 newly issued shares of common stock at $16.00 per share (the
"Offering"). Prior to the Offering, there was no public market for the Company's
common stock. In May 1995, in a subsequent offering, selling shareholders sold
3,225,000 shares and the Company sold 225,000 shares at $24.00 per share. The
Company used the net proceeds from these offerings to retire debt that had been
incurred at the time of the acquisition of ITI.
In April 1996, ITI incorporated ITI Finance Corporation as a wholly
owned subsidiary under the laws of the State of Minnesota for the purpose of
providing financing to the Company's independent dealer base.
On April 30, 1997, the Company purchased all of the outstanding
stock of CADDX-CADDI Controls, Inc. ("CADDX") for $19.0 million in cash (the
"Acquisition"). In conjunction with the Acquisition, the Company also purchased
from the majority shareholder of CADDX the manufacturing facility leased by
CADDX for $530,000. Immediately following the Acquisition, the corporate name
was changed to CADDX Controls, Inc. CADDX, located in Gladewater, Texas,
designs, manufactures and markets hardwire electronic security systems in the
United States and certain international locations.
On May 22, 1997, the Company completed the cash purchase of the
Regency product line and dealer program from the Silent Knight Division of
Willknight, Inc., located in Minneapolis, Minnesota, for $1.8 million. If sales
of Regency products over the 36-month period ending May 2000 exceed certain
levels, a contingent payment of up to $800,000 will be made. This product line
allows the Company to offer an established product that integrates intrusion
protection, fire protection and access control.
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Unless the context requires otherwise, the term "Company" shall
refer to ITI Technologies, Inc. and its wholly owned subsidiaries, ITI, CADDX,
ITI International, Inc., and ITI Finance Corporation.
INDUSTRY OVERVIEW
There are multiple markets in the electronic security industry. The
Company currently competes in the burglar alarm market, the electronic access
control market and the commercial fire detection market.
A typical electronic security system consists of four basic
components: (i) a central control panel which coordinates and controls all
security and home automation system functions and automatically reports
emergency conditions and service information to a remote central monitoring
facility; (ii) touchpads which enable the user to arm, disarm and give other
commands to the system, including panic buttons to alert the central monitoring
facility to police, fire and medical emergencies; (iii) a variety of sensors
that detect intrusion, fire and other environmental conditions and report them
to the system's central control panel; and (iv) sirens designed to frighten away
an intruder and which alert the user to the particular alarm condition by
audible signal or digitized voice while the control panel is reporting the
condition to the central monitoring station. All of these devices are located in
the protected home or business.
There are two primary types of security systems: (i) hardwire
systems, consisting of a control panel and sensors that communicate through
low-voltage wires, and (ii) wireless systems, which utilize sensors that
communicate with a central control panel using radio frequency (RF) signals.
Hardwire systems are particularly suited to new construction or areas of the
world in which installation and labor costs are extremely low. Wireless systems
are particularly well-suited for retrofitting systems into existing homes or
businesses and for life safety markets such as panic and medical alert systems.
A third type of security system is a hybrid system, which has both hardwire and
wireless capabilities.
The Company believes that several factors contribute to a favorable
outlook for growth in the electronic security system market. These include
increasing use of wireless security systems, increasing growth in international
demand for burglar alarm systems, increasing concern about crime, low
penetration of security systems in United States households, improved technology
and product features, lower cost systems and the availability of insurance
discounts to homeowners who purchase security systems.
SUPERVISED WIRELESS SECURITY SYSTEMS MARKETED UNDER THE ITI(R) TRADEMARK
The Company's wireless security systems are very flexible and can be
programmed by the end-user to offer varying degrees of security, depending on
the end-user's protection desires. The systems have the ability in all security
levels to detect fire and other environmental conditions and to respond to
manual activation for police, fire and medical emergencies.
The Company offers a number of wireless security systems to meet a
variety of price points and customer performance requirements, including:
CONCORD. In 1998, the Company released a modular hybrid system
called Concord. By containing both hardwire and wireless capabilities,
Concord offers the installing dealer the low-price of hardwire with the
flexibility of wireless. The basic 8-zone hardwire control panel can be
upgraded through the use of modules to a 76-zone panel with lighting
control, telephone control, voice feedback and paging output for latchkey
reporting. The modular approach allows the installing dealer to utilize
one product platform for a wide variety of installation requirements.
ULTRAGARD SYSTEM. The UltraGard system was introduced in 1996. The
UltraGard system features a 76-zone panel which operates on 12 volts (as
opposed to the other products in ITI's lines, which operate
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on 6 volts). This high performance system is well suited for commercial
applications as well as the largest residential applications.
SIMON. The Simon system, first introduced in 1997, received
substantial enhancements in 1998. Simon is an entry-level wireless
security system aimed at those in the industry looking for a low-cost
wireless solution for mass marketing programs or where security equipment
is either given away or installed at a loss in an effort to obtain a
long-term monitoring contract. The Simon system has the capability to
individually recognize up to 24 wireless sensors. With the enhancement, it
can now be controlled via a remote touch-tone phone and is compatible with
two-way listen-in, talk-back alarm verification. The Company also
introduced TOUCHTALK, the industry's first wireless talking touchpad as an
upgrade option. Simon can be used with all of the Company's existing ITI
wireless sensors.
COMMANDER 2000 SYSTEM. The Commander 2000 system was introduced in
1994 to succeed the RF Commander system, which was first introduced in
1990. This system was designed as an entry level wireless security system
for use in smaller businesses, homes and apartments and has many of the
advanced features found in more expensive systems. The Commander 2000 has
the capability to individually recognize up to 16 wireless sensors and can
be used with substantially all of ITI's wireless accessories.
CUSTOMIZED AND PRIVATE LABEL SYSTEMS. The Company has established
relationships with large security companies to develop and manufacture
customized, private label wireless security systems. In developing these
systems, the Company may modify its existing systems by adding customized
control panel software and component packaging as requested by the
customer.
SYSTEM FEATURES AND COMPONENTS OF ITI WIRELESS SECURITY SYSTEMS
ITI wireless security systems incorporate several innovative and
advanced features and components which increase product performance, reliability
and marketability:
SUPERIOR SUPERVISED RADIO TECHNOLOGY. The Company believes its
wireless security systems incorporate the most advanced radio technology
currently available in supervised wireless systems. Each wireless sensor
in an ITI system reports to the central control panel as a unique zone,
enabling the central monitoring station personnel to identify and
communicate to police or firefighters the exact location and nature of an
emergency. If the control panel does not receive scheduled signals from a
sensor, it reports the identity of the particular sensor to the central
monitoring station and the end-user. This feature also allows service
personnel to quickly find a malfunctioning sensor. Through the use of
crystal-controlled radio transmitters and receivers, coupled with its
patented LEARN MODE and signaling protocol technologies, the Company has
virtually eliminated the effects of interference and greatly increased the
range of its systems within the limitations imposed by the Federal
Communications Commission ("FCC"). This supervised radio technology
enhances the reliability and performance of ITI wireless systems and
allows them to be used in larger premises, including many commercial
facilities, where the use of wireless systems once was not feasible.
LEARN MODE TECHNOLOGY. The Company's patented Learn Mode technology
enables control panels to automatically "learn" the identity and type of
each factory-programmed sensor in its system when the system is installed.
The Learn Mode technology is attractive to the Company's customers because
each sensor is manufactured with a unique programmed identity. This Learn
Mode process reduces the time and cost of installing sensors and
programming the systems and allows the installation of large numbers of
security systems in densely populated areas without interference with
neighboring systems.
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TOUCH-TONE TELEPHONE INTERFACE. The Company was the first to
introduce the use of on- or off-site touch-tone telephones as touchpads to
control security systems. This technology provides touch-tone telephones
with all the system control capabilities of the touchpads manufactured by
the Company for ITI wireless security systems. This feature contributes to
end-user convenience by enabling the end-user to control the system from
on- or off-premises by using touch-tone telephones.
DIGITIZED VOICE TECHNOLOGY. The Company enhanced the
"user-friendliness" and convenience of its systems by incorporating
digitized voice technology. ITI wireless security systems can "talk" to
the end-user on-site with digitized voice, and all systems except for the
Commander 2000 also "talk" over on-or off-site touch-tone telephones.
Incorporating digitized voice technology allows the end-user to confirm
commands, such as the level of protection or a disarming signal, or to
receive a status report of protection levels and environmental conditions,
such as the temperature inside the end-user's house. In response to
various foreign sales opportunities, the Company has incorporated
digitized voice response capabilities in several foreign languages into
its systems.
BREADTH OF SENSOR LINE. The Company believes it offers the widest
variety of wireless sensors currently available in the security system
market. ITI wireless sensors include motion detectors; different types of
intrusion sensors activated by sound, shock, or shattering glass;
photoelectric smoke sensors; "rate-of-rise" fire sensors with a special
thermostat activated by an unusually rapid temperature increase; carbon
monoxide sensors; pocket-sized emergency transmitters; and environmental
sensors to detect such conditions as furnace failure and flooding. ITI
sensors also are the smallest available in any supervised wireless
security system. The Company believes that its wide variety of sensors and
their compact size offer it a significant competitive advantage. Most of
the Company's wireless sensors have long-life lithium batteries, thus
increasing system reliability and convenience. Much of the ITI wireless
sensor line utilizes crystal-controlled radio transmitters. In 1997, the
Company introduced a new lower cost sensor line based on Surface Acoustic
Wave, or SAW, radio technology.
INTERACTIVE CAPABILITIES. ITI systems communicate alarm information
to central monitoring facility personnel over telephone lines using the
Company's CS-5000 central station receiver. ITI Toolbox(R), a PC-based
software tool, allows a technician to remotely perform certain kinds of
service and programming on ITI security systems remotely, avoiding delay
and expensive on-site service calls.
HOME MANAGEMENT CAPABILITIES. The ITI energy saver module, which is
available with the UltraGard and Concord systems, enables an end-user to
adjust a thermostat using either a touchpad or an on- or off-site
touch-tone telephone which can result in reduced energy costs to the
end-user. The ITI wireless systems also can be used to control lights
through the use of touchpads. The Company has developed a power line
signaling technology that allows its system control panels to activate
sirens and light modules over the household electrical system. Sirens and
lights thus can be installed and controlled virtually anywhere in the
premises where there is an electrical outlet.
ALARM VERIFICATION. False alarms represent a troublesome issue for
the security industry. In 1993, the Company introduced its Interrogator
alarm verification module to address the false alarm issue. The
Interrogator gives ITI wireless systems two-way voice capabilities through
sensitive microphones and talk-back speakers that are placed strategically
throughout a home or business. After an alarm has occurred and been
reported to the central station, the Interrogator will allow the central
station operator to either "listen in" or, if desired, "talk back" to the
subject home or business. This built-in communicator helps enable the
central station operator to verify alarms before dispatching the police or
fire department. The Interrogator can digitally record and play back 16
seconds of an alarm event with the simple addition of the optional
recording module. This enables the central station operator to listen to a
recording of the actual emergency event as it happened. The Interrogator
and the optional recording module work with all
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of ITI's wireless security systems and also can be sold separately for use
with other manufacturers' security systems.
HARDWIRE AND HYBRID SECURITY SYSTEMS MARKETED UNDER THE CADDX(TM) TRADEMARK
The Company has developed a line of hardwire and hybrid security
systems targeted at both the domestic and international markets. The
international market for security systems is rapidly growing and is
approximately twice the size of the U.S. market and is roughly split between
Europe and the rest of the world. The Company is one of the largest U.S.
exporters of security system controls, offering multiple systems to satisfy the
needs of the international, new construction and low-end hardwire markets.
NX PRODUCT LINE. In mid-1997, the Company introduced the CADDX NX-8
security system, which is designed to be a hybrid security system that
will meet various countries' regulatory requirements throughout the world.
The NX-8 is flexible, durable and user/installer friendly. The development
of the NX-8 required several design and engineering innovations, including
the creation of special telecom and power interfaces that would be
acceptable under any country's regulations anywhere in the world. By
adding an ITI wireless receiver to the NX-8 control panel, the NX-8
becomes a true hybrid system with both hardwire and wireless capabilities.
In 1998, the Company built on the success of the NX-8 by introducing the
NX-6 and NX-4 security systems offering similar functionality at a lower
price point.
RANGER PRODUCT LINE. The CADDX Ranger 9000E is a powerful, simple
and flexible hardwire panel that can become a hybrid panel with the
addition of a radio receiver. The Ranger 9000E is suitable for
residential, commercial, retail and multi-tenant office building
applications. This system provides the ability to incorporate security,
access control and environmental process monitoring for commercial
applications. Other security control panels in the CADDX Ranger family
include the Ranger 8600, Ranger 8600E, Ranger 8980 and the Ranger 8980E.
GLASS BREAK DETECTORS. The Company manufactures a line of glass
break detectors under the CADDX trademark. The Company's patented "3x3"
technology, which is a method of glass break detection that monitors three
specific frequency ranges for three different sets of data and looks for a
"match" to the "signature" of breaking glass, is incorporated in CADDX
glass break sensors, making them extremely reliable.
OTHER HARDWIRE SECURITY PRODUCTS. The Company also manufactures
various other hardwire sensors for use in connection with hardwire control
panels, including passive infrared sensors (or motion detectors) and
seismic detectors.
ACCESS CONTROL
Electronic Access Control ("EAC") systems are designed to monitor
traffic through and grant or deny access to buildings and other restricted areas
depending on the clearance and authority level of the individual attempting to
enter. A basic EAC system consists of four components: (i) a controller that,
either independently or with a remote computer, controls the system database and
issues commands to lock or unlock doors; (ii) a magnetic lock that responds to
the controller commands; (iii) cards, or other identification technology, that
carry user data; and (iv) readers that read the user data on the cards and send
the information to the controller for processing. Assuming the user's identity
resides in the system database and the user has proper authority, the controller
issues the command for the door to unlock. EAC can range from control of a
single door with a few users to hundreds of doors at multiple locations with
thousands of users.
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The Company offers a number of EAC systems to meet a variety of
price points and customer performance requirements, including:
ACCESS NT. Based on Microsoft Windows NT software, this system
allows multiple work stations to be functioning simultaneously to monitor
the system, add cards, change access times, make badges, control
closed-circuit television cameras, create reports, etc. The system expands
the functionality of the Access Point Manager ("APM") panels.
ACCESS 5.0. This system has many of the same functions as Access NT,
but with a smaller system capacity that performs in a non-multitasking
operation at a lower price point. Both Access 5.0 and Access NT are aimed
at the middle to large EAC installations.
EASY ACCESS. This is a Microsoft Windows-based system that provides
the sophistication of more expensive PC-based systems but at a low price
point. Easy Access controls up to 32 doors with a very simple to use
point-and-click graphical interface.
451 APM. This is a stand-alone system that provides much of the
sophistication of a PC-based system without the expense of a host
computer. Each 451 system has its own microprocessor, database and clock.
Each 451 system can operate independently or as part of a network of up to
16 APMs, allowing the control of up to 32 doors without the use of a host
computer.
351 APM. The 351 system is aimed at small businesses that may have
only one or two doors to protect but want to control who gets in and at
what times. The 351 system is designed to work independently to control
one or two doors and has its own microprocessor, database and clock.
FIRE PROTECTION SYSTEMS
The total fire alarm market is estimated at $2 billion, including
product, installation, service and monitoring. The manufacturers' equipment
market is estimated at $800 million. While new to the commercial fire equipment
market, the Company will shortly be offering several commercial fire products.
The soon to be released Advent Fire System offers an excellent product solution
for the high-end fire market. The Regency product and soon to be released UL
commercial fire rated version of the CADDX NX-8 offer solutions for the retail
and small commercial fire markets.
Fire business is traditionally won by persuading specifying firms to
specify your product. It is common to take two to five years in the specifying
market for relationships to lead to sales. Business is also gained through
negotiating directly with the end-users. Achieving the above market goals will
necessitate a strategy of focusing on negotiated sales, particularly with
Midwest regional end-users, in the first 18 months while developing
relationships with specifying companies for future sales.
ADVENT FIRE SYSTEM, slated for mid-1999, is a full-featured,
high-level system. With its built-in multi-partition, 250 zone and
long-range wireless capabilities, Advent Fire System is targeted for large
commercial applications such as industrial complexes, government
facilities, campuses, and high-rise office and residential complexes. The
system can be powered by either one Class I or two Class II AC power
transformers for up to 6 amps of 12/24 VDC regulated power for a large
number of sensor, siren, analog smoke loop and other hardwire peripheral
devices. Advent's capabilities can be increased by plugging in panel
input, output, and/or smoke loop expansion cards. It can also be expanded
through the built-in high speed, digital data bus that can connect a wide
array of ITI SuperBus peripherals.
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REGENCY is a UL rated system that incorporates commercial burglary,
fire and access control into a single platform. The integration makes it
particularly attractive for retail and small commercial applications
desiring multiple functionality.
The NX-8 CF, which will be available in 1999, is a commercial fire
version of the popular NX-8 control panel. It has 8 zones on-board and can
be upgraded to over 40 zones with the addition of modules.
OTHER PRODUCTS
In addition to developing new features for existing products, the
Company's innovative product development programs have produced products for
related markets using its existing technologies:
THE QUIK BRIDGE FAMILY. The Quik Bridge family is a group of
wireless receivers equipped with interfaces that broaden the market
opportunities for ITI Learn Mode sensors. The Company has introduced
several Quik Bridge family members. The Quik Bridge Repeater extends the
range of ITI wireless sensors attached to ITI wireless receivers. The Quik
Bridge Loop Receiver enables adding up to 16 ITI wireless sensors to any
hardwire panel that supports a common loop ground and/or a relay unit
connection. In 1998, the Company released the Quik Bridge two-channel
receiver, which adds up to four wireless devices to any hardwire system.
The Company also has custom receiver products specifically designated to
work with the CADDX NX line of control panels in domestic and
international markets and certain Radionics and Detection Systems controls
in the U.S. market. In addition, the Quik Bridge family allows the use of
the ITI keychain touchpad to control the Company's and other
manufacturers' access control systems.
CS 5000 COMPUTERIZED CENTRAL STATION RECEIVER. In 1998, the Company
released the CS 5000 as a replacement for the CS 4000 central station
receiver. The CS 5000 can be used by the central monitoring service
providers to receive and monitor information from homes and businesses
protected with ITI wireless security systems and certain other
manufacturers' security systems. Monitoring station personnel transmit
emergency messages to police, fire, medical or other authorities.
LIFEGARD. Recognizing the growing elderly population, the Company
introduced in 1996 its LifeGard personal emergency response system. Like a
security system, LifeGard maintains a communication link with a monitoring
company in order to provide the fastest possible response during an
emergency. Two-way voice communication with the monitoring company is
initiated either when the owner presses one of at least two panic buttons,
or when the system does not detect activity in the home after an elapsed
time. The LifeGard system includes a control panel mounted on a base, a
built-in Interrogator and a water-resistant panic pendant.
SALES AND MARKETING
The Company sells ITI wireless security equipment directly to its
independent dealer network, large security companies and other private label
customers, and electric and gas utility companies. The Company sells CADDX
hardwire and hybrid security systems primarily through domestic and
international distributors. Approximately 47% of CADDX branded product is sold
outside of the United States and Canada.
SALES TO INDEPENDENT DEALER NETWORK. The Company has a nation-wide
sales force supporting its network of over 2,000 independent dealers.
Through its independent dealer network, ITI wireless security products are
sold extensively throughout the United States and Canada. The Company's
dealer sales and support programs include sales aids (such as sales
literature and demo kits), marketing literature and instructional videos
for both dealers and end-users. In addition, the Company provides its
dealers with a
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wide variety of training programs and materials, including technical,
sales, marketing and business management programs and a number of
marketing newsletters. The Company recognizes its top dealers with an
incentive program which includes an annual trip to ITI's national dealer
sales meeting, which reinforces the ties between the Company and its key
dealers. ITI believes its dealer program gives it a competitive advantage
and engenders dealer loyalty. The Company's Security Pro and Regency
dealer programs enhance and support its independent dealer network.
SALES TO LARGE SECURITY COMPANIES AND OTHER PRIVATE LABEL
ARRANGEMENTS. The Company designs and manufactures customized and private
label systems for companies that sell the systems on a national and
regional basis. These customers offer the potential for substantial sales
volume, provide extensive geographic coverage and, in many cases, offer
the ability to sell ITI products under nationally recognized brand names.
Members of the Company's senior management team are involved in initiating
and maintaining relationships with its private label customers.
SALES TO ELECTRIC AND GAS UTILITIES. Electric and gas utilities
provide the Company with an additional distribution channel and the
opportunity to develop related applications of its technologies. These
utilities are increasingly seeking to enter unregulated industries,
including the security systems industry, to increase their profits. This
industry offers electric and gas utilities a logical complement to their
businesses, as many already have the infrastructure in place to sell,
install and repair security and home automation systems and provide
monthly monitoring services. Over 60 electric and other utilities are now
purchasing the Company's products. The Company has two sales
representatives who sell to utilities with support from the Company's
field sales force.
INTERNATIONAL SALES
Export sales, primarily to Canada, Europe and Australia, accounted
for 18.3%, 13.9% and 8.7% of the Company's net sales for 1998, 1997 and 1996,
respectively (see the Consolidated Financial Statements and Notes thereto). The
Company believes that international markets offer an important opportunity for
sales growth. The Company currently sells its products in over 50 foreign
countries through distributors and dealers. The CADDX NX product line was
designed specifically with the international market in mind. The NX control
panels include special telecom and power interfaces that are acceptable under
most regulatory requirements throughout the world. Furthermore, in response to
various foreign sales opportunities, the Company has incorporated into its
wireless security systems digitized voice response capabilities in several
foreign languages and intends to expand its product development and marketing
efforts to increase its international sales of wireless security products. The
Company is currently designing its next generation of wireless security systems
to satisfy the power, telephone, radio and other regulatory standards necessary
to sell the systems in the European Community. The Company has also developed a
wireless receiver for the CADDX NX hardwire panels, which creates a global
hybrid product solution. Because the NX security panels have already gained
numerous international approvals, it is helping to accelerate the introduction
of ITI wireless sensors in the international market.
SALES TO A SIGNIFICANT CUSTOMER
During the years ended December 31, 1997 and 1996, one customer
accounted for 25% and 41%, respectively, of consolidated net sales. This
customer accounted for 11% of consolidated accounts receivable at December 31,
1997. No one customer exceeded more than 6% of consolidated sales or accounts
receivable for the year ended December 31, 1998.
12
<PAGE>
PRODUCT DEVELOPMENT
In the years ended December 31, 1998, 1997, and 1996, the Company
had research and development expenditures of $8.0 million, $7.5 million and $6.3
million, respectively. The Company's current product development efforts are
primarily devoted to continuing the enhancement and expansion of its product
lines and technologies.
COMPETITION
The security systems industry is highly competitive, with a large
number of manufacturers providing a wide range of products, from simple sensor
components to advanced and complete systems. Competition is based primarily on
product reliability, the incorporation of advanced technological features, ease
of installation, sales support and price. The Company's competitors in the
supervised wireless security system industry include Ademco Security Group (a
division of Pittway Corporation), Linear Corp. (a subsidiary of Nortek, Inc.)
and several smaller manufacturers. The Company also competes with numerous
manufacturers of hardwire security systems, including Ademco Security Group,
Napco Security Systems, Inc., Detection Systems, Inc., Digital Security Controls
Ltd., C&K Components, Silent Knight Security Systems (an affiliate of Cargill
Corporation), Aritech Corp. (a subsidiary of Sentrol, Inc.) and Radionics, Inc.
(a subsidiary of Detection Systems, Inc.). Furthermore, the Company may
encounter additional competition from future industry entrants. Some of these
manufacturers have, and new competitors may have, substantially greater
financial and other resources than the Company. While the Company believes that
its product development program, innovative and attractive product features,
technology and engineering expertise, and established independent dealer network
and customer relationships give it a competitive advantage over many other
security system manufacturers, there can be no assurance that the Company will
continue to develop and market products that will be accepted in the
marketplace.
MANUFACTURING
The Company's production processes include printed circuit board
assembly, testing and calibration and final assembly and testing. The Company
has manufacturing facilities in North St. Paul, Minnesota and Gladewater, Texas.
A Mexican contract manufacturing facility, which is dedicated to the Company,
assembles less complex, high-volume circuit boards, such as transmitter boards,
and sends them to North St. Paul. The Company has invested in various automated
printed circuit board assembly and test equipment at its North St. Paul,
Gladewater and Mexican facilities to achieve manufacturing cost efficiencies and
vertically integrate its production processes. From time to time, the Company
uses certain contract manufacturers to perform some of its printed circuit board
assembly and may increase its use of such companies to meet any increased
demand. Certain of the chips, microprocessors and other products used in the
Company's systems are obtained from single sources. If the Company could not
obtain these components from these sources, there may be a 16-to 30-week lead
time to obtain them from a different supplier. To help prevent delays in the
shipment of its products, the Company maintains what it believes to be a
sufficient amount of certain components in inventory or has made safety stock
program arrangements with the suppliers.
INTELLECTUAL PROPERTY
The Company's success is dependent in part on its proprietary
information, technology and know-how. The Company relies on a combination of
trade secret and copyright protection and confidentiality agreements to
establish and protect its proprietary rights. In addition, the Company holds 21
patents covering various technologies, including its Learn Mode technology, and
has several patent applications pending. The Company believes its Learn Mode
technology in particular affords it significant competitive advantages because
it has allowed the Company to substantially improve the performance and
reliability of its products. The Company plans to aggressively protect its
patents and other intellectual property and to pursue patents to
13
<PAGE>
protect its technology. There can be no assurance, however, that the Company
will be able to protect its proprietary information, technology and know-how,
deter misappropriation of its proprietary rights, or prevent third party
development of substantially similar technology and products. In addition, there
can be no assurance that any patent applications filed by the Company will
result in issued patents or that any patents issued are or will be sufficiently
broad to protect the Company's technologies or provide the Company with any
material competitive advantages. There also can be no assurance that the patents
the Company has obtained in the past or may obtain in the future will not be
contested, invalidated or circumvented. See applicable discussions under "Item
3. Legal Proceedings" and the Consolidated Financial Statements and Notes
thereto for discussions of current litigation proceedings involving intellectual
property issues.
The Company has occasionally received, and may receive in the
future, communications from third parties asserting intellectual property rights
relating to the Company's products and technologies. Upon receiving such claims,
the Company evaluates their merits and risks and on occasion has negotiated
licenses where third-party technology was necessary or useful for the
development or manufacture of the Company's products. There can be no assurance
that third parties will not assert claims against the Company with respect to
existing or future products or that any licenses will be available on reasonable
terms with respect to any third-party technology. The Company could incur
substantial costs in redesigning its products or in defending any legal action
taken against it.
GOVERNMENT REGULATION
Substantially all of the components in the Company's security
systems require approval by the FCC before the systems may be marketed in the
United States. Although the Company has obtained FCC approval of its products in
the past, it cannot predict whether it will obtain FCC approvals for components
of future products or whether FCC regulations might change with respect to the
Company's current or future products. In addition, sales of the Company's
products in countries outside of the United States usually are subject to
similar types of approvals by regulatory authorities in those countries. The
Company also is subject to various federal, state and foreign laws and
regulations pertaining to the use of potentially dangerous material, the
discharge of material in the environment and otherwise relating to the
protection of the environment. The Company believes it has complied in all
material respects with all such laws and regulations.
EMPLOYEES
On December 31, 1998, the Company had 645 full-time employees,
consisting of 375 in manufacturing, 88 in engineering and product development,
70 in customer service, 50 in sales, 52 in management and administration and 10
in marketing. These employees do not include the contract workers in the Mexican
facility. None of the Company's employees are members of a collective bargaining
unit, and the Company's management believes employee relations are good.
ITEM 2. PROPERTIES
The Company's corporate headquarters and its largest manufacturing
facility are located in North St. Paul, Minnesota, in two adjacent leased
buildings that together provide approximately 148,000 square feet of
manufacturing, warehouse and office space. The leases on the North St. Paul
facilities expire on September 1, 1999. The Company believes the leases for the
facilities can be renewed under acceptable terms. The Company also owns an
approximately 33,000 square foot manufacturing and warehouse facility in
Gladewater, Texas. Products marketed under the CADDX trademark are manufactured
and distributed at the Gladewater facility. In 1998, the Company purchased a
parcel of land adjacent to its Gladewater facility and has entered into a
contract for the construction of a 31,063 square foot building that will enhance
the Company's ability to manufacture CADDX products. The estimated construction
cost is $1,200,000 and the building is scheduled to be completed in June of
1999. The Company also utilizes a contract assembly plant in
14
<PAGE>
Navajoa, Mexico, consisting of approximately 22,000 square feet devoted
exclusively to the Company's manufacturing needs.
The Company leases small warehouse and shipping point facilities in
Anaheim, California, Richmond, Virginia and Toronto, Ontario, Canada.
The Company considers its key properties identified above, including
the planned expansion in Gladewater, as suitable to its business and, in
general, adequate for its current and near-term needs.
ITEM 3. LEGAL PROCEEDINGS
On August 17, 1995, the Company commenced an action for patent
infringement against Pittway Corporation and its subsidiary, Ademco Distribution
Inc., in the United States District Court for the District of Minnesota. On
March 9, 1998, the jury found that the Ademco VISTA Plus/5800 family of wireless
security systems infringes the Company's Learn Mode patent and awarded the
Company damages of approximately $36 million for lost profits and royalties. On
April 9, 1998, the Court entered an injunction prohibiting Pittway Corporation
from manufacturing and marketing the Ademco 5800 series wireless products that
infringe the Company's Learn Mode patent and awarded the Company prejudgment
interest of approximately $3 million, bringing the total judgment to
approximately $39 million. Pittway Corporation appealed the verdict. On March 4,
1999, the Federal Circuit Court of Appeals heard oral arguments on the case. The
Company anticipates that the appeal will be resolved during the first half of
1999.
Pittway has announced that in 1997 it had "introduced an improved
method of enrolling transmitters in its VISTA series of control panels." Pittway
calls this new method "QED." While the Company has maintained that Pittway's QED
products also infringe the Company's LEARN MODE patent, the judge would not
allow the Company to add Pittway's QED products to the action commenced in
August of 1995. Accordingly, the Company commenced a second patent infringement
lawsuit against Pittway and Ademco Distribution, Inc. on August 3, 1998, for
infringement of the Company's Learn Mode patent. The suit was also filed in the
United States District Court for the District of Minnesota. Discovery in the
second suit has been stayed by agreement of the parties pending resolution of
the appeal of the first suit.
In addition, the Company experiences routine litigation in the
normal course of its business. The Company does not believe that any of this
routine litigation will have a material adverse effect on the financial
condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the Company's fourth quarter ended December 31, 1998, or in the first quarter of
1999.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market
and is quoted on The Nasdaq National Market under the symbol "ITII." As of
February 25, 1999, there were approximately 63 record holders of the Company's
Common Stock.
The following table sets forth, on a quarterly basis, the high and
low closing sale prices for the Company's Common Stock for the two years ended
December 31, 1998:
HIGH LOW
------- -------
1997
----
Quarter:
First $18 $13-1/4
Second 22-7/8 14-1/8
Third 29 22-13/16
Fourth 28-1/8 21-3/4
1998
----
Quarter:
First $26-1/8 $20
Second 33 26
Third 28-1/2 23
Fourth 32-1/8 24-1/2
The Company has never paid dividends on its Common Stock. The
Company presently intends to retain any and all future earnings for the
operation and expansion of its business and does not expect to pay any cash
dividends on its Common Stock in the foreseeable future. See applicable
discussion under "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
16
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The financial information set forth below should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales ................................... $ 108,986 $ 100,999 $ 93,331 $ 79,012 $ 59,127
Cost of goods sold .......................... 58,815 53,628 48,217 42,126 32,371
Inventory purchase accounting adjustment(1) . 725
--------- --------- --------- --------- ---------
Gross profit ................................ 50,171 46,646 45,114 36,886 26,756
Operating expenses:
Marketing, general and administrative ..... 19,405 18,421 15,005 12,982 12,096
Research and development, net ............. 7,974 7,491 6,270 5,178 4,125
Purchased research and development costs(2) 5,200
Amortization of intangible assets ......... 1,412 1,233 912 912 912
--------- --------- --------- --------- ---------
Operating income ............................ 21,380 14,301 22,927 17,814 9,623
Interest income (expense), net .............. 805 627 815 38 (4,325)
Other income (expense), net ................. 49 (122) 5 (13) 13
--------- --------- --------- --------- ---------
Income before income tax expense and
extraordinary item ........................ 22,234 14,806 23,747 17,839 5,311
Income tax expense(2) ....................... 8,004 7,202 8,655 6,488 1,896
--------- --------- --------- --------- ---------
Income before extraordinary item ............ 14,230 7,604 15,092 11,351 3,415
Extraordinary item(3) ....................... 820
--------- --------- --------- --------- ---------
Net income .................................. $ 14,230 $ 7,604 $ 15,092 $ 11,351 $ 2,595
========= ========= ========= ========= =========
Per share amounts, basic:
Income before extraordinary item .......... $ 1.68 $ .91 $ 1.69 $ 1.31 $ .61
Extraordinary item(3) ..................... (.15)
--------- --------- --------- --------- ---------
Net income ................................ $ 1.68 $ .91 $ 1.69 $ 1.31 $ .46
========= ========= ========= ========= =========
Weighted average common
shares outstanding ..................... 8,461 8,394 8,930 8,671 5,624
========= ========= ========= ========= =========
Per share amounts, diluted:
Income before extraordinary item .......... $ 1.61 $ .87 $ 1.63 $ 1.26 $ .52
Extraordinary item(3) ..................... (.12)
--------- --------- --------- --------- ---------
Net income ................................ $ 1.61 $ .87 $ 1.63 $ 1.26 $ .40
========= ========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding .......... 8,860 8,705 9,246 9,022 6,515
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH | FIRST SECOND THIRD FOURTH
-------- -------- -------- -------- | -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ........... $ 23,914 $ 27,139 $ 29,326 $ 28,607 | $ 23,740 $ 25,403 $ 26,468 $ 25,388
Gross profit (1) .... 10,864 12,418 13,305 13,584 | 11,524 11,167 11,952 12,003
Net income (loss) (2) 2,534 3,398 3,956 4,342 | 3,744 (2,421) 3,189 3,092
Per share amounts: |
Basic(4) .......... $ .30 $ .40 $ .47 $ .52 | $ .45 $ (.29) $ .38 $ .37
Diluted(4) ........ $ .29 $ .38 $ .45 $ .50 | $ .44 $ (.29) $ .36 $ .35
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital .............. $ 43,015 $ 36,336 $ 42,047 $ 34,866 $ 19,145
Total assets ................. 115,957 103,959 89,794 80,077 64,494
Current liabilities .......... 10,874 8,995 6,056 6,225 7,300
Total debt ................... 4,500
Total liabilities ............ 18,550 16,258 10,468 9,986 14,686
Stockholders' equity ......... 97,407 87,701 79,326 70,091 49,808
</TABLE>
- -------------------------
(1) Amount reflects a non-recurring purchase accounting adjustment to cost of
goods sold of $725,000 in the second quarter of the year ended December 31,
1997, which resulted from the sale of inventory which had been written-up to
reflect estimated selling price less the sum of estimated costs of completion
and selling at the time of the Acquisition.
(2) The Company recorded a non-recurring purchase accounting adjustment in the
second quarter of the year ended December 31, 1997, which resulted from the
write-off of $5.2 million for the value assigned to technology in process at the
time of the Acquisition. This charge is not deductible for income tax purposes
and, as such, no related tax benefit has been recorded as a part of the
Company's income tax expense. During the fourth quarter of 1998, the Company
recognized a $140,000 after-tax benefit from the reversal of certain expired
customer rebates.
(3) In the fourth quarter of 1994, the Company incurred an extraordinary
charge of $820,000, or $.12 per share, related to the write-off of unamortized
discount and deferred financing charges, net of related income tax benefits of
$462,000, in connection with the conversion of all outstanding warrants and
retirement of debt subsequent to its November 24, 1994, initial public offering.
(4) The summation of quarterly per share amounts may not equal the calculation
for the full year, as each quarterly calculation is performed discretely.
(The remainder of this page was intentionally left blank)
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
On June 18, 1998, the Board of Directors authorized the repurchase,
from time to time, of up to 1,000,000 shares of the Company's common stock in
the open market or in private transactions. Total repurchases of 245,200 shares
occurred during the third quarter of 1998 under this authorization. This action
also canceled the stock repurchase program authorized on November 22, 1996, that
allowed for the purchase of up to 900,000 shares of the Company's common stock.
The Company purchased 90,000 and 621,500 shares in 1997 and 1996, respectively,
under the November 22, 1996, authorization.
On May 22, 1997, the Company completed the cash purchase of the
Regency product line and dealer program from the Silent Knight Division of
Willknight, Inc., located in Minneapolis, Minnesota, for $1.8 million. In the
event sales of Regency products over the 36-month period ending May 2000 exceed
certain levels, a contingent payment of up to $800,000 will be made. This
product line allows the Company to offer an established product that integrates
intrusion protection, fire protection and access control. At the time of the
acquisition, the Regency dealer program consisted of approximately 150 Regency
dealers throughout North America. The purchase price was allocated to the
estimated fair value of the assets acquired, primarily to customer lists, which
will be amortized over its expected useful life of 10 years.
On April 30, 1997 (the "Acquisition Date"), the Company purchased
all of the outstanding stock of CADDX for $19.0 million in cash. In conjunction
with the Acquisition, the Company also purchased from the majority shareholder
of CADDX the manufacturing facility leased by CADDX for $530,000. Immediately
following the Acquisition, the corporate name was changed to CADDX Controls,
Inc. CADDX, located in Gladewater, Texas, designs, manufactures and markets
hardwire electronic security systems in the United States and certain
international locations.
The Acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of operations of CADDX have been
included in the Company's financial statements from the effective date, April
30, 1997. The Acquisition cost has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the Acquisition
date, including $4.0 million to net current assets, $1.2 million to property and
equipment, $1.25 million to customer lists, principally related to CADDX
customers outside the United States, $2.1 million to net long-term deferred tax
liabilities, $3.75 million to trade names and $5.2 million to technology under
development, leaving a $5.7 million excess of cash paid (including transaction
costs) over net assets acquired. The values assigned to the various identifiable
intangible assets were determined based on anticipated discounted after-tax cash
flows for the period estimated to encompass the remaining life of the technology
existing at the Acquisition date and the expected life cycle of the next
generation of technology under development at the Acquisition date. Depreciation
periods for property and equipment and amortization periods for trade names,
customer lists and the excess of cash paid over net assets acquired are
consistent with the Company's existing policies.
At the time of the Acquisition, CADDX had under development
technology related to the NX-8 security system and it was not clear whether any
of this technology would be commercially acceptable or whether it would function
correctly. The development of the NX-8 required several design and engineering
innovations, including the creation of special telecom and power interfaces that
would be acceptable under any country's regulations anywhere in the world, the
development of software to drive these interfaces and a buss structure to allow
high speed transmissions over long lines without loss of signal, all within the
specified physical space and cost structure contemplated. It was not certain
that these design innovations could be accomplished, and failure to achieve any
one of these innovations would have caused the NX-8 project to fail. As a
result, in May 1997, the Company made a $5.2 million non-recurring charge to
operations for the value assigned to NX-8 technology in process at the time of
the Acquisition. The product was introduced in the last half of 1997 and has
been commercially successful. Also, subsequent to the Acquisition, the Company
included in cost of goods sold in the second quarter of 1997, a $725,000
non-recurring purchase accounting adjustment which resulted from the sale of
inventory which had been written-up to reflect estimated selling price less the
sum of estimated costs of completion and sale at the time of the Acquisition.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of net sales represented by certain items included in the
Consolidated Statements of Operations for the year ended December 31:
1998 1997 1996
----- ----- -----
Net sales ................................ 100.0% 100.0% 100.0%
Cost of goods sold ....................... 54.0 53.1 51.7
Inventory purchase accounting adjustment . .7
----- ----- -----
Gross profit ............................. 46.0 46.2 48.3
Operating expenses:
Marketing, general and administrative .. 17.8 18.2 16.0
Research and development ............... 7.3 7.4 6.7
Purchased research and development costs 5.2
Amortization of intangible assets ...... 1.3 1.2 1.0
----- ----- -----
Operating income ......................... 19.6% 14.2% 24.6%
===== ===== =====
Net sales to the Company's ten largest security system customers and
to all other customers were as follows for the year ended December 31:
1998 1997 1996
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- ------- -------
(Dollars in thousands)
Net sales:
Ten largest customers. $ 35,696 33% $ 45,695 45% $ 56,030 60%
All other customers... 73,290 67 55,304 55 37,301 40
-------- --- -------- --- -------- ---
$108,986 100% $100,999 100% $ 93,331 100%
======== === ======== === ======== ===
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET SALES. Net sales increased by $8.0 million, or 7.9%, from $101.0
million for 1997 to $109.0 million for 1998. The increase in net sales is
attributable to business acquisitions and volume increases, primarily reflecting
the successful introduction of the Company's new products designed for the mass
market portion of the industry.
Net sales for 1997 include eight months of revenue for the CADDX
acquisition and the Regency product line. Excluding the effect of the
acquisitions and sales to the branch operations of the Company's 1997 largest
customer, sales to all other customers increased 26.6% from 1997. Sales to this
customer's branch operations declined from approximately 21% of total sales in
1997 to less than 1% of total sales in 1998.
GROSS PROFIT. Gross profit increased from $46.6 million for 1997 to
$50.2 million for 1998, primarily due to the increased sales in 1998. As a
percentage of sales, gross margin decreased from 46.2% in 1997 to 46.0% in 1998.
This decrease was primarily due to excess capacity in the Company's North St.
Paul manufacturing facility in the first half of the year, which resulted from
the loss of business from the Company's largest customer in 1997, and due to
additional employee benefits in the CADDX subsidiary that were planned at the
time of the acquisition but not implemented until January 1998. In addition,
1997 margins were negatively impacted by the purchase accounting adjustment of
$725,000, or .7% of sales, which resulted from the sale of inventory that had
been written-up at the time of the Acquisition.
20
<PAGE>
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general
and administrative expenses increased from $18.4 million for 1997 to $19.4
million for 1998 due to 1998 expenses reflecting a full year of the CADDX
acquisition as compared to eight months of such expenses in 1997. Expressed as a
percentage of net sales, these expenses decreased from 18.2% for 1997 to 17.8%
for 1998. This decrease can be attributed to increased sales and the fact that a
significant portion of these expenses are of a fixed nature.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased from $7.5 million for 1997 to $8.0 million for 1998 as the Company
continued its emphasis on research and development. New products introduced in
1998 include Concord(TM), a modular hybrid control panel that allows dealers to
start with a low-cost hardwire platform with the ability to add wireless
sensors, the NX-4 and NX-6 systems that are smaller versions of Company's
successful NX-8 panel and the release of upgrades to the feature content of the
Company's traditional control panels and central station receiver. The Company
also continues development on its Advent(R) platform, which is designed for the
commercial burglary and fire market. The Company anticipates that it will
continue this high level of development activity in 1999.
PURCHASED RESEARCH AND DEVELOPMENT COSTS. During the second quarter
of 1997, in conjunction with the Acquisition, the Company recorded a $5.2
million non-recurring charge to operations for value assigned at the Acquisition
date to purchased technology under development.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of
acquisition-related intangible assets increased from $1.2 million for 1997 to
$1.4 million for 1998. This increase is attributable to the Company's second
quarter 1997 acquisitions.
NET INTEREST INCOME. Net interest income increased from $627,000 for
1997 to $805,000 for 1998. The Company had utilized a substantial portion of its
cash and cash equivalents in late 1996 and early 1997 to purchase the Company's
common stock through its stock repurchase program and for the second quarter
1997 acquisitions. The Company had steadily increased its cash balances
throughout 1998 until the third quarter when the Company repurchased, under its
June 18, 1998, stock repurchase program, 245,200 shares of its common stock for
a total of $6.3 million. In addition, the Company has increased participation in
the ITI Finance program. Interest earned under this program increased from
$159,000 in 1997 to $364,000 in 1998.
INCOME TAX EXPENSE. Income tax expense increased from $7.2 million
for 1997 to $8.0 million for 1998. The Company's effective income tax rates for
these periods vary from the statutory rate primarily due to the
non-deductibility for income tax purposes of amortization of excess of cost over
net assets acquired, state income taxes net of tax benefit, and other tax
credits. The effective rate in 1997 was also impacted by the nondeductibility of
the purchased research and development costs.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales increased by $7.7 million, or 8.2%, from $93.3
million for 1996 to $101.0 million for 1997. The increase in net sales is
primarily attributable to business acquisitions and volume increases, as prices
remained relatively stable over these periods.
Net sales for 1997 include approximately eight months of revenue for
the CADDX acquisition and the Regency product line. Excluding the effect of the
acquisitions and sales to the Company's largest customer's branch operations,
sales to all other customers increased over 16% from 1996. Sales to the
Company's largest customer's branch operations declined from approximately 40%
of total sales in 1996 to 21% of total sales in 1997.
GROSS PROFIT. Gross profit increased from $45.1 million for 1996 to
$46.6 million for 1997 but decreased as a percentage of net sales from 48.3% in
1996 to 46.2% in 1997. This decrease was primarily due to the fact that the
CADDX business has lower gross margins than the Company's traditional wireless
business as the CADDX product line
21
<PAGE>
is sold primarily through distribution rather than direct to dealers, and
hardwire products have lower margins as compared to wireless products. In
addition, margins were negatively impacted by the purchase accounting adjustment
of $725,000, or .7% of sales, which resulted from the sale of inventory that had
been written-up at the time of the Acquisition. Also, with the reduction of
business from the branch operations of the Company's largest customer, the
Company experienced excess capacity in its wireless manufacturing facility in
the second half of the year.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general
and administrative expenses increased from $15.0 million for 1996 to $18.4
million for 1997 and increased as a percentage of net sales from 16.0% to 18.2%.
The increase was primarily due to the addition of CADDX, increased employment
costs in the sales and marketing areas, marketing costs associated with new
product introductions and a $300,000 charge for costs associated with a change
in distribution arrangements in Australia.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased from $6.3 million for 1996 to $7.5 million for 1997 as the Company
continued its emphasis on research and development. New products introduced in
1997 included the Quik Bridge product line, the Simon security system, the CADDX
NX-8 security system and related sensors. The Company anticipates that it will
continue this high level of development activity.
PURCHASED RESEARCH AND DEVELOPMENT COSTS. During the second quarter
of 1997, in conjunction with the Acquisition, the Company recorded a $5.2
million non-recurring charge to operations for value assigned at the Acquisition
date to purchased technology under development.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of
acquisition-related intangible assets increased from $912,000 for 1996 to
$1,233,000 for 1997. This increase is attributable to the Company's second
quarter 1997 acquisitions.
NET INTEREST INCOME. Net interest income decreased from $815,000 for
1996 to $627,000 for 1997 as cash and cash equivalents were used in late 1996
and early 1997 to purchase the Company's common stock through its stock
repurchase program and for the second quarter 1997 acquisitions.
INCOME TAX EXPENSE. Income tax expense decreased from $8.7 million
for 1996 to $7.2 million for 1997. The Company's effective income tax rates for
these periods vary from the statutory rate primarily due to the
non-deductibility for income tax purposes of both the purchased research and
development cost and amortization of excess of cost over net assets acquired.
LIQUIDITY AND CAPITAL RESOURCES
On April 30, 1997, the Company entered into an unsecured $15.0
million bank revolving credit facility. The facility provides for interest
calculated, at the Company's option, at LIBOR plus 1.0% or the commercial bank's
base rate less 1.25%. In addition, the facility requires a commitment fee of
0.1% per annum on the unused portion of the facility. The agreement allows for
payment of annual dividends equal to 25% of the Company's net income for the
immediately preceding fiscal year and requires the maintenance of specified
financial ratios and minimum net worth. No amounts were outstanding under this
facility at December 31, 1998, or at any time during 1998.
The Company has funded its operations primarily with cash from
operations. The Company generated net cash from operating activities of $9.4
million for 1998 and $18.0 million for 1997. Net cash provided by operating
activities for 1998 resulted primarily from $14.2 million of net income and $3.8
million of depreciation and amortization charges. The changes in operating
assets and liabilities resulted in a use of cash of $9.6 million, which included
a $4.9 million increase in accounts receivable, a $3.2 million increase in
inventory and a $2.8 million increase in notes receivable from the Company's
dealer financing program, less $1.8 million source of cash from an increase in
accounts payable. Accounts receivable has increased primarily due to the
Company's sales shifting away from a few, high-volume installation companies to
numerous smaller dealers, coupled with a 12.7% or $3.2 million increase in sales
in the fourth
22
<PAGE>
quarter of 1998 as compared to the fourth quarter of 1997. The growth in
inventory was in support of these higher sales volumes and expanded product
offerings.
During 1998, the Company used $5.1 million for investing activities,
consisting primarily of the purchase of property and equipment totaling $3.1
million and other intangible assets, including ongoing patent defense cost, of
$1.8 million. The Company expects that purchases of property and equipment in
1999, including an estimated $1.2 million for an additional manufacturing
facility in Gladewater, Texas, scheduled to be completed in the second quarter
of 1999, will be approximately $4.5 million.
Net cash used in financing activities was $4.5 million for 1998.
Cash totaling $6.3 million was used to repurchase 245,200 shares of the
Company's common stock, which was partially offset by the $1.8 million in
proceeds paid to the Company from the exercise of stock options.
A substantial amount of the Company's working capital is invested in
accounts receivable and inventories. The Company periodically reviews accounts
receivable for non-collectibility and inventories for obsolescence and
establishes allowances it believes are appropriate. In addition, the Company
periodically assesses the recoverability of intangible assets based on
undiscounted cash flows.
The Company believes that cash flow from operations and funds
currently available will be adequate to fund its working capital and capital
expenditure requirements for the foreseeable future.
LITIGATION
On August 17, 1995, the Company commenced an action for patent
infringement against Pittway Corporation and its subsidiary, Ademco Distribution
Inc., in the United States District Court for the District of Minnesota. On
March 9, 1998, the jury found that the Ademco VISTA Plus/5800 family of wireless
security systems infringes the Company's Learn Mode patent and awarded the
Company damages of approximately $36 million for lost profits and royalties. On
April 9, 1998, the Court entered an injunction prohibiting Pittway Corporation
from manufacturing and marketing the Ademco 5800 series wireless products that
infringe the Company's LEARN MODE patent and awarded the Company prejudgment
interest of approximately $3 million, bringing the total judgment to
approximately $39 million. Pittway Corporation appealed the verdict. On March 4,
1999, the Federal Circuit Court of Appeals heard oral arguments on the case. The
Company anticipates that the appeal will be resolved during the first half of
1999.
Pittway has announced that in 1997 it had "introduced an improved
method of enrolling transmitters in its VISTA series of control panels." Pittway
calls this new method "QED." While the Company has maintained that Pittway's QED
products also infringe the Company's LEARN MODE patent, the judge would not
allow the Company to add Pittway's QED products to the action commenced in
August of 1995. Accordingly, the Company commenced a second patent infringement
lawsuit against Pittway and Ademco Distribution, Inc. on August 3, 1998, for
infringement of the Company's Learn Mode patent. The suit was also filed in the
United States District Court for the District of Minnesota. Discovery in the
second suit has been stayed by agreement of the parties pending resolution of
the appeal of the first suit.
Costs associated with these actions and related appeal are being
capitalized as a patent asset associated with the related technology. As of
December 31, 1998, the Company has capitalized $4.8 million of costs related to
these lawsuits, which are included in other intangible assets on the
consolidated balance sheet.
EFFECT OF INFLATION AND FOREIGN CURRENCY TRANSACTIONS
The Company believes that inflation and foreign currency
fluctuations have not had a significant effect on its operations. Currently, the
Company does not conduct any transactions or maintain any accounting records in
any European currency. As such, the Company anticipates that there will be no
material effect on its operations as a result of the conversion by eleven member
states of the European Union to a common currency on January 1, 1999.
23
<PAGE>
FINANCIAL INSTRUMENTS
The only financial instruments the Company maintains are in accounts
receivable and notes receivable. The Company believes that the interest rate
risk related to these accounts is not significant. The Company manages the risk
associated with these accounts through periodic reviews of the carrying value
for non-collectability and establishment of appropriate allowances in connection
with the Company's internal controls and policies. The Company does not enter
into hedging or derivative instruments.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the inability of many computer programs to
correctly identify dates occurring after December 31, 1999, because they use two
digits rather than four digits to identify years. This could cause a computer
system failure or miscalculations, resulting in disruptions of operations
including, among other things, a temporary inability to process transactions or
engage in similar normal business activities.
The Company's assessment of the Year 2000 issue is substantially
complete. The Company believes that with modifications to existing software and
conversions to new software, the Year 2000 issue will not pose significant
operational problems for its computer systems or the Company and that the cost
of such modifications will not be significant.
In addition to internal Year 2000 remediation activities, the
Company is in contact with key suppliers and customers to ensure no interruption
in the relationship between the Company and these important third parties from
the Year 2000 issue. A comprehensive survey of all vendors and customers has not
been, nor will one be, undertaken. All efforts thus far have been focused on key
vendors and customers. If these third parties do not convert their systems in a
timely manner and in a way that is compatible with the Company's systems, the
Year 2000 issue could have a material adverse effect on Company operations. The
Company believes that its actions with key suppliers and customers will minimize
these risks.
The vast majority of the Company's products are not date-sensitive.
The Company has collected information on current and discontinued date-sensitive
products. This information is available to customers as of the date of this
filing.
At this time, the Company does not have in place a comprehensive,
global contingency plan relative to potential Year 2000 disruptions. Rather,
each significant system either has been repaired and tested, or is being
reworked. For systems currently being reworked, contingency plans exist to
address unforeseen problems.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements and Notes thereto commencing
at Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in, or disagreements with, the
accountants for the Company which require reporting under Item 9.
24
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by
reference to the sections entitled "Proposal 1 -- Election of Directors --
General -- Information Regarding Nominees for Election as Directors -- Board
Actions and Committees" and "Executive Compensation -- Information Regarding
Certain Executive Officers" contained in the Company's Proxy Statement to be
filed with the Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by
reference to the sections entitled "Executive Compensation -- Compensation
Committee Interlocks and Insider Participation in Compensation Decisions" --
"Election of Directors -- Compensation of Directors," -- "Compliance with
Section 16(a) of the Securities Exchange Act of 1934," "Execution Compensation
- -- Report of the Compensation Committee," and "Performance Graph" contained in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by
reference to the section entitled "Security Ownership of Management and Certain
Beneficial Owners" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No transactions have occurred that require reporting under Item 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The financial statements filed as part of this Annual Report on
Form 10-K are described in the Index to Financial Statements appearing on page
F-1.
(b) No Current Reports on Form 8-K were filed by the Company during
the fourth quarter ended December 31, 1998, or from December 31, 1998 to the
date of this Annual Report on Form 10-K.
(c) The following exhibits are hereby filed as part of this Annual
Report on Form 10-K:
10.1 Long-Term Stock Incentive Plan (1992) (Amended and
Restated as of May 13, 1998).
10.2 Supply Agreement between Edison Select, an Edison
International Company, and Interactive Technologies,
Inc. dated December 15, 1998.
10.3 Lease Agreement between Aetna Institutional
Investors I Limited Partnership and Interactive
Technologies, Inc. dated January 1, 1999.
10.4 Lease Agreement between G.D. Package Machinery,
Inc. and Interactive Technologies, Inc. dated June 1,
1998.
10.5 Construction Agreement between Noah's Construction,
Inc. and CADDX Controls, Inc. dated October 8, 1998.
25
<PAGE>
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule (for electronic filing
purposes only).
The following exhibits are hereby incorporated into this Annual
Report on Form 10-K by reference to exhibits filed with the Company's
Registration Statement on Form S-1, as amended, which became effective on
November 22, 1994 (the "Registration Statement"); the exhibit number assigned to
each exhibit as filed with the Registration Statement is set forth in
parentheses after the description of the exhibit:
Exhibit No. Description
----------- -----------
2.1 Stock Purchase and Sale Agreement by and
among Professional Services Industries
Holding, Inc., Interactive Technologies
Holding Corporation ("ITHC"), and the
Company dated March 25, 1992. (Exhibit 2.1)
2.2 Amendment No. 1 to Stock Purchase and Sale
Agreement dated as of April 1, 1992.
(Exhibit 2.2)
2.3 Amendment No. 2 to Stock Purchase and Sale
Agreement dated as of May 11, 1992. (Exhibit
2.3)
2.4 Warranty and Indemnification Agreement by
and between the Company and Professional
Services Industries Holding, Inc. (Exhibit
2.4)
2.5 Guaranty of ADIA S.A. in favor of the
Company dated March 31, 1992. (Exhibit 2.5)
2.6 Stockholders Agreement dated as of May 11,
1992, by and among the Company and the
investors named therein. (Exhibit 2.6)
2.7 Stock Subscription Agreement dated as of May
11, 1992, by and among the Company and the
purchasers listed on the signature pages
thereof. (Exhibit 2.7)
2.8 Stock Purchase Agreement dated as of March
25, 1992, by and among ITHC and the
individuals listed on Exhibit A attached
thereto. (Exhibit 2.8)
2.9 Shareholders' Agreement dated as of March 1,
1989, by and among ITHC and the shareholders
listed on Schedule A attached thereto.
(Exhibit 2.9)
3.2 Certificate of Incorporation of the Company,
as amended, in effect on the date hereof.
(Exhibit 3.1)
3.3 Bylaws of the Company in effect as of the
date hereof. (Exhibit 3.2)
4.1 Form of Common Stock Certificate. (Exhibit
4.1)
10.6 Adoption Agreement for Qualified Profit
Sharing and 401(K) Plan. (Exhibit 10.7)
26
<PAGE>
10.7 Securities Purchase Agreement dated as of
May 11, 1992, by and among the Company and
TCW Special Placements Fund III, Sun Life
Insurance Company, The Lincoln National
Convertible Securities Fund, Inc., TCW
Capital, and The Lincoln National Income
Fund, Inc. (the "Warrantholders"). (Exhibit
10.16)
10.8 First Amendment to Securities Purchase
Agreement dated as of June 15, 1993, among
the Company and Warrantholders. (Exhibit
10.17)
10.9 Second Amendment to Securities Purchase
Agreement dated as of December 23, 1993,
among the Company and Warrantholders.
(Exhibit 10.18)
10.10 Letter Agreement dated March 15, 1993, by
and between Thomas L. Auth and the Company.
(Exhibit 10.33)
10.11 Letter Agreement dated March 15, 1993, by
and between Charles E. Briskey and the
Company. (Exhibit 10.35)
10.12 Memorandum of Agreement dated August 16,
1989, between Interactive Technologies, Inc.
and Mo-Mex Corporation. (Exhibit 10.43)
10.13 Settlement Agreement and Release between
Atrix International, Inc. and Interactive
Technologies, Inc. and License Agreement
between Atrix International, Inc. and
Interactive Technologies, Inc. (Exhibit
10.48).
The following exhibits are hereby incorporated into this Annual
Report on Form 10-K by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K");
the exhibit number assigned to each exhibit as filed with the 1996 Form 10-K is
set forth in parentheses after the description of the exhibit:
Exhibit No. Description
----------- -----------
10.14 Strategic Supplier Agreement No. FD1106
between Interactive Technologies, Inc. and
Honeywell Inc. dated November 20, 1996.
(Exhibit 10.1)
10.15 Letter Agreement dated December 23, 1996,
between ADT Security Systems, Inc. and
Interactive Technologies, Inc. (Exhibit
10.2)
The following exhibit is hereby incorporated into this Annual Report
on Form 10-K by reference to Exhibit 4.1 to the Registration Statement on Form
8-A filed by the Company with the Commission on December 6, 1996:
Exhibit No. Description
----------- -----------
4.2 Rights Agreement dated November 27, 1997, by
and between ITI Technologies, Inc. and
Norwest Bank Minnesota, N.A.
27
<PAGE>
The following exhibit is hereby incorporated into this Annual Report
on Form 10-K by reference to Exhibit 2 to the Current Report on Form 8-K filed
by the Company with the Commission on April 30, 1997:
Exhibit No. Description
----------- -----------
10.16 Stock Purchase and Sale Agreement dated
April 4, 1997, by and among ITI, CADDX and
the Shareholders.
The following exhibits are hereby incorporated into this Annual
Report on Form 10-K by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K");
the exhibit number assigned to each exhibit as filed with the 1997 Form 10-K is
set forth in parentheses after the description of the exhibit.
3.4 Certificate of Amendment of Certificate of
Incorporation filed with the Secretary of State of the
State of Delaware on May 22, 1997. (Exhibit 3.1)
10.17 Real Estate Sales Contract dated April 30, 1997,
between Kenneth T. Lewis and CADDX-CADDI Controls, Inc.
(Exhibit 10.1)
10.18 Employment Agreement dated April 30, 1997, between
CADDX Controls, Inc. and Joe Hurst. (Exhibit 10.2)
10.19 Noncompetition Agreement dated April 30, 1997,
between ITI Technologies, Inc. and Joe Hurst. (Exhibit
10.3)
10.20 Revolving Credit Agreement dated April 30, 1997,
between ITI Technologies, Inc. and Norwest Bank
Minnesota, National Association. (Exhibit 10.4)
10.21 Compatibility Agreement dated June 3, 1997,
between Prince Corporation and Interactive Technologies,
Inc. (Exhibit 10.6)
10.22 Trademark License Agreement dated June 3, 1997,
between Prince Corporation and Interactive Technologies,
Inc. (Exhibit 10.7)
10.23 Development and Supply Agreement between
Interactive Technologies, Inc. and Westsec, Inc. d/b/a
Westar Security Services dated June 20, 1997. (Exhibit
10.8)
10.24 Form of Exchange Agreement used in connection with
the exchange of options issued to Nonemployee Directors
under the Company's Nonemployee Director Stock Option
Plan. (Exhibit 10.9)
10.25 Form of Exchange Agreement used in connection with
the exchange of Series C Stock Options. (Exhibit 10.10)
10.26 Form of Consent to Award Modification used in
connection with the repricing of Series D and E Stock
Options. (Exhibit 10.11)
(d) The following report and consolidated financial statement
schedule are filed as part of this Annual Report on Form 10-K: Schedule II --
Valuation and Qualifying Accounts and the Report of Independent Accountants
thereon.
28
<PAGE>
F-14
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
------
Report of Independent Accountants....................................... F-2
Consolidated Statement of Operations.................................... F-3
Consolidated Balance Sheet.............................................. F-4
Consolidated Statement of Cash Flows.................................... F-5
Consolidated Statements of Stockholders' Equity......................... F-6
Notes to Consolidated Financial Statements.............................. F-7-16
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
ITI Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of ITI
Technologies, Inc. as of December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
-----------------------------------
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
March 23, 1999
F-2
<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales ............................................ $ 108,986 $ 100,999 $ 93,331
Cost of goods sold ................................... 58,815 53,628 48,217
Inventory purchase accounting adjustment ............. 725
--------- --------- ---------
Gross profit ......................................... 50,171 46,646 45,114
Operating expenses:
Marketing, general and administrative ............ 19,405 18,421 15,005
Research and development ......................... 7,974 7,491 6,270
Purchased research and development costs ......... 5,200
Amortization of intangible assets ................ 1,412 1,233 912
--------- --------- ---------
Operating income ..................................... 21,380 14,301 22,927
Other income (expense):
Interest, net .................................... 805 627 815
Other, net ....................................... 49 (122) 5
--------- --------- ---------
Income before income tax expense ..................... 22,234 14,806 23,747
Income tax expense ................................... 8,004 7,202 8,655
--------- --------- ---------
Net income ........................................... $ 14,230 $ 7,604 $ 15,092
========= ========= =========
Per share amounts:
Basic ............................................ $ 1.68 $ .91 $ 1.69
Weighted average common shares outstanding - basic 8,461 8,394 8,930
Diluted .......................................... $ 1.61 $ .87 $ 1.63
Weighted average common and common equivalent
shares outstanding - diluted ................... 8,860 8,705 9,246
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 5,594 $ 5,838
Accounts receivable ........................................................ 19,037 14,510
Inventories ................................................................ 25,201 21,962
Deferred income taxes ...................................................... 1,223 1,300
Other current assets ....................................................... 2,834 1,721
--------- ---------
Total current assets ................................................... 53,889 45,331
Property and equipment ......................................................... 10,647 9,825
Excess of cost over net assets acquired ........................................ 27,576 28,380
Other intangible assets ........................................................ 19,897 18,834
Notes receivable, net of current portion ....................................... 3,948 1,589
--------- ---------
Total assets ........................................................... $ 115,957 $ 103,959
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 6,874 $ 5,108
Accrued wages .............................................................. 2,045 1,880
Other accrued expenses ..................................................... 1,955 2,007
--------- ---------
Total current liabilities .............................................. 10,874 8,995
Income taxes ................................................................... 7,676 7,263
--------- ---------
Total liabilities ...................................................... 18,550 16,258
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock ($.01 par value; 30,000 shares authorized; 9,304 shares issued,
8,347 shares outstanding in 1998; 9,190 shares issued, 8,478 shares
outstanding in 1997) .................................................... 93 92
Additional paid-in capital ................................................. 76,368 74,575
Retained earnings .......................................................... 36,325 22,095
Treasury stock, at cost (957 shares in 1998, 712 shares in 1997) ........... (15,379) (9,061)
--------- ---------
Total stockholders' equity ............................................. 97,407 87,701
--------- ---------
Total liabilities and stockholders' equity ............................. $ 115,957 $ 103,959
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income .......................................... $ 14,230 $ 7,604 $ 15,092
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of intangible assets ................ 1,518 1,329 1,105
Depreciation and amortization .................... 2,258 1,802 1,170
Provision for doubtful accounts .................. 399 657 385
Inventory purchase accounting adjustment ......... 725
Purchased research and development costs ......... 5,200
Deferred income taxes ............................ 619 250 988
Changes in operating assets and liabilities:
Accounts receivable ......................... (4,926) 1,603 (1,634)
Inventories ................................. (3,239) (2,729) (2,150)
Financing notes receivable .................. (2,762) (737) (304)
Other current assets ........................ (447) 596 (349)
Accounts payable ............................ 1,766 1,370 (1,118)
Accrued wages and other accrued expenses .... 113 235 949
Other liabilities ........................... (129) 100 118
-------- -------- --------
Net cash provided by operating activities ........... 9,400 18,005 14,252
-------- -------- --------
INVESTING ACTIVITIES:
Additions to property and equipment ............... (3,080) (2,790) (3,722)
Additions to other intangible assets .............. (1,777) (2,004) (1,258)
Issuance of notes receivable ...................... (263) (974)
Acquisitions of businesses, net of cash acquired .. (20,522)
-------- -------- --------
Net cash used in investing activities ............. (5,120) (26,290) (4,980)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from revolving credit agreement .......... 6,310
Payments of revolving credit agreement ............ (6,310)
Proceeds from exercise of employee stock options .. 1,794 2,166 1,809
Payments for treasury stock ....................... (6,318) (1,395) (7,666)
-------- -------- --------
Net cash provided by (used in) financing activities (4,524) 771 (5,857)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ............................. (244) (7,514) 3,415
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR ........................................... 5,838 13,352 9,937
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............ $ 5,594 $ 5,838 $ 13,352
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Treasury Stock Total
---------------------- Paid-in (Accumulated ---------------------- Stockholders'
Shares Amount Capital Deficit) Shares Amount Equity
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ... 8,915 $ 89 $ 70,603 $ (601) $ 70,091
Options exercised, including tax
benefits of $1,251 ........... 121 1 1,808 1,809
Purchase of treasury stock ..... (622) $ (7,666) (7,666)
Net income ..................... 15,092 15,092
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1996 ... 9,036 90 72,411 14,491 (622) (7,666) 79,326
Options exercised, including tax
benefits of $957 ............. 154 2 2,164 2,166
Purchase of treasury stock ..... (90) (1,395) (1,395)
Net income ..................... 7,604 7,604
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 ... 9,190 92 74,575 22,095 (712) (9,061) 87,701
Options exercised, including tax
benefits of $813 ............. 114 1 1,793 1,794
Purchase of treasury stock ..... (245) (6,318) (6,318)
Net income ..................... 14,230 14,230
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1998 ... 9,304 $ 93 $ 76,368 $ 36,325 (957) $(15,379) $ 97,407
======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
ITI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
ITI Technologies, Inc. and its wholly owned subsidiaries (the
"Company"), operating in one business segment, designs, manufactures and markets
electronic security products and access control systems for the residential and
commercial marketplace. The Company also has an ongoing research and development
program which focuses its efforts on developing new and improved security
systems at lower costs and on utilizing its technology base to develop products
for related markets. The Company's products are sold through various channels,
including a direct sales force to independent dealers and through regional,
national and international distributors. In addition, the Company manufactures
products on a private label basis for large security system installation
companies. These customers are located primarily throughout North America,
Europe and Australia.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform with 1998 presentation. These reclassifications had no
impact on previously reported net income or stockholders' equity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash equivalents include short-term investments with original
maturities of three months or less. The Company's cash and cash equivalents are
concentrated primarily in one financial institution.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out method.
NOTES RECEIVABLE
The Company's ITI Finance subsidiary records a note receivable in
connection with the financing of certain customers' equipment purchases. These
notes receivable have terms between three and six years. Principal and interest
payments are primarily received on a monthly basis. The Company accrues interest
monthly and periodically reviews the carrying value of these receivables for
non-collectability and establishes appropriate allowances.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and
amortization of property and equipment is computed using the straight-line
method over the estimated useful lives of the assets, ranging from three to
seven years. The costs and related accumulated depreciation and amortization on
asset disposals are removed from the accounts and any gain or loss is included
in operations.
INTANGIBLE ASSETS
The excess of acquisition cost over amounts assigned to the net
identifiable assets acquired in the Company's various acquisitions are being
amortized on a straight-line basis over forty years. Total accumulated
amortization at December 31, 1998 and 1997 was $4,614,000 and $3,810,000,
respectively.
F-7
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other identifiable intangible assets include value assigned to
existing technology, trademarks, trade names and customer lists acquired,
deferred financing costs, patents, including litigation cost associated with
defending a patent, and other intangibles. Value assigned to trademarks
purchased are amortized on a straight-line basis over an estimated useful life
of forty years. Customer lists are amortized over their estimated useful lives,
which range from ten to fifteen years. Patents and other intangibles are carried
at cost less accumulated amortization calculated on a straight-line basis over
their estimated useful lives, which range from eighteen months to twenty years.
The Company periodically evaluates the carrying value its long lived
assets based upon current and anticipated undiscounted cash flows.
INCOME TAXES
Deferred income taxes result from temporary differences between
financial reporting and income tax reporting based on enacted rates in effect
for the periods in which these differences are expected to reverse. Income tax
expense is the tax payable for the current period plus the change during the
period in deferred tax assets and liabilities.
REVENUE RECOGNITION
Sales are recognized at the date of product shipment. Estimated
warranty costs are provided for at the time of the related sales.
EARNINGS PER SHARE
The Company calculated basic and dilutive earnings per share as
follows for the years ended December 31 (in thousands, except per share data):
1998 1997 1996
------- ------- -------
Net income $14,230 $ 7,604 $15,092
======= ======= =======
Weighted average shares outstanding:
Basic (actual shares outstanding) 8,461 8,394 8,930
Effect of dilutive options 399 311 316
------- ------- -------
Diluted 8,860 8,705 9,246
======= ======= =======
Per share amounts:
Basic $ 1.68 $ .91 $ 1.69
Diluted $ 1.61 $ .87 $ 1.63
The only dilutive effect on earnings results from the assumed
exercise of stock options outstanding under the Company's Stock Incentive Plan.
Various options to purchase shares of the Company's common stock (the "Common
Stock") were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average market price of
the Common Stock. These options expire on various dates through 2008. The
weighted average number of options excluded in the computation of diluted
earnings per share and their associated exercise prices were as follows for the
years ended December 31 (in thousands, except per share data):
1998 1997 1996
------- ------- -------
Weighted average options excluded 265 383 189
Exercise price range:
Low $ 26.75 $ 16.50 $ 22.50
High $ 30.75 $ 33.50 $ 33.50
F-8
<PAGE>
3. ACQUISITIONS
On May 22, 1997, the Company completed the cash purchase of the
Regency product line and dealer program from the Silent Knight Division of
Willknight, Inc., located in Minneapolis, Minnesota, for $1.8 million. In the
event sales of Regency products over the 36-month period ending May 2000 exceed
certain levels, a contingent payment of up to $800,000 will be made. This
product line allows the Company to offer an established product that integrates
intrusion protection, fire protection and access control. At the time of
acquisition, the Regency dealer program consisted of approximately 150 Regency
dealers throughout North America. The purchase price was allocated to the
estimated fair value of the assets acquired, primarily to customer lists, which
will be amortized over its expected useful life of 10 years.
On April 30, 1997, the Company purchased all of the outstanding
stock of CADDX-CADDI Controls, Inc. ("CADDX") for $19.0 million in cash (the
"Acquisition"). In conjunction with the Acquisition, the Company also purchased
from the majority shareholder of CADDX the manufacturing facility leased by
CADDX for $530,000. Immediately following the Acquisition, the corporate name
was changed to CADDX Controls, Inc. CADDX, located in Gladewater, Texas,
designs, manufactures and markets hardwire electronic security systems in the
United States and certain international locations.
The Acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of operations of CADDX have been
included in these financial statements from the effective date, April 30, 1997.
The Acquisition cost has been allocated to the assets acquired and liabilities
assumed based on their estimated fair values at the Acquisition date, including
$4.0 million to net current assets, $1.2 million to property and equipment,
$1.25 million to customer lists (principally related to CADDX customers outside
the United States), $2.1 million to net long-term deferred tax liabilities,
$3.75 million to trade names and $5.2 million to technology under development,
leaving a $5.7 million excess of cash paid (including transaction costs) over
net assets acquired. The values assigned to the various identifiable intangible
assets were determined based on anticipated discounted after-tax cash flows for
the period estimated to encompass the remaining life of the technology existing
at the Acquisition date and the expected life cycle of the next generation of
technology under development at the Acquisition date. Depreciation periods for
property and equipment and amortization periods for trade names, customer lists
and the excess of cash paid over net assets acquired are consistent with ITI's
existing policies.
At the time of the Acquisition, CADDX had under development
technology related to the NX-8 security system and it was not clear whether any
of this technology would be commercially acceptable or whether it would function
correctly. The development of the NX-8 required several design and engineering
innovations, including the creation of special telecom and power interfaces that
would be acceptable under any country's regulations anywhere in the world, the
development of software to drive these interfaces and a buss structure to allow
high speed transmissions over long lines without loss of signal, all within the
specified physical space and cost structure contemplated. It was not certain
that these design innovations could be accomplished, and failure to achieve any
one of these innovations would have caused the NX-8 project to fail. As a
result, in May 1997, the Company made a $5.2 million non-recurring charge to
operations for the value assigned to NX-8 technology in process at the time of
the Acquisition. The product was introduced in the last half of 1997 and has
been commercially successful. Also, subsequent to the Acquisition, the Company
included in cost of goods sold, in the second quarter of 1997, a $725,000
non-recurring purchase accounting adjustment which resulted from the sale of
inventory which had been written-up to reflect estimated selling price less the
sum of estimated costs of completion and sale at the time of the Acquisition.
F-9
<PAGE>
3. ACQUISITIONS (CONTINUED)
The following are unaudited pro forma consolidated results of
operations for the years ended December 31, 1997 and 1996, as if the Acquisition
had occurred as of the beginning of each period. The unaudited pro forma
consolidated results of operations have been adjusted to eliminate the effect of
the $5.2 million non-recurring charge to operations for the value assigned to
the in-process NX-8 technology and the $725,000 non-recurring purchase
accounting adjustment which resulted from the sale of the purchased inventory.
The pro forma information also includes adjustments for additional depreciation
and amortization, the reduction of compensation expense for a non-active
majority shareholder, the reduction of interest income and additional interest
expense due to the reduction of cash used for the Acquisition and the impact on
the tax provision due to these adjustments. The unaudited pro forma consolidated
results of operations do not purport to represent what the Company's results of
operations would actually have been if the Acquisition had, in fact, occurred on
that date (in thousands, except per share data).
Pro forma
year ended
December 31,
---------------------------
1997 1996
----------- -----------
(Unaudited)
Net sales, in thousands $ 106,939 $ 111,548
Net income, in thousands 13,717 16,504
Basic earnings per share 1.63 1.85
Diluted earnings per share 1.58 1.78
(The remainder of this page was intentionally left blank)
F-10
<PAGE>
4. OTHER FINANCIAL STATEMENT DATA
The following financial statement data is as of December 31 (in
thousands).
1998 1997
-------- --------
Accounts receivable:
Accounts receivable ..................... $ 20,182 $ 15,555
Allowance for doubtful accounts ......... (1,145) (1,045)
-------- --------
Total ................................. $ 19,037 $ 14,510
======== ========
Inventories:
Raw materials ........................... $ 12,600 $ 9,956
Allowance for obsolescence .............. (1,360) (1,660)
-------- --------
11,240 8,296
Work-in-process ......................... 5,615 4,877
Finished goods .......................... 8,346 8,789
-------- --------
Total ................................. $ 25,201 $ 21,962
======== ========
Property and equipment:
Machinery and equipment ................. $ 12,433 $ 10,080
Furniture and fixtures .................. 4,545 3,881
Land, building and improvements ......... 1,786 1,751
-------- --------
18,764 15,712
Accumulated depreciation and amortization (8,117) (5,887)
-------- --------
Total ................................. $ 10,647 $ 9,825
======== ========
Other intangible assets:
Trademarks and trade names .............. $ 13,829 $ 13,829
Technology and patents .................. 5,336 3,569
Customer lists .......................... 3,007 3,007
Other ................................... 626 616
-------- --------
22,798 21,021
Accumulated amortization ................ (2,901) (2,187)
-------- --------
Total ................................. $ 19,897 $ 18,834
======== ========
Other accrued expenses:
Warranty ................................ $ 650 $ 650
Professional fees ....................... 432 493
Other ................................... 873 864
-------- --------
Total ................................. $ 1,955 $ 2,007
======== ========
Income taxes:
Deferred ................................ $ 7,027 $ 6,485
Other ................................... 649 778
-------- --------
Total ................................. $ 7,676 $ 7,263
======== ========
SIGNIFICANT CUSTOMER AND EXPORT SALES
During the years ended December 31, 1997 and 1996, one customer
accounted for 25% and 41%, respectively, of consolidated net sales. This
customer accounted for 11% of consolidated accounts receivable at December 31,
1997. No one customer exceeded more than 6% of consolidated sales or accounts
receivable for the year ended December 31, 1998.
Export sales, primarily to Canada, Europe and Australia, accounted
for 18.3%, 13.9% and 8.7% of consolidated net sales for the years ended December
31, 1998, 1997 and 1996, respectively.
F-11
<PAGE>
5. INCOME TAXES
Income tax expense consisted of the following for the year ended
December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal ................................. $ 6,697 $ 6,443 $ 7,069
State ................................... 698 509 598
Deferred .................................. 619 250 988
------- ------- -------
$ 8,004 $ 7,202 $ 8,655
======= ======= =======
</TABLE>
The Company paid taxes of $7,251,000, $5,163,000 and $6,751,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
The differences between the income tax expense and income taxes
computed using the statutory federal income tax rate were as follows for the
year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Amount using the statutory federal tax rate $ 7,782 $ 5,182 $ 8,311
Purchased research and development
costs ................................... 1,820
Amortization of excess of cost over net
assets acquired ......................... 281 265 231
State income taxes, net of federal benefit 448 331 389
Research and development
tax credits ............................. (380) (345) (208)
Foreign sales corporation benefit ......... (279) (208) (147)
Other, net ................................ 152 157 79
------- ------- -------
$ 8,004 $ 7,202 $ 8,655
======= ======= =======
</TABLE>
A summary of the components of deferred tax assets (liabilities) is
as follows for the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Current deferred tax asset:
Accrued expenses and valuation reserves not
yet deducted for tax purposes .................... $ 1,223 $ 1,300
======= =======
Long-term deferred tax liability:
Depreciation ....................................... $ (632) $ (553)
Patent defense costs ............................... (1,744) (1,133)
Other intangible assets ............................ (4,651) (4,799)
------- -------
($7,027) ($6,485)
======= =======
</TABLE>
F-12
<PAGE>
6. CREDIT FACILITY
On April 30, 1997, the Company entered into an unsecured $15.0
million bank revolving credit facility. The facility provides for interest
calculated, at the Company's option, at LIBOR plus 1.0% or the commercial bank's
base rate less 1.25%. In addition, the facility requires a commitment fee of
0.1% per annum on the unused portion of the facility. The agreement allows for
payment of annual dividends equal to 25% of the Company's net income for the
immediately preceding fiscal year and requires the maintenance of specified
ratios and minimum net worth. No borrowings were outstanding at December 31,
1997 or any time during 1998.
On December 12, 1994, the Company entered into a bank credit
agreement for an unsecured $15.0 million bank revolving credit facility which
provided for interest calculated, at the Company's option, at LIBOR plus 1.0% or
a commercial bank's base rate. In addition, the facility required a commitment
fee of .25% per annum on the unused portion of the revolving credit commitment.
During 1996, in consideration of its cash position, the Company voluntarily
decided to terminate this facility. No amounts were outstanding under this
agreement at any time during 1996.
The Company paid $20,000, $24,000 and $27,000 of interest for the
years ended December 31, 1998, 1997 and 1996, respectively.
7. COMMITMENTS
The Company leases certain property and equipment under various
non-cancelable operating leases which expire at various periods through 2001.
Total rent expense of the Company was $709,000, $676,000 and $652,000 for the
years ended December 31, 1998, 1997 and 1996, respectively. At December 31,
1998, future minimum rentals required under non-cancelable operating leases are
as follows (in thousands):
1999...................$ 701
2000................... 616
2001................... 45
-------
$ 1,362
=======
The Company has entered into a contract for the construction of a
31,063 square foot building on a parcel of land adjacent to its Gladewater,
Texas facility. The estimated construction cost is $1,200,000 and the building
is scheduled to be completed in June of 1999.
8. LITIGATION
On August 17, 1995, the Company commenced an action for patent
infringement against Pittway Corporation and its subsidiary, Ademco Distribution
Inc., in the United States District Court for the District of Minnesota. On
March 9, 1998, the jury found that the Ademco VISTA Plus/5800 family of wireless
security systems infringes the Company's Learn Mode patent and awarded the
Company damages of approximately $36 million for lost profits and royalties. On
April 9, 1998, the Court entered an injunction prohibiting Pittway Corporation
from manufacturing and marketing the Ademco 5800 series wireless products that
infringe the Company's Learn Mode patent and awarded the Company prejudgment
interest of approximately $3 million, bringing the total judgment to
approximately $39 million. Pittway Corporation appealed the verdict. On March 4,
1999, the Federal Circuit Court of Appeals heard oral arguments on the case. The
Company anticipates that the appeal will be resolved during the first half of
1999.
F-13
<PAGE>
8. LITIGATION (CONTINUED)
Pittway has announced that in 1997 it had "introduced an improved
method of enrolling transmitters in its VISTA series of control panels." Pittway
calls this new method "QED." While the Company has maintained that Pittway's QED
products also infringe the Company's LEARN MODE patent, the judge would not
allow the Company to add Pittway's QED products to the action commenced in
August of 1995. Accordingly, the Company commenced a second patent infringement
lawsuit against Pittway and Ademco Distribution, Inc. on August 3, 1998, for
infringement of the Company's Learn Mode patent. The suit was also filed in the
United States District Court for the District of Minnesota. Discovery in the
second suit has been stayed by agreement of the parties pending resolution of
the appeal of the first suit.
Costs associated with these actions and related appeal are being
capitalized as a patent asset associated with the related technology. As of
December 31, 1998, the Company has capitalized $4.8 million of costs related to
these lawsuits, which are included in other intangible assets on the
consolidated balance sheet.
In addition, the Company experiences routine litigation in the
normal course of its business. The Company does not believe that any of this
routine litigation will have a material adverse effect on the financial
condition or results of operations of the Company.
9. PROFIT SHARING PLANS
The Company contributes to certain defined contribution plans (the
"Plans") which qualify under Section 401(k) of the Internal Revenue Code.
Employees who meet minimum age and service requirements are eligible to
participate in the Plans. The Company's contributions to the Plans were
$217,000, $171,000 and $148,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
10. STOCKHOLDERS' EQUITY
TREASURY SHARES
On June 18, 1998, the Board of Directors of the Company canceled the
stock repurchase program authorized on November 22, 1996 and authorized the
repurchase, from time to time, of up to 1,000,000 shares of the Company's common
stock in the open market or in private transactions. Total repurchases under
this authorization of 245,200 shares occurred during the third quarter of 1998.
On November 22, 1996, the Board of Directors authorized, subject to
market conditions and other factors, the purchase of up to 900,000 shares of the
Company's Common Stock. The Company purchased 90,000 and 621,500 shares under
this authorization in 1997 and 1996, respectively.
STOCKHOLDER RIGHTS PLAN
In November 1996, the Company's Board of Directors declared a
dividend distribution of one common share purchase right (a "Right") for each
outstanding share of Common Stock payable to stockholders of record at the close
of business on December 9, 1996. Each Right entitles the holder to purchase from
the Company one-half of a share of Common Stock, or a combination of securities
and assets of equivalent value, subject to adjustment, at a purchase price of
$25.00. The Rights will only become exercisable on the tenth business day
following (i) the public announcement that a person or group has acquired 20% or
more of the Company's Common Stock; or (ii) the public announcement by a person
or group of a tender or exchange offer that would result in ownership of 20% or
more of the Company's Common Stock, unless such offer has been determined by the
Company's Board, prior to the purchase of shares under such tender or exchange
offer, to be fair to the Company's stockholders and in the best interests of the
Company and its stockholders; or (iii) a determination by the Company's Board
that a person is an Adverse Person and that such Person, alone or together with
its affiliates, has become the beneficial owner of at least 15% of the Company's
Common Stock. Prior to becoming exercisable, the Rights are redeemable at the
discretion of the Company's Board and expire at the close of business on
November 26, 2006.
F-14
<PAGE>
10. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK INCENTIVE PLAN
The Company's Long-Term Stock Incentive Plan (1992) (the "Stock
Plan") provides for grants of up to 2,500,000 stock options, shares of
restricted stock, restricted stock units and stock appreciation rights to
officers, directors and other key employees. Options granted that are canceled
or expire are available for grant in future periods. Stock option activity was
as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS SHARES EXERCISE PRICE FAIR VALUE
--------- ---------------- ----------------
<S> <C> <C> <C>
Outstanding at December 31, 1995 1,016,509 13.53
Granted ........................ 311,000 27.91 10.26
Exercised ...................... (120,900) 5.31
Canceled ....................... (15,450) 22.39
---------
Outstanding at December 31, 1996 1,191,159 18.00
Granted ........................ 366,000 14.26 5.94
Granted under exchange and
repricing agreements ......... 653,300 16.47 6.69
Canceled ....................... (677,650) 25.22
Exercised ...................... (153,782) 8.11
---------
Outstanding at December 31, 1997 1,379,027 13.84
Granted ........................ 386,000 30.48 12.61
Exercised ...................... (114,630) 9.29
Canceled ....................... (30,050) 16.55
---------
Outstanding at December 31, 1998 1,620,347 18.08
=========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
RANGE OF ----------- ---------------- -------------- ----------- --------------
EXERCISE PRICES
- ---------------
<S> <C> <C> <C> <C> <C>
$5.00 to $7.50 ...... 252,777 4.2 years $ 5.32 247,337 $ 5.33
$14.125 to $16.50.... 894,420 8.0 years 15.72 660,084 15.83
$22.56 to $30.75..... 473,150 8.4 years 29.35 290,660 28.68
--------- ---------
$5.00 to $30.75...... 1,620,347 7.5 years 18.08 1,198,081 16.78
========= =========
</TABLE>
Options vest over periods up to seven years from the date of grant
and expire at various periods up to November 2008. All options were granted with
an exercise price equal to or exceeding the fair value of the Company's Common
Stock at the date of grant. Upon termination of employment, options not
exercisable expire.
F-15
<PAGE>
10. STOCKHOLDERS' EQUITY (CONTINUED)
On May 22, 1997, the Company canceled all stock options awarded to
date to the Company's Board of Directors having an exercise price of $25.88 and
replaced such options with options issued under the Company's Stock Plan having
an exercise price of $16.00, the market price of the Common Stock on that date.
All other terms and conditions contained in such options remained unchanged.
On May 5, 1997, the Company repriced certain Series D and E Stock
Options that had an exercise price of $22.56 or higher to provide for a new
exercise price of $16.50, the market price of the Common Stock on that date. All
other terms and conditions contained in such options remained unchanged.
On January 28, 1997, the Company offered an exchange agreement to
all current employees previously awarded certain Series C Stock Options during
the period beginning April 18, 1995 and ending December 31, 1996. The agreement
offered such employees the ability to exchange their unexercised Series C Stock
Options issued to them during the indicated period for new options in the
identical number but with a five-year vesting period commencing January 28, 1997
and a new exercise price of $16.50, the market price of the Common Stock on that
date.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company utilizes the intrinsic value method to account for
employee stock option grants. Had compensation expense for the Stock Plan been
determined consistent with the fair-value-based method of SFAS No. 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below.
The fair value of each option is estimated on the date of grant
using the Black-Scholes option-pricing model with weighted average assumptions
of no dividend yield; expected volatility of 33.1%, 30.7% and 25.1%; expected
option holding periods of 5.6, 5.3, and 5.3 years; and risk-free interest rates
of 5.66%, 6.81%, and 6.38% for 1998, 1997 and 1996, respectively.
1998 1997 1996
------- ------- -------
Net income (in thousands) As Reported $14,230 $ 7,604 $15,092
Pro forma 12,966 6,929 13,936
Basic earnings per share As Reported $ 1.68 $ .91 $ 1.69
Pro forma 1.53 .83 1.56
Diluted earnings per share As Reported $ 1.61 $ .87 $ 1.63
Pro forma 1.47 .80 1.52
The pro forma information above only includes stock options granted
subsequent to December 31, 1994. Pro forma compensation expense under the
fair-value-based method may increase over the next few years as additional stock
option grants are considered.
F-16
<PAGE>
S-3
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
ITI Technologies, Inc.:
Our report on the consolidated financial statements of ITI
Technologies, Inc. is included on page F-2 of this Annual Report on Form 10-K.
In connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed on page S-2 of this Annual
Report on Form 10-K.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ PricewaterhouseCoopers LLP
-----------------------------------
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
March 23, 1999
S-1
<PAGE>
ITI TECHNOLOGIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
BALANCE BALANCE
AT BEGINNING CHARGED TO AT END
DESCRIPTION OF PERIOD EXPENSE DEDUCTIONS OF PERIOD
- -------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts 1996 $ 800,000 $ 384,593 $ 284,593 $ 900,000
1997 900,000 657,000 512,000 1,045,000
1998 1,045,000 399,201 299,201 1,145,000
Allowance for Inventory Obsolescence 1996 $1,300,000 $ 202,624 $ 102,624 $1,400,000
1997 1,400,000 388,000 128,000 1,660,000
1998 1,660,000 39,500 339,500 1,360,000
</TABLE>
S-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ITI TECHNOLOGIES, INC.
By: /s/ Thomas L. Auth
Thomas L. Auth
ITS: CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed below by the following persons on behalf of the registrant
on the dates and in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
Chairman, President, Chief Executive
/s/ Thomas L. Auth Officer and Director March 26, 1999
- ----------------------------
/s/ W. Wallace McDowell, Jr. Director March 26, 1999
- ----------------------------
/s/ William C. Ughetta, Jr. Director March 26, 1999
- ----------------------------
/s/ Perry J. Lewis Director March 26, 1999
- ----------------------------
/s/ Sangwoo Ahn Director March 26, 1999
- ----------------------------
/s/ Walter R. Barry, Jr. Director March 26, 1999
- ----------------------------
Vice President, Finance (Chief
/s/ Jack A. Reichert Accounting Officer) March 26, 1999
- ----------------------------
</TABLE>
S-3
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
10.1 Long-Term Stock Incentive Plan (1992) (Amended and Restated as of
May 13, 1998)
10.2 Supply Agreement between Edison Select, an Edison International
Company, and Interactive Technologies, Inc. dated December 15, 1998.
10.3 Lease Agreement between Aetna Institutional Investors I Limited
Partnership and Interactive Technologies, Inc. dated January 1,
1999.
10.4 Lease Agreement between G.D. Package Machinery, Inc. and Interactive
Technologies, Inc. dated June 1, 1998.
10.5 Construction Agreement between Noah's Construction, Inc. and CADDX
Controls, Inc. dated October 8, 1998.
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule (for electronic filing purposes only)
EXHIBIT 10.1
ITI TECHNOLOGIES, INC.
LONG-TERM STOCK INCENTIVE PLAN (1992)
(AMENDED AND RESTATED AS OF MAY 13, 1998)
Section 1. PURPOSE
The purposes of the ITI Technologies, Inc. Long-Term Stock Incentive
Plan (1992) (the "PLAN") are to promote the interests of ITI Technologies, Inc.
and its shareholders by attracting and retaining nonemployee directors,
executive personnel and other key employees of outstanding ability; and enabling
such directors and employees to participate in the long-term growth and
financial success of ITI Technologies, Inc.
Section 2. DEFINITIONS
"AWARD" shall mean a grant or award under SECTION 6, 7 or 8 of the
Plan, as evidenced in a written document delivered to a Participant as provided
in SECTION 9(b).
"BOARD OF DIRECTORS" shall mean the Board of Directors of the
Corporation.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"COMMITTEE" shall mean the Compensation Committee of the Board of
Directors and any sub-committee of the Compensation Committee designated by the
Board of Directors and/or the Compensation Committee.
"COMMON STOCK" or "STOCK" shall mean the Common Stock, $.01 par value,
of the Corporation.
"CORPORATION" shall mean ITI Technologies, Inc.
"DESIGNATED BENEFICIARY" shall mean the beneficiary designated by the
Participant, in a manner determined by the Committee, to receive amounts due the
Participant in the event of the Participant's death. In the absence of an
effective designation by the Participant, Designated Beneficiary shall mean the
Participant's estate.
"EMPLOYEE" shall mean any key employee of the Employer.
"EMPLOYER" shall mean the Corporation and any Subsidiary.
"FISCAL YEAR" shall mean the fiscal year of the Corporation.
"NONEMPLOYEE DIRECTOR" shall mean a director of the Corporation who is
not also an employee of the Corporation.
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"OPTION" shall mean a stock option granted under SECTION 6 which is not
intended to be an incentive stock option within the meaning of Section 422 of
the Code.
"PARTICIPANT" shall mean an Employee and/or a Nonemployee Director who
is selected by the Committee to receive an Award under the Plan.
"RESTRICTION PERIOD" shall mean the period of years selected by the
Committee during which a grant of Restricted Stock or Restricted Stock Units may
be forfeited to the Corporation.
"RESTRICTED STOCK" shall mean shares of Common Stock contingently
granted to a Participant under SECTION 7 of the Plan.
"RESTRICTED STOCK UNIT" shall mean a unit contingently awarded under
SECTION 7 of the Plan.
"STOCK APPRECIATION RIGHT" shall mean a right granted under SECTION 8.
"SUBSIDIARY" shall mean any business entity in which the Corporation
possesses directly or indirectly fifty percent (50%) or more of the total
combined voting power.
Section 3. ADMINISTRATION
The Plan shall be administered by the Committee. The Committee shall
have sole and complete authority to adopt, alter and repeal such administrative
rules, guidelines and practices governing the operation of the Plan as it shall
from time to time deem advisable, and to interpret the terms and provisions of
the Plan. The Committee may delegate to one or more executive officers of the
Corporation the power to make Awards to Participants who are not executive
officers or directors of the Corporation provided the Committee shall fix the
maximum amount of such Awards for the group and a maximum for any one
Participant. The Committee's decisions shall be binding upon all persons,
including the Corporation, stockholders, an Employer, Employees, Nonemployee
Directors, Participants and Designated Beneficiaries.
Section 4. ELIGIBILITY
All Employees and Nonemployee Directors who, in the opinion of the
Committee, have the capacity for contributing in a substantial measure to the
successful performance of the Corporation are eligible to be Participants in the
Plan.
Section 5. MAXIMUM AMOUNT AVAILABLE FOR AWARDS
(a) The maximum number of shares of Stock in respect of which Awards
may be made under the Plan shall be a total of 2,500,000 shares of Common Stock.
Shares of Common Stock may be made available from the authorized but unissued
shares of the Corporation or from shares reacquired by the Corporation. In the
event that (i) an Option expires or is terminated
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unexercised as to any shares of Common Stock covered thereby; or (ii) any Award
in respect of shares is canceled or forfeited for any reason under the Plan
without the delivery of shares of Common Stock, such shares shall thereafter be
again available for award pursuant to the Plan.
(b) In the event that the Committee shall determine that any stock
dividend, extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, split-up, spin-off, combination, exchange of shares, warrants or
rights offering to purchase Common Stock at a price substantially below fair
market value, or other similar corporate event affects the Common Stock such
that an adjustment is required in order to preserve the benefits or potential
benefits intended to be made available under this Plan, then the Committee
shall, in its sole discretion, and in such manner as the Committee may deem
equitable, adjust any or all of (i) the number and kind of shares which
thereafter may be awarded or optioned and sold under the Plan; (ii) the number
and kind of shares subject to outstanding Options and other Awards; and (iii)
the grant, exercise or conversion price with respect to any of the foregoing
and/or, if deemed appropriate, make provision for a cash payment to a
Participant or a person who has an outstanding Option or other Award; provided,
however, that the number of shares subject to any Option or other Award shall
always be a whole number.
Section 6. STOCK OPTIONS
(a) GRANT. Subject to the provisions of the Plan, the Committee shall
have sole and complete authority to determine the Employees and/or Nonemployee
Directors to whom Options shall be granted, the number of shares to be covered
by each Option, the option price therefor and the conditions and limitations
applicable to the exercise of the Option.
(b) OPTION PRICE. The Committee shall establish the option price at the
time each Option is granted.
(c) EXERCISE.
(1) Each Option shall be exercisable at such times and subject
to such terms and conditions as the Committee may, in its sole discretion,
specify in the applicable Award or thereafter, provided, however, that in no
event may any Option granted hereunder be exercisable after the expiration of
ten years from the date of such grant. The Committee may impose such conditions
with respect to the exercise of Options, including, without limitation, any
relating to the application of federal or state securities laws, as it may deem
necessary or advisable.
(2) No shares shall be delivered pursuant to any exercise of
an Option until payment in full of the option price therefor is received by the
Corporation. Such payment may be made in cash, or its equivalent, or, if and to
the extent permitted by the Committee, by exchanging shares of Common Stock
owned by the optionee (which are not the subject of any pledge or other security
interest), or by a combination of the foregoing, provided that the combined
value of all cash and cash equivalents and the fair market value of any such
Common Stock so tendered to the Corporation, valued as of the date of such
tender, is at least equal to such option price.
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Section 7. RESTRICTED STOCK AND RESTRICTED STOCK UNITS
(a) Subject to the provisions of the Plan, the Committee shall have
sole and complete authority to determine the Employees and/or Nonemployee
Directors to whom shares of Restricted Stock and Restricted Stock Units shall be
granted, the number of shares of Restricted Stock and the number of Restricted
Stock Units to be granted to each Participant, the duration of the Restriction
Period during which, and the conditions under which, the Restricted Stock and
Restricted Stock Units may be forfeited to the Corporation, and the other terms
and conditions of such Awards. The Restriction Period shall consist of at least
one (1) year (which may be shortened or waived by the Committee at any time in
its discretion) with respect to one (1) or more Participants or Awards
outstanding.
(b) Restricted Stock Units and shares of Restricted Stock may not be
sold, assigned, transferred, pledged or otherwise encumbered, except as herein
provided, during the Restriction Period. Certificates issued in respect of
shares of Restricted Stock shall be registered in the name of the Participant
and deposited by such Participant, together with a stock power endorsed in
blank, with the Corporation. At the expiration of the Restriction Period, the
Corporation shall deliver such certificates to the Participant or the
Participant's legal representative. Payment for Restricted Stock Units shall be
made by the Corporation in cash or shares of Common Stock, as determined at the
sole discretion of the Committee.
Section 8. STOCK APPRECIATION RIGHTS
The Committee may, with sole and complete authority, grant Stock
Appreciation Rights in tandem with an Option, in addition to an Option, or
freestanding and unrelated to an Option. Stock Appreciation Rights granted in
tandem with or in addition to an Option may be granted either at the same time
as the Option or at a later time. Stock Appreciation Rights shall not be
exercisable earlier than six (6) months after grant, shall not be exercisable
after the expiration of ten (10) years from the date of grant and shall have an
exercise price of not less than one hundred percent (100%) of the fair market
value of the Common Stock on the close of business on the date of grant ("FAIR
MARKET VALUE"). A Stock Appreciation Right shall entitle the Participant to
receive from the Corporation an amount of cash equal to the excess, if any, of
the Fair Market Value of a share of Common Stock on the exercise of the Stock
Appreciation Right (or such other date specified by the Committee at the time of
grant) over the exercise price thereof.
Section 9. GENERAL PROVISIONS
(a) WITHHOLDING. The Employer shall have the right to deduct from all
amounts paid to a Participant in cash (whether under this Plan or otherwise) any
taxes required by law to be withheld in respect of Awards under this Plan. In
the case of payments of Awards in the form of Common Stock, at the Committee's
discretion the Participant may be required to pay to the Employer the amount of
any taxes required to be withheld with respect to the amount of any taxes
required to be withheld with respect to such Common Stock, or, in lieu thereof,
the Employer shall have the right to retain (or the Participant may be offered
the opportunity to elect
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to tender) the number of shares of Common Stock whose fair market value equals
the amount required to be withheld.
(b) AWARDS. Each Award hereunder shall be evidenced in writing,
delivered to the Participant and shall specify the terms and conditions thereof
and any rules applicable thereto, including, but not limited to, the effect on
such Award of the death, retirement or other termination of employment of the
Participant and the effect thereon, if any, of a change in control of the
Corporation.
(c) NONTRANSFERABILITY. No Award shall be assignable or transferable
except by will or the laws of descent and distribution, and no right or interest
of any Participant shall be subject to any lien, obligation or liability of the
Participant.
(d) NO RIGHT TO EMPLOYMENT. No person shall have any claim or right to
be granted an Award, and the grant of an Award shall not be construed as giving
a Participant the right to be retained in the employ of the Employer. Further,
the Employer expressly reserves the right at any time to dismiss a Participant
free from any liability, or any claim under the Plan, except as provided herein
or in any agreement entered into with respect to any Award.
(e) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the
applicable Award, no Participant or Designated Beneficiary shall have any rights
as a stockholder with respect to any shares of Common Stock to be distributed
under the Plan until he or she has become the holder thereof. Notwithstanding
the foregoing, in connection with each grant of Restricted Stock hereunder, the
applicable Award shall specify if and to what extent the Participant shall not
be entitled to the rights of a stockholder in respect of such Restricted Stock.
(f) CONSTRUCTION OF THE PLAN. The validity, construction,
interpretation, administration and effect of the Plan and of its rules and
regulations, and rights relating to the Plan, shall be determined solely in
accordance with the laws of New York, regardless of the law that might be
applied under applicable principles of conflicts of laws.
(g) EFFECTIVE DATE. Subject to the approval of the stockholders of the
Corporation, the Plan shall be effective on May 11, 1992. No Options or Awards
may be granted under the Plan after May 10, 2002.
(h) AMENDMENT OF AWARD; AMENDMENT OF THE PLAN.
(1) The Committee may amend, modify or terminate any
outstanding Award with the Participant's consent at any time prior to payment or
exercise in any manner not inconsistent with the terms of the Plan, including
without limitation (i) to change the date or dates as of which (A) an Option
becomes exercisable; (B) Restricted Stock becomes nonforfeitable; or (ii) to
cancel and reissue an Award under such different terms and conditions as it
determines appropriate.
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(2) The Board of Directors may amend, suspend or terminate the
Plan or any portion thereof at any time, provided that no amendment shall be
made without stockholder approval if such approval is necessary to comply with
any tax or regulatory requirement. Notwithstanding anything to the contrary
contained herein, the Committee may amend the Plan in such manner as may be
necessary so as to have the Plan conform with local rules and regulations.
(i) NOTICE OF EXERCISE. Prior to the receipt of any shares of Common
Stock in connection with any Award hereunder, the Participant will execute and
deliver to the Corporation a Notice of Exercise of Stock Option in the form, and
containing such terms and conditions, as shall be determined by the Committee.
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EXHIBIT 10.2
SUPPLY AGREEMENT
EDISON SELECT
This Purchase Agreement is between EDISON SELECT, an Edison International
Company d/b/a EDISON SECURITY SERVICES ("EDISON"), and INTERACTIVE TECHNOLOGIES,
INC., a Minnesota corporation ("ITI").
EDISON AND ITI AGREE AS FOLLOWS:
1. PURCHASE AND SALE. This Agreement governs the purchases from ITI by Edison,
and the sale by ITI to Edison, of various electronic security products
manufactured and/or distributed by ITI and/or its affiliate, CADDX Controls,
Inc. ("CADDX").
2. TERM. The term of this Agreement shall start on the date set forth on the
signature page hereof and shall continue in full force and effect for a period
of two (2) years following January 1, 1999, unless otherwise terminated in
accordance with PARAGRAPH 24 below.
3. SOURCING.
A) Except as otherwise provided in SUBSECTIONS 3.B. and 3.C. below,
Edison shall purchase from ITI all of its requirements for electronic
security equipment for its residential security branches located in the
States of California and Washington. This sourcing requirement is
subject to a reasonable transition period. The parties will use their
good faith best efforts to complete the transition no later than
January 1, 1999.
B) Notwithstanding anything contained in SUBSECTION 3.A. to the
contrary, the sourcing requirement set forth in SUBSECTION 3.A. does
not apply to Edison Commercial (Eric McRae's operation) or Valley Alarm
(the Fresno branch and its satellites).
C) Notwithstanding anything contained in SUBSECTION 3.A. to the
contrary, ITI acknowledges and agrees that Edison may purchase
electronic security equipment from other vendors under the following
circumstances:
i) For use in installations where more than 76 zones are
required;
ii) To service or upgrade equipment already installed in the
field by Edison or a third party;
iii) Equipment to be installed by Edison under contractual
commitments existing as of the date of this Agreement and/or
building projects existing as of the date of this Agreement;
iv) To meet a specific customer installation or product
requirement that cannot be met by product offered by ITI; or
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v) If ITI is unable to meet Edison's demand for product.
4. PRICE. All prices are in U.S. dollars and F.O.B. "Destination Point" (as that
term is defined in PARAGRAPH 19 below). So long as Edison has not breached any
material obligation under this Agreement, Edison shall be entitled to purchase
and be invoiced for product from ITI at prices set forth in EXHIBIT A.
5. PRIVATE LABELING. All wall-mount keypads sold by ITI to Edison under this
Agreement shall be private labeled with such trademarks or other designations
that are owned by Edison, all in accordance with directions received by ITI from
Edison. Edison shall provide ITI with a six-month rolling forecast for ITI's use
in forecasting private label needs, which forecast shall be nonbinding except as
otherwise set forth in PARAGRAPH 6 below.
6. DEMAND FORECAST. Edison shall provide ITI each month with a six-month rolling
forecast of anticipated product needs (the "MONTHLY DEMAND FORECAST(S))"), which
Monthly Demand Forecast shall be nonbinding except as expressly stated below in
this PARAGRAPH 6. Edison agrees that it shall be bound to purchase any unique or
proprietary raw materials, components or unfinished goods required to support
the most current Monthly Demand Forecast. Notwithstanding anything contained
herein to the contrary, Edison's obligations under the second sentence of this
PARAGRAPH 6 shall survive expiration or termination of this Agreement (other
than termination based upon a material breach of this contract by ITI).
7. ELECTRONIC ORDER ENTRY. ITI will establish a system of electronic order entry
for Edison branches to order equipment from ITI. ITI will present a plan
outlining order procedures to Edison by December 15, 1998, and ITI will use its
best efforts to have the electronic ordering procedures shall be in effect no
later than January 1, 1999.
8. DISTRIBUTION. Product will be delivered to Edison from ITI's warehouse
located in Anaheim, California (or such alternate warehouse facility as ITI may
designate from time in its sole and absolute discretion). Product will be
shipped to each Edison branch on a weekly basis. Order cutoff times and delivery
days will be established on a branch-by-branch basis. ITI will present Edison
with a detailed distribution plan as soon as possible.
9. CONSIGNMENT INVENTORY.
A) The parties shall settle up by December 31, 1998, with respect to
all inventory consigned to Edison under that certain Consignment and
Security Agreement between the parties dated July 18, 1997, by
returning to ITI any excess control panel inventory and paying ITI for
the balance of all inventory consigned under that agreement.
B) Pursuant to the terms and conditions of a Consignment and Security
Agreement of even date with this Agreement, ITI agrees to consign to
Edison product equal to fifteen (15) days of demand (as forecasted by
Edison) plus 20 percent (20%) as safety stock. Edison shall provide ITI
with a seven-day demand forecast as soon as possible. ITI shall
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provide Edison with a detailed procedure for controlling consignment
inventory and the adjustment of consignment inventory as soon as
possible.
10. WESTEC PANEL REPAIR FACILITY.
A) During the term of this Agreement and subject to a reasonable
transition period (as discussed in further detail in SUBPARAGRAPH 10.D.
below), ITI shall be responsible for the repair of Westec security
equipment. Provided that Edison has timely supplied ITI with the
assistance and information called out in SUBPARAGRAPH 10.B. below, ITI
shall present Edison with a written plan for transition of the Westec
repair facility to ITI no later than December 15, 1998. ITI's plan
shall include proposed repair pricing and a proposed transition date
(consistent with the intent of SUBPARAGRAPH 10.D. below). ITI's
obligations to repair Westec products shall cease upon the expiration
or termination of this Agreement.
B) Edison shall fully cooperate with ITI in the transition of the
Westec repair facility and provide ITI with such assistance and data as
necessary to facilitate such transition, including, but not limited to,
full and complete cooperation in connection with the sourcing of repair
parts, staffing and training. Without limiting the generality of the
foregoing, Edison shall provide ITI (as soon as possible) with the
following information: (i) a bill of material for each Westec product;
(ii) an estimated field population for each Westec product; (iii) an
estimated number of units repaired, by product, over the last six
months; (iv) the existing repair pricing schedule; (v) a schedule of
all test equipment and tools used in connection with the repair
operation, including estimated value of such equipment and tools; and
(vi) an inventory of all supplies, raw materials, components and
finished goods, together with an estimated value therefor, used in
connection with the Westec repair program.
C) Edison hereby represents to ITI that (i) the Westec security
controls are no longer in production and production of all Westec
security peripherals will cease no later than February 28, 1999; and
(ii) that repair parts for Westec products will be available to ITI and
that ITI shall not be responsible to manufacture any component parts
(including plastic housings) or subassemblies for Westec products,
unless otherwise subsequently agreed to in writing between the parties.
In the event that fulfillment of ITI's obligations with respect to the
Westec panel repair facility is anticipated to result in any
extraordinary costs (E.G., the purchase of new tooling for the making
of plastic), the parties will negotiate a mutually acceptable financial
arrangement. Notwithstanding anything contained in the previous
sentence to the contrary, ITI acknowledges and agrees that the subject
repair operations may involve the assembly, from available component
parts, of various keypads in small quantities.
D) ITI will use its good faith best efforts to complete the transition
by January 2, 1999. Edison acknowledges and agrees, however, that a
successful and timely transition is wholly dependent upon the full,
complete and timely cooperation of Edison, including,
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but not limited to, the fulfillment of Edison's obligations under
SUBPARAGRAPH 10.B. above.
E) The written plan to be delivered by ITI in accordance with
SUBPARAGRAPH 10.A. above shall include a proposal regarding the
transference of related testing equipment, tools, supplies, raw
materials, components and finished goods from Edison to ITI.
F) ITI shall bill Edison directly for all Westec repair activity.
Edison shall procure for ITI a list of all Westec franchisees and other
entities for whom Edison has an obligation to repair Westec security
equipment.
G) ITI acknowledges that, in the course of performing its repair
obligations under this Agreement, ITI may obtain confidential
information of the manufacturer of the subject equipment, including the
Westec product code and receiving formats. Accordingly, ITI agrees to
treat such information as strictly confidential, and shall use the same
care to prevent the disclosure of such information as ITI uses with
respects to its own confidential and proprietary information (which
shall be no less than the care a reasonable person would use under
similar circumstances).
11. PRODUCT DEVELOPMENT.
A) ITI will use its best efforts to develop, at its own cost and
expense, a hardwire input module retropack for the Westec panel
("WESTEC RETROPACK"). Edison acknowledges and agrees that ITI shall
retain all intellectual property and distribution rights to the Westec
Retropack.
B) The parties acknowledge and expect that the arrangement documented
herein will result in a mutually beneficial strategic alliance between
the parties. To that end, the parties intend to cooperate in the
development of the following features for the various security controls
covered by this Agreement: (i) proprietary user interfaces (keypads)
(I.E., proprietary look, style, shape and appearance of the plastic and
the buttons); (ii) additional programmable macro buttons; (iii) a
cancel button; and (iv) a bi-directional, full data port (E.G., RS232).
The parties acknowledge and agree that the timing and extent of such
product development activities shall conform with sound business
practices, including, but not limited to, actual and anticipated
quantities of product to be sold under this Agreement, the anticipated
duration of the relationship between the parties, and cost and price
constraints.
C) In light of the strategic alliance between the parties discussed in
SUBPARAGRAPH 11.B. above, ITI will also work with Edison to customize
owners' manuals and marketing communication materials or media that
Edison uses in the sales, service or customer support of the ITI
products covered by this Agreement. Such customization shall include,
but is not limited to, private labeling and rewriting of text to make
such documents proprietary or more user-friendly for Edison and its
customers.
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Notwithstanding anything contained in this Agreement to the contrary,
ITI shall retain final editorial control over all technical disclosures
contained in such documents and such document development activities
shall conform with sound business practices, including, but not limited
to, actual and anticipated quantities of product to be sold under this
Agreement, the anticipated duration of the relationship between the
parties, and cost and price constraints.
12. TRAINING AND SUPPORT.
A) ITI will provide Edison, at no cost to Edison, technical and sales
training at Edison's facilities as part of Edison's new product
roll-out and at such other times and locations as are mutually agreed
upon by ITI and Edison.
B) ITI will provide technical service through ITI's 800 help line from
7:00 a.m. to 8:00 p.m. CST, Monday through Friday.
C) ITI will provide Edison, at no cost to Edison, all relevant
technical documents, including product reference manuals, installation
instructions and prompt technical updates. All end-user documentation
shall be private labeled for Edison.
D) ITI customer service representatives will be available from 7:30
a.m. to 6:00 p.m. CST, Monday through Friday.
E) ITI shall supply Edison, free of charge, with 100 NX-6 demo keypads
and 200 demo keychain touchpads.
F) In consideration of roll-out expenses to be incurred by Edison and
the purchase of demonstration equipment by Edison, over and above the
demonstration equipment to be supplied by ITI pursuant to SUBPARAGRAPH
12.E. above, ITI shall rebate Edison an amount equal to one-half of one
percent (0.5%) the aggregate invoice value (excluding any amounts
invoiced for freight, taxes or other third-party charges) of all
purchases made by Edison from ITI under this Agreement during calendar
year 1999. Such rebates shall be paid by ITI within thirty (30) days of
the end of calendar year 1999.
13. RESALE OF PRODUCT. Edison shall purchase product from ITI under this
Agreement only for resale to ultimate end-users and/or authorized Edison Dealers
operating under the Edison name ("AUTHORIZED DEALERS"). Edison shall not resell
product to anyone other than a bona fide end-user and/or Authorized Dealers, and
represents to ITI that Edison does not intend to purchase product from ITI with
an intention to distribute such product to others for resale (other than
Authorized Dealers). Edison acknowledges that Edison is not the exclusive dealer
of ITI for any product or geographic area and that ITI reserves to itself the
unrestricted right to sell product in any geographic area, including Edison's
trade area, directly to any distributor, dealer, individual or entity.
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14. LICENSES AND PERMITS. Edison hereby represents to ITI that Edison has and
shall maintain during the term of this Agreement all governmental licenses or
permits necessary in connection with Edison's business operations.
15. PURCHASE ORDERS. All orders for product shall be considered accepted only if
accepted by ITI in writing or by shipment. All orders will be subject to the
terms and conditions of this Agreement.
16. PAYMENT TERMS. All amounts payable under this Agreement shall be in U.S.
dollars. Subject to written credit approval, which shall be in ITI's sole and
absolute discretion, payment terms will be NET 30 days. Invoices will be
considered past due if not paid in full thirty (30) days from the date of
receipt by Edison. If, at any time, Edison's account balance with ITI extends
beyond the date for payment specified above, ITI may, in its sole discretion,
either (i) ship product to Edison on a C.O.D., C.I.A. or other advanced payment
basis until the account is paid in full; or (ii) refuse to ship any product to
Edison until the account is paid in full.
17. INVOICE SUBMITTAL AND PAYMENT. Every invoice submitted to Edison must show
the Purchase Order number, the quantity, the description, the unit price and the
extended price charged and the invoice total dollar amount for the
product/service. The invoice should be mailed to Edison at the following
address:
Edison Select / Edison Security Services
13191 Crossroads Parkway North
City of Industry, CA 91746
Attention: Accounts Payable
Invoices shall be paid within thirty (30) days after receipt by Edison, less any
amounts for incorrect or unsubstantiated charges. If rates, prices, pricing
format or pricing components are different from that stated in this Agreement,
payment may be delayed due to necessary validation the invoice.
18. TAXES, DUTIES AND TARIFFS. All prices are exclusive of any present or future
federal, state, local or other governmental taxes, duties or tariffs applicable
to the sale, transportation or use of product under this Agreement, all of which
taxes, duties or tariffs shall be paid by Edison.
19. SHIPMENT, TITLE AND RISK OF LOSS. All prices for product sold by ITI to
Edison are F.O.B. Destination. The "DESTINATION" will be any Edison branch
location located in the States of California or Washington as Edison may
designate from time to time in its sole and absolute discretion. ITI shall pay
all ground transportation fees, costs and charges, including, without
limitation, insurance, handling and loading charges; provided, however, that
Edison shall reimburse ITI for the cost of air freight in the event Edison
requests product to be shipped by air freight. Title to product and risk of loss
shall transfer to Edison upon delivery of product to the Destination.
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20. WARRANTY. ITI extends to Edison its standard warranty, as the same may
change from time to time. A copy of ITI's current standard warranty is attached
hereto as EXHIBIT B. EXCEPT AS EXPRESSLY PROVIDED IN ITI'S STANDARD WARRANTY,
ITI MAKES NO WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, WITH RESPECT TO ANY
PRODUCT OR PORTION THEREOF, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. ITI SHALL
UNDER NO CIRCUMSTANCES BE LIABLE TO EDISON OR ANY THIRD PARTY FOR SPECIAL,
INCIDENTAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES OF NATURE WHATSOEVER, EVEN IF ITI
SHALL HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
21. RETURNS. Returns of product to ITI shall be made in accordance with the
Distribution Plan to be delivered by ITI to Edison in accordance with PARAGRAPH
8 above.
22. CONFIDENTIALITY; PUBLICITY. Edison agrees not to disclose the terms and
conditions of this Agreement, including, but not limited to, the prices set
forth on EXHIBIT A, to any third party except, and only to the extent, as
required by law. Neither party will publicly announce or disclose the terms and
conditions of this Agreement, or advertise or release any publicity regarding
this Agreement or the existence of this Agreement, without the prior written
consent of the other party.
23. INDEMNIFICATION.
A) Edison shall indemnify, defend and hold ITI and its legal
representatives, agents, employees, divisions, subsidiaries, affiliates
and their successors and assigns, harmless from and against any loss,
claim, liability, damage or expense (including reasonable legal
expenses and costs) that ITI or they may suffer, sustain or become
subject to, as a result of any alleged act, omission or obligation of
or by Edison or Edison's agents arising out of (i) the sale,
installation, maintenance and/or monitoring of product purchased
pursuant to this Agreement; (ii) Edison's operation of its business
pursuant to this Agreement; or (iii) any alleged breach by Edison of
any provision of this Agreement. Edison will reimburse any entity
entitled to be indemnified hereunder for all expenses (including
reasonable legal expenses and costs) as they are incurred in connection
with investigating or defending any such action or claim, whether or
not in connection with pending or threatened litigation in which the
entity is a party.
B) ITI shall indemnify, defend and hold Edison and its legal
representatives, agents, employees, divisions, subsidiaries, affiliates
and their successors and assigns, harmless from and against any loss,
claim, liability, damage or expense (including reasonable legal
expenses and costs) that Edison or they may suffer, sustain or become
subject to, as a result of (i) any actual or alleged infringement of
any patent, copyright or other intellectual property right of any third
party arising out of or based upon services
Edison Agreement
2/18/99 2:38 PM
Page 7
<PAGE>
performed by ITI or product delivered by ITI under this Agreement; (ii)
any alleged or actual infringement of any patent, copyright or other
intellectual property right of any third party that arises out of or is
based upon any written materials provided by ITI to Edison pursuant to
the terms of this Agreement; and (iii) any claim for injury, damage or
other liability by any employee of ITI where such ITI employee has
attended a field call with an Edison employee or is on Edison's
premises, other than injury, damage or other liability established to
have been caused by the sole negligence of Edison. ITI will reimburse
any entity entitled to be indemnified hereunder for all expenses
(including reasonable legal expenses and costs) as they are incurred in
connection with investigating or defending any such action or claim,
whether or not in connection with pending or threatened litigation in
which the entity is a party.
24. TERMINATION. Notwithstanding anything contained in this Agreement to the
contrary, either party shall have the right to terminate this Agreement, in the
event the other party materially breaches any of the covenants, agreements,
representations or warranties set forth herein or fails to perform any
obligation of it hereunder, by giving the other party written notice indicating
its intent to terminate this Agreement together with a description of the
alleged grounds for termination. This Agreement will be deemed terminated in the
event the breaching party has not substantially cured the breach identified in
such written notice within ten (10) working days following receipt of such
notice. Notwithstanding the termination or expiration of this Agreement, each of
the parties hereto shall be required to carry out any provision hereof that
contemplates performance subsequent to such termination or expiration and such
termination or expiration shall not affect any liability or other obligation
that shall have accrued prior to termination or expiration.
25. MISCELLANEOUS.
A) The relationship between Edison and ITI shall be that of independent
contractors, and nothing contained herein shall be construed or applied
to create between Edison and ITI the relationship of principal and
agent, partners, joint ventures or employer and employee.
B) No waiver, modification or amendment of any term, condition or
provision of this Agreement shall be valid, binding or of any effect
unless made in writing, signed by both Edison and ITI, and specifying
with particularity the nature and extent of such waiver, modification
or amendment.
C) All correspondence or other notices shall be in writing and
considered delivered if sent by first class mail, postage prepaid, at
the address listed below:
Interactive Technologies, Inc.
2266 North Second Street
North St. Paul, Minnesota 55109
Edison Select / Edison Security Services
13191 Crossroads Parkway North
City of Industry, California 91746
Attention: Craig Knauf
Edison Agreement
2/18/99 2:38 PM
Page 8
<PAGE>
D) This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
E) Except for actions by ITI to collect amounts owed to ITI by Edison
pursuant to the terms and conditions of this Agreement and any purchase
orders hereunder, any dispute, controversy or claim arising out of or
in connection with this Agreement shall be settled by binding
arbitration in accordance with the rules of the American Arbitration
Association, which arbitration shall take place at a location mutually
agreeable to both parties.
26. EXCLUSIVE TERMS. This Agreement, including any exhibits attached hereto or
documents expressly referred to herein, contains the entire agreement between
Edison and ITI and supersedes and cancels any and all other agreements, whether
oral or in writing, between Edison and ITI with respect to the matters referred
to herein. Any term or condition in any purchase order, confirmation or other
document furnished by Edison that is in any way inconsistent with or in addition
to the terms and conditions of the Agreement is hereby expressly rejected by
both Edison and ITI.
Entered into on December 15, 1998.
EDISON SELECT, an Edison International INTERACTIVE TECHNOLOGIES, INC.
Company
By: /s/ Michael L. Merlo By: /s/ Thomas L. Auth
-------------------------------- ---------------------------------
Michael L. Merlo, President Thomas L. Auth, CEO and President
Edison Agreement
2/18/99 2:38 PM
Page 9
EXHIBIT 10.3
LEASE AGREEMENT
BY AND BETWEEN
AETNA INSTITUTIONAL INVESTORS I LIMITED PARTNERSHIP,
A CONNECTICUT LIMITED PARTNERSHIP
AS LANDLORD
AND
INTERACTIVE TECHNOLOGIES, INC.
AS TENANT
DATE DECEMBER 18, 1998
LA PALMA/MODIFIED GROSS
<PAGE>
TABLE OF CONTENTS
Page
Basic Lease Information.......................................................iv
1. Demise......................................................................1
2. Premises....................................................................1
3. Term........................................................................2
4. Rent........................................................................3
5. Utility Expenses............................................................6
6. Late Charge.................................................................7
7. Security Deposit............................................................7
8. Possession..................................................................8
9. Use Of Premises.............................................................8
10. Acceptance of Premises....................................................10
11. Surrender.................................................................10
12. Alterations and Additions.................................................11
13. Maintenance and Repairs of Premises.......................................13
14. Landlord's Insurance......................................................14
15. Tenant's Insurance........................................................15
16. Indemnification...........................................................16
17. Subrogation...............................................................17
18. Signs.....................................................................17
19. Free From Liens...........................................................17
20. Entry By Landlord.........................................................18
21. Destruction and Damage....................................................18
22. Condemnation..............................................................20
23. Assignment and Subletting.................................................21
24. Tenant's Default..........................................................24
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LA PALMA/MODIFIED GROSS
<PAGE>
25. Landlord's Remedies.......................................................26
26. Landlord's Right to Perform Tenant's Obligations..........................29
27. Attorney's Fees...........................................................29
28. Taxes.....................................................................30
29. Effect Of Conveyance......................................................30
30. Tenant's Estoppel Certificate.............................................30
31. Subordination.............................................................31
32. Environmental Covenants...................................................32
33. Notices...................................................................35
34. Waiver....................................................................35
35. Holding Over..............................................................36
36. Successors and Assigns....................................................36
37. Time......................................................................36
38. Brokers...................................................................36
39. Limitation of Liability...................................................37
40. Financial Statements......................................................37
41. Rules and Regulations.....................................................38
42. Mortgagee Protection......................................................38
43. Entire Agreement..........................................................38
44. Interest..................................................................39
45. Construction..............................................................39
46. Representations and Warranties of Tenant..................................39
47. Security..................................................................40
48. Jury Trial Waiver.........................................................40
ii
LA PALMA/MODIFIED GROSS
<PAGE>
EXHIBIT
A Diagram of the Premises
B Tenant Improvements
B-1 Final Plans and Specifications for Tenant
Improvements
C Commencement and Expiration Date
Memorandum
D Rules and Regulations
E Sign Criteria
F Hazardous Materials Disclosure Certificate
G Tenant Improvements Loan Amortization
Memorandum
ADDENDA
- --------------------------------------
- --------------------------------------
iii
LA PALMA/MODIFIED GROSS
<PAGE>
LEASE AGREEMENT
BASIC LEASE INFORMATION
LEASE DATE: December 18, 1998
LANDLORD: AETNA INSTITUTIONAL INVESTORS I LIMITED
PARTNERSHIP, a Connecticut limited
partnership
LANDLORD'S ADDRESS: c/o Allegis Realty Investors LLC
1740 Technology Drive, Suite 600
San Jose, California 95110
ALL NOTICES SENT TO LANDLORD UNDER THIS LEASE
SHALL BE SENT TO THE ABOVE ADDRESS, WITH
COPIES TO:
Trammell Crow Company So. Cal., Inc.
2970 E. La Palma Avenue, Suite M
Anaheim, California 92806
TENANT: Interactive Technologies, Inc.
TENANT'S CONTACT PERSON: Jerry Murphy
TENANT'S ADDRESS AND TELEPHONE 2970 East La Palma Avenue, Suite D&E,
NUMBER: Anaheim, CA 92806
(714) 632-9338
PREMISES SQUARE FOOTAGE: Approximately Three Thousand Two Hundred
Fifty-two (3,252) rentable square feet.
PREMISES ADDRESS: 2970 E. La Palma Avenue, Suite D&E,
Anaheim, California 92806
PROJECT: La Palma Corporate Park together with the
land on which the Project is situated and
all Common Areas
(IF NOT THE SAME AS THE PROJECT): 2970 E. La Palma Avenue, Suite D&E,
Anaheim, California 92806
TENANT'S PROPORTIONATE SHARE OF
PROJECT: 1.16%
iv
LA PALMA/MODIFIED GROSS
<PAGE>
TENANT'S PROPORTIONATE SHARE OF 15.54%
BUILDING:
LENGTH OF TERM: Thirty-six (36) months. Full execution of
this lease will cancel that lease dated
April 24, 1998 between Aetna Institutional
Investors I Limited Partnership and
Interactive Technologies, Inc. for that
space located at 2970 E. La Palma Avenue,
Suite F, Anaheim, CA 92806.
ESTIMATED COMMENCEMENT DATE: January 1, 1999
ESTIMATED EXPIRATION DATE: December 31, 2002
MONTHLY BASE RENT: MONTHLY MONTHLY
MONTHS SQ. FT. BASE RENT BASE RENT
01-12 3,252 x $0.70 $2,276.40
13-24 3,252 x $0.73 $2,373.96
25-36 3,252 x $0.76 $2,471.52
ESCALATIONS: See above. There is an additional tenants'
proportionate share of expenses charge of
$0.03 per square foot the first year and
$0.035 the second year.
PREPAID RENT: N/A ($0.00)
PREPAID ADDITIONAL RENT: N/A ($0-00)
TO WHICH PREPAID BASE RENT AND
ADDITIONAL RENT WILL BE APPLIED: N/A
BASE YEAR: 1998
SECURITY DEPOSIT: 0ne Thousand Two Hundred Fifty-one and 77/100
($1,251.77) dollars. Tenant currently has
$1,219.75 on file.
PERMITTED USE: General office and warehouse for repair and
distribution of security products.
UNRESERVED PARKING SPACES: Eight (8) non assigned spaces
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LA PALMA/MODIFIED GROSS
<PAGE>
BROKER(S): Trammell Crow Company
TENANT IMPROVEMENTS ALLOWANCE: See Exhibit "B-1"
TENANT IMPROVEMENTS LOAN: N/A ($0.00)
ARCHITECT: N/A
vi
LA PALMA/MODIFIED GROSS
<PAGE>
LEASE AGREENIENT
THIS LEASE AGREEMENT is made and entered into by and between Landlord and
Tenant on the Lease Date. The defined terms used in this Lease which are defined
in the Basic Lease Information attached to this Lease Agreement ("Basic Lease
Information") shall have the meaning and definition given them in the Basic
Lease Information. The Basic Lease Information, the exhibits, the addendum or
addenda described in the Basic Lease Information, and this Lease Agreement are
and shall be construed as a single instrument and are referred to herein as the
"Lease".
1. DEMISE
In consideration for the rents and all other charges and payments payable
by Tenant, and for the agreements, terms and conditions to be performed by
Tenant in this Lease, LANDLORD DOES HEREBY LEASE TO TENANT, AND TENANT DOES
HEREBY HIRE AND TAKE FROM LANDLORD, the Premises described below (the
"Premises"), upon the agreements, terms and conditions of this Lease for the
Term hereinafter stated.
2. PREMISES
The Premises demised by this Lease is located in that certain building
(the "Building") specified in the Basic Lease Information, which Building is
located in that certain real estate development (the "Project") specified in the
Basic Lease Information. The Premises has the address and contains the square
footage specified in the Basic Lease Information. The location and dimensions of
the Premises are depicted on EXHIBIT A, which is attached hereto and
incorporated herein by this reference. Tenant shall have the non-exclusive right
(in common with the other tenants, Landlord and any other person granted use by
Landlord) to use the Common Areas (as hereinafter defined), except that, with
respect to parking, Tenant shall have only a license to use the number of
non-exclusive and undesignated parking spaces set forth in the Basic Lease
Information in the Project's parking areas (the "Parking Areas"); provided,
however, that Landlord shall not be required to enforce Tenant's right to use
such parking spaces; and, provided further, that the number of parking spaces
allocated to Tenant hereunder shall be reduced on a proportionate basis in the
event any of the parking spaces in the Parking Areas are taken or otherwise
eliminated as a result of any Condemnation (as hereinafter defined) or casualty
event affecting such Parking Areas. No easement for light or air is incorporated
in the Premises. For purposes of this Lease, the term "Common Areas" shall mean
all areas and facilities outside the Premises and within the exterior boundary
line of the Project that are provided and designated by Landlord for the
non-exclusive use of Landlord, Tenant and other tenants of the Project and their
respective employees, guests and invitees.
Tenant understands and agrees that the Premises shall be leased by Tenant
in its as-is condition without any improvements or alterations by Landlord
unless Landlord has
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LA PALMA/MODIFIED GROSS
<PAGE>
expressly agreed to make such improvements or alterations in a tenant
improvement work agreement attached hereto, if at all, as EXHIBIT B. If Landlord
has agreed to make any such improvements or alterations, then the Premises
demised by this Lease shall include any Tenant Improvements (as that term is
defined in the aforesaid tenant improvement work agreement) to be constructed by
Landlord within the interior of the Premises. Landlord shall construct any
Tenant Improvements on the terms and conditions set forth in EXHIBIT B, if
attached hereto. Landlord and Tenant agree to and shall be bound by the terms
and conditions of EXHIBIT B, if any.
Landlord has the right, in its sole discretion, from time to time, to: (a)
make changes to the Common Areas, including, without limitation, changes in the
location, size, shape and number of driveways, entrances, parking spaces,
parking areas, ingress, egress, direction of driveways, entrances, corridors and
walkways; (b) close temporarily any of the Common Areas for maintenance purposes
so long as reasonable access to the Premises remains available; (c) add
additional buildings and improvements to the Common Areas or remove existing
buildings or improvements therefrom; (d) use the Common Areas while engaged in
making additional improvements, repairs or alterations to the Project or any
portion thereof, and (e) do and perform any other acts or make any other changes
in, to or with respect to the Common Areas and the Project as Landlord may, in
its sole discretion, deem to be appropriate.
3. TERM
The term of this Lease (the "Term") shall be for the period of months
specified in the Basic Lease Information, commencing on the earliest to occur OF
the following dates (the "Commencement Date"):
(a) The date Landlord delivers possession of the Premises to Tenant with
all Tenant Improvements to be constructed by Landlord, if any, substantially
complete; for purposes of this Paragraph 3(a), the Tenant Improvements shall be
deemed to be substantially complete on the earlier of (i) the date the Tenant
Improvements are approved by the appropriate governmental agency as being in
accordance with its building code and the building permit issued for such
improvements, as evidenced by the issuance of a final building inspection
approval, or (ii) the date Landlord's architect and general contractor have both
certified in writing to Tenant that the Tenant Improvements have been
substantially completed in accordance with the plans and specifications
therefor; or
(b) The date Tenant commences occupancy of the Premises.
In the event the actual Commencement Date, as determined pursuant to the
foregoing, is a date other than the Estimated Commencement Date, then Landlord
and Tenant shall promptly execute a Commencement and Expiration Date Memorandum
in the form attached hereto as EXHIBIT C, wherein the parties shall specify the
2
LA PALMA/MODIFIED GROSS
<PAGE>
Commencement Date, the date on which the Term expires (the "Expiration Date")
and the date on which Tenant is to commence paying Rent.
4. RENT
(a) BASE RENT. Tenant shall pay to Landlord, in advance on the first day
of each month, without further notice or demand and without offset or deduction,
the monthly installments of rent specified in the Basic Lease Information (the
"Base Rent").
Upon execution of this Lease, Tenant shall pay to Landlord the Prepaid
Rent and first monthly installment of estimated Additional Rent (as hereinafter
defined) specified in the Basic Lease Information to be applied toward Base Rent
and Additional Rent for the month of the Term specified in the Basic Lease
Information.
(b) ADDITIONAL RENT.
(1) During the Term, in addition to the Base Rent, Tenant shall pay to
Landlord as additional rent (the "Additional Rent") (i) Tenant's Proportionate
Share of the Expenses, (ii) Tenant's Proportionate Share(s) of the dollar
increase, if any, in Insurance Expenses (as defined below) attributable to each
Computation Year over Base Expenses (as defined below), and (iii) Tenant's
Proportionate Share(s) of the total dollar increase, if any, in Taxes (as
defined below) attributable to each Computation Year over Base Taxes (as defined
below).
(2) As used in this Lease, the following terms shall have the meanings
specified:
(i) "Tenant's Proportionate Share of Expenses" means the
following: (A) for the months 1 through 12, $0.03 per rentable square foot per
month (i.e., $48.81); (B) for the months 13 through 24, $0.035 per rentable
square foot per month (i.e., $56.95); Landlord and Tenant agree that Tenant's
Proportionate Share of Expenses is the stipulated amount of the costs and
expenses relating to Landlord's and operation of the Project and the Building
which Tenant is to pay and Landlord's agreement to accept such amount and
Tenant's agreement to pay such amount shall not be affected by the possibility
that Tenant's share of actual costs and expenses might be higher or lower than
such stipulated amount.
(ii) "Insurance Expense" means the total costs and expenses paid
or incurred by Landlord in connection with the obtaining of insurance on the
Premises, the Building and/or the Project or any part thereof or interest
therein, including, without limitation, premiums for "all risk" fire and
extended coverage insurance, commercial general liability insurance, rent loss
or abatement insurance, earthquake insurance, flood or
3
LA PALMA/MODIFIED GROSS
<PAGE>
surface water coverage, and other insurance as Landlord deems necessary in its
sole discretion, and any deductibles paid under policies of any such insurance.
(iii) "Taxes" means all real estate taxes and assessments, which
shall include any form of tax, assessment, fee, license fee, business license
fee, levy, penalty (if a result of Tenant's delinquency), or tax (other than net
income, estate, succession, inheritance, transfer or franchise taxes), imposed
by any authority having the direct or indirect power to tax, or by any city,
county, state or federal government or any improvement or other district or
division thereof, whether such tax is (i) determined by the area of the
Premises, the Building and/or the Project or any part thereof, or the Rent and
other sums payable hereunder by Tenant or by other tenants, including, but not
limited to, any gross income or excise tax levied by any of the foregoing
authorities with respect to receipt of Rent and/or other sums due under this
Lease; (ii) upon any legal or equitable interest of Landlord in the Premises,
the Building and/or the Project or any part thereof, (iii) upon this transaction
or any document to which Tenant is a party creating or transferring any interest
in the Premises, the Building and/or the Project; (iv) levied or assessed in
lieu of, in substitution for, or in addition to, existing or additional taxes
against the Premises, the Building and/or the Project, whether or not now
customary or within the contemplation of the parties; or (v) surcharged against
the parking area. Tenant and Landlord acknowledge that Proposition 13 was
adopted by the voters of the State of California in the June, 1978 election and
that assessments, taxes, fees, levies and charges may be imposed by governmental
agencies for such purposes as fire protection, street, sidewalk, road, utility
construction and maintenance, refuse removal and for other governmental services
which may formerly have been provided without charge to property owners or
occupants. It is the intention of the parties that all new and increased
assessments, taxes, fees, levies and charges due to any cause whatsoever are to
be included within the definition of real property taxes for purposes of this
Lease. "Taxes" shall also include legal and consultants' fees, costs and
disbursements incurred in connection with proceedings to contest, determine or
reduce taxes, Landlord specifically reserving the right, but not the obligation,
to contest by appropriate legal proceedings the amount or validity of any taxes.
(iv) "Base Year" shall mean the calendar year specified in the
Basic Lease Information.
(v) "Base Insurance Expenses" shall mean the amount of Insurance
Expenses for the Base Year.
(vi) "Base Taxes" shall mean the amount of Taxes for the Base
Year.
(vii) "Computation Year" shall mean each twelve (12) consecutive
month period commencing January 1 of each year during the Term following the
Base Year, provided that Landlord, upon notice to Tenant, may change the
Computation Year from
4
LA PALMA/MODIFIED GROSS
<PAGE>
time to time to any other twelve (12) consecutive month period, and, in the
event of any such change, Tenant's Proportionate Share(s) of Expenses over Base
Expenses, of Insurance Expenses over Base Insurance Expenses, and of Taxes over
Base Taxes shall be equitably adjusted for the Computation Years involved in any
such change.
(c) PAYMENT OF ADDITIONAL RENT.
(1) During the last month of the Base Year and each Computation Year
or as soon thereafter as practicable, Landlord shall give to Tenant notice of
Landlord's estimate of the total amounts that will be payable by Tenant under
Section 4(b) for the following Computation Year, and Tenant shall pay such
estimated Additional Rent on a monthly basis, in advance, on the first day of
each month. Tenant shall continue to make said monthly payments until notified
by Landlord of a change therein. If at any time or times Landlord determines
that the amounts payable under Section 4(b) for the current Computation Year
will vary from Landlord's estimate given to Tenant, Landlord, by notice to
Tenant, may revise the estimate for such Computation Year, and subsequent
payments by Tenant for such Computation Year shall be based upon such revised
estimate. By April I of each calendar year following the initial Computation
Year, Landlord shall endeavor to provide to Tenant a statement showing the
actual Additional Rent due to Landlord for the prior Computation Year. If the
total of the monthly payments of Additional Rent that Tenant has made for the
prior Computation Year is less than the actual Additional Rent chargeable to
Tenant for such prior Computation Year, then Tenant shall pay the difference in
a lump sum within ten (10) days after receipt of such statement from Landlord.
Any overpayment by Tenant of Additional Rent for the prior Computation Year
shall be credited towards the Additional Rent next due.
(2) Landlord's then-current annual operating and capital budgets for
the Building and the Project or the pertinent part thereof shall be used for
purposes of calculating Tenant's monthly payment of estimated Additional Rent
for the current year, subject to adjustment as provided above. Landlord shall
make the final determination of Additional Rent for the year in which this Lease
terminates as soon as possible after termination of such year. Even though the
Term has expired and Tenant has vacated the Premises, Tenant shall remain liable
for payment of any amount due to Landlord in excess of the estimated Additional
Rent previously paid by Tenant, and, conversely, Landlord shall promptly return
to Tenant any overpayment. Failure of Landlord to submit statements as called
for herein shall not be deemed a waiver of Tenant's obligation to pay Additional
Rent as herein provided.
(3) With respect to Expenses which Landlord allocates to the Building,
Tenant's "Proportionate Share" shall be the percentage set forth in the Basic
Lease Information as Tenant's Proportionate Share of the Building, as adjusted
by Landlord from time to time for a remeasurement of or changes in the physical
size of the Premises or the Building, whether such changes in size are due to an
addition to or a sale or conveyance of a portion of the Building or otherwise.
With respect to Expenses which
5
LA PALMA/MODIFIED GROSS
<PAGE>
Landlord allocates to the Project as a whole or to only a portion of the
Project, Tenant's "Proportionate Share" shall be, with respect to Expenses which
Landlord allocates to the Project as a whole, the percentage set forth in the
Basic Lease Information as Tenant's Proportionate Share of the Project and, with
respect to Expenses which Landlord allocates to only a portion of the Project, a
percentage calculated by Landlord from time to time in its sole discretion and
furnished to Tenant in writing, in either case as adjusted by Landlord from time
to time for a remeasurement of or changes in the physical size of the Premises
or the Project, whether such changes in size are due to an addition to or a sale
or conveyance of a portion of the Project or otherwise. Notwithstanding the
foregoing, Landlord may equitably adjust Tenant's Proportionate Share(s) for all
or part of 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 Building and/or the Project or that varies with the occupancy of
the Building and/or the Project. Without limiting the generality of the
foregoing, Tenant understands and agrees that Landlord shall have the right to
adjust Tenant's Proportionate Share(s) of any Utility Expenses based upon
Tenant's use of the Utilities or similar services as reasonably estimated and
determined by Landlord based upon factors such as size of the Premises and
intensity of use of such Utilities by Tenant such that Tenant shall pay the
portion of such charges reasonably consistent with Tenant's use of such
Utilities and similar services. If Tenant disputes any such estimate or
determination of Utility Expenses, then Tenant shall either pay the estimated
amount or cause the Premises to be separately metered at Tenant's sole expense.
(d) GENERAL PAYMENT TERMS. The Base Rent, Additional Rent and all
other sums payable by Tenant to Landlord hereunder, including, without
limitation, payments of principal and interest on the Tenant Improvements Loan
(as defined in EXHIBIT B hereto), if any, any late charges assessed pursuant to
Paragraph 6 below and any interest assessed pursuant to Paragraph 45 below, are
referred to as the "Rent". All Rent shall be paid without deduction, offset or
abatement in lawful money of the United States of America. Checks are to be made
payable to Aetna Institutional Investors I Limited Partnership and shall be
mailed to: Trammell Crow Company, 2970 E. La Palma Avenue, Suite M, Anaheim,
California 92806, or to such other person or place as Landlord may, from time to
time, designate to Tenant in writing. The Rent for any fractional part of a
calendar month at the commencement or termination of the Lease term shall be a
prorated amount of the Rent for a full calendar month based upon a thirty (30)
day month.
5. UTILITY EXPENSES
(a) Tenant shall pay the cost of all water, sewer use, sewer discharge
fees and permit costs and sewer connection fees, gas, heat, electricity, refuse
pick-up, janitorial service, telephone and all materials and services or other
utilities (collectively, "Utilities") billed or metered separately to the
Premises and/or Tenant, together with all taxes, assessments, charges and
penalties added to or included within such cost. Tenant acknowledges that the
Premises, the Building and/or the Project may become subject to
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LA PALMA/MODIFIED GROSS
<PAGE>
the rationing of Utility services or restrictions on Utility use as required by
a public utility company, governmental agency or other similar entity having
jurisdiction thereof. Tenant acknowledges and agrees that its tenancy and
occupancy hereunder shall be subject to such rationing or restrictions as may be
imposed upon Landlord, Tenant, the Premises, the Building and/or the Project,
and Tenant shall in no event be excused or relieved from any covenant or
obligation to be kept or performed by Tenant by reason of any such rationing or
restrictions. Tenant agrees to comply with energy conservation programs
implemented by Landlord by reason of rationing, restrictions or Laws.
(b) Landlord shall not be liable for any loss, injury or damage to
property caused by or resulting from any variation, interruption, or failure of
Utilities due to any cause whatsoever, or from failure to make any repairs or
perform any maintenance. No temporary interruption or failure of such services
incident to the making of repairs, alterations, improvements, or due to
accident, strike, or conditions or other events shall be deemed an eviction of
Tenant or relieve Tenant from any of its obligations hereunder. In no event
shall Landlord be liable to Tenant for any damage to the Premises or for any
loss, damage or injury to any property therein or thereon occasioned by
bursting, rupture, leakage or overflow of any plumbing or other pipes
(including, without limitation, water, steam, and/or refrigerant lines),
sprinklers, tanks, drains, drinking fountains or washstands, or other similar
cause in, above, upon or about the Premises, the building, or the Project.
6. LATE CHARGE
Notwithstanding any other provision of this Lease, Tenant hereby
acknowledges that late payment to Landlord of Rent, or other amounts due
hereunder will cause Landlord to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. If any Rent or
other sums due from Tenant are not received by Landlord or by Landlord's
designated agent within three (3) days after their due date, then Tenant shall
pay to Landlord a late charge equal to ten percent (10%) of such overdue amount,
plus any costs and attorneys' fees incurred by Landlord by reason of Tenant's
failure to pay Rent and/or other charges when due hereunder. Landlord and Tenant
hereby agree that such late charges represent a fair and reasonable estimate of
the cost that Landlord will incur by reason of Tenant's late payment and shall
not be construed as a penalty. Landlord's acceptance of such late charges shall
not constitute a waiver of Tenant's default with respect to such overdue amount
or estop Landlord from exercising any of the other rights and remedies granted
under this Lease.
INITIALS: LANDLORD _____ TENANT _____
7. SECURITY DEPOSIT
Concurrently with Tenant's execution of the Lease, Tenant shall deposit
with Landlord the Security Deposit specified in the Basic Lease Information as
security for the
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full and faithful performance of each and every term, covenant and condition of
this Lease. Landlord may use, apply or retain the whole or any part of the
Security Deposit as may be reasonably necessary (a) to remedy Tenant's default
in the payment of any Rent, (b) to repair damage to the Premises caused by
Tenant, (c) to clean the Premises upon termination of this Lease, (d) to
reimburse Landlord for the payment of any amount which Landlord may reasonably
spend or be required to spend by reason of Tenant's default, or (e) to
compensate Landlord for any other loss or damage which Landlord may suffer by
reason of Tenant's default. Should Tenant faithfully and fully comply with all
of the terms, covenants and conditions of this Lease, within thirty (30) days
following the expiration of the Term, the Security Deposit or any balance
thereof shall be returned to Tenant or, at the option of Landlord, to the last
assignee of Tenant's interest in this Lease. Landlord shall not be required to
keep the Security Deposit separate from its general funds and Tenant shall not
be entitled to any interest on such deposit. If Landlord so uses or applies all
or any portion of said deposit, within five (5) days after written demand
therefor Tenant shall deposit cash with Landlord in an amount sufficient to
restore the Security Deposit to the full extent of the above amount, and
Tenant's failure to do so shall be a default under this Lease. In the event
Landlord transfers its interest in this Lease, Landlord shall transfer the then
remaining amount of the Security Deposit to Landlord's successor in interest,
and thereafter Landlord shall have no further liability to Tenant with respect
to such Security Deposit.
8. POSSESSION
(a) TENANT'S RIGHT OF POSSESSION. Subject to Paragraph 8(b), Tenant shall
be entitled to possession of the Premises upon commencement of the Term.
(b) DELAY IN DELIVERING POSSESSION. If for any reason whatsoever, Landlord
cannot deliver possession of the Premises to Tenant on or before the Estimated
Commencement Date, this Lease shall not be void or voidable, nor shall Landlord,
or Landlord's agents, advisors, employees, partners, shareholders, directors,
invitees or independent contractors (collectively, "Landlord's Agents"), be
liable to Tenant for any loss or damage resulting therefrom. Tenant shall not be
liable for Rent until Landlord delivers possession of the Premises to Tenant.
The Expiration Date shall be extended by the same number of days that Tenant's
possession of the Premises was delayed beyond the Estimated Commencement Date.
9. USE OF PREMISES
(a) PERMITTED USE. The use of the Premises by Tenant and Tenant's agents,
advisors, employees, partners, shareholders, directors, invitees and independent
contractors (collectively, "Tenant's Agents") shall be solely for the Permitted
Use specified in the Basic Lease Information and for no other use. Tenant shall
not permit any objectionable or unpleasant odor, smoke, dust, gas, noise or
vibration to emanate from or near the Premises. The Premises shall not be used
to create any nuisance or
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<PAGE>
trespass, for any illegal purpose, for any purpose not permitted by Laws, for
any purpose that would invalidate the insurance or increase the premiums for
insurance on the Premises, the Building or the Project or for any purpose or in
any manner that would interfere with other tenants' use or occupancy of the
Project. Tenant agrees to pay to Landlord, as Additional Rent, any increases in
premiums on policies resulting from Tenant's Permitted Use or any other use or
action by Tenant or Tenant's Agents which increases Landlord's premiums or
requires additional coverage by Landlord to insure the Premises. Tenant agrees
not to overload the floor(s) of the Building.
(b) COMPLIANCE WITH GOVERNMENTAL REGULATIONS AND PRIVATE RESTRICTIONS.
Tenant and Tenant's Agents shall, at Tenant's expense, faithfully observe and
comply with (1) all municipal, state and federal laws, statutes, codes, rules,
regulations, ordinances, requirements, and orders (collectively, "Laws"), now in
force or which may hereafter be in force pertaining to the Premises or Tenant's
use of the Premises, the Building or the Project, including without limitation,
any Laws requiring installation of fire sprinkler systems, seismic reinforcement
and related alterations, and removal of asbestos, whether substantial in cost or
otherwise, provided, however, that except as provided in Paragraph 9(c) below,
Tenant shall not be required to make or, except as provided in Paragraph 4
above, pay for, structural changes to the Premises or the Building not related
to Tenant's specific use of the Premises unless the requirement for such changes
is imposed as a result of any improvements or additions made or proposed to be
made at Tenant's request; (2) all recorded covenants, conditions and
restrictions affecting the Project ("Private Restrictions") now in force or
which may hereafter be in force; and (3) any and all rules and regulations set
forth in EXHIBIT D and any other rules and regulations now or hereafter
promulgated by Landlord related to parking or the operation of the Premises, the
Building and/or the Project (collectively, the "Rules and Regulations"). The
judgment of any court of competent jurisdiction, or the admission of Tenant in
any action or proceeding against Tenant, whether Landlord be a party thereto or
not, that Tenant has violated any such Laws or Private Restrictions, shall be
conclusive of that fact as between Landlord and Tenant.
(c) COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT. Landlord and Tenant
hereby agree and acknowledge that the Premises, the Building and/or the Project
may be subject to, among other Laws, the requirements of the Americans with
Disabilities Act, a federal law codified at 42 U.S.C. 12101 ET SEQ., including,
but not limited to Title III thereof, and all regulations and guidelines related
thereto, together with any and all laws, rules, regulations, ordinances, codes
and statutes now or hereafter enacted by local or state agencies having
jurisdiction thereof, including all requirements of Title 24 of the State of
California, as the same may be in effect on the date of this Lease and may be
thereafter modified, amended or supplemented (collectively, the "ADA"). Any
Tenant Improvements to be constructed hereunder shall be in compliance with the
requirements of the ADA, and all costs incurred for purposes of compliance
therewith shall be a part of and included in the costs of the Tenant
Improvements. Tenant shall be solely responsible for conducting its own
independent investigation of this matter and for ensuring that the
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<PAGE>
design of all Tenant Improvements strictly complies with all requirements of the
ADA. Subject to reimbursement pursuant to Paragraph 4 above, if any barrier
removal work or other work is required to the Building, the Common Areas or the
Project under the ADA, then such work shall be the responsibility of Landlord;
provided, if such work is required under the ADA as a result of Tenant's use of
the Premises or any work or Alteration (as hereinafter defined) made to the
Premises by or on behalf of Tenant, then such work shall be performed by
Landlord at the sole cost and expense of Tenant. Except as otherwise expressly
provided in this provision, Tenant shall be responsible at its sole cost and
expense for fully and faithfully complying with all applicable requirements of
the ADA, including without limitation, not discriminating against any disabled
persons in the operation of Tenant's business in or about the Premises, and
offering or otherwise providing auxiliary aids and services as, and when,
required by the ADA. Within ten (10) days after receipt, Tenant shall advise
Landlord in writing, and provide Landlord with copies of (as applicable), any
notices alleging violation of the ADA relating to any portion of the Premises,
the Building or the Project; any claims made or threatened orally or in writing
regarding noncompliance with the ADA and relating to any portion of the
Premises, the Building, or the Project; or any governmental or regulatory
actions or investigations instituted or threatened regarding noncompliance with
the ADA and relating to any portion of the Premises, the Building or the
Project. Tenant shall and hereby agrees to protect, defend (with counsel
acceptable to Landlord) and hold Landlord and Landlord's Agents harmless and
indemnify Landlord and Landlord's Agents from and against all liabilities,
damages, claims, losses, penalties, judgments, charges and expenses (including
attorneys' fees, costs of court and expenses necessary in the prosecution or
defense of any litigation including the enforcement of this provision) arising
from or in any way related to, directly or indirectly, Tenant's or Tenant's
Agents' violation or alleged violation of the ADA. Tenant agrees that the
obligations of Tenant herein shall survive the expiration or earlier termination
of this Lease.
10. ACCEPTANCE OF PREMISES
By entry hereunder, Tenant accepts the Premises as suitable for Tenant's
intended use and as being in good and sanitary operating order, condition and
repair, AS IS, and without representation or warranty by Landlord as to the
condition, use or occupancy which may be made thereof. Any exceptions to the
foregoing must be by written agreement executed by Landlord and Tenant.
11. SURRENDER
Tenant agrees that on the last day of the Term, or on the sooner
termination of this Lease, Tenant shall surrender the Premises to Landlord (a)
in good condition and repair (damage by acts of God, fire, and normal wear and
tear excepted), but with all interior walls painted or cleaned so they appear
painted, any carpets cleaned, all floors cleaned and waxed, all non-working
light bulbs and ballasts replaced and all roll-up doors and plumbing fixtures in
good condition and working order, and (b) otherwise in accordance
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<PAGE>
with Paragraph 32(h). Normal wear and tear shall not include any damage or
deterioration to the floors of the Premises arising from the use of forklifts
in, on or about the Premises (including, without limitation, any marks or stains
on any portion of the floors), and any damage or deterioration that would have
been prevented by proper maintenance by Tenant, or Tenant otherwise performing
all of its obligations under this Lease. On or before the expiration or sooner
termination of this Lease, (i) Tenant shall remove all of Tenant's Property (as
hereinafter defined) and Tenant's signage from the Premises, the Building and
the Project and repair any damage caused by such removal, and (ii) Landlord may,
by notice to Tenant given not later than ninety (90) days prior to the
Expiration Date (except in the event of a termination of this Lease prior to the
scheduled Expiration Date, in which event no advance notice shall be required),
require Tenant at Tenant's expense to remove any or all Alterations and/or the
initial Tenant Improvements constructed and installed pursuant to EXHIBIT B
hereto, and to repair any damage caused by such removal. Any of Tenant's
Property not so removed by Tenant as 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; provided, however, that
Tenant shall remain liable to Landlord for all costs incurred in storing and
disposing of such abandoned property of Tenant. All Tenant Improvements and
Alterations except those which Landlord requires Tenant to remove shall remain
in the Premises as the property of Landlord. If the Premises are not surrendered
at the end of the Term or sooner termination of this Lease, and in accordance
with the provisions of this Paragraph 11 and Paragraph 32(h) below, Tenant shall
continue to be responsible for the payment of Rent (as the same may be increased
pursuant to Paragraph 35 below) until the Premises are so surrendered in
accordance with said Paragraphs, and Tenant shall indemnify, defend and hold
Landlord harmless from and against any and all loss or liability resulting from
delay by Tenant in so surrendering the Premises including, without limitation,
any loss or liability resulting from any claim against Landlord made by any
succeeding tenant or prospective tenant founded on or resulting from such delay
and losses to Landlord due to lost opportunities to lease any portion of the
Premises to any such succeeding tenant or prospective tenant, together with, in
each case, actual attorneys' fees and costs.
12. ALTERATIONS AND ADDITIONS
(a) Tenant shall not make, or permit to be made, any alteration, addition
or improvement (hereinafter referred to individually as an "Alteration" and
collectively as the "Alterations") to the Premises or any part thereof without
the prior written consent of Landlord, which consent shall not be unreasonably
withheld; provided, however, that Landlord shall have the right in its sole and
absolute discretion to consent or to withhold its consent to any Alteration
which affects the structural portions of the Premises, the Building or the
Project or the Systems serving the Premises, the Building and/or the Project or
any portion thereof.
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<PAGE>
(b) Any Alteration to the Premises shall be at Tenant's sole cost and
expense, in compliance with all applicable Laws and all requirements requested
by Landlord, including, without limitation, the requirements of any insurer
providing coverage for the Premises or the Project or any part thereof, and in
accordance with plans and specifications approved in writing by Landlord, and
shall be constructed and installed by a contractor approved in writing by
Landlord. As a further condition to giving consent, Landlord may require Tenant
to provide Landlord, at Tenant's sole cost and expense, a payment and
performance bond in form acceptable to Landlord, in a principal amount not less
than one and one-half times the estimated costs of such Alterations, to ensure
Landlord against any liability for mechanic's and materialmen's liens and to
ensure completion of work. Before Alterations may begin, valid building permits
or other permits or licenses required must be furnished to Landlord, and, once
the Alterations begin, Tenant will diligently and continuously pursue their
completion. Landlord may monitor construction of the Alterations and Tenant
shall reimburse Landlord for its costs (including, without limitation, the costs
of any construction manager retained by Landlord) in reviewing plans and
documents and in monitoring construction. Tenant shall maintain during the
course of construction, at its sole cost and expense, builders' risk insurance
for the amount of the completed value of the Alterations on an all-risk
nonreporting form covering all improvements under construction, including
building materials, and other insurance in amounts and against such risks as
Landlord shall reasonably require in connection with the Alterations. In
addition to and without limitation on the generality of the foregoing, Tenant
shall ensure that its contractor(s) procure and maintain in full force and
effect during the course of construction a "broad form" commercial general
liability and property damage policy of insurance naming Landlord, Tenant and
Landlord's lenders as additional insureds. The minimum limit of coverage of the
aforesaid policy shall be in the amount of not less than Three Million Dollars
($3,000,000.00) for injury or death of one person in any one accident or
occurrence and in the amount of not less than Three Million Dollars
($3,000,000.00) for injury or death of more than one person in any one accident
or occurrence, and shall contain a severability of interest clause or a cross
liability endorsement. Such insurance shall further insure Landlord and Tenant
against liability for property damage of at least One Million Dollars
($1,000,000.00).
(c) All Alterations, including, but not limited to, heating, lighting,
electrical, air conditioning, fixed partitioning, drapery, wall covering and
paneling, built-in cabinet work and carpeting installations made by Tenant,
together with all property that has become an integral part of the Premises or
the Building, shall at once be and become the property of Landlord, and shall
not be deemed trade fixtures or Tenant's Property. If requested by Landlord,
Tenant will pay, prior to the commencement of construction, an amount determined
by Landlord necessary to cover the costs of demolishing such Alterations and/or
the cost of returning the Premises and the Building to its condition prior to
such Alterations.
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<PAGE>
(d) No private telephone systems and/or other related computer or
telecommunications equipment or lines may be installed without Landlord's prior
written consent. If Landlord gives such consent, all equipment must be installed
within the Premises and, at the request of Landlord made at any time prior to
the expiration of the Term, removed upon the expiration or sooner termination of
this Lease and the Premises restored to the same condition as before such
installation.
(e) Notwithstanding anything herein to the contrary, before installing any
equipment or lights which generate an undue amount of heat in the Premises, or
if Tenant plans to use any high-power usage equipment in the Premises, Tenant
shall obtain the written permission of Landlord. Landlord may refuse to grant
such permission unless Tenant agrees to pay the costs to Landlord for
installation of supplementary air conditioning capacity or electrical systems
necessitated by such equipment.
(f) Tenant agrees not to proceed to make any Alterations, notwithstanding
consent from Landlord to do so, until Tenant notifies Landlord in writing of the
date Tenant desires to commence construction or installation of such Alterations
and Landlord has approved such date in writing, in order that Landlord may post
appropriate notices to avoid any liability to contractors or material suppliers
for payment for Tenant's improvements. Tenant will at all times permit such
notices to be posted and to remain posted until the completion of work.
13. MAINTENANCE AND REPAIRS OF PREMISES
(a) MAINTENANCE BY TENANT. Throughout the Term, Tenant shall, at its sole
expense, (1) subject to Landlord's repair and maintenance obligations set forth
in Paragraph 13(b) below, keep and maintain in good order and condition the
Premises, and repair and replace every part thereof, including skylights,
interior and exterior doors, door frames and door closers, interior lighting
(including, without limitation, light bulbs and ballasts), all communications
systems serving the Premises, Tenant's signage, interior demising walls and
partitions, equipment, interior painting and interior walls and floors, (2)
furnish all expendables, including light bulbs, paper goods and soaps, used in
the Premises, and (3) keep and maintain in good order and condition, repair and
replace all of Tenant's security systems in or about or serving the Premises.
Tenant shall not do nor shall Tenant allow Tenant's Agents to do anything to
cause any damage, deterioration or unsightliness to the Premises, the Building
or the Project.
(b) MAINTENANCE BY LANDLORD. Subject to the provisions of Paragraphs
13(a), 22 and 23, and further subject to Tenant's obligation under Paragraph 4
to reimburse Landlord, in the form of Additional Rent, for Tenant's
Proportionate Share(s) of the cost and expense of the following items, Landlord
agrees to repair and maintain the following items: the glass, windows, window
frames and window casements in or on the Premises or the Building; the roof
coverings (provided that Tenant installs no additional air conditioning, or
other equipment on the roof that damages the roof coverings, in which
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<PAGE>
event Tenant shall pay all costs resulting from the presence of such additional
equipment); the roll-up doors, ramps and dock equipment, including, without
limitation, dock bumpers, dock plates, dock seals, dock levelers and dock lights
located in or on the Premises; the Parking Areas, pavement, landscaping,
sprinkler systems, sidewalks, driveways, curbs, and lighting systems in the
Common Areas; and the Systems serving the Premises and the Building; provided,
however, that with respect to the repair and maintenance of the Systems serving
the Premises, Landlord shall have the right in its sole and absolute discretion
to either allocate the cost of such repair and maintenance to Tenant and other
tenants of the Building and/or Project, as determined by Landlord, as Additional
Rent, or to separately allocate such cost and expense to Tenant as contemplated
under Paragraph 4(c)(3) above. Subject to the provisions of Paragraphs 13(a), 22
and 23, Landlord, at its own cost and expense, agrees to repair and maintain the
following items: the structural portions of the roof (specifically excluding the
roof coverings), the foundation, the footings, the floor slab, and the load
bearing walls and exterior walls of the Building (excluding any glass and any
routine maintenance, including, without limitation, any painting, sealing,
patching and waterproofing of such walls). Notwithstanding anything in this
Paragraph 13 to the contrary, Landlord shall have the right to either repair or
to require Tenant to repair any damage to any portion of the Premises, the
Building and/or the Project caused by or created due to any act, omission,
negligence or willful misconduct of Tenant or Tenant's Agents and to restore the
Premises, the Building and/or the Project, as applicable, to the condition
existing prior to the occurrence of such damage; provided, however, that in the
event Landlord elects to perform such repair and restoration work, Tenant shall
reimburse Landlord upon demand for all costs and expenses incurred by Landlord
in connection therewith. Landlord's obligation hereunder to repair and maintain
is subject to the condition precedent that Landlord shall have received written
notice of the need for such repairs and maintenance and a reasonable time to
perform such repair and maintenance. Tenant shall promptly report in writing to
Landlord any defective condition known to it which Landlord is required to
repair, and failure to so report such defects shall make Tenant responsible to
Landlord for any liability incurred by Landlord by reason of such condition.
(c) TENANT'S WAIVER OF RIGHTS. Tenant hereby expressly waives all rights
to make repairs at the expense of Landlord or to terminate this Lease, as
provided for in California Civil Code Sections 1941 and 1942, and 1932(l),
respectively, and any similar or successor statute or law in effect or any
amendment thereof during the Term.
14. LANDLORD'S INSURANCE
Landlord shall purchase and keep in force fire, extended coverage and "all
risk" insurance covering the Building and the Project. Tenant shall, at its sole
cost and expense, comply with any and all reasonable requirements pertaining to
the Premises, the Building and the Project of any insurer necessary for the
maintenance of reasonable fire and commercial general liability insurance,
covering the Building and the Project. Landlord, at Tenant's cost, may maintain
"Loss of Rents" insurance, insuring that the
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Rent will be paid in a timely manner to Landlord for a period of at least twelve
(12) months if the Premises, the Building or the Project or any portion thereof
are destroyed or rendered unusable or inaccessible by any cause insured against
under this Lease.
15. TENANT'S INSURANCE
COMMERCIAL GENERAL LIABILITY INSURANCE. Tenant shall, at Tenant's expense,
secure and keep in force a "broad form" commercial general liability insurance
and property damage policy covering the Premises, insuring Tenant, and naming
Landlord and its lenders as additional insureds, against any liability arising
out of the ownership, use, occupancy or maintenance of the Premises. The minimum
limit of coverage of such policy shall be in the amount of not less than One
Million Dollars ($1,000,000.00) for injury or death of one person in any one
accident or occurrence and in the amount of not less than One Million Dollars
($1,000,000.00) for injury or death of more than one person in any one accident
or occurrence, shall include an extended liability endorsement providing
contractual liability coverage (which shall include coverage for Tenant's
indemnification obligations in this Lease), and shall contain a severability of
interest clause or a cross liability endorsement. Such insurance shall further
insure Landlord and Tenant against liability for property damage of at least One
Million Dollars ($1,000,000.00). Landlord may from time to time require
reasonable increases in any such limits if Landlord believes that additional
coverage is necessary or desirable. The limit of any insurance shall not limit
the liability of Tenant hereunder. No policy maintained by Tenant under this
Paragraph 15(a) shall contain a deductible greater than two thousand five
hundred dollars ($2,500.00). No policy shall be cancelable or subject to
reduction of coverage without thirty (30) days prior written notice to Landlord,
and loss payable clauses shall be subject to Landlord's approval. Such policies
of insurance shall be issued as primary policies and not contributing with or in
excess of coverage that Landlord may carry, by an insurance company authorized
to do business in the State of California for the issuance of such type of
insurance coverage and rated A:XIII or better in Best's Key Rating Guide.
(a) PERSONAL PROPERTY INSURANCE. Tenant shall maintain in full force and
effect on all of its personal property, furniture, furnishings, trade or
business fixtures and equipment (collectively, "Tenant's Property") on the
Premises, a policy or policies of fire and extended coverage insurance with
standard coverage endorsement to the extent of the full replacement cost
thereof. No such policy shall contain a deductible greater than two thousand
five hundred dollars ($2,500.00). During the term of this Lease the proceeds
from any such policy or policies of insurance shall be used for the repair or
replacement of the fixtures and equipment so insured. Landlord shall have no
interest in the insurance upon Tenant's equipment and fixtures and will sign all
documents reasonably necessary in connection with the settlement of any claim or
loss by Tenant. Landlord will not carry insurance on Tenant's possessions.
(b) WORKER'S COMPENSATION INSURANCE; EMPLOYER'S LIABILITY INSURANCE.
Tenant shall, at Tenant's expense, maintain in full force and effect worker's
compensation
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insurance with not less than the minimum limits required by law, and employer's
liability insurance with a minimum limit of coverage of One Million Dollars
($1,000,000).
(c) EVIDENCE OF COVERAGE. Tenant shall deliver to Landlord certificates of
insurance and true and complete copies of any and all endorsements required
herein for all insurance required to be maintained by Tenant hereunder at the
time of execution of this Lease by Tenant. Tenant shall, at least thirty (30)
days prior to expiration of each policy, furnish Landlord with certificates of
renewal or "binders" thereof. Each certificate shall expressly provide that such
policies shall not be cancellable or otherwise subject to modification except
after thirty (30) days prior written notice to Landlord and the other parties
named as additional insureds as required in this Lease (except for cancellation
for nonpayment of premium, in which event cancellation shall not take effect
until at least ten (10) days notice has been given to Landlord).
16. INDEMNIFICATION
(a) OF LANDLORD. Tenant shall indemnify and hold harmless Landlord and
Landlord's Investment Advisor and Agent, Allegis Realty Investors LLC, against
and from any and all claims, liabilities, judgments, costs, demands, causes of
action and expenses (including, without limitation, reasonable attorneys' fees)
arising from (1) the use of the Premises, the Building or the Project by Tenant
or Tenant's Agents, or from any activity done, permitted or suffered by Tenant
or Tenant's Agents in or about the Premises, the Building or the Project, and
(2) any act, neglect, fault, willful misconduct or omission of Tenant or
Tenant's Agents, or from any breach or default in the terms of this Lease by
Tenant or Tenant's Agents, and (3) any action or proceeding brought on account
of any matter in items (1) or (2). If any action or proceeding is brought
against Landlord by reason of any such claim, upon notice from Landlord, Tenant
shall defend the same at Tenant's expense by counsel reasonably satisfactory to
Landlord. As a material part of the consideration to Landlord, Tenant hereby
releases Landlord and Landlord's Agents from responsibility for, waives its
entire claim of recovery for and assumes all risk of (i) damage to property or
injury to persons in or about the Premises, the Building or the Project from any
cause whatsoever (except that which is caused by the sole active gross
negligence or willful misconduct of Landlord or Landlord's Agents or by the
failure of Landlord to observe any of the terms and conditions of this Lease, if
such failure has persisted for an unreasonable period of time after written
notice of such failure), or (ii) loss resulting from business interruption or
loss of income at the Premises. The obligations of Tenant under this Paragraph
16 shall survive any termination of this Lease.
(b) NO IMPAIRMENT OF INSURANCE. The foregoing indemnity shall not relieve
any insurance carrier of its obligations under any policies required to be
carried by either party pursuant to this Lease, to the extent that such policies
cover the peril or occurrence that results in the claim that is subject to the
foregoing indemnity.
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17. SUBROGATION
Landlord and Tenant hereby mutually waive any claim against the other and
its Agents for any loss or damage to any of their property located on or about
the Premises, the Building or the Project that is caused by or results from
perils covered by property insurance carried by the respective parties, to the
extent of the proceeds of such insurance actually received with respect to such
loss or damage, whether or not due to the negligence of the other party or its
Agents. Because the foregoing waivers will preclude the assignment of any claim
by way of subrogation to an insurance company or any other person, each party
now agrees to immediately give to its insurer written notice of the terms of
these mutual waivers and shall have their insurance policies endorsed to prevent
the invalidation of the insurance coverage because of these waivers. Nothing in
this Paragraph 17 shall relieve a Party of liability to the other for failure to
carry insurance required by this Lease.
18. SIGNS
Tenant shall not place or permit to be placed in, upon, or about the
Premises, the Building or the Project any exterior lights, decorations,
balloons, flags, pennants, banners, advertisements or notices, 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 the Premises
without obtaining Landlord's prior written consent or without complying with
Landlord's signage criteria specified on EXHIBIT E hereto, as the same may be
modified by Landlord from time to time, and with all applicable Laws, and will
not conduct, or permit to be conducted, any sale by auction on the Premises or
otherwise on the Project. Tenant shall remove any sign, advertisement or notice
placed on the Premises, the Building or the Project by Tenant upon the
expiration of the Term or sooner termination of this Lease, and Tenant shall
repair any damage or injury to the Premises, the Building or the Project caused
thereby, all at Tenant's expense. If any signs are not removed, or necessary
repairs not made, Landlord shall have the right to remove the signs and repair
any damage or injury to the Premises, the Building or the Project at Tenant's
sole cost and expense.
19. FREE FROM LIENS
Tenant shall keep the Premises, the Building and the Project free from any
liens arising out of any work performed, material furnished or obligations
incurred by or for Tenant. In the event that Tenant shall not, within ten (10)
days following the imposition of any such lien, cause the lien to be released of
record by payment or posting of a proper bond, Landlord shall have in addition
to all other remedies provided herein and by law the right but not the
obligation to cause same to be released by such means as it shall deem proper,
including payment of the claim giving rise to such lien. All such sums paid by
Landlord and all expenses incurred by it in connection therewith (including,
without limitation, attorneys' fees) shall be payable to Landlord by Tenant upon
demand.
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<PAGE>
Landlord shall have the right at all times to post and keep posted on the
Premises any notices permitted or required by law or that Landlord shall deem
proper for the protection of Landlord, the Premises, the Building and the
Project, from mechanics' and materialmen's liens. Tenant shall give to Landlord
at least five (5) business days' prior written notice of commencement of any
repair or construction on the Premises.
20. ENTRY BY LANDLORD
Tenant shall permit Landlord and Landlord's Agents to enter into and upon
the Premises at all reasonable times, upon reasonable notice (except in the case
of an emergency, for which no notice shall be required), and subject to Tenant's
reasonable security arrangements, for the purpose of inspecting the same or
showing the Premises to prospective purchasers, lenders or tenants or to alter,
improve, maintain and repair the Premises or the Building as required or
permitted of Landlord under the terms hereof, or for any other business purpose,
without any rebate of Rent and without any liability to Tenant for any loss of
occupation or quiet enjoyment of the Premises thereby occasioned (except for
actual damages resulting from the sole active gross negligence or willful
misconduct of Landlord); and Tenant shall permit Landlord to post notices of
non-responsibility and ordinary "for sale" or "for lease" signs. No such entry
shall be construed to be a forcible or unlawful entry into, or a detainer of,
the Premises, or an eviction of Tenant from the Premises. Landlord may
temporarily close entrances, doors, corridors, elevators or other facilities
without liability to Tenant by reason of such closure in the case of an
emergency and when Landlord otherwise deems such closure necessary.
21. DESTRUCTION AND DAMAGE
(a) If the Premises are damaged by fire or other perils covered by
extended coverage insurance, Landlord shall, at Landlord's option:
(1) In the event of total destruction (which shall mean destruction or
damage in excess of twenty-five percent (25%) of the full insurable value
thereof) of the Premises, elect either to commence promptly to repair and
restore the Premises and prosecute the same diligently to completion, in which
event this Lease shall remain in full force and effect; or not to repair or
restore the Premises, in which event this Lease shall terminate. Landlord shall
give Tenant written notice of its intention within sixty (60) days after the
date (the "Casualty Discovery Date") Landlord obtains actual knowledge of such
destruction. If Landlord elects not to restore the Premises, this Lease shall be
deemed to have terminated as of the date of such total destruction.
(2) In the event of a partial destruction (which shall mean
destruction or damage to an extent not exceeding twenty-five percent (25%) of
the full insurable value thereof) of the Premises for which Landlord will
receive insurance proceeds sufficient to cover the cost to repair and restore
such partial destruction and, if the damage thereto is such that the Premises
may be substantially repaired or restored to its condition existing
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LA PALMA/MODIFIED GROSS
<PAGE>
immediately prior to such damage or destruction within one hundred eighty (180)
days from the Casualty Discovery Date, Landlord shall commence and proceed
diligently with the work of repair and restoration, in which event the Lease
shall continue in full force and effect. If such repair and restoration requires
longer than one hundred eighty (180) days or if the insurance proceeds therefor
(plus any amounts Tenant may elect or is obligated to contribute) are not
sufficient to cover the cost of such repair and restoration, Landlord may elect
either to so repair and restore, in which event the Lease shall continue in full
force and effect, or not to repair or restore, in which event the Lease shall
terminate. In either case, Landlord shall give written notice to Tenant of its
intention within sixty (60) days after the Casualty Discovery Date. If Landlord
elects not to restore the Premises, this Lease shall be deemed to have
terminated as of the date of such partial destruction.
(3) Notwithstanding anything to the contrary contained in this
Paragraph, in the event of damage to the Premises occurring during the last
twelve (12) months of the Term, Landlord may elect to terminate this Lease by
written notice of such election given to Tenant within thirty (30) days after
the Casualty Discovery Date.
(b) If the Premises are damaged by any peril not covered by extended
coverage insurance, and the cost to repair such damage exceeds any amount Tenant
may agree to contribute, Landlord may elect either to commence promptly to
repair and restore the Premises and prosecute the same diligently to completion,
in which event this Lease shall remain in full force and effect; or not to
repair or restore the Premises, in which event this Lease shall terminate.
Landlord shall give Tenant written notice of its intention within sixty (60)
days after the Casualty Discovery Date. If Landlord elects not to restore the
Premises, this Lease shall be deemed to have terminated as of the date on which
Tenant surrenders possession of the Premises to Landlord, except that if the
damage to the Premises materially impairs Tenant's ability to continue its
business operations in the Premises, then this Lease shall be deemed to have
terminated as of the date such damage occurred.
(c) Notwithstanding anything to the contrary in this Paragraph 22,
Landlord shall have the option to terminate this Lease, exercisable by notice to
Tenant within sixty (60) days after the Casualty Discovery Date, in each of the
following instances:
(1) If more than twenty-five percent (25%) of the full insurable value
of the Building or the Project is damaged or destroyed, regardless of whether or
not the Premises are destroyed.
(2) If the Building or the Project or any portion thereof is damaged
or destroyed and the repair and restoration of such damage requires longer than
one hundred eighty (180) days from the Casualty Discovery Date.
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<PAGE>
(3) If the Building or the Project or any portion thereof is damaged
or destroyed and the insurance proceeds therefor are not sufficient to cover the
costs of repair and restoration.
(4) If the Building or the Project or any portion thereof is destroyed
during the last twelve (12) months of the Term.
(d) In the event of repair and restoration as herein provided, the monthly
installments of Base Rent shall be abated proportionately in the ratio which
Tenant's use of the Premises is impaired during the period of such repair or
restoration, but only to the extent of rental abatement insurance proceeds
received by Landlord; provided, however, that Tenant shall not be entitled to
such abatement to the extent that such damage or destruction resulted from the
acts or inaction of Tenant or Tenant's Agents. Except as expressly provided in
the immediately preceding sentence with respect to abatement of Base Rent,
Tenant shall have no claim against Landlord for, and hereby releases Landlord
and Landlord's Agents from responsibility for and waives its entire claim of
recovery for any cost, loss or expense suffered or incurred by Tenant as a
result of any damage to or destruction of the Premises, the Building or the
Project or the repair or restoration thereof, including, without limitation, any
cost, loss or expense resulting from any loss of use of the whole or any part of
the Premises, the Building or the Project and/or any inconvenience or annoyance
occasioned by such damage, repair or restoration.
(e) If Landlord is obligated to or elects to repair or restore as herein
provided, Landlord shall repair or restore only the initial tenant improvements,
if any, constructed by Landlord in the Premises pursuant to the terms of this
Lease, substantially to their condition existing immediately prior to the
occurrence of the damage or destruction; and Tenant shall promptly repair and
restore, at Tenant's expense, Tenant's Alterations which were not constructed by
Landlord.
(f) Tenant hereby waives the provisions of California Civil Code Section
1932(2) and Section 1933(4) which permit termination of a lease upon destruction
of the leased premises, and the provisions of any similar law now or hereinafter
in effect, and the provisions of this Paragraph 22 shall govern exclusively in
case of such destruction.
22. CONDEMNATION
(a) If twenty-five percent (25%) or more of either the Premises, the Building or
the Project or the parking areas for the Building or the Project is taken for
any public or quasi-public Purpose by any lawful governmental power or
authority, by exercise of the right of appropriation, inverse condemnation,
condemnation or eminent domain, or sold to prevent such taking (each such event
being referred to as a "Condemnation"), Landlord may, at its option, terminate
this Lease as of the date title vests in the condemning party. If twenty-five
percent (25%) or more of the Premises is taken and if the Premises remaining
after such Condemnation and any repairs by Landlord would be untenantable
20
LA PALMA/MODIFIED GROSS
<PAGE>
for the conduct of Tenant's business operations, Tenant shall have the right to
terminate this Lease as of the date title vests in the condemning party. If
either party elects to terminate this Lease as provided herein, such election
shall be made by written notice to the other party given within thirty (30) days
after the nature and extent of such Condemnation have been finally determined.
If neither Landlord nor Tenant elects to terminate this Lease to the extent
permitted above, Landlord shall promptly proceed to restore the Premises, to the
extent of any Condemnation award received by Landlord, to substantially the same
condition as existed prior to such Condemnation, allowing for the reasonable
effects of such Condemnation, and a proportionate abatement shall be made to the
Base Rent corresponding to the time during which, and to the portion of the
floor area of the Premises (adjusted for any increase thereto resulting from any
reconstruction) of which, Tenant is deprived on account of such Condemnation and
restoration, as reasonably determined by Landlord. Except as expressly provided
in the immediately preceding sentence with respect to abatement of Base Rent,
Tenant shall have no claim against Landlord for, and hereby releases Landlord
and Landlord's Agents from responsibility for and waives its entire claim of
recovery for any cost, loss or expense suffered or incurred by Tenant as a
result of any Condemnation or the repair or restoration of the Premises, the
Building or the Project or the parking areas for the Building or the Project
following such Condemnation, including, without limitation, any cost, loss or
expense resulting from any loss of use of the whole or any part of the Premises,
the Building, the Project or the parking areas and/or any inconvenience or
annoyance occasioned by such Condemnation, repair or restoration. The provisions
of California Code of Civil Procedure Section 1265.130, which allows either
party to petition the Superior Court to terminate the Lease in the event of a
partial taking of the Premises, the Building or the Project or the parking areas
for the Building or the Project, and any other applicable law now or hereafter
enacted, are hereby waived by Tenant.
(b) Landlord shall be entitled to any and all compensation, damages, income,
rent, awards, or any interest therein whatsoever which may be paid or made in
connection with any Condemnation, and Tenant shall have no claim against
Landlord for the value of any unexpired term of this Lease or otherwise;
provided, however, that Tenant shall be entitled to receive any award separately
allocated by the condemning authority to Tenant for Tenant's relocation expenses
or the value of Tenant's Property (specifically excluding fixtures, Alterations
and other components of the Premises which under this Lease or by law are or at
the expiration of the Term will become the property of Landlord), provided that
such award does not reduce any award otherwise allocable or payable to Landlord.
23. ASSIGNMENT AND SUBLETTING
(a) Tenant shall not voluntarily or by operation of law, (1) mortgage,
pledge, hypothecate or encumber this Lease or any interest herein, (2) assign or
transfer this Lease or any interest herein, sublease the Premises or any part
thereof, or any right or privilege appurtenant thereto, or allow any other
person (the employees and invitees of Tenant excepted) to occupy or use the
Premises, or any portion thereof, without first
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LA PALMA/MODIFIED GROSS
<PAGE>
obtaining the written consent of Landlord, which consent shall not be withheld
unreasonably provided that (i) Tenant is not then in Default under this Lease
nor is any event then occurring which with the giving of notice or the passage
of time, or both, would constitute a Default hereunder, and (ii) Tenant has not
previously assigned or transferred this Lease or any interest herein or
subleased the Premises or any part thereof. When Tenant requests Landlord's
consent to such assignment or subletting, it shall notify Landlord in writing of
the name and address of the proposed assignee or subtenant and the nature and
character of the business of the proposed assignee or subtenant and shall
provide current and prior financial statements for the proposed assignee or
subtenant prepared in accordance with generally accepted accounting principles.
Tenant shall also provide Landlord with a copy of the proposed sublease or
assignment agreement, including, all material terms and conditions thereof.
Landlord shall have the option, to be exercised within thirty (30) days of
receipt of the foregoing, to (1) terminate this Lease as of the commencement
date stated in the proposed sublease or assignment, (2) sublease or take an
assignment, as the case may be, from Tenant of the interest, or any portion
thereof, in this Lease and/or the Premises that Tenant proposes to assign or
sublease, on the same terms and conditions as stated in the proposed sublet or
assignment agreement, (3) consent to the proposed assignment or sublease, or (4)
refuse its consent to the proposed assignment or sublease, providing that such
consent shall not be unreasonably withheld so long as Tenant is not then in
Default under this Lease nor is any event then occurring which with the giving
of notice or the passage of time, or both, would constitute a Default hereunder.
In the event Landlord elects to terminate this Lease or sublease or take an
assignment from Tenant of the interest, or portion thereof, in the Lease and/or
the Premises that Tenant proposes to assign or sublease as provided in the
foregoing clauses (1) and (2), respectively, then Landlord shall have the
additional right to negotiate directly with Tenant's proposed assignee or
subtenant and to enter into a direct lease or occupancy agreement with such
party on such terms as shall be acceptable to Landlord in its sole and absolute
discretion, and Tenant hereby waives any claims against Landlord related
thereto, including, without limitation, any claims for any compensation or
profit related to such lease or occupancy agreement.
(b) Without otherwise limiting the criteria upon which Landlord may
withhold its consent, Landlord shall be entitled to consider all reasonable
criteria including, but not limited to, the following: (1) whether or not the
proposed subtenant or assignee is engaged in a business which, and the use of
the Premises will be in a manner which, is in keeping with the then character
and nature of all other tenancies in the Project, (2) whether the use to be made
of the Premises by the proposed subtenant or assignee will conflict with any
so-called "exclusive" use then in favor of any other tenant of the Building, or
the Project, and whether such use would be prohibited by any other portion of
this Lease, including, but not limited to, any rules and regulations then in
effect, or under applicable Laws, and whether such use imposes a greater load
upon the Premises and the Building and Project services then imposed by Tenant,
(3) the business reputation of the proposed individuals who will be managing and
operating the business operations of the assignee or subtenant, and the
long-term financial and competitive business prospects of
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LA PALMA/MODIFIED GROSS
<PAGE>
the proposed assignee or subtenant, and (4) the creditworthiness and financial
stability of the proposed assignee or subtenant in light of the responsibilities
involved. In any event, Landlord may withhold its consent to any assignment or
sublease, if (i) the actual use proposed to be conducted in the Premises or
portion thereof conflicts with the provisions of Paragraph 8(a) or (b) above or
with any other lease which restricts the use to which any space in the Building
or the Project may be put, or (ii) the proposed assignment or sublease requires
alterations, improvements or additions to the Premises or portions thereof.
(c) If Landlord approves an assignment or subletting as herein provided,
Tenant shall pay to Landlord, as Additional Rent, the difference, if any,
between (1) the Base Rent plus Additional Rent allocable to that part of the
Premises affected by such assignment or sublease pursuant to the provisions of
this Lease, and (2) the rent and any additional rent payable by the assignee or
sublessee to Tenant, less reasonable and customary market-based leasing
commissions, if any, incurred by Tenant in connection with such assignment or
sublease. The assignment or sublease agreement, as the case may be, after
approval by Landlord, shall not be amended without Landlord's prior written
consent, and shall contain a provision directing the assignee or subtenant to
pay the rent and other sums due thereunder directly to Landlord upon receiving
written notice from Landlord that Tenant is in default under this Lease with
respect to the payment of Rent. In the event that, notwithstanding the giving of
such notice, Tenant collects any rent or other sums from the assignee or
subtenant, then Tenant shall hold such sums in trust for the benefit of Landlord
and shall immediately forward the same to Landlord. Landlord's collection of
such rent and other sums shall not constitute an acceptance by Landlord of
attornment by such assignee or subtenant. A consent to one assignment,
subletting, occupation or use shall not be deemed to be a consent to any other
or subsequent assignment, subletting, occupation or use, and consent to any
assignment or subletting shall in no way relieve Tenant of any liability under
this Lease. Any assignment or subletting without Landlord's consent shall be
void, and shall, at the option of Landlord, constitute a Default under this
Lease.
(d) 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 assignment or subletting).
(e) Tenant shall pay Landlord's reasonable fees (including, without
limitation, the fees of Landlord's counsel), incurred in connection with
Landlord's review and processing of documents regarding any proposed assignment
or sublease.
(f) Notwithstanding anything in this Lease to the contrary, in the event
Landlord consents to an assignment or subletting by Tenant in accordance with
the terms of this Paragraph 24, Tenant's assignee or subtenant shall have no
right to further assign this
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LA PALMA/MODIFIED GROSS
<PAGE>
Lease or any interest therein or thereunder or to further sublease all or any
portion of the Premises. In furtherance of the foregoing, Tenant acknowledges
and agrees on behalf of itself and any assignee or subtenant claiming under it
(and any such assignee or subtenant by accepting such assignment or sublease
shall be deemed to acknowledge and agree) that no sub-subleases or further
assignments of this Lease shall be permitted at any time.
(g) Tenant acknowledges and agrees that the restrictions, conditions and
limitations imposed by this Paragraph 24 on Tenant's ability to assign or
transfer this Lease or any interest herein, to sublet the Premises or any part
thereof, to transfer or assign any right or privilege appurtenant to the
Premises, or to allow any other person to occupy or use the Premises or any
portion thereof, are, for the purposes of California Civil Code Section 1951.4,
as amended from time to time, and for all other purposes, reasonable at the time
that the Lease was entered into, and shall be deemed to be reasonable at the
time that Tenant seeks to assign or transfer this Lease or any interest herein,
to sublet the Premises or any part thereof, to transfer or assign any right or
privilege appurtenant to the Premises, or to allow any other person to occupy or
use the Premises or any portion thereof.
24. TENANT'S DEFAULT
The occurrence of any one of the following events shall constitute an
event of default on the part of Tenant ("Default"):
(a) The vacation or abandonment of the Premises by Tenant for a period of
ten (10) consecutive days or any vacation or abandonment of the Premises by
Tenant which would cause any insurance policy to be invalidated or otherwise
lapse, or the failure of Tenant to continuously operate Tenant's business in the
Premises, in each of the foregoing cases irrespective of whether or not Tenant
is then in monetary default under this Lease. Tenant agrees to notice and
service of notice as provided for in this Lease and waives any right to any
other or further notice or service of notice which Tenant may have under any
statute or law now or hereafter in effect;
(b) Failure to pay any installment of Rent or any other monies due and
payable hereunder, said failure continuing for a period of three (3) days after
the same is due;
(c) A general assignment by Tenant or any guarantor or surety of Tenant's
obligations hereunder (collectively, "Guarantor") for the benefit of creditors;
(d) The filing of a voluntary petition in bankruptcy by Tenant or any
Guarantor, the filing by Tenant or any Guarantor of a voluntary petition for an
arrangement, the filing by or against Tenant or any Guarantor of a petition,
voluntary or involuntary, for reorganization, or the filing of an involuntary
petition by the creditors of Tenant or any Guarantor, said involuntary petition
remaining undischarged for a period of sixty (60) days;
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LA PALMA/MODIFIED GROSS
<PAGE>
(e) Receivership, attachment, or other judicial seizure of substantially
all of Tenant's assets on the Premises, such attachment or other seizure
remaining undismissed or undischarged for a period of sixty (60) days after the
levy thereof;
(f) Death or disability of Tenant or any Guarantor, if Tenant or such
Guarantor is a natural person, or the failure by Tenant or any Guarantor to
maintain its legal existence, if Tenant or such Guarantor is a corporation,
partnership, limited liability company, trust or other legal entity;
(g) Failure of Tenant to execute and deliver to Landlord any estoppel
certificate, subordination agreement, or lease amendment within the time periods
and in the manner required by Paragraphs 30 or 31 or 42;
(h) An assignment or sublease, or attempted assignment or sublease, of
this Lease or the Premises by Tenant contrary to the provision of Paragraph 24,
unless such assignment or sublease is expressly conditioned upon Tenant having
received Landlord's consent thereto;
(i) Failure of Tenant to restore the Security Deposit to the amount and
within the time period provided in Paragraph 7 above;
(j) Failure in the performance of any of Tenant's covenants, agreements or
obligations hereunder (except those failures specified as events of Default in
subparagraphs (b), (1) or (m) above or any other subparagraphs of this Paragraph
25, which shall be governed by such other Paragraphs), which failure continues
for ten (10) days after written notice thereof from Landlord to Tenant, provided
that, if Tenant has exercised reasonable diligence to cure such failure and such
failure cannot be cured within such ten (10) day period despite reasonable
diligence, Tenant shall not be in default under this subparagraph so long as
Tenant thereafter diligently and continuously prosecutes the cure to completion
and actually completes such cure within thirty (30) days after the giving of the
aforesaid written notice;
(k) Chronic delinquency by Tenant in the payment of Rent, or any other
periodic payments required to be paid by Tenant under this Lease. "Chronic
delinquency" shall mean failure by Tenant to pay Rent, or any other payments
required to be paid by Tenant under this Lease within three (3) days after
written notice thereof for any three (3) months (consecutive or nonconsecutive)
during any period of twelve (12) months. In the event of a Chronic Delinquency,
in addition to Landlord's other remedies for Default provided in this Lease, at
Landlord's option, Landlord shall have the right to require that Rent be paid by
Tenant quarterly, in advance;
(1) Chronic overuse by Tenant or Tenant's Agents of the number of
undesignated parking spaces set forth in the Basic Lease Information. "Chronic
Overuse" shall mean use by Tenant or Tenant's Agents of a number of parking
spaces greater than the number
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LA PALMA/MODIFIED GROSS
<PAGE>
of parking spaces set forth in the Basic Lease Information more than three (3)
times during the Term after written notice by Landlord;
(m) Any insurance required to be maintained by Tenant pursuant to this
Lease shall be canceled or terminated or shall expire or be reduced or
materially changed, except as permitted in this Lease; and
(n) Any failure by Tenant to discharge any lien or encumbrance placed on
the Project or any part thereof in violation of this Lease within ten (10) days
after the date such lien or encumbrance is filed or recorded against the Project
or any part thereof.
Tenant agrees that any notice given by Landlord pursuant to Paragraph
25(j), (k) or (1) above shall satisfy the requirements for notice under
California Code of Civil Procedure Section 1161, and Landlord shall not be
required to give any additional notice in order to be entitled to commence an
unlawful detainer proceeding.
25. LANDLORD'S REMEDIES
(a) TERMINATION. In the event of any Default by Tenant, then in addition
to any other remedies available to Landlord at law or in equity and under this
Lease, Landlord shall have the immediate option to terminate this Lease and all
rights of Tenant hereunder by giving written notice of such intention to
terminate. In the event that Landlord shall elect to so terminate this Lease
then Landlord may recover from Tenant:
(1) the worth at the time of award of any unpaid Rent and any other
sums due and payable which have been earned at the time of such termination;
plus
(2) the worth at the time of award of the amount by which the unpaid
Rent and any other sums due and payable which would have been earned after
termination until the time of award exceeds the amount of such rental loss
Tenant proves could have been reasonably avoided; plus
(3) the worth at the time of award of the amount by which the unpaid
Rent and any other sums due and payable for the balance of the term of this
Lease after the time of award exceeds the amount of such rental loss that Tenant
proves could be reasonably avoided; plus
(4) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course would be likely to result
therefrom, including, without limitation, (A) any costs or expenses incurred by
Landlord (1) in retaking possession of the Premises; (2) in maintaining,
repairing, preserving, restoring, replacing, cleaning, altering, remodeling or
rehabilitating the Premises or any affected portions of the Building or the
Project, including such actions undertaken in connection with the reletting or
attempted reletting of the Premises to a new tenant or tenants; (3) for leasing
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LA PALMA/MODIFIED GROSS
<PAGE>
commissions, advertising costs and other expenses of reletting the Premises; or
(4) in carrying the Premises, including, taxes, insurance premiums, utilities
and security precautions; (B) any unearned brokerage commissions paid in
connection with this Lease; (C) reimbursement of any previously waived or abated
Base Rent or Additional Rent or any free rent or reduced rental rate granted
hereunder; and (D) any concession made or paid by Landlord to the benefit of
Tenant in consideration of this Lease including, but not limited to, any moving
allowances, contributions, payments or loans by Landlord for tenant improvements
or build-out allowances (including without limitation, any unamortized portion
of the Tenant Improvement Allowance (such Tenant Improvement Allowance to be
amortized over the Term in the manner reasonably determined by Landlord), if
any, and any outstanding balance (principal and accrued interest) of the Tenant
Improvement Loan, if any), or assumptions by Landlord of any of Tenant's
previous lease obligations; plus
(5) such reasonable attorneys' fees incurred by Landlord as a result
of a Default, and costs in the event suit is filled by Landlord to enforce such
remedy; and plus
(6) at Landlord's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by applicable law.
As used in subparagraphs (1) and (2) above, the "worth at the time of award" is
computed by allowing, interest at an annual rate equal to twelve percent (12%)
per annum or the maximum rate permitted by law, whichever is less. As used in
subparagraph (3) above, the "worth at the time of award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award, plus one percent (1%). Tenant waives redemption
or relief from forfeiture under California Code of Civil Procedure Sections 1174
and 1179, or under any other pertinent present or future Law, in the event
Tenant is evicted or Landlord takes possession of the Premises by reason of any
Default of Tenant hereunder.
(b) CONTINUATION OF LEASE. In the event of any Default by Tenant, then in
addition to any other remedies available to Landlord at law or in equity and
under this Lease, Landlord shall have the remedy described in California Civil
Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant's
Default and abandonment and recover Rent as it becomes due, provided Tenant has
the right to sublet or assign, subject only to reasonable limitations). In
addition, Landlord shall not be liable in any way whatsoever for its failure or
refusal to relet the Premises. For purposes of this Paragraph 26(b), the
following, acts by Landlord will not constitute the termination of Tenant's
right to possession of the Premises:
(1) Acts of maintenance or preservation or efforts to relet the
Premises, including, but not limited to, alterations, remodeling, redecorating,
repairs, replacements and/or painting as Landlord shall consider advisable for
the purpose of reletting the Premises or any part thereof; or
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<PAGE>
(2) The appointment of a receiver upon the initiative of Landlord to
protect Landlord's interest under this Lease or in the Premises.
(c) RE-ENTRY. In the event of any Default by Tenant, Landlord shall also
have the right, with or without terminating this Lease, in compliance with
applicable law, to reenter the Premises and remove all persons and property from
the Premises; such property may be removed and stored in a public warehouse or
elsewhere at the cost of and for the account of Tenant.
(d) RELETTING. In the event of the abandonment of the Premises by Tenant
or in the event that Landlord shall elect to re-enter as provided in Paragraph
26(c) or shall take possession of the Premises pursuant to legal proceeding or
pursuant to any notice provided by law, then if Landlord does not elect to
terminate this Lease as provided in Paragraph 26(a), Landlord may from time to
time, without terminating this Lease, relet the Premises or any part thereof for
such term or terms and at such rental or rentals and upon such other terms and
conditions as Landlord in its sole discretion may deem advisable with the right
to make alterations and repairs to the Premises in Landlord's sole discretion.
In the event that Landlord shall elect to so relet, then rentals received by
Landlord from such reletting shall be applied in the following order: (1) to
reasonable attorneys' fees incurred by Landlord as a result of a Default and
costs in the event suit is filed by Landlord to enforce such remedies; (2) to
the payment of any indebtedness other than Rent due hereunder from Tenant to
Landlord; (3) to the payment of any costs of such reletting; (4) to the payment
of the costs of any alterations and repairs to the Premises; (5) to the payment
of Rent due and Unpaid hereunder; and (6) the residue, if any, shall be held by
Landlord and applied in payment of future Rent and other sums payable by Tenant
hereunder as the same may become due and payable hereunder. Should that portion
of such rentals received from such reletting during any month, which is applied
to the payment of Rent hereunder, be less than the Rent payable during the month
by Tenant hereunder, then Tenant shall pay such deficiency to Landlord. Such
deficiency shall be calculated and paid monthly. Tenant shall also pay to
Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in
such reletting or in making such alterations and repairs not covered by the
rentals received from such reletting.
(e) TERMINATION. No re-entry or taking of possession of the Premises by
Landlord pursuant to this Paragraph 26 shall be construed as an election to
terminate this Lease unless a written notice of such intention is given to
Tenant or unless the termination thereof is decreed by a court of competent
jurisdiction. Notwithstanding any reletting without termination by Landlord
because of any Default by Tenant, Landlord may at any time after such reletting
elect to terminate this Lease for any such Default.
(f) CUMULATIVE REMEDIES. The remedies herein provided are not exclusive
and Landlord shall have any and all other remedies provided herein or by law or
in equity.
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<PAGE>
(g) NO SURRENDER. No act or conduct of Landlord, whether consisting of the
acceptance of the keys to the Premises, or otherwise, shall be deemed to be or
constitute an acceptance of the surrender of the Premises by Tenant prior to the
expiration of the Term, and such acceptance by Landlord of surrender by Tenant
shall only flow from and must be evidenced by a written acknowledgment of
acceptance of surrender signed by Landlord. The surrender of this Lease by
Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects
in writing that such merger take place, but shall operate as an assignment to
Landlord of any and all existing subleases, or Landlord may, at its option,
elect in writing to treat such surrender as a merger terminating Tenant's estate
under this Lease, and thereupon Landlord may terminate any or all such subleases
by notifying the sublessee of its election so to do within five (5) days after
such surrender.
26. LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS
(a) Without limiting the rights and remedies of Landlord contained in
Paragraph 26 above, if Tenant shall be in Default in the performance of any of
the terms, provisions, covenants or conditions to be performed or complied with
by Tenant pursuant to this Lease, then Landlord may at Landlord's option,
without any obligation to do so, and without notice to Tenant perform any such
term, provision, covenant, or condition, or make any such payment and Landlord
by reason of so doing shall not be liable or responsible for any loss or damage
thereby sustained by Tenant or anyone holding under or through Tenant or any of
Tenant's Agents.
(b) Without limiting the rights of Landlord under Paragraph 26(a) above,
Landlord shall have the right at Landlord's option, without any obligation to do
so, to perform any of Tenant's covenants or obligations under this Lease without
notice to Tenant in the case of an emergency, as determined by Landlord in its
sole and absolute judgment, or if Landlord otherwise determines in its sole
discretion that such performance is necessary or desirable for the proper
management and operation of the Building or the Project or for the preservation
of the rights and interests or safety of other tenants of the Building or the
Project.
(c) If Landlord performs any of Tenant's obligations hereunder in
accordance with this Paragraph 26, the full amount of the cost and expense
incurred or the payment so made or the amount of the loss so sustained shall
immediately be owing by Tenant to Landlord, and Tenant shall promptly pay to
Landlord upon demand, as Additional Rent, the full amount thereof with interest
thereon from the date of payment by Landlord at the lower of (1) ten percent
(10%) per annum, or (2) the highest rate permitted by applicable law.
27. ATTORNEY'S FEES
(a) If either party hereto fails to perform any of its obligations under
this Lease or if any dispute arises between the parties hereto concerning the
meaning or interpretation
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<PAGE>
of any provision of this Lease, then the defaulting, party or the party not
prevailing in such dispute, as the case may be, shall pay any and all costs and
expenses incurred by the other party on account of such default and/or in
enforcing or establishing its rights hereunder, including, without limitation,
court costs and reasonable attorneys' fees and disbursements. Any such
attorneys' fees and other expenses incurred by either party in enforcing a
judgment in its favor under this Lease shall be recoverable separately from and
in addition to any other amount included in such judgment, and such attorneys'
fees obligation is intended to be severable from the other provisions of this
Lease and to survive and not be merged into any such judgment.
(b) Without limiting the generality of Paragraph 27(a) above, if Landlord
utilizes the services of an attorney for the purpose of collecting any Rent due
and unpaid by Tenant or in connection with any other breach of this Lease by
Tenant, Tenant agrees to pay Landlord actual attorneys' fees as determined by
Landlord for such services, regardless of the fact that no legal action may be
commenced or filed by Landlord.
28. TAXES
Tenant shall be liable for and shall pay, prior to delinquency, all taxes
levied against Tenant's Property. If any Alteration installed by Tenant pursuant
to Paragraph 11 or any of Tenant's Property is assessed and taxed with the
Project or Building, Tenant shall pay such taxes to Landlord within ten (10)
days after delivery to Tenant of a statement therefor.
29. EFFECT OF CONVEYANCE
The term "Landlord" as used in this Lease means, from time to time, the
then current owner of the Building or the Project containing the Premises, so
that, in the event of any sale of the Building or the Project, Landlord shall be
and hereby is entirely freed and relieved of all covenants and obligations of
Landlord hereunder, and it shall be deemed and construed, without further
agreement between the parties and the purchaser at any such sale, that the
purchaser of the Building or the Project has assumed and agreed to carry out any
and all covenants and obligations of Landlord hereunder.
30. TENANT'S ESTOPPEL CERTIFICATE
From time to time, upon written request of Landlord, Tenant shall execute,
acknowledge and deliver to Landlord or its designee, a written certificate
stating (a) the date this Lease was executed, the Commencement Date of the Term
and the date the Term expires; (b) the date Tenant entered into occupancy of the
Premises; (c) the amount of Rent and the date to which such Rent has been paid;
(d) that this Lease is in full force and effect and has not been assigned,
modified, supplemented or amended in any way (or, if assigned, modified,
supplemented or amended, specifying the date and terms of any agreement so
affecting this Lease); (e) that this Lease represents the entire agreement
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<PAGE>
between the parties with respect to Tenant's right to use and occupy the
Premises (or specifying such other agreements, if any); (f) that all obligations
under this Lease to be performed by Landlord as of the date of such certificate
have been satisfied (or specifying those as to which Tenant claims that Landlord
has yet to perform); (g) that all required contributions by Landlord to Tenant
on account of Tenant's improvements have been received (or stating exceptions
thereto); (h) that on such date there exist no defenses or offsets that Tenant
has against the enforcement of this Lease by Landlord (or stating exceptions
thereto); (i) that no Rent or other sum payable by Tenant hereunder has been
paid more than one (1) month in advance (or stating exceptions thereto); (j)
that security has been deposited with Landlord, stating the original amount
thereof and any increases thereto; and (k) any other matters evidencing the
status of this Lease that may be required either by a lender making a loan to
Landlord to be secured by a deed of trust covering the Building or the Project
or by a purchaser of the Building or the Project. Any such certificate delivered
pursuant to this Paragraph 30 may be relied upon by a prospective purchaser of
Landlord's interest or a mortgagee of Landlord's interest or assignee of any
mortgage upon Landlord's interest in the Premises. If Tenant shall fail to
provide such certificate within ten (10) days of receipt by Tenant of a written
request by Landlord as herein provided, such failure shall, at Landlord's
election, constitute a Default under this Lease, and Tenant shall be deemed to
have given such certificate as above provided without modification and shall be
deemed to have admitted the accuracy of any information supplied by Landlord to
a prospective purchaser or mortgagee.
31. SUBORDINATION
Landlord shall have the right to cause this Lease to be and remain subject
and subordinate to any and all mortgages, deeds of trust and ground leases, if
any ("Encumbrances") that are now or may hereafter be executed covering the
Premises, or any renewals, modifications, consolidations, replacements or
extensions thereof, for the full amount of all advances made or to be made
thereunder and without regard to the time or character of such advances,
together with interest thereon and subject to all the terms and provisions
thereof; provided only, that in the event of termination of any such ground
lease or upon the foreclosure of any such mortgage or deed of trust, so long as
Tenant is not in default, the holder thereof ("Holder") shall agree to recognize
Tenant's rights under this Lease as long as Tenant shall pay the Rent and
observe and perform all the provisions of this Lease to be observed and
performed by Tenant. Within ten (10) days after Landlord's written request,
Tenant shall execute, acknowledge and deliver any and all reasonable documents
required by Landlord or the Holder to effectuate such subordination. If Tenant
fails to do so, such failure shall constitute a Default by Tenant under this
Lease. Notwithstanding anything to the contrary set forth in this Paragraph 31,
Tenant hereby attorns and agrees to attorn to any person or entity purchasing or
otherwise acquiring the Premises at any sale or other proceeding or pursuant to
the exercise of any other rights, powers or remedies under such Encumbrance.
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<PAGE>
32. ENVIRONMENTAL CONVENANTS
(a) Prior to executing this Lease, Tenant has completed, executed and
delivered to Landlord a Hazardous Materials Disclosure Certificate ("Initial
Disclosure Certificate"), a fully completed copy of which is attached hereto as
EXHIBIT F and incorporated herein by this reference. Tenant covenants,
represents and warrants to Landlord that the information on the Initial
Disclosure Certificate is true and correct and accurately describes the
Hazardous Materials which will be manufactured, treated, used or stored on or
about the Premises by Tenant or Tenant's Agents. Tenant shall, on each
anniversary of the Commencement Date and at such other times as Tenant desires
to manufacture, treat, use or store on or about the Premises new or additional
Hazardous Materials which were not listed on the Initial Disclosure Certificate,
complete, execute and deliver to Landlord an updated Disclosure Certificate
(each, an "Updated Disclosure Certificate") describing Tenant's then current and
proposed future uses of Hazardous Materials on or about the Premises, which
Updated Disclosure Certificates shall be in the same format as that which is set
forth in EXHIBIT F or in such updated format as Landlord may require from time
to time. Tenant shall deliver an Updated Disclosure Certificate to Landlord not
less than thirty (30) days prior to the date Tenant intends to commence the
manufacture, treatment, use or storage of new or additional Hazardous Materials
on or about the Premises, and Landlord shall have the right to approve or
disapprove such new or additional Hazardous Materials in its sole and absolute
discretion. Tenant shall make no use of Hazardous Materials on or about the
Premises except as described in the Initial Disclosure Certificate or as
otherwise approved by Landlord in writing in accordance with this Paragraph
32(a).
(b) As used in this Lease, the term "Hazardous Materials" shall mean and
include any substance that is or contains (1) any "hazardous substance" as now
or hereafter defined in ss. 101(14) of the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA") (42 U.S.C. ss.
9601 et seq.) or any regulations promulgated under CERCLA; (2) any "hazardous
waste" as now or hereafter defined in the Resource Conservation and Recovery
Act, as amended ("RCRA") (42 U.S.C. ss. 6901 et seq.) or any regulations
promulgated under RCRA; (3) any substance now or hereafter regulated by the
Toxic Substances Control Act, as amended ("TSCA") (15 U.S.C. ss. 2601 et seq.)
or any regulations promulgated under TSCA; (4) petroleum, petroleum by-products,
gasoline, diesel fuel, or other petroleum hydrocarbons; (5) asbestos and
asbestos-containing material, in any form, whether friable or non-friable; (6)
polychlorinated biphenyls; (7) lead and lead-containing materials; or (8) any
additional substance, material or waste (A) the presence of which on or about
the Premises (i) requires reporting, investigation or remediation under any
Environmental Laws (as hereinafter defined), (ii) causes or threatens to cause a
nuisance on the Premises or any adjacent area or property or poses or threatens
to pose a hazard to the health or safety of persons on the Premises or any
adjacent area or property, or (iii) which, if it emanated or migrated from the
Premises, could constitute a trespass, or (B) which is now
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<PAGE>
or is hereafter classified or considered to be hazardous or toxic under any
Environmental Laws.
(c) As used in this Lease, the term "Environmental Laws" shall mean and
include (1) CERCLA, RCRA and TSCA; and (2) any other federal, state or local
laws, ordinances, statutes, codes, rules, regulations, orders or decrees now or
hereinafter in effect relating to (A) pollution, (B) the protection or
regulation of human health, natural resources or the environment, (C) the
treatment, storage or disposal of Hazardous Materials, or (D) the emission,
discharge, release or threatened release of Hazardous Materials into the
environment.
(d) Tenant agrees that during its use and occupancy of the Premises it
will (1) not (A) permit Hazardous Materials to be present on or about the
Premises except in a manner and quantity necessary for the ordinary performance
of Tenant's business or (B) release, discharge or dispose of any Hazardous
Materials on, in, at, under, or emanating from, the Premises, the Building or
the Project; (2) comply with all Environmental Laws relating to the Premises and
the use of Hazardous Materials on or about the Premises and not engage in or
permit others to engage in any activity at the Premises in violation of any
Environmental Laws; and (3) immediately notify Landlord of (A) any inquiry,
test, investigation or enforcement proceeding by any governmental agency or
authority against Tenant, Landlord or the Premises, Building or Project relating
to any Hazardous Materials or under any Environmental Laws or (B) the occurrence
of any event or existence of any condition that would cause a breach of any of
the covenants set forth in this Paragraph 32.
(e) If Tenant's use of Hazardous Materials on or about the Premises
results in a release, discharge or disposal of Hazardous Materials on, in, at,
under, or emanating from, the Premises, the Building or the Project, Tenant
agrees to investigate, clean up, remove or remediate such Hazardous Materials in
full compliance with (1) the requirements of (A) all Environmental Laws and (B)
any governmental agency or authority responsible for the enforcement of any
Environmental Laws; and (2) any additional requirements of Landlord that are
reasonably necessary to protect the value of the Premises, the Building or the
Project.
(f) Upon reasonable notice to Tenant, Landlord may inspect the Premises
and surrounding areas for the Purpose of determining whether there exists on or
about the Premises any Hazardous Material or other condition or activity that is
in violation of the requirements of this Lease or of any Environmental Laws.
Such inspections may include, but are not limited to, entering the Premises or
adjacent property with drill rigs or other machinery for the purpose of
obtaining laboratory samples. Landlord shall not be limited in the number of
such inspections during the Term of this Lease. In the event (1) such
inspections reveal the presence of any such Hazardous Material or other
condition or activity in violation of the requirements of this Lease or of any
Environmental Laws, or (2) Tenant or its Agents contribute or knowingly consent
to the presence of any
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<PAGE>
Hazardous Materials in, on, under, through or about the Premises, the Building
or the Project or exacerbate the condition of or the conditions caused by any
Hazardous Materials in, on, under, through or about the Premises, the Building
or the Project, Tenant shall reimburse Landlord for the cost of such inspections
within ten (10) days of receipt of a written statement therefor. Tenant will
supply to Landlord such historical and operational information regarding the
Premises and surrounding areas as may be reasonably requested to facilitate any
such inspection and will make available for meetings appropriate personnel
having knowledge of such matters. Tenant agrees to give Landlord at least sixty
(60) days' prior notice of its intention to vacate the Premises so that Landlord
will have an opportunity to perform such an inspection prior to such vacation.
The right granted to Landlord herein to perform inspections shall not create a
duty on Landlord's part to inspect the Premises, or liability on the part of
Landlord for Tenant's use, storage, treatment or disposal of Hazardous
Materials, it being understood that Tenant shall be solely responsible for all
liability in connection therewith.
(g) Landlord shall have the right, but not the obligation, prior or
subsequent to a Default, without in any way limiting Landlord's other rights and
remedies under this Lease, to enter upon the Premises, or to take such other
actions as it deems necessary or advisable, to investigate, clean up, remove or
remediate any Hazardous Materials or contamination by Hazardous Materials
present on, in, at, under, or emanating from, the Premises, the Building or the
Project in violation of Tenant's obligations under this Lease or under any
Environmental Laws. Notwithstanding any other provision of this Lease, Landlord
shall also have the right, at its election, in its own name or as Tenant's
agent, to negotiate, defend, approve and appeal, at Tenant's expense, any action
taken or order issued by any governmental agency or authority with regard to any
such Hazardous Materials or contamination by Hazardous Materials. All costs and
expenses paid or incurred by Landlord in the exercise of the rights set forth in
this Paragraph 32 shall be payable by Tenant upon demand.
(h) Tenant shall surrender the Premises to Landlord upon the expiration or
earlier termination of this Lease free of debris, waste or Hazardous Materials
placed on, about or near the Premises by Tenant or Tenant's Agents, and in a
condition which complies with all Environmental Laws and any additional
requirements of Landlord that are reasonably necessary to protect the value of
the Premises, the Building or the Project, including, without limitation, the
obtaining of any closure permits or other governmental permits or approvals
related to Tenant's use of Hazardous Materials in or about the Premises.
Tenant's obligations and liabilities pursuant to the provisions of this
Paragraph 32 shall survive the expiration or earlier termination of this Lease.
If it is determined by Landlord that the condition of all or any portion of the
Premises, the Building, and/or the Project is not in compliance with the
provisions of this Lease with respect to Hazardous Materials, including, without
limitation, all Environmental Laws, at the expiration or earlier termination of
this Lease, then at Landlord's sole option, Landlord may require Tenant to hold
over possession of the Premises until Tenant can surrender the Premises to
Landlord in the condition in which the Premises existed as of the Commencement
Date and prior to
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<PAGE>
the appearance of such Hazardous Materials except for normal wear and tear,
including without limitation, the conduct or performance of any closures as
required by any Environmental Laws. The burden of proof hereunder shall be upon
Tenant. For purposes hereof, the term "normal wear and tear" shall not include
any deterioration in the condition or diminution of the value of any portion of
the Premises, the Building, and/or the Project in any manner whatsoever related
to directly, or indirectly, Hazardous Materials. Any such holdover by Tenant
will be with Landlord's consent, will not be terminable by Tenant in any event
or circumstance and will otherwise be subject to the provisions of Paragraph 35
of this Lease.
(i) Tenant agrees to indemnify and hold harmless Landlord from and against
any and all claims, losses (including, without limitation, loss in value of the
Premises, the Building or the Project, liabilities and expenses (including
attorney's fees)) sustained by Landlord attributable to (1) any Hazardous
Materials placed on or about the Premises, the Building or the Project by Tenant
or Tenant's Agents, or (2) Tenant's breach of any provision of this Paragraph
32.
(j) The provisions of this Paragraph 32 shall survive the expiration or
earlier termination of this Lease.
33. NOTICES
All notices and demands which are required or may be permitted to be given
to either party by the other hereunder shall be in writing and shall be sent by
United States mail, postage prepaid, certified, or by personal delivery or
overnight courier, addressed to the addressee at Tenant's Address or Landlord's
Address as specified in the Basic Lease Information, or to such other place as
either party may from time to time designate in a notice to the other party
given as provided herein. Copies of all notices and demands given to Landlord
shall additionally be sent to Landlord's property manager at the address
specified in the Basic Lease Information or at such other address as Landlord
may specify in writing from time to time. Notice shall be deemed given upon
actual receipt (or attempted delivery if delivery is refused), if personally
delivered, or one (1) business day following deposit with a reputable overnight
courier that provides a receipt, or on the third (3rd) day following deposit in
the United States mail in the manner described above.
34. WAIVER
The waiver of any breach of any term, covenant or condition of this Lease
shall not be deemed to be a waiver of such term, covenant or condition or of any
subsequent breach of the same or any other term, covenant or condition herein
contained. The subsequent acceptance of Rent by Landlord shall not be deemed to
be a waiver of any preceding breach by Tenant other than the failure of Tenant
to pay the particular rental so accepted, regardless of Landlord's knowledge of
such preceding breach at the time of
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<PAGE>
acceptance of such Rent. No delay or omission in the exercise of any right or
remedy of Landlord in regard to any Default by Tenant shall impair such a right
or remedy or be construed as a waiver. Any waiver by Landlord of any Default
must be in writing and shall not be a waiver of any other Default concerning the
same or any other provisions of this Lease.
35. HOLDING OVER
Any holding over after the expiration of the Term, without the express
written consent of Landlord, shall constitute a Default and, without limiting
Landlord's remedies provided in this Lease, such holding over shall be construed
to be a tenancy at sufferance, at a rental rate of one hundred fifty percent
(150%) of the Base Rent last due in this Lease, plus Additional Rent, and shall
otherwise be on the terms and conditions herein specified, so far as applicable;
provided, however, in no event shall any renewal or expansion option or other
similar right or option contained in this Lease be deemed applicable to any such
tenancy at sufferance. If the Premises are not surrendered at the end of the
Term or sooner termination of this Lease, and in accordance with the provisions
of Paragraphs 11 and 32(h), Tenant shall indemnify, defend and hold Landlord
harmless from and against any and all loss or liability resulting from delay by
Tenant in so surrendering the Premises including, without limitation, any loss
or liability resulting from any claim against Landlord made by any succeeding
tenant or prospective tenant founded on or resulting from such delay and losses
to Landlord due to lost opportunities to lease any portion of the Premises to
any such succeeding tenant or prospective tenant, together with, in each case,
actual attorneys' fees and costs.
36. SUCCESSORS AND ASSIGNS
The terms, covenants and conditions of this Lease shall, subject to the
provision to assignment, apply to and bind the heirs, successors, executors,
administrators and assigns of all of the parties hereto. If Tenant shall consist
of more than one entity or person, the obligations of Tenant under this Lease
shall be joint and several.
37. TIME
Time is of the essence of this Lease and each and every term, condition
and provision herein.
38. BROKERS
Landlord and Tenant each represents and warrants to the other that neither
it nor its officers or agents nor anyone acting on its behalf has dealt with any
real estate broker except the Broker(s) specified in the Basic Lease Information
in the negotiating or making of this Lease, and each party agrees to indemnify
and hold harmless the other from any claim or claims, and costs and expenses,
including attorneys' fees, incurred by
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the indemnified party in conjunction with any such claim or claims of any other
broker or brokers to a commission in connection with this Lease as a result of
the actions of the indemnifying party.
39. LIMITATION OF LIABILITY
(a) Tenant agrees that, in the event of any default or breach by Landlord
with respect to any of the terms of the Lease to be observed and performed by
Landlord (1) Tenant shall look solely to the then-current landlord's interest in
the Building for the satisfaction of Tenant's remedies for the collection of a
judgment (or other judicial process) requiring the payment of money by Landlord;
(2) no other property or assets of Landlord, its partners, shareholders,
officers, directors or any successor in interest shall be subject to levy,
execution or other enforcement procedure for the satisfaction of Tenant's
remedies; (3) no personal liability shall at any time be asserted or enforceable
against Landlord's partners or successors in interest (except to the extent
permitted in (1) above), or against Landlord's shareholders, officers or
directors, or their respective partners, shareholders, officers, directors or
successors in interest; and (4) no judgment will be taken against any partner,
shareholder, officer or director of Landlord. The provisions of this section
shall apply only to the Landlord and the parties herein described, and shall not
be for the benefit of any insurer nor any other third party.
(b) Notwithstanding anything to the contrary contained in this Lease, and
without limiting the terms of Paragraph 39 (a) above, Aetna Institutional
Investors I Limited Partnership is entering into this Lease solely on behalf of
Aetna Institutional Investors I Limited Partnership Separate Account _____,
which is a separate account as defined in Section 3(17) of the Employee
Retirement Income Security Act of 1974, as amended. Only the assets of Separate
Account _____ shall be bound for the obligations of Separate Account _____ and
Tenant shall have no resort to any other assets of Aetna Institutional Investors
I Limited Partnership for the obligations of Landlord hereunder or under any
other agreement, document or instrument executed and delivered in connection
herewith. This provision shall survive the termination or expiration of this
Lease.
40. FINANCIAL STATEMENTS
Within ten (10) days after Landlord's request, Tenant shall deliver to
Landlord the then current financial statements of Tenant (including interim
periods following the end of the last fiscal year for which annual statements
are available), prepared or compiled by a certified public accountant, including
a balance sheet and profit and loss statement for the most recent prior year,
all prepared in accordance with generally accepted accounting principles
consistently applied.
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41. RULES AND REGULATIONS
Tenant agrees to comply with such reasonable rules and regulations as
Landlord may adopt from time to time for the orderly and proper operation of the
Building and the Project. Such rules may include but shall not be limited to the
following: (a) restriction of employee parking to a limited, designated area or
areas; and (b) regulation of the removal, storage and disposal of Tenant's
refuse and other rubbish at the sole cost and expense of Tenant. The then
current rules and regulations shall be binding upon Tenant upon delivery of a
copy of them to Tenant. Landlord shall not be responsible to Tenant for the
failure of any other person to observe and abide by any of said rules and
regulations. Landlord's current rules and regulations are attached to this Lease
as EXHIBIT D.
42. MORTGAGEE PROTECTION
(a) MODIFICATIONS FOR LENDER. If, in connection with obtaining financing
for the Project or any portion thereof, Landlord's lender shall request
reasonable modifications to this Lease as a condition to such financing, Tenant
shall not unreasonably withhold, delay or defer its consent to such
modifications, provided such modifications do not materially adversely affect
Tenant's rights or increase Tenant's obligations under this Lease.
(b) RIGHTS TO CURE. Tenant agrees to give to any trust deed or mortgage
holder ("Holder"), by registered mail, at the same time as it is given to
Landlord, a copy of any notice of default given to Landlord, provided that prior
to such notice Tenant has been notified, in writing, (by way of notice of
assignment of rents and leases, or otherwise) of the address of such Holder.
Tenant further agrees that if Landlord shall have failed to cure such default
within the time provided for in this Lease, then the Holder shall have an
additional twenty (20) days after expiration of such period, or after receipt of
such notice from Tenant (if such notice to the Holder is required by this
Paragraph 42(b)), whichever shall last occur within which to cure such default
or if such default cannot be cured within that time, then such additional time
as may be necessary if within such twenty (20) days, any Holder has commenced
and is diligently pursuing the remedies necessary to cure such default
(Including, but not limited to commencement of foreclosure proceedings, if
necessary to effect such cure), in which event this Lease shall not be
terminated.
43. ENTIRE AGREEMENT
This Lease, including the Exhibits and any Addenda attached hereto, which
are hereby incorporated herein by this reference, contains the entire agreement
of the parties hereto, and no representations, inducements, promises or
agreements, oral or otherwise, between the parties, not embodied herein or
therein, shall be of any force and effect.
38
LA PALMA/MODIFIED GROSS
<PAGE>
44. INTEREST
Any installment of Rent and any other sum due from Tenant under this Lease
which is not received by Landlord within ten (10) days from when the same is due
shall bear interest from the date such payment was originally due under this
Lease until paid at an annual rate equal to the maximum rate of interest
permitted by law. Payment of such interest shall not excuse or cure any Default
by Tenant. In addition, Tenant shall pay all costs and attorneys' fees incurred
by Landlord in collection of such amounts.
45. CONSTRUCTION
This Lease shall be construed and interpreted in accordance with the laws
of the State of California. The parties acknowledge and agree that no rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall be employed in the interpretation of this Lease, including
the Exhibits and any Addenda attached hereto. All captions in this Lease are for
reference only and shall not be used in the interpretation of this Lease.
Whenever required by the context of this Lease, the singular shall include the
plural, the masculine shall include the feminine, and vice versa. If any
provision of this Lease shall be determined to be illegal or unenforceable, such
determination shall not affect any other provision of this Lease and all such
other provisions shall remain in full force and effect.
46. REPRESENTATIONS AND WARRANTIES OF TENANT
Tenant hereby makes the following representations and warranties, each of
which is material and being relied upon by Landlord, is true in all respects as
of the date of this Lease, and shall survive the expiration or termination of
the Lease.
(a) If Tenant is an entity, Tenant is duly organized, validly existing and
in good standing under the laws of the state of its organization and the persons
executing this Lease on behalf of Tenant have the full right and authority to
execute this Lease on behalf of Tenant and to bind Tenant without the consent or
approval of any other person or entity. Tenant has full power, capacity,
authority and legal right to execute and deliver this Lease and to perform all
of its obligations hereunder. This Lease is a legal, valid and binding
obligation of Tenant, enforceable in accordance with its terms.
(b) Tenant has not (1) made a general assignment for the benefit of
creditors, (2) filed any voluntary petition in bankruptcy or suffered the filing
of an involuntary petition by any creditors, (3) suffered the appointment of a
receiver to take possession of all or substantially all of its assets, (4)
suffered the attachment or other judicial seizure of all or substantially all of
its assets, (5) admitted in writing its inability to pay its debts as they come
due, or (6) made an offer of settlement, extension or composition to its
creditors generally.
39
LA PALMA/MODIFIED GROSS
<PAGE>
47. SECURITY
(a) Tenant acknowledges and agrees that, while Landlord may engage
security personnel to patrol the Building or the Project, Landlord is not
providing any security services with respect to the Premises, the Building or
the Project and that Landlord shall not be 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, the Building or the Project.
(b) Tenant hereby agrees to the exercise by Landlord and Landlord's
Agents, within their sole discretion, of such security measures as, but not
limited to, the evacuation of the Premises, the Building or the Project for
cause, suspected cause or for drill purposes, the denial of any access to the
Premises, the Building or the Project and other similarly related actions that
it deems necessary to prevent any threat of property damage or bodily injury.
The exercise of such security measures by Landlord and Landlord's Agents, and
the resulting interruption of service and cessation of Tenant's business, if
any, shall not be deemed an eviction or disturbance of Tenant's use and
possession of the Premises, or any part thereof, or render Landlord or
Landlord's Agents liable to Tenant for any resulting damages or relieve Tenant
from Tenant's obligations under this Lease.
48. JURY TRIAL WAIVER
Tenant hereby waives any right to trial by jury with respect to any action
or proceeding (i) brought by Landlord, Tenant or any other party, relating to
(A) this Lease and/or any understandings or prior dealings between the parties
hereto, or (B) the Premises, the Building or the Project or any part thereof, or
(ii) to which Landlord is a party. Tenant hereby agrees that this Lease
constitutes a written consent to waiver of trial by jury pursuant to the
provisions of California Code of Civil Procedure Section 631, and Tenant does
hereby constitute and appoint Landlord its true and lawful attorney-in-fact,
which appointment is coupled with an interest, and Tenant does hereby authorize
and empower Landlord, in the name, place and stead of Tenant, to file this Lease
with the clerk or judge of any court of competent jurisdiction as a statutory
written consent to waiver of trial by jury.
Landlord and Tenant have executed and delivered this Lease as of the Lease
specified in the Basic Lease Information.
40
LA PALMA/MODIFIED GROSS
<PAGE>
LANDLORD: TENANT:
AETNA INSTITUTIONAL INVESTORS Interactive Technologies, Inc.,
I LIMITED PARTNERSHIP a Minnesota Corporation
By: AETNA REAL ESTATE
PROPERTIES, INC.
Its General Partner By: /s/ Charles E. Briskey
-----------------------------------
Print Name: Charles E. Briskey
By: /s/ Sylvia Melikian Its: Vice President, Operations
----------------------------------
Sylvia Melikian
Vice President By: /s/ Charles A. Durant
-----------------------------------
Print Name: Charles A. Durant
Its: Vice President and General Counsel
41
LA PALMA/MODIFIED GROSS
EXHIBIT 10.4
LEASE AGREEMENT
This lease agreement, dated as of the 29th day of May, 1998, by and
between the G.D Package Machinery, Inc. hereinafter referred to as "Landlord",
and ITI Technologies, Inc. hereinafter referred to as "Tenant".
Witnesseth, that for and in consideration of the rent hereafter
reserved, and the convenants contained herein, the parties hereby agree as
follows:
1. LEASE PREMISES.
Landlord hereby leases to Tenant the premises situated in the County of
Chesterfield, Virginia, known and described as follows:
A portion of that development known as Southport Corporate
Center and located at 481 Southlake Boulevard. Said premises
contain 2,725 square feet of office/warehouse space. Said
premises are outlined in red on Exhibit "A" site plan, which
is attached hereto and made a part hereof, hereinafter
referred to as the "Premises".
2. TERM AND POSSESSION.
2.1 TERM. The term of this Lease shall be for thirty-six (36) months
commencing on June 1, 1998 and ending on May 30, 2001 unless sooner
terminated pursuant to any provision hereof.
3. RENT.
3.1 RENT. Tenant shall pay to Landlord as rent for the Premises the
annual sum of (see Section 3.2 below) payable without deduction or
demand, in equal monthly installments of (see Section 3.2 below)
hereinafter referred to as the "basic monthly rental", in advance on
the first day of each calendar month during the term hereof, the first
installment payable on the execution of the Lease and the remaining
installments payable on the first day of each month during the said
term to and at the office of G.D Package Machinery Inc., 501 Southlake
Blvd., Richmond, VA 23236, or at such other place as Landlord may from
time to time designate to Tenant in writing. Rent checks shall be made
payable to G.D Package Machinery Inc. Should the term of this lease
commence on a day other than the first day of a calendar month, the
parties agree that rental for the first and last month of the term
shall be pro-rated and rent for the remaining months shall be due and
payable on the first of the month as provided above.
<PAGE>
3.2 RENT SCHEDULE.
Landlord and Tenant agree that rent shall be paid as follows:
Period Annual Rent Monthly Rent
June 1, 1998 -- May 31, 1999 $17,376 $1,448
June 1. 1999 -- May 31, 2000 $17,892 $1,491
June 1, 2000 -- May 31, 2001 $18,432 $1,536
3.3 LATE CHARGE. Tenant hereby recognized and acknowledges that if
rental or other payments are not received when due, Landlord will
suffer damages and additional expense thereby and Tenant therefore
agrees, in addition to such other remedies as are available to
Landlord, to pay as additional rent (if not waived by Landlord) a late
charge equal to five percent (5%) of any sum due hereunder which is not
paid within seven (7) days of its due date. Furthermore, Landlord or
Agent shall have the right to require that rental payments be made by
certified or cashier's check.
4. SECURITY DEPOSIT.
Landlord acknowledges and agrees that the Tenant has previously
deposited with Landlord One Thousand Three Hundred Twenty-five and
no/100 dollars ($1325.00) as security for the faithful performance of
Tenant's obligations hereunder. The conditions under which Landlord
will hold (and be obligated subsequently to return) the security are as
follows:
a. Full term of Lease has expired.
b. Tenant has given Landlord at least sixty (60) days' written
notice that it will vacate the Premises.
c. Tenant does vacate the Premises at the termination of Lease
and return keys thereto.
d. Premises, inside and out, are left in "broom clean" condition
and undamaged (except ordinary wear and tear).
e. That there are no unpaid late charges, delinquent rent, court
costs or attorneys fees or other monies owed by Tenant to
Landlord.
If Tenant has complied with each of the above requirements, Landlord
agrees that said security deposit will be returned. No interest shall
be paid on the security deposit and Tenant shall not offset any payment
due hereunder by the security or any part thereof. If Tenant violates
any of the above requirements, Landlord may apply a part of, or all of
the security deposit to cover the cost of expense incurred or
deficiency existing in any monies due to the Landlord for failure to
comply with the provisions of this Lease and the matters as set forth
in paragraph 4(a) through (e) and the Landlord shall have the right to
proceed with any other legal or equitable remedies available to it.
5. USE.
The Premises shall be used and occupied for office/laboratory purposes
as allowed in the Chesterfield County M-1 Zoning classification and for
no other purpose.
<PAGE>
6. UTILITIES.
Tenant agrees to pay when due all utility charges, except water and
sewer, incurred in connection with its use and occupancy of the
Premises, including, but not limited to, electricity, fuel, gas, and
telephone (including equipment and installation charges) and to
immediately transfer all utility accounts into its own name at the
commencement of the term of this Lease (or whenever Tenant occupies the
Premises, if such occupancy is prior to the commencement of the Lease).
7. ACCEPTANCE OF PREMISES.
Except as otherwise provided in this Lease, Tenant hereby accepts the
Premises in their condition existing as of the Lease commencement date
or the date that Tenant takes possession of the Premises, whichever is
earlier, subject to all applicable zoning, municipal, county and state
laws, ordinance and regulations governing and regulating the use of the
Premises, and any easements, convenants, restrictions or other matters
of record, and accepts this Lease subject thereto and to all matters
disclosed thereby and by any exhibits attached hereto. Tenant
acknowledges that neither Landlord nor Landlord's agent has made any
representation or warranty as to the present or future of the Premises
for the conduct of Tenant's business.
<PAGE>
8. MAINTENANCE AND REPAIRS.
8.1 STRUCTURAL MAINTENANCE. Landlord shall be solely responsible for
and shall maintain in good condition and repair the roof, foundation,
exterior walls, as well as the underground pipes and conduits, and the
sprinkler system (provided that the system serves more than Tenant's
Premises): and Landlord shall make all repairs becoming necessary by
reason of any structural defect in the Premises; provided however, that
Landlord shall not be required to make any repairs necessitated by
reason of any act or omission by Tenant, its employees, agents,
licensees, invitees or anyone entering the Premises by force, but if
Landlord does make any such repairs, Tenant agrees to promptly, upon
demand, reimburse Landlord for the full costs thereof. That no
liability shall be imposed on the Landlord because of any injury or
damage to personal property. or because of any interference with the
services and facilities listed above, caused by accidents or repairs,
riots, strikes, or any other reason beyond the control of the Landlord,
and that the Landlord shall be under duty of restore any of such
services and facilities or to make any of the repairs for which the
Landlord is obligated, except after receipt of written notice from the
Tenant of a need therefore, and there shall be a reasonable period of
time within which the Landlord may make such repairs, in no event,
however, shall Landlord fail to begin making repairs within 30 days
after notice of diligently pursue such repairs to completion.
8.2 OTHER MAINTENANCE AND REPAIRS. Except as otherwise expressly
provided in Paragraph 8.1 and except to the extent a guarantor or
warrantor performs under Paragraph 7.1, Tenant shall, at its own
expense, during the full term of this Lease, keep the Premises in good
order and condition, and make all repairs and do all acts of
maintenance becoming necessary in, upon or about the Premises,
including specifically but not being limited to the, doors and door
jambs, both inside and outside, loading docks, windows, and window
casings and sills, both inside and outside, and plate or other glass
windows and doors, and to make, a Tenant's expense, all repairs and to
do all acts or maintenance becoming necessary during the term of the
Lease and to replace all worn out and broken parts of, the plumbing and
electrical systems and equipment. All plate glass and other glass which
may be damaged or broken shall be replaced by Tenant with 24 hours of
such damage.
9. ALTERATIONS.
9.1 INSTALLATION. Tenant shall not make any alterations, additions,
modifications or improvements to the Premises without the prior written
consent of the Landlord, which consent will not be unreasonably
withheld, and with the consent of any mortgagee or underlying lessor to
the extent required. If Tenant desires to make any such alterations,
etc., plans for same shall first be submitted to and approved by
Landlord and same shall be done by Tenant, at its own expense, and
Tenant agrees that all such work shall be done in a good and
workmanlike manner and in accordance with applicable laws and
regulations, that the structural integrity of the building shall not be
impaired, that no liens shall attached to the Premises by reason
thereof, and that Tenant will secure all necessary permits pertaining
to the aforementioned alterations.
<PAGE>
9.2 OWNERSHIP AND REMOVAL. The alterations, additions, modifications
and improvements referred to in Paragraph 9.1, and consented to in
writing by Landlord, shall become part of the real property as soon as
they are affixed thereto; however, Landlord may, at Landlord's option,
require that Tenant remove all or any part of said alterations prior to
the expiration of the Lease Term. If Landlord so requires, Tenant
agrees at its own expense, to remove same and to restore the Premises
to their original condition, reasonable wear and tear excepted.
10. HAZARDOUS STORAGE.
Tenant agrees that it will not store gasoline or other explosive,
flammable or toxic material in the Premises or do anything which may
cause Landlord's insurance company to void the policy covering the
Premises or to increase the premium thereon, and that Tenant will
immediately conform to all rules and regulations from time to time
established by the Landlord's insurance company or insurance rating
bureau. See Lease Addendum.
11. INSURANCE.
11.1 FIRE INSURANCE. Tenant agrees, in addition to the provisions of
Paragraph 10, that it will not do anything that will cause Landlord's
insurance against loss by fire or other hazards, as well as public
liability insurance, to be canceled or that will prevent Landlord from
procuring same in acceptable companies and at standard rates. Tenant
will further do everything reasonably possible and consistent with the
conduct of Tenant's business, to enable Landlord to obtain the lowest
possible rates for insurance on the Premises. If the cost to Landlord
of obtaining insurance on the Premises (or the building in which the
Premises are located) is increased above the first year due to the
Tenant's occupancy thereof or any increase in rate or value of the
Premises, Tenant agrees to pay, promptly upon demand, as additional
rental, any such increase.
11.2 LIABILITY INSURANCE AND INDEMNIFICATION OF LANDLORD. Landlord and
Agent shall not be liable to Tenant for and Tenant does hereby release
Landlord and Agent and their respective agents and employees from
liability for any injury, loss or damages to the Tenant or to any other
person or property occurring upon the Premises or the approaches
thereto or the parking facilities in or adjacent thereto from any cause
other than Landlord's willful negligence or gross negligence. Tenant
agrees to indemnify and save the Landlord harmless against and from any
and all liability, damages, expenses, including reasonable attorneys'
fees, except for damages caused by Landlord's willful negligence or
gross negligence, that may be brought against it, for or on account of
any damages, loss or injury to persons or property in or about the
Premises during the term of this Lease, or during any occupancy by
Tenant prior to the commencement of this Lease. Tenant further agrees
to carry, at its own expense, at all times, during the term hereof,
public liability insurance, in a form and with a company satisfactory
to Landlord's bodily injury and property damage combined single limit
policy of at least $1,000,000 or in such greater amounts as Landlord
may from time to time reasonably require. Tenant shall also carry, at
its own expense, plate glass insurance, where appropriate. All such
policies shall name the Tenant, the Landlord and Agent, as parties
insured and shall contain a provision that the same may not be canceled
without giving the Landlord and the Agent at least thirty (30)
<PAGE>
days' prior written notice. In addition, such policies or certificates
evidencing that such policies are in effect, shall be delivered to
Landlord and Agent at the commencement of the term hereof and renewals
shall be delivered at least ten (10) days prior to the expiration or
cancellation of any such policy. See Lease Addendum.
12. PERMITS -- COMPLIANCE WITH LAWS.
12.1 PERMITS.
12.2 COMPLIANCE WITH LAWS. Tenant shall thereafter promptly comply with
all statutes, laws, ordinances, orders, rules, regulations and
requirements of the Federal, State and local governments and of the
Board of Fire Underwriters applicable to Tenant's use of the Premises,
for the correction, prevention and abatement of nuisances or violations
in, upon or connected with the Premises during the term of this Lease.
Tenant shall not use nor permit the use of the Premises in any manner
that will tend to create waste or a nuisance or, if there shall be more
than one tenant in the building containing the Premises, shall tend to
disturb such other tenants.
13. ASSIGNMENT AND SUBLETTING.
Tenant agrees that it will not transfer, assign or sublet the Premises,
in whole or in part, without Landlord's prior written consent. Landlord
agrees that it will not unreasonably withhold its consent, but if such
consent if given, Tenant shall not be relieved from any liability under
this Lease. Tenant further agrees that if it wishes to assign this
Lease or sublet more than 75% of the Premises, it will first notify
Landlord in writing, and the Landlord may, by written notice to Tenant
within thirty (30) days after receipt of Tenant's notice, cancel this
Lease, in which event Landlord shall release Tenant as to liability
arising under this Lease after the date of cancellation. Consent by
Landlord to any assignment or subletting shall not constitute a waiver
of the necessity for such consent to any subsequent assignment or
subletting. This prohibition against assigning or subletting shall be
construed to include a prohibition against any assignment or subletting
by operation of law.
14. SUBORDINATION.
Unless otherwise provided in the applicable instrument, Tenant accepts
this Lease, and the tenancy created hereunder, subject and subordinate
to any underlying leases, mortgages, deeds or trust, leasehold
mortgages or other security interests now or hereafter, on request
execute any instruments that may be required by any mortgage,
mortgagee, deed of trust, trustee, or underlying owner of Landlord
hereunder to subordinate Tenant's interest hereunder to the lien of any
such mortgages, deed or deeds of trust or underlying lease, and the
failure of Tenant to execute any such instruments, leases or documents
shall constitute a default hereunder.
15. ATTORNMENT AND NON-DISTURBANCE.
Tenant agrees that upon any termination of Landlord's interest in the
Premises, Tenant will, upon request, attorn to the person or
organization then holding title to the reversion of the Premises (the
"Successor") and to all subsequent Successors, and shall pay to the
<PAGE>
Successor all rents and other monies required to be paid by the Tenant
hereunder and perform all of the other terms, convenants, conditions
and obligations contained in this Lease, provided, however, that Tenant
shall not be so obligated to attorn unless, if Tenant shall so request
in writing, such Successor will execute and deliver to Tenant an
instrument wherein such Successor agrees that so long as Tenant
performs all of the terms, convenants and conditions of this Lease,
Tenant's possession of the Premises under the Premises under the
provisions of this Lease shall not be disturbed by any such Successor.
16. PROPERTY LOSS OR DAMAGE.
16.1 Tenant hereby expressly agrees that Landlord and Agent shall not
be responsible in any manner for and does hereby release Landlord and
Agent and their respective agents and employees from any and all
liability for any damage or injury directly and indirectly caused by
(1) dampness or water, whether due to a break or leak in any part of
the roof, heating, plumbing, or other Tenant system within the
Premises, or in the building in which the Premises are located, no
matter how caused; (2) theft; (3) fire or other casualty; (4) any other
cause whatsoever unless caused by Landlord's negligence or willful
misconduct and not otherwise covered by Tenant's insurance.
16.2 Subject to the provisions of paragraph 16.1, Landlord shall not be
liable for damage or injury to person or property of Tenant or of any
other person or business unless notice in writing of any defect (a)
which Landlord has under the terms of this Lease the duty to correct
and (b) which has caused such damage or injury, shall have been given
in sufficient time before the occurrence of such damage or injury
reasonably to have enabled Landlord to correct such defect, and even
then only if such damage or injury is due to Landlord's negligence.
17. TENANT'S FAILURE TO PERFORM.
In the event that Tenant fails, after fifteen (15) days' written notice
from Landlord, to keep the Premises in good state of condition and
repair, or to commence and continuously make required repairs, or to do
any act or make any payment or perform any term or convenant on
Tenant's part required under this Lease or otherwise fails to comply
herewith, Landlord may (at its option, but without being required to do
so) immediately, or at any time thereafter and without notice perform
the same for the account of Tenant (including entering the Premises at
all reasonable hours to make repairs and do any act or make any payment
which Tenant has failed to do), and if Landlord makes any expenditures,
or incurs any obligations for the payment of money in connection
therewith, including, but not limited to, attorney's fees in
instituting prosecuting or defending any action or proceeding, such
sums paid or obligations incurred, with interest at the rate of twelve
percent (12%) per annum and costs, shall be deemed to be additional
rent hereunder and shall be paid by Tenant to Landlord within five (5)
days of rendition of any bill or statement to Tenant therefor. All
rights given to Landlord in this section shall be addition to any other
right or remedy of Landlord herein contained.
<PAGE>
18. LANDLORD'S RIGHT TO ENTER AND SHOW PREMISES.
18.1 LANDLORD'S RIGHT TO INSPECT AND REPAIR. Tenant agrees to permit
Landlord or Agent to enter the Premises at any reasonable time for the
purpose of determining the condition of the Premises and making repairs
thereto, as provided above in Paragraph 18.
18.2 LANDLORD'S RIGHT TO SHOW PREMISES. Tenant agrees that Landlord may
show prospects through the premises during normal business hours and,
within the last six months of the lease term, display a "For Lease" or
"For Sale" sign on the Premises. Landlord must cooperate with Tenant
and not detrimentally affect Tenant's business.
19. SURRENDER AT END OF TERM.
Except as otherwise provided in Paragraph 9.2, Tenant shall vacate the
Premises at the expiration or other termination of this Lease and shall
remove all goods and effects not belonging to Landlord and shall
surrender possession of the Premises and all fixtures and systems
thereof in good repair, reasonable wear and tear excepted.
20. EMINENT DOMAIN.
If the entire Premises shall be substantially taken (either temporarily
or permanently) for public purposes, or in the event Landlord shall
convey or lease the Premises to any public authority under threat or
condemnation or taking, the rent shall be adjusted to the date of such
taking or leasing or conveyance, and this Lease shall thereupon
terminate. If only a portion of the Premises shall be so taken, leased
or condemned, and a result of such partial taking, Tenant is reasonably
able to use the remainder of the Premises for the purposes intended
hereunder, then this Lease shall not terminate, but, effective as of
the date of such taking, leasing or condemnation, the rent hereunder
shall be abated in any amount thereof proportionate to the area of the
Premises so taken, leased or condemned. If, following such partial
taking, Tenant shall not be reasonably able to use the remainder of the
premises for the purposes intended hereunder, then this Lease shall
terminate as if then entire Premises had been taken, leased or
condemned. In the event of a taking, lease or condemnation as described
in this Paragraph, whether or not there is a termination hereunder,
Tenant shall have no claim against Landlord other than an adjustment of
rent to the date of taking lease or condemnation, and Tenant shall not
be entitled to any portion of any amount that may be awarded as damages
or paid as a result or in settlement of such proceedings or threat.
21. DEFAULTS - REMEDIES.
The occurrence of any one or more of the following events shall
constitute a material default and breach of this Lease of Tenant:
(a) The vacating or abandonment of the Premises by Tenant.
(b) The failure by Tenant to make any payment of rent or any other
payment required to be made by Tenant hereunder, as and when due.
Tenant shall be entitled to one written
<PAGE>
notice of late payment from Landlord per year before such an event
shall constitute a default, provided Tenant makes payment within 10
days after receipt of said notice.
(c) The failure by Tenant to observe or perform any of the convenants,
conditions or provisions of this Lease to be observed or performed by
Tenant other than described in Paragraph (b) hereinabove, where such
failure shall continue for a period of five (5) days after written
notice thereof from Landlord to Tenant; provided, however, that if the
nature of the Tenant's default is such that more than five (5) days are
reasonably required for its cure, then Tenant shall not be deemed to be
default if Tenant commences such cure within said five (5) day period
and thereafter, diligently prosecutes such cure to completion.
(d) The making by Tenant of any general assignment or general
arrangement for the benefit of creditors, filing by or against Tenant
under any law relating to bankruptcy (unless in the case of a petition
filed against Tenant, the same is dismissed within sixty (60) days, the
appointment of a Trustee or receiver to take possession of
substantially all of the Tenant's assets located in the Premises or the
Tenant's interest in this Lease where possession is not restored to
Tenant within thirty (30) days or the attachment, execution of other
judicial seizure of substantially all Tenant's assets located at the
premises or Tenant's interest in this Lease, where such seizure is not
discharged within thirty (30) days.
In the event of such material default or breach by Tenant, Landlord may
at any time hereunder, with or without notice or demand, without
limiting Landlord in the exercise of any other right or remedy which
Landlord may have hereunder or pursuant to applicable law by reason of
such default or breach, proceed in the following manner:
Notwithstanding that Landlord prior to such breach or default shall
have received rent or any payment, however designated, for the use of
the Premises from or on behalf of Tenant or from any other person and
regardless of and notwithstanding the fact that Landlord has or may
have some other remedy under this Lease or by virtue hereof or by law
or in equity, Landlord may immediately or at any time after any of such
breach or default give to Tenant a notice of termination of this Lease,
and, upon the giving of such notice, this Lease and the term and estate
hereby granted shall expire and terminate upon the day so specified in
such notice as fully and completely and with the same force and effect
as if the day so specified were the date hereinbefore fixed for the
normal expiration of the term of this Lease and all rights of Tenant
under this Lease shall expire and terminate, but Tenant shall remain
liable for damages as hereinafter provided.
Upon any such termination of this Lease, Tenant shall peaceably quit
and surrender the Premises to Landlord, and Landlord may, without
further notice, enter upon, re-enter, possess and repossess itself
thereof, by force, summary proceeding, ejectment, unlawful detainer, or
otherwise, and may dispossess and remove Tenant and all other persons
and property from the Premises, and may have, hold and enjoy the
Premises and the right to receive all rental and other income and other
income of and from the same. No re-entry by Landlord shall be deemed an
acceptance of a surrender of this Lease.
It is convenanted and agreed by Tenant that in the event of the
termination of this Lease or of re-entry by Landlord, under any
provisions of this Section or pursuant to law by reason of default
hereunder on the part of Tenant, Tenant will pay to Landlord, as
<PAGE>
damages, at the election of Landlord, sums equal to the basic rental,
additional rental and any other sums which would have been payable by
Tenant has this Lease not so terminated, payable upon the days
specified herein following such termination or such re-entry and until
the date hereinabove set for the normal expiration of the full term
hereby granted, provided, however, that if Landlord shall re-let the
Premises during said period (it being understood that Landlord has no
obligation to do so), Landlord shall credit Tenant with the net rents,
if any, received by Landlord from such re-letting, the expenses
incurred or paid by Landlord in terminating this Lease or of
re-entering the Premises and of securing possession thereof, as well as
the expenses of re-letting, including altering and preparing the
Premises for new tenants, brokers' commissions and all other expenses
chargeable against the Premises and the rental therefrom; but in no
event shall Tenant be entitled to receive any excess of such net rents
over the sums otherwise payable by Tenant to Landlord hereunder.
Suit or suits for the recovery of such damages, or any installments
thereof, may be brought by Landlord from time to time at its election,
and nothing contained herein shall be deemed to require Landlord to
postpone suit until the date when the term of this Lease would have
expired if it had not been terminated under the provisions of this
paragraph, or under any provisions of law, or had Landlord not
re-entered the Premises. Landlord shall also be entitled to collect
from Tenant any reasonable attorney's fees arising out of Tenant's
default hereunder. Landlord shall also be entitled to such other
remedies as may be available at law or in equity in the event of
default by Tenant hereunder.
Tenant, for Tenant, and on behalf of any and all persons claiming by,
through or under Tenant, including creditors of all kind, does hereby
waive and surrender all right and privilege which they or any of them
might have under or by reason of any present or future law to redeem
the Premises or to have a continuance of this Lease for the term hereby
demised after being dispossessed or ejected therefrom by process of law
or under the terms of this Lease or after the termination of this Lease
as herein provided.
22. SEVERAL LIABILITY.
If the Tenant shall be one or more individuals, corporations or other
entities, whether or not operating as a partnership or joint venture,
then each such individual, corporation, entity, joint venture or
partner shall be deemed to be both jointly and severally liable for the
payment of the entire rent and other payments specified herein and all
other duties and obligations of Tenant hereunder.
23. ESTOPPEL CERTIFICATES.
Tenant agrees at any time and from time to time upon five (5) days'
prior notice by Landlord to execute, acknowledge and deliver to
Landlord a statement in writing certifying that this Lease is
unmodified and in full force and effect (or if there have been
modifications, that the same is in full force and effect as modified
and stating the modifications) and the dates to which the rent and
other charges have been paid in advance, if any, and stating whether or
not, to the best knowledge of the signer of such certificate, Landlord
is in default in performance of any covenant, agreement or condition
contained in this Lease and, if so, specifying each such default of
which the signer may
<PAGE>
have knowledge, and such other matters as Landlord may request, it
being intended that any such statement hereunder may be relied upon by
any third party not a party to this Lease.
24. NOTICES.
Any notices required to be served in accordance with the terms of this
Lease shall be in writing and served by registered or certified mail,
or delivered in person and duly acknowledged, as follows:
To Tenant: ITI Technologies, Inc.
Attn: General Counsel
2266 Second Street North
North St. Paul, Minnesota 55109
To Landlord: G.D. Package Machinery Inc.
501 Southlake Boulevard
Richmond, Virginia 23226
Either party may at any time designate by written notice to the other a
change in the above addresses for addressees. All notices, demands and
requests which shall be served by registered or certified mail in the
manner aforesaid shall be deemed sufficiently served or given for all
purposes hereunder at the time such notice, demand or request shall be
mailed by United States registered or certified mail as aforesaid in
any Post Office or Branch Post Office regularly maintained by the
United States Government.
25. SEPARABILITY.
If any term or provision of this Lease or the application thereof to
any person or circumstances shall, to any extent, be invalid or
unenforceable, the remainder of this Lease or the application of such
term or provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, shall not be affected
thereby and each term and provision of the Lease shall be valid and
enforceable to the fullest extent permitted by law.
26. CAPTIONS.
All headings in this Lease are intended for convenience of reference
only and are not to be deemed or taken as a summary of the provisions
to which they pertain or as a construction thereof.
27. SUCCESSORS AND ASSIGNS.
Except as otherwise provided, the covenants, conditions and agreements
contained in the Lease shall bind and inure to the benefit of Landlord
and Tenant, and their respective heirs, distributees, executors,
administrators, successors and assigns.
<PAGE>
28. GOVERNING LAW.
This Lease was made in the state of Virginia and shall be governed by
and construed in all respects in accordance with the laws of the State
of Virginia.
29. INCORPORATION OF PRIOR AGREEMENTS.
This Lease contains all agreements of the parties with respect to any
matters contained herein. No prior agreement or understanding
pertaining to any such matter shall be affected. This Lease may be
modified only in writing and signed by the parties in interest at the
time of the modification.
30. CUMULATIVE REMEDY.
No remedy or election hereunder shall be deemed exclusive but shall,
wherever possible, be cumulative with all other remedies at law or in
equity.
31. ATTORNEY'S FEES.
If Landlord or Agent or Tenant brings an action to enforce the terms
hereof or declare rights hereunder, and prevails in any such action,
the prevailing party shall be entitled to reasonable attorneys' fees
from the non-prevailing parties.
32. AUCTIONS.
Tenant shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without
first having obtained Landlord's prior written consent. Notwithstanding
anything to the contrary in this lease, Landlord shall not be obligated
to exercise any standard of reasonableness in determining whether to
grant such consent.
33. RECORDING.
Either Landlord or Tenant shall, upon request of the other, execute,
acknowledge and deliver to the other a "short form" memorandum of this
lease suitable for recording purposes.
34. EASEMENTS.
Landlord reserves to itself the right, from time to time to grant such
easements, rights and dedications that Landlord deems necessary or
desirable, and to cause the recordation of Subdivision Maps and
restrictions, so long as such easements, rights, dedications, Maps and
restrictions do not unreasonably interfere with the permitted use of
the Premises by Tenant. Tenant shall sign any of the aforementioned
documents upon request of Landlord and failure to do so constitutes a
material breach of the Lease.
<PAGE>
35. AUTHORITY.
If Tenant is a corporation, trust or general or limited partnership,
each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute
and deliver this Lease on behalf of said entity. If Tenant is a
corporation, trust or partnership, Tenant shall, within thirty (30)
days after execution of the Lease, deliver to Landlord evidence of such
authority satisfactory to Landlord.
36. MISCELLANEOUS.
(a) As used in this Lease, and where the context requires: (1) the
masculine shall be deemed to include the feminine and neuter
and vice-versa; and (2) the singular shall be deemed to
include the plural and vice-versa.
(b) Tenant convenants and agrees that it shall not inscribe,
affix, or otherwise display signs, advertisements or notices
in, on, upon or behind any windows or on any door, partition
or other part of the interior or exterior of the building
without the prior written consent of the Landlord, which
consent shall be withheld at Landlord's sole discretion. If
such consent be given by Landlord, or a company approved by
Landlord, but the cost of same shall be charged to and be paid
by Tenant, and Tenant agrees to pay the same promptly, on
demand.
(c) Tenant convenants and agrees that it shall not attach or place
awnings, antennas or other projections to the outside walls or
any exterior portion of the building. No curtains, blinds,
shades or otherwise shall be attached to or hung in, or used
in connection with any window or door of the Premises, without
the prior written consent of Landlord.
(d) Tenant further convenants and agrees that it shall not pile or
place or permit to be placed any goods on the sidewalks or
parking lots in the front, rear or sides of the building, or
to block said sidewalks, parking lots and loading areas and
not to do anything that directly or indirectly will take any
of the rights or ingress or egress or of light from any other
tenant of the Landlord.
(e) Tenant waives statutory notice to quit prior to commencement
of an action for summary possession for nonpayment of rent.
(f) Except as otherwise expressly provided, Landlord and Agent
shall not be deemed to have waived any of the provisions
hereof unless the waiver be in writing and signed by the party
against whom waiver is sought to be enforced.
<PAGE>
37. ACKNOWLEDGMENT.
Landlord and Tenant agree that any previous Lease Agreement previously
entered into and executed between these two parties on the above
written premise shall be null and void, and that this Lease Agreement
shall supersede any such previously executed Lease Agreement between
these two parties.
Landlord and Tenant have carefully read and reviewed this Lease and
each term and provision contained herein and, by execution of the
Lease, show their informed and voluntary consent thereto. The parties
hereby agree that, at the time this Lease is executed, the terms of
this Lease are commercially reasonable and effectuate the intent and
purpose of Landlord and Tenant with respect to the Premises. The
Parties shall rely solely upon the advice of their own legal counsel as
to the legal and tax consequences of the Lease.
In witness whereof, Landlord and Tenant have respectively signed and
sealed this Lease of the day and year first above written.
WITNESS LANDLORD: G.D. PACKAGE MACHINERY INC.
AT VIRGINIA CORPORATION
/s/ Janet G. Workman /s/ illegible
- ------------------------------------ -----------------------------------------
BY:
WITNESS TENANT: ITI TECHNOLOGIES, INC.
A DELAWARE CORPORATION
/s/ illegible /s/ illegible
- ------------------------------------ -----------------------------------------
EXHIBIT 10.5
CONSTRUCTION AGREEMENT BETWEEN
GENERAL CONTRACTOR AND OWNER
DESIGN BUILD
THIS AGREEMENT, is made and entered into this 28th day of October, 1998
by and between Noah's Construction, Inc., a ("Contractor") and Caddx Controls,
Inc., a ("Owner").
RECITALS:
WHEREAS, Owner has title or an agreement to acquire title to certain
real property as described in Exhibit A ("Property");
WHEREAS, Owner desires that certain improvements be made on said real
property, the scope and purposes as generally outlined in the specifications and
plan as described in Exhibit B ("Project");
WHEREAS, Contractor desires to provide certain architectural,
engineering and construction services to complete Project for Owner and shall
complete detailed specifications and plans, to be set forth in Exhibit C; and
WHEREAS, Contractor and Owner desire to set forth in writing the term
and conditions of their Agreement and intend to be legally bound by their
Agreement.
NOW, THEREFORE, for and in consideration of the above premises, and of
the following terms, conditions and mutual covenants of Contractor and Owner as
hereinafter stated, IT IS HEREBY AGREED:
SECTION 1
OWNER'S OBLIGATIONS
1.01 Project. Owner shall provide Property for Project. Owner shall
furnish at Owner's expense certified surveys describing the physical
characteristics, soil reports, legal restrictions, utility locations and legal
description; and an ALTA title policy or other title report acceptable to
Contractor. Contractor shall be entitled to rely upon the accuracy and the
completeness of such information furnished by Owner.
1.02 Other Requirements. Owner shall furnish at Owner's expense all
necessary approvals; easements; assessments; expenses; building, use or
occupancy and other governmental permits and licenses required for the
construction; use or occupancy of permanent structures of Project; any bonds
that may be required; and any legal services that may be required to obtain such
items.
1.03 Owner's Participation. Owner shall timely furnish Contractor
complete information regarding Owner's requirements for Project. Owner shall
designate in writing a representative who shall have authority to approve Change
Orders and to furnish information on a timely basis. Owner shall promptly give
notice to Contractor of any known fault or defect in Project or nonconformance
with Project requirements.
1.04 Funding. Prior to Contractor commencing construction and at any
subsequent time requested by Contractor, Owner shall furnish evidence acceptable
to Contractor that sufficient funds are available and committed for the entire
Cost of Project as set forth in Section 4. If such evidence is not furnished by
Contractor, Section 8.02 shall apply.
1.05 Safety. Owner shall require and cause all of Owner's tenants and
all contractors separately hired by Owner to abide by and fully adhere to all
applicable federal, state and local safety laws and regulations and to comply
with Contractor's request for the elimination or abatement of safety hazards.
Owner shall indemnify and hold Contractor harmless from all claims and damages
arising from safety hazards caused by Owner's tenants and by separate
contractors employed by Owner. Owner shall be responsible for the elimination or
abatement of safety hazards created at Project by other persons employed by
Owner as separate contractors or by Owner's tenants.
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Owner shall cause such separate contractors and such tenants to coordinate and
cooperate with Contractor in all other respects of construction.
1.06 Subcontractors. Owner shall not have a contractual relationship
with Contractor's subcontractors and Owner shall communicate with such
subcontractors through Contractor.
SECTION 2
CONTRACTOR'S OBLIGATIONS
2.01 Design and Engineering. Based upon Owner's requirements,
Contractor shall perform the necessary design and engineering and shall prepare
detailed construction drawings and specifications to be set forth in Exhibit C
(to be signed by Owner and Contractor). Construction of Project shall be in
accordance with these drawings and specifications and with any subsequent
drawings and specifications as approved in writing by Owner and Contractor. The
drawings and specifications shall remain the property of Contractor and are not
to be used by Owner for other projects without the written consent of
Contractor.
2.02 Construction. Contractor shall be responsible for the construction
of Project and shall provide all supervision, labor, materials, tools,
machinery, equipment and other items necessary for the completion of Project.
Contractor shall use Contractor's best efforts to complete construction at the
earliest possible time and shall at all times furnish sufficient materials and
labor to assure an efficient completion of Project. Contractor is experienced
and qualified to perform the work provided for herein and shall finance its own
operations hereunder. Contractor shall operate as an independent contractor and
not as an agent of Owner.
2.03 Completion Date. The work to be performed under this Agreement
shall be substantially completed on or before the 1st day of June 1999
(Completion Date) as set forth in Paragraph 5.01, subject however, to delays
beyond the Contractor's control. In the event the work to be performed under
this Agreement shall not be substantially completed by the Completion Date, then
there shall be a penalty of -0-.
2.04 Accounting. Contractor shall keep detailed records necessary for
financial accounting of Project. Owner shall have access to Contractor's
records, drawings, receipts and similar data relating to Project. Contractor
shall specifically itemize all changes in Cost of Project and all Change Orders.
Contractor shall maintain all records for a period of three years after Final
Payment or longer where required by law.
2.05 Safety. Contractor shall take precautions for the safety of
Contractor's employees and shall comply with applicable provisions of federal,
state and local safety laws to prevent accidents or injury to persons on
Project.
2.06 Subcontracts. All construction that Contractor does not perform
shall be performed by subcontractors. The term "Subcontractor" shall not include
any separate contractor employed by Owner or such separate contractor's
subcontractors. Contractor shall be responsible for the management of
subcontractors in the performance of their work. Contractor shall cause all
subcontractors to indemnify and hold harmless Owner and Contractor form all
claims for bodily injury and property damage that may arise, other than property
damage required to be insured by Owner as set forth in Section 7.02.
2.07 Clean Conditions. Contractor shall maintain Project free from the
accumulation of construction waste and rubbish. Upon completion of Project,
Contractor shall deliver Project in a "clean" condition, free from all trash,
rubbish, debris, Contractor's tools, construction equipment and machinery,
surplus materials and inventory.
2.08 Warranties. Contractor warrants that all materials and equipment
furnished shall be new, unless otherwise specified, and that all construction
shall be of good quality, free from improper workmanship and defective materials
and in conformance with the drawings and specifications. Contractor warrants
that title to all work, materials and equipment shall pass to Owner upon
delivery to Owner free and clear of all liens, claims, security interests or
encumbrances ("Liens").
2
<PAGE>
Contractor shall correct all work performed by Contractor which proves to be
defective in material and workmanship within a period of one year from the date
of completion. Upon written notice of such defects, Contractor shall, at
Contractor's option, either make necessary repairs or request Owner to make such
repairs at Contractor's expense. Contractor will secure required certificatess
of inspection, testing or approval and any and all express warranties from
manufacturers, suppliers and subcontractors, and deliver same to Owner.
2.09 Manufactured Equipment. Contractor shall guarantee manufactured
equipment for ninety (90) days after initial use. Contractor shall collect all
warranties and equipment manuals and deliver same to Owner. Contractor shall
assist Owner's maintenance personnel with the testing and initial start up of
such systems and equipment.
SECTION 3
MUTUAL REPRESENTATIONS
3.01 Litigation. Contractor and Owner hereby warrant and represent that
neither is a party to or threatened with any litigation proceeding or
controversy before any Court or administrative agency nor in default with
respect to any judgment, order, writ, injunction, decree, rule, or regulation
before any Court or administrative agency which might result in any adverse
effect on representations, statements and conditions set forth in this
Agreement.
3.02 Conflicts. The execution of this Agreement by Contractor and Owner
will not violate or conflict with or result in a breach of or constitute a
default under any agreement or instrument which they may be bound. No consent of
any third party not a party to this Agreement is required.
3.03 Accuracy of Information. Contractor and Owner hereby warrant and
represent that this Agreement does not contain any false statements and that
this Agreement does not omit any material facts.
3.04 Authorization. Contractor and Owner have the requisite power and
authority for execution of this Agreement.
3.05 Legal Responsibilities. Contractor and Owner shall comply, abide
by and fully adhere with all applicable federal, state, local and municipal
laws, regulations and ordinances applicable to any responsibilities of
Contractor and Owner hereunder.
SECTION 4
LUMP SUM BID
4.01 Lump Sum Bid. Owner shall pay Contractor for the cost of Project
as defined in Section 4.02 ("Cost of Project"). Owner shall pay Contractor
compensation for services a Lump Sum Price of $1,178,165.00.
4.02 Cost of Project. Cost of Project shall include:
(a) Architectural, engineering and consulting fees incurred in
design and construction of Project;
(b) Wages for Contractor's employees under (1) applicable
collective bargaining agreements, if any, and (2) under salary or wage schedule
agreed upon by Owner and Contractor;
(c) Salaries of contractor's employees when stationed at the field
office, and employees from the main office performing functions related to
Project;
(d) Cost of all employee benefits and taxes for unemployment
compensation and social security (all such cost based on wages of salaries paid
to Contractor's employees);
(e) Reasonable transportation, travel, hotel and relocation
expenses of Contractor's employees connected with Project;
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<PAGE>
(f) Cost of all materials, supplies and equipment for Project and
cost of transportation and storage;
(g) Payments to subcontractors for work performed pursuant to this
Agreement;
(h) Cost, including transportation and maintenance, of all
temporary facilities and hand tools which are employed or consumed;
(i) Rental charges for machinery and equipment, whether rented
from Contractor or others, including installations, repairs, replacements,
removal, transportation and delivery costs, at rental rates consistent with
those prevailing in the area;
(j) Cost of premiums for all insurance and performance bonds which
Contractor is required to obtain or that is deemed necessary by Contractor;
(k) Sales, use, gross receipts or similar taxes related to
Project;
(l) Permit fees, licenses, tests, royalties, damages for
infringement of patents (and costs of defending suits thereof), and deposits
lost for causes other than Contractor's gross negligence;
(m) Losses, expenses or damages to the extent not compensated by
insurance or otherwise (including settlements made with the written approval of
Owner), and the cost of corrective work;
(n) Expenses such as telegrams, long-distance telephone calls,
telephone service at the site and similar minor cash items connected with
Project;
(o) Cost of removal of all trash and construction debris;
(p) Cost incurred due to an emergency affecting safety of persons
and property;
(q) Cost of accounting services required herein;
(r) Legal fees reasonably and properly resulting from actions
taken by Contractor on behalf of Owner or Project; and
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<PAGE>
SECTION 5
PAYMENTS
5.01 Time Schedule. Construction of Project shall commence on or about
the 1st day of November 1998 ("Commencement Date"). Substantial completion of
Project shall occur on the 31st day of May 1999 ("Completion Date"). Contractor
shall prepare an estimated progress schedule for Project which shall set forth
the dates for the commencement and completion of the various stages of
construction. The schedule and Completion Date may be revised as provided in
Section 6.
5.02 Progress Payments. On or before the 25th day of each month after
Commencement Date, Contractor shall submit to Owner an application for progress
payment ("Application for Progress Payment") in such detail reasonably required
by Owner and based on the construction completed, along with the proportionate
amount of Contractor's Fee for such period, such aggregate amount hereinafter
referred to as "Progress Payment." Within ten days after receipt of said monthly
Application for Progress Payment, Owner shall pay Contractor the appropriate
amount for which Application for Progress Payment is made.
5.03 Retainage. Owner may retain ten percent (10%) of the amount of
each monthly Progress Payment to assure performance of this Agreement. A
reduction in the amount of funds retained shall be paid to Contractor if Owner
and Contractor agree that satisfactory progress is being maintained in the
construction of Project.
5.04 Final Payment. The final payment, ("Final Payment") shall be due
and payable when Project is substantially completed and (1) delivered to Owner
ready for occupancy or (2) when Owner occupies Project, whichever event occurs
first, ("Substantial Completion"); PROVIDED, HOWEVER, in the event that there
should remain minor items to be completed, then and in that event Contractor and
Owner shall list such items and Contractor shall deliver a written guarantee to
complete said items within a reasonable time thereafter. Owner may retain a sum
equal to One Hundred Fifty Percent (150%) of the estimated costs of completing
any unfinished items; PROVIDED, HOWEVER, that each unfinished item and the
estimated cost of completing each unfinished item shall be listed separately.
Thereafter, Owner shall pay Contractor on a monthly basis the amount retained
for such unfinished items as said items are completed for the previous month.
Contractor shall provide Owner with a Certificate of Completion and Application
for Final Payment prior to Owner's Final Payment to Contractor.
5.05 Inspection. Progress Payments to Contractor shall not be construed
as an absolute acceptance by Owner of the construction completed to the date of
such Progress Payment except as to matters that are open and obvious. During the
construction period, Owner shall exercise reasonable diligence in discovering
and promptly reporting to Contractor all materials and labor which are not in
accordance with drawings and specifications. Upon Completion Date, Owner shall
diligently inspect all work for improper workmanship or defective materials,
including work not open and obvious upon inspection during construction.
5.06 Payments Due and Unpaid. In the event Owner should fail to pay
Contractor at the time that the payment of any amount becomes due under the
terms of this Agreement, then and in that event Contractor may, and at any time
thereafter, serve written notice that Contractor will stop work within five days
after receipt of the notice by Owner. After the expiration of said five day
period, Contractor shall have the right to stop all work on Project until
payment of said unpaid amount has been paid to Contractor. Payments due to
Contractor and unpaid shall bear interest at the highest legal commercial rate.
5.07 Waiver of Claims. The making of Final Payment shall constitute a
waiver of all claims by Owner except those rising from unsettled liens, improper
workmanship and defective materials appearing within one year after Completion
Date, except those previously made in writing and unsettled. The acceptance of
Final Payment shall constitute a waiver of all claims by Contractor except those
previously made in writing and unsettled.
5.08 Discounts. All discounts for prompt payment shall accrue to Owner
when paid directly by Owner or from a fund made available by Owner to Contractor
for such payments. To the extent that such is paid with funds of Contractor, all
cash discounts shall accrue to Contractor. All trade discounts, rebates and
refunds, and all returns from sale of surplus materials and equipment, shall be
credited to Cost of Project.
5.09 Royalties and Patents. Contractor shall pay all royalties and
license fees for materials, methods and systems. Contractor shall defend all
suits or claims for infringement of any patent rights except when a particular
design, process or product is specified by Owner.
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<PAGE>
SECTION 6
CONTINGENCIES
6.01 Change Orders. All changes to Project shall be authorized by a
written change order authorizing such change and signed by Contractor and Owner
("Change Order"). Each Change Order shall be numbered and dated, and shall
clearly itemize the amount attributable to Cost of Project and Contractor's Fee
and shall reflect any change in Completion Date. The value of the work added or
omitted in a Change Order shall be agreed upon by Owner and Contractor. A Change
Order shall be signed by Contractor and Owner prior to Contractor proceeding
with the work set forth in the Change Order.
6.02 Events Beyond Control: Cost of Project shall be increased by a
reasonable amount and Completion Date shall be extended by a reasonable period
upon the occurrence of events beyond Contractor's control as agreed upon by
Owner and Contractor. Such additional costs and fee adjustments required by any
event beyond Contractor's control shall be evidenced by a written Change Order
executed within a thirty day period after such event occurs. Such events shall
include, but not be limited to, the following: (1) an act or neglect by Owner or
by third persons not under the control of Contractor; (2) changes required to
comply with new laws, rules or regulations; (3) labor disputes; (4) earthquakes,
tornado, windstorms, floods or other actions of the elements; (5) war; (6) fire;
(7) concealed and unknown conditions below the surface of the ground or
concealed and unknown conditions in an existing structure at variance with the
conditions indicated by the drawings and specifications, information furnished
by Owner, or of an unusual nature differing materially from those ordinarily
encountered and generally recognized as inherent in work of the character
provided for in this Agreement; or (8) any cause beyond Contractor's control
which Contractor could not have reasonably foreseen.
6.03 Emergencies. In an emergency affecting the safety of persons or
property, Contractor shall act, in Contractor's sole discretion, to prevent
threatened damage, injury or loss. Any increase in the Cost of Project or
extension of Completion Date on account of emergency work shall be determined as
provided in Section 6.02.
SECTION 7
INSURANCE/INDEMNITY
7.01 Contractor. Contractor shall purchase and maintain the following
insurance:
(a) Workers' Compensation Insurance that shall comply with the state
law of the site of the Project relating to compensation of injured workmen; and
(b) Comprehensive General Liability Insurance, for not less than such
reasonable limits of liability as may be required by Owner. Such insurance
policies shall contain a provision that the policies will not be cancelled or
not renewed until at least sixty days written notice has been given to Owner and
Contractor. Certificates of Insurance showing such coverages to be in force
shall be filed with Owner prior to commencement of the work.
(c) Contractor shall purchase and maintain "All Risk" Builder's Risk
Insurance.
7.03 Waiver of Subrogation. Owner and Contractor waive all rights
against each other, Subcontractors and Sub-subcontractors for damages caused by
perils covered by insurance provided by Owner, except such rights as they may
have to the proceeds of such insurance. Contractor shall require waivers from
all Subcontractors and Sub-subcontractors.
7.04 Indemnity. Owner hereby indemnifies Contractor against all
liabilities, claims and demands for negligent acts or personal injury or
property damage arising out of or caused by any act or omission of Owner.
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<PAGE>
Owner's separate Contractors and separate Sub-subcontractors, Owner's agents and
employees arising from the commencement of construction until final completion.
Contractor hereby indemnifies Owner against all liabilities, claims and demands
for negligent acts or personal injury or property damage arising out of or
caused by any act or omission of Contractor, Contractor's separate contractors
and separate Sub-subcontractors, agents and employees arising from the
commencement of construction until final completion. Contractor and Owner agree
to use proper care not to cause damage to any adjoining or adjacent property.
Contractor shall indemnify and hold Owner harmless from any liabilities, claims
or demands for damage to such adjoining or adjacent property caused by
Contractor.
SECTION 8
TERMINATION
8.01 Termination by Owner. In the event Contractor should at any time
fail to perform the work with promptness or diligence, then and in that event
Owner shall have the right to terminate this Agreement after ten days notice to
Contractor (unless within said ten day period Contractor begins to remedy such
failure.) In the event of termination by Owner, Owner shall pay Contractor for
all work performed, all obligations incurred by Contractor which cannot be
cancelled, and the proportionate amount of Contractor's Fee.
8.02 Termination by Contractor. In the event (1) the work should be
stopped for a period of ten days by Owner, (2) Owner should fail to pay
Contractor any sum then payable and due Contractor, or (3) Owner should fail for
ten days to perform any other obligation hereunder, then and in that event
Contractor may after five days notice to Owner stop work or terminate this
Agreement and recover from Owner payment for all work performed, all obligations
incurred by Contractor which cannot be cancelled, all loss sustained upon
Project or material, Contractor's Fee on the Cost of Project incurred, and any
other expense, loss or damage which Contractor may sustain.
8.03 Termination Without Cause. If the work should be stopped for a
period of thirty days by any public law, regulation, acts of public officials or
other causes not the fault of Owner or Contractor, then either Owner or
Contractor shall have the right and option, upon ten day's notice to the other,
to terminate this Agreement, in which event Owner shall pay Contractor for all
Cost of Project, all obligations incurred by Contractor which cannot be
cancelled, all loss sustained upon the Project or materials, and the
proportionate amount of Contractor's Fee.
SECTION 9
MISCELLANEOUS PROVISIONS
9.01 Arbitration. Subsequent to the execution of this Agreement by the
parties hereto, all claims, disputes, differences, controversies and questions
which may arise concerning the matters and obligations set forth in this
Agreement, or for the construction or application of this Agreement, or
concerning any liabilities created hereunder, or any act or omission of any
Party hereto, shall be subject to arbitration in accordance with the rules and
regulations then in force of the American Arbitration Association. The
prevailing party shall be entitled to their costs including reasonable
attorney's fees; PROVIDED, HOWEVER, this clause shall not limit the right of any
party to seek temporary injunctive relief where an unacceptable interim period
may exist between the time the decision to arbitrate is made and the earliest
time at which arbitration can be commenced.
9.02 Time of Essence. Time is of the essence of this Agreement.
9.03 Attorney's Fees. Any party who unreasonably fails to perform any
covenant of this Agreement shall pay to the other party the amounts of all
attorney's fees and expenses incurred or sustained by such other party in
enforcing performance by the other party.
7
<PAGE>
9.04 Notices. Any notices or other communication to be given under this
Agreement to any party hereto shall be mailed certified mail, return receipt
requested, addressed to such party as follows:
Contractor: Noah's Construction, Inc.
P.O. Box 9847
Longview, TX 75608
Owner: Caddx Controls, Inc.
1420 N. Main St.
Gladewater, TX 75647
A change of such mailing address by either party shall be made by giving notice
to the other party in accordance with this Section. Such notice or other
communication shall be deemed to have been given when so served, or upon the
expiration of seventy-two (72) hours after such mailing, as the case may be.
9.05 Entire Agreement. This Agreement constitutes the entire Agreement
between the parties hereto and none of the parties shall be bound by any
promises, representations or agreements except as are herein expressly set
forth.
9.06 Amendments. This Agreement can be amended, modified or
supplemented only by a written document signed by the parties hereto. Any
purported oral amendment, modification or supplement shall be void.
9.07 Filing of Agreement. This is a confidential Agreement among the
parties hereto and this Agreement shall not be filed of record with any city,
county, state or federal authority.
9.08 Assignment. The parties hereto shall not have the power or right
to assign their respective duties and obligations hereunder unless such
assignment is agreed to in writing by the parties hereto, or is provided
otherwise herein.
9.09 Applicable Law. This Agreement shall be construed according to the
laws of the State of Texas regardless of where such Agreement is signed or the
site of Project.
9.10 Unenforceable Provisions. If any portion of this Agreement shall
be held to be void or unenforceable, the balance thereof shall nevertheless be
carried into effect.
9.11 Benefit. This Agreement shall be binding upon the parties, their
heirs, legal representatives, successors and permitted assigns.
9.12 Preamble Clauses. The preamble clauses hereto are hereby
incorporated into this Agreement as though fully rewritten herein at length.
9.13 Descriptive Headings. The descriptive paragraph headings contained
herein are for convenience only and are not intended to include or conclusively
define all the subject matter in the paragraphs accompanying such headings and,
accordingly, such headings should not be resorted to for interpretation of this
Agreement.
9.14 Interpretation. Any words used herein shall be interpreted as
singular or plural, and any pronouns used herein shall be interpreted as
masculine, feminine or neuter, as the context so requires.
9.15 Exhibits. All Exhibits attached hereto are made a part hereof by
reference and are hereby incorporated into this Agreement as though fully
rewritten herein at length.
8
<PAGE>
9.16 Acknowledgments. Each of the parties to this Agreement hereby
acknowledges that such party has received a fully executed copy of this
Agreement and further acknowledges that such party has carefully reviewed the
representations, terms and conditions contained herein.
IN WITNESS WHEREOF, the parties have entered into this Agreement the
day and year first above written.
"Contractor"
/s/ Noah Yoder
- ----------------------------------
By Noah Yoder
-------------------------------
Title President
----------------------------
"Owner"
/s/ JOE HURST
- ----------------------------------
By JOE HURST
-------------------------------
Title President
----------------------------
CONTRACTOR
9
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 of ITI Technologies, Inc. (Registration Nos. 33-89826, 333-08943,
333-08945, 333-23751 and 333-58257) of our reports dated March 23, 1999, on our
audits of the consolidated financial statements and financial statement schedule
of ITI Technologies, Inc. as of December 31, 1998 and 1997, and for each of the
three years in the period ended December 31, 1998, which reports are included in
this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
----------------------------------
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
March 26, 1999
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