<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 1998
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-11275
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TELTONE CORPORATION
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(Name of small business issuer in its charter)
WASHINGTON 91-0839067
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
22121 - 20th Avenue SE, Bothell, WA 98021
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (425) 487-1515
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
None
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Securities registered pursuant to Section 12(g) of the Act:
Common stock without par value
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(Title of Class)
Check whether the registrant (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Exchange Act 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
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Check if there is no disclosure of delinquent filers in response to Item 405
if Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year. $9,049,191
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State the aggregate market value of the voting and non-voting common equity
held by non affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as of
a specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.) $1,877,000
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(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the registrant's classes
of common equity, as of the latest practicable date.
6,006,796 shares of common stock outstanding as of September 2, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by
reference and the Part of the Form 10-KSB into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b)
or (c) under the Securities Act of 1933. The listed documents should be
clearly described for identification purposes.
(1) PROXY STATEMENT DATED SEPTEMBER 28, 1998 FOR USE IN CONNECTION WITH THE
COMPANY'S ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON OCTOBER 29, 1998. (PART
III, ITEM 9, (DIRECTORS ONLY) AND ITEMS 10, 11, AND 12).
Transitional Small Business Disclosure Format (check one): Yes No X
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<PAGE>
PART I
ITEM 1. BUSINESS
Teltone Corporation (Teltone or the Company) sells specialized
telecommunications software, equipment and components in the United States
and international markets. Teltone's customers include business end-users,
original equipment manufacturers (OEMs), telephone call centers, and
utilities. Teltone Corporation was incorporated in the state of Washington in
July 1968.
INDUSTRY BACKGROUND
The telecommunications market has been changing dramatically and the rate of
change is accelerating. These changes have been driven by new computer and
telephony technologies, by deregulation, and by the Internet. This dynamic and
competitive environment provides many new opportunities for Teltone's product
lines. The equipment products are sold primarily in North America to utilities,
telecom carriers, and end users, both large and small. The component products
are sold to telecom original equipment manufacturers (OEMs) throughout the
world.
PRODUCTS
TELECOMMUTING SOLUTIONS
The concept of telecommuting or telework is the movement among businesses to
allow employees to work from home or other remote locations, eliminating the
daily round trip from home to workplace. Telecommuting is enjoying increasing
acceptance as businesses are encouraged to share in the reduction of traffic
congestion and energy consumption. Teltone currently offers two solutions,
OfficeLink 2000 and OffcieLink I, for telecommuting, both of which extend the
features and functions of the central-site telephone system to remote workers,
enabling them to work as productively as they do in the office.
The OfficeLink 2000 telecommuting solution is targeted to call center remote
agents and corporate telecommuters. OfficeLink 2000 provides remote workers
with the full functionality of digital phonesets on the Windows-Registered
Trademark- PC Platform, without requiring costly extra hardware at the remote
location. Communications systems manufactured by Lucent, Nortel, and Siemens
Business Communications are now supported by the OfficeLink 2000.
The OfficeLink I is a single-user solution which gives home workers an analog
connection to centrally located phone systems. It enables companies to begin
telecommuting right away with a minimal investment.
TELECOM EQUIPMENT
Teltone is a market leader in telecommunications test and demonstration
products. Our portable Telephone Line Simulators provide extensive PBX and
telephone central office functionality for testing, training, and demonstration
of telecommunications equipment, without installing costly phone lines. The
TLS-5C, introduced in fiscal 1996, incorporates caller identification in call
waiting and several other new product features. The latest member of this
family, the Telephone Line Emulator (TLE), is a sophisticated emulator that is
targeted for product development and product test applications. The TLE basic
unit includes programmable attenuation and impedance as well as Type 2/3 Caller
ID. In addition, software modules were introduced in fiscal 1998 that allow
users to perform a variety of more advanced test operations, emulation of
international call progress and dial tones, and automated testing. The TLE is
also CE marked to enable sales in Europe.
The ISDN digital line service is now widely available in North America. Teltone
provides two simulators for the OEMs that want to test or demonstrate their ISDN
equipment. The ILS-2000 is a fully featured simulator of both North American
and European (ETSI) switches and includes both the U and S/T interfaces. The
ISDN Demonstrator is a lower cost and lesser featured unit.
Teltone's Line Sharing Products enable multiple devices at remote locations to
share a single telephone line for voice and data transmission. Benefits to the
user include greatly reduced monthly line charges and installation costs,
improved data security, faster connect times, and quick return of the initial
investment. In a typical application, a headquarters office will poll or
exchange data with hundreds of widely dispersed locations.
<PAGE>
The Substation Line Sharing Switch (SLSS) is an embodiment of Teltone's line
sharing technology which, along with other complementary products, is especially
suited for line sharing in power utility substations as well as for utility
distribution automation applications.
TELECOM COMPONENTS
Teltone offers the industry a wide selection of tone-based telecom IC solutions
for telecom equipment manufacturers.
Teltone is a market leader in call progress detection, offering this critical
function both as part of industry-standard single-function devices (such as
our new low power 3V/5V M980-02) and integrated with DTMF reception and
generation functions in our industry-standard M-8880 and M-8888 devices. In
addition, Teltone has a unique line of precise call progress detection
devices (M-981, M-982 and M-984) that allow customers to rapidly determine
precisely which call progress signal is present without waiting for several
cycles. All these receivers are used in equipment that connects to the
telephone network worldwide, such as computer-telephone equipment, automatic
dialers, voice mail and pay phone systems. The M-991 tone generator is used
extensively by manufacturers of wireless switches, simulators and test
equipment.
Teltone's MF signaling IC product line supports tone-based inter-switch
signaling with proprietary, DSP-based single channel and dual channel CCITT
Region 1 and Region 2 transceivers (the M-986 transceiver product line and the
M-993 generator). These devices enable Central Office, customer premises, and
PBX/Centrex switch manufacturers to build switches compatible with standards
used in the largest and fastest-growing telephone equipment markets worldwide.
A SOURCE FOR CUSTOM SOLUTIONS
Teltone's engineering expertise and customer-oriented focus allow it to rapidly
respond to its customers' requests for changes to standard products or for new
product designs. Teltone's engineering staff has a thorough understanding of
telephone network interface technology, analog and digital application,
regulatory requirements, and computer interface technologies. These skills have
often been brought to bear to create a unique solution customized to precisely
match the customer's requirements.
MARKETING, SALES, AND DISTRIBUTION
TELECOM EQUIPMENT AND TELECOMMUTING PRODUCTS
Teltone's products for end user businesses are sold directly, through
specialized distributors, or through value added resellers (VARs). The
OfficeLink 2000 is sold directly and through VARs, and may be sold through OEMs
in the future.
The power utilities in North America are served primarily through a network of
manufacturers representatives. The SLSS and other utility products are usually
delivered directly to these customers with no distributors involved. Starting
in fiscal 1998, some international utilities were supplied with SLSS through
specialized distributors.
Products are promoted through magazine articles and advertising, direct mail,
and telephone sales. Product and sales support are provided from Teltone's
Bothell, WA, facility.
TELECOM COMPONENTS
In the United States and Canada, components are sold direct from Teltone to high
volume users, as well as through a network of manufacturers' representatives and
electronics distributors. Specifications, literature, and customer support are
provided by Teltone from its headquarters. In foreign countries the Company's
OEM products are marketed through stocking distributors who purchase the
products from Teltone and resell them to telecommunications OEMs in the
countries they serve. Teltone currently has 30 international distributors for
OEM products.
<PAGE>
COMPETITION
Teltone concentrates on applications for which its technology is particularly
well matched and which can be quickly addressed with unique product solutions.
Over the years, Teltone has developed a strong reputation for delivering high
quality products and excellent customer service. This reputation helps the
Company sell its products throughout the telecommunications industry. Teltone
is also known for solving unique customer problems in specialty niches of the
business-user market. Some user products face significant competition from
suppliers which are larger and more established in their particular market
segments. Many of the competitors have lower overhead costs and are able to
sell their products at lower prices than Teltone. In these situations, Teltone
concentrates on selling its products into applications that require the
relatively high performance, reliability and excellent service that will allow
it to command its relatively high prices.
Teltone's component business to OEMs, though not supported by in-house
manufacturing, has been able to compete successfully in the marketplace because
of the value added by the Company's proprietary products, customer service and
applications support for its component products. The most significant
competition for Teltone's components comes from integrated circuit
manufacturers, some of them Teltone's suppliers, that also sell to Teltone's
customer base.
Digital-Signal-Processing ("DSP") technology offers another form of competition
which allows the customer to implement sophisticated signaling schemes by
programming standard DSP devices. In some cases, depending on the product and
volume, a potential customer can literally replace the older component function
with software when DSP is used. To respond to this competitive threat, Teltone
has developed and is marketing products using DSP techniques to better serve the
customer's needs with competitive products.
RESEARCH AND DEVELOPMENT
The telecommunications industry is subject to continuous technological changes.
Thus, well positioned new products that solve problems for customers are
essential to Teltone's ability to grow. In fiscal 1998 the Company spent
$1,147,461 or approximately 13% of each sales dollar on product development.
The Company spent approximately $ 962,000 for fiscal 1997 and $819,000 for
fiscal 1996 (10% and 9%, respectively) on product development. Management of
the Company expects to spend approximately 11% of sales on product development
in fiscal 1999.
CUSTOMER SERVICE AND SUPPORT
Responsive customer service and field support are important in the customer's
decision to buy the Company's products, often at a premium over competitive
products. Field service personnel are located at the Company's facilities in
Bothell, WA.
BACKLOG
At June 30, 1998, backlog totaled $746,000 compared to $1,177,000 at June 30,
1997. Teltone's experience is that most customers normally order Company
products on an "as needed" basis.
<PAGE>
MANUFACTURING
Teltone assembles its equipment products from standard and specialized
components manufactured by others to Teltone's specifications. The Company then
performs all assembly and test steps in the manufacture of its products at its
Bothell, WA, facility. Component testing takes place upon their receipt from
suppliers, and functional testing is completed after assembly and burn-in of the
subsystems. These tests are primarily performed by automated equipment.
RAW MATERIALS
Most standard components are available from a number of suppliers. Custom
microcircuitry components are normally purchased from single sources but,
because the Company owns the tooling for these components, other electronics
manufacturers could take over if an existing vendor ceased production. In such
a case, the Company's supply of a component might be affected by start-up
delays. The Company enters into contracts for one year or longer with both its
standard and custom component suppliers as a means of insuring that short-term
supplies will be available. To date, the Company has not had any significant
procurement problems. However, future shortages could result in production
delays that could adversely affect the Company's business.
PATENTS AND TRADEMARKS
The Company owns a number of trademarks which are used on its products. It is
the owner of federal registrations for its trademarks TELTONE, stylized TELTONE,
CableLink, CallData, CallPro, Convert-A-Pak, and Teltone OfficeLink. In
addition, its REMOBS and stylized TELTONE trademarks have been registered in
Canada. In Europe, its stylized TELTONE has been registered in France and
Benelux (Belgium-Netherlands-Luxembourg), West Germany and Italy.
The Company owns United States and foreign patents on various features
incorporated into certain equipment it produces. Because of the technological
nature of the telecommunications industry, and the significant number of patents
extant that cover various aspects of such technology, companies producing
products for the telephone industry often find that they have included patented
technology in the design of one or more of their products. In such an event,
the use of such technology may be licensed from the patent holder and a
licensing fee paid by the user, or the patent holder may insist that use of the
patented technology be discontinued. In that event, the user has the option of
either discontinuing use or risking suit. In any such suit, the issues may
include the validity of the patent or the fact of infringement. Management is
not currently aware of any infringements.
EMPLOYEES
As of June 30, 1998, the Company employed 56 persons full time. On such date,
12 employees were engaged in production, 10 in engineering, 14 in sales,
marketing, and service, and 20 in administrative functions. The Company
believes its relations with its existing employees to be excellent. None of the
Company's employees are represented by a labor union.
SEASONALITY
No material portion of the business of the Company is regarded as seasonal.
<PAGE>
ITEM 2. PROPERTIES
Teltone's corporate headquarters are located approximately fifteen miles
northeast of Seattle in Bothell, WA. The leased headquarters building provides
65,000 square feet of floor space of which 50,000 square feet are used for the
manufacturing, product development, marketing, sales, quality control, and
administrative functions of the Company and 15,000 square feet are subleased.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various contractual and warranty liability cases and
claims which are considered normal to its business. In the opinion of
management, these claims, when concluded, will not have a material adverse
impact on the consolidated financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Ragen MacKenzie Incorporated is a market maker for Teltone stock,
which is traded on the NASD electronic OTC Bulletin Board under
the symbol TTNC. For further information call Ragen MacKenzie
Incorporated at (206) 343-5000. While the Board of Directors
has declared and paid dividends in past years, in fiscal 1983 it
adopted a policy of retaining all earnings to fund business
development and growth.
Following are the Company's high and low sales prices by
quarter for the fiscal years ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Fiscal Year 1998 High Low
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<S> <C> <C>
Quarter ended September 30, 1997 $.22 $.18
Quarter ended December 31, 1997 $.63 $.13
Quarter ended March 31, 1998 $.34 $.19
Quarter ended June 30, 1998 $.69 $.32
<CAPTION>
Fiscal Year 1997 High Low
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<S> <C> <C>
Quarter ended September 30, 1996 $.50 $.35
Quarter ended December 31, 1996 $.63 $.31
Quarter ended March 31, 1997 $.38 $.31
Quarter ended June 30, 1997 $.31 $.19
</TABLE>
There were 886 common shareholders and 135 preferred shareholders as
of September 2, 1998.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements in this report covering future performance, developments,
expectations or events, including the discussion of the Company's product
development and introduction plans, and resulting expectations for its
growth, constitute forward-looking statements which are subject to a number
of known or unknown risks and uncertainties that might cause actual results
to differ materially from those expressed or implied by such statements.
All forward-looking statements contained in this report reflect the Company's
expectations at the time of this report, and the Company disclaims any
responsibility to revise or update any such forward-looking statement except
as may be required by law.
1998 VS. 1997
Net sales for 1998 were $9,049,000, a 10% decrease when compared to
$10,053,000 for 1997. This decrease was due to a 31% reduction in sales of
lower margin integrated circuits, partially offset by a 3% increase in higher
gross margin telephone line simulator and emulator products. Gross margin
increased to 44% of net sales in 1998 compared 39% in 1997 due to changes in
product mix. This improvement in the gross margin percent resulted in total
gross margin of $3,940,000 remaining relatively unchanged despite the
decrease in sales. Operating expenses increased 5% in 1998 over 1997 due
primarily to increased investment in engineering and development projects to
pursue the computer-telephone integration market (CTI). During fiscal 1998
the Company reorganized its Engineering and Development department,
increasing its internal capabilities to produce CTI and other software
products. These new products are expected to generate higher revenues in
fiscal 1999 and contribute to increased gross margins due to their higher
levels of software content. These increases are planned to offset a
continued decrease in sales of integrated circuits. Interest expense
decreased 70% to $18,000 due to the pay down of the line of credit.
During fiscal 1998 the Company implemented a Y2K Project to address a potential
problem with which substantially all users of automated data processing and
information systems are faced. This problem arises from the use by some systems
of only two digits to represent the year applicable to a transaction. This
potential problem could affect a wide variety of automated systems such as
Enterprise Requirements Planning systems, personal computers, communications
systems, and other information systems routinely used in all industries. The
Company is addressing this issue on several different fronts. First, all
Teltone products are Year 2000 compliant. The Company assigned a team to assess
product compliance and has created a new area within the Company website
(www.teltone.com) containing comprehensive information about the Year 2000 issue
and the Company's compliance program. Second, the Company has requested Year
2000 compliance certification from each of its qualified suppliers. Finally,
the Company has established a Year 2000 coordinator to assess its own internal
systems, with a goal of being compliant by the end of fiscal 1999. The Company
currently does not expect that the cost of its Year 2000 compliance program will
be material to its financial condition or results of operations or that its
business will be adversely affected by the Year 2000 issue in any material
respect. Nevertheless, achieving Year 2000 compliance is dependent on many
factors, some of which are not completely within the Company's control. Should
either the Company's internal systems or the internal systems of one or more
significant suppliers fail to achieve Year 2000 compliance, the Company's
business and its results of operations could be adversely affected.
1997 VS. 1996
Net sales for 1997 were $10,053,000 as compared to $9,471,000 for 1996. This
increase was driven by an 8% increase in customer premises equipment sales and
by an 11% increase in the sale of integrated circuits. Gross margin was 39% of
net sales in 1997 compared 44% in 1996. The decrease in margin was attributable
to special volume pricing on certain integrated circuits. Operating expenses
were 39% of net sales in 1997 and 41% of net sales for 1996, reflecting
management's continued efforts to control costs while growing both net sales and
engineering and development efforts.
At June 30, 1998, approximately $12,458,000 in net operating loss carryforwards
were available to offset future taxable income and expire from 2000 through
2013. If substantial changes in the Company's ownership should occur, there may
be annual limitations on the utilization of such carryforwards. The Company
also has investment tax credit as well as research and development tax credit
carryforwards of $290,000 and $753,000, respectively,
<PAGE>
available to offset future income tax liabilities through 2001. Although the
Company has adopted the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," there is no tax asset recognized for the net
operating loss carryforwards and tax credits due to the Company's loss
history and therefore uncertainty regarding future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a line of credit agreement for $1,500,000, renewable in July of
1999. The agreement is collateralized by eligible accounts receivable,
inventory, and other tangible and intangible assets and contains financial
covenants including working capital and debt ratios, as well as maximum loss
provisions. As of June 30, 1998, there were no borrowings outstanding under
this line. During fiscal 1998 the Company was able to completely pay down the
line of credit due primarily to the benefits of changes in the manufacturing
process which resulted in a shorter manufacturing cycle and lower inventory
requirements.
In August 1998, Richard Soshea, Chief Executive Officer of the Company,
exercised options to purchase 400,000 shares of common stock at $.51 per share,
which provided the Company with $204,000 in cash for use in its operations.
The Company invested $103,000 in capital equipment in 1998 compared to $130,000
in 1997. The Company anticipates an increase in the level of capital
expenditures from 1998 to 1999 as a result of planned enhancements to the
telecommunications and internal networking systems.
Cash generated from operations, sale of common shares, and the line of credit
should enable the Company to meet its operating and working capital needs during
the next twelve months.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPORTING DATA
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the five years ended June 30, 1998
In thousands except share and per share data 1998 1997 1996 1995 1994
- -------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net sales . . . . . . . . . . . . . . . . . . . . . . $9,049 $10,053 $9,471 $9,176 $7,600
Gross margin. . . . . . . . . . . . . . . . . . . . . 3,940 3,950 4,202 4,261 2,947
Net (loss) income . . . . . . . . . . . . . . . . . . (155) (42) 377 405 (907)
PER SHARE DATA
Basic net (loss) income per common
share outstanding. . . . . . . . . . . . . . . . $ (.02) $ (.01) $ .06 $ .06 $ (.14)
Average common shares (including
preferred) outstanding . . . . . . . . . . . . . 6,682,437 6,666,937 6,651,437 6,562,230 6,564,791
Diluted net (loss) income per common and
common equivalent share outstanding. . . . . . . $ (.02) $ (.01) $ .05 $ .06 $ (.14)
Average common and common equivalent
shares outstanding . . . . . . . . . . . . . . . 6,682,437 6,666,937 7,201,784 6,679,253 6,564,791
OTHER FINANCIAL INFORMATION
Cash and short-term cash investments. . . . . . . . . $ 305 $ 530 $ 148 $ 60 $ 64
Working capital . . . . . . . . . . . . . . . . . . . 1,665 1,777 1,805 1,314 1,256
Property, plant, and equipment - net. . . . . . . . . 251 294 297 369 416
Total assets. . . . . . . . . . . . . . . . . . . . . 3,010 3,523 3,652 3,606 3,213
Long-term liabilities . . . . . . . . . . . . . . . . - - - - 394
Stockholders' equity. . . . . . . . . . . . . . . . . 1,916 2,071 2,102 1,684 1,278
OTHER STATISTICS
Current ratio . . . . . . . . . . . . . . . . . . . . 2.5 to 1 2.2 to 1 2.2 to 1 1.7 to 1 1.8 to 1
Long-term liabilities to equity . . . . . . . . . . . - - - - .3 to 1
Number of employees at end of year. . . . . . . . . . 58 62 65 60 57
</TABLE>
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Teltone Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity, and of cash flows present fairly, in all
material respects, the financial position of Teltone Corporation at June 30,
1998 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Seattle, Washington
September 1, 1998
<PAGE>
STATEMENTS OF OPERATIONS
For the two years ended June 30, 1998
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,049,191 $10,053,062
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . 5,109,301 6,103,288
------------ ------------
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . 3,939,890 3,949,774
Operating expenses:
Selling, general, and administrative. . . . . . . . . . 2,922,122 2,915,787
Engineering and development . . . . . . . . . . . . . . 1,147,461 962,490
------------ ------------
4,069,583 3,878,277
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(Loss) income from operations. . . . . . . . . . . . . . . . (129,693) 71,497
------------ ------------
Other expense:
Interest expense . . . . . . . . . . . . . . . . . . . . . . (18,455) (62,262)
Other expense--net . . . . . . . . . . . . . . . . . . . . . (6,747) (50,795)
------------ ------------
(25,202) (113,057)
------------ ------------
Income tax provision . . . . . . . . . . . . . . . . . . . . - -
------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (154,895) $ (41,560)
------------ ------------
Basic and diluted net loss per common and
common equivalent share. . . . . . . . . . . . . . . . . . $ (.02) $ (.01)
------------ ------------
------------ ------------
Average common and common equivalent
shares outstanding . . . . . . . . . . . . . . . . . . . . 6,682,437 6,666,937
</TABLE>
<PAGE>
BALANCE SHEETS
June 30, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
---- ----
<S> <C> <C>
Current assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 304,875 $ 530,074
Trade accounts receivable (net of allowance for
doubtful accounts of $34,289 and $35,024). . . . . . . . . . . . . . . . . 1,391,004 1,315,819
Inventories (net of allowance for obsolescence of
$269,000 and $296,346)
Raw materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489,133 699,414
Work in process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,168 74,405
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402,060 575,274
------------ ------------
Total inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,048,361 1,349,093
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,574 33,922
------------ ------------
Property, plant, and equipment--at cost. . . . . . . . . . . . . . . . . . . . . 2,448,646 2,346,028
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . . (2,197,586) (2,051,926)
------------ ------------
Property, plant, and equipment--net. . . . . . . . . . . . . . . . . . 251,060 294,102
------------ ------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,009,874 $ 3,523,010
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable--trade . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 587,199 $ 548,599
Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . . . 369,696 406,714
Accrued warranty expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 35,510 33,373
Notes payable to bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,620 63,580
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . 1,094,025 1,452,266
Commitments: Notes 2 and 3
Stockholders' equity
Convertible preferred stock--no par value; authorized 6,000,000
shares; 1,075,641 shares issued and outstanding in 1998 and 1997
($2,151,282 liquidation preference; or $2 per share) . . . . . . . . . . . 2,063,149 2,063,149
Common stock--no par value; authorized 20,000,000 shares;
5,606,796 shares issued and outstanding in 1998 and 1997 . . . . . . . . . 2,998,685 2,998,685
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,145,985) (2,991,090)
------------ ------------
Stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,915,849 2,070,744
------------ ------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,009,874 $ 3,523,010
------------ ------------
------------ ------------
</TABLE>
<PAGE>
STATEMENTS OF CASH FLOWS
For the two years ended June 30, 1998
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(154,895) $ (41,560)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,660 129,970
Loss on disposal of property . . . . . . . . . . . . . . . . . . . . . . . 2,506
Change in:
Trade accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . (75,185) 79,083
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,732 421,329
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . 41,759 301,730
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,348 8,770
------------ ------------
Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . 277,419 901,828
Investing activities:
Investment in property, plant, and equipment . . . . . . . . . . . . . . . (102,618) (130,060)
------------ ------------
Cash used by investing activities:. . . . . . . . . . . . . . . . . . . . . . (102,618) (130,060)
Financing activities:
Net repayments of notes payable to bank. . . . . . . . . . . . . . . . . . (400,000) (400,000)
Employee stock sales, net. . . . . . . . . . . . . . . . . . . . . . . . . _ 10,410
------------ ------------
Cash used by financing activities . . . . . . . . . . . . . . . . . . . . . . (400,000) (389,590)
------------ ------------
(Decrease) increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . (225,199) 382,178
Cash, beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 530,074 147,896
------------ ------------
Cash, end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 304,875 $ 530,074
------------ ------------
------------ ------------
</TABLE>
Supplemental Disclosure of Cash Flow Information
Interest paid during 1998 and 1997 was $18,503 and $62,691, respectively.
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
For the two years ended June 30, 1998
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Accumulated
Shares Amount Shares Amount Deficit Total
--------------- ---------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 . . . . . . . . . 1,075,641 $2,063,149 5,575,796 $2,988,275 $(2,949,530) $2,101,894
Issuance of common stock under
employee stock option plan. . . . . . 31,000 10,410 10,410
Net loss . . . . . . . . . . . . . . . . (41,560) (41,560)
--------- ----------- ---------- ------------ ----------- -----------
Balance, June 30, 1997 . . . . . . . . . 1,075,641 $2,063,149 5,606,796 $2,998,685 $(2,991,090) $2,070,744
Net loss . . . . . . . . . . . . . . . . (154,895) (154,895)
--------- ----------- ---------- ------------ ----------- -----------
Balance, June 30, 1998 . . . . . . . . . 1,075,641 $2,063,149 5,606,796 $2,998,685 $(3,145,985) $1,915,849
--------- ----------- ---------- ------------ ----------- -----------
--------- ----------- ---------- ------------ ----------- -----------
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Teltone Corporation designs, manufactures, and sells specialty electronic
telecommunications equipment, software, and components to a variety of business
end users, and original equipment manufacturers internationally. Customers are
primarily located in North America, Asia, and Western Europe.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment. Estimated
sales returns are subtracted from sales to obtain net sales and are not
material. In accordance with Statement of Position 97-2, "Software Revenue
Recognition," revenue from software sales is recognized when earned, after any
right of return clauses expire. Payments received in advance of revenue
recognition are recorded as a deferred revenue liability until earned.
INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization which is calculated on a straight-line basis over their estimated
useful lives of 2-7 years. Property and equipment consist primarily of
manufacturing and engineering equipment, and furniture and fixtures.
ENGINEERING AND DEVELOPMENT COSTS
Engineering and development costs are charged to expense as incurred.
WARRANTY COSTS
Estimated warranty costs are accrued at the time products are sold.
INCOME TAX
Income taxes are calculated using the asset and liability approach under which
deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amount and the tax basis of assets and
liabilities using the enacted tax rates in effect in the years in which the
differences are expected to reverse.
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock is convertible one-for-one into common stock at the
stockholder's option.
NET LOSS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128), which changed the Company's presentation and
calculation of net loss per common share. Basic net loss per common share is
based on the weighted average number of common shares and convertible preferred
shares outstanding during the year. Common equivalent shares, including
warrants and stock options, are included in the calculation of diluted earnings
per common and common equivalent shares to the extent that they are dilutive and
are excluded to the extent they are antidilutive. During the years ended June
30, 1998 and 1997, the Company had stock options and warrants which were not
included in the computation of net loss per share because the impact would have
been antidilutive. Per share amounts for all periods have been retroactively
adjusted to this new presentation. The adoption of SFAS 128 did not have a
material impact on the Company's net loss per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, trade accounts receivable, inventories, accounts
payable trade, accrued compensation and benefits, and other accrued expenses
approximate their fair value because of the short-term maturity of these
instruments.
16
<PAGE>
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. LEASE COMMITMENTS
The Company leases its headquarters facility under an operating lease agreement.
Future minimum lease payments for the years ending June 30 are as follows:
<TABLE>
<S> <C>
1999 $562,385
2000 515,847
2001 541,452
2002 559,897
2003 573,072
2004 238,780
</TABLE>
Operating lease expense was $608,405 in 1998 and $574,666 in 1997.
3. LINE OF CREDIT
The Company has a line of credit agreement with a bank for the lesser of
$1,500,000 or an amount calculated based on 75% of eligible domestic and 60% of
eligible foreign accounts receivable. The line is renewable in July 1999, is
collateralized by eligible accounts receivable, inventory, and other tangible
and intangible assets, and contains financial covenants including working
capital and debt ratios, as well as maximum loss provisions. The line of credit
bears interest at prime + 1/2%. As of June 30, 1998, there were no borrowings
under this line of credit.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
-------------- -------------
<S> <C> <C>
Manufacturing and engineering equipment $ 2,372,024 $ 2,281,641
Furniture and fixtures 71,923 59,688
Other 4,699 4,699
-------------- -------------
2,448,646 2,346,028
Less accumulated depreciation (2,197,586) (2,051,926)
-------------- -------------
$ 251,060 $ 294,102
-------------- -------------
-------------- -------------
</TABLE>
5. INCOME TAX
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
-------------- -------------
<S> <C> <C>
Net operating loss carryforwards $ 4,300,000 $ 4,177,000
Depreciation and amortization 251,000 315,000
Tax credits 1,043,000 1,043,000
Inventory reserves 91,000 101,000
Other 100,000 110,000
-------------- -------------
Deferred tax assets 5,785,000 5,746,000
Valuation allowance (5,785,000) (5,746,000)
-------------- -------------
$ - $ -
-------------- -------------
-------------- -------------
</TABLE>
17
<PAGE>
Due to the Company's loss history and therefore uncertainty regarding future
taxable income, the Company has established a valuation allowance of $5,785,000
against deferred tax assets. At June 30, 1998, the Company had net operating
loss carryforwards of approximately $12,458,000. The carryforwards expire from
2000 through 2013. If substantial changes in the Company's ownership should
occur, there may be annual limitations on the utilization of such carryforwards.
The Company also has investment tax credit as well as research and development
tax credit carryforwards of $290,000 and $753,000, respectively, available to
offset future income tax liabilities through 2001.
The reconciliation of taxes on income at the federal statutory rate to the
actual tax expense of $0 is:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Tax at statutory rate $(52,664) $(14,130)
Nondeductible items 13,664 2,130
Change in valuation allowance 39,000 12,000
----------- -----------
$ - $ -
----------- -----------
----------- -----------
</TABLE>
6. STOCK OPTIONS
The Company has two active stock option plans. The Nonemployee Directors' Stock
Option Plan provides for the grant of options to purchase up to 320,000 common
shares to outside directors of the Company. Options are granted at the fair
market value of the stock on the date of grant and vest over a four year period.
The maximum term of an option may not exceed six years.
The Employees Stock Option Plan provides for the grant of options to purchase up
to 800,000 common shares to key employees of the Company. Options are granted
at the fair market value of the stock on the date of grant and vest over a four
year period. The maximum term of an option may not exceed six years.
The Company accounts for common stock options of the Nonemployee Directors Stock
Option Plan and the Employees Stock Option Plan under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). In
1995 the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS 123),
which requires companies who elect to adopt its provisions to utilize a fair
value approach for accounting for stock compensation. The Company has elected
to continue to apply the provisions of APB 25 in its financial statements.
Accordingly, no compensation expense cost has been recognized for its fixed
stock option plans. Had compensation cost for the Company's two stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of FAS 123, the
Company's net loss and net loss per share would have been reduced to the amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C>
Net loss As reported $(154,895) $ (41,560)
Pro forma (213,579) (107,737)
Basic and diluted net loss per common As reported $(.02) $(.01)
and common equivalent share Pro forma (.03) (.02)
</TABLE>
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: expected
volatility of 127.8% and 45.7% for the years ended June 30, 1998 and 1997,
respectively; an expected life of 6 years in both years, risk-free interest rate
ranging from 6.10% to 6.70% for fiscal 1998 and 6.44% to 6.51% for fiscal 1997;
no expected dividend payments in either year; and assumed forfeiture rate of 0%
in both years. The weighted average fair value of options granted during fiscal
1998 and fiscal 1997 was $.24 and $.27, respectively.
The proforma effect on net loss and net loss per share resulting from the
compensation expense attributed to stock options as calculated under FAS 123 may
not be representative of the effects on future years as options vest over
several years and additional awards may be granted in the future.
18
<PAGE>
The Company's stock option plans are summarized below:
<TABLE>
<CAPTION>
Employee Stock Nonemployee Directors
Option Plan* Stock Option Plan
------------ ------------------
Weighted Average Weighted Average
Shares under option: Shares Exercise Price Shares Exercise Price
------- ---------------- ------ ---------------------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1996 994,000 $ .47
Options granted 285,000 .49 240,000 $ .50
Options exercised (31,000) .34
Options lapsed (260,000) .51
----------- ------ --------- -------
Outstanding, June 30, 1997 988,000 .47 240,000 .50
Options granted 285,000 .51
Options exercised
Options lapsed (191,000) .47 (40,000) .50
----------- ------ --------- -------
Balance, June 30, 1998 1,082,000 .48 200,000 .50
Available to grant at June 30, 1998 110,750 120,000
----------- ---------
----------- ---------
</TABLE>
* Includes options granted under option plans previous to the 1992 plan of
527,500, 400,000, and 400,000 for the years ended June 30, 1996, 1997 and 1998,
respectively.
In August 1998, options to purchase 400,000 shares of common stock were
exercised at $.51 per share.
At June 30, 1998, there were 632,125 options exercisable in the Employee Stock
Option Plan and 112,500 in the Nonemployee Directors Stock Option Plan.
The following table summarizes information about stock options outstanding at
June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------------
Number Weighted Average Weighted Number Weighted
Range of Exercise Outstanding at Remaining Average Exercisable at Average
Prices 6/30/98 Contractual Life Exercise Price 6/30/98 Exercise Price
------------------ -------------- ------------------ --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Employee Plan
$.28 to $.45 206,000 2 years $.39 176,625 $.36
$.47 to $.51 858,000 3 years $.51 455,500 $.51
$.72 18,000 6 years $.72
Director Plan
$.50 200,000 5 years $.50 112,500 $.50
</TABLE>
7. EMPLOYEE BENEFIT PLAN
The Company offers its employees a 401(k) savings plan which is designed to
allow participating employees to accumulate savings for retirement and other
purposes. Under the 401(k) plan, all Company employees are eligible to
participate following the first day of the month following their hire date.
Employees may elect to contribute up to 15% of their annual compensation to the
plan. In addition, the Company provides for discretionary employer
contributions.
19
<PAGE>
ITEM 8. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AND BUSINESS EXPERIENCE AGE POSITION
---------------------------- --- ---------
<S> <C> <C>
Richard W. Soshea 66 President and Chief
M/A-COM, Inc., 1988-1991 Executive Officer
Harris Corp. & Litton Systems, Inc., 1980-1988 Effective August 1, 1991
Hewlett Packard, 1962-1980
Richard G. Johnson 54 Vice President, Operations
Director of Manufacturing, 1983-1987 Effective February 25, 1987
Senior Operations Manager, 1982-1983
Manufacturing Manager, 1977-1982
Ray Ma 52 Vice President Engineering
Director of Engineering, 1989-1995 Effective March 1, 1995
Engineering Manager, 1976-1989
Design Engineer, 1972-1976
Debra L. Griffith 39 Vice President Finance and
Carver Corporation, 1996-1998 Chief Financial Officer
Teltone Corporation, 1983-1996 Effective July 20, 1998
Deloitte Haskins & Sells, 1980-1983
Mark Blazek 34 Vice President Sales & Marketing
Market Group Manager, 1994-1997 Effective June 17, 1997
GN Netcom, 1988-1994
Industrial Servo, Inc., 1986-1988
Peter C. Spratt 43 Secretary & General Counsel
Secretary 1991-1995 Effective June 12, 1995
Preston Gates & Ellis, 1990-1995
Touche Ross & Co., 1985-1987
Shidler McBroom Gates & Lucas, 1982-1985
</TABLE>
The remaining information required by this item is incorporated by
reference to pages 2 through 4 of the Company's definitive Proxy
Statement to be used in connection with the Annual Meeting of
Shareholders to be held on October 29, 1998 (the "Proxy
Statement"), which the Company will file with the Commission within
120 days after the end of its 1998 fiscal year. Information
regarding executive officers of the Company is included at the end
of Part I of this Form 10-KSB.
20
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The section entitled "Executive Officer Compensation" on pages 5
through 7 of the Proxy Statement and the section entitled "Director
Compensation" on page 4 of the Proxy Statement are incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections entitled "Election of Directors and Management
Information" to the extent of the disclosures on pages 1 through 4
of the Proxy Statement are incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
21
<PAGE>
PART IV
ITEM 13. EXHIBITS, SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
A. Exhibits filed herewith:
<TABLE>
<S> <C>
3 Articles of Incorporation and Bylaws(3)
10.1 Teltone Corporation 1983 Stock Option Plan, as amended(1)
10.2 Teltone Corporation 1989 Employees' Stock Purchase Plan(2)
10.3 Sales agreement covering Kirkland, Washington, property(4)
10.4 Building sublease covering Kirkland, Washington, property(5)
10.5 Building lease covering Bothell, Washington, property(6)
10.6 Teltone Corporation 1992 Stock Option Plan(7)
21 List of subsidiaries(4)
23 Consent of Independent Auditors
27 Financial Data Schedules
28 Building lease covering Bothell, Washington, property
</TABLE>
<TABLE>
<S> <C>
(1) Incorporated herein by reference to the Corporation's Registration
Statement on Form S-8, Commission file 33-29304.
(2) Incorporated herein by reference to the Corporation's Registration
Statement on Form S-8, Commission file No. 33-28779.
(3) Incorporated herein by reference to the Corporation's Annual Report on Form
10-K for the fiscal year ended June 30, 1983, Commission file No. 0-11275.
(4) Incorporated herein by reference to the Corporation's Registration
Statement on Form S-1, Commission file No. 33-1703.
(5) Incorporated herein by reference to the Corporation's Annual Report on Form
10-K for the fiscal year ended June 30, 1987, Commission file No. 0-11275.
(6) Incorporated herein by reference to the Corporation's Annual Report on Form
10-K for the fiscal year ended June 30, 1991, Commission file No. 0-11275.
(7) Incorporated herein by reference to the Corporation's Annual Report on Form
10-K for the fiscal year ended June 30, 1992, Commission file No. 0-11275.
</TABLE>
B. Reports on Form 8-K:
None
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Bothell,
State of Washington, on September 25, 1998.
TELTONE CORPORATION
By /s/ Richard W. Soshea
-------------------------
Richard W. Soshea
President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the pursuing persons in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ------- ------
<S> <C> <C>
/s/ Charles L. Anderson Chairman and Director September 25, 1998
-------------------------------
Charles L. Anderson
(a) Principal Executive Officer:
/s/ Richard W. Soshea President and Chief September 25, 1998
------------------------------- Executive Officer and
Richard W. Soshea Director
(b) Principal Financial and Accounting
Officer:
/s/ Debra L. Griffith Vice President of Finance and September 25, 1998
------------------------------- Chief Financial Officer
Debra L. Griffith
(c) Other Directors:
/s/ Tracy S. Storer Director September 25, 1998
-------------------------------
Tracy S. Storer
/s/ Charles P. Waite Director September 25, 1998
-------------------------------
Charles P. Waite
/s/ Don C. Wilson Director September 25, 1998
-------------------------------
Don C. Wilson
/s/ Paul M. Wythes Director September 25, 1998
-------------------------------
Paul M. Wythes
</TABLE>
23
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-28779 and No. 33-29304) of Teltone Corporation of
our report dated September 1, 1998, appearing on page 12 of this Form 10-KSB.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Seattle, Washington
September 22, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 304,875
<SECURITIES> 0
<RECEIVABLES> 1,391,004
<ALLOWANCES> 34,289
<INVENTORY> 1,048,361
<CURRENT-ASSETS> 2,758,814
<PP&E> 2,448,646
<DEPRECIATION> 2,197,586
<TOTAL-ASSETS> 3,009,874
<CURRENT-LIABILITIES> 1,094,025
<BONDS> 0
0
2,063,149
<COMMON> 2,998,685
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,009,874
<SALES> 9,049,191
<TOTAL-REVENUES> 9,049,191
<CGS> 5,109,301
<TOTAL-COSTS> 5,109,301
<OTHER-EXPENSES> 4,069,583
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,455
<INCOME-PRETAX> (154,895)
<INCOME-TAX> 0
<INCOME-CONTINUING> (154,895)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (154,895)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
<PAGE>
EXHIBIT 28
INDUSTRIAL LEASE - MULTIPLE TENANT
THIS LEASE AGREEMENT made this 6th day of July, 1998, by and between Benaroya
Capital Company, LLC, a Washington limited liability company (the "Lessor") and
Teltone Corporation, a Washington Corporation (the "Lessee").
1. PREMISES. Lessor does hereby lease to Lessee those certain premises, to
wit: 46,134 square feet of space in the Building located at 22121 20th
Avenue SE in Bothell, Washington as outlined on Exhibit A attached hereto
(hereinafter called "Premises"). The multiple building complex of which
the Building is a part is hereafter sometimes referred to as the "Project".
In addition, the Lessee has the right, in common with other tenants in the
Project and subject to the Rules and Regulations, to use of the Common
Areas including the parking areas. See Legal Description attached as
Exhibit B which Exhibit is incorporated herein by reference.
2. TERM. This Lease shall be for a term of sixty (60) months commencing
February 1, 1999 (the "Commencement Date") and terminating January 31, 2004
3. RENT. Lessee covenants and agrees to pay Lessor at 1001 Fourth Avenue,
Suite 4700, Seattle, WA 98154, or to such other party or at such other
place as Lessor may hereafter designate, monthly rent in advance without
offset or deduction, on or before the first (1st) day of each month of the
Lease term in the amounts as follows:
Months: Base Rent:
1 through 12 $40,000 per month
13 through 24 $43,000 per month
25 through 36 $45,000 per month
37 through 60 $46,170 per month
IV. SECURITY DEPOSIT. Lessee will deposit with Lessor on the date hereof forty
six thousand one hundred seventy and No/100 dollars ($46,170). Said sum
shall be held by Lessor as security for the faithful performance by Lessee
of all the terms, covenants and conditions of this Lease to be kept and
performed by Lessee during the entire Term hereof. If Lessee defaults with
respect to any provision of this Lease, including, but not limited to, the
provisions relating to the payment of Base Rent, Additional Rent,
Percentage Rent, Adjustments or other charges or sums due under this Lease,
Lessor may (but shall not be required to) use, apply or retain all or any
part of the security deposit for the payment of any Base Rent, Additional
Rent, Percentage Rent, Adjustments or other charges or sums due under this
Lease or any sum in default, or for the payment of any amount which Lessor
may spend or become obligated to spend by reason of Lessee's default, or to
compensate Lessor for any other loss, damage, cost or expense (including
attorneys' fees) which Lessor may suffer or incur by reason of Lessee's
default. If any portion of said security deposit is so used or applied,
Lessee shall, within five (5) days after written demand therefor, deposit a
certified or cashier's check with Lessor in an amount sufficient to restore
the security deposit to its original amount and Lessee's failure to do so
shall be a default under this Lease. Lessor shall not be required to keep
the security deposit separate from its general funds and Lessee shall not
be entitled to interest on such deposit. If Lessee shall fully and
faithfully perform every provision of this Lease to be performed by it, the
security deposit or any balance thereof after deduction hereunder by Lessor
shall be returned to Lessee (or, at Lessor's option, to the last assignee
of Lessee's interest hereunder) within thirty (30) days following
expiration of the Lease Term; provided, that in the event this Lease shall
be terminated upon the default of the Lessee, the security deposit shall be
retained by Lessor and all of Lessee's interest therein shall terminate and
the security deposit will be applied against the damages
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suffered by Lessor by reason of the Lessee's default. In the event of
termination of Lessor's interest in this Lease, Lessor shall transfer
said deposit to Lessor's successor in interest.
Notwithstanding the above, Lessor agrees to waive payment of the Security
Deposit by Lessee provided Lessee has not been late in the payment of any
amount due under this Lease (as defined in Section 28 below), more than
once in any consecutive twelve (12) month period. The Security Deposit
referenced in this Section 4 will be immediately due and payable by Lessee
to Lessor upon the second such occurrence.
5. USE. Lessee shall use and occupy the Premises for the purposes of general
office and assembly space and for no other purposes, without prior written
consent of Lessor, and shall comply with all governmental laws, ordinances,
regulations, orders and directives and insurance requirements applicable to
Lessee's use of the Premises. Lessee shall not occupy or use or permit any
portion of the Premises to be occupied or used in such a manner or for any
purpose which would increase the cost of insurance coverage upon the
Premises, the building or the contents thereof.
6. RULES AND REGULATIONS. Lessee agrees to comply with any Rules and
Regulations attached hereto, any recorded Covenants, Conditions and
Restrictions affecting the Project, as well as such other reasonable rules
and regulations as may from time to time be adopted by Lessor for the
management, good order and safety of common areas, the building and its
Lessee(s). Lessee shall be responsible for the compliance with such rules
and regulations by its employees, agents and invitees. Lessor's failure to
enforce any of such rules and regulations against Lessee or any other
Lessee shall not be deemed to be a waiver of same.
7. MAINTENANCE. Lessee agrees by taking possession that the Premises are in
tenantable and good condition. Lessee shall at its expense and at all
times keep, maintain, repair and replace the Premises, including but not
limited to storefronts, exterior doors and windows, Lessee division walls
and mechanical, electrical, sprinkler and other utility systems, together
with connections to utility distribution systems, in good condition, repair
and order and in accordance with applicable laws, ordinances, rules,
regulations and requirements of government authorities and insurance rating
bureaus. Lessee agrees to maintain a preventative maintenance contract
providing for the regular inspection and maintenance of the heating and air
conditioning systems with a licensed mechanical contractor and containing
terms and specifications acceptable to Lessor. Lessee shall further keep
the Premises and adjoining common areas in a neat, clean, safe and sanitary
condition; protect water, drain, gas and other pipes to prevent freezing or
clogging and repair all leaks and damage caused thereby; replace all glass
and panels in windows and doors of the Premises which become cracked,
broken or damaged; and remove ice and snow from entries and common areas
immediately adjacent to the Premises. After reasonable notice from Lessee,
Lessor shall repair the roof, exterior walls (excluding storefronts, doors
and windows), foundations and common areas and facilities, if any, and the
cost thereof shall be shared as provided in Section 9 hereof.
8. UTILITIES AND FEES. Lessee agrees to pay promptly when due all charges for
light, heat, water, sewer, garbage, fire protection and other utilities and
services to the Premises, and all license fees and other governmental
charges levied on Lessee's property and the operation of Lessee's business
on the Premises. Lessor shall not be liable for any injury or damages
suffered as a result of the interruption of utilities or services by fire,
or other casualty, strike, riot, vandalism, the making of necessary repairs
or improvements, or other causes beyond Lessor's reasonable control.
9. MONTHLY OPERATING EXPENSE ADJUSTMENTS. Lessee shall pay as additional
monthly rent its prorata share of all expenses incurred by Lessor for
operation of the Project during the term or any extension hereof, as
follows:
A. Real Estate taxes and assessments, together with any assessments
levied by the Owner's
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Association, if any.
B. Usual and necessary costs of operation, maintenance and repair
(including replacement) as determined by standard accounting practice,
including without limitation, all utilities and services not metered
or charged directly to Lessee, insurance (including, but not limited
to the insurance provided for under Paragraph 16 C below), painting,
upkeep and repair of building exterior, roofing, parking, landscaping,
and all common areas and facilities. If any portion of the Property,
or any system or equipment is replaced by Lessor, and if the useful
life of such replaced item extends beyond the term of this Lease (as
such term may be extended by the exercise of any options), the cost of
such replacement will be prorated over its useful life and Lessee will
be responsible only for that portion of the cost which is applicable
to the lease term (as extended).
C. A Management fee equal to three percent (3%) of Lessee's monthly rent,
including Base Rent and any Additional Rent. Lessor shall from time
to time estimate and provide notice to Lessee of its monthly expense
based upon existing or expected costs. Such monthly estimated amount
shall be paid by Lessee on or before the first day of each month.
Lessor, annually or upon termination hereof, shall compute Lessee's
actual expenses. Any overpayment shall be applied as a credit to
Lessee against future expense payments. Any deficiency shall be paid
to Lessor by Lessee within fifteen (15) days after the date of
Lessor's statement. Lessor's records showing expenditures made for
such expenses shall be available for Lessee's inspection at any
reasonable time.
The determination of actual costs and estimated costs allocable to the
Premises shall be made by Lessor. Lessor or its agent shall keep
records showing all expenditures made for the items enumerated above,
which records shall be available for inspection and audit by Lessee.
The Lessee shall have the right, at reasonable times and upon
reasonable prior notice to the Lessor to audit the Lessor's records
relating to the actual costs and estimated costs allocable to the
Premises for a particular Lease Year, which audit must be conducted
within one (1) year after Lessee's receipt of the statement of actual
costs allocable to the Premises for that particular Lease Year. If
such audit is not conducted within such one (1) year period, then the
matters set forth in the statement of actual costs allocable to the
Premises for that particular Lease Year shall be deemed conclusive.
The Lessee shall pay the costs and expenses of such audit unless such
audit reveals that the Lessor has overstated the amount due from
Lessee for the Lease Year in question by an amount equal to 5% or more
of the actual costs allocable to the Premises for that particular
Lease Year in which event the Lessor shall pay up to $1,000 in payment
of the actual costs incurred by Lessee in the performance of such
audit.
10. LESSOR'S RESERVATIONS. Lessor reserves the right without liability to
Lessee: (a) to inspect the Premises, and to show them to prospective
Lessees, partners or lenders and if they are vacated, to prepare them for
re-occupancy; (b) to retain at all times and to use in appropriate
instances keys to doors within and into the Premises; (c) to make repairs,
alterations, additions or improvements, whether structural or otherwise, in
or about the building, and for such purposes to enter upon the Premises and
during the continuance of any work, to close common areas and to interrupt
or temporarily suspend building services and facilities, all without
affecting any of Lessee's obligations hereunder, so long as the Premises
are reasonably accessible; and (d) generally to perform any act relating to
the safety, protection and preservation of the Premises or building.
11. POSSESSION. If Lessor does not deliver possession of the Premises at the
Commencement Date of the term of this Lease, then, unless such delay is
caused by Lessee, Lessee may give Lessor written notice of its intention to
cancel this Lease if possession is not delivered within ninety (90) days
after receipt of such notice by Lessor. Lessor shall not be liable for any
damages caused by failure to
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deliver possession of the Premises and Lessee shall not be liable for
any rent until such time as Lessor delivers possession. A delay of
possession shall not extend the termination date. Notwithstanding the
above, in the event the delay was caused by Lessee, then the payment of
Rent shall commence on the Commencement Date and Lessee shall not have
any right to cancel this Lease as a result of such delay. If Lessor
offers possession of the Premises or any portion thereof prior to the
Commencement Date of the term of this Lease, and if Lessee accepts such
early possession, then both parties shall be bound by all of the
covenants and terms contained herein during such period of early
possession including the payment of rent which shall be pro-rated
accordingly and for the number of days of such early possession.
12. ASSIGNMENT AND SUBLETTING. Lessee shall not either voluntarily or by
operation of law assign, transfer, convey or encumber this Lease or any
interest under it, or sublet its right to occupy or use all or any portion
of the Premises without Lessor's prior written consent. Among the criteria
to be used by Lessor in evaluating a request for assignment or subletting
will be (i) the proposed use of the Premises; (ii) the anticipated impact,
if any, on parking; (iii) the financial capacity of the assignee/sublessee
to perform the obligations under this Lease; (iv) the compatibility of the
proposed user with the remainder of the tenants and operation of the
Building. Lessor reserves the right to recapture the Premises or
applicable portion thereof in lieu of giving its consent by notice given to
Lessee within twenty (20) days after receipt of Lessee's written request
for assignment or subletting. Such recapture shall terminate this Lease as
to the applicable space effective on the prospective date of assignment or
subletting, which shall be the last day of a calendar month and not earlier
than sixty (60) days after receipt of Lessee's request hereunder. In the
event that Lessor shall not elect to recapture and shall thereafter give
its consent, Lessee shall pay Lessor a reasonable fee, not to exceed One
Thousand And No/100 Dollars ($1,000.00) to reimburse Lessor for processing
costs incurred in connection with such consent. Lessor's consent shall not
release or discharge Lessee from future liability under this Lease and
shall not waive Lessor's right to consent to any future assignment or
sublease. Any assignment or subletting without Lessor's consent shall be
void and shall, at Lessor's option, constitute a default under this Lease.
A transfer by the present majority shareholders of ownership or control of
a majority of the voting stock of a corporate Lessee, or the change in form
of entity of the Lessee, shall be deemed an assignment.
The Lessee shall not assign its interest in or under this Lease for
security purposes, nor shall the Lessee grant any security interest, lien
or encumbrance against its interest in this Lease or in or to any property
in or affixed to the Premises without the prior written consent of the
Lessor, which consent shall be granted, withheld or conditioned in Lessor's
sole discretion. In no event shall the Lessee grant, or allow to exist,
any security interest in, or lien or encumbrance against the fee title to
the Premises, the building in which the Premises is located or the real
property on which the building is located.
13. ALTERATIONS. After obtaining the prior written consent of Lessor, Lessee
may make minor alterations, additions and improvements in said Premises (so
long as such alterations, additions or improvements are not structural in
nature and not visible from the exterior of the Premises) at its sole cost
and expense. Lessee agrees to save Lessor harmless from any damage, loss,
or expense arising therefrom and to comply with all laws, ordinances, rules
and regulations. Upon termination of this Lease, all alterations,
additions and improvements made in, to or on the Premises (including
without limitation all electrical, lighting, plumbing, heating, air
conditioning, and communications equipment and systems, doors, windows,
partitions, drapery, carpeting, shelving, counters, and physically attached
fixtures unless excluded by written agreement annexed hereto), shall remain
upon and be surrendered as a part of the Premises; provided however, upon
Lessor's request, Lessee shall remove those additions, alterations, or
improvements as may be specified by Lessor, and repair and restore the
Premises to is original condition at Lessee's sole cost and expense prior
to expiration of the Term.
14. LIENS. Lessee shall keep the Premises free from any liens arising out of
any work performed,
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materials furnished, equipment supplied, or obligations incurred by or
on behalf of Lessee. No work performed, material furnished, equipment
supplied or obligations incurred by or on behalf of Lessee shall be
deemed to be for the immediate use and benefit of Lessor so that no
mechanic's lien or other lien shall be allowed against Lessor's estate
in the premises. Lessee shall provide, at Lessee's own cost, waivers of
lien signed by any party (including the Lessee) who performs work,
furnishes materials, or supplies equipment to the Premises. Lessor may
require, at Lessee's sole cost and expense, a lien release and
completion bond in an amount equal to either the actual contract price
or one and one-half times the estimated cost of any improvements,
additions or alterations in the Premises which Lessee desires to make,
to insure Lessor against any liability for lien and to insure completion
of the work.
15. SIGNS. All signs or symbols placed by Lessee in the windows and doors of
the Premises, or upon any exterior part of the building, shall be subject
to Lessor's prior written approval. Prior to termination of this Lease,
Lessee will remove all signs placed by it upon the Premises, and will
repair any damages caused by such removal.
16. INSURANCE.
A. Lessee shall pay for and maintain, during the entire Lease Term, the
following policies of insurance:
(i) Commercial general liability insurance, including products,
completed operations coverage and auto liability insurance
covering Lessee's operations and the Premises with limits of not
less than $2,000,000 per occurrence. Such policies shall be
endorsed to provide contractual liability insurance covering all
liability assumed by Lessee under the provisions of this Lease
and a copy of said endorsement will be delivered to Lessor prior
to commencement of the Term.
(ii) Special cause of loss "all risk" perils and sprinkler leakage
property insurance upon all building improvements and alterations
on the Premises for which Lessee is responsible and upon Lessee's
property in the amount of one hundred percent (100%) full
replacement cost. The policy shall include Lessor and Lessor's
mortgagee, if any, as additional insureds, as their interests may
appear, with a loss payable clause in favor of Lessor and
Lessor's mortgagee to the extent of their interest in the
property.
B. Each policy provided by Lessee shall expressly provide that it shall
not be subject to cancellation or material change without at least
thirty (30) days prior written notice to the Lessor. Lessee shall
furnish Lessor, prior to commencement of the Term, with insurance
certificates naming Lessor as additional insured and, upon request,
copies of such policies required to be maintained hereunder.
C. Lessor shall pay for and maintain property insurance during the entire
Lease Term for the perils of Special cause of loss ("all risk") and
earthquake. Such insurance shall be in the amount of one hundred
percent (100%) full replacement value of the Building and Lessor's
improvements.
17. INDEMNITY AGAINST LIABILITY FOR LOSS OR DAMAGE
A. Lessee assumes all liability for and shall indemnify, hold harmless
and defend Lessor from and against all loss, damage or expense which
the Lessor may sustain or incur, and against any and all claims,
demands, suits and actions whatsoever, including expense of
investigation and litigation, on account of injury to or death of
persons, including without
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limitation employees of Lessor, employees of Lessee or its
affiliated companies or on account of damage to or destruction of
property, including without limitation property owned by and property in
the care, custody or control of Lessor during the Term, due to or
arising in any manner from:
(i) The acts or negligence of Lessee or any contractor,
subcontractor, or agent of Lessee or their respective
employees;
(ii) The condition, use or operation of the Premises and/or
materials or substances used by Lessee or any of its
contractors, subcontractors or agents of Lessee or by their
respective employees, regardless of whether or not furnished by
Lessor under this Lease or otherwise;
(iii) Any damage or injury to persons or property arising out of
Lessee's breach or this Lease, including, but not limited to,
obligations of Lessee under Section 7, Maintenance.
B. Lessor shall have no liability to Lessee as a result of loss or damage
to Lessee's property or for death or bodily injury caused by the acts
or omissions of other tenants in the project or by third parties
(including criminal acts).
C. Lessee shall not be obligated to indemnify Lessor for the portion of
any claim or liability caused by or arising from the act, or
negligence of Lessor.
D. It is mutually understood and agreed that the assumption of
liabilities and indemnification provided for in this Section 17 shall
survive any termination of this Lease.
18. DAMAGE OR DESTRUCTION. If any of the Premises, or a substantial part of
the building in which the Premises are located, shall be damaged or
destroyed by fire or other insured casualty, and repair of the damage can
not be completed within one hundred twenty (120) days, following receipt by
Lessor of actual notice of such damage or destruction Lessor shall have the
option either (a) to repair or rebuild within a reasonable time utilizing
the insurance proceeds to effect such repair, or (b) not to repair or
rebuild, and to cancel this Lease on thirty (30) days notice. If Lessor
fails to give Lessee written notice of its election within thirty (30) days
from the date of damage, or if the restoration of the Premises cannot be
completed within one hundred twenty (120) days from date of notice, Lessee
may cancel this Lease at its option on three (3) days notice. During the
period of untenantability, rent shall abate in the same ratio as the
portion of the Premises rendered untenantable bears to the whole of the
Premises; provided that if the damage is due to the fault or neglect of
Lessee, there shall be no abatement of rent.
If the Premises or the building in which the Premises are located shall be
damaged or destroyed by fire or other insured casualty, and repair of the
damage can be completed within one hundred twenty (120) days, Lessor shall
repair or rebuild within a reasonable time utilizing the insurance proceeds
to effect such repair.
If any part of the Premises or the building in which the Premises are
located shall be damaged or destroyed by an uninsured casualty Lessor
shall have the option either (a) to repair or rebuild within a reasonable
time, or (b) not to repair or rebuild, and to cancel this Lease on thirty
(30) days notice. In the event of cancellation by Lessor as a result of an
uninsured casualty, Lessee shall have the right, within five (5) days
following Lessor's notice of cancellation, to override such cancellation by
agreeing to repair the damage at Lessee's sole cost and expense. In such
event, the Lessee shall repair or rebuild within a reasonable time
following the damage or destruction.
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19. EMINENT DOMAIN. If the whole of the Premises shall be taken by any
public authority under the power of eminent domain, or purchased by the
condemnor in lieu thereof, then the term of this Lease shall cease as of
the date possession is taken by such public authority. If only part of the
Premises shall be so taken, the Lease shall terminate only as to the
portion taken, and shall continue in full force and effect as to the
remainder of said Premises, and the monthly rent shall be reduced
proportionately; provided, however, if the remainder of the Premises cannot
be made tenantable for the purposes for which Lessee has been using the
Premises or if more than twenty-five percent (25%) of the rentable square
footage of the Premises shall be so taken, then either party, by written
notice to the other, given at least thirty (30) days prior to the date that
possession must be surrendered to the public authority, may terminate this
Lease effective as of such surrender of possession. If any part of the
building other than the Premises shall be so taken so as to render in
Lessor's opinion the termination of this Lease beneficial to the remaining
portion of the building, Lessor shall have the right within sixty (60) days
of said taking to terminate this Lease upon thirty (30) days written notice
to Lessee. In the event of any taking, whether whole or partial, Lessor
shall be entitled to all awards, settlements, or compensation which may be
given for the land and buildings. Lessee shall have no claim against
Lessor for the value of any unexpired term of this Lease. Lessee shall
have the right to seek an independent and separate award from the
condemning authority so long as such award does not diminish the amount of
the award payable to Lessor.
20. INSOLVENCY. If Lessee shall be declared insolvent or bankrupt, or if
Lessee's leasehold interest herein shall be levied upon or seized under
writ of any court of law, or if a trustee, receiver or assignee be
appointed for the property of Lessee, whether under operation of State or
Federal statutes, then Lessor may, at its option, immediately, without
notice (notice being expressly waived), terminate this Lease and take
possession of said Premises.
21. DEFAULT AND RE-ENTRY. If Lessee fails to keep or perform any of the
covenants and agreements herein contained, then the same shall constitute a
breach hereof, and if Lessee has not remedied such breach within three (3)
days after written notice thereof from Lessor if the breach is non-payment
of rent or other charges, or within ten (10) days after written notice
thereof from Lessor in the event of the breach of any other covenant,
except that if the breach cannot reasonably be cured within such ten (10)
day period, then if Lessee fails to commence to cure within such ten (10)
day period and thereafter, diligently prosecute such cure to completion,
then Lessor may, at its option, without further notice or demand:
A. Cure such breach for the account and at the expense of Lessee
(including entry upon the Premises to make repairs on behalf of the
Lessee where Lessee has failed to make such repairs as required under
this Lease) and such expense shall be deemed additional rent due on
the first of the following month; or
B. Re-enter the Premises, remove all persons therefrom, take possession
of the Premises and remove all personal property therein at Lessee's
risk and expense and (1) terminate this Lease, or (2) without
terminating the Lease or in any way affecting the rights and remedies
of Lessor or the obligations of Lessee, re-let the whole or any part
of the Premises as agent for Lessee, upon such terms and conditions as
Lessor may deem advisable. In either event, any moneys received from
Lessee and any deposit or other amounts held by Lessor may first be
applied by Lessor to any damages suffered by Lessor as a result of
such default, including without limitation, costs and expenses
incurred on re-entry and re-letting, any unamortized tenant
improvements and commissions, cleaning, necessary repairs, restoration
and alteration, and any commissions incurred on re-letting, and the
balance of such amounts may be applied toward payment of other sums
due to Lessor hereunder. In the event the Premises are re-let for
Lessee's account, Lessee shall pay to Lessor monthly any deficiency;
however, Lessor shall not be required to pay any excess to Lessee.
Upon termination of this Lease or of Lessee's right to possession,
Lessor has the right to recover from Lessee: (1) The worth
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of the unpaid rent that had been earned at the time of such
termination; (2) The worth of the amount of the unpaid rent that would
have been earned after the date of such termination; and (3) Any other
amount, including court, attorney and collection costs, necessary to
compensate Lessor. "The Worth," as used in Section (1) is to be
calculated allowing interest at 18% per year (or, if applicable, at
such lower rate as may represent the highest legal limit allowed in
the State of Washington). "The worth" as used for Section (2) is to
be computed by discounting the amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of termination. The
above remedies of Lessor are cumulative and in addition to any other
remedies now or hereafter allowed by law or elsewhere provided for in
this Lease.
22. REMOVAL OF PROPERTY. Any property of Lessee removed by Lessor in
accordance with Section 21 above may be stored by Lessor or may be
deposited on any area adjacent to the building at the sole risk and expense
of Lessee and without any further responsibility of Lessor, and Lessor may
at its sole discretion without or after removing said property, without
obligation to do so and without notice to Lessee, sell or dispose of the
same at public or private sale for the account of Lessee, in which event
the proceeds therefrom may be applied by Lessor upon any indebtedness due
from Lessee to Lessor. Lessee waives all claims for damages that may be
caused by Lessor re-entering the Premises and removing or disposing of said
property as herein provided.
23. COSTS AND ATTORNEYS' FEES. In the event either party shall commence legal
action to enforce any provision of this Lease, the court shall award to the
prevailing party all reasonable attorneys' fees and all costs incurred in
connection therewith, including fees and costs on appeal. Any action
relating to this Lease shall be brought in the County in which the Premises
are located or, at Lessor's election, in King County, Washington.
24. SUBROGATION WAIVER. Lessor and Lessee each herewith and hereby release and
relieve the other and waive its entire right of recovery against the other
for loss or damage arising out of or incident to the perils of fire,
explosion or any other perils described in the "all risk" insurance and the
events covered under the liability insurance coverages required under this
Lease, whether due to the negligence of either party, their agents,
employees or otherwise. Each party shall obtain from its respective
insurer under each insurance policy that it maintains a waiver of all
rights of subrogation which the insurer may have against the other party
for claims that are released under this Section 24.
25. HOLDING OVER. If Lessee, with the express consent of Lessor, shall hold
over after the expiration of the term of this Lease, Lessee shall remain
bound by all the covenants and agreements herein, except that (a) the
tenancy shall be from month-to-month and (b) the monthly rent to be paid by
Lessee shall be determined by multiplying the monthly rent in effect
immediately preceding such expiration times 150%. If Lessee holds
possession of the Demised Premises after the expiration of the Lease
without the express written consent of Lessor, Lessee shall remain bound by
all the covenants and agreements herein, except that (a) the tenancy shall
be from month-to-month and (b) the monthly rent to be paid by Lessee shall
the greater of twice the Monthly Minimum Rent in effect immediately
preceding such expiration or the total rent which other Lessees have agreed
to pay for the Premises during the period of such holdover, if Lessor has
leased all or part of the Premises to other Lessees effective upon the
expiration or termination of this Lease. Any such tenancy may be
terminated with twenty (20) days prior notice as provided by Washington
State law.
In the event of any unauthorized holding over, Lessee shall also indemnify
and hold Lessor harmless from and against all liability, losses, claims,
causes of action, damages, costs and expenses (including without limitation
attorney fees) resulting from Lessee's failure to surrender the Premises,
including without limitation claims made by succeeding Lessees resulting
from Lessee's failure to surrender the Premises.
SURVIVAL OF LESSEE'S OBLIGATIONS. Lessee's obligations under this Section
25 shall survive the
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expiration or termination of this Lease.
26. SUBORDINATION AND ATTORNMENT; MORTGAGE PROTECTION.
A. SUBORDINATION-NOTICE TO MORTGAGEE. At the request of Lessor, Lessee
shall promptly execute, acknowledge and deliver, all instruments which
may be required to subordinate this Lease to any existing or future
mortgages, deeds of trust and/or other security documents on or
encumbering the Premises or on the leasehold interest held by Lessor,
and to any extensions, renewals, or replacements thereof, provided
that the mortgagee or beneficiary, as the case may be, shall agree to
recognize this Lease in the event of foreclosure if Lessee is not in
material default at such time.
B. LESSEE'S CERTIFICATE. Lessee shall at any time and from time to time
within five (5) days after written notice from Lessor execute,
acknowledge and deliver to Lessor a statement in writing (a)
certifying that this Lease is unmodified and in full force and effect
(or, if modified, stating the nature of such modification and
certifying that this Lease as so modified is in full force and
effect), and the date to which the rental and other charges are paid
in advance, if any; and (b) acknowledging that there are not, to
Lessee's knowledge, any uncured defaults on the part of the Lessor or
Lessee hereunder, or specifying such defaults if any are claimed; and
(c) setting forth the date of commencement of rents and expiration of
the Lease Term hereof; and, (d) such other information as the Lessor
shall reasonably require. Any such statement may be relied upon by
any prospective purchaser or encumbrancer of all or any portion of the
Premises of which the Premises are a part.
C. MORTGAGEE PROTECTION CLAUSE. Lessee agrees to notify any mortgagee
and/or trust deed holders, by registered mail, with a copy of any
notice of default served upon the Lessor, provided that prior to such
notice Lessee has been notified in writing (by way of Notice of
Assignment of Rents and Lease, or otherwise) of the addresses of such
mortgagees and/or trust deed holders. Lessee further agrees that if
Lessor shall have failed to cure such default, then the mortgagees
and/or trust deed holders have thirty (30) days within which to cure
such default or if such default cannot be cured within that time, then
such additional times as may be necessary if within such thirty (30)
days any mortgagee and/or trust deed holder has commenced and is
diligently pursuing the remedies necessary to cure such default
(including but not limited to commencement of foreclosure proceedings
if necessary to affect such cure), in which event this Lease shall not
be terminated if such remedies are being so diligently pursued.
27. SURRENDER OF POSSESSION. Lessee shall, prior to the termination of this
Lease or of Lessee's right to possession, remove from the Premises all
personal property which Lessee is entitled to remove and those alterations,
additions, improvements or signs which may be required by Lessor to be
removed, pursuant to Sections 13 and 15 above, and shall repair or pay for
all damage to the Premises caused by such removal. All such property
remaining and every interest of Lessee in the same shall be conclusively
presumed to have been conveyed by Lessee to Lessor under this Lease as a
bill of sale, without compensation, allowance, or credit to Lessee. Lessee
shall upon termination of this Lease or of Lessee's right of possession,
deliver all keys to Lessor and peacefully quit and surrender the Premises
without notice, neat and clean, and in as good condition as when Lessee
took possession, except for reasonable wear and tear as determined by
Lessor and except for damage by casualty or condemnation.
28. LATE PAYMENT AND INTEREST. If any amount due from Lessee is not received
in the office of Lessor on or before the third (3rd) day following the date
upon which such amount is due and payable, a late charge of five percent
(5%) of said amount shall become immediately due and payable, which late
charge Lessor and Lessee agree represents a fair and reasonable estimate of
the processing and
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accounting costs that Lessor will incur by reason of such late payment.
All past due amounts owing to Lessor under this Lease, including rent,
shall be assessed interest at an annual percentage rate of eighteen
percent (18%) from the date due until paid.
29. NOTICE. Any notice, communication or remittance required or permitted by
this Lease by either party to the other shall be deemed given, served or
delivered, in writing, delivered personally or by courier or by telephonic
facsimile transmission with automatic confirmation, addressed to the Lessor
at the address specified for the payment of rent under paragraph 3 of this
Lease or to Lessee at the Premises or to such other address as either party
may designate to the other in writing from time to time.
30. NO WAIVER OR COVENANTS. Time is of the essence of this Lease. Any waiver
by either party of any breach hereof by the other shall not be considered a
waiver of any future similar or other breach.
31. ENTIRE AGREEMENT. It is expressly understood and agreed by Lessor and
Lessee that there are no promises, agreements, conditions, understandings,
inducements, warranties, or representations, oral or written, express or
implied, between them, other than as herein set forth and that this Lease
shall not be modified in any manner except by an instrument in writing
executed by the parties.
32. BINDING ON HEIRS, SUCCESSORS AND ASSIGNS. The covenants and agreements of
this Lease shall be binding upon the heirs, executors, administrators,
successors and assigns of both parties hereto, except as hereinabove
provided.
33. LESSOR'S ASSIGNMENT. It is fully understood that Lessor shall have the
full right to assign this Lease, without any notice to Lessee, thereby
relieving Lessor from all and any liabilities; provided however, that the
assignee assumes all Lessor's responsibilities as set forth in this Lease.
34. ENVIRONMENTAL. See Rider One attached and incorporated into this Lease by
this reference.
33. BROKERS; AGENCY DISCLOSURE; BROKERAGE RELATIONSHIPS. Lessee and Lessor
each represent they that they have not engaged the services of any real
estate agent or broker in connection with this Lease. Each party agrees to
defend and hold the other harmless from any claims resulting from a breach
of this representation.
36. FORCE MAJEURE. Lessor shall have no liability to Lessee on account of the
following acts of "force majeure," which shall include (a) the inability of
Lessor to fulfill, or delay in fulfilling, any of Lessor's obligations
under this Lease by reason of strike, lockout, other labor trouble, dispute
or disturbance; (b) governmental regulation, moratorium, action, inaction,
preemption or priorities or other controls, including delays in receipt of
permits; (c) shortages of fuel, supplies or labor; (d) any failure or
defect in the supply, quantity or character of electricity or water
furnished to the Premises by reason of any requirement, act or omission of
the public utility or others furnishing the Building with electricity or
water; or (e) for any other reason, whether similar or dissimilar to the
above, or for act of God, beyond Lessor's reasonable control. If this
Lease specifies a time period for performance of an obligation of Lessor,
that time period shall be extended by the period of any delay in Lessor's
performance caused by any of the events of force majeure described herein.
37. LIMITATION OF LIABILITY. The recourse of Lessee to recover any claim
against Lessor arising under this Lease shall be limited to Lessor's
interest in the Building and to the rents, issues and profits from the
Building. Lessee waives any and all recourse for any such liability
against Lessor's members, partners, shareholders, trustees or
beneficiaries, or any property or assets of Lessor other than the Building.
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38. EXHIBITS. The following exhibits or riders are made a part of this Lease
and are incorporated herein by reference:
Rider One - Environmental
Exhibit A - Premises
Exhibit B - Legal Description
Exhibit C - Rules and Regulations
39. TENANT IMPROVEMENTS. Prior to the commencement of this Lease, Lessor will:
1) provide a new demising wall at the location depicted on Exhibit A
segregating the Premises from the adjacent space, and; 2) Modify the
existing HVAC in the assembly area so that it is separated from the
adjacent space.
40. OPTION TO RENEW. Provided Lessee has not been in default of any term or
condition of the Lease, Lessee shall have the Option to Renew this Lease
under all of the terms and conditions contained in this Lease, except
Rent, for a term (commencing February 1, 2004) of: two, three, four or
five years ("Extended Term") as requested by Lessee. The Rent for the
Extended Term shall be the market rent as reasonably determined by
Lessor. Lessee shall notify Lessor, in writing, of its intent to
exercise this Option to Renew (specifying which length of term Lessee
chooses) at least eight (8) months prior to the expiration of the
Initial Term of this Lease. Within ten (10) days following receipt of
such notice from Lessee, Lessor will inform Lessee of market rent.
Within ten (10) days thereafter, Lessee shall notify Lessor of its
exercise of the Option to Renew on the defined terms. If Lessee either
waives its right or fails to exercise its right within such ten (10) day
period, then this option will terminate and be of no further force or
effect.
LESSOR: LESSEE:
Benaroya Capital Company, LLC Teltone Coporation
By: Larry R. Benaroya By: Richard W. Soshea
Its: Manager Its: President & CEO
Date: July 27, 1998 Date: July 21, 1998
STATE OF WASHINGTON ]
] ss.
COUNTY OF KING ]
I certify that I know or have satisfactory evidence that Larry R. Benaroya
is the person who appeared before me, a Notary Public in and for the State of
Washington duly commissioned and sworn, and acknowledged that he is the Manager
of Benaroya Capital Company, LLC, a Washington limited liability company, who
executed the within and foregoing instrument, and acknowledged the instrument to
be the free and voluntary act and deed of said company for the uses and purposes
therein mentioned, and on oath stated that affiant is authorized to execute said
instrument on behalf of said company.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal the
day and year first above written.
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_______________________________________
Notary Public in and for the
State of_______________________________
residing at____________________________
Commission expires_____________________
Print Name_____________________________
STATE OF WASHINGTON ]
] ss.
COUNTY OF ______________ ]
I certify that I know or have satisfactory evidence that _____________ is
the person who appeared before me, a Notary Public in and for the State of
Washington duly commissioned and sworn, and acknowledged that he/she is the
_________________, of _________________________, a _________________________,
who executed the within and foregoing instrument, and acknowledged the
instrument to be the free and voluntary act and deed of said corporation for the
uses and purposes therein mentioned, and on oath stated that affiant is
authorized to execute said instrument on behalf of said corporation.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal the
day and year first above written.
_______________________________________
Notary Public in and for the
State of_______________________________
residing at____________________________
Commission expires_____________________
Print Name_____________________________
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RIDER ONE
EMISSIONS; STORAGE, USE AND DISPOSAL OF WASTE
a. EMISSIONS. Lessee shall not (i) discharge, emit or permit to be discharged
or emitted, any liquid, solid or gaseous matter, or any combination
thereof, into the atmosphere, the ground or any body of water, which does
or may pollute or contaminate the same, or does or may adversely affect the
health or safety of persons, or the use or enjoyment of the Premises; nor
(ii) transmit, receive or permit to be transmitted or received, any
electromagnetic, microwave or other radiation in, on or about the Premises.
b. STORAGE. If, with or without violation of this Lease, Lessee possesses at
the Premises any matter described in Section A above or any Hazardous
Substances (as defined below), Lessee shall store the same in appropriate
leak proof containers and/or areas which comply with all laws and all
prudent practices.
c. DISPOSAL OF WASTE. Lessee shall not keep any trash, garbage, waste or
other refuse on the Premises except in sanitary containers and shall
regularly and frequently remove same from the Premises. Lessee shall keep
all such containers in a clean and sanitary condition. Lessee shall
properly dispose of all sanitary sewage and shall not use the sewage system
for the disposal of anything except sanitary sewage, nor in excess of
capacity. Lessee shall not cause any obstruction in the sewage disposal
system.
d. COMPLIANCE OF LAW. Notwithstanding any other provision in the Lease to the
contrary, Lessee shall comply with all Laws in complying with its
obligations under this Lease, and in particular, Laws relating to the
storage, use and disposal of Hazardous Substances (as defined below).
e. INDEMNIFICATION FOR BREACH. Lessee shall defend, indemnify and hold
Lessor, the Project and the holder of a trust deed or mortgage on the
Project harmless from any loss, claim, liability or expense, including,
without limitation, attorneys fees and costs, at trial and/or on appeal and
review, arising out of or in connection with its failure to observe or
comply with the provisions of this Rider. This indemnity shall survive the
expiration or earlier termination of the term of the Lease or the
termination of Lessee's right of possession and be fully enforceable
thereafter.
f. INDEMNIFICATION REGARDING HAZARDOUS SUBSTANCES. In addition to the
indemnity obligations contained elsewhere herein, Lessee shall indemnify,
defend and hold harmless Lessor, the Premises, the Project, and the holder
of a trust deed or mortgage on the Project, from and against all claims,
losses, damages, monitoring costs, response costs, liabilities, and other
costs expenses caused by, arising out of, or in connection with, the
generation, release, handling, storage, discharge, transportation, deposit
or disposal in, on, under or about the Premises by Lessee or any of
Lessee's agents of the following (collectively referred to as "Hazardous
Substances"): hazardous materials, hazardous substances, toxic wastes,
toxic substances, pollutants, petroleum products, underground tanks, oils,
pollution, asbestos, PCB's, radioactive materials, or contaminants, as
those terms are commonly used or as defined by federal, state, and/or local
law or regulation related to protection of health or the environment as any
of same may be amended from time to time, and/or by any rules and
regulations promulgated thereunder. Such damages, costs, liability and
expenses shall include such as are claimed by any regulating and/or
administering agency, any ground lessor or master lessor of the Project,
the holder of any Mortgage or Deed of Trust on the Project, and/or any
successor of the Lessor named herein. This indemnity shall include (i)
claims of third parties, including governmental agencies, for damages,
fines, penalties, response costs, monitoring costs, injunctive or other
relief; (ii) the costs, expenses or losses resulting from any injunctive
relief, including preliminary or temporary injunctive relief; (iii) the
expenses, including fees of attorneys and experts, of report the existence
of Hazardous Substances to an agency of the State of which the Premises is
located or of the United States as required by applicable laws and
regulations; and (iv) any and all expenses or obligations, including
attorney's fees, incurred at, before and after any administrational
proceeding, trial, appeal and review. This indemnity shall survive the
expiration or earlier termination of the term of the Lease or the
termination of Lessee's right of possession and shall remain fully
enforceable thereafter.
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g. INFORMATION. Lessee shall give prior written notice to Lessor of any use,
whether incidental or otherwise, of Hazardous Substances on the Premises,
and shall immediately deliver to Lessor a copy of any notice of any
violation of any Law with respect to such use. Lessee shall also provide
to Lessor, upon request, with any and all information regarding Hazardous
Substances in the Premises, including contemporaneous copies of all filings
and reports to governmental entities, and any other information requested
by Lessor. In the event of any accident, spill or other incident involving
Hazardous Substances, Lessee shall immediately report the same to Lessor
and supply Lessor with all information and reports with respect to the
same. All information described herein shall be provided to Lessor
regardless of any claim by Lessee that it is confidential or privileged.
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EXHIBIT A
PREMISES
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EXHIBIT B
LEGAL DESCRIPTION
LOT 9 OF BINDING SITE PLAN RECORDED MAY 10, 1985, UNDER AUDITOR'S FILE NO.
8505105032, RECORDS OF SNOHOMISH COUNTY, WASHINGTON, SAID LOT 9 BEING A PORTION
OF THE NORTHEWEST QUARTER OF THE SOUTHWEST QUARTER OF SECTION 29, TOWNSHIP 27
NORTH, RANGE 5 EAST, W.M., SNOHOMISH COUNTY, WASHINGTON.
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EXHIBIT C
RULES AND REGULATIONS
1. Except as specifically provided in the Lease to which these Rules and
Regulations are attached, no sign, placard, picture, advertisement, name
or notice shall be installed or displayed on any part of the outside or
inside of the Building or Project without the prior written consent of
Lessor. Lessor shall have the right to remove, at Lessee's expense and
without notice, any sign installed or displayed in violation of this rule.
All approved signs or lettering on doors and walls shall be printed,
painted, affixed or inscribed at the expense of Lessee by a person
approved by Lessor.
2. If Lessor objects in writing to any objects attached to or used in
connection with any window or door of the Premises, or placed on any
windowsill, which is visible from the exterior of the Premises, Lessee
shall immediately discontinue such use. Lessee shall not place anything
against or near glass partitions or doors or windows which may appear
unsightly from outside the Premises.
3. Lessee shall not obstruct any sidewalks, exits, entrances, or stairways of
the Project. The exits, entrances, and stairways are not open to the
general public, but are open, subject to reasonable regulations, to
Lessee's business invitees. No Lessee and no employee or invitee of any
Lessee shall go upon the roof(s) of the Project except for Lessee's
mechanical contractor to access the HVAC equipment. Lessee's choice of a
contractor is subject to the reasonable approval of Lessor.
4. Lessor will furnish Lessee, free of charge, with two keys to each door
lock in the Premises. Lessor may make a reasonable charge for any
additional keys. Lessee shall not alter any lock or install a new
additional lock or bolt on any door of its Premises without Lessor's prior
consent, which will not be unreasonably withheld. In the event of such an
alteration or installation, Lessee will promptly deliver a copy of any new
keys to Lessor. Lessee, upon the termination of its tenancy, shall
deliver to Lessor the keys of all doors which have been furnished to
Lessee, and in the event of loss of any keys so furnished, shall pay
Lessor therefor.
5. If Lessee requires telegraphic, telephonic, burglar alarm or similar
services, it shall first obtain, and comply with, Lessor's instructions in
their installation.
6. Lessee shall not place a load upon any floor of the Premises which exceeds
the load per square foot which such floor was designed to carry and which
is allowed by Law. Heavy objects shall, if considered necessary by
Lessor, stand on such platforms as determined by Lessor to be necessary to
properly distribute the weight, which platforms shall be provided at
Lessee's expense. Equipment belonging to Lessee which cause noise or
vibration that may be transmitted to the structure of the Building or to
any space therein shall be placed and maintained by Lessee, at Lessee's
expense, on vibration eliminators, or other devices sufficient to
eliminate noise or vibration. The persons employed to move such equipment
in or out of the Building must be acceptable to Lessor. Lessor will not
be responsible for loss of, or damage to, any such equipment or other
property from any cause, and all damage done to the building by
maintaining or moving such equipment or other property shall be repaired
at the expense of Lessee.
7. Lessee shall not use or keep in the Premises any kerosene, gasoline or
inflammable or combustible fluid or material other than those limited
quantities necessary for the operation or maintenance of Lessee's
equipment. Lessee shall not use or permit to be used in the Premises any
foul or noxious gas or substance, or permit or allow the Premises to be
occupied or used in manner offensive or objectionable to Lessor or other
occupants of the building by reason of noise, odors or vibrations, nor
shall Lessee bring into or keep in or about the Premises any animals.
8. Lessee shall not use any method of heating or air conditioning other than
that supplied by Lessor.
9. Lessee shall not waste water and agrees to cooperate fully with Lessor to
assure the most effective
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operation of the Building and to comply with any governmental
energy-saving rules, laws or regulations of which Lessee has actual
notice.
10. Lessor reserves the right, exercisable without notice and without
liability to Lessee, to change the name and street address of the
Building.
11. Lessee shall entirely shut off any water faucets or other water apparatus,
and adjustable electricity, gas or air outlets before Lessee and its
employees leave the Premises. Lessee shall be responsible for any damage
or injuries sustained by other Lessees or occupants of the Building or by
Lessor for noncompliance with this rule.
12. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall
not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be
thrown therein.
13. Lessee shall not make any room-to-room solicitation of business from other
Lessees in the Project. Lessee shall not use the Premises for any
business or activity other than that specifically provided for in Lessee's
Lease. Canvassing, soliciting and distribution of handbills or any other
written material, and peddling in the Project are prohibited, and Lessee
shall cooperate to prevent such activities.
14. Lessee shall not install any radio or television antenna, loudspeaker or
other devices on the roof(s) or exterior walls of the Building or Project.
Lessee shall not interfere with radio or television broadcasting or
reception from or in the Project or elsewhere.
15. Lessee shall not in any way deface the Premises or any part thereof,
except in accordance with the provisions of the Lease pertaining to
alterations. Lessor reserves the right to direct electricians as to where
and how telephone and telegraph wires are to be introduced to the
Premises. Lessee shall not cut or bore holes for wires. Lessee shall not
affix any floor covering to the floor of the Premises in any manner except
as approved by Lessor. Lessee shall repair any damage resulting from
noncompliance with this rule.
16. Lessee shall not install, maintain or operate upon the Premises any
vending machines other than those to be used by employees of Lessee
without the written consent of Lessor.
17. Lessor reserves the right to exclude or expel from the Project any person
who, in Lessors' judgment, is intoxicated or under the influence of liquor
or drugs or who is in violation of any of the Rules and Regulations of the
Building.
18. The Premises shall not be used for lodging, nor shall the Premises be used
for any improper, immoral or objectionable purpose. No cooking shall be
done or permitted on the Premises without Lessor's consent, except that
used by Lessee of Underwriters' Laboratory approved equipment for brewing
coffee, tea, hot chocolate and similar beverages or use of microwave ovens
for employee use shall be permitted, provided that such equipment and use
is in accordance with all applicable Laws.
19. Lessee shall comply with all safety, fire protection and evacuation
procedures and regulations established by Lessor or any governmental
agency.
20. Lessee assumes any and all responsibility for protecting its Premises from
theft, robbery and pilferage, which includes keeping doors locked and
other means of entry to the Premises closed.
21. Employees of Lessor shall not be required to perform any work or do
anything outside of their regular duties unless under special instructions
from Lessor.
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22. Lessor may waive any one or more of these Rules and Regulations for the
benefit of Lessee or any other Lessee, but no such waiver by Lessor shall
be construed as a waiver of such Rules and Regulations in favor of Lessee
or any other Lessee, nor prevent Lessor from thereafter enforcing any such
Rules and Regulations against any or all of the Lessees of the Project.
23. These Rules and Regulations are in addition to, and shall not be construed
to in any way modify or amend, in whole or in part, the terms, covenants,
agreements and conditions of the Lease.
24. Lessor reserves the right to make such other and reasonable Rules and
Regulations as, in its judgment, may from time to time be needed for
safety and security, for care and cleanliness of the Project and for the
preservation of good order therein. Lessee agrees to abide by all such
Rules and Regulations hereinabove stated and any additional rules and
regulations which are adopted.
25. Lessee shall be responsible for the observance of all of the foregoing
rules by Lessee's employees, agents, clients, customers, invitees and
guests.
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