<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1996 COMMISSION FILE NUMBER 0-25524
HELLO DIRECT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3043208
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5884 EDEN PARK PLACE 95138-1859
SAN JOSE, CALIFORNIA (Zip Code)
(Address of principal executive offices)
(408) 972-1990
(Registrant's telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class July 31, 1996
Common Stock, Par Value $.001 4,979,224
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
HELLO DIRECT, INC.
Condensed Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
------- -------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $12,382,000 $9,038,000 $24,455,000 $17,784,000
Cost of goods sold 5,898,000 4,042,000 11,621,000 7,994,000
----------- ---------- ----------- -----------
Gross profit 6,484,000 4,996,000 12,834,000 9,790,000
Selling, general and administrative
expenses 5,613,000 4,074,000 11,196,000 7,621,000
Product development expenses 540,000 311,000 1,075,000 668,000
CellBase expenses - 170,000 - 352,000
----------- ---------- ----------- -----------
Operating income 331,000 441,000 563,000 1,149,000
Other income - net 178,000 163,000 371,000 115,000
----------- ---------- ----------- -----------
Income before income taxes 509,000 604,000 934,000 1,264,000
Income tax 204,000 (97,000) 374,000 (247,000)
----------- ---------- ----------- -----------
Income before extraordinary item 305,000 701,000 560,000 1,511,000
Extraordinary item - 137,000 - 137,000
----------- ---------- ----------- -----------
Net income $ 305,000 $ 564,000 $ 560,000 $ 1,374,000
=========== ========== =========== ===========
Per share amounts:
Income before extraordinary item $ 0.06 $ 0.15 $ 0.11 $ 0.38
=========== ========== =========== ===========
Net income $ 0.06 $ 0.12 $ 0.11 $ 0.34
=========== ========== =========== ===========
Weighted average shares outstanding 5,037,000 4,642,000 5,025,000 3,994,000
=========== ========== =========== ===========
</TABLE>
See accompanying note to condensed financial statements
<PAGE>
HELLO DIRECT, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,513,000 $ 3,487,000
Short-term investments 8,725,000 4,322,000
Trade accounts receivable, less allowance for returns
and doubtful accounts 4,281,000 3,408,000
Inventories 3,681,000 3,914,000
Deferred tax assets 231,000 231,000
Other current assets 1,725,000 1,004,000
----------- -----------
Total current assets 21,156,000 16,366,000
Long-term investments - 6,147,000
Notes receivable 1,200,000 -
Property and equipment, net 2,058,000 1,280,000
Long-term deferred tax assets 1,555,000 1,923,000
----------- -----------
Total assets $25,969,000 $25,716,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation $ 26,000 $ 26,000
Accounts payable 987,000 1,593,000
Accrued expenses 575,000 350,000
----------- -----------
Total current liabilities 1,588,000 1,969,000
Long-term portion of capital lease obligation 9,000 20,000
----------- -----------
Total liabilities 1,597,000 1,989,000
Stockholders' equity:
Common stock 5,000 5,000
Additional paid-in capital 27,717,000 27,632,000
Accumulated deficit (2,905,000) (3,465,000)
Less treasury stock, at cost (445,000) (445,000)
----------- -----------
Total stockholders' equity 24,372,000 23,727,000
----------- -----------
Total liabilities and stockholders' equity $25,969,000 $25,716,000
=========== ===========
</TABLE>
See accompanying note to condensed financial statements
<PAGE>
HELLO DIRECT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 560,000 $ 1,374,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 132,000 179,000
Deferred income taxes 368,000 (305,000)
Provision for returns and doubtful accounts (5,000) (11,000)
Changes in items affecting operations:
Trade accounts receivable (868,000) (720,000)
Inventories 233,000 241,000
Other assets (721,000) (421,000)
Accounts payable and accrued expenses (381,000) 214,000
----------- ------------
Net cash provided by (used in) operating activities (682,000) 551,000
----------- ------------
Cash flows from investing activities:
Purchases of property and equipment (910,000) (687,000)
Decrease (increase) in investments and notes receivable 544,000 (6,034,000)
----------- ------------
Net cash used in investing activities (366,000) (6,721,000)
----------- ------------
Cash flows from financing activities:
Payments on capital lease obligations (11,000) (11,000)
Decrease in subordinated notes - (1,912,000)
Sale of common stock, net 85,000 17,805,000
----------- ------------
Net cash provided by financing activities 74,000 15,882,000
----------- ------------
Net increase (decrease) in cash and cash equivalents (974,000) 9,712,000
Cash and cash equivalents at beginning of period 3,487,000 1,699,000
----------- ------------
Cash and cash equivalents at end of period $ 2,513,000 $ 11,411,000
=========== ============
Noncash financing activity:
Conversion of preferred stock Series I and II - $ 2,638,000
=========== ============
</TABLE>
<PAGE>
HELLO DIRECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 1996
1. Interim Financial Statements
In the opinion of the Company, the accompanying unaudited financial statements
include all adjustments, consisting only of normal recurring adjustments
necessary to present fairly the financial information set forth therein.
Results of operations for the three and six month periods ended June 30, 1996
are not necessarily indicative of future financial results.
Certain notes and other information have been condensed or omitted from the
interim financial statements in the Quarterly Report on Form 10-Q. Accordingly,
these financial statements should be read in conjunction with the audited
financial statements for the fiscal year ended December 31, 1995 in the
Company's Annual Report on Form 10-K.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis section contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed below and in the Company's reports filed with the
Securities and Exchange Commission including the Company's Annual Report on Form
10-K/A for the year ended December 31, 1995 and the Quarterly Report on Form
10-Q for the quarter ended March 31, 1996. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. Forward-looking statements are identified with an asterisk (*).
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Net Sales. Net sales reflect total sales less a provision for returns. Net
sales increased $3,344,000 or 37.0% to $12,382,000 in the three month period
ended June 30, 1996 from $9,038,000 for the comparable period in 1995. This
increase was primarily attributable to a 26.9% increase in the number of
catalogs mailed (to 5,305,000), a 41.9% increase in the number of orders
received (to 72,000), a 1.7% increase in the average order size (to $218) and a
31.0% increase in the number of active accounts (to 128,400). During the
quarter, the Company introduced a 60 page prospecting catalog in addition to the
full line catalog of 88 pages which is mailed to the house list. The Company is
testing the effectiveness of this 60 page catalog at converting prospective
customers into actual customers.*
For the six month period ended June 30, 1996, net sales increased $6,671,000 or
37.5% to $24,455,000 from the comparable period in 1995. This increase was
primarily attributable to a 36.7% increase in the number of catalogs mailed (to
10,895,000), a 37.7% increase in the number of orders received (to 140,000), a
1% increase in the average order size (to $217), and the 31.0% increase in the
number of active accounts discussed above. The Company continually sources and
adds new products to its catalog on a quarterly basis and also deletes products
that do not meet revenue expectations. Any significant decrease in net sales
from new products added to the catalog could have a material negative effect on
the Company's operating results.
Gross Profit. Gross profit increased $1,488,000 or 29.8% to $6,484,000 in the
three month period ended June 30, 1996 and $3,044,000 or 31.1% to $12,834,000 in
the six month period ended June 30, 1996 from the comparable periods in 1995.
As a percentage of net sales, gross profit for the three month period was 52.4%
for 1996 versus 55.3% for 1995 and for the six month period 52.5% in 1996 versus
55.0% in 1995. This decrease in gross margin was the result of a shift in
product mix toward a larger percentage of
_______________________
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in the Company's Annual Report on Form 10-K and Quarterly Report on
Form 10-Q.
<PAGE>
branded and private label products which carry a lower gross margin but also
have lower product development and marketing expenses (as a percentage of net
sales) associated with them.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1,539,000 or 37.8% to $5,613,000 in the three
month period ended June 30, 1996 and $3,575,000 or 46.9% to $11,196,000 in the
six month period ended June 30, 1996 from the comparable periods in 1995. As a
percentage of net sales, these expenses for the three month period were 45.3%
for 1996 versus 45.1% for 1995 and for the six month period 45.8% in 1996 versus
42.9% in 1995. This increase was the result of planned headcount additions to
the Company's administrative management group, product management team, and
customer care activities. A significant portion of the Company's selling,
general and administrative expenses are related to the distribution of its
catalog. Any significant increases in the cost of paper or postage, or
deterioration in the response rates from mailings could have a material negative
effect on the Company's operating results. As a percentage of net sales, the
Company expects that total selling, general and administrative expenses for the
six months ending December 31, 1996 will be approximately the same as for the
six months ended June 30, 1996.*
Product Development Expenses. Product development expenses increased $229,000
or 73.6% to $540,000 in the three month period ended June 30, 1996 and $407,000
or 60.9% to $1,075,000 in the six month period ended June 30, 1996 from the
comparable periods in 1995. As a percentage of net sales, these expenses for
the three month period were 4.4% for 1996 versus 3.4% for 1995 and for the six
month period 4.4% in 1996 versus 3.8% in 1995. This increase was the result of
expenses incurred in connection with the development of several new and in
process products which are currently planned for introduction in late 1996 and
1997.* It is anticipated these expenses will fluctuate from time to time
based upon the number and character of the products being developed, however,
the Company believes that these expenses, as a percentage of net sales, will be
approximately the same for the year ending December 31, 1997.*
CellBase Expenses. In December 1995, the Company announced that it had
discontinued the development and marketing of CellBase. The expenses presented
for the three and six month periods ended June 30, 1995 represent costs incurred
during these periods related to the development and marketing of CellBase. No
expenses related to this product were incurred in the comparable 1996 periods.
Other Income. Other income includes interest income of $178,000 and $371,000
for the three and six month periods, respectively, ended June 30, 1996 versus
$218,000 and $235,000, respectively, for the comparable periods in 1995. There
was no interest expense in 1996 versus $103,000 and $169,000 for the three and
six month periods ended
_______________________
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in the Company's Annual Report on Form 10-K and Quarterly Report on
Form 10-Q.
<PAGE>
June 30, 1995. This increase relates to interest earned on the remaining
proceeds from the Company's initial public offering. The interest expense is
related to the $2,000,000 Subordinated Promissory Note issued in May 1994 and
retired in April 1995 with a portion of the proceeds from the initial public
offering.
Extraordinary Item. Reflects the net of tax write-off of the unamortized
financing costs associated with the Subordinated Promissory Note issued in May
1994 and retired in April 1995.
Net Income. Net income decreased $259,000 or 45.9% to $305,000 in the three
month period and $814,000 or 59.2% to $560,000 in the six month period ended
June 30, 1996 from the comparable periods in 1995. This decrease was due to
the reasons enumerated above and the effect on the provision (credit) for income
taxes from the application of tax loss carryforwards in accordance with
Statement of Financial Accounting Standards No. 109 in 1995.
Quarterly and Seasonal Fluctuations. The Company has experienced in the past
and will experience in the future quarterly variations in net sales and net
income as a result of many factors, including the timing of catalog mailings;
catalog response rates; product mix; the level of selling, general and
administrative expenses; the timing and level of product development expenses;
and the timing and success of new product introductions by the Company or its
competitors.* The Company's planned operating expenditures are based on sales
forecasts. If net sales are below expectations in any given quarter, operating
results would be materially adversely affected. Due to the foregoing factors,
it is possible that in some future quarter the Company's operating results will
be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock would likely be materially
adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been cash flow from operations,
proceeds from its initial public offering, venture capital equity and debt
financing, and borrowings under its revolving bank line of credit.
Cash used in operating activities during the six month period ended June 30,
1996 was $682,000. This was the result of $1,055,000 provided by operations
including net income, depreciation and amortization and other non-cash charges
offset by $1,737,000 of changes in operating assets and liabilities. Cash used
by investing activities for the six
_______________________
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in the Company's Annual Report on Form 10-K and Quarterly Report on
Form 10-Q.
<PAGE>
month period ended June 30, 1996 was $366,000, due to purchases of property
and equipment ($910,000) and the initial financing for the Company's new
facility, discussed below ($1,200,000), offset by a decrease in investments
($1,744,000). Cash provided by financing activities during the six month period
ended June 30, 1996 was $74,000, relating primarily to the issuance of common
stock pursuant to the Company's employee stock purchase plan.
Additions to equipment during the six month period ended June 30, 1996 were
$910,000 compared to $687,000 for same period in the prior year. This increase
was anticipated and is reflective of the growth in sales activity and the
tooling requirements for new product introductions.* The Company plans to expend
between $1,800,000 and $2,500,000 in capital expenditures for the year ending
December 31, 1996.* The Company believes that capital expenditures for the year
ending December 31, 1997 will be approximately the same as for the year ending
December 31, 1996.*
The Company has entered into a customized financing arrangement for the
construction of a new corporate headquarters building that will serve the
Company's expansion needs over the long term. Under the arrangement, the
Company has committed $5,000,000 in financing for the construction of a new
facility at a fixed interest rate of 7.5% for a period of 12 years. Following
completion of the new building, expected in January 1997, the company will enter
into a 15-year lease agreement for the facility.* The Company has advanced
$1,200,000 of the financing commitment as of June 30, 1996, which is reflected
in the financial statements as notes receivable.
The Company believes that funds generated from operations, together with
available funds remaining from the net proceeds of its public offering, will be
sufficient to finance its working capital for the foreseeable future.*
However, should the Company need additional funds, it has an unsecured revolving
line of credit with a bank for $5,000,000 at the bank's prime lending rate.
During the three month period ended June 30, 1996, no borrowings were made
against this line, and at present there are no outstanding balances against this
line.
ADDITIONAL FACTORS AFFECTING FUTURE PERFORMANCE
Approximately 58% of the Company's net sales for the six months ended June
30, 1996 were derived from sales of the Company's proprietary products (mainly
telephone headset products) which have a higher gross margin than its other
products. The Company anticipates that these headset products will continue to
account for a significant portion of its net sales and profits in the
foreseeable future.* If sales of the Company's proprietary products were to
decline significantly for any reason, or the gross margins on such products were
to decrease significantly for any reason, including competitive
_______________________
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in the Company's Annual Report on Form 10-K and Quarterly Report on
Form 10-Q.
<PAGE>
pressures or technological obsolescence, the Company's operating results would
be materially adversely affected.
A substantial portion of the Company's private label and proprietary
products are manufactured by a relatively small number of manufacturers and most
of such products, including all headset products, are manufactured by only two
sources. To date, the Company has been able to obtain adequate supplies of
these products, although on occasion the Company has incurred additional
delivery costs to air ship products to obtain inventory in a timely manner. The
Company's inability in the future to obtain sufficient quantities of sole of
limited source products, or to develop alternate sources, would result in
shortages of such products, which would have a material adverse effect on the
Company's net sales and operating results.
Substantially all of Hello Direct's proprietary products are manufactured
to its specifications by Seo Won K-Tec, Inc. ("K-Tec"), located in South Korea,
and Sinoca Enterprises Co. Ltd. ("Sinoca"), located in Taiwan and Singapore.
Each of these manufacturers is a substantial supplier to the Company and
products manufactured by Sinoca and K-Tec together represented approximately 58%
of the Company's net sales in the six month period ending June 30, 1996. The
Company has no long-term contracts with these manufacturing sources and competes
with other companies for production facilities and import quota capacity.
Although the Company believes that it has established close relationships with
these foreign manufacturing sources, the Company's future success will depend in
large measure upon its ability to maintain such relationships. The Company's
business is subject to the risks generally associated with doing business
abroad, in countries in which the Company's manufacturing sources are located.
The Company cannot predict the effect that such factors will have on its
business arrangements with foreign manufacturing sources. If any such factors
were to render the conduct of business in a particular country undesirable or
impractical, or if the Company's current foreign manufacturing sources were to
cease doing business with the Company for any reason, the Company's business and
operating results could be adversely affected. Further, the Company cannot
predict whether additional United States quotas, duties, taxes or other charges
or restrictions will be imposed upon the importation of its products in the
future, or what effect any such actions would have on its business, financial
condition and results of operations.
Increases in postal rates and paper and printing costs increase the cost of
the Company's catalog mailings. While the Company experienced significant paper
price increases in 1995, the price of paper has stabilized and additional price
increases, if any, in the remainder of 1996 are not anticipated to be
material.* Effective July 1, 1996 the Postal Service implemented requirements
for sorting and bar coding of third class mail which will result in a small
discount from present rates for third class mail. These requirements are
expected to reduce postage expense in the second half of 1996, although not
materially.* Should there be changes in the current outlook, an increase in
postal
_______________________
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in the Company's Annual Report on Form 10-K and Quarterly Report on
Form 10-Q.
<PAGE>
rates or higher than anticipated paper and printing costs could have a
material adverse impact on the Company's financial position and results of
operations to the extent that the Company is unable to pass such increase
directly on to customers by raising prices or to offset such increase by
implementing more efficient printing, mailing, and delivery systems.
The Company has experienced in the past and will experience in the future
quarterly variations in net sales and net income as a result of many factors,
including the timing of catalog mailings; catalog response rates; product mix;
the level of selling, general and administrative expenses; the timing and level
of product development expenses; and the timing and success of new product
introductions by the Company or its competitors.* The Company's planned
operating expenditures are based on sales forecasts. If net sales are below
expectations in any given quarter, operating results would be materially
adversely affected.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed of" and SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company expects that the
implementation of those Statements will not have a material effect its the
financial statements.*
_______________________
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in the Company's Annual Report on Form 10-K and Quarterly Report on
Form 10-Q.
<PAGE>
PART II. OTHER INFORMATION
Items 1-3. Not applicable.
Item 4. Submission of matters to vote of security holders.
At the Annual Meeting of Stockholders of the Company, held on May 8, 1996,
in San Jose, CA, the stockholders elected five directors to serve until the next
Annual Meeting of the Stockholders and ratified the appointment of KPMG Peat
Marwick LLP as independent public accountants of the Company for the fiscal year
ending December 31, 1996.
Results of the stockholder vote:
<TABLE>
<CAPTION>
ITEM FOR AGAINST ABSTAIN
---- --- ------- -------
<S> <C> <C> <C>
Election of Directors
---------------------
C. Allen Batts 4,409,446 10,500 0
John B. Mumford 4,409,446 10,500 0
Deepak Kamra 4,409,446 10,500 0
William P. Sousa 4,409,446 10,500 0
John W. Combs 4,409,446 10,500 0
Appoint KPMG Peat Marwick 4,417,596 950 1,400
-------------------------
</TABLE>
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
10.7 Lease Agreement by and between MPJ-A and Registrant, dated May 10, 1996.
10.8 Promissory Note by and between MPJ-A and Registrant, dated May 10, 1996.
10.9 Construction Loan Agreement by and between MPJ-A and Registrant, dated
June 7, 1996.
10.10 Line of Credit Agreement by and between Wells Fargo Bank and Registrant,
dated June 17, 1996.
11.1 Computation of net income per share.
27.1 Financial Data Schedule.
b. Reports on Form 8-K.
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended June 30, 1996.
<PAGE>
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, as amended, the Registrant
has duly caused this report to be signed by the undersigned, thereunto duly
authorized.
HELLO DIRECT, INC.
(Registrant)
August 13, 1996 /s/ Norman L. Bunas
--------------------
Norman L. Bunas,
Vice President of Operations and
Chief Financial Officer (Principal
Financial and Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------ -----------------------
10.7 Lease Agreement by and between MPJ-A and Registrant, dated
May 10, 1996.
10.8 Promissory Note by and between MPJ-A and Registrant, dated
May 10, 1996.
10.9 Construction Loan Agreement by and between MPJ-A and Registrant,
dated June 7, 1996.
10.10 Line of Credit Agreement by and between Wells Fargo Bank and
Registrant, dated June 17, 1996.
11.1 Computation of net income per share.
27.1 Financial Data Schedule.
<PAGE>
EXHIBIT 10.7
LEASE AGREEMENT
BY AND BETWEEN
MPJ-A,
A CALIFORNIA GENERAL PARTNERSHIP,
AS LANDLORD
AND
HELLO DIRECT, INC.,
A CALIFORNIA CORPORATION,
AS TENANT
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C> <C>
1. Parties.............................................. 1
2. Demise of Premises................................... 1
3. Lease Term........................................... 1
4. Rent................................................. 3
5. Security Deposit..................................... 4
6. Use of Premises...................................... 4
7. Taxes and Assessments................................ 5
8. Insurance............................................ 6
9. Utilities............................................ 9
10. Repairs and Maintenance.............................. 9
11. Alterations.......................................... 11
12. Acceptance of the Premises........................... 12
13. Default.............................................. 12
14. Destruction.......................................... 15
15. Condemnation......................................... 17
16. Mechanics' Lien...................................... 18
17. Inspection of the Premises........................... 18
18. Compliance with Laws................................. 18
19. Subordination........................................ 19
20. Holding Over......................................... 20
21. Notices.............................................. 20
22. Attorneys' Fees...................................... 20
23. Subleasing and Assignment............................ 21
24. Successors........................................... 22
25. Mortgagee Protection................................. 22
26. Estoppel Certificate and Financial Statement......... 22
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
27. Surrender of Lease Not Merger.................... 23
28. Waiver........................................... 23
29. General.......................................... 23
30. Sign............................................. 25
31. Interest on Past Due Obligations................. 25
32. Surrender of the Premises........................ 25
33. Authority........................................ 26
34. Easements........................................ 26
35. Brokers.......................................... 26
36. Limitation on Landlord's Liability............... 26
37. Hazardous Material............................... 27
38. Approvals........................................ 31
39. Right to Perform Other Party's Covenants......... 31
40. Options to Extend................................ 32
41. Right of First Opportunity to Purchase........... 34
</TABLE>
ii
<PAGE>
LEASE AGREEMENT
---------------
1. Parties. This Lease, dated for reference purposes as of May 10, 1996,
-------
is made by and between MPJ-A, a California general partnership ("Landlord"), and
HELLO DIRECT, INC., a California corporation ("Tenant").
2. Demise of Premises. Landlord hereby leases to Tenant and Tenant
------------------
hereby leases from Landlord, upon the terms and conditions hereinafter set
forth, those certain premises (the "Premises") located in the City of San Jose,
County of Santa Clara, State of California, described as follows:
A. That certain parcel of land (the "Parcel") consisting of
approximately five (5) acres more particularly described in EXHIBIT "A" ("Parcel
Map") and EXHIBIT "A-1" ("Legal Description") attached hereto;
B. That certain one story building to consist of approximately
seventy-six thousand eight hundred (76,800) square feet as shown on the Site
Plan attached hereto as EXHIBIT "B" to be constructed on the Parcel by Landlord
in accordance with the provisions of EXHIBIT "D" attached hereto (the
"Building").
C. The improvements (the "Tenant Improvements") to be constructed in
and about the Building in accordance with the provisions of the Improvement
Agreement attached hereto as EXHIBIT "C" (the "Improvement Agreement"), which
Tenant Improvements shall consist of all improvements in excess of the shell
improvements described in EXHIBIT "D" attached hereto.
D. The driveways, parking areas, loading areas, walkways and
landscape areas to be constructed on the Parcel by Landlord in accordance with
the provisions of EXHIBIT "D" attached hereto (the "Outside Area").
The Building, the Outside Area and the Tenant Improvements are collectively
referred to in this Lease as the "Improvements".
3. Lease Term.
----------
A. Lease Term. The term of this Lease ("Lease Term") shall be for
----------
fifteen (15) years commencing on the Commencement Date (as defined below) and
ending fifteen (15) years thereafter unless sooner terminated pursuant to any
provision hereof.
B. Commencement Date. As used in this Lease, the term "Commencement
-----------------
Date" shall mean the date when the Improvements are Substantially Complete (as
defined in the Improvement Agreement).
C. Early Entry. As used in this Lease, the term "Fixturization Date"
-----------
shall mean the date when the construction by Landlord of the Building and Tenant
Improvements has reached such stage of completion that Tenant may commence and
thereafter diligently prosecute to completion Tenant's Fixturization Work
1
<PAGE>
without substantial interruption or interference from Landlord's contractors or
by any work uncompleted by Landlord. As used in this Lease, the term "Tenant's
Fixturization Work" shall mean (i) installation of warehouse rack systems; (ii)
installation of telephone equipment, computer equipment, local area network
lines and computer cabling; (iii) installation of furniture and demountable
partitions; and (iv) testing of telephone switch and computer equipment. On and
after the Fixturization Date, Landlord shall permit Tenant to enter the Premises
for the purpose of, and only for the purpose of, performing Tenant's
Fixturization Work. Such entry shall be subject to all the terms and conditions
of this Lease, excepting only the obligation to pay the Monthly Installment of
rent and Additional Rent (as defined in Subparagraph 4.E below). Tenant shall
coordinate its entry onto the Premises with Landlord and the contractors and
other personnel employed by Landlord so as to minimize interference with the
construction activities of Landlord's contractor. In any case, Tenant shall
repair any damage to the Improvements constructed by Landlord resulting from the
entry upon the Premises by Tenant or Tenant's Agents prior to the Commencement
Date or caused by the installation of fixtures and equipment by Tenant or
Tenant's Agents.
D. Failure of Fixturization Date to Occur by December 10, 1996. If,
-----------------------------------------------------------
for any reason other than delays caused by Tenant, the Fixturization Date does
not occur on or before December 10, 1996, then, upon commencement of the Lease
Term, Tenant shall be entitled to one (1) day of free rent for each day which
elapses after December 10, 1996 until the Fixturization Date occurs. The remedy
provided to Tenant under this Subparagraph 3.D shall be Tenant's sole and
exclusive remedy for Landlord's failure to provide early access to the Premises
on or before December 10, 1996 as provided in Subparagraph 3.C above.
E. Failure of Commencement Date to Occur by December 28, 1996. If,
----------------------------------------------------------
for any reason other than delays caused by Tenant, the Commencement Date does
not occur on or before December 28, 1996, then, upon commencement of the Lease
Term, Tenant shall be entitled one (1) day of free rent for each day that
elapses after December 28, 1996 until the Commencement Date occurs. The remedy
provided to Tenant under this Subparagraph 3.E shall be Tenant's sole and
exclusive remedy for Landlord's failure to cause the Commencement Date to occur
on or before December 28, 1996, or any other date.
F. Option to Terminate. Landlord and Tenant acknowledge that the
-------------------
permits and approvals for the construction of the Improvements have not yet been
issued by the City of San Jose. If the site and architectural approval is not
granted by the Department of Planning of the City of San Jose on or before June
15, 1996, or if a Grading Permit is not issued by the Building Department of the
City of San Jose on or before July 1, 1996, then either the Landlord or Tenant
may terminate this Lease by giving written notice to the other at any time prior
to the time when such permits have been issued, and upon the giving of such
notice, this Lease shall terminate without liability of either party to the
other.
2
<PAGE>
Landlord, as Borrower, and Tenant, as Lender, are parties to a Construction
Loan Agreement executed concurrently herewith (the "Construction Loan
Agreement"). If the initial disbursement of One Million Two Hundred Thousand
Dollars ($1,200,000.00) is not disbursed to Landlord pursuant to the
Construction Loan Agreement on or before July 15, 1996, then either Landlord or
Tenant may terminate this Lease by giving written notice to the other at any
time prior to the time when such initial disbursement has been made, and upon
the giving of such notice, this Lease shall terminate without liability of
either party to the other.
4. Rent.
----
A. Time of Payment. Tenant shall pay to Landlord as rent for the
---------------
Premises the respective sums specified in Subparagraph 4.B below (the "Monthly
Installment") each month in advance on the first day of each calendar month,
without deduction or offset (except as provided in Paragraph 39 below), prior
notice or demand, commencing on the Commencement Date and continuing through the
Lease Term, together with such additional rents as are payable by Tenant to
Landlord under the terms of this Lease. The Monthly Installment for any period
during the Lease Term which is less than one (1) full month shall be a pro rata
portion of the Monthly Installment based upon a thirty (30) day month.
B. Monthly Installment.
-------------------
(1) Initial Monthly Installment. The Initial Monthly Installment of
---------------------------
rent payable each month during the first (1st) through the twenty-fourth (24th)
months of the Lease Term shall be the sum of Fifty-Three Thousand Seven Hundred
Sixty Dollars ($53,760.00) per month.
(2) Rental Adjustments. During the Lease Term, the Monthly
------------------
Installment of rent shall be adjusted as follows:
Upon commencement of the twenty-fifth (25th), forty-ninth (49th),
seventy-third (73rd), ninety-seventh (97th) and one hundred twenty-
first (121st) months of the Lease Term (the "Rental Adjustment
Date(s)"), the Monthly Installment of rent shall be increased to a sum
equal to one hundred and eight and sixteen hundredths percent
(108.016%) of the Monthly Installment of rent payable during the
period immediately prior to each such Rental Adjustment Date.
C. Late Charge. Tenant acknowledges that late payment by Tenant to
-----------
Landlord of rent and other sums due hereunder will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Landlord by the
terms of any mortgage or deed of trust covering the Premises. Accordingly, if
any installment of rent or any other sum
3
<PAGE>
due from Tenant shall not be received by Landlord within three (3) days after
Landlord's delivery to Tenant of written notice stating that such amount was
due, then Tenant shall pay to Landlord, as Additional Rent, a late charge equal
to four percent (4%) of such overdue amount. The parties hereby agree that such
late charge represents a fair and reasonable estimate of the costs Landlord will
incur by reason of late payment by Tenant. Acceptance of such late charge by
Landlord shall in no event constitute a waiver of Tenant's default with respect
to such overdue amount, nor prevent Landlord from exercising any of its other
rights and remedies granted hereunder.
E. Additional Rent. All taxes, insurance premiums, late charges,
---------------
costs, expenses and other sums which Tenant is required to pay under this Lease,
together with all interest and penalties that may accrue thereon in the event of
Tenant's failure to pay such amounts, and all reasonable damages, costs, and
attorneys' fees and expenses which Landlord may incur by reason of any default
of Tenant or failure on Tenant's part to comply with the terms of this Lease,
shall be deemed to be additional rent ("Additional Rent") and shall be paid in
addition to the Monthly Installment of rent, and, in the event of nonpayment by
Tenant, Landlord shall have all of the rights and remedies with respect thereto
as Landlord has for the nonpayment of the Monthly Installment of rent.
F. Place of Payment. Rent shall be payable in lawful money of the
----------------
United States of America to Landlord at 511 Division Street, Campbell,
California 95008 or to such other person(s) or at such other place(s) as
Landlord may designate in writing.
G. Advance Payment. Concurrently with the execution of this Lease,
---------------
Tenant shall pay to Landlord the sum of Fifty Three Thousand Seven Hundred Sixty
Dollars ($53,760.00) to be applied to the Monthly Installment of rent first
accruing under this Lease.
5. Security Deposit. Intentionally deleted.
----------------
6. Use of Premises. Tenant may use the Premises only in conformance with
---------------
applicable governmental laws, regulations, rules and ordinances and only for the
purpose of general office, sales, distribution and warehousing and for no other
purpose without the prior written consent of Landlord. Tenant shall indemnify,
defend and hold Landlord harmless against any loss, expense, damage, attorneys'
fees or liabilities arising out of the failure of Tenant to comply with any Law
regulating Tenant's use of the Premises. Tenant shall not commit or suffer to be
committed, any waste upon the Premises, or any nuisance, or other acts or things
which may disturb the quiet enjoyment of any other tenant in the buildings
adjacent to the Premises, or allow any sale by auction upon the Premises, or
allow the Premises to be used for any unlawful purpose, or place any loads upon
the floor, walls or ceiling which would endanger the structure, or place any
harmful liquids in the drainage system of the Premises. No waste materials or
refuse shall be dumped upon or permitted to remain upon any part of the Premises
outside of the Building, except in trash containers placed
4
<PAGE>
inside exterior enclosures designated for that purpose by Landlord. No
materials, supplies, equipment, finished products or semifinished products, raw
materials or articles of any nature shall be stored upon or permitted to remain
on any portion of the Premises outside of the Building. Tenant shall strictly
comply with the provisions of Paragraph 37 below. Tenant acknowledges that
neither the Landlord nor Landlord's agents has made any representation or
warranty as to the suitability of the Premises to the conduct of Tenant's
business.
7. Taxes and Assessments.
---------------------
A. Tenant's Property. Tenant shall pay before delinquency any and
-----------------
all taxes and assessments, license fees and public charges levied, assessed or
imposed upon or against Tenant's fixtures, equipment, furnishings, furniture,
appliances and personal property installed or located on or within the Premises.
Tenant shall cause said fixtures, equipment, furnishings, furniture, appliances
and personal property to be assessed and billed separately from the real
property of Landlord. If any of Tenant's said personal property shall be
assessed with Landlord's real property, Tenant shall pay Landlord the taxes
attributable to Tenant within ten (10) days after receipt of a written statement
from Landlord setting forth the taxes applicable to Tenant's property.
B. Property Taxes. Tenant shall pay, as Additional Rent, one
--------------
hundred percent (100%) of all Property Taxes levied or assessed with respect to
the Premises which become due or accrue during the term of this Lease. Tenant
shall pay such Property Taxes to Landlord not later than (i) ten (10) days prior
to the delinquency date of such Property Taxes, or (ii) twenty (20) days after
receipt of billing, whichever is later. If Tenant fails to do so, Tenant shall
reimburse Landlord, on demand, for all interest, late fees and penalties that
the taxing authority charges Landlord. In the event Landlord's first mortgagee
requires an impound for Property Taxes, then on the first day of each month
during the Lease Term, Tenant shall pay Landlord one twelfth (1/12) of the
annual Property Taxes. Tenant's liability hereunder shall be prorated to
reflect the commencement and termination dates of this Lease.
C. Property Taxes Defined. For the purpose of this Lease, "Property
----------------------
Taxes" means and includes all taxes, assessments (including, but not limited to,
assessments for public improvements or benefits), taxes based on vehicles
utilizing parking areas, taxes based or measured by the rent paid, payable or
received under this Lease, taxes on the value, use, or occupancy of the
Premises, the Building and/or the Parcel, Environmental Surcharges and all other
governmental impositions and charges of every kind and nature whatsoever,
whether or not customary or within the contemplation of the parties hereto and
regardless of whether the same shall be extraordinary or ordinary, general or
special, unforeseen or foreseen, or similar or dissimilar to any of the
foregoing which, at any time during the Lease Term, shall be applicable to the
Premises, the Building and/or the Parcel or assessed, levied or
5
<PAGE>
imposed upon the Premises, the Building and/or the Parcel, or become due and
payable and a lien or charge upon the Premises, the Building and/or the Parcel,
or any part thereof, under or by virtue of any present or future laws, statutes,
ordinances, regulations or other requirements of any governmental authority
whatsoever. The term "Environmental Surcharges" shall mean and include any and
all expenses, taxes, charges or penalties imposed by the Federal Department of
Energy, the Federal Environmental Protection Agency, the Federal Clean Air Act,
or any regulations promulgated thereunder, or any other local, state or federal
governmental agency or entity now or hereafter vested with the power to impose
taxes, assessments or other types of surcharges as a means of controlling or
abating environmental pollution or the use of energy; provided, however, the
term "Environmental Surcharge" shall not include the cost of investigation or
remediation of Hazardous Materials on the Premises (which subject is covered
separately by Paragraph 37). The term "Property Taxes" shall not include any
federal, state or local net income, estate, transfer or inheritance tax imposed
on Landlord.
D. Other Taxes. Tenant shall, as Additional Rent, pay or reimburse
-----------
Landlord for any tax based upon, allocable to, or measured by the area of the
Premises or the Building or the Parcel; any tax upon or with respect to the
possession, leasing, operation, management, maintenance, alteration, repair, use
or occupancy of the Premises or any portion thereof; any privilege tax, excise
tax, business and occupation tax, gross receipts tax, sales and/or use tax,
water tax, sewer tax, employee tax, occupational license tax imposed upon
Landlord or Tenant with respect to the Premises; any tax upon this transaction
or any document to which Tenant is a party creating or transferring an interest
or an estate in the Premises. This Paragraph 7.D shall not obligate Tenant to
pay any federal, state or local net income tax, estate, transfer or inheritance
tax imposed on Landlord.
8. Insurance.
---------
A. Indemnity. Tenant agrees to indemnify, protect and defend
---------
Landlord against and hold Landlord harmless from any and all claims, causes of
action, judgments, obligations or liabilities, and all reasonable expenses
incurred in investigating or resisting the same (including reasonable attorneys'
fees), on account of, or arising out of, the operation, maintenance, use or
occupancy of the Premises. This Lease is made on the express understanding that
Landlord shall not be liable for, or suffer loss by reason of, injury to person
or property, from whatever cause (except for the active negligence or willful
misconduct of Landlord or its Agents), which in any way may be connected with
the operation, use or occupancy of the Premises specifically including, without
limitation, any liability for injury to the person or property of Tenant or its
Agents.
B. Liability Insurance. Tenant shall, at Tenant's expense, obtain
-------------------
and keep in force during the term of this Lease a policy of comprehensive public
liability insurance insuring Landlord and Tenant against claims and liabilities
arising out of
6
<PAGE>
the operation, use, or occupancy of the Premises. Such insurance shall be in an
amount of not less than Three Million Dollars ($3,000,000.00) for bodily injury
or death as a result of any one occurrence and Five Hundred Thousand Dollars
($500,000.00) for damage to property as a result of any one occurrence. Landlord
shall have the right to require Tenant to increase the amount of coverage of
such public liability insurance to the extent reasonably necessary to bring such
insurance coverage into conformity with the level of coverage commonly carried
by similar businesses in California, which right Landlord may exercise no more
frequently than once every two (2) years during the Lease Term. The insurance
shall be provided by companies approved by Landlord, which approval shall not be
unreasonably withheld. Tenant shall deliver to Landlord, prior to possession,
and at least thirty (30) days prior to the expiration thereof, a certificate of
insurance evidencing the existence of the policy required hereunder and such
certificate shall certify that the policy (1) names Landlord as an additional
insured, (2) shall not be canceled or altered without thirty (30) days prior
written notice to Landlord, (3) insures performance of the indemnity set forth
in Paragraph 8.A above, (4) the coverage is primary and any coverage by Landlord
is in excess thereto and (5) contains a cross-liability endorsement.
Landlord may maintain a policy or policies of comprehensive general
liability insurance insuring Landlord (and such others as are designated by
Landlord), against liability for personal injury, bodily injury, death and
damage to property occurring or resulting from an occurrence in, on or about the
Premises, with such limits of coverage as Landlord may from time to time
determine are reasonably necessary for its protection. Tenant shall, as
Additional Rent, reimburse Landlord for the cost of any such liability insurance
policy maintained by Landlord within ten (10) days after receipt of billing.
C. Property Insurance. Landlord shall, at Tenant's expense, obtain
------------------
and keep in force during the Lease Term a policy of insurance covering loss or
damage to the Building and Tenant Improvements, in the amount of the full
replacement value thereof with Agreed Amount Endorsement, providing protection
against those perils included within the classification of "all risk" insurance,
plus a policy of rental income insurance in the amount of one hundred percent
- ----
(100%) of twelve (12) months' rent (including, without limitation, sums payable
as Additional Rent), together with such additional coverages (such as earthquake
and/or flood insurance) which Landlord may elect to maintain from time to time
or which may be required from time to time by Landlord's Lender. Tenant shall
have no interest in nor any right to the proceeds of any insurance procured by
Landlord on the Building and Tenant Improvements. Tenant shall, within twenty
(20) days after receipt of billing, pay to Landlord, as Additional Rent, the
full cost of such insurance procured and maintained by Landlord pursuant to this
Paragraph 8.C. Notwithstanding the foregoing, Tenant shall not be obligated to
contribute to the cost of earthquake insurance to the extent the cost thereof
exceeds a commercially reasonable rate. Tenant shall, however, have the right to
require Landlord to maintain earthquake insurance if Tenant agrees to pay the
entire
7
<PAGE>
cost of such insurance. Tenant acknowledges that such insurance procured
by Landlord shall contain a deductible which reduces Tenant's cost for such
insurance and, in the event of loss or damage, Tenant shall be required to pay
to Landlord the amount of such deductible, or a portion thereof, as follows:
(1) Tenant shall pay to Landlord one hundred percent (100%) of
the amount of such deductible which does not exceed the amount of the
Monthly Installment of rent then payable under this Lease; and
(2) To the extent the deductible exceeds the Monthly Installment
of rent then payable under the Lease, Tenant shall pay to Landlord a
fraction of such excess amount, which fraction shall have as its
numerator the number of calendar months then remaining in the Lease
Term and shall have as its denominator the number of calendar months
in the useful life of the restoration work for which the deductible
amount is to be used.
D. Tenant's Option to Maintain Property Insurance. So long as, and
----------------------------------------------
only for so long as, Tenant is the beneficiary of a first deed of trust against
the Premises, Tenant shall have the right to obtain and keep in force all of the
insurance described in Subparagraph 8.C above in lieu of Landlord obtaining such
insurance. If Tenant desires to exercise such right to obtain such insurance,
Tenant may do so only on the renewal date of Landlord's then current insurance
policy and Tenant must exercise such right by giving Landlord written notice of
Tenant's election to obtain such insurance not later than thirty (30) days prior
to the renewal date of Landlord's then current insurance policy. If Tenant so
elects to obtain the insurance described in Subparagraph 8.C above, such
insurance shall be provided by companies approved by Landlord which approval
shall not be unreasonably withheld. Tenant shall deliver to Landlord, at least
fifteen (15) days prior to the expiration of Landlord's then current insurance
policy or Tenant's then current insurance policy, as the case may be, a
duplicate original of or a certificate evidencing the policy required hereunder.
Such policy and/or certificate shall certify that the policy: (i) names Landlord
and Landlord's Lender as additional insureds; (ii) shall not be cancelled or
altered without thirty (30) days prior written notice to Landlord and to
Landlord's Lender; (iii) is primary and any coverage by Landlord is in excess
thereto; and (iv) contains a standard lender's loss payable endorsement in favor
of Landlord's Lender. If any such policy obtained by Tenant contains a
deductible, Tenant shall be responsible for the amount of such deductible, or a
portion thereof, as specified in Subparagraph 8.C above. Any deductible must be
approved by Landlord and Landlord's Lender, which approval shall not be
unreasonably withheld. If Tenant makes the election to maintain all of the
insurance described in Subparagraph 8.C above, Landlord shall be relieved of its
obligation to obtain and maintain such insurance.
8
<PAGE>
If at any time Tenant fails to keep in effect the insurance coverage
required by this Subparagraph 8.D after Tenant has elected to so maintain such
insurance, then Landlord and/or Landlord's Lender shall have the right, but not
the obligation, in addition to all other remedies which Landlord may have, to
obtain such insurance coverage. In such event, Tenant shall, within ten (10)
days after receipt of billing, reimbursement Landlord and/or Landlord's Lender,
as Additional Rent, for the full cost of such insurance procured by Landlord.
E. Tenant's Personal Property Insurance. Tenant acknowledges that
------------------------------------
the insurance to be maintained Landlord on the Premises pursuant to Paragraph
8.C above will not insure any of Tenant's property. Accordingly, Tenant, at
Tenant's own expense, shall maintain in full force and effect on all of its
fixtures, equipment and personal property in the Premises, a policy of "All
Risk" coverage insurance to the extent of at least ninety percent (90%) of their
insurable value.
F. Mutual Waiver of Subrogation. Tenant and Landlord hereby
----------------------------
mutually waive their respective rights of recovery against each other of any
loss of or damage to the property of either party, to the extent such loss or
damage is insured by any insurance policy required to be maintained by this
Lease or otherwise in force at the time of such loss or damage. Each party
shall obtain any special endorsements, if required by the insurer, whereby the
insurer waives its right of subrogation against the other party hereto. The
provisions of this Subparagraph 8.E shall not apply in those instances in which
the waiver of subrogation would cause either party's insurance coverage to be
voided or otherwise made uncollectible.
9. Utilities. Tenant shall pay for all water, gas, light, heat, power,
---------
electricity, telephone, trash pick-up, sewer charges, and all other services
supplied to or consumed on the Premises, and all taxes and surcharges thereon.
10. Repairs and Maintenance.
-----------------------
A. Landlord's Repairs. Subject to the provisions of Paragraph 14,
------------------
Landlord, at its expense, shall keep and maintain the structural elements of the
Building in good order and repair. Landlord shall not, however, be required to
maintain, repair or replace the interior surface of exterior walls, nor shall
Landlord be required to maintain, repair or replace windows, doors, skylights or
plate glass. Landlord shall have no obligation to make repairs under this
Subparagraph 10.A until a reasonable time after receipt of written notice from
Tenant of the need for such repairs. Notwithstanding the foregoing, Tenant
shall reimburse Landlord, as Additional Rent, within fifteen (15) days after
receipt of billing, for the cost of maintenance and repairs of the structural
elements of the Building to the extent such maintenance or repair is required
because of the negligence or willful misconduct of Tenant or Agents. As used
herein, the term "structural elements of the Building" shall mean and be limited
to the foundation, footings, floor slab (but not flooring), structural
9
<PAGE>
walls and roof structure (but not roofing or roof membrane).
B. Tenant's Repairs. Except as expressly provided in Subparagraph
----------------
10.A above, Subparagraph 10.C below, Paragraph 14 below, Paragraph 15 below, and
in the Improvement Agreement and EXHIBIT "D", Tenant shall, at its sole cost,
keep and maintain the entire Premises and every part thereof, including without
limitation, the roof, roof membrane, the windows, window frames, plate glass,
glazing, skylights, truck doors, doors and all door hardware, the walls and
partitions, carpets, flooring, the electrical, plumbing, lighting, heating,
ventilating and air conditioning systems and equipment, and all areas outside
the Building (including all landscaping, irrigation systems, paving, driveways,
parking areas, sidewalks, fences, signs and exterior lighting and other portions
of the Outside Area) in good order, condition and repair. The term "repair"
shall include replacements, restorations and/or renewals when necessary as well
as painting. Tenant's obligation shall extend to all alterations, additions and
improvements to the Premises, and all fixtures and appurtenances therein and
thereto. Tenant shall, at all times during the Lease Term, have in effect a
service contract for the maintenance of the heating, ventilating and air
conditioning ("HVAC") equipment with an HVAC repair and maintenance contractor
reasonably approved by Landlord. The HVAC service contract shall provide for
periodic inspection and servicing at least once every three (3) months during
the term hereof, and Tenant shall provide Landlord with a copy of such contract
and all periodic service reports. Landlord shall assign to Tenant for the term
of this Lease the benefit of all warranties available to Landlord which would
reduce the cost of performing the obligations of Tenant to make repairs under
this Subparagraph 10.B. Landlord shall cooperate with Tenant in the enforcement
of such warranties.
C. Capital Replacements. Notwithstanding anything in Subparagraphs
--------------------
10.A or 10.B above to the contrary, if (i) the roof membrane of the Building,
the HVAC equipment or the parking lot surface requires replacement during the
Lease Term, and (ii) the cost of such replacement exceeds Fifty Thousand Dollars
($50,000.00) and is required under generally acceptable accounting principles to
be capitalized, then Landlord shall perform such replacement and Tenant shall
pay to Landlord within fifteen (15) days after receipt of billing, as Additional
Rent, a fraction of the cost of such replacement, which fraction shall have as
its numerator the number of calendar months then remaining in the Lease Term at
the time of such replacement and shall have as its denominator the number of
months in the useful life of the item being replaced.
D. Waiver. Landlord shall have no maintenance or repair obligations
------
whatsoever with respect to the Premises except as expressly provided in
Subparagraphs 10.A and 10.C and Paragraph 14. Tenant hereby expressly waives
the provisions of Subsection 1 of Section 1932 and Sections 1941 and 1942 of the
Civil Code of California and all rights to make repairs at the expense of
Landlord as provided in Section 1942 of said Civil Code. There shall be no
allowance to Tenant for diminution of rental value, and
10
<PAGE>
no liability on the part of Landlord, by reason of inconvenience, annoyance or
injury to business arising from the making of, or the failure to make, any
repairs, alterations, decorations, additions or improvements in or to any
portion of the Premises or the Building (or any of the areas used in connection
with the operation thereof, or in or to any fixtures, appurtenances or
equipment), or by reason of the negligence of Tenant. In no event shall Landlord
be responsible for any consequential damages arising or alleged to have arisen
from any of the foregoing matters. Tenant hereby agrees that Landlord shall not
be liable for injury to Tenant's business or any loss of income therefrom or for
damage to the goods, wares, merchandise or other property of Tenant, Tenant's
employees, invitees, customers, or any other person in or about the Premises,
nor shall Landlord be liable for injury to the person of Tenant, Tenant's
employees, agents or contractors whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, sprinklers, wires, appliances,
plumbing, air conditioning or lighting fixtures, or from any other cause,
whether the said damage or injury results from conditions arising upon the
Premises, or from other sources or places and regardless of whether the cause of
such damage or injury or the means of repairing the same is inaccessible to
Tenant, unless caused by the active negligence or wilful misconduct of Landlord
or its Agents.
11. Alterations.
-----------
A. Limitations. Tenant shall not make, or suffer to be made, any
-----------
alterations, improvements or additions in, on, about or to the Premises or any
part thereof, without the prior written consent of Landlord (which consent shall
not be unreasonably withheld) and without a valid building permit issued by the
appropriate governmental authority; provided, however, Landlord's consent shall
not be required for interior non-structural alterations which (i) cost less than
Twenty-Five Thousand Dollars ($25,000.00) per work of improvement and (ii) cost
less than Fifty Thousand Dollars ($50,000.00) for all alterations made in any
twelve (12) month period so long as Tenant provides Landlord with copies of
plans and applicable permits prior to commencing construction. As a condition
to the giving of such consent, Landlord may require that Tenant agree to remove
any such alter ations, improvements or additions at the termination of this
Lease, and to restore the Premises to their prior condition. Unless Landlord
requires that Tenant remove any such alteration, improvement or addition, any
alteration, addition or improvement to the Premises, except movable furniture
and trade fixtures, shall become the property of Landlord upon termination of
the Lease and shall remain upon and be surrendered with the Premises at the
termination of this Lease. Without limiting the generality of the foregoing,
all heating, lighting, electrical (including all wiring, conduit, outlets,
drops, buss ducts, main and subpanels), air conditioning, partitioning, drapery,
and carpet installations made by Tenant regardless of how affixed to the
Premises, shall be and become the property of the Landlord upon termination of
the Lease, and shall not be deemed trade fixtures, and shall remain upon and
11
<PAGE>
be surrendered with the Premises at the termination of this Lease.
B. Alterations Required by Law. If, during the Lease Term, any
---------------------------
alteration, addition or change of any sort to all or any portion of the Premises
is required by Law by reason of (i) Tenant's particular use or change of use of
the Premises; (ii) Tenant's application for a new permit or governmental
approval; or (iii) Tenant's construction or installation of any leasehold
improvement or trade fixtures, Tenant shall promptly make the same at its sole
cost and expense. If, during the Lease Term, any alteration, addition or change
of any sort to all or any portion of the Premises is required by Law for reasons
other than those described in the immediately preceding sentence, Landlord shall
promptly make the same and Tenant shall reimburse Landlord within fifteen (15)
days after receipt of billing, for a fraction of the cost thereof, which
fraction shall have as its numerator the number of calendar months then
remaining in the Lease Term and shall have as its denominator the number of
months in the useful life of the alteration, addition or change in question.
12. Acceptance of the Premises. By entry and taking possession of the
--------------------------
Premises pursuant to this Lease, Tenant accepts, subject to the provisions of
Paragraph 9 of the Improvement Agreement, the Premises as being in good and
sanitary order, condition and repair and accepts the Premises in their condition
existing as of the date of such entry and Tenant further accepts the Tenant
Improvements to be constructed by Landlord as being completed in accordance with
the plans and specifications for such Improvements, except for punch list items.
Tenant acknowledges that neither the Landlord nor Landlord's agents has made any
representation or warranty as to the suitability of the Premises to the conduct
of Tenant's business Any agreements, warranties or representations not
expressly contained herein shall in no way bind either Landlord or Tenant, and
Landlord and Tenant expressly waive all claims for damages by reason of any
statement, representation, warranty, promise or agreement, if any, not contained
in this Lease. This Lease constitutes the entire understanding between the
parties hereto and no addition to, or modification of, any term or provision of
this Lease shall be effective until set forth in a writing signed by both
Landlord and Tenant.
13. Default.
-------
A. Events of Default. A breach of this Lease by Tenant shall exist
-----------------
if any of the following events (hereinafter referred to as "Event of Default")
shall occur:
(1) Default in the payment when due of any installment of rent
or other payment required to be made by Tenant hereunder, where such default
shall not have been cured within three (3) days after written notice of such
default is given to Tenant;
(2) Tenant's failure to perform any other term, covenant or
condition contained in this Lease where such failure shall have continued for
thirty (30) days after written notice of
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such failure is given to Tenant; provided, however, if such failure cannot be
reasonably cured within said thirty (30) day period, Tenant shall not be deemed
in default if Tenant commences to cure such failure within said thirty (30) day
period and thereafter diligently prosecute such cure to completion;
(3) Tenant's abandonment of the Premises;
(4) Tenant's assignment of its assets for the benefit of its
creditors;
(5) The sequestration of, attachment of, or execution on, any
substantial part of the property of Tenant or on any property essential to the
conduct of Tenant's business, shall have occurred and Tenant shall have failed
to obtain a return or release of such property within sixty (60) days
thereafter, or prior to sale pursuant to such sequestration, attachment or levy,
whichever is earlier;
(6) Tenant or any guarantor of Tenant's obligations hereunder
shall commence any case, proceeding or other action seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it or its
debts under any law relating to bankruptcy, insolvency, reorganization or relief
of debtors, or seek appointment of a receiver, trustee, custodian, or other
similar official for it or for all or any substantial part of its property;
(7) Tenant or any such guarantor shall take any corporate action
to authorize any of the actions set forth in Clause 6 above; or
(8) Any case, proceeding or other action against Tenant or any
guarantor of Tenant's obligations hereunder shall be commenced seeking to have
an order for relief entered against it as debtor, or seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it or its
debts under any law relating to bankruptcy, insolvency, reorganization or relief
of debtors, or seeking appointment of a receiver, trustee, custodian or other
similar official for it or for all or any substantial part of its property, and
such case, proceeding or other action (i) results in the entry of an order for
relief against it which is not fully stayed within thirty (30) business days
after the entry thereof or (ii) remains undismissed for a period of ninety (90)
days.
B. Remedies. Upon any Event of Default, Landlord shall have the
--------
following remedies, in addition to all other rights and remedies provided by
law, to which Landlord may resort cumulatively, or in the alternative:
(1) Recovery of Rent. Landlord shall be entitled to keep this
----------------
Lease in full force and effect (whether or not Tenant shall have abandoned the
Premises) and to enforce all of its rights and remedies under this Lease,
including the right to recover rent and other sums as they become due, plus
interest at the Permitted
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<PAGE>
Rate (as defined in Paragraph 31 below) from the due date of each installment of
rent or other sum until paid.
(2) Termination. Landlord may terminate this Lease by giving
-----------
Tenant written notice of termination. On the giving of the notice all of
Tenant's rights in the Premises shall terminate. Upon the giving of the notice
of termination, Tenant shall surrender and vacate the Premises in the condition
required by Paragraph 32, and Landlord may re-enter and take possession of the
Premises and all the remaining improvements or property and eject Tenant or any
of Tenant's subtenants, assignees or other person or persons claiming any right
under or through Tenant or eject some and not others or eject none. This Lease
may also be terminated by a judgment specifically providing for termination. Any
termination under this paragraph shall not release Tenant from the payment of
any sum then due Landlord or from any claim for damages or rent previously
accrued or then accruing against Tenant. In no event shall any one or more of
the following actions by Landlord constitute a termination of this Lease:
(a) maintenance and preservation of the Premises;
(b) efforts to relet the Premises;
(c) appointment of a receiver in order to protect
Landlord's interest hereunder; or
(d) consent to any subletting of the Premises or assignment
of this Lease by Tenant, whether pursuant to provisions hereof concerning
subletting and assignment or otherwise.
(3) Damages. In the event this Lease is terminated pursuant to
-------
Subparagraph 13.B(2) above, or otherwise, Landlord shall be entitled to damages
in the following sums:
(a) the worth at the time of award of the unpaid rent which
has been earned at the time of termination; plus
(b) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus
(c) the worth at the time of award of the amount by which
the unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided; and
(d) any other amount necessary to compensate Landlord for
all detriment proximately caused by Tenant's failure to perform Tenant's
obligations under this Lease, or which in the ordinary course of things would be
likely to result therefrom including, without limitation, the following: (i)
expenses for
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cleaning, repairing or restoring the Premises; (ii) expenses of re-leasing the
Premises that are fairly allocable to the remainder of the Lease Term; (iii)
expenses in retaking possession of the Premises; and (iv) attorneys' fees and
court costs.
(e) The "worth at the time of award" of the amounts
referred to in Subparagraphs (a) and (b) of this Paragraph 13.B(3), is computed
by allowing interest at the Permitted Rate. The "worth at the time of award" of
the amounts referred to in Subparagraph (c) of this Paragraph 13.B(3) is
computed by discounting such amount at the discount rate of the Federal Reserve
Board of San Francisco at the time of award plus one percent (1%). The term
"rent" as used in this Paragraph 13 shall include all sums required to be paid
by Tenant to Landlord pursuant to the terms of this Lease.
14. Destruction.
-----------
A. Landlord's Duty to Restore. If the Improvements are damaged by
--------------------------
any peril after the Commencement Date of this Lease, Landlord shall restore the
Premises unless the Lease is terminated by Landlord pursuant to Paragraph 14.B
or by Tenant pursuant to Paragraph 14.C. All insurance proceeds available from
the property damage insurance carried by Landlord or Tenant pursuant to
Paragraph 8.C and Tenant's share of the deductible shall be paid to and become
the property of Landlord subject to the rights of Landlord's Lender. If this
Lease is terminated pursuant to either Paragraphs 14.B or 14.C, then all
insurance proceeds available from the insurance required to be carried by Tenant
which covers loss to property that is Landlord's property or would become
Landlord's property on the termination of this Lease shall be paid to and become
the property of Landlord. If this Lease is not so terminated, then upon receipt
of the insurance proceeds (if the loss is covered by insurance) and Tenant's
share of the deductible (as provided in Paragraph 8.C) and the issuance of all
necessary governmental permits, Landlord shall commence and diligently prosecute
to completion the restoration of the Premises, to the extent then allowed by
Law, to substantially the same condition in which the Premises were immediately
prior to such damage. If the Improvements are damaged by any peril both (i) not
covered by the type of insurance Landlord is required to carry pursuant to
Paragraph 8.C and (ii) not covered by valid and collectible insurance actually
carried by Landlord or Tenant in force at the time of such damage or
destruction, to such an extent that the estimated restoration cost does not
exceed ten percent (10%) of the then actual replacement cost of the
Improvements, then, provided that Landlord does not elect to terminate the
Lease, Tenant shall pay to Landlord, prior to Landlord's commencement of the
restoration, the amount of such estimated cost of restoration, or a portion
thereof, as follows: (i) Tenant shall pay to Landlord one hundred percent (100%)
of the amount of such estimated cost of restoration which does not exceed the
amount of the Monthly Installment of rent then payable under this Lease; and
(ii) to the extent the estimated cost of restoration exceeds the Monthly
Installment of rent then payable under this Lease, Tenant shall pay to Landlord
a fraction of such excess amount, which fraction shall
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<PAGE>
have as its numerator the number of calendar months then remaining in the Lease
Term and shall have as its denominator the number of calendar months in the
useful life of the restoration work in question. Landlord's obligation to
restore shall be limited to the Building and Tenant Improvements constructed by
Landlord as they existed as of the Commencement Date, excluding any trade
fixtures and/or personal property and/or alterations constructed or installed by
Tenant in the Premises. Tenant shall forthwith replace or fully repair all trade
fixtures installed by Tenant and existing at the time of such damage or
destruction.
B. Landlord's Right to Terminate. Landlord shall have the option to
-----------------------------
terminate this Lease in the event any of the following occurs, which option may
be exercised only by delivery to Tenant of a written notice of election to
terminate within thirty (30) days after the date of such damage:
(1) The Improvements are damaged by any peril both (i) not
covered by the type of insurance Landlord is required to carry pursuant to
Paragraph 8.C and (ii) not covered by valid and collectible insurance actually
carried by Landlord or Tenant and in force at the time of such damage or
destruction, to such an extent that the estimated restoration cost exceeds ten
percent (10%) of the then actual replacement cost thereof; provided, however,
that Landlord may not terminate this Lease pursuant to this subparagraph if
Tenant agrees in writing to pay the amount by which the restoration cost exceed
ten percent (10%) of the replacement cost of the Improvements and deposits with
Landlord an amount equal to the estimated amount of such excess within thirty
(30) days after Landlord has notified Tenant with its election to terminate this
Lease pursuant to this subparagraph.
(2) The Improvements are damaged by any peril during the last
twelve (12) months of the Lease Term to such an extent that the estimated cost
to restore equals or exceeds an amount equal to six (6) times the Monthly
Installment of rent then due; provided, however, that Landlord may not terminate
this Lease pursuant to this subparagraph if Tenant, at the time of such damage,
has an express written option to further extend the term of this Lease and
Tenant exercises such option to so further extend the Lease Term within fifteen
(15) days following the date of such damage.
(3) The Improvements are damaged by any peril and, because of
the Laws then in force, (i) may not be restored at reasonable costs to
substantially the same condition in which it was prior to such damage, or (ii)
if restored, may not be used for the same use being made thereof before such
damage.
C. Tenant's Right to Terminate. If the Improvements are damaged by
---------------------------
any peril and Landlord does not elect to terminate this Lease or is not entitled
to terminate this Lease pursuant to Paragraph 14.B, then as soon as reasonably
practicable, Landlord shall furnish Tenant with the written opinion of
Landlord's architect or construction consultant as to when the restoration work
required of Tenant may be completed. Tenant shall have the
16
<PAGE>
option to terminate this Lease in the event any of the following occurs, which
option may be exercised only by delivery to Landlord of a written notice of
election to terminate within fifteen (15) days after Tenant receives from
Landlord the estimate of the time needed to complete such restoration:
(1) The Improvements are damaged by any peril and, in the
reasonable opinion of Landlord's architect or construction consultant, the
restoration of the Premises cannot be substantially completed within two hundred
seventy (270) days after the issuance of necessary building permits for such
restoration.
(2) The Improvements are damaged by any peril within twelve (12)
months of the last day of the Lease Term, and, in the reasonable opinion of
Landlord's architect or construction consultant, the restoration of the Premises
cannot be substantially completed within ninety (90) days after the date of such
damage.
D. Abatement of Rent. In the event of damage to the Premises which
-----------------
does not result in the termination of this Lease, the Monthly Installment of
rent and Additional Rent shall be temporarily abated during the period of
restoration in proportion to the degree to which Tenant's use of the Premises is
impaired by such damage. Tenant shall not be entitled to any compensation from
Landlord for loss of Tenant's property or loss to Tenant's business caused by
such damage or restoration. Tenant hereby waives the provisions of Section
1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil
Code, and the provisions of any similar law, hereinafter enacted.
15. Condemnation.
------------
A. Definition of Terms. For the purposes of this Lease, the term
-------------------
(1) "Taking" means a taking of the Premises or damage to the Premises related to
the exercise of the power of eminent domain and includes a voluntary conveyance,
in lieu of court proceedings, to any agency, authority, public utility, person
or corporate entity empowered to condemn property; (2) "Total Taking" means the
taking of the entire Premises or so much of the Premises as to prevent or
substantially impair the use thereof by Tenant for the uses herein specified;
(3) "Partial Taking" means a Taking which does not constitute a Total Taking;
(4) "Date of Taking" means the date upon which the title to the Premises, or a
portion thereof, passes to and vests in the condemnor or the effective date of
any order for possession if issued prior to the date title vests in the
condemnor; and (5) "Award" means the amount of any award made, consideration
paid, or damages ordered as a result of a Taking.
B. Rights. The parties agree that in the event of a Taking all
------
rights between them or in and to an Award shall be as set forth herein and
Tenant shall have no right to any Award except as set forth herein.
C. Total Taking. In the event of a Total Taking during the term
------------
hereof (1) the rights of Tenant under the Lease and the
17
<PAGE>
leasehold estate of Tenant in and to the Premises shall cease and terminate as
of the Date of Taking; (2) Landlord shall refund to Tenant any prepaid rent and
any unapplied security deposit; (3) Tenant shall pay Landlord any rent or
charges due Landlord under the Lease, each prorated as of the Date of Taking;
(4) Tenant shall receive from the Award those portions of the Award attributable
to trade fixtures of Tenant and for moving expenses of Tenant; and (5) the
remainder of the Award shall be paid to and be the property of Landlord.
D. Partial Taking. In the event of a Partial Taking during the term
--------------
hereof (1) the rights of Tenant under the Lease and the leasehold estate of
Tenant in and to the portion of the Premises taken shall cease and terminate as
of the Date of Taking; (2) from and after the Date of Taking the Monthly
Installment of rent shall be reduced to an amount that bears the same
relationship to such Monthly Installment of rent before such reduction as the
fair market rental value of the Premises which remains after the Partial Taking
bears to the fair market rental value of the Premises prior to the Partial
Taking; (3) Tenant shall receive from the Award the portions of the Award
attributable to trade fixtures of Tenant; and (4) the remainder of the Award
shall be paid to and be the property of Landlord.
16. Mechanics' Lien. Tenant shall (A) pay for all labor and services
---------------
performed for, materials used by or furnished to, Tenant or any contractor
employed by Tenant with respect to the Premises; (B) indemnify, defend, protect
and hold Landlord and the Premises harmless and free from any liens, claims,
liabilities, demands, encumbrances, or judgments created or suffered by reason
of any labor or services performed for, materials used by or furnished to,
Tenant or any contractor employed by Tenant with respect to the Premises; (C)
give notice to Landlord in writing five (5) days prior to employing any laborer
or contractor to perform services related to, or receiving materials for use
upon the Premises; and (D) permit Landlord to post a notice of nonresponsibility
in accordance with the statutory requirements of California Civil Code Section
3094 or any amendment thereof. In the event Tenant is required to post an
improvement bond with a public agency in connection with the above, Tenant
agrees to include Landlord as an additional obligee.
17. Inspection of the Premises. Tenant shall permit Landlord and its
--------------------------
Agents to enter the Premises at any reasonable time upon reasonable prior notice
for the purpose of inspecting the same, performing Landlord's maintenance and
repair responsibilities, posting a notice of non-responsibility for alterations,
additions or repairs and at any time within ninety (90) days prior to expiration
of this Lease, to place upon the Premises, ordinary "For Lease" or "For Sale"
signs; provided, however, Landlord may only enter the Premises in the company of
an escort provided by Tenant if Tenant provides such escort on a reasonable
basis and Landlord shall use reasonable efforts to minimize any interference
with Tenant's business operations.
18. Compliance with Laws. Subject to the provisions of
--------------------
18
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Paragraph 11.B above, Tenant shall, at its own cost, comply with all of the
requirements of all municipal, county, state and federal authorities now in
force, or which may hereafter be in force, pertaining to the use and occupancy
of the Premises, and shall faithfully observe all municipal, county, state and
federal law, statutes or ordinances now in force or which may hereafter be in
force pertaining to the use and occupancy of the Premises. 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 ordinance or statute in the use and occupancy of
the Premises shall be conclusive of the fact that such violation by Tenant has
occurred.
19. Subordination. The following provisions shall govern the relationship
-------------
of this Lease to any underlying lease, mortgage or deed of trust which now or
hereafter affects the Premises or Landlord's interest or estate therein and any
renewal, modification, consolidation, replacement, or extension thereof (a
"Security Instrument").
A. Priority. This Lease is subject and subordinate to all Security
--------
Instruments existing as of the Commencement Date. However, if any Lender so
requires, this Lease shall become prior and superior to any such Security
Instrument.
B. Subsequent Security Instruments. At Landlord's election, this
-------------------------------
Lease shall become subject and subordinate to any Security Instrument created
after the Commencement Date provided that the Lender holding such Security
Agreement agrees that in the event of foreclosure of the Security Instrument in
question, such Lender shall recognize the tenancy of Tenant on the terms and
conditions contained in this Lease so long as Tenant is not in default under
this Lease. Notwithstanding such subordination, Tenant's right to quiet
possession of the Premises shall not be disturbed so long as Tenant is not in
default and performs all of its obligations under this Lease, unless this Lease
is otherwise terminated pursuant to its terms.
C. Documents. Tenant shall execute any reasonable document or
---------
instrument required by Landlord or any Lender to make this Lease either prior or
subordinate to a Security Instrument, which may include such other matters as
the Lender customarily requires in connection with such agreements, including
provisions that the Lender not be liable for (1) the return of the Security
Deposit unless the Lender receives it from Landlord, and (2) any defaults on the
part of Landlord occurring prior to the time that the Lender takes possession of
the Premises in connection with the enforcement of its Security Instrument.
Tenant's failure to execute any such document or instrument within ten (10) days
after written demand therefor shall constitute a default by Tenant. Tenant's
obligation to execute and deliver any subordination agreement to any future
Lender shall be conditioned upon such Lender agreeing that in the event of
foreclosure of the Security Instrument in question, such Lender shall recognize
the tenancy of Tenant on the terms and conditions contained in this Lease so
long
19
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as Tenant is not in default under this Lease.
D. Tenant's Attornment. Tenant shall attorn (1) to any purchaser of
-------------------
the Premises at any foreclosure sale or private sale conducted pursuant to any
Security Instrument encumbering the Premises; (2) to any grantee or transferee
designated in any deed given in lieu of foreclosure; or (3) to the lessor under
any underlying ground lease should such ground lease be terminated.
E. Lender. The term "Lender" as used in this Lease shall mean: (i)
------
any beneficiary, mortgagee, secured party or other holder of any deed of trust,
mortgage or other written security device or agreement effecting the Premises;
and (ii) any Lessor underlying Lease under which Landlord holds an interest in
the Premises.
20. Holding Over. This Lease shall terminate without further notice at
------------
the expiration of the Lease Term. Any holding over by Tenant after expiration
shall not constitute a renewal or extension or give Tenant any rights in or to
the Premises.
21. Notices. Any notice required or desired to be given under this Lease
-------
shall be in writing with copies directed as indicated below and shall be
personally served or given by mail. Any notice given by mail shall be deemed to
have been given when forty-eight (48) hours have elapsed from the time such
notice was deposited in the United States mails, certified and postage prepaid,
return receipt requested, addressed to the party to be served with a copy as
indicated herein at the last address given by that party to the other party
under the provisions of this paragraph. At the date of execution of this Lease,
the address of Landlord is:
511 Division Street
Campbell, CA 95008
ATTN: James D. Mair
and the address of Tenant is:
5884 Eden Park Place
San Jose, CA 95138-1859
ATTN: Chief Financial Officer
After the Commencement Date, the address of Tenant will be at the Premises.
22. Attorneys' Fees. In the event either party shall bring any action or
---------------
legal proceeding for damages for any alleged breach of any provision of this
Lease, to recover rent or possession of the Premises, to terminate this Lease,
or to enforce, protect or establish any term or covenant of this Lease or right
or remedy of either party, the prevailing party shall be entitled to recover as
a part of such action or proceeding, reasonable attorneys' fees and court costs,
including attorneys' fees and costs for appeal, as may be fixed by the court or
jury. The term "prevailing party" shall mean the party who received
substantially the relief requested,
20
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whether by settlement, dismissal, summary judgment, judgment, or otherwise.
23. Subleasing and Assignment.
-------------------------
A. Landlord's Consent Required. Tenant's interest in this Lease is
---------------------------
not assignable, by operation of law or otherwise, nor shall Tenant have the
right to sublet the Premises, transfer any interest of Tenant therein or permit
any use of the Premises by another party, without the prior written consent of
Landlord to each such assignment, subletting, transfer or use, which consent
Landlord agrees not to withhold unreasonably subject to the provi sions of
Subparagraph 23.C below. A consent to one assignment, subletting, occupancy or
use by another party shall not be deemed to be a consent to any subsequent
assignment, subletting, occupancy or use by another party. Any assignment or
subletting without such consent shall be void and shall, at the option of
Landlord, terminate this Lease.
Landlord's waiver or consent to any assignment or subletting hereunder
shall not relieve Tenant from any obligation under this Lease unless the consent
shall so provide.
B. Transferee Information Required. If Tenant desires to assign its
-------------------------------
interest in this Lease or sublet the Premises, or transfer any interest of
Tenant therein, or permit the use of the Premises by another party (hereinafter
collectively referred to as a "Transfer"), Tenant shall give Landlord at least
thirty (30) business days prior written notice of the proposed Transfer and of
the terms of such proposed Transfer, including, but not limited to, the name and
legal composition of the proposed transferee, a financial statement of the
proposed transferee, the nature of the proposed transferee's business to be
carried on in the Premises (including a list of the type and quantities of all
Hazardous Materials to be used by the transferee on the Premises), the payment
to be made or other consideration to be given to Tenant on account of the
Transfer, and such other pertinent information as may be reasonably requested by
Landlord, all in sufficient detail to enable Landlord to evaluate the proposed
Transfer and the prospective transferee.
C. Landlord's Rights. It is the intent of the parties hereto that
-----------------
this Lease shall confer upon Tenant only the right to use and occupy the
Premises, and to exercise such other rights as are conferred upon Tenant by this
Lease. In the event Tenant seeks to Transfer its interest in this Lease or the
Premises, Landlord shall have the following options, which may be exercised at
its sole choice without limiting Landlord in the exercise of any other right or
remedy which Landlord may have by reason of such proposed Transfer:
(1) Landlord may consent to the proposed Transfer on the
condition that Tenant agrees to pay to Landlord, as Additional Rent, fifty
percent (50%) of any and all rents or other consideration (including key money)
received by Tenant from the transferee by reason of such Transfer in excess of
the rent payable
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by Tenant to Landlord under this Lease (less any brokerage commissions,
attorneys' fees, advertising expenses and tenant improvement costs incurred by
Tenant in connection with the Transfer and less any rent payable under this
Lease for the period of time, if any, not to exceed three (3) months, that the
Premises are vacant and listed with a broker for sublease and ending when the
term of the sublease commences). Tenant expressly agrees that the foregoing is
a reasonable condition for obtaining Landlord's consent to any Transfer; or
(2) Landlord may reasonably withhold its consent to the proposed
Transfer.
D. Permitted Transfers. Notwithstanding the foregoing, Tenant may,
-------------------
without Landlord's prior written consent, assign its interest in the Lease or
sublet the Premises or a portion thereof to (i) a subsidiary, affiliate,
division or corporation which controls or is controlled by or under common
control with Tenant; (ii) a successor corporation related to Tenant by merger,
consolidation, non-bankruptcy reorganization or government action;
or (iii) a purchaser of substantially all of the Tenant's assets; provided that,
in each instance described above, (a) the transferee (other than in the case of
a sublease) assumes the obligations of the Tenant under this Lease in a written
instrument delivered to Landlord; (b) the transferor tenant remains liable as a
primary obligor for the obligations of Tenant under this Lease; and (c) the
tangible net worth (determined in accordance with generally accepted accounting
principles) of the transferee tenant is no less than Tenant's tangible net worth
immediately prior to the date of such Transfer.
24. Successors. The covenants and agreements contained in this Lease
----------
shall be binding on the parties hereto and on their respective heirs, successors
and assigns (to the extent the Lease is assignable).
25. Mortgagee Protection. In the event of any default on the part of
--------------------
Landlord, Tenant will give notice by registered or certified mail to any
beneficiary of a deed of trust or mortgagee of a mortgage encumbering the
Premises, whose address shall have been previously furnished to Tenant. So long
as such beneficiary or mortgagee is making reasonable efforts to cure the
default, including, but not limited to, obtaining possession of the Premises by
power of sale or judicial foreclosure, if such should prove necessary to effect
a cure, Tenant shall not have the right to terminate this Lease.
26. Estoppel Certificate and Financial Statement. At all times during the
--------------------------------------------
Lease Term, each party agrees, following any request by the other party,
promptly to execute and deliver to the requesting party an estoppel certificate
(i) certifying that this Lease is unmodified and in full force and effect or, if
modified, stating the nature of such modification and certifying that this
Lease, as so modified, is in full force and effect, (ii) stating the date to
which the rent and other charges are paid in advance, if any, (iii)
acknowledging that there are not, to the certifying
22
<PAGE>
party's knowledge, any uncured defaults on the part of any party hereunder or,
if there are uncured defaults, specifying the nature of such defaults, and (iv)
certifying such other information about the Lease as may be reasonably required
by the requesting party. a failure to deliver an estoppel certificate within ten
(10) days after delivery of a request therefor shall be a conclusive admission
that, as of the date of the request for such statement, (a) this Lease is
unmodified except as may be represented by the requesting party in said request
and is in full force and effect, (b) there are no uncured defaults in the
requesting party's performance, and (c) no rent has been paid in advance for
more than thirty (30) days. At any time during the Lease Term, Tenant shall,
upon ten (10) days prior written notice from Landlord, provide Tenant's most
recent financial statement and financial statements covering the twenty-four
(24) month period prior to the date of such most recent financial statement to
any existing Lender or to any potential Lender or buyer of the Premises;
provided, however, that so long as Tenant is a public company, the stock of
which is publicly traded, Tenant shall only be obligated to provide to Landlord
such financial information as has been made available to the public in filings
with the Securities and Exchange Commission. Such statements shall be prepared
in accordance with generally accepted accounting principles and, if such is the
normal practice of Tenant, shall be audited by an independent certified public
accountant. Failure to deliver such statements within ten (10) days after
receipt of written notice from Landlord of delinquency in delivery of such
statement shall be an Event of Default under Paragraph 13.
27. Surrender of Lease Not Merger. The voluntary or other surrender of
-----------------------------
this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger
and shall, at the option of Landlord, terminate all or any existing subleases or
subtenants, or operate as an assignment to Landlord of any or all such subleases
or subtenants.
28. Waiver. The waiver by Landlord or Tenant of any breach of any term,
------
covenant or condition herein contained shall not be deemed to be a waiver of
such term, covenant or condition or any subsequent breach of the same or any
other term, covenant or condition herein contained. Any waiver shall be in
writing and signed by both Landlord and Tenant.
29. General.
-------
A. Captions. The captions and paragraph headings used in this Lease
--------
are for the purposes of convenience only. They shall not be construed to limit
or extend the meaning of any part of this Lease, or be used to interpret
specific sections. The word(s) enclosed in quotation marks shall be construed
as defined terms for purposes of this Lease. As used in this Lease, the
masculine, feminine and neuter and the singular or plural number shall each be
deemed to include the other whenever the context so requires.
B. Definition of Landlord. The term Landlord as used in this Lease,
----------------------
so far as the covenants or obligations on the part
23
<PAGE>
of Landlord are concerned, shall be limited to mean and include only the owner
at the time in question of the fee title of the Premises, and in the event of
any transfer or transfers of the title of such fee, the Landlord herein named
(and in case of any subsequent transfers or conveyances, the then grantor) shall
be automatically freed and relieved of all liability with respect to performance
of any covenants or obligations on the part of Landlord contained in this Lease
to be performed or based on events occurring after the date of such transfer or
conveyance; provided that (i) any funds in the hands of Landlord or the then
grantor at the time of such transfer, in which Tenant has an interest, shall be
turned over to the grantee; (ii) the grantee assumes the obligations on the part
of Landlord contained in this Lease to be performed after the date of such
transfer or conveyance; and (iii) the original Landlord shall not be released of
liability until all Improvements have been completed and the "Commencement Date"
has occurred. It is intended that the covenants and obligations contained in
this Lease on the part of Landlord shall, subject as aforesaid, be binding upon
each Landlord, its heirs, personal representatives, successors and assigns only
during its respective period of ownership.
C. Time of Essence. Time is of the essence for the performance of
---------------
each term, covenant and condition of this Lease.
D. Severability. In case any one or more of the provisions
------------
contained herein, except for the payment of rent, shall for any reason be held
to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Lease, but this Lease shall be construed as if such invalid, illegal or
unenforceable provision had not been contained herein. This Lease shall be
construed and enforced in accordance with the laws of the State of California.
E. Quiet Enjoyment. Upon Tenant paying the rent for the Premises
---------------
and observing and performing all of the covenants, conditions and provisions on
Tenant's part to be observed and performed hereunder, Tenant shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
F. Law. As used in this Lease, the term "Law" or "Laws" shall mean
---
any judicial decision, statute, constitution, ordinance, resolution, regulation,
rule, administrative order, or other requirement of any government agency or
authority having jurisdiction over the parties to this Lease or the Premises or
both, in effect at the Commencement Date of this Lease or any time during the
Lease Term, including, without limitation, any regulation, order, or policy of
any quasi-official entity or body (e.g., board of fire examiners, public utility
----
or special district).
G. Agent. As used in this Lease, the term "Agent" shall mean, with
-----
respect to either Landlord or Tenant, its respective agents, employees,
contractors (and their subcontractors), and invitees (and in the case of Tenant,
its
24
<PAGE>
subtenants).
H. WAIVER OF JURY TRIAL.
--------------------
LANDLORD AND TENANT HEREBY WAIVE THEIR RESPECTIVE RIGHT TO TRIAL BY JURY OF
ANY CAUSE OF ACTION, CLAIM, COUNTERCLAIM OR CROSS-COMPLAINT IN ANY ACTION,
PROCEEDING AND/OR HEARING BROUGHT BY EITHER LANDLORD AGAINST TENANT OR
TENANT AGAINST LANDLORD ON ANY MATTER WHATSOEVER ARISING OUT OF, OR IN ANY
WAY CONNECTED WITH, THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT,
TENANT'S USE OR OCCUPANCY OF THE PREMISES, OR ANY CLAIM OF INJURY OR
DAMAGE, OR THE ENFORCEMENT OF ANY REMEDY UNDER ANY LAW, STATUTE, OR
REGULATION, EMERGENCY OR OTHERWISE, NOW OR HEREAFTER IN EFFECT.
INITIALS: ______ (Landlord)
______ (Tenant)
30. Sign. Tenant shall not place or permit to be placed any
----
sign or decoration on the Parcel or the exterior of the Building which violates
any applicable Law. Tenant, upon written notice by Landlord, shall immediately
remove any sign or decoration that Tenant has placed or permitted to be placed
on the Parcel or the exterior of the Building in violation of applicable Law,
and if Tenant fails to so remove such sign or decoration within five (5) days
after Landlord's written notice, Landlord may enter upon the Premises and remove
said sign or decoration and Tenant agrees to pay Landlord, as additional rent
upon demand, the cost of such removal. At the termination of this Lease, Tenant
shall remove any sign which it has placed on the Parcel or Building and shall
repair any damage caused by the installation or removal of such sign.
31. Interest on Past Due Obligations. Any amount due from Tenant or
--------------------------------
Landlord not paid when due shall bear interest from the due date until paid, at
an annual rate equal to the lower of (the "Permitted Rate"): (1) ten percent
(10%); or (2) five percent (5%) plus the rate established by the Federal Reserve
Bank of San Francisco, as of the twenty-fifth (25th) day of the month
immediately preceding the due date, on advances to member banks under Sections
13 and 13(a) of the Federal Reserve Act, as now in effect or hereafter from time
to time amended. Payment of such interest shall not excuse or cure any default
by Tenant under this Lease.
32. Surrender of the Premises. On the last day of the term hereof, or on
-------------------------
the sooner termination of this Lease, Tenant shall surrender the Premises to
Landlord in their condition existing as of the Commencement Date of this Lease,
ordinary wear and tear excepted, with all originally painted interior walls
washed, and other interior walls cleaned, and repaired or replaced, the air
conditioning and heating equipment serviced and repaired by a reputable and
licensed service firm, all floors cleaned and waxed,
25
<PAGE>
all to the reasonable satisfaction of Landlord. Tenant shall remove all of
Tenant's personal property and trade fixtures from the Premises, and all
property not so removed shall be deemed abandoned by Tenant. Tenant, at its sole
cost, shall repair any damage to the Premises caused by the removal of Tenant's
personal property, machinery and equipment, which repair shall include, without
limitation, the patching and filling of holes and repair of structural damage.
If the Premises are not so surrendered at the termination of this Lease, Tenant
shall indemnify, defend, protect and hold Landlord harmless from and against
loss or liability resulting from delay by Tenant in so surrendering the Premises
including without limitation, any claims made by any succeeding tenant or losses
to Landlord due to lost opportunities to lease to succeeding tenants.
33. Authority. The undersigned parties hereby warrant that they have
---------
proper authority and are empowered to execute this Lease on behalf of Landlord
and Tenant, respectively.
34. Easements. This Lease is made subject to all matters of public record
---------
affecting title to the property of which the Premises are a part.
35. Brokers. Tenant represents and warrants to Landlord that
-------
it has not dealt with any broker respecting this transaction other than Colliers
Parish International, Inc. and hereby agrees to indemnify and hold Landlord
harmless from and against any brokerage commission or fee, obligation, claim or
damage (including attorneys' fees) paid or incurred respecting any broker
claiming through Tenant or with which/whom Tenant has dealt.
36. Limitation on Landlord's Liability.
----------------------------------
A. Limitation. Tenant, for itself and its successors and assigns
----------
(to the extent this Lease is assignable), hereby agrees that in the event of any
actual, or alleged, breach or default by Landlord under this Lease that:
(1) Tenant's sole and exclusive remedy and recourse against
Landlord shall be as against Landlord's interest in the Premises;
(2) No partner of Landlord shall be sued or named as a party in
a suit or action (except as may be necessary to secure jurisdiction of the
partnership);
(3) No service of process shall be made against any partner of
Landlord (except as may be necessary to secure jurisdiction of the partnership);
(4) No partner of Landlord shall be required to answer or
otherwise plead to any service of process;
(5) No judgment will be taken against any partner of Landlord;
26
<PAGE>
(6) Any judgment taken against any partner of Landlord may be
vacated and set aside at any time nunc pro tunc;
(7) No writ of execution will ever be levied against the assets
of any partner of Landlord; and
(8) The covenants and agreements of Tenant set forth in this
Paragraph 36 shall be enforceable by Landlord and any partner of Landlord.
B. Exceptions. The limitations on Tenant's remedy and recourse set
----------
forth in Paragraph 36.A above shall not apply to (i) the obligation of Landlord
to construction the Building and Tenant Improvements in accordance with EXHIBITS
"C" and "D", (ii) the obligation of the Landlord concerning Hazardous Materials
as set forth in Subparagraph 37.B below, and (iii) loss resulting to Tenant from
the Landlord's failure to carry insurance required by this Lease.
37. Hazardous Material.
------------------
A. Definitions. As used herein, the term "Hazardous Material" shall
-----------
mean any substance: (i) the presence of which requires investigation or
remediation under any federal, state or local statute, regulation, ordinance,
order, action, policy or common law; (ii) which is or becomes defined as a
"hazardous waste," "hazardous substance," pollutant or contaminant under any
federal, state or local statute, regulation, rule or ordinance or amendments
thereto including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) and/or the
Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.); (iii)
which is toxic, explosive, corrosive, flammable, infectious, radioactive,
carcinogenic, mutagenic, or otherwise hazardous and is or becomes regulated by
any governmental authority, agency, department, commission, board, agency or
instrumentality of the United States, the State of California or any political
subdivision thereof; (iv) the presence of which on the Premises causes or
threatens to cause a nuisance upon the Premises or to adjacent properties or
poses or threatens to pose a hazard to the health or safety of persons on or
about the Premises; (v) the presence of which on adjacent properties could
constitute a trespass by Landlord or Tenant; (vi) without limitation which
contains gasoline, diesel fuel or other petroleum hydrocarbons; (vii) without
limitation which contains polychlorinated biphenyls (PCBs), asbestos or urea
formaldehyde foam insulation; or (viii) without limitation radon gas.
B. Landlord's Obligation. Landlord, at its sole cost, shall comply
---------------------
with all Laws which impose liability or responsibility upon either Landlord or
Tenant to investigate, remediate or otherwise take any action with respect to
(i) any Hazardous Material which is present in, on or under the Premises as of
the Commencement Date of this Lease or (ii) any Hazardous Material used,
generated, discharged, transported to or from, stored or disposed of by Landlord
or its Agents, in, on, under, through or about the Premises and/or the
surrounding real property during the
27
<PAGE>
Lease Term. Landlord shall indemnify, defend, protect and hold Tenant harmless
from and against all liabilities, claims, penalties, fines, response costs and
other expenses (including reasonable attorneys' fees) which result from
Landlord's failure to perform the obligation stated in the immediate preceding
sentence.
C. Permitted Use. Subject to the compliance by Tenant with the
-------------
provisions of Subparagraphs D, E, F, G, I, J and K below, Tenant shall be
permitted to use and store on the Premises those Hazardous Materials listed in
EXHIBIT "E" attached hereto, in the quantities set forth in EXHIBIT "E".
D. Hazardous Materials Management Plan. Prior to Tenant using,
-----------------------------------
handling, transporting or storing any Hazardous Material at or about the
Premises (including, without limitation, those listed in EXHIBIT "E"), Tenant
shall submit to Landlord a Hazardous Materials Management Plan ("HMMP") for
Landlord's review and approval, which approval shall not be unreasonably
withheld. The HMMP shall describe: (aa) the quantities of each material to be
used, (bb) the purpose for which each material is to be used, (cc) the method of
storage of each material, (dd) the method of transporting each material to and
from the Premises and within the Premises, (ee) the methods Tenant will employ
to monitor the use of the material and to detect any leaks or potential hazards,
and (ff) any other information any department of any governmental entity (city,
state or federal) requires prior to the issuance of any required permit for the
Premises or during Tenant's occupancy of the Premises. Landlord may, but shall
have no obligation to review and approve the foregoing information and HMMP, and
such review and approval or failure to review and approve shall not act as an
estoppel or otherwise waive Landlord's rights under this Lease or relieve Tenant
of its obligations under this Lease. If Landlord determines in good faith by
inspection of the Premises or review of the HMMP that the methods in use or
described by Tenant are not adequate in Landlord's good faith judgment to
prevent or eliminate the existence of environmental hazards, then Tenant shall
not use, handle, transport, or store such Hazardous Materials at or about the
Premises unless and until such methods are approved by Landlord in good faith
and added to an approved HMMP. Once approved by Landlord, Tenant shall strictly
comply with the HMMP and shall not change its use, operations or procedures with
respect to Hazardous Materials without submitting an amended HMMP for Landlord's
review and approval as provided above.
E. Use Restriction. Except as specifically allowed in Subparagraph
---------------
C above, Tenant shall not cause or permit any Hazardous Material to be used,
stored, generated, discharged, transported to or from, or disposed of in or
about the Premises, or any other land or improvements in the vicinity of the
Premises, by Tenant or its Agents, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld provided Tenant
complies with the provisions of this Paragraph 39. In no case shall Tenant use
or permit the Premises to be used for any of the following uses or purposes: (i)
leather tanning, metal plating, salvage operations of any type (including, but
not limited to, automobiles, electrical equipment or transformers, military
surplus
28
<PAGE>
or lead batteries); (ii) fertilizer or pesticide manufacture, packaging or bulk
storage; (iii) wood or pole treatment facilities; (iv) paint manufacturing
plants; (v) drum or tank recycling or salvage; (vi) oil reclamation; (vii)
petroleum blending, packaging or bulk storage; (viii) chemical manufacturing,
processing, blending, bulk storage, packaging or distribution; (ix) ceramics
manufacturing; (x) precious metal recovery; (xi) on-site dry cleaning; (xii) gas
station; (xiii) automobile painting; (xiv) automatic service center for the
lubrication of automobiles; (xv) semiconductor or circuit board manufacturing
(semiconductor research and development involving prototypes only as opposed to
manufacture for sale and distribution may be permitted with Landlord's consent);
(xvi) storage of any Hazardous Materials in underground tanks; or (xvii) the
use, storage, or disposal of freon, TCE or any Hazardous Material that has been
detected at levels exceeding naturally occurring background levels or "action
levels" of any government agency in the soil or groundwater of the Premises as
of the Commencement Date. Without limiting the generality of the foregoing,
Tenant, at its sole cost, shall comply with all Laws relating to the storage,
use, generation, transport, discharge and disposal by Tenant or its Agents of
any Hazardous Material. If the presence of any Hazardous Material on the
Premises caused or permitted by Tenant or its Agents results in contamination of
the Premises or any soil, air, ground or surface waters under, through, over,
on, in or about the Premises, Tenant, at its expense, shall promptly take all
actions necessary to return the Premises and/or the surrounding real property to
the condition existing prior to the appearance of such Hazardous Material. In
the event there is a release, discharge or disposal of or contamination of the
Premises by a Hazardous Material which is of the type that has been stored,
handled, transported or otherwise used or permitted by Tenant or its Agents on
or about the Premises, Tenant shall have the burden of proving that such
release, discharge, disposal or contamination is not the result of the acts or
omissions of Tenant or its Agents.
F. Tenant Indemnity. Tenant shall defend, protect, hold harmless
----------------
and indemnify Landlord and its Agents and Lenders with respect to all actions,
claims, losses (including, diminution in value of the Premises), fines,
penalties, fees (including, but not limited to, attorneys' and consultants'
fees) costs, damages, liabilities, remediation costs, investigation costs,
response costs and other expenses arising out of, resulting from, or caused by
(i) any Hazardous Material used, generated, discharged, transported to or from,
stored, or disposed of by Tenant or its Agents in, on, under, over, through or
about the Premises and/or the surrounding real property or (ii) any disposal or
release of any Hazardous Material on the surface of the Premises occurring after
the Commencement Date and prior to the termination of this Lease that is not the
result of the negligent acts or wilful misconduct of Landlord or its Agents.
Tenant shall not suffer any lien to be recorded against the Premises as a
consequence of the disposal of any Hazardous Material on the Premises by Tenant
or its Agents, including any so called state, federal or local "super fund" lien
related to the "clean up" of any Hazardous Material in, over, on, under,
through, or about the Premises.
29
<PAGE>
G. Compliance. Tenant shall immediately notify Landlord of any
----------
inquiry, test, investigation, enforcement proceeding by or against Tenant or the
Premises concerning any Hazardous Material. Any remediation plan prepared by or
on behalf of Tenant must be submitted to Landlord prior to conducting any work
pursuant to such plan and prior to submittal to any applicable government
authority and shall be subject to Landlord's consent. Tenant acknowledges that
Landlord, as the owner of the Property, at its election, shall have the sole
right to negotiate, defend, approve and appeal any action taken or order issued
with regard to any Hazardous Material by any applicable governmental authority.
H. Assignment and Subletting. It shall not be unreasonable for
-------------------------
Landlord to withhold its consent to any proposed assignment or subletting if (i)
the proposed assignee's or subtenant's anticipated use of the Premises involves
the storage, generation, discharge, transport, use or disposal of any Hazardous
Material not permitted under Subparagraph C above; (ii) if the proposed assignee
or subtenant has been required by any prior landlord, lender or governmental
authority to "clean up" or remediate any Hazardous Material; (iii) if the
proposed assignee or subtenant is subject to investigation or enforcement order
or proceeding by any governmental authority in connection with the use,
generation, discharge, transport, disposal or storage of any Hazardous Material;
provided that (ii) and (iii) will not apply in the case of a Fortune 500 Company
or a company that has a tangible net worth of at least Twenty Million Dollars
($20,000,000.00).
I. Surrender. Upon the expiration or earlier termination of the
---------
Lease, Tenant, at its sole cost, shall remove all Hazardous Materials from the
Premises that Tenant or its Agents introduced to the Premises. If Tenant fails
to so surrender the Premises, Tenant shall indemnify, protect, defend and hold
Landlord harmless from and against all damages resulting from Tenant's failure
to surrender the Premises as required by this Paragraph, including, without
limitation, any actions, claims, losses, liabilities, fees (including, but not
limited to, attorneys' and consultants' fees), fines, costs, penalties, or
damages in connection with the condition of the Premises including, without
limitation, damages occasioned by the inability to relet the Premises or a
reduction in the fair market and/or rental value of the Premises by reason of
the existence of any Hazardous Material in, on, over, under, through or around
the Premises.
J. Right to Appoint Consultant. Landlord shall have the right to
---------------------------
appoint a consultant to conduct an investigation to determine whether any
Hazardous Material is being used, generated, discharged, transported to or from,
stored or disposed of in, on, over, through, or about the Premises, in an
appropriate and lawful manner. If Tenant has violated any Law or covenant in
this Lease regarding the use, storage or disposal of Hazardous Materials on or
about the Premises, Tenant shall reimburse Landlord for the cost of such
investigation. Tenant, at its expense, shall comply with all reasonable
recommendations of the consultant required to conform Tenant's use, storage or
disposal of Hazardous Materials to the requirements of applicable Law or to
fulfill the obligations of
30
<PAGE>
Tenant hereunder.
K. Holding Over. If any action of any kind is required or requested
------------
to be taken by any governmental authority to clean-up, remove, remediate or
monitor any Hazardous Material (the presence of which is the result of the acts
or omissions of Tenant or its Agents) and such action is not completed prior to
the expiration or earlier termination of the Lease, Tenant shall be deemed to
have impermissibly held over until such time as such required action is
completed, and Landlord shall be entitled to all damages directly or indirectly
incurred in connection with such holding over, including without limitation,
damages occasioned by the inability to re-let the Premises or a reduction of the
fair market and/or rental value of the Premises.
L. Landlord's Representation. Landlord represents that, to the best
-------------------------
of its knowledge, there are no hazardous materials currently present in, on or
under the Premises. Landlord further represents that it does not have any
hazardous material reports in its possession relating to the Premises.
M. Provisions Survive Termination. The provisions of this Paragraph
------------------------------
37 shall survive the expiration or termination of this Lease.
N. Controlling Provisions. The provisions of this Paragraph 37 are
----------------------
intended to govern the rights and liabilities of the Landlord and Tenant
hereunder respecting Hazardous Materials to the exclusion of any other
provisions in this Lease that might otherwise be deemed applicable. The
provisions of this Paragraph 37 shall be controlling with respect to any
provisions in this Lease that are inconsistent with this Paragraph 37.
38. Approvals. Whenever the Lease requires that approval or consent of
---------
either Landlord or Tenant, such approval or consent shall not be unreasonably
withheld or delayed.
39. Right to Perform Other Party's Covenants. If either party shall, at
----------------------------------------
any time, fail to make any payment or perform any other act on its part to be
made or performed under this Lease, and such failure shall continue for thirty
(30) days following notice to the other party of such failure (unless the nature
of the obligation is such that it cannot be completed within thirty (30) days,
in which event the defaulting party need only commence performance within the
thirty (30) day period and thereafter diligently complete the same), the other
party may, but shall not be obligated to and without waiving or releasing such
party from any obligation of such party under this Lease, make such payment or
perform such other act to the extent the other party may deem desirable, and in
connection therewith pay expenses and employ counsel. Notwithstanding the
above, in the event such failure to perform shall create any unsafe or other
emergency condition, the other party may take such actions as it deems
reasonably necessary for protection of person and property in and about the
Premises and shall promptly thereafter notify the other party of such actions.
All sums so paid by the other party and all penalties, interest and
31
<PAGE>
costs in connection therewith shall be due and payable by the defaulting party
on the next day after any such payment by the other party, together with
interest at the Permitted Rate from such date to the date of payment thereof by
the defaulting party to the other party. All such sums owed by Tenant to
Landlord under this Paragraph 39 shall be deemed Additional Rent.
Tenant shall not have the right to deduct or offset amounts owing by
Landlord to Tenant under this Paragraph 39 against the Monthly Installment of
rent or Additional Rent due under this Lease except as follows: so long as, and
only so long as, Tenant is the beneficiary of a first deed of trust against the
Premises, Tenant shall have the right to deduct and offset against all Monthly
Installments of rent accruing under this Lease, any sums owing by Landlord to
Tenant under this Paragraph 39 which result from Landlord's failure to perform
its obligations under the Improvement Agreement and/or EXHIBIT "D".
40. Options to Extend.
-----------------
A. Tenant shall have three (3) options to extend the Lease Term,
each for a period of five (5) years (each of which is referred to herein as an
"Option Term"). Each option may be exercised only by written notice delivered to
Landlord not later than one year prior to the expiration of the then existing
Lease Term. Tenant may not exercise any of such options at any time that there
exists an Event of Default by Tenant involving those events described in
Paragraphs 13.A(4), (6), (7) or (8), or there exists an Event of Default by
Tenant that is capable of being cured but has not been cured by Tenant. In all
respects, the terms, covenants and conditions of this Lease shall remain
unchanged during each Option Term, except that the Monthly Installment of rent
payable during each Option Term shall be adjusted in accordance with Paragraph
40.B and except that there shall be no further option to extend the Lease Term
at the end of the third Option Term.
B. The Monthly Installment of rent payable during each Option Term
shall be ninety-five percent (95%) of the "Fair Market Rent for the Premises"
(as defined in Paragraph 40.D) as of the first day of the Option Term in
question. The Monthly Installment of rent during an Option Term may be subject
to an adjustment or adjustments at such times, in such amount or using such
formula, as may be established in connection with determining the Fair Market
Rent for the Premises.
C. Promptly following exercise of each option to extend, the parties
shall meet and endeavor to agree upon the Fair Market Rent of the Premises. If
within fifteen (15) days after exercise of any of the options, the parties
cannot agree upon the Fair Market Rent for the Premises as of the first day of
the Option Term in question, the parties shall submit the matter to binding
appraisal in accordance with the following procedure except that in any event
neither party shall be obligated to start such procedure sooner than twelve (12)
months before the expiration of the Lease Term. Within thirty (30) days after
exercise of the option (but
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<PAGE>
not sooner than twelve (12) months before the expiration of the Lease Term), the
parties shall either (i) jointly appoint an appraiser for this purpose or (ii)
failing this joint action, separately designate a disinterested appraiser. No
person shall be appointed or designated an appraiser unless he has at least five
(5) years experience in appraising major commercial property in Santa Clara
County and is a member of a recognized society of real estate appraisers. If
within thirty (30) days after the appointment the two appraisers reach agreement
on the Fair Market Rent for the Premises that value shall be binding and
conclusive upon the parties. If the two appraisers thus appointed cannot reach
agreement on the question presented within thirty (30) days after their
appointment, then the appraisers thus appointed shall appoint a third
disinterested appraiser having like qualifications. If within thirty (30) days
after the appointment of the third appraiser a majority of the appraisers agree
on the Fair Market Rent of the Premises that value shall be binding and
conclusive upon the parties. If within thirty (30) days after the appointment of
the third appraiser a majority of the appraisers cannot reach agreement on the
question presented, then the three appraisers shall each submit to the parties
their independent appraisals of the Fair Market Rent as of the first day of the
Option Term in question based upon the assumption that the Monthly Installment
of rent will be increased once at beginning of the 31st month of the Option Term
in proportion to the increase in the Consumer Price Index (All Urban Consumers)
for San Francisco/Oakland/San Jose region since the beginning of the Option
Term. The appraisal farthest from the median of the three appraisals shall be
disregarded, and the mean average of the remaining two appraisals shall be
deemed to be the Fair Market Rent of the Premises as of the first day of the
Option Term in question and shall be binding and conclusive upon the parties. In
such case, the Monthly Installment of rent shall be increased at the beginning
of the 31st month of the Option Term in proportion to the increase in the
Consumer Price Index (All Urban Consumers) for the San Francisco/Oakland/San
Jose region since the beginning of the Option Term. Each party shall pay the
fees and expenses of the appraiser appointed by it and shall share equally the
fees and expenses of the third appraiser. If the two appraisers appointed by the
parties cannot agree on the appointment of the third appraiser, they or either
of them shall give notice of such failure to agree to the parties and if the
parties fail to agree upon the selection of such third appraiser within ten (10)
days after the appraisers appointed by the parties give such notice, then either
of the parties, upon notice to the other party, may request such appointment by
the American Arbitration Association or, on its failure, refusal or inability to
act, may apply for such appointment to the presiding judge of the Superior Court
of Santa Clara County, California.
D. For purposes of this Paragraph, the term "Fair Market Rent for
the Premises" shall mean the going market rental and any adjustment or
adjustments to such rental at such time(s) and in such amount or using such
formula as is prevailing at the time of the commencement of the Option Term in
question, for comparably equipped space in buildings containing between 50,000
33
<PAGE>
and 100,000 square feet, located within a ten (10) mile radius of the Premises,
and in a condition comparable to the then condition of the Premises, taking into
account all legal uses for which the Premises could be used without material
alteration thereto and the value of all the improvements in the Premises made by
Landlord (but adjusting for the age and then condition of such improvements and
the fact that Landlord is not obligated to make any further improvements before
or during the Option Term in question) for a tenant proposing to sign a lease
for a similar term and having financial qualifications similar to Tenant and
using as a guide equivalent space in the size range specified above of similar
age, construction, quality, use and location. There shall be excluded from any
determination of "Fair Market Rent of the Premises" the rental value
attributable to any improvements constructed by Tenant with its own funds and
all trade fixtures and personal property of Tenant located in the Premises. Any
determination of "Fair Market Rent of the Premises" shall take into account
rental concessions then prevailing in the market (e.g., "free rent," lease
----
assumptions, payment of moving expenses, etc.).
41. Right of First Opportunity to Purchase. Landlord hereby grants Tenant
--------------------------------------
the right to purchase the Premises on the following terms and conditions:
A. Term of Right. The right created by this Paragraph 41 shall
-------------
commence as of the Effective Date and shall terminate upon the last to occur of
the expiration or earlier termination of the Lease Term or the last Option Term
as provided in Paragraph 40.
B. Landlord's First Offer. If Landlord desires to sell the Premises
----------------------
or any portion thereof or interest therein (with the portion or interest offered
being referred to herein as the "Offered Parcel") to a third party during the
time the right created by this Paragraph 41 exists pursuant to Paragraph 41.A,
then, before Landlord enters into a binding agreement to sell the Offered
Parcel, Landlord shall first offer to Tenant the oppor tunity to purchase the
Offered Parcel by giving Tenant written notice of the terms upon which Landlord
would be willing to sell the Offered Parcel ("Landlord's First Offer").
Landlord's First Offer shall include the following basic business terms upon
which Landlord would be willing to sell the Offered Parcel (the "Basic Purchase
Terms"): (i) the sales price, (ii) the amount and terms of any seller financing,
(iii) the amount and terms of any assumable third-party financing, (iv) the
state of title to be transferred by Landlord, (v) the time period between the
date a binding agreement to sell is fully executed and the date for close of
escrow, (vi) the proration of closing expenses, (vii) the legal description of
the Offered Parcel, and (viii) any other material business terms Landlord elects
to specify. The Offered Parcel can only be the Premises or an interest therein
and cannot include any other property. Landlord may deliver one or more offers
at any time and from time to time, each of which shall constitute a Landlord's
First Offer for purposes of this Paragraph 41, unless it qualifies as a
"Landlord's Re-Offer" pursuant to Paragraph 41.D. Tenant shall have the
exclusive right to purchase the Offered Parcel upon the terms and conditions
stated in Landlord's First Offer, which
34
<PAGE>
Tenant may exercise by giving written notice to Landlord of Tenant's exercise of
such right within thirty (30) days after Tenant's receipt of Landlord's First
Offer. If Tenant exercises its right, Tenant shall purchase and Landlord shall
sell the Offered Parcel on the terms and conditions contained in Landlord's
First Offer.
C. Third Party Sale. If Tenant does not accept Landlord's First
----------------
Offer within said thirty (30) day period, then Landlord may sell the Offered
Parcel to any third party without re-offering it to Tenant, so long as (i) the
purchase price received by Landlord is at least 95% of the purchase price that
would have been paid by Tenant had Tenant accepted Landlord's First Offer, (ii)
any seller financing (except for any seller financing the amount of which is
less than 50% of the purchase price and the maturity of which is less than one
year following closing) is not substantially more favorable to the purchaser
than that contained in Landlord's First Offer, (iii) Landlord enters into a
binding written agreement for the sale and purchase of the Offered Parcel within
two hundred seventy (270) days after delivery to Tenant of Landlord's First
Offer, and (iv) title to the Offered Parcel is conveyed to a third party
purchaser pursuant to such agreement within one hundred eighty (180) days after
such agreement for the sale and purchase of the Offered Parcel is fully executed
by Landlord and such third party purchaser.
D. Landlord's Re-Offer. During the two hundred seventy (270) day
-------------------
period immediately following expiration of the thirty (30) day period described
in Paragraph 41.C, Landlord may re-offer to sell the Offered Parcel to Tenant at
any price and on any terms by delivering to Tenant a written notice of such
election and the Basic Purchase Terms of such sale ("Landlord's Re-offer").
Tenant shall have the right to purchase the Offered Parcel at the price and upon
the terms and conditions stated in Landlord's Re-Offer exercisable by giving
written notice to Landlord of Tenant's exercise of such right within ten (10)
days following Tenant's receipt of Landlord's Re-Offer. If Tenant accepts
Landlord's Re-Offer then Tenant shall purchase and Landlord shall sell the
Offered Parcel on the terms and conditions contained in Landlord's Re-Offer. If
Tenant does not accept Landlord's Re-Offer within said ten (10) day period, then
Landlord may sell the Offered Parcel to any third party without re-offering it
to Tenant so long as (i) the purchase price received by Landlord is at least 95%
of the purchase price that would have been paid by Tenant had Tenant accepted
Landlord's Re-Offer, (ii) any seller financing (except for any seller financing
the amount of which is less than 50% of the purchase price and the maturity of
which is less than one year following closing) is not substantially more
favorable to the purchaser than that contained in Landlord's Re-Offer, (iii)
Landlord enters into a binding written agreement for the sale and purchase of
the Offered Parcel within two hundred seventy (270) days after Landlord has
delivered Landlord's Re-Offer to Tenant, and (iv) title to the Offered Parcel is
conveyed to such third party purchaser within two hundred seventy (270) days
after such agreement for the sale and purchase of the Offered Parcel is fully
executed by Landlord and such third party purchaser.
35
<PAGE>
E. Continuing Right of Tenant. If Landlord has not entered into a
--------------------------
binding written agreement for the sale and purchase of the Offered Parcel within
two hundred seventy (270) days after delivery to Tenant of Landlord's First
Offer, or if Landlord has delivered to Tenant a Landlord's Re-Offer and Landlord
does not enter into a binding written agreement for the sale and purchase of the
Offered Parcel within two hundred seventy (270) days after delivery to Tenant of
such Landlord's Re-Offer, or if title to the Offered Parcel is not conveyed to
the purchaser within one hundred eighty (180) days after such agreement for the
sale and purchase of the Offered Parcel has been fully executed by Landlord and
such purchaser, then any subsequent attempt or election by Landlord to sell the
Offered Parcel shall be deemed a new determination to do so and shall be subject
to all of the procedures set forth in this Paragraph 41.
F. Exempt Transfers. This Paragraph 41 shall not be applicable to
----------------
the following transactions:
(1) A sale or other transfer of the Premises or any portion
thereof or any interest therein as a result of a judicial foreclosure, non-
judicial foreclosure (pursuant to a power of sale), or deed in lieu of
foreclosure of a deed of trust, mortgage or other written security device or
agreement encumbering the Premises, except any such sale by an Affiliate of
Landlord;
(2) A sale or other transfer of the Premises or any portion
thereof by Landlord to an Affiliate of Landlord provided, however, that such
Affiliate of Landlord assumes in writing all of Landlord's obligations under
this Lease; and
(3) The creation of one or more deeds of trust, mortgages, or
other written security devices or agreements encumbering the Premises, provided
that the beneficiary, mortgagee or other holder of the beneficial interest
thereunder is not an Affiliate of Landlord.
As used herein, the term "Affiliate of Landlord" shall mean one or more of
the partners of Landlord and any entity controlling, controlled by or under
common control with Landlord or one or more of the partners of Landlord.
G. Estoppel Certificates. If at any time Tenant has received notice
---------------------
from Landlord of the terms of an intended transfer by Landlord of the Premises
or any part thereof, Tenant shall have the obligation, upon request by either
Landlord or any proposed transferee, to deliver a certificate stating that
either: (i) based on the truthfulness and continuing accuracy of the written
information provided by Landlord to Tenant in connection with the request for
the certificate, Landlord has complied with the provisions of this Paragraph 41
and may transfer the property in question without being in violation of this
Paragraph 41 or (ii) based on the truthfulness and continuing accuracy of the
written information provided by Landlord to Tenant in connection with the
request for the certificate, Landlord has not complied with the provisions of
this Paragraph 41 and specifying in detail the manner
36
<PAGE>
in which Landlord has failed to so comply. Such certificate shall be delivered
within seven (7) days after request therefor is delivered to Tenant. Failure to
deliver such certificate shall (i) constitute a conclusive admission by Tenant
that Landlord has complied with the provisions of Paragraph 41 and may transfer
the property in question without being in violation of Paragraph 41; and (ii)
constitutes a material default under this Lease.
H. Termination on Sale. The rights created by this Paragraph 41
-------------------
shall terminate: (i) upon a sale or transfer of the Premises by Landlord to any
person or entity who is not an Affiliate of Landlord after Landlord has complied
with the provisions of this Paragraph 41, and Tenant has failed to exercise its
right to purchase; or (ii) in the event the Premises are sold at a foreclosure
sale or are transferred to a deed in lieu of foreclosure.
I. No Separate Assignment. The rights granted to Tenant under this
----------------------
Paragraph 41 may not be severed from this Lease or separately sold, assigned or
otherwise transferred.
J. Subordination. Notwithstanding anything in the foregoing to the
-------------
contrary, the rights granted to Tenant under this Paragraph 41 are, and shall be
at all times, subject and subordinate to any mortgage or deed of trust
constituting a lien against the Premises or any part thereof, whether such
mortgage or deed of trust has heretofore been, or may hereafter be placed,
against the Premises by Landlord. Tenant agrees to execute any documents
required by the holder of any mortgage or deed of trust to effectuate or confirm
the subordination of the rights of Tenant under this Paragraph 41 to such
mortgage or deed of trust.
K. Effect of Default. Tenant shall not have the right to exercise
-----------------
its rights under this Paragraph 41 at any time that there exists an Event of
Default by Tenant involving those events described in Paragraphs 13.A(4), (6),
(7) or (8), or there exists an Event of Default by Tenant that is capable of
being cured but has not been cured by Tenant.
[DOCUMENT CONTINUES]
37
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the dates
set forth below.
TENANT:
HELLO DIRECT, INC.,
a California corporation
DATED: 6/7/96 By: /s/ Norman L. Bunas
------------------------------------
Name: Norman L. Bunas
----------------------------------
Title: Vice President Operations, CFO
---------------------------------
LANDLORD:
MPJ-A,
a California general partnership
DATED: 6/7/96 By: /s/ W. Leslie Pelio
-----------------------------------
Name: W. Leslie Pelio
----------------------------------
Title: General Partner
---------------------------------
/s/ James D. Mair
James D. Mair
General Partner
38
<PAGE>
EXHIBIT "A"
PARCEL MAP
----------
39
<PAGE>
EXHIBIT "A-1"
LEGAL DESCRIPTION
-----------------
40
<PAGE>
EXHIBIT "B"
SITE PLAN
---------
41
<PAGE>
EXHIBIT "C"
IMPROVEMENT AGREEMENT
---------------------
This Improvement Agreement is made part of that Lease dated May 10, 1996
(the "Lease") by and between MPJ-A, a California general partnership
("Landlord"), and HELLO DIRECT, INC., a California corporation ("Tenant").
Landlord and Tenant agree that the following terms are part of the Lease:
1. Purpose of Improvement Agreement. The purpose of this Improvement
--------------------------------
Agreement is to set forth the rights and obligations of Landlord and Tenant with
respect to the construction of the Tenant Improvements in the Premises.
2. Definitions. As used in this Improvement Agreement, the following
-----------
terms shall have the following meanings, and initially capitalized terms which
are not defined below, but which are defined in the Lease and which are used in
this Improvement Agreement, shall have the meanings ascribed to them by the
Lease:
A. Final Tenant Improvement Plans. The term "Final Tenant
------------------------------
Improvement Plans" shall mean those plans and specifications for the Tenant
Improvements to be constructed by Landlord which are to be designed and approved
by Landlord and Tenant pursuant to Paragraph 3 below.
B. Tenant Improvements. The term "Tenant Improvements" shall mean
-------------------
the tenant improvements to be constructed by Landlord in accordance with the
Final Tenant Improvement Plans; provided, however, that the Tenant Improvements
should not include any Building Shell Work.
C. Building Shell Work. The term "Building Shell Work" shall mean
-------------------
all work required to be performed by Landlord in connection with the
construction of the Building Shell that is described in Exhibit "D" to the
Lease.
D. Substantial Completion and Substantially Complete. The terms
-------------------------------------------------
"Substantial Completion" and "Substantially Complete" shall each mean the date
when all of the following have occurred with respect to the Building Shell Work
and the Tenant Improvements: (i) the construction of the Building Shell Work and
Tenant Improvements has been substantially completed in accordance with the
provisions of this Improvement Agreement and Exhibit "D" (except for minor punch
list items which do not substantially interfere with Tenant's use of the
Premises); (ii) the Building Department of the City of San Jose has completed
its final inspection of such improvements and has "signed off" the building
inspection card approving such work as complete; and (iii) the City of San Jose
shall have issued temporary or final certificate of occupancy allowing occupancy
of the Premises by Tenant.
E. TI Costs. The term "TI Costs" shall mean and
--------
42
<PAGE>
include all costs and expenses paid or incurred by Landlord for any or all of
the following to the extent directly related to the design or construction of
the Tenant Improvements: architectural and engineering fees and costs, all
building permit fees and taxes and other governmental fees and taxes required
for the construction and occupancy of the Tenant Improvements, all of Landlord's
contractors' and subcontractors' prices and fees for constructing the Tenant
Improvements, including the cost of all partitioning, utility systems, fire
sprinkler systems, heating, ventilating and air conditioning systems and
equipment, roof screens, electrical distribution facilities, wiring, lighting,
ceilings, installation of fixtures and equipment, restrooms, carpeting, and all
other improvements and alterations required to finish the existing Building for
occupancy by Tenant in accordance with the Final Tenant Improvement Plans;
provided, however, TI Costs shall not include any costs attributable to: (i) the
Building Shell Work; (ii) delays in construction not caused by Tenant; (iii)
defaults by Landlord's contractor; and (iv) defects in design, construction or
equipment not caused by Tenant or Tenant's consultants. The Landlord's
contractor's price for constructing the Tenant Improvements shall include the
cost of a job superintendent and project manager plus a fee of five and one-half
percent (5.5%) of all other TI Costs.
F. Maximum TI Allowance. The term "Maximum TI Allowance" shall mean
--------------------
a sum equal to One Million, Three Hundred Eighty-two Thousand Four Hundred
Dollars ($1,382,400.00).
G. Excess TI Costs. The term "Excess TI Costs" shall mean all TI
---------------
Costs in excess of the Maximum TI Allowance.
3. Design of Tenant Improvements.
-----------------------------
A. Preliminary Tenant Improvement Plans. Tenant shall, on or before
------------------------------------
June 10, 1996, prepare and deliver to Landlord for its review and approval
preliminary plans for the Tenant Improvements, which preliminary plans shall
show Tenant's desired floor plan, layout, electrical requirements, HVAC
requirements and general requirements in sufficient detail in order to permit
Landlord to prepare working drawings for the Tenant Improvements (the
"Preliminary Tenant Improvement Plans"). Within five (5) business days after
receipt of the Preliminary Tenant Improvement Plans, Landlord shall either
approve such plans or notify Tenant in writing of any request for changes to the
Preliminary Tenant Improvement Plans. If Landlord submits any request for
changes, the parties shall meet and confer to develop Preliminary Tenant
Improvement Plans that are acceptable to both Landlord and Tenant within five
(5) business days after Landlord has notified Tenant of its request for changes.
B. Development and Approval of Tenant Improvement Plans. Once the
----------------------------------------------------
Preliminary Tenant Improvement Plans have been approved by Landlord and Tenant,
Landlord shall complete and submit to Tenant for its approval final working
drawings for the Tenant Improvements. Tenant shall approve the final working
drawings for the Tenant Improvements or notify Landlord in writing of its
43
<PAGE>
specific request for changes within five (5) business days after receipt of the
working drawings from Landlord. If Tenant submits any request for changes, the
parties shall confer and reach agreement upon the final working drawings for the
Tenant Improvements within five (5) business days after Tenant has notified
Landlord of its request for changes. When Landlord and Tenant agree upon the
final working drawings for the Tenant Improvements, a representative of each
shall sign the same. The final working drawings so approved by Landlord and
Tenant are referred to herein as the "Final Tenant Improvement Plans".
4. Construction of Tenant Improvements. Landlord shall, at the expense
-----------------------------------
of Landlord and Tenant as specified in Paragraph 10 below, construct the Tenant
Improvements, in accordance with the following:
A. Building Permit. As soon as the Final Tenant Improvement Plans
---------------
have been approved by Landlord and Tenant, Landlord shall apply for a building
permit for the Tenant Improvements, and shall diligently pursue the obtaining of
such building permit.
B. Commencement of Tenant Improvements. As soon as the building
-----------------------------------
permit for the Tenant Improvements has been issued, Landlord shall commence
construction of the Tenant Improvements and shall diligently prosecute such
construction to completion.
C. Target Completion Date. Landlord and Tenant shall use reasonable
----------------------
efforts to coordinate the development of the final tenant improvement plans, the
obtaining of all necessary permits, the competitive bidding of subcontracts and
the conduct of the work so that the Building Shell Work and all Tenant
Improvements are Substantially Completed by December 28, 1996.
5. Construction Contract. The following shall govern the manner in which
---------------------
the construction contract shall be let by Landlord for the construction of the
Tenant Improvements:
A. Landlord shall engage South Bay Construction Company, a
California corporation ("SBCC") as the general contractor to construct the
Tenant Improvements. Tenant acknowledges that SBCC is an affiliate of the
Landlord.
B. All major subcontractors for the Tenant Improvements shall be
chosen by a competitive bid process where (i) Tenant shall have the right to
approve subcontractors who bid on specific parts of the job and (ii) the
subcontractor shall be awarded to the lowest responsible bidder unless Landlord
and Tenant otherwise agree (which decision may arise from concerns as to whether
the subcontractor will be able to complete its work in a timely manner).
C. The construction contract with SBCC shall provide for SBCC to be
compensated or reimbursed as follows with respect to the construction of the
Tenant Improvements: (i) to be paid a general contractor's fee equal to five and
one-half percent (5.5%)
44
<PAGE>
of all TI Costs (excluding the general contractor's fee and reimbursement of
general conditions paid to SBCC); (ii) to be reimbursed for all payments to
subcontractors or material suppliers; (iii) to be reimbursed for the following
cost items (a) temporary electric power, (b) on-site office trailer, (c)
temporary on-site toilets, (d) trash removal and site clean up, (e) long
distance telephone charges, (f) messenger and air courier charges; and (iv) to
be reimbursed the following hourly rates for the cost of a job superintendent
($55.00/hr) and of a project manager ($68.00/hr).
6. Substitutions. In developing the Preliminary Tenant Improvement Plans
-------------
and Final Tenant Improvement Plans, Tenant shall designate and select material
and equipment which can be obtained with normal lead times. If at any time
during the plan development process or the course of construction, it becomes
apparent that a particular material or item of equipment is not or will not be
obtainable within a reasonable period of time, the parties shall meet and confer
to find a substitute therefor.
7. Changes to Approved Plans. Once the Final Tenant Improvement Plans
-------------------------
have been approved by Landlord and Tenant, neither shall have the right to order
extra work or change orders with respect to the construction of the Tenant
Improvements without the prior written consent of the other, which consent shall
not be unreasonably withheld or delayed, provided there is a reasonable basis
for such change or such change is required by any Law. All extra work or change
orders requested by either Landlord or Tenant shall be made in writing, shall
specify any added or reduced cost and/or construction time resulting therefrom,
and shall become effective and a part of the Final Tenant Improvement Plans once
approved in writing by both parties. If a change order requested by Tenant
results in a net increase in the TI Costs which causes the total TI Costs to
exceed the Maximum TI Allowance, Tenant shall pay to Landlord the amount of such
increase caused by the change order requested by Tenant in accordance with the
provisions of Paragraph 10 below.
8. Delivery of Possession, Punch List and Acceptance Agreement. As soon
-----------------------------------------------------------
as the Tenant Improvements are Substantially Completed, Landlord and Tenant
shall together walk through the Premises and inspect all Tenant Improvements so
completed, using reasonable efforts to discover all uncompleted or defective
construction in the Tenant Improvements. Unless any uncompleted or defective
construction would materially affect Tenant's ability to conduct its business,
then when such inspection has been completed, Tenant shall sign an acceptance
agreement which shall (i) include a list of all "punch list" items which the
parties agree are to be corrected by Landlord and (ii) state the Commencement
Date. As soon as such inspection has been completed and such acceptance
agreement executed, Landlord shall deliver possession of the Premises to Tenant.
Landlord shall use reasonable efforts to complete and/or repair such "punch
list" items within thirty (30) days after receiving the acceptance agreement and
punch list. Landlord shall have no obligation to deliver possession of the
Premises to Tenant until such procedures regarding the preparation
45
<PAGE>
of a punch list and the execution of the acceptance agreement have been
completed. Tenant's taking possession of any part of the Premises shall be
deemed to be an acceptance by Tenant of Landlord's work of improvement in such
part as complete and in accordance with the terms of the Lease except for the
punch list items noted and latent defects that could not reasonably have been
discovered by Tenant during its inspection of the Tenant Improvements prior to
completion of the acceptance agreement; provided, however, that the foregoing
shall not modify or excuse the obligation of Landlord to correct defects in
design, construction and equipment pursuant to Paragraph 9 below, but if the
item in question is not a punchlist item or latent defect that could not
reasonably have been discovered by Tenant during its inspection of the Tenant
Improvements prior to the completion of the acceptance agreement, then Tenant
shall have the burden of proving that the defect in question was not caused by
Tenant or its Agents. Notwithstanding anything contained herein, Tenant's
obligation to pay the Monthly Installment of rent and Additional Rent shall
commence as provided in the Lease, regardless of whether Tenant completes such
inspection or executes such acceptance agreement.
9. Standard of Construction and Warranty. Landlord warrants that the
-------------------------------------
Tenant Improvements shall be constructed in a good and workmanlike manner
substantially in accordance with the Final Tenant Improvement Plans (as modified
by change orders approved by Landlord and Tenant) and in accordance with all
applicable laws. All materials and equipment furnished shall be new, of good
quality and installed in accordance with the vendor's or manufacturer's
specifications, instructions and requirements. The foregoing warranty shall
terminate one (1) year following the date of Substantial Completion of the
Tenant Improvements unless (i) Tenant makes a written claim against Landlord
under the foregoing warranty within said one (1) year period, in which case the
warranty shall survive only as to the specific matter described in such claim,
or (ii) the defect was a latent defect which could not reasonably have been
discovered by Tenant during said one (1) year period, in which case the
foregoing warranty shall terminate as to such latent defect three (3) years
following the date of Substantial Completion of the Tenant Improvements unless
Tenant makes a written claim against Landlord under the foregoing warranty
within said three (3) year period, in which case the warranty shall have survive
only as to the specific matter described in such claim.
10. Payment of TI Costs. The TI Costs for the Tenant Improvements shall
-------------------
be paid by Landlord and Tenant as follows:
A. Landlord shall pay all TI Costs up to the Maximum TI Allowance.
In no event shall Landlord be required to pay any TI Costs in excess of the
Maximum TI Allowance.
B. If the TI Costs exceed the Maximum TI Allowance, then Tenant
shall pay to Landlord the full amount of all Excess TI Costs in accordance with
the procedures set forth in Subparagraph C below.
46
<PAGE>
C. During the course of constructing the Tenant Improvements, each
progress payment due to Landlord's contractor or to any subcontractor or
material supplier shall be paid by Landlord and Tenant as follows: (i) Landlord
shall pay a fraction of each progress payment, which fraction shall have as its
numerator the Maximum TI Allowance and shall have as its denominator Landlord's
estimate of the total TI Costs to complete the construction of the Tenant
Improvements; and (ii) Tenant shall pay the balance of each progress payment
("Tenant's Share"). Tenant shall pay Tenant's Share of each progress payment to
Landlord within ten (10) days after receipt of billing. If, at any time during
the course of constructing the Tenant Improvements, Landlord revises its
estimate of the total TI Costs to complete the Tenant Improvements so that the
amount previously paid by Tenant is not sufficient to pay Tenant's Share of the
TI Costs paid to date, then Tenant shall pay to Landlord, within ten (10) days
after receipt of billing, the amount necessary to increase Tenant's contribution
toward the TI Costs so that Landlord has paid only its fractional share of the
TI Costs and Tenant has paid the balance. Upon the completion of the Tenant
Improvements, Landlord shall provide Tenant with a reconciliation of the
estimated TI Costs to the actual TI Costs and Tenant's payments on account
thereof, and Tenant shall pay to Landlord, or Landlord shall refund to Tenant, a
any net amount due or refundable, as the case may be, within ten (10) days after
Tenant's receipt of the reconciliation. If Tenant shall fail to comply with any
demand for payment made pursuant to this Paragraph 10.C within ten (10) days of
receipt thereof, Landlord may (i) terminate, effective immediately, this Lease
by giving written notice of termination to Tenant, (ii) cease construction of
the Tenant Improvements, and/or (iii) exercise any and all remedies available to
Landlord at law or in equity, including those set forth in Paragraph 15.B of the
Lease.
11. Accounting. When the Tenant Improvements are Substantially Completed
----------
and all TI Costs have been determined, Landlord shall submit to Tenant a final
and detailed accounting of all TI Costs paid by Landlord. Tenant shall have the
right to the audit books, records and supporting documents of Landlord to the
extent necessary to determine the accuracy of such accounting during normal
business hours after giving Landlord at least five (5) business days prior
written notice. Any such audit must be conducted, if at all, within thirty (30)
days after Landlord delivers such accounting to Tenant.
12. Landlord's Building Shall Work. Landlord shall perform all of the
------------------------------
Building Shell Work at Landlord's sole cost and expense.
[DOCUMENT CONTINUES]
47
<PAGE>
13. Effect of Agreement. In the event of any inconsistency between this
-------------------
Improvement Agreement and the Lease, the terms of this Improvement Agreement
shall prevail.
TENANT:
HELLO DIRECT, INC.,
a California corporation
DATED: 6/7/96 By: /s/ Norman L. Bunas
------------------------------------
Name: Norman L. Bunas
----------------------------------
Title: Vice President Operations, CFO
LANDLORD:
MPJ-A,
a California general partnership
DATED: 6/7/96 By: /s/ James D. Mair
------------------------------------
JAMES D. MAIR
General Partner
/s/ W. Leslie Pelio
W. Leslie Pelio
General Partner
48
<PAGE>
EXHIBIT "D"
BUILDING SHELL
--------------
The purpose of this Exhibit "D" is to set forth and define the Landlord's
obligations with respect to the design, construction and installation of the
Building Shell and all necessary and required appurtenances thereto. Landlord
shall pay all costs for the design, construction and installation of the
Building Shell and all necessary and required appurtenances thereto as its sole
cost and expense.
A. Building Shell Plans and Specifications. Landlord shall prepare the
---------------------------------------
Building Shell Plans and Specifications complete in every respect to assure the
timely approval and issuance of all required permits for construction.
Approvals shall be by all parties and/or governmental agencies having
jurisdiction. Landlord shall cooperate with Tenant during the preparation of
the Plans and Specifications for the Building Shell and coordination to assure
that changes during the construction to either the shell work or tenant
improvements work will not be necessary or required. Tenant shall have the
right to ongoing review of the Shell Plans and Specifications during the
preparation. Tenant shall also have the right to final review and approval of
the completed Building Shell Plans and Specifications. Tenant's final review
and approval shall not be unreasonably withheld and shall be made within fifteen
(15) business days following receipt.
B. Description of Building Shell. Building Shell shall include, but not
-----------------------------
be limited to, the following:
1. Building Structure.
------------------
(a) All foundations to include footings, piers, caissons,
pilings, grade beams, foundation walls or other building foundation components
required to support the entire building structures, or any other additional
loads that may be imposed such as core restrooms, switchgear and any other loads
relating to construction that my be imposed on the foundations. Provide and
install reinforcing steel in all foundation components as detailed and required.
(b) All columns, beams, joists, purlins, headers, or other
framing members to support the roof and roofing membrane, or other additional
loads that may be imposed such as roof top mechanical or electrical equipment,
roof penthouses, screens or blinds, or any other loads relating to construction
that may be imposed on the roof structure. Columns shall be steel box or pipe
columns.
(c) Five inch (5") thick concrete slab on grade with welded wire
mesh and any other reinforcing or structural connections that may be necessary
or required.
49
<PAGE>
(d) Concrete exterior walls that enclose the perimeter of the
buildings, with steel reinforcing and structural connections that may be
necessary or required.
(e) All exterior glass and glazing with anodized aluminum
frames. Glass to be tinted as appropriate to the aesthetic design of the
buildings. All exterior doors with exiting hardware, door closures, locking
devices and all other hardware necessary or required for proper functioning.
(f) Vulcraft roof system with roof sheathing to support the
roofing membrane.
(g) Three (3) ply built up roofing with cap sheet and all
flashings by Owens-Corning, John Manville, or equal.
(h) Exterior painting of all concrete with Tex-Coat or Kel-Tex
textural paint. All caulking of exterior concrete joints in preparation for
painting.
2. Plumbing.
--------
(a) Underground sanitary sewer laterals connected to the city
sewer main in the street and piped into the building and under the concrete slab
as required by the Tenant's preliminary interior improvement plan. Main waste
lines under the slabs will be in as close proximity possible to the building
rest room locations.
(b) Domestic water mains connected to the city water main in the
street and stubbed up through the slab on grade into the buildings. Stub in
locations will be carefully considered to assure concealment of these mains for
future routing to rest room or other locations. Water mains to the building
shall be not less than 3" in size.
(c) Roof drain leaders piped and connected to the site storm
drainage system.
(d) Gas lines connected to the city or public utility mains and
run to gas meters adjacent to, and in close proximity to the building. Gas mains
and meters will be sufficiently sized to accommodate each building's heating and
hot water requirements to point of usage. Meter supplied by utility company.
3. Heating, Ventilating and Air Conditioning.
-----------------------------------------
(a) All structural requirements to support the heating,
ventilating and cooling of the building.
4. Electrical.
----------
(a) All primary electrical service to the building including
underground conduit, wire feeders, transformers, and transformer pads.
Underground conduits and secondary feeders from
50
<PAGE>
transformer pads into the building's main switchgear electrical room. The
electrical characteristics of the secondary side of transformers shall be
277/480 Volt, 3 Phase and the rated capacity of the transformer for the building
shall be 2000 amps unless PG&E requires less amps. Underground conduit for both
primary and secondary feeders shall be sized to accept wire feeders that would
increase the above rate transformer capacities, if transformers were replaced,
by 20%.
(b) Underground pull section, meter, and panel(s), for site
lighting and landscaping.
(c) Underground conduit from the street to the building for
telephone trunk line service by Pacific Telephone. Conduit to the building shall
not be less than 4".
(d) All parking lot and landscape lighting to include fixtures,
underground conduit, wire, distribution panel and controller. All exterior
lighting shall be a complete and functioning system.
(e) An electrically operated landscape irrigation controller
that is a complete and functioning system.
(f) Underground conduit from the building to the main fire
protection system shut off valve (PIV) for installation of security alarm
warning.
(g) All other electrical work that may be necessary for site
requirements outside the building perimeter walls.
5. Fire Protection (Sprinklers).
----------------------------
(a) A complete and fully functional overhead system distributed
throughout the Building. The systems shall be classified ordinary hazard group
II, and be distributed throughout the building.
(b) System shall include all sprinkler heads that may be
required by building codes above the ceiling, when ceilings are installed.
(c) Site sprinkler main to be sized adequately to support
required densities.
6. Site Work.
---------
(a) All work outside the building perimeter walls shall be
considered site work for the Building Shell and shall include grading, paving,
landscaping, landscape irrigation, storm drainage, utility services laterals,
curbs, gutters, sidewalks, specialty paving, retaining walls, planter boxes,
parking lot and landscape lighting, other exterior lighting, outside trash
enclosures and any other work necessary on the site or obtain approvals and
permits for construction.
51
<PAGE>
(b) Paving section for automobile parking will be 3" asphalt
over 7" class II, aggregate base. Paving for truck access and docks will be 3"
asphalt over 8" aggregate base. Subgrade to receive aggregate base and asphalt
paving shall be well compacted and properly pitched to assure sub-drainage to
the site storm drainage system.
(c) All parking lot striping to include handicap signage and
spaces.
(d) Underground site storm drainage system shall be connected to
the city storm system main.
(e) All environmental contaminants on the property which must be
treated, removed or otherwise remediated pursuant to the terms of applicable
laws and regulations shall be treated, disposed of and otherwise remediated in
accordance with all applicable laws and regulations, at Landlord's sole cost and
expense.
7. Other Shell Work and/or Requirements.
------------------------------------
(a) All connection charges, fees, assessment or any other costs
to connect any utility serving the site or building. Utilities to be connected
shall include, but not limited to: sanitary sewer, storm drainage, gas services,
electric service, fire sprinkler mains, domestic water mains, conduit for
telephone services, or any other utility or service.
(b) Any off-site improvements required to be constructed in
connection with the development of the Premises shall be part of the Building
Shell.
(c) Landlord, in the preparation of the Building Shell plans,
shall indicate on the plans the preferred location of all building core
requirements, including, but not limited to, restrooms with fixtures to meet
codes, janitor closets, main electrical switchgear rooms, rooms for telephone
cable entry and equipment, and building main corridor routing to all points of
building entry or egress. The selection of preferred locations for the core
requirements shall be made on the basis that the building shall have multi-
tenant occupancy. Tenant in its space analysis and preparation of the Design
Development Drawings for Tenant Improvements will endeavor to design to the
Landlord's preferred core arrangement. Tenant, in the preparation of its Design
Development Drawings for Tenant Improvements may make rearrangements to the
Landlord's preferred core arrangement in order to maximize its utilization of
rented space. Landlord agrees that Tenant has the right to review and approve
the final shell working drawings.
(d) Landlord shall construct the Building Shell in accordance
with the final plans and specifications approved by Tenant. Tenant's final
approval of the Building Shell Plans and Specifications shall not relieve the
Landlord of providing any of the requirements set forth in this exhibit.
52
<PAGE>
(e) All shell work shall be completed in a good and workmanlike
manner and all materials and equipment incorporated into the shells (i) will be
new and free of defects, (ii) will conform to all applicable codes, and (iii)
will conform to the final working plans and specifications approved by Tenant,
including all modifications and changes thereto approved by Tenant. Landlord
shall promptly correct and remedy any defective work or materials.
(f) Landlord shall perform all other work reasonably necessary
or required for the completion of the construction of the Building Shell as
describe in this Exhibit "D".
(g) Roof screens, outside monument signs, grease traps and waste
water storage facilities, if any, shall not be included in the Building Shell
but shall be part of the Tenant Improvements.
TENANT:
HELLO DIRECT, INC.,
a California corporation
DATED: 6/7/96 By: /s/ Norman L. Bunas
------------------------------------
Name: Norman L. Bunas
----------------------------------
Title: Vice President Operation, CFO
LANDLORD:
MPJ-A,
a California general partnership
DATED: 6/7/96 By: /s/ James D. Mair
------------------------------------
JAMES D. MAIR
General Partner
/s/ W. Leslie Pelio
W. Leslie Pelio
General Partner
53
<PAGE>
EXHIBIT "E"
LIST OF HAZARDOUS MATERIALS
---------------------------
TENANT WILL USE ON THE PREMISES
-------------------------------
54
<PAGE>
EXHIBIT 10.8
PROMISSORY NOTE
1. DEFINED TERMS. As used in this Promissory Note, the following terms
-------------
shall have the following meanings:
1.1 Borrower: MPJ-A, a California general partnership.
---------
1.2 Lender: Hello Direct, Inc., a California corporation.
------
1.3 Construction Loan Agreement: That Construction Loan Agreement of
---------------------------
even date with this Note executed by Lender and Borrower.
1.4 Principal Sum: Five Million Dollars ($5,000,000).
-------------
1.5 Initial Disbursement Date: The date any portion of the
--------------------------
Principal Sum is first disbursed to Borrower pursuant to the Construction Loan
Agreement.
1.6 Final Disbursement Date: The date when Lender has advanced the
------------------------
entire Principal Sum to Borrower.
1.7 Maximum Interest Rate: 7.5% per annum.
---------------------
1.8 Maturity Date: The date 30 years following the Initial
--------------
Disbursement Date.
1.9 Property: The real property described in the Indenture
---------
commonly known as 15 Rue Ferrari, San Jose, Santa Clara County, California.
1.10 Hello Direct Lease: That lease of even date with this Note
------------------
executed by Borrower, as landlord, and Lender, as tenant, by which the Property
and certain improvements to be constructed thereon pursuant to the Construction
Loan Agreement are leased to Lender by Borrower.
1.11 Indenture: That Construction Deed of Trust, Security Agreement
----------
and Fixture Filing with Assignment of Rents and Agreements of even date with
this Note, from Borrower to Lender which secures Borrower's obligations
hereunder and which encumbers the Property.
1.12 Loan Documents: This Note, the Indenture, the Construction Loan
---------------
Agreement, and all other documents defined as Loan Documents pursuant to Section
1.8 entitled "Loan Documents" of the Indenture.
1
<PAGE>
1.13 Construction Period: The period beginning on the Initial
--------------------
Initial Disbursement Date and ending on the Final Disbursement Date.
1.14 Gross Receipts: The aggregate of all payments received from
---------------
tenants of the Property, including but not limited to payments on account of or
for the following:
(a) Rent, including payments made in consideration of the
cancellation, surrender or modification of any lease or made by reason of any
default thereunder, payments of damages for lease default (including interest
and attorneys' fees), or the application of any security deposit;
(b) Taxes, including real property taxes, general or special
assessments and taxes on rental income not paid directly by tenants to the
taxing authorities;
(c) Common area expenses, including reimbursement by tenants for
operating, maintenance, upkeep and repair expenses for the buildings,
improvements and common areas of the Property;
(d) Fire, extended coverage and other casualty insurance
premiums, liability insurance premiums, premiums for any other kind of
insurance, contribution to insurance deductibles and repair of damage caused by
any peril, and proceeds of rental value or rent loss or interruption insurance;
(e) Water, gas, electricity, sewer, trash pick up and other
utility services not directly payable by tenants of the Property;
(f) Management fees for the operation and management of the
Property;
(g) Reimbursements by tenants of tenant improvement costs;
(h) Proceeds received by Borrower from tenants from subleasing or
assignments by such tenants; and
(i) Payments on account of any indemnification obligation.
Gross receipts shall not include:
(i) Proceeds of any sale, financing or refinancing of all or any
portion of the Property;
2
<PAGE>
(ii) Payments or awards received by Borrower as a result of any
condemnation of the Property (which shall be applied as provided in the
Indenture);
(iii) Payments received by Borrower as a result of a casualty (which
shall be applied as provided in the Indenture) except for the proceeds of rental
value or rent interruption insurance, which proceeds shall be included in Gross
Receipts; and
(iv) Any security or other deposits unless or until applied to the
tenant's obligations under any lease.
1.15 Operating Expenses: All reasonable and necessary charges and
-------------------
expenses actually paid by Borrower for the maintenance, protection, management
and operation of the Property in the manner required by the Loan Documents and
any lease of the Property and consistent with the management and operation of
like properties in the San Jose area and shall include but not be limited to:
(a) a management fee not to exceed two percent (2%) of Gross
Receipts if Borrower or an affiliate of Borrower acts as manager of such
Property; otherwise, management fees charged by management companies managing
similar facilities in area of each such Property;
(b) payment of utilities, maintenance supplies, real estate taxes
and installments of assessments and other taxes (but not income taxes),
cleaning, repairs and insurance; and
(c) any costs or expenses incurred or expended with respect to
any default by any tenant of the Property or re-leasing of the Property after
any tenant default or vacancy of the Property including, without limitation,
attorneys' fees to enforce leases, expenses of Borrower with respect to new
leases to repaint, recarpet and remodel the Property, brokerage commissions in
obtaining new occupancy tenants and architectural fees for redesign of vacant
space in the Property.
Operating Expenses shall not include (i) payments of principal or interest
or other charges on any loans made to Borrower, (ii) depreciation or any other
non-cash costs, (iii) any payments made to any affiliate of Borrower except for
the management fee described above, (iv) costs of whatever nature that are paid
out of reserve accounts or proceeds of the loan evidenced by this Note, (v) any
capital expenditures in excess of Fifty-Three Thousand Dollars ($53,000)
(including replacements of mechanical equipment, roof, and paving, tenant
improvements for new tenants, and leasing commissions) except to the extent
approved in writing by Lender, which approval shall not be unreasonably
withheld, (vi) so long as the Hello Direct Lease is in effect and has not
expired or been terminated, any expenses (including the cost of structural
maintenance and repairs and the correction of defects in the design and
construction of the Property) which are not required to be paid or reimbursed by
the tenant pursuant to the Hello Direct Lease; (vii) any expenses (including
investigation and remediation costs) directly related to any release of
Hazardous Substances (as
3
<PAGE>
defined in the Indenture) affecting the Property except to the extent such
expenses are required to be paid by the tenant under the Hello Direct Lease; and
(viii) so long as the Hello Direct Lease is in effect and has not expired or
been terminated, expenses paid or incurred for the repair or restoration of
damage to the Property caused by fire, earthquake, or other peril; provided,
---------
however, that notwithstanding anything contained in this subparagraph excluding
- -------
certain expenses from Operating Expenses, Operating Expenses shall include any
such expense that would otherwise be excluded because of this subparagraph to
the extent Borrower has received a payment from any tenant of the Property to
pay such expense and such payment has been included in Gross Receipts.
Operating Expenses which are properly characterized as capital expenditures
in accordance with generally accepted accounting principles shall be treated as
follows for purposes of determining Net Cash Flow for any period during the term
of this Note: (i) such Operating Expenses shall be amortized over the useful
life of the improvement or transaction to which they relate, except tenant
improvements and leasing commissions shall be amortized over the primary term of
the lease to which they relate; (ii) such amortization shall commence upon
completion of the improvement or transaction to which such Operating Expense
relates; (iii) for any period during the term of this Note during which Net Cash
Flow must be determined to implement the payment provisions hereof, Operating
Expenses for such period shall only include such amortization due for such
period together with accrued interest on the unrecovered balance of such
amortization at an annual rate of interest equal to the then prime rate or
reference rate of Bank of America plus two percent (2%). Such amortization and
interest shall be deemed recovered or paid to the extent it has been included in
Operating Expenses for the purpose of determining Net Cash Flow and been offset
by an equivalent amount of Gross Receipts.
1.16 Loan Year: The 12 calendar month period commencing each
----------
January lst and terminating on December 31st of each calendar year following the
Final Disbursement Date. However, the first Loan Year shall be the period
commencing with the Final Disbursement Date and ending December 31st of the
calendar year in which the Final Disbursement Date falls and the last Loan Year
shall be the period commencing with January 1st of such calendar year and
terminating on the Maturity Date.
1.17 Net Cash Flow. Gross Receipts less Operating Expenses for the
-------------
period in question; provided, however that (i) Borrower has an obligation
pursuant to the Indenture to use commercially reasonable efforts to lease the
Property to third parties, and (ii) if any portion of the Property remains
unleased for more than six (6) months, Lender has the right to find a third
party tenant pursuant to the Indenture, and if Lender so finds a third party
tenant that is ready, willing and able to enter into a commercially reasonable
lease for a term of not less than three (3) years with Borrower but Borrower
refuses to enter into such lease, then the term "Net Cash Flow" as used in this
Note will be determined based upon the assumption that the lease procured by
Lender had been put into effect and all payments due thereunder from the tenant
had been paid when due until such time as the space in question is actually
leased to a third party and such third party commences the payment of rent.
4
<PAGE>
2. DEBT. For value received, Borrower promises to pay to the order of
----
Lender the Principal Sum, or so much thereof as may from time to time be
outstanding, with interest on unpaid principal from the Initial Disbursement
Date at the respective rates specified in Paragraph 3 below.
3. INTEREST.
--------
A. Construction Period Interest. During the Construction Period,
------------ ------ --------
interest shall. accrue on the outstanding principal balance from time to time
outstanding at the Maximum Interest Rate.
B. Post-Construction Period Interest. Commencing on the Final
---------------------------------
Disbursement Date, interest shall accrue on the outstanding principal balance
from time to time outstanding during each Loan Year at the Maximum Interest
Rate; provided, however, that interest accruing on this Note for any calendar
month preceding a Payment Date occurring during any Net Cash Flow Only Period
(as defined herein) shall be equal to the lesser of (i) interest at the Maximum
Interest Rate for such month on the outstanding principal balance (including the
balance of the Deferred Interest Account described in Paragraph 4.C), or (ii)
Net Cash Flow received by Borrower during such calendar month. A "Net Cash Flow
Only Period" shall be that period of time commencing and ending as follows:
(i) A Net Cash Flow Only Period shall commence if and when (i) the
Hello Direct Lease is terminated for any reason (except because of a material
default by landlord or a termination permitted by such lease as a result of
damage by any peril or condemnation), or (ii) the tenant under the Hello Direct
Lease fails to pay rent when due;
(ii) A Net Cash Flow Only Period that has commenced shall end upon
the first to occur of the following: (i) if the Hello Direct Lease has been
terminated that date which is one hundred eighty (180) days after the date
possession of the Property is surrendered to Borrower free of tenants or other
occupants and without restriction so that Borrower may freely lease the Property
to third parties; or (ii) if the Hello Direct Lease is not terminated, the date
when all delinquent rent, interest, and late charges then due under such lease
are paid in full.
4. PAYMENTS. The principal and interest under this Note shall be paid
--------
as follows:
A. Construction Period. During the Construction Period, monthly
-------------------
payments of accrued interest only shall be due and payable on the first day of
each calendar month commencing with the first calendar month next following the
Initial Disbursement Date.
B. Post-Construction Period. Following the Final Disbursement Date,
------------------------
principal and interest shall be payable in equal monthly installments of Fifty-
Two Thousand Seven Hundred Ninety-One and 67/100 Dollars ($52,791.67) each (the
"Scheduled Payment") commencing on the first day of the first calendar month
next following the Final Disbursement Date and continuing on the first day of
each calendar month thereafter (the "Payment Date (s)") until the Principal Sum
and
5
<PAGE>
all accrued interest has been paid in full; provided, however, that
notwithstanding anything contained herein, on any Payment Date, Borrower shall
not be obligated to pay more on account of principal and interest due hereunder
than the amount of Net Cash Flow received by Borrower during the calendar month
preceding such Payment Date.
C. Deferred Payment Account. If on any Payment Date Borrower is
------------------------
entitled pursuant to Paragraph 4.B to pay less than the Scheduled Payment
because of insufficient Net Cash Flow, then (i) the amount of such Scheduled
Payment that is not paid is referred to herein as a "Deferred Payment", and (ii)
if such Payment Date does not occur during a Net Cash Flow Only Period, then
that part of a Deferred Payment which constitutes (or if paid would have been
credited to) accrued interest shall be added to the principal due under this
Note, shall begin to bear interest at the rate applicable to principal due
pursuant to this Note, and shall be repaid in accordance with the provisions of
this paragraph. To administer the provisions of this paragraph, Lender shall
maintain two memo accounts that shall be referred to herein as the "Deferred
Interest Account" and the "Deferred Principal Account", which memo accounts
shall be maintained as follows: (i) the Deferred Interest Account shall be
credited (increased) by the amount of Deferred Payments which constitute (or if
paid would have been credited to) accrued interest and all interest that accrues
thereon (with such account increased on the last day of each calendar month to
account for accrued interest on such account balance for such month), and
debited (decreased) on account of payments made from Net Cash Flow to Lender
pursuant to this Paragraph 4.C; and (ii) the Deferred Principal Account shall be
credited (increased) by the amount of Deferred Payments which constitute
principal, and debited (decreased) on account of payments made from Net Cash
Flow to Lender pursuant to this Paragraph 4.C. On each Payment Date when a
positive balance exists in the Deferred Interest Account and/or the Deferred
Principal Account, if a Scheduled Payment has been made and the amount of Net
Cash Flow received by Borrower for the calendar month preceding such Payment
Date exceeds the Scheduled Payment so made, an amount equal to such excess shall
be paid by Borrower to Lender on such Payment Date and applied (i) first, to
reduce the Deferred Interest Account until the balance thereof equals zero, and
then (ii) second, to reduce the Deferred Principal Account until the balance
thereof equals zero.
D. Accounting. If on any Payment Date there is insufficient Net Cash
----------
Flow to make the Scheduled Payment then due or if there is a positive balance in
the Deferred Payment Account, then on such Payment Date Borrower shall furnish
to Lender a statement for the month preceding such Payment Date of Gross
Receipts, Operating Expenses, and Net Cash Flow for such month, certified as
correct by a general partner of Borrower. Within ninety (90) days after the end
of any Loan Year during which a Net Cash Flow Only Period has occurred, any
Scheduled Payment has not been paid in full when due, or the Deferred Interest
Account or the Deferred Principal Account has had a positive balance, Borrower
shall furnish to Lender a statement of the Gross Receipts, Operating Expenses,
and Net Cash Flow for the immediately preceding Loan Year certified by a general
partner of Borrower as true and correct (the "Year End Financial Statement"). If
a Year End Financial Statement shows a deficiency in the payment of interest for
the preceding Loan Year, Borrower shall forthwith pay such deficiency, and if
such Year End Financial Statement shows an overpayment of interest, then Lender
shall forthwith refund the
6
<PAGE>
amount of such overpayment to Borrower. Any payment or refund to be made under
this paragraph by either Lender or Borrower shall be without interest. Lender
may, at its own expense, cause an independent public accounting firm selected by
Lender to audit Borrower's books to ascertain the accuracy of such Year End
Financial Statement. If such audit discloses a deficiency in the payment of
interest, Borrower shall, within fifteen (15) days after receiving a copy of
Lender's audit, pay such deficiency, and if such audit discloses an overpayment
of interest, Lender shall within fifteen (15) days after receiving the results,
refund the amount of such overpayment to Borrower. If Lender's audit disclose
that Borrower has underpaid the amount of principal and interest due for such
Loan Year by more than five percent (5%), Borrower shall pay the reasonable cost
of such audit.
E. Maturity Date. Notwithstanding anything in the foregoing to the
-------------
contrary, the entire unpaid balance of principal, together with accrued
interest, shall be due and payable on the Maturity Date.
F. Method and Application of Payments. Each payment shall, when made,
----------------------------------
be credited first against interest then due, and the remainder against
principal, and interest shall thereon cease upon the principal so credited. All
payments shall be made in lawful money of the United States of America, at, or
at such place as Lender may from time to time designated in writing.
5. LATE CHARGE AND ADDITIONAL INTEREST. Borrower recognizes that a
-----------------------------------
default by it in making the payments herein agreed to be paid when due will
result in Lender's incurring additional administrative expenses in servicing the
loan, loss of the use of the money due and frustration in meeting its other
financial and loan commitments. Borrower acknowledges that Lender s damages for
such a default would be extremely difficult and impractical to ascertain.
Borrower, therefore, agrees that a late charge equal to six cents for each one
dollar of each payment which is not made within ten (10) days after the same is
due is a reasonable estimate of said damages, which late charge Borrower shall
pay to Lender immediately after each such default. Such payment shall not affect
Lender's other rights and remedies under this Note and the Loan Documents.
6. NO USURY. Lender and Borrower intend to comply at all times with
--------
applicable usury laws. If at any time such laws would ever render usurious any
amounts called for under this Note or the other Loan Documents, then it is
Borrower's and Lender's express intention that Borrower shall never be required
to pay interest on this Note at a rate in excess of the maximum lawful rate,
that the provisions of this paragraph shall control over all other provisions of
this Note and the Loan Documents which may be in apparent conflict hereunder,
that such excess amount shall be immediately credited on the principal balance
of this Note (or if this Note has been fully paid, refunded by Lender to
Borrower), and the provisions hereof shall be immediately reformed and the
amounts thereafter collectible under this Note reduced, without the necessity of
the execution of any further documents, so as to comply with the then applicable
law, but so as to permit the recovery of the fullest amount otherwise called for
under this Note. Any such crediting
7
<PAGE>
or refund shall not cure or waive any default by Borrower under this Note or the
other Loan Documents. If at any time following any reduction in the interest
rate payable by Borrower there remains unpaid any principal amounts under this
Note and the maximum interest rate not prohibited by applicable law is increased
or eliminated, then the interest rate payable under this Note shall be
readjusted, to the extent not prohibited by applicable law, so that the total
dollar amount of interest payable hereunder shall be equal to the dollar amount
of interest which would have been paid by Borrower without giving effect to the
reduction in interest resulting from compliance with applicable usury laws.
Borrower agrees that in determining whether or not any interest payable under
this Note or the other Loan Documents exceeds the highest rate not prohibited by
law, any non-principal payment (except payments specifically stated in this Note
or in the other Loan Documents to be "interest"), including, without limitation,
late charges, shall, to the maximum extent not prohibited by law, be an expense,
fee, or premium rather than interest. The term "applicable law, as used in this
Note shall mean the laws of the state in which the Property is located or the
laws of the United States, whichever laws allow the greater rate of interest, as
such laws now exist or may be changed or amended or come into effect in the
future.
7. ACCELERATION. Upon the occurrence of an Event of Default
------------
under the Indenture, or if the Hello Direct Lease is terminated because of a
--
material default by the landlord thereunder or because of the exercise of a
right to terminate by either the landlord or tenant thereunder because of damage
to the Property caused by fire, earthquake, or other peril or because of
condemnation, or if any sum herein specified be not paid when due, or upon a
--
breach of any other terms, covenants, conditions or agreements of this Note, the
Loan Documents, or any other instrument given as collateral security for the
obligation evidenced by this Note, the entire Principal Sum, or so much thereof
as may remain unpaid at the time, and all interest, fees and charges accrued
thereon, together with all other sums due under the terms hereof, the Indenture,
the Loan Documents, or any other instrument given as collateral security for the
obligation evidenced by this Note shall, at the option of Lender, become due and
payable immediately.
8. AMENDMENTS. This Note may not be changed or amended orally but only by
----------
an agreement in writing, signed by the party against whom enforcement is sought.
9. GOVERNING LAW. This Note shall be governed and construed by the laws
-------------
of the state of California.
10. PREPAYMENT. Borrower shall have the right to prepay, in whole or in
----------
part, any of the unpaid Principal Sum at any time without penalty.
11. LIMITATION ON RECOURSE. Lender's recourse against Borrower for a
----------------------
failure by Borrower to perform its obligations under this Note, the Indenture,
and the Loan Documents is limited by the provisions of Paragraph 10.14 of the
Indenture, which are incorporated herein by this reference and shall control and
prevail over all other provisions of this Note and Loan Documents.
8
<PAGE>
12. SECURITY. This Note is secured by the Indenture and other Loan
--------
Documents, and all amendments, modifications, supplements, substitutions,
additions, renewals, replacements and extensions thereof.
13. ATTORNEYS' FEES. In the event that suit be brought hereon, or an
----------------
attorney be employed or expenses be incurred to compel payment of this Note or
any portion of the indebtedness evidenced hereby or to defend the priority of
the Indenture securing this Note, Borrower agrees to pay all such expenses and
attorneys' fees incurred by Lender as a result thereof.
14. LENDER'S RELATIONSHIP TO BORROWER. The relationship between Borrower
---------------------------------
and Lender shall be solely that of debtor and creditor and not that of joint
venturers, partners, tenants in common, or joint tenants; and all payments of
Interest due and payable hereunder shall in all respects be and remain in the
nature of interest on the principal. Nothing set forth herein or in the
Indenture is intended to create, nor shall the same be deemed or construed to
create, any interest in the Property, or any portion thereof, in Lender other
than that of a beneficiary under a deed of trust.
Lender shall have no equity in the Property or any portion thereof nor
shall Lender have any right in or to the equity of redemption of the Borrower
therein, which equity of redemption shall, absolutely and forever, be and remain
with the Borrower and the Borrower's heirs, representatives and assigns,
including successors in title to the Property, or any portion thereof.
All benefits and burdens of ownership of the Property are, and shall be and
remain, with Borrower, and Borrower's heirs, representatives and assigns,
including successors in title. All obligations to pay real estate or other
taxes, assessments, insurance premiums, fines, impositions and all other charges
or fees relating to or arising from the ownership, operation or occupancy of the
Property shall be the sole responsibility of the Borrower.
IN WITNESS WHEREOF, this Note is dated as of this 6th day of June 1996.
BORROWER:
MPJ-A, a California general partnership
By: /s/ JAMES D. MAIR
---------------------------
JAMES D. MAIR,
a General Partner
By: /s/ W. LESLIE PELIO
---------------------------
W. LESLIE PELIO,
a General Partner
9
<PAGE>
EXHIBIT 10.9
CONSTRUCTION LOAN AGREEMENT
---------------------------
THIS AGREEMENT, made and entered into this 7th day of June, 1996, between
MPJ-A, a California general partnership (the "Borrower"), and HELLO DIRECT,
INC., a California corporation ("Lender").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Borrower desires to borrow certain sums from Lender, and Lender is
willing to lend said sums to Borrower upon the terms, conditions and provisions
hereinafter set forth;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. AMOUNT, GENERAL PURPOSE AND SECURITY.
--------- ------------------------------------
1.01 AMOUNT AND GENERAL PURPOSE OF LOAN.
----------------------------------
(a) Amount. Upon satisfaction of the conditions set forth in
------
Section 2 below, Lender agrees to make, and Borrower agrees to accept, a loan to
Borrower (the "Loan") in an aggregate principal amount of Five Million Dollars
($5,000,000.00).
(b) Purpose. The purpose of the Loan is to provide funds for the
-------
construction of certain improvements (the "Improvements") on that certain real
property in the County of Santa Clara, California, as described more fully in
EXHIBIT "A" attached hereto (the "Real Property"), to pay certain fees, taxes,
insurance, carrying costs and other so-called "soft costs", and to payoff in
full certain existing loans of Borrower. The Improvements will consist of the
building shell improvements described in Exhibit "D" of the Lease (as defined in
Section 2.01(g) below) and the Tenant Improvements to be constructed in
accordance with Exhibit "C" of the Lease. The Improvements will be more
particularly described in Plans and Specifications approved by Lender and
Borrower pursuant to Section 2.01(d) below. The construction of the Improvements
in accordance with the Plans and Specifications is hereinafter referred to as
the "Project."
1.02 PROMISSORY NOTE. The Loan shall be evidenced by one (1) promissory
---------------
note (the "Note") of Borrower, payable to Lender in the principal amount of Five
Million Dollars ($5,000,000.00) in a form acceptable to Lender.
1.03 DEED OF TRUST; PERMITTED TITLE EXCEPTIONS. The Note shall be secured
-----------------------------------------
by a deed of trust (the "Deed of Trust"). The Deed of Trust shall constitute a
first lien on the Real Property, subject only to current taxes and assessments
not yet due and payable,
1
<PAGE>
Exception Nos. 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12 and 13 as shown on that
certain Preliminary Title Report No. 118042 dated March 20, 1996, issued by
Santa Clara Land Title Company ("Title Company") and such other exceptions as
Lender may agree to in writing. The Deed of Trust shall be in a form acceptable
to Lender.
1.04 OTHER SECURITY.
--------------
(a) Assignment of Construction Contract; Assignment of Plans and
------------------------------------------------------------
Specifications. Borrower hereby assigns to Lender, and grants to Lender a
- --------------
security interest in, all construction contracts, subcontracts, plans and
specifications, architectural renderings or models, and any other "contract
documents", and any and all proceeds thereof, as collateral for Lender's Loan.
Borrower shall obtain from the General Contractor and all subcontractors and
other contractors, and shall deliver to Lender, the written consents and
agreements of the General Contractor and all subcontractors and other
contractors, to complete the work in the event Borrower defaults and Lender
undertakes to cause the work to be completed. Borrower shall obtain from the
Architect, and shall deliver to Lender, the written consent and agreement of the
Architect that all plans and specifications prepared or furnished by the
Architect may be utilized in completing the work in the event Borrower defaults
and Lender undertakes to cause the work to be completed. All such consents and
agreements shall be in such forms acceptable to Lender.
(b) Assignment of Lessor's Interest in Leases. The Loan shall also
-----------------------------------------
be secured by an absolute assignment (or assignments) of Borrower's right, title
and interests in all leases executed and to be executed by Borrower, as lessor,
of the Improvements to be constructed by Borrower, and Borrower agrees to
execute and deliver to Lender an assignment (or assignments) of its interests in
said leases, in form satisfactory to Lender, and other documents as may be
required by Lender in connection with said assignment (or assignments).
(c) Miscellaneous Assignments and Security. The Loan shall also be
--------------------------------------
secured, to the extent applicable and required by Lender, by a Security
Agreement and UCC-1 Financing Statement granting Lender a security interest in
certain personal property owned by Borrower, and by an assignment (or
assignments) to Lender of all road, sewer, utility, building, and other permits
issued to Borrower for the construction of the Improvements, and by such
personal security agreements and other such property as Lender may require. Such
assignments may be executed concurrently herewith or immediately upon request of
Lender.
(d) Completion Guaranty. The general partners of Borrower shall
-------------------
execute a Completion Guaranty with respect to the completion of the Project in
form and content satisfactory to Lender.
2
<PAGE>
(e) Environmental Indemnity Agreement. The Borrower shall execute
---------------------------------
an Environmental Indemnity Agreement in favor of Lender in form and content
satisfactory to Lender.
1.05 LOAN DOCUMENTS; INDEBTEDNESS. The Note, the Deed of Trust, this
----------------------------
Agreement and all other documents evidencing or securing the Loan are
hereinafter collectively referred to as the "Loan Documents." As used herein,
the "Indebtedness" means all indebtedness evidenced or secured by the Loan
Documents.
SECTION 2. DISBURSEMENT OF LOAN PROCEEDS.
--------- -----------------------------
2.01 CONDITIONS PRECEDENT TO INITIAL DISBURSEMENT. Lender agrees to
--------------------------------------------
disburse the Loan proceeds (in the amount, and in the time and manner, set forth
in Section 2.03 below) when each of the following conditions have been satisfied
and/or complied with, in addition to those conditions applicable to all
disbursements after the initial disbursement as described in Section 2.04 and
2.05 below:
(a) Execution of Loan Documents and Delivery to Lender. Borrower has
--------------------------------------------------
executed the Loan Documents, and all other documents required hereunder.
(b) Recordation of Deed of Trust and Issuance of Title Insurance
------------------------------------------------------------
Policy to Lender. The Deed of Trust has been recorded, and there has been
- ----------------
issued to Lender, by Title Company, an "American Land Title Association, Loan
Policy, Additional Coverage - 1990", with LP-10 reissue package form of title
insurance policy, together with such endorsements as Lender may require, which
shall insure the Deed of Trust as a first lien upon the Real Property described
in the Deed of Trust and the Improvements to be constructed thereon, subject to
no exceptions except those referred to in Section 1.03 above.
(c) Warranties, Representations, Covenants and Agreements. Borrower
-----------------------------------------------------
is not then in default in the performance of any of its warranties,
representations, covenants or agreements contained in the Loan Documents, and no
work of construction of the Improvements (including grading, demolition, on-site
or off-site improvement work) has been commenced on or about the Real Property.
(If any work of construction has been commenced on or about the Real Property,
then Borrower shall furnish to Lender all releases and agreements required by
Lender and/or the Title Company insuring that Lender's Deed of Trust shall be at
the time of its recordation, and shall thereafter continue to be, superior or
first in priority to any existing or future liens or encumbrances on the Real
Property arising from such work of construction).
(d) Site and Architectural Approval. The Planning Department of the
-------------------------------
City of San Jose shall have granted site and Architectural approval for the
Project.
3
<PAGE>
(e) Grading Permit. A grading permit for the Project shall have
--------------
been issued by the City of San Jose.
(f) Insurance. Borrower has furnished Lender with certificates of
---------
insurance evidencing the coverage required pursuant to Section 4.10 below.
(g) Execution of Lease. Borrower, as Landlord, and Lender, as
------------------
Tenant, shall have executed a Lease covering the Real Property and Improvements
on terms and conditions mutually satisfactory to Landlord and Tenant (the
"Lease") and such Lease shall not have been terminated and shall be in full
force and effect.
(h) Legal Opinion. Borrower's counsel has issued to Lender a legal
-------------
opinion with respect to (i) the formation and existence of Borrower and (ii) the
execution, delivery and authorization by Borrower of the Lease and the Loan
Documents, in form and content satisfactory to Lender.
(i) Environmental Assessment. Lender, at Lender's sole cost and
------------------------
expense, shall have obtained and approved a Phase I Environmental Site
Assessment prepared by an environmental consultant selected by Lender.
(j) Cost Breakdown. Borrower shall have delivered to Lender and
--------------
Lender shall have approved a Preliminary Construction Progress Schedule and Cost
Schedule and Breakdown.
2.02 DISBURSEMENT PROCEDURE FOR LOAN PROCEEDS. When all the conditions
----------------------------------------
set forth in Section 2.01 have been satisfied and/or complied with, Borrower and
Lender mutually agree that the Loan proceeds shall be disbursed in the manner
set forth in Sections 2.03, 2.04 and 2.05 below.
2.03 AMOUNT AND TIMING OF DISBURSEMENTS.
----------------------------------
(a) Initial Disbursement on Loan Closing. Upon satisfaction of all
------------------------------------
conditions precedent to the initial funding of the Loan as described in Section
2.01, a disbursement of One Million Two Hundred Thousand Dollars ($1,200,000.00)
will be made by Lender to the Title Company for the account of Borrower and
shall be disbursed by Title Company in accordance with Borrower's instructions.
(b) Further Loan Disbursements. Subject to the provisions of
--------------------------
Sections 2.04 and 2.05 below, the remaining loan proceeds shall be disbursed by
Lender to Borrower in the following manner:
(i) On or about the tenth (10th) day of each month, Borrower
shall furnish or cause to be furnished to Lender, in form and substance
satisfactory to Lender, an updated current Construction Progress Schedule and a
current Cost Schedule and Breakdown.
4
<PAGE>
(ii) Each request for disbursement of direct costs shall be
made at least seven (7) business days before the disbursement is desired and
shall show the percentage of materials provided or contract completed at the
date of the request. Such request must be accompanied by such supporting
documentation as Lender may require, including, without limitation, the
following: (A) "Application and Certificate for Payment" on AIA forms G702 and
G703; (B) conditional waivers of mechanics' or materialmens' liens from the
General Contractor and each subcontractor and supplier with respect to the work
for which payment is being requested; (C) a statement verified under penalty of
perjury by the General Contractor that all work covered by the application for
payment has been completed in accordance with the applicable contracts and
should now be paid and that all costs incurred in connection with the Project
either have been paid or will be paid out of the proceeds of the disbursement;
(D) supporting billings to the General Contractor covering the application for
payment; and (E) supporting billings of the General Contractor with respect to
the work of the General Contractor as to which a disbursement is being
requested. The amount to be disbursed on account of the cost of construction
shall be ninety percent (90%) of such cost and ten percent (10%) of such cost
shall be retained to be disbursed pursuant to Section 2.05 below. Any amount
allocated for contingencies in the Cost Schedule and Breakdown shall be
disbursed only for the payment of additional costs incurred as a result of any
extra work, installation of materials or change in the Plans and Specifications
(collectively, "Changes") ordered by Borrower and approved in advance and in
writing by Lender. Lender shall not be obligated to make more than one such
disbursement in any calendar month.
(iii) A separate request, concurrent with the request for
disbursement of direct costs referred to in Section 2.02(b)(ii) hereof, shall be
made for each disbursement of indirect costs, such request to include billings
to Borrower, certified by Borrower. Funds for such verifiable indirect costs
shall be disbursed in accordance with the breakdown of indirect costs included
within the Cost Schedule and Breakdown, provided, however, that disbursements
for architectural and engineering fees shall be made in accordance with the
architectural and engineering contracts approved by Lender.
(iv) Lender may make on-site inspections and review
construction to verify the percentage of completion and certify disbursement
requests.
2.04 GENERAL CONDITIONS PRECEDENT TO FURTHER DISBURSEMENTS. In addition to
-----------------------------------------------------
the conditions set forth in Section 2.03(b) above, each disbursement after the
initial disbursement shall be further conditioned on the following:
(a) Approved Final Plans and Specifications. Copies of the final
---------------------------------------
working plans and specifications for the phase of the work
5
<PAGE>
for which payment is being requested, with Borrower's approval, its Architect's
approval, and the approval of the General Contractor and the appropriate local
governmental bodies, agencies and/or departments endorsed thereon, have been
furnished to Lender and have been approved by Lender in writing, which approval
shall not be unreasonably with held. Such approved final plans and
specifications are hereinafter collectively referred to as the "Plans and
Specifications."
(b) Government Permits and Approvals. All permits and approvals
--------------------------------
required under Federal, State or local law or regulation (including but not
limited to subdivision or tract map requirements, Federal or State environmental
protection laws, the California Coastal Act of 1976, and other planning, zoning,
and/or building requirements) in connection with the phase of the work for which
payment is being requested have been obtained, are in force, and are not subject
to appeal or to conditions which have not been met. Copies of all such permits
and approvals, together with evidence of all required governmental inspections
of such phase of the work, shall have been furnished to Lender.
(c) Construction Progress Schedule and Cost Breakdown. Borrower has
-------------------------------------------------
furnished to Lender a Construction Progress Schedule and a Cost Schedule and
Breakdown, each based upon the Plans and Specifications and based upon actual
bids, as prepared by Borrower or by Borrower's Architect and/or General
Contractor on behalf of Borrower. The Construction Progress Schedule shall be a
schedule detailing on a monthly basis, each item of work for the Project to be
performed during such month. The Cost Schedule and Breakdown shall be a schedule
of estimated monthly disbursements for the Project, along with a cost breakdown
showing (i) with regard to direct costs, a breakdown of the direct cost of the
work, itemized as to trade item, trade description, name of contractor,
subcontractor and/or supplier (if they have been selected) and the contract
price or, if none, the estimated cost; and (ii) with regard to indirect costs, a
breakdown of the indirect cost of the work, itemized as to the type of service
to be provided or cost to be incurred, name of the service provider, if any, and
the contract price, or if none, the estimated cost.
(d) Construction Contracts and Subcontracts. As required by Lender,
---------------------------------------
all contracts and subcontracts for the work of the construction of the
Improvements have been submitted to and approved by Lender, and Borrower has
furnished Lender with an assignment of such contracts in form and substance
satisfactory to Lender.
(e) No Defaults. Borrower is not in default under any agreement
-----------
contained in the Loan Documents.
(f) No Mechanics' Liens and Stop Notices. There are no mechanics'
------------------------------------
liens or stop notices filed against the Real Property or the Improvements.
6
<PAGE>
(g) No Shortfall. No determination has been made by Lender that the
------------
amount of the Loan proceeds remaining undisbursed is less than the amount
required to pay all expenses in connection with completion of the Project,
unless Borrower shall have deposited with Lender an amount at least equal to the
amount of such deficiency as determined by Lender.
(h) Title Insurance Indorsements. Borrower has furnished to Lender
----------------------------
at Borrower's expense, if requested by Lender: (i) evidence satisfactory to
Lender that the Title Company is prepared to issue to Lender a title insurance
indorsement to the Title Policy, showing no intervening liens or encumbrances
upon the Real Property and insuring the full amount of the disbursement, and
(ii) a satisfactory report under the Uniform Commercial Code showing no liens or
interests other than those of Lender or previously approved in writing by
Lender.
(i) Architect's Certificate. The Architect has certified in writing
-----------------------
to Lender in a form satisfactory to Lender at the time of each disbursement
request hereunder that the Project is being constructed in accordance with the
Plans and Specifications.
(j) Representations and Warranties. All representations and
------------------------------
warranties contained in the Loan Documents are correct on and as of the date of
such disbursement as though made on and as of such date.
2.05 CONDITIONS PRECEDENT TO FINAL DISBURSEMENT. The final disbursement
------------------------------------------
shall be made when the following conditions have been satisfied, in addition to
those conditions set forth in Section 2.04 above:
(a) Architect's Certificate Regarding Completion. The Architect has
--------------------------------------------
certified to Lender on AIA Form G704 in a manner satisfactory to Lender that, to
the best of the Architect's knowledge, information and belief, the Improvements
have been completed in accordance with the Plans and Specifications and
applicable law and without material defects in design, construction or
equipment.
(b) Title Indorsements. Borrower has furnished to Lender, at
------------------
Borrower's expense, any other title policy indorsements required by Lender, in
form and amount satisfactory to Lender (including (i) a foundation endorsement
insuring that there are no encroachments of improvements over boundary lines,
city setback lines or easement areas, and (ii) an endorsement insuring lien-free
completion of the Improvements).
(c) ALTA Survey. Borrower has furnished to Lender, at Borrower's
-----------
expense, an ALTA as built survey of the Real Property and Improvement in form
satisfactory to Lender and Title Company showing that there are no encroachments
of improvements over boundary lines, city setback lines or easement areas.
7
<PAGE>
(d) Final Lien Releases. Borrower has furnished to Lender
-------------------
unconditional final lien releases obtained from the General Contractor, each of
the various subcontractors and materialmen and substantially all of the sub-
subcontractors and submaterialmen under the subcontractors and materialmen at
any level, or Borrower has furnished evidence satisfactory to Lender that the
General Contractor and the subcontractors and materialmen and sub-subcontractors
and submaterial men have been paid in full.
(e) Evidence of Compliance. Borrower has furnished evidence, in
----------------------
form and substance satisfactory to Lender, that: (i) Borrower has obtained final
certificates of occupancy for all of the Improvements, (ii) all other permits
and approvals necessary for the construction, operation, use and/or ownership of
the Improvements have been obtained, subject only to those conditions approved
by Lender, and (iii) the completed Improvements comply with all applicable
zoning regulations, subdivision map acts, building code provisions and similar
governmental laws and regulations, and have adequate ingress and egress from
public streets, such evidence to be in the form of a certificate executed by
Borrower in favor of Lender.
(f) Utilities Available. Borrower has furnished evidence in form
-------------------
and substance satisfactory to Lender that all utilities necessary for the full
utilization and operation of the Improvements are available and have been
connected to the Improvements.
SECTION 3. REPRESENTATIONS AND WARRANTIES.
--------- ------------------------------
3.01 ORGANIZATION OF BORROWER; VALIDITY OF LOAN DOCUMENTS. Borrower hereby
----------------------------------------------------
represents and warrants to Lender that:
(a) Organization. If Borrower is a partnership, Borrower is duly
------------
organized and validly existing under the laws of the State of California and is
duly qualified to do business in the State of California.
(b) Authority. Borrower has the requisite power and authority to
---------
own and manage its properties, to carry on its business as now being conducted
and to own, develop and operate the Real Property. Borrower is qualified to do
business in every jurisdiction in which the nature of its business or its
properties makes such qualification necessary.
(c) Compliance. Borrower is in compliance with all laws,
----------
regulations, ordinances and orders of public authorities applicable to it.
(d) Binding Obligation. The execution, delivery and performance by
------------------
Borrower of the Loan Documents and the borrowing evidenced by the Note (i) are
within the power of Borrower, (ii) have been duly authorized by all requisite
partnership actions, (iii) have
8
<PAGE>
received all necessary governmental approvals, and (iv) will not violate any
provision of law, any order of any court or agency of government, the charter
documents of Borrower, or any indenture, agreement or any other instrument to
which it is a party or by which it or any of its property is bound, or be in
conflict with, result in a breach of or constitute (with due notice and/or lapse
of time) a default under any such indenture, agreement or other instrument, or
result in the creation or imposition of any lien, charge or encumbrance of any
nature whatsoever upon any of the property or assets of Borrower, except as
contemplated by the provisions of the Loan Documents. Each of the Loan
Documents, when executed and delivered to Lender, will constitute a legal, valid
and binding obligation enforceable in accordance with its terms.
3.02 OWNERSHIP OF REAL PROPERTY. At the time of recordation of the Deed
--------------------------
of Trust hereinabove referred to, Borrower is the owner of the Real Property on
which the Improvements are to be constructed.
3.03 NO LITIGATION OR PROCEEDING. As of the date of this Agreement, there
---------------------------
is no litigation, proceeding or dispute pending against Borrower (nor to the
knowledge of Borrower, is there any threatened action, suit or proceeding), the
adverse determination of which would impair in any material respect the ability
of Borrower to repay the Loan or to construct and install the Improvements. All
rights to appeal any decision rendered must have expired prior to the date
hereof.
3.04 ENVIRONMENTAL WARRANTIES. Borrower hereby represents, warrants and
------------------------
covenants that Borrower has not, and, to the best of Borrower's knowledge, no
prior owner or current or prior tenant, subtenant, or other occupant of all or
any part of the Real Property, has: used, stored, transported, discharged,
generated or disposed of Hazardous Materials on, from or affecting the Real
Property in any manner that violates federal, state or local laws, ordinances,
rules, regulations or policies governing the use, storage, treatment, discharge,
transportation, manufacture, refinement, handling, production or disposal of
Hazardous Materials (collectively, the "Environmental Laws"), and that, to the
best of Borrower's knowledge, no Hazardous Materials have been disposed on or
exist on the Real Property.
3.05 COMPLIANCE WITH LAWS. To the best of Borrower's knowledge, the Real
--------------------
Property and the proposed and actual use thereof comply with all laws,
ordinances, rules and regulations of all local, regional, county, state and
federal governmental authorities having jurisdiction over the same.
SECTION 4. COVENANTS AND AGREEMENTS.
--------- ------------------------
Until the entire Indebtedness shall have been paid in full, Borrower hereby
covenants to and agrees with Lender as follows:
9
<PAGE>
4.01 GENERAL OBLIGATIONS OF BORROWER.
-------------------------------
(a) Payment. Borrower shall pay the Indebtedness and Borrower shall
-------
continue to be liable for the payment of the Indebtedness until it has been paid
in full, subject to the provisions of Paragraph 10.14 of the Deed of Trust.
(b) Performance. Borrower shall perform or cause to be performed
-----------
all covenants, agreements, terms and conditions to be performed by Borrower
under the Loan Documents. Borrower shall apply all Loan proceeds (except those
disbursed in the initial disbursement) only to pay costs shown on the Cost
Schedule and Breakdown last approved by Lender. Lender will not disburse more on
account of any item than the amount shown for such item in the Cost Schedule and
Breakdown last approved by Lender without Lender's consent.
(c) Security Instruments. From time to time, upon the request of
--------------------
Lender, Borrower shall execute and deliver to Lender a security instrument
naming Lender as secured party covering all contracts of any kind entered into
in connection with the Project and all other property used or to be used in the
construction of the Improvements. Borrower, at its expense, shall cause such
security instruments and all supplements thereto to be recorded and filed in
such manner as Lender shall reasonably request.
(d) Performance by Borrower of Lessor's Obligations Under Executed
--------------------------------------------------------------
Lease. Borrower shall faithfully perform all of the terms, covenants and
- -----
conditions of all leases which it may enter into with respect to the Real
Property and shall not substantially amend, modify, or alter any such lease
without the express written consent of Lender. Borrower shall not accept (except
as permitted hereunder or by the express written consent of Lender) any amount
payable under any such lease in advance of its due date, and shall not commit
any, or permit any act to be committed, which would constitute or be deemed to
constitute an act of default under any such lease.
(e) Insufficiency of Loan Funds to Complete Construction. If and
----------------------------------------------------
whenever the total undisbursed Loan proceeds are not sufficient, in the judgment
of Lender (exercised in good faith and after consultation with Borrower and
Borrower's Architect and General Contractor), to pay in full for the completion
of the Improvements, then, no further disbursements of Loan proceeds shall be
made and Borrower shall pay all costs of construction of the Improvements until
the Loan is "in balance" (i.e., there are sufficient undisbursed Loan funds to
pay in full for the completion of the Improvements). Should Borrower not pay
such costs of construction, Lender may, as election, do either of the following,
in addition to exercising any right or remedy it may have under the Loan
Documents (i) declare Borrower to be in default, accelerate the maturity of the
Note, and exercise all remedies for default existing under the Loan Documents,
including foreclosure; or (ii) Lender may advance the additional funds required
10
<PAGE>
to complete the Improvements; provided that such advances are within the Loan
limits applicable to Lender and of Borrower owing to Lender, pursuant to state
and federal law and regulation; and provided that Borrower shall deliver
additional collateral as may be requested by Lender. Such advances shall
constitute additional loans to Borrower, repayable upon demand, bearing interest
at the same rate as the Note, which loans shall be secured by a deed or deeds of
trust which (together with required title insurance) have the legal effect of
being equivalent in priority with the Deed of Trust initially recorded for this
Loan.
4.02 CONSTRUCTION OBLIGATIONS.
------------------------
(a) Construction Schedule. Borrower shall fully satisfy and comply
---------------------
with all of the conditions and provisions of Section 2 and shall commence
construction of the Improvements within ten (10) days from the date of
recordation of the Deed of Trust. Borrower shall, in accordance with good
building practices, in strict accordance with the Plans and Specifications
hereinabove described, and in conformity with all applicable governmental laws
and regulations, diligently and continuously proceed with such construction in a
good and workmanlike fashion. Borrower shall use its best efforts to complete
the construction and installation of the Improvements by December 28, 1996, and
in any event, no later than two hundred seventy (270) days after the recordation
of the Deed of Trust.
(b) Commencement and Completion of Off-Site Improvements. Borrower
----------------------------------------------------
shall commence and complete any off-site Improvements which are part of the
Project or necessary to complete the Project in conformance with applicable laws
and private restrictions, as required, and shall provide utilities and other
facilities, all to be in accordance with the approved Plans and Specifications
and requirements of the governmental body having jurisdiction thereof. Except as
may be inconsistent with the context of this Agreement, such off-site
Improvements shall be deemed a part of the work of construction of the
Improvements. Borrower expressly agrees to protect, defend, indemnify Lender and
to hold it harmless from and against any claim of any surety furnishing a bond
for such work to the governmental body having jurisdiction, and/or against any
claim therefor of the governmental body itself, whether such claim be founded
upon existing or future liability and whether such liability be expressed or
implied.
(c) Property Subject to Vendor's Lien or Security Interest. Borrower
------------------------------------------------------
shall not incorporate in the Improvements, nor permit any other person to
incorporate therein, any property acquired under any lease or conditional sales
contract, or under any contract whereby the vendor retains title or a security
interest therein or any rights to remove or repossess such property, except as
Lender may agree in writing to permit.
(d) Duplicate Plans. Borrower shall submit to Lender a
---------------
11
<PAGE>
duplicate set of plans and specifications for approval before any material
improvements, repairs or alterations are begun affecting the Real Property.
4.03 MAINTENANCE, WASTE AND REPAIR. Borrower shall maintain the
-----------------------------
Improvements now or hereafter existing in good and tenantable repair, and shall
not structurally alter the same without the prior written consent of Lender, nor
remove or demolish the same in whole or in part, nor (except where appropriate
replacements free of superior titles, liens and claims, and of a value at least
equal to the value of the building equipment removed, are immediately made)
shall any building equipment be removed from the Real Property without the prior
written consent of Lender, nor shall Borrower suffer any waste of the Real
Property or make any change in the use thereof that will in any way increase any
ordinary fire or other hazard insurance premiums or do or permit to be done
thereon anything that may in any way impair the security of the Deed of Trust.
During the course of the Project, Borrower shall use due care in protecting all
construction and Improvements from weather, elements and other hazards.
4.04 COMPLIANCE WITH LAW. Borrower shall preserve and keep in full force
-------------------
and effect its existence, rights and powers. Borrower shall promptly and
faithfully comply with, and the Project and Improvements shall conform to, all
present and future laws, ordinances, rules, regulations and requirements of
every duly constituted governmental authority or agency and of every board of
fire underwriters (or similar body exercising similar functions) having
jurisdiction that may be applicable to Borrower or to the Real Property, or any
part thereof, or to the use or manner of construction, occupancy, possession,
operation, maintenance, alteration or repair thereon or with respect to any part
thereof, whether or not such law, ordinance, rule, order, regulation or
requirement shall necessitate structural changes or improvements or interfere
with the use or enjoyment of the Real Property.
4.05 FURTHER ASSURANCES. Borrower, at any time upon the reasonable
------------------
request of Lender, shall at Borrower's expense execute, acknowledge and deliver
all such additional papers and instruments and all such further assurances of
title and shall do or cause to be done all further acts and things as may be
proper or reasonably necessary to carry out the purpose hereof and of the Loan
Documents and subject to the liens thereof any property intended by the terms
thereof to be covered thereby and any renewals, additions, substitutions,
replacements or betterments thereto.
4.06 BORROWER'S RESPONSIBILITIES.
---------------------------
(a) Supervision. To prevent and avoid construction defects,
-----------
Borrower shall inspect, review, supervise and assure the high quality, adequacy
and suitability of:
12
<PAGE>
(i) the Plans and Specifications and all changes and
amendments thereto;
(ii) architects, contractors, subcontractors and materialmen
employed or utilized in the Project and the workmanship of and the materials
used by all of them; and
(iii) the progress and course of construction and its
conformance with the Plans and Specifications and any amendments, alterations
and changes thereto as may be approved by Lender.
(b) Copies. Borrower will promptly give to Lender copies of all
------
notices of violation that Borrower receives from any governmental agency or
authority.
(c) Mechanics' Liens and Stop Notices. Borrower agrees to pay and
---------------------------------
discharge promptly and fully all claims for labor done and materials and
services furnished in connection with the Project, diligently to file or procure
the filing of a valid Notice of Completion upon completion of the Project,
diligently to file or procure the filing of a Notice of Cessation upon the event
of a cessation of labor on the Project for a continuous period of thirty (30)
days or more, and to take all other reasonable steps to forestall the assertion
of claims of lien against the Real Property or any part thereof, or of claims
against the Loan proceeds. Borrower shall require the General Contractor to
obtain a lien release with respect to each payment by or to the General
Contractor and each of the various subcontractors and materialmen (and the major
sub-subcontractors and submaterialmen under them). Nothing herein contained
shall require Borrower to pay any claims for labor, materials or services which
Borrower in good faith disputes and which Borrower, at its own expense is
currently and diligently contesting, provided that Borrower shall, in such case
and in each other case where a claim of lien has been filed, within ten (10)
days after the filing of any such claim of lien, (A) record in the office of the
Recorder of the County where the Real Property is located a surety bond
sufficient to release said claim of lien, or (B) make a deposit of cash in the
amount of one hundred fifty percent (150%) of the claim of lien with Lender, or
(C) deliver to Lender a specific title insurance policy indorsement under which
the Title Company insures Lender that such claim of lien is not valid, or (D)
deliver to Lender such other assurance as may be acceptable to Lender.
4.07 STATEMENTS AND RECORDS OF BORROWER.
----------------------------------
(a) Note Balance; Offsets. Borrower, upon ten (10) days' written
---------------------
request, shall furnish a statement of the amount due or outstanding on the Note
and a statement of any offsets, counterclaims or defenses to the payment
thereof.
(b) Project Status. Borrower and/or Borrower's General
--------------
13
<PAGE>
Contractor shall furnish to Lender monthly, verified written statements, in such
form and detail as Lender may require, showing: (i) all items and amounts paid
and those remaining to be paid for labor, materials, and subcontracts; and (ii)
all other construction activities.
(c) Accounts and Records. Borrower and Borrower's General
--------------------
Contractor shall keep detailed accounts and records, in accordance with sound
accounting practices, and shall make available to Lender, it officers, agents,
contractors and employees, at all times, all books, statements, invoices,
receipted bills, orders and other records relating to the construction of the
Improvements, and shall furnish Lender with copies of the same upon Lender's
request.
4.08 INDEMNITY.
---------
(a) Indemnity. Borrower agrees to release, indemnify, defend and
---------
hold Lender harmless from and against all liabilities, claims, actions, damages,
costs and expenses (including all reasonable legal fees and expenses of Lender's
counsel) arising out of resulting from the construction of the Project; breach
of any representation or warranty made or given by Borrower to Lender; breach of
any obligation of Borrower contained in any of the loan documents; or any claim
or cause of action of any kind by any party that Lender is liable for any act or
omission committed or made by Borrower in connection with the construction of
the Project. Upon demand by Lender, Borrower shall defend any action or
proceeding brought against Lender arising out of alleging any claim or cause of
action covered by this indemnity, all at Borrower's own cost and by counsel to
be approved by Lender in the exercise of its reasonable judgment.
(b) Provisions Survive Termination. The provisions of this Section
------------------------------
4.08 shall survive the termination of the Deed of Trust and the repayment of the
Indebtedness.
4.09 SPECIFIC PAYMENTS.
-----------------
(a) Tax Receipts. Borrower will pay, when due, taxes and
------------
assessments against the Real Property. Upon request, Borrower shall exhibit to
Lender, within seven (7) days after demand made therefor, bills (which shall be
receipted from and after the date receipted bills are obtainable) showing the
payment to the extent then due of all taxes, assessments (including those
payable in periodic installments) and/or any other tax or assessment that may
have become a lien upon the Real Property, or any portion thereof.
4.10 INSURANCE.
---------
(a) Property Damage Insurance. Borrower, at its sole cost and
-------------------------
expense, shall keep the Real Property insured for the mutual benefit of Borrower
and Lender against loss or damage by fire and
14
<PAGE>
against loss or damage by other risks embraced by coverage of the type now known
as the broad form of extended coverage, including, but not limited to, riot and
civil commotion, vandalism, malicious mischief, burglary, theft and mysterious
disappearance and against such other risks or hazards as Lender from time to
time reasonably may designate, in an amount not less than one hundred percent
(100%) of the then "full replacement cost," of the Improvements without
deduction for physical depreciation. The policies of insurance carried in
accordance with this Section shall contain the "Replacement Cost Endorsement."
During construction of the Project, all policies required by this Section shall
be on All Risk Builder's Risk 100% Completed Value Non-Reporting Form or other
form approved by Lender, shall include earthquake insurance and shall insure all
new construction, including all materials and equipment therefor incorporated
in, on or about the Real Property (including excavations, foundations and
footings).
(b) Public Liability Insurance. Borrower, at its sole cost and
--------------------------
expense, shall obtain and maintain public liability insurance covering the Real
Property and the ownership, use, occupancy and maintenance thereof and any
portions thereof.
(c) Worker's Compensation Insurance. Borrower, at its sole cost and
-------------------------------
expense, shall obtain and maintain adequate Worker's Compensation Insurance
issued to Borrower or evidence of the same issued to Borrower's General
Contractor and/or subcontractors or other contractors.
(d) Form of Policies of Insurance. All policies of insurance
-----------------------------
required pursuant hereto shall be satisfactory in form and substance to Lender
and shall be approved by Lender as to amounts, form, risk coverage, deductibles,
insurer, loss payable and cancellation provisions and shall be delivered to
Lender.
(e) Rights Upon Default. Effective upon the occurrence of any Event
-------------------
of Default, all of Borrower's right, title and interest in and to all policies
of property insurance and any unearned premiums paid thereon are hereby assigned
to Lender, who shall have the right, but not the obligation, to assign the same
to any purchaser of the Real Property at any foreclosure sale.
SECTION 5. CASUALTIES AND CONDEMNATION.
--------- ---------------------------
5.01 CASUALTIES.
----------
(a) Notifications; Repayment Option. Borrower shall notify Lender
-------------------------------
in writing promptly after loss or damage caused by fire or other casualty to the
Real Property, and prior to the making of any repairs thereto. Borrower shall
furnish to Lender within ninety (90) days after such loss or damage the
following:
15
<PAGE>
(i) evidence satisfactory to Lender of the cost of repair or
reconstruction;
(ii) evidence satisfactory to Lender that sufficient funds are
available and/or committed for the benefit of Lender, including insurance
proceeds or otherwise, to complete such repair or reconstruction; and
(iii) evidence satisfactory to Lender that such repair or
reconstruction may be completed in accordance with all applicable laws, rules,
regulations and ordinances and that all necessary permits and approvals have
been or will be obtained.
(b) Repayment Option. In the event Borrower does not furnish the
----------------
foregoing evidence to Lender within said ninety (90) day period, then within
thirty (30) days after the expiration of such ninety (90) day period, Lender
shall have the option (referred to herein as the "Repayment Option") to have all
insurance proceeds applied against the Indebtedness. If Lender elects the
Repayment Option, Borrower shall transfer immediately to Lender all insurance
proceeds received by Borrower, if any, to the extent of the Indebtedness, and
Lender shall apply such insurance proceeds received by it, if any, against the
Indebtedness. If the insurance proceeds held by Borrower and Lender shall exceed
the Indebtedness, such excess insurance proceeds shall belong and be paid over
to and/or retained by Borrower.
(c) Repairs. In the event Lender does not elect the Repayment
-------
Option within the time period above specified, Borrower shall with all diligence
repair or otherwise reconstruct such damage to the Real Property, all according
to the Plans and Specifications and elevations thereof or such modified Plans
and Specifications conforming to the then laws and regulations as shall first
have been approved in writing by Lender and any occupants of the Improvements
having the right to approve. Lender shall use all insurance proceeds, if any,
received by it relating to such damage or destruction to reimburse Borrower from
time to time for expenditures made for repair of such damage or for the erection
of any building, structure or improvements in their place if permitted
hereunder. Any such disbursement of insurance proceeds shall be subject to the
same disbursement procedures and restrictions applicable to the Loan proceeds as
described in Section 2 above.
(d) Excess Insurance Proceeds. If the insurance proceeds shall
-------------------------
exceed the cost of completing such work, such excess insurance proceeds shall
belong and be retained by and/or paid over to Lender to be applied against the
Indebtedness. If the costs of completing such work shall exceed the insurance
proceeds, Borrower shall pay the balance of the costs of completing such work
within thirty (30) days after the completion thereof.
16
<PAGE>
5.02 CONDEMNATION. Immediately upon obtaining knowledge of the
------------
institution of any proceedings for the condemnation of the Real Property or any
portion thereof, Borrower shall notify Lender of the pendency of such
proceedings. Lender may participate in any such proceedings and Borrower from
time to time shall deliver to Lender all instruments requested by Lender to
permit such participation. In the event of such condemnation proceedings, the
award or compensation payable is hereby assigned to and shall be paid to Lender.
Lender shall be under no obligation to question the amount of any such award or
compensation and may accept the same in the amount in which the same shall be
paid. In any such condemnation proceedings Lender may be represented by counsel
selected by Lender, at Borrower's expense. The proceeds of any award or
compensation so received shall, at the option of Lender, either be applied,
without premium, to the prepayment of the Note or be paid over to Borrower for
restoration of the Improvements in accordance with the provisions of Section
5.01(b) above.
SECTION 6. DEFAULT.
--------- -------
6.01 EVENTS OF DEFAULT. An "Event of Default" shall mean that one or more
-----------------
of the following events has/have occurred:
(a) Work Cessation. (i) Work ceases on the Project for a period of
--------------
fifteen (15) consecutive days for any reason other than strikes, lockouts, acts
of God or other reasons beyond the control of Borrower (excluding financial
inability); (ii) work on the Improve ments does not proceed in a diligent,
continuous and workmanlike manner or in accordance with the provisions of this
Agreement; (iii) such delays have occurred that the Improvements will not be
substantially completed within two hundred seventy (270) days after the
recordation of the Deed of Trust; or (iv) the Lease between Borrower, as
Landlord, and Lender, as Tenant, covering the Property is terminated for any
reason other than a default by Lender, as tenant under such Lease;
(b) Default Under Agreements. Borrower is in default under any
------------------------
agreement or covenant contained herein or in the Note or Deed of Trust;
(c) Actions or Proceedings. Any action, suit or proceeding is
----------------------
brought against Borrower, the Real Property or the Improvements by any person,
entity, or governmental body alleging noncompliance with any law, regulation,
statute, order or ordinance, including, but not limited to, the California
Environmental Quality Act, the California Subdivision Map Act, or the
regulations issued pursuant to such acts, and such action, suit or proceeding is
not be dismissed within sixty (60) days thereafter;
(d) False Representation. Any warranty or representation of
--------------------
Borrower is or becomes untrue or proves to have been false or misleading as of
the date the same was made;
17
<PAGE>
(e) Attachments or Writs. Any execution, attachment, or other writs
--------------------
is/are levied against the Real Property, the Improvements or the Loan proceeds
and remain(s) in effect for thirty (30) days thereafter;
(f) Bankruptcy. (i) Any proceeding under the Bankruptcy Code is
----------
instituted by or against Borrower or a receiver, trustee or custodian is
appointed for Borrower, or for the Real Property or the Project and such
proceeding or receiver, trustee or custodian is not dismissed within sixty (60)
days thereafter; or (ii) Borrower makes an assignment for the benefit of
creditors and such assignment is not voided within sixty (60) days thereafter;
(g) Mechanics' Liens; Stop Notices. Any mechanic's lien, stop
------------------------------
notice or other notice to withhold funds related to the Loan proceeds is filed
or served and is not bonded against or released within ten (10) days after such
filing;
(h) Initial Disbursement Conditions. Borrower does not fully
-------------------------------
satisfy all of the conditions of Section 2.01 prior to the disbursement of the
Loan proceeds on or before thirty (30) days from the date of recordation of the
Deed of Trust;
(i) Defective Work. Substantial deviations in the Project from the
--------------
Plans and Specifications exist without the approval of Lender, or the existence
of defective workmanship or materials incorporated into the Improvements arises
and such deviations or defects are not corrected within thirty (30) days after
written notice thereof to Borrower;
(j) Enforceability of Loan Documents. Any of the Loan Documents, at
--------------------------------
any time after their respective execution and delivery and for any reason,
ceases to be in full force and effect or is declared null and void, or the
validity or enforceability thereof is contested by Borrower or any stockholder
or partner of Borrower, or Borrower denies that it has any or further liability
or obligation under any of the Loan Documents to which it is a party.
6.02 EFFECT OF DEFAULT UNDER THIS AGREEMENT. The Note shall include and
--------------------------------------
does include provisions whereby an Event of Default hereunder shall be a default
under the Note. The Deed of Trust shall include and does include appropriate
provisions whereby it is made security for the performance of all of the terms,
conditions and provisions of this Agreement and any Event of Default hereunder
shall, in turn, be an Event of Default under the Deed of Trust. In the event of
any default hereunder, Lender may (a) seek to enforce its rights and remedies
under the Note and/or the Deed of Trust; (b) declare all the Indebtedness to be
forthwith due and payable and the same shall thereupon become forthwith due and
payable without any further presentment, demand, protest or notice of any kind;
(c) institute appropriate proceedings for injunctive relief (including, without
18
<PAGE>
limitation, specific performance of the obligations of Borrower under any Loan
Document); (d) terminate this Agreement; (e) declare its obligation to make
advances under this Agreement to be terminated, whereupon such obligation shall
immediately terminate; and/or (f) exercise all rights and remedies available
under any of the Loan Documents, at law, in equity or otherwise. The remedies
provided in this Agreement shall be in addition to, and not in substitution for,
the rights and remedies which would otherwise be vested in Lender for the
recovery of damages, or otherwise, in the event of a breach of any of the
undertakings of Borrower hereunder. No failure by Lender to exercise and no
delay in exercising any right, power or privilege under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof.
6.03 LENDER'S ADDITIONAL RIGHTS AND REMEDIES UPON DEFAULT. If any one or
----------------------------------------------------
more of the events specified in Section 6.01 occurs, Lender, at its option, and
without declaring a total default hereunder, may enter onto the Real Property
and cause to be performed and furnished any and all labor or work and materials
it may deem necessary or desirable for the protection of the Real Property
and/or the protection and completion of the Improvements substantially in
accordance with the Plans and Specifications and, to this end, Lender may do any
act, and may enter into any contract and incur such costs therefor, as it deems
proper for such purpose, and may pay therefor any part or all of the undisbursed
available funds, and any sums so expended shall be deemed disbursements of the
Loan to Borrower. Should the amounts so expended, including incidental expenses
and attorneys' fees, exceed the amount of the undisbursed available funds,
Borrower agrees to pay such excess to Lender on demand, together with interest
thereon at the rate specified in Paragraph 8.2 of the Deed of Trust, and the
amount thereof, with said interest, if not paid, shall be secured by said Deed
of Trust with the same effect as if originally part of the Loan.
SECTION 7. GENERAL PROVISIONS.
--------- ------------------
7.01 LENDER'S RIGHT TO APPEAR IN LITIGATION OR PROCEEDINGS. It is agreed
-----------------------------------------------------
that Lender shall have the right, but not the obligation, to commence, appear in
or defend any action, suit or proceeding purporting to affect the Real Property
or the Improvements, or the rights or duties of the parties hereunder, or the
payment of any funds in connection herewith, and in connection therewith, Lender
may pay all necessary expenses, employ counsel and pay its reasonable fees, all
of which Borrower agrees to repay to Lender upon demand, together with interest
thereon at the rate specified in Paragraph 8.2 of the Deed of Trust.
7.03 NO THIRD PARTY BENEFICIARIES OF THIS AGREEMENT. Nothing herein
----------------------------------------------
contained shall establish a trust fund or right of action for the benefit of any
person or persons not parties to this Agreement,
19
<PAGE>
nor shall any such person or persons have any rights hereunder, not shall
anything herein impose any liability upon Lender to pay or be chargeable with
any claims for labor or materials. This Agreement is made and entered into for
the sole benefit of the parties hereto and their permitted successors and
assigns.
7.04 WAIVER OF LENDER. Any waiver by Lender of any term, condition or
----------------
requirement of this Agreement shall not constitute a waiver of any other term,
condition or requirement hereof or constitute a waiver of the same term,
condition of requirement in any other instance. Any express waiver shall only
affect the default referenced in the waiver and shall only be operative for the
time and to the extent therein stated. No waiver by Lender of any default or
breach by Borrower hereunder shall be implied from any omission by Lender to
take action on account of such default if such default persists or is repeated.
7.05 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF
--------------------------------------------------------------------
BORROWER. All representations, warranties, covenants and agreements herein
- --------
contained on the part of Borrower shall survive the making of the Loan and the
execution of Borrower's Note and shall be effective as long as any interest on
or principal of the Indebtedness remains unpaid. In accepting each advance of
Loan proceeds, Borrower shall be deemed to have reaffirmed to Lender as of the
date of said acceptance, the truth and correctness of each of Borrower's
representations and warranties set forth herein. Nothing contained in this
Agreement shall limit any other provision of the Loan Documents which by their
stated terms survive the repayment of the Indebtedness or the termination of any
Loan Document.
7.06 ATTORNEYS' FEES. In the event of any action at law or suits in
---------------
equity in relation to this Agreement, or any documents executed pursuant hereto,
or any promissory note issued hereunder, the prevailing party, in addition to
all other sums to which it may be entitled, shall be entitled to a reasonable
sum for attorneys' fees.
7.07 NOTICES. Any notice or demand which shall be required or permitted
-------
by law or by any provisions of this Agreement shall be in writing and if the
same is to be served upon Lender, shall be personally delivered to Lender, or in
the alternative, shall be deposited in the United States mail, certified, return
receipt requested, postage prepaid, addressed to Lender as follows:
MPJ-A
511 Division Street
Campbell, CA 95008
ATTN: James D. Mair
If such notices or demands are to be served upon Borrower, said notices or
demands shall be personally delivered to Borrower, or in the alternative, shall
be deposited in the United States mail,
20
<PAGE>
certified, return receipt requested, postage prepaid, addressed to Borrower as
follows:
Hello Direct, Inc.
5884 Eden Park Place
San Jose, CA 95138-1859
Attn: Chief Financial Officer
No requests for advances or notices of changes of address shall be
effective until actual receipt. Except for the foregoing notices, notice shall
be deemed sufficiently given for all purposes hereunder on the date the same was
deposited, postage prepaid and properly addressed as set forth herein, in a U.S.
Post Office or delivered, if personally delivered.
7.08 NO RELATIONSHIP OTHER THAN DEBTOR AND CREDITOR. Nothing herein
----------------------------------------------
contained shall in any manner be construed as creating any relationship between
Borrower and Lender other than that of debtor and creditor.
7.09 APPLICABLE LAW. The parties to this Agreement mutually agree that
--------------
California law shall apply to this Loan transaction and to the interpretation
and enforcement of all documents evidencing this Loan transaction.
7.10 ENTIRE AGREEMENT. This Agreement and all schedules, addenda and
----------------
exhibits hereto constitute the entire and complete understanding of the parties
with respect to this Loan transaction. All previous conversations, memorandums
and writings between the parties and/or pertaining to this Loan transaction not
incorporated or referenced in this Agreement are superseded by this Agreement.
7.11 MODIFICATION OR AMENDMENT OF AGREEMENT; WRITTEN APPROVAL. This
--------------------------------------------------------
Agreement shall not be modified, amended or altered without the express written
agreement of the parties hereto. All consents, waivers and approvals by Lender
required or permitted by any provision of this Agreement shall be in writing. No
consent or approval of any act of Borrower shall be deemed to waive or render
unnecessary the consent or approval regarding any subsequent similar act.
7.12 SUCCESSOR AND ASSIGNS; ASSIGNMENT. This Agreement shall bind and
---------------------------------
inure to the benefit of the respective successors and assigns of each of the
parties.
7.13 TIME OF THE ESSENCE. Time is of the essence of this Agreement.
-------------------
7.14 CONTEXT. In this Agreement, personal pronouns shall be construed as
-------
though of the gender and number required by the context, the singular shall
include the plural, the plural the singular as may be required by the context
and, if this Agreement is signed by
21
<PAGE>
more than one person as "Borrower," all of Borrower's liability and obligations
hereunder shall be joint and several liabilities and obligations of said
parties.
7.15 CAPTIONS. The captions and headings used in this Agreement are for
--------
convenience and reference purposes only, and shall in no way or manner be deemed
to limit, restrict, define, describe, modify, amend or add to the
interpretation, construction or meaning of any section, paragraph or provision,
or of the scope or intent, of this Agreement.
7.16 WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY WAIVE ANY RIGHT TO
--------------------
TRIAL BY JURY WITH RESPECT TO ANY ACTION OR PROCEEDING BROUGHT BY BORROWER,
LENDER OR ANY OTHER PERSON RELATING TO (i) THE LOAN AND/OR ANY UNDERSTANDINGS OR
PRIOR DEALINGS BETWEEN THE PARTIES HERETO OR (ii) THE LOAN DOCUMENTS. BORROWER
AND LENDER HEREBY AGREE THAT THIS AGREEMENT CONSTITUTES A WRITTEN CONSENT TO
WAIVER OF TRIAL BY JURY PURSUANT TO THE PROVISIONS OF CALIFORNIA CODE OF CIVIL
PROCEDURE SECTION 631.
LENDER'S INITIALS: ________ BORROWER'S INITIALS: ________
7.17 COUNTERPARTS. The Loan Documents may be executed in any number of
------------
counterparts and by different parties in separate counterparts, each of which
when executed and delivered shall be deemed an original and all of which
counterparts taken together shall constitute but one and the same instrument.
7.18 SEVERABILITY. If any term, provision, covenant or condition hereof
------------
or any application thereof should be held by a court of competent jurisdiction
to be invalid, void or unenforceable, all terms, provisions, covenants and
conditions hereof and all applications thereof not held invalid, void or
unenforceable shall continue in full force and effect and shall in no way be
affected, impaired or invalidated thereby.
22
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed the day and year first
hereinabove written.
BORROWER: LENDER:
MPJ-A, HELLO DIRECT, INC.
a California general a California corporation
partnership
By: /s/ James D. Mair By: /s/ Norman L. Buvas
------------------------- -------------------------------
Its: General Partner Its: Vice President Operations, CFO
------------------------ ------------------------------
By: /s/ W. Leslie Pelio
-------------------------
Its: General Partner
------------------------
23
<PAGE>
EXHIBIT 10.10
[WELLS FARGO BANK LETTERHEAD]
June 17, 1996
Mr. Paul F. Robinson
Director of Finance
Hello Direct, Inc.
5884 Eden Park Place
San Jose, CA 95138
Dear Paul:
The following outlines our proposal to increase the Line of Credit for Hello
Direct to $5,000,000. The covenants are similar to last year, allowing you a
high degree of financial flexibility. As you may recall, we waived the
quarterly profitability covenant for you during the last quarter of the year,
but the covenant remains in place for succeeding periods. I have also added a
Libor pricing option. No fees will be charged for legal, audit, documentation
or special handling of Letters of Credit.
AMOUNT: $5,000,000 for direct borrowing and issuance of trade letters of
credit.
EXPIRATION: May 15, 1997
RATE: Option of the following 1) WFB Prime rate, floating
(Currently 8.25%).
2) Libor plus 2.50% (Currently 8.00%
all-in rate for 90 day borrowing
for $500,000 or more).
FEE: $10,000.00
TERMS: Annual CPA audited financial statements and 10K to be submitted
within 120 days of fiscal year end.
Quarterly Company prepared financial statements and 10Q to be
submitted within 45 days of quarter end.
Company will not, without prior written consent from Wells Fargo
Bank, pledge, create a security interest in, hypothecate or file a
financing statement with respect to any of its inventory, A/R, or
proceeds of such inventory or A/R whether now in existence or
hereafter acquired.
<PAGE>
Without prior written approval from Wells Fargo Bank, the Company
will not:
Enter into direct borrowing or guarantees;
Enter into any mergers or acquisitions;
Declare any dividends.
Paul Robinson
The Company shall maintain the following financial covenant on a
quarterly basis:
Minimum Quick Ration 1.25%
Maximum Debt/ETNW 1.00%
Profitability Quarterly
As of the following dates, Hello Direct was in compliance with all terms and
conditions as represented below.
Required Actual 12/31/96 Actual 3/31/96
Minimum Quick Ratio 1.25% 4.65% 3.26%
Maximum Debt/ETNW 1.00% .10% .18%
Profitability Quarterly Waived on 1/30/96 $255M
This facility is subject to the terms and conditions listed above as well as the
terms and conditions detailed in all supporting documentation including the note
and security agreement.
Please indicate your acceptance by signing and returning a copy of this letter.
Accepted, Hello Direct
/s/ Norman L. Bunas
By:
Sincerely,
/s/ John Adams
John Adams
<PAGE>
EXHIBIT 11.1
HELLO DIRECT, INC.
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 305,000 $ 564,000 $ 560,000 $1,374,000
========== ========== ========== ==========
Weighted average common shares outstanding 4,979,000 4,979,000 457,000 4,967,000 455,000
Common stock equivalents:
Common stock options, utilizing treasury stock method
when dilutive 58,000 193,000 58,000 165,000
Preferred stock, utilizing as if converted method when
dilutive - 3,944,000 - 3,326,000
Staff Accounting Bulletin No. 83 issuances and grants (1) - 48,000 - 48,000
---------- ---------- ---------- ----------
Weighted average shares outstanding 5,037,000 4,642,000 5,025,000 3,994,000
========== ========== ========== ==========
Net income per share $ 0.06 $ 0.12 $ 0.11 $ 0.34
========== ========== ========== ==========
</TABLE>
(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common and preferred stock issued for consideration below the assumed
initial public offering (IPO) price, and stock options and warrants granted
with exercise prices below the IPO proce during the 12-month period
preceding the date of the initial filing of the Registration Statement, have
been included in the calculation of common equivalent shares, using the
treasury stock method, as if they were outstanding for all periods
presented.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,513,000
<SECURITIES> 8,725,000
<RECEIVABLES> 4,281,000
<ALLOWANCES> 0
<INVENTORY> 3,681,000
<CURRENT-ASSETS> 21,156,000
<PP&E> 2,058,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,969,000
<CURRENT-LIABILITIES> 1,588,000
<BONDS> 0
0
0
<COMMON> 5,000
<OTHER-SE> 24,367,000
<TOTAL-LIABILITY-AND-EQUITY> 25,969,000
<SALES> 24,455,000
<TOTAL-REVENUES> 24,455,000
<CGS> 11,621,000
<TOTAL-COSTS> 23,892,000
<OTHER-EXPENSES> (371,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 934,000
<INCOME-TAX> 374,000
<INCOME-CONTINUING> 560,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 560,000
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
