-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Su6uDb7f1zlGozTUTUNdcPn9veQK8aJoPainJtQsrspEP2NXojNVpB/q1Dor9+pn /6g+pi29EA9z8MP82Mmc2Q== 0001017062-99-001945.txt : 19991117 0001017062-99-001945.hdr.sgml : 19991117 ACCESSION NUMBER: 0001017062-99-001945 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEITH COMPANIES INC CENTRAL INDEX KEY: 0001080922 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 330203193 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26561 FILM NUMBER: 99753507 BUSINESS ADDRESS: STREET 1: 2955 RED HILL AVENUE CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7146687001 MAIL ADDRESS: STREET 1: 2955 RED HILL AVENUE CITY: COSTA MESA STATE: CA ZIP: 92626 10-Q 1 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 Commission File Number 0-19655 THE KEITH COMPANIES, INC. -------------- (Exact name of registrant as specified in its charter) California 33-0203193 --------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2955 REDHILL AVENUE, COSTA MESA, CALIFORNIA 92626 --------------------------------------------------------- (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (714) 540-0800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares outstanding of the registrant's common stock on November 9, 1999 was 5,069,489 THE KEITH COMPANIES,INC. AND SUBSIDIARIES INDEX
PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets 2 Consolidated Statements of Income 3 Condensed Consolidated Statements of Cash Flows 4 Notes to the Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Qualitative and Quantitative Disclosures about Market Risk 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities and Use of Proceeds 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20
1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements THE KEITH COMPANIES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Note 1) (Unaudited)
September 30, December 31, 1999 1998 ---------------- ---------------- Assets Current assets: Cash and Cash equivalents $ 1,346,000 $ 457,000 Contracts and trade receivables, net of allowance for doubtful accounts of $829,000 and $364,000 at September 30, 1999 and December 31, 1998, respectively 7,271,000 5,582,000 Costs and estimated earnings in excess of billings 5,728,000 3,783,000 Prepaid expenses and other current assets 440,000 534,000 Deferred offering costs - 291,000 Deferred tax assets - 270,000 ---------------- ---------------- Total current assets 14,785,000 10,917,000 Equipment and improvements, net 4,508,000 2,862,000 Goodwill, net of accumulated amortization of $62,000 and $10,000 at September 30, 1999 and December 31, 1998, respectively 4,709,000 621,000 Other assets 165,000 130,000 ---------------- ---------------- Total assets $24,167,000 $14,530,000 ================ ================ Liabilities and Stockholders' Equity (Deficit) Current liabilities: Short-term borrowings $ 438,000 $ - Current portion of long-term debt and capital lease obligations 1,391,000 1,488,000 Trade accounts payable 881,000 1,221,000 Accrued employee compensation 2,858,000 1,720,000 Accrued liabilities to related parties - 185,000 Other accrued liabilities 2,105,000 688,000 Deferred tax liabilities 313,000 - Billings in excess of costs and estimated earnings 566,000 435,000 ---------------- ---------------- Total current liabilities 8,552,000 5,737,000 Long-term debt and capital lease obligations, less current portion 2,499,000 5,778,000 Notes payable to related parties - 2,401,000 Other liabilities 280,000 485,000 Redeemable securities - 430,000 ---------------- ---------------- Stockholders' equity (deficit): Preferred stock, $0.001 par value. Authorized 5,000,000 shares; no shares - - issued or outstanding Common stock, $0.001 par value. Authorized 100,000,000 shares at September 30, 1999 and December 31, 1998; issued and outstanding 5,069,119 shares at September 30, 1999 and 3,485,634 shares at December 31, 1998 5,000 3,000 Additional paid-in capital 12,327,000 652,000 Retained earnings (accumulated deficit) 504,000 (956,000) ---------------- ---------------- Total stockholders' equity (deficit) 12,836,000 (301,000) ---------------- ---------------- Commitments and contingencies (Notes 1, 3 and 5) Total liabilities and stockholders' equity (deficit) $24,167,000 $14,530,000 ================ ================
See accompanying notes to the condensed consolidated financial statements. 2
THE KEITH COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Income (Note 1) (Unaudited) Three Months Ended Nine Months Ended ----------------------------- --------------------------------- September 30, September 30, September 30, September 30, 1999 1998 1999 1998 ------------- ------------- --------------- ------------ Gross revenue $11,397,000 $9,192,000 $30,867,000 $24,712,000 Subcontractor costs 739,000 1,292,000 2,596,000 3,799,000 ------------- ------------- --------------- ------------ Net revenue 10,658,000 7,900,000 28,271,000 20,913,000 Costs of revenue 7,350,000 5,077,000 19,051,000 13,770,000 ------------- ------------- --------------- ------------ Gross profit 3,308,000 2,823,000 9,220,000 7,143,000 Selling, general and administrative expenses 2,211,000 1,626,000 5,904,000 4,227,000 ------------- ------------- --------------- ------------ Income from operations 1,097,000 1,197,000 3,316,000 2,916,000 Interest expense 149,000 249,000 678,000 714,000 Other expense, net 132,000 18,000 102,000 7,000 ------------- ------------- --------------- ------------ Income before provision for income taxes 816,000 930,000 2,536,000 2,195,000 Provision for income taxes 347,000 418,000 1,076,000 986,000 ------------- ------------- --------------- ------------ Net income 469,000 512,000 1,460,000 1,209,000 Reversal (accretion) of redeemable securities to redemption value, net 344,000 (57,000) 230,000 (171,000) ------------- ------------- --------------- ------------ Net income available to common stockholders $ 813,000 $ 455,000 $ 1,690,000 $ 1,038,000 ============= ============= =============== ============ Earnings per share: Basic $ 0.17 $ 0.13 $ 0.43 $ 0.30 ============= ============= =============== ============ Diluted $ 0.16 $ 0.12 $ 0.40 $ 0.29 ============= ============= =============== ============ Weighted average number of shares outstanding: Basic 4,807,300 3,485,634 3,931,030 3,485,634 ============= ============= =============== ============ Diluted 5,063,349 3,660,639 4,213,751 3,624,724 ============= ============= =============== ============
See accompanying notes to the condensed consolidated financial statements. 3 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Note 1) (Unaudited)
Nine Months Ended ------------------------------ September 30, September 30, 1999 1998 ------------- ------------- Cash flows from operating activities: Net income $ 1,460,000 $ 1,209,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 652,000 410,000 Changes in operating assets and liabilities, net of effects from acquisitions: Contracts and trade receivables 564,000 (917,000) Other receivables 182,000 (23,000) Costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings, net (1,964,000) (1,008,000) Prepaid expenses (87,000) 348,000 Deferred tax assets and liabilities, net 375,000 1,209,000 Other long-term assets (30,000) (166,000) Trade accounts payable and accrued liabilities 992,000 (1,060,000) Accrued liabilities to related parties (185,000) 55,000 ----------- ----------- Net cash provided by operating activities 1,959,000 57,000 ----------- ----------- Cash flows from investing activities: Net cash expended in connection with acquisitions (3,659,000) (77,000) Additions to equipment and improvements, net (840,000) (404,000) ----------- ----------- Net cash used in investing activities (4,499,000) (481,000) ----------- ----------- Cash flows from financing activities: (Payments on) proceeds from line of credit, net (4,527,000) 1,464,000 Principal payments on long-term and short-term debt and capital leases (989,000) (1,429,000) Borrowings on notes payable to related parties - 300,000 Payments on notes payable to related parties (2,401,000) (150,000) Proceeds from issuance of common stock, net 12,447,000 - Payment of deferred offering costs (1,101,000) (91,000) ----------- ----------- Net cash provided by financing activities 3,429,000 94,000 ----------- ----------- Net increase (decrease) in cash and cash equivalents 889,000 (330,000) Cash and cash equivalents, beginning of period 457,000 587,000 ----------- ----------- Cash and cash equivalents, end of period $ 1,346,000 $ 257,000 =========== =========== See supplemental cash flow information at Note 9
See accompanying notes to the condensed consolidated financial statements. 4 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) 1. Organization and Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of The Keith Companies, Inc., and its wholly owned subsidiaries ("TKCI" or the "Company"). On August 1, 1998, TKCI acquired all of the outstanding common stock of Keith Engineering, Inc. ("KEI") (the "Reorganization") by a contribution to capital of TKCI by KEI's shareholders of all of the outstanding stock of KEI in exchange for the issuance by TKCI of an equal number of shares of its stock. On November 30, 1998, KEI, a wholly owned subsidiary of TKCI, was merged with and into TKCI, and its outstanding shares, all of which were then owned by TKCI, were cancelled as a result of the merger. Prior to the Reorganization, TKCI and KEI were under common management and common control as a result of a contemporaneous written agreement dated July 1992 between their majority shareholders. This agreement provided for the shareholders to vote in concert and thus the majority shareholders became a common control group. The Reorganization was accounted for as a combination of affiliated entities under common control in a manner similar to a pooling-of- interests. Under this method, the assets, liabilities and equity of TKCI and KEI were carried over at their historical book values and their operations prior to the Reorganization have been recorded on a combined historical basis. The combination did not require any material adjustments to conform the accounting policies of the separate entities. As a result of the Reorganization, the accompanying condensed consolidated financial statements include the consolidated assets, liabilities, equity and results of operations of TKCI, and its wholly owned subsidiaries, and KEI effective August 1, 1998. On July 15, 1999, TKCI completed an initial public offering of 1,500,000 shares of its common stock. The offering price was $9.00 per share resulting in proceeds of approximately $11,673,000 to the Company, net of underwriters' discount and offering costs. The net proceeds were used primarily to repay related party notes payable and accrued interest of $2,647,000, to repay notes payable and accrued interest of $251,000, to repay the bank line of credit of $4,731,000 and to acquire substantially all of the assets of and assume substantially all of the liabilities of Thompson-Hysell, Inc. ("Thompson-Hysell") (see Note 3). The accompanying condensed consolidated balance sheet as of September 30, 1999, the consolidated statements of income for the three and nine months ended September 30, 1999 and 1998, and the consolidated statements of cash flows for the nine months ended September 30, 1999 and 1998, are unaudited and in the opinion of management include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. The results of operations for these interim periods are not necessarily indicative of results for the full year. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission and declared effective on July 12, 1999. 2. Summary of Significant Accounting Policies Principles of Consolidation The accompanying condensed consolidated financial statements include the accounts of the Company. All material intercompany transactions and balances have been eliminated in consolidation. Cash and Cash Equivalents Cash equivalents are comprised of highly liquid instruments with maturities three months or less when purchased. Income Taxes Prior to August 1, 1998, KEI, with the consent of its stockholders, elected to be taxed as an S corporation under the Internal Revenue Code of 1986, as amended. As an S corporation, corporate income or loss flows through to the stockholders who are responsible for including the income, deductions, losses and credits in their individual income tax returns. The Company's effective tax rate of approximately 45% for the period ended September 30, 1998 reflects the anticipated conversion of KEI from an S corporation to a C corporation in August 1998. 5 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) 2. Summary of Significant Accounting Policies (continued) Deferred Offering Costs In anticipation of its initial public offering, the Company deferred the related costs incurred and included them in the accompanying condensed consolidated balance sheet as of December 31, 1998 as deferred offering costs. The Company completed its initial public offering on July 15, 1999, at which time these costs were netted against the offering proceeds. Stock Split On April 23, 1999, the board of directors authorized a 2.70-for-1 reverse split of TKCI's common stock, effective April 26, 1999. All share amounts in the accompanying condensed consolidated financial statements (except for shares of authorized common stock) have been restated to give effect to the stock split. Par Value On June 22, 1999, TKCI established a par value for its common and preferred stock of $0.001 per share. Prior to this date, the Company's common and preferred stock had no par value. All amounts in the accompanying condensed consolidated financial statements have been restated to give effect to the $0.001 per share par value. Use of Estimates The preparation of these condensed consolidated 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, the disclosure of contingent assets and liabilities and the amounts of revenue and expenses reported during the periods. Actual results may differ from the estimates and assumptions used in preparing these condensed consolidated financial statements. 3. Acquisitions In conjunction with its initial public offering, on July 15, 1999, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of Thompson-Hysell. The Company paid cash at closing in the amount of $3,333,000. In addition, contingent consideration consists of (i) cash in the amount of $500,000 related to the net book value of assets acquired and liabilities assumed, (ii) a promissory note in the original principal amount of $1,333,000 payable in 2001, and (iii) shares of common stock with a value equal to $1,333,000, which may be issuable in 2000 if various conditions are met. TKCI is also obligated to pay cash related to the income tax effects to the sellers of Thompson- Hysell, which is estimated to be $525,000. The issuance of common stock and the principal balance of the promissory note are contingent upon earnings for the years ended December 31, 1999 and 2000, respectively. The acquisition was accounted for using the purchase method of accounting. Goodwill, which represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed, in the amount of $4,200,000 is being amortized over a period of twenty-five years. 6 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) 4. Acquisitions (continued) The following unaudited pro forma data presents information as if the acquisition of Thompson-Hysell had occurred at the beginning of the periods presented. The pro forma data is based on historical information and does not necessarily reflect the actual results of operations that would have occurred had Thompson-Hysell and TKCI comprised a single entity during the periods, nor is it necessarily indicative of future results of operations of the combined entities. Pro forma for the periods ended September 30, 1999 -------------------------------- Three Months Nine Months Ended Ended -------------- -------------- Net revenue $11,150,000 $33,655,000 Net income $ 518,000 $ 2,058,000 On August 1, 1998, TKCI acquired all of the outstanding common stock of John M. Tettemer & Associates, Inc. ("JMTA"). The purchase price was $700,000, consisting of cash, amortizing and interest only notes payable and warrants to purchase 55,556 shares of TKCI common stock, exercisable immediately at a purchase price of $4.73 per share. The acquisition was accounted for using the purchase method of accounting. On December 30, 1997, TKCI acquired all of the outstanding common stock of ESI, Engineering Services, Inc., and its wholly-owned subsidiary Engineered Systems Integrated, Inc. ("ESI"). The purchase price was $200,000, consisting of 74,074 shares of TKCI common stock, which are subject to certain repurchase provisions and stock indemnification rights (see Note 5). The acquisition was accounted for using the purchase method of accounting. 5. Redeemable Securities and Stock Indemnification Rights In connection with the acquisition of ESI, TKCI issued to the sellers 74,074 shares of common stock which contained redemption provisions. These redemption provisions allowed any of the sellers, at their discretion, to redeem the common shares, for a stated price per share, if the Company did not complete an initial public offering prior to October 31, 1999. In connection with the acquisition of ESI, the Company also issued to the sellers options to purchase 44,444 shares of common stock containing redemption provisions which provided that in the event that the underlying shares did not have a fair market value of at least $8.10 per share at some time during the period between the date of the Company's initial public offering and October 1, 2002, the holders were entitled to receive, at their discretion, a stated amount for all unexercised vested options. The difference between the redemption values and the initial values of the common stock and options to purchase common stock was accreted over the respective period through charges to redeemable securities and common stock. As a result of the Company's completion of its initial public offering at $9.00 per share on July 15, 1999, the securities are no longer redeemable and, accordingly, $353,000 of accumulated accretion on redeemable securities was reclassified to common stock and additional paid- in capital. Subsequent to the acquisition of ESI, TKCI agreed to indemnify certain holders of 40,000 shares of common stock issued in connection with the acquisition of ESI against a market decline in TKCI's common stock after the initial public offering of TKCI's common stock. The excess of the guarantee price over the market value of the 40,000 shares of common stock was $130,000 on September 30, 1999 and is recorded as other expense and accrued expenses in the accompanying condensed consolidated financial statements as of and for the periods ended September 30, 1999. 7 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) 6. Per Share Data Basic EPS is computed by dividing earnings available to common stockholders during the period by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing earnings available to common stockholders during the period by the weighted average number of shares that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period, net of shares assumed to be repurchased using the treasury stock method. The following is a reconciliation of the denominator for the basic EPS computation to the denominator of the diluted EPS computation. Net income available to common stockholders is used in the basic and diluted EPS calculations as the assumed impact of the redeemable securities would be anti-dilutive.
Three Months Ended Nine Months Ended ---------------------------- ----------------------------- September 30, September 30, September 30, September 30, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Weighted average shares used for the basic EPS computation (deemed outstanding the entire period) 4,807,300 3,485,634 3,931,030 3,485,634 Incremental shares from the assumed exercise of dilutive stock options and stock warrants 256,049 175,005 282,721 139,090 ---------- ----------- ---------- ----------- Weighted average shares used for the diluted EPS computation 5,063,349 3,660,639 4,213,751 3,624,724 ========== =========== ========== ===========
Anti-dilutive shares excluded from the above calculations were 336,902 and 147,115 for the three and nine months ended September 30, 1999, respectively and 13,285 and 40,997 for the three and nine months ended September 30, 1998, respectively. 7. Indebtedness On September 1, 1999, the Company entered into a new line of credit agreement with a bank to fund working capital needs and the acquisition of equipment. The line of credit has a working capital component with a maximum outstanding principal balance of $6,000,000 which matures on September 3, 2001 and an equipment component with a maximum outstanding principal balance of $3,500,000, which matures on September 3, 2000. The line of credit bears interest at either the prime rate or, at one and three-quarters percent above LIBOR. The aggregate outstanding principal balance of working capital advances and equipment advances can not exceed $8,500,000. The line of credit is subject to various restrictions and contains certain financial and nonfinancial related covenants. As of September 30, 1999, there was no outstanding borrowing on the line of credit. The Company anticipates borrowing on its line of credit as appropriate in the future. In conjunction with the acquisition of substantially all of the assets and assumption of substantially all of the liabilities of Thompson-Hysell, TKCI assumed $438,000 related to a portion of the Thompson-Hysell existing bank debt. TKCI's intent is to pay-off this liability in the fourth quarter of 1999. Prior to September 1, 1999, the Company maintained a line of credit agreement with a bank, which allowed us to borrow up to $5,500,000, not to exceed 80% of our eligible accounts receivable, as defined in the agreement. On March 5, 1999, the bank amended the agreement to, among other things, amend some of the financial related covenants effective December 31, 1998, adjust the interest rate to the bank's prime rate plus a variable margin tied to financial covenants and extend the maturity on the line to March 1, 2000. A portion of the proceeds from the Company's initial public offering on July 15, 1999 were used to repay the outstanding principal balance of $4,731,000. 8 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) 8. Segment and Related Information The Company evaluates performance and makes resource allocation decisions based on the overall type of services provided to customers. For financial reporting purposes, we have grouped our operations into two primary reportable segments. The Real Estate Development, Public Works and Wireless Telecommunications ("REPWWT") segment includes engineering, consulting and technical services for the development of both private projects, like residential communities, commercial and industrial properties and recreational projects; public works projects, like transportation and water/sewage facilities; and site acquisition and construction management services for wireless telecommunications. The Industrial Engineering ("IE") segment, which consists of ESI, provides the technical expertise and management required to design and test manufacturing facilities and processes. The following tables set forth certain information regarding the Company's operating segments for the three and nine months ended September 30, 1999 and 1998:
Three Months Ended September 30, 1999 - ------------------------------------------------------------------------------------------------------------------------- Corporate REPWWT IE Costs Consolidated -------------- ---------- ----------------- ---------------- Net revenue $ 9,715,000 $ 943,000 $ - $10,658,000 Income (loss) from operations $ 1,549,000 $ 135,000 $ (587,000) $ 1,097,000 Identifiable assets $22,827,000 $1,340,000 $ - $24,167,000 Three Months Ended September 30, 1998 - ------------------------------------------------------------------------------------------------------------------------- Corporate REPWWT IE Costs Consolidated -------------- ---------- ----------------- ---------------- Net revenue $ 6,927,000 $ 973,000 $ - $ 7,900,000 Income (loss) from operations $ 1,564,000 $ 125,000 $ (492,000) $ 1,197,000 Identifiable assets $12,260,000 $1,652,000 $ - $13,912,000 Nine Months Ended September 30, 1999 - ------------------------------------------------------------------------------------------------------------------------- Corporate REPWWT IE Costs Consolidated -------------- ---------- ----------------- ---------------- Net revenue $25,485,000 $2,786,000 $ - $28,271,000 Income (loss) from operations $ 5,012,000 $ 175,000 $(1,871,000) $ 3,316,000 Nine Months Ended September 30, 1998 - ------------------------------------------------------------------------------------------------------------------------- Corporate REPWWT IE Costs Consolidated -------------- ---------- ----------------- ---------------- Net revenue $18,108,000 $2,805,000 $ - $20,913,000 Income (loss) from operations $ 4,129,000 $ 263,000 $(1,476,000) $ 2,916,000
9 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) 9. Supplemental Cash Flow Information
Nine Months Ended September 30, ------------------------------- 1999 1998 ----------- ---------- Supplemental disclosure of cash flow information: Cash paid for interest $ 856,000 $874,000 =========== ======== Cash paid for income taxes $ 124,000 $ 2,000 =========== ======== Noncash financing and investing activities: Capital lease obligations recorded in connection with equipment acquisitions $ 258,000 $608,000 =========== ======== Purchase price adjustment $ 60,000 $ - =========== ======== Accretion of redeemable securities $(230,000) $114,000 =========== ======== Accrued deferred offering costs $(291,000) $ - =========== ========
The acquisition of Thompson-Hysell on July 15, 1999 resulted in the following:
July 15, 1999 ---------------- Contracts and trade receivables $(2,253,000) Goodwill (4,200,000) Equipment and improvements (1,105,000) Other assets (6,000) Short-term borrowings 438,000 Long-term debt, including current portion 1,943,000 Billings in excess of cost and estimated earnings 150,000 Other liabilities 1,224,000 Common stock 150,000 ---------------- Cash expended for the acquisition $ 3,659,000 ================
10. Subsequent Event On October 13, 1999, the board of directors of TKCI approved the repurchase of up to 100,000 shares of the Company's common stock. Through October 31, 1999, the Company acquired 13,700 shares of its common stock at prices ranging from $5.50 to $6.25 per share. These shares are being held in treasury by the Company. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements of TKCI and its subsidiaries and the related notes included elsewhere in Part I- Item I of this Form 10-Q and in the Form S-1 filed by the Company. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth under "Risk Factors" included in Form S-1 filed by the Company. In this Management's Discussion and Analysis of Financial Condition and Results of Operations section, references to "TKCI", "we", "our" and "us" mean TKCI and its subsidiaries and references to KEI means Keith Engineering. Overview The following discussion includes the operations of TKCI and our wholly-owned subsidiaries, including KEI. TKCI and KEI have been under common management and ownership since the inception of TKCI in 1986. TKCI and KEI were under common control as a result of a contemporaneous written agreement dated July 1992 between their majority shareholders. This agreement provided for the shareholders to vote in concert and thus the majority shareholders became a common control group. On August 1, 1998, TKCI was reorganized, so that KEI became a wholly-owned subsidiary of TKCI. This reorganization was accounted for as a combination of affiliated entities under common control in a manner similar to a pooling-of-interests. Under this method, the assets, liabilities and equity were carried over at their historical book values and the operations of TKCI and KEI have been recorded on a combined historical basis. The combination did not require any material adjustments to conform the accounting policies of the separate entities. On November 30, 1998, KEI was merged with and into TKCI. In December 1997, TKCI purchased ESI and its wholly-owned subsidiary ESII, Engineered Systems Integration, Inc., which was subsequently merged into ESI. In August 1998, TKCI purchased John M. Tettemer and Associates. On July 15, 1999, TKCI completed an initial public offering of 1.5 million shares of its common stock. The offering price was $9.00 per share resulting in proceeds of approximately $11.8 million to the Company, net of underwriters' discount and unpaid offering costs. In conjunction with its initial public offering, on July 15, 1999, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of Thompson-Hysell, Inc. ("Thompson-Hysell"). The Company paid cash in the amount of $3.3 million. In addition, contingent consideration consisted of a promissory note in the original principal amount of $1.3 million payable in 2001 and shares of common stock with a value equal to $1.3 million which may be issuable in 2000 if various conditions are met. TKCI may also be obligated or entitled to pay or receive cash related to financial targets being met, related to the assets acquired and liabilities assumed, and pay cash related to the income tax effects to the sellers of Thompson-Hysell. We derive most of our revenue from professional service activities. The majority of these activities are billed under various types of contracts with our clients, including fixed fee and time and material contracts. Most of our time and material contracts have not-to-exceed provisions. Revenue is recognized on the percentage of completion method of accounting based on the proportion of actual direct contract costs incurred to total estimated direct contract costs. We believe that costs incurred are the best available measure of progress towards completion on the contracts. In the course of providing services, we sometimes subcontract for various services. These costs are included in billings to clients and, in accordance with industry practice, are included in our gross revenue. Because subcontractor services can change significantly from project to project, changes in gross revenue may not be indicative of business trends. Accordingly, we also report net revenue, which is gross revenue less subcontractor costs. Our revenue is generated from a large number of relatively small contracts. For the periods presented, a substantial portion of our net revenue was derived from services rendered in connection with commercial and residential real estate development projects. The real estate market has historically experienced pronounced business cycles. Our consolidated results of operations can be adversely impacted by downturns in the real estate market. Based upon the number of building permits issued, the last peak of the business cycle in the southern California real estate market was in 1989 and the last trough was in 1996. A majority of our net revenue for the periods presented, was derived from services rendered in southern California. Consequently, adverse economic conditions affecting the southern California economy could also have an adverse effect on our consolidated results of operations. We anticipate that as we consummate acquisitions in the future, the concentration of revenue from both real estate development and southern California will decline. 11 Costs of revenue include labor, non-reimbursable subcontract costs, materials and various direct and indirect overhead costs including rent, utilities and depreciation. Selling, general, and administrative expenses consist primarily of corporate costs related to finance and accounting, information technology, contract proposal, executive salaries, provisions for doubtful accounts and other indirect overhead costs. Results of Operations The following table sets forth unaudited historical consolidated operating results for each of the periods presented as a percentage of net revenue.
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 1999 1998 1999 1998 -------- ------- -------- ------- Gross revenue 107% 116% 109% 118% Subcontractor costs 7% 16% 9% 18% -------- ------- -------- ------- Net revenue 100% 100% 100% 100% Costs of revenue 69% 64% 67% 66% -------- ------- -------- ------- Gross profit 31% 36% 33% 34% Selling, general and administrative expenses 21% 21% 21% 20% -------- ------- -------- ------- Income from operations 10% 15% 12% 14% Interest expense 1% 3% 2% 3% Other expense, net 1% -% -% -% -------- ------- -------- ------- Income before provision for income taxes 8% 12% 9% 10% Provision for income taxes 3% 5% 4% 5% -------- ------- -------- ------- Net income 4% 6% 5% 6% ======== ======= ======== =======
Three and Nine Months Ended September 30, 1999 and September 30, 1998 Revenue. Net revenue for the nine months ended September 30, 1999 was $28.3 million compared to $20.9 million for the nine months ended September 30, 1998, an increase of $7.4 million, or 35%. Net revenue for the three months ended September 30, 1999 was $10.7 million compared to $7.9 million for the three months ended September 30, 1998, an increase of $2.8 million, or 35%. Net revenue increased by $3.6 million and $2.5 million for the nine and three months ended September 30, 1999, respectively, as a result of the acquisitions of John M. Tettemer & Associates in August 1998 and Thompson-Hysell in July 1999. Excluding the revenue from the acquisitions, our net revenue grew $3.8 million, or 18%, and $275,000, or 4% for the nine and three months ended September 30, 1999, respectively, compared to the nine and three months ended September 30, 1998. The net revenue growth resulted primarily from the overall continued strengthening of the California and Nevada economies. However, net revenue for the nine and three months ended September 1999, was negatively impacted by an increase to the estimated direct contract costs expected to be incurred on several large projects resulting in a reduction to the estimated percentage of completion on these contracts and consequently a $600,000 reduction in net revenue. Subcontractor costs, as a percentage of net revenue, declined to 9% and 7% for the nine and three months ended September 30, 1999, respectively, as compared to 18% and 16% for the nine and three months ended September 30, 1998, respectively. The percentage decline in subcontractor costs resulted primarily from a decrease in services for our primary wireless telecommunications contract, which was substantially completed by the end of 1998. Gross Profit. Gross profit for the nine months ended September 30, 1999 was $9.2 million compared to $7.1 million for the nine months ended September 30, 1998, an increase of $2.1 million, or 29%. Gross profit for the three months ended September 30, 1999 was $3.3 million compared to $2.8 million for the three months ended September 30, 1998, an increase of $485,000, or 17%. The gross profit growth is attributable to both our internal revenue increases as well as the acquisition of John M. Tettemer & Associates and Thompson-Hysell. As a percentage of net revenue, gross profit decreased slightly to 33% for the nine months ended September 30, 1999 compared to 34% for the nine months ended September 30, 1998. As a percentage of net revenue, gross profit decreased to 31% for the three months ended September 30, 1999 compared to 36% for the three months ended September 30, 1998. The decrease in gross profit as a percentage of net revenue for the nine and three months ended September 30, 1999 resulted primarily from the negative impact to revenue relating to the increase to the estimated direct contract costs on several large projects previously discussed. Excluding this revenue impact of $600,000, gross profit as a percentage of net revenue remained flat at 34% for the nine months ended September 30, 1999 compared to the prior year period and decreased to 35% for the three months ended September 30, 1999 compared to 36% for the three 12 months ended September 30, 1998. The gross profit percentage was further reduced by a decline in the industrial engineering operations of ESI, as a percentage of net revenue for the nine months ended September 30, 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the nine months ended September 30, 1999 were $5.9 million as compared to $4.2 million for the nine months ended September 30, 1998, an increase of $1.7 million, or 40%. Selling, general and administrative expenses for the three months ended September 30, 1999 were $2.2 million as compared to $1.6 million for the three months ended September 30, 1998, an increase of $585,000, or 36%. As a percentage of net revenue, selling, general and administrative expenses increased to 21% for the nine months ended September 30, 1999 from 20% for the nine months ended September 30, 1998, while for the three month period ended September 30, 1999, selling, general and administrative expenses remained flat at 21% compared to the previous year period. Included in the nine months ended September 30, 1998 period is a credit to bad debt expense included in selling, general and administrative expense resulting from the cash collection of $390,000 related to a receivable written-off in a prior period. Excluding the $390,000 collection in 1998, selling, general and administrative expenses, as a percentage of net revenue, declined 1% for the nine months ended September 30, 1999 compared to the previous year period. The selling, general and administrative expense percentage of net revenue for the nine and three months ended September 30, 1999 were also negatively impacted by the decrease to revenue relating to the increase to the estimated direct contract costs previously discussed. Interest expense and other expense, net. Interest expense for the nine months ended September 30, 1999 was $678,000 as compared to $714,000 for the nine months ended September 30, 1998, a decrease of $36,000, or 5%. Interest expense for the three months ended September 30, 1999 was $149,000 as compared to $249,000 for the three months ended September 30, 1998, a decrease of $100,000, or 40%. The lower interest expense resulted from the repayment of our line of credit and various related party notes payable with a portion of the net proceeds from the initial public offering on July 15, 1999. Other expense, net for the nine months ended September 30, 1999 was $102,000 as compared to $7,000 for the nine months ended September 30, 1998, an increase of $95,000. Other expense, net for the three months ended September 30, 1999 was $132,000 as compared to $18,000 for the three months ended September 30, 1998, an increase of $114,000. Subsequent to the acquisition of ESI, TKCI agreed to indemnify certain holders of 40,000 shares of common stock issued in connection with the acquisition of ESI against a market decline in TKCI's common stock after the initial public offering of TKCI's common stock. The excess of the guarantee price over the market value of the 40,000 shares of common stock was $130,000 on September 30, 1999. Income Taxes. The provision for income taxes for the nine months ended September 30, 1999 was $1.1 million compared to $1.0 million for the nine months ended September 30, 1998. The provision for income taxes for the three months ended September 30, 1999 was $347,000 compared to $418,000 for the three months ended September 30, 1998. Our effective income tax rate was approximately 42% for the nine and three months ended September 30, 1999 compared to an effective tax rate of 45% for the nine and three months ended September 30, 1998. Our effective income tax rate of 45% for the periods ended September 30, 1998 was primarily due to the anticipated conversion of KEI from an S corporation to a C corporation in August 1998. Liquidity and Capital Resources We have financed our working capital needs and capital expenditure requirements through a combination of internally generated funds, bank borrowings, leases and the initial public offering of our common stock. Working capital as of September 30, 1999 was $6.2 million compared to $5.2 million as of December 31, 1998, an increase of $1.1 million, or 20%. The increase in working capital resulted primarily from higher cash balances resulting from the initial public offering, the acquisition of substantially all of the assets and assumption of substantially all of the liabilities of Thompson-Hysell and growth in contracts and trade receivables and cost and estimated earnings in excess of billings due to higher revenue volume. Cash generated from operating activities increased $1.9 million to $2.0 million for the nine months ended September 30, 1999, compared to $57,000 for the nine months ended September 30, 1998. The significant growth in operating cash flow resulted primarily from higher income from operations and the timing of payments related to prepaid expenses, trade accounts payable and accrued liabilities. The growth in cash generated from operating activities was used primarily to fund capital expenditures of $840,000 for the nine months ended September 30, 1999 compared to $404,000 for the nine months ended September 30, 1998 and to make principal payments on long-term and short-term debt and capital leases. Capital expenditures consisted primarily of computer equipment and upgrades to our information systems. On July 15, 1999, TKCI completed an initial public offering of 1.5 million shares of its common stock resulting in proceeds net of underwriters' discount of approximately $12.4 million to the Company. TKCI's cash from operations in addition to the proceeds from the offering were used to pay approximately $1.1 million in offering costs for the nine months ended September 30, 1999. The remaining net proceeds were used to fund the $3.7 million cash expended for the acquisition of 13 substantially all of the assets and the assumption of substantially all of the liabilities of Thompson-Hysell, the repayment of the line of credit balance of $4.5 million, the repayment of related party notes payable of $2.4 million and notes payable of $250,000. On September 1, 1999, the Company entered into a new line of credit agreement with a bank to fund working capital needs and the acquisition of equipment. The line of credit has a working capital component with a maximum outstanding principal balance of $6,000,000 which matures on September 3, 2001 and an equipment component with a maximum outstanding principal balance of $3,500,000, which matures on September 3, 2000. The aggregate outstanding principal balance of working capital advances and equipment advances can not exceed $8,500,000. The line of credit is subject to various restrictions and contains certain financial and nonfinancial related covenants. As of September 30, 1999, there was no outstanding borrowing on the line of credit. The Company anticipates borrowing on its line of credit as appropriate in the future. In conjunction with the acquisition of substantially all of the assets and assumption of substantially all of the liabilities of Thompson-Hysell, TKCI assumed $438,000 related to a portion of the Thompson-Hysell existing bank debt. TKCI's intent is to pay-off this liability in the fourth quarter of 1999. Prior to September 30, 1999, TKCI maintained a line of credit agreement with a bank, which allowed us to borrow up to $5.5 million, not to exceed 80% of our eligible accounts receivable, as defined in the agreement. On July 15, 1999, a portion of the net proceeds from the Company's initial public offering was used to pay off the $4.5 million outstanding line of credit balance. On September 30, 1999 this line of credit agreement was terminated. We believe existing cash balances, internally generated funds, and availability under credit facilities will be sufficient to fund our anticipated internal operating needs for the next twelve months. Inflation Although our operations can be influenced by general economic trends, we do not believe that inflation had a significant impact on our results of operations for the periods presented. Due to the short-term nature of most of our contracts, if costs of revenue increase, we attempt to pass these increases to our clients. Year 2000 We are currently in the final phase of identifying and evaluating the potential impacts of the Year 2000 on information systems and embedded systems. A Year 2000 Mitigation Committee comprised of senior management and functional managers is evaluating the following issues: . State of readiness . Costs to address Year 2000 issues . Risk assessment . Contingency plan The following is a description of the process we have established and which we intend to follow to minimize our Year 2000 risk exposure: State of readiness. Our information technology and non-information technology systems can be divided into support/administrative and operational/production systems. The significant systems used to perform our support and administrative functions as well as our engineering work and the operating systems upon which these systems function are detailed in the table below. We have surveyed the system suppliers and have received from each supplier either written assurance or vendor documentation in the form of information published on a website stating that these systems are Year 2000 compliant or Year 2000 compliant with minor issues as indicated below.
Operating System System Name Description (if applicable) Year 2000 Status ----------- ----------- ---------------- ---------------- Harper & Shuman CFMS/RD Compliant V5.0 (Server) Accounting and Project Cost software Open VMS V7.1-1H1 Assurance received Windows 95, Windows 98, Harper & Shuman CFMS/RD Client component that allows access to Windows NT 4.0 Compliant V5.0 (Client) server data Workstation SP4 Assurance received Compaq-DEC Open VMS Alpha operating system that supports Compliant V7.1-1H1 CFMS/RD software N/A Assurance received Autodesk AutoCAD R14 Engineering CAD design software Windows 95, Compliant
14
Operating System System Name Description (if applicable) Year 2000 Status ----------- ----------- ---------------- ---------------- being run on Windows operating system Windows 98, Assurance received Windows NT 4.0 Workstation SP4 Windows 95, Office suite includes word processing, Windows 98, Microsoft Office 97 SR-2 spreadsheet, database, presentation Windows NT 4.0 Compliant components Workstation SP4 Assurance received ProBusiness Payroll PowerPay Compliant v.5.03 Payroll software Windows 95 Assurance received ProBusiness HRMS Compliant Powersource II V1.0 Human Resources software Windows 95 Assurance received Windows 95, Windows 98, MicroStation 95 V5.05.01.65 Engineering CAD design software being Windows NT 4.0 Compliant run on Windows operating system Workstation SP4 Assurance received Microsoft Windows NT Server 4.0 Server operating system for storing SP4 engineering drawings and administrative Compliant documents N/A Assurance received Microsoft Windows NT Operating system running on workstations Compliant Workstation 4.0 SP4 and laptops N/A Assurance received Microsoft Windows 95 Operating system running on workstations Compliant and laptops N/A Assurance received Microsoft Windows 98 Operating system running on workstations Compliant and laptops N/A Assurance received Microsoft Exchange Server 5.5 E-mail server application running on Compliant SP2 Windows operating system Windows NT 4.0 SP4 Assurance received Compliant Nortel Meridian SL1 (Corporate) Telephone switch N/A Assurance received Compliant Nortel Meridian Mail R5.0 Voicemail messaging system N/A Assurance received (Corporate) Compliant Toshiba Perception II (Moreno Telephone system N/A Assurance received Valley Location) Not Compliant AVT PhoneXpress (Moreno Valley Location) Voice mail system N/A (see below) Toshiba Strata DK-424 (Las Compliant Vegas Location) Telephone system N/A Assurance received AVT CallXpress3 (Las Vegas Compliant Location) Voicemail messaging system N/A Assurance received N/A no feature within this product is pertinent to Y2K per telephone vendor, Trillium Panther 2064 (Thompson-Hysell) Telephone system N/A O'Leary Telephone & Data Compliant Pacific Bell Voice Mail Assurance received (Thompson-Hysell) Voice message boxes N/A Compliant Nortel Norstar Plus Model II Integrated telephone and voice mail N/A Assurance received DR5.1 (John M. Tettemer) system Compliant Toshiba Strata DK424 (ESI) Telephone system N/A Assurance received Compliant AVT PhoneXpress (ESI) Voice message system N/A Assurance received Toshiba Strata DK96 (Palm Compliant Desert Location) Voice message system N/A Assurance received
We are currently in the process of asking the vendors of embedded systems to provide us with written assurance of Year 2000 compliance. In addition, where cost effective and appropriate, have performed internal tests on mission critical and operational production systems and all either passed the Year 2000 testing or require minor manual remediation following the January 1, 2000 date. Cost to address Year 2000 issues. The only costs we have incurred in connection with addressing the Year 2000 issues are administrative expenses resulting from the efforts of our Mitigation Committee and time spent in attempting to identify and resolve Year 2000 issues in contacting our vendors and subconsultants to ensure compliance. These costs are included in selling, general and administrative expense in the consolidated statements of income. All costs related to Year 2000 issues are paid from cash flows from operations. 15 We anticipate a cost of $25,000 to $50,000 to upgrade our telephone voice message system near the end of the fourth quarter 1999 to ensure Year 2000 compliance. This expenditure will be recorded as selling, general and administrative expense as incurred. Our Mitigation Committee has determined that the primary computer systems that we use are Year 2000 compliant and therefore we do not anticipate any additional costs related to the Year 2000 date change that will be material to our business, financial condition or results of operations. Risk assessment. Based on the findings of our Mitigation Committee, we believe that the impact of Year 2000 issues on our internal operations will be minimal. In order to minimize any adverse effect caused by the Year 2000 date change, our operational personnel transfer their work to back-up tapes on a daily basis and store these tapes in an offsite facility. We have not deferred any information technology projects due to Year 2000 issues. We have had difficulty estimating the impact of Year 2000 non-compliance by outside parties with whom we transact business. We have received Year 2000 compliance letters from most of our critical vendors and subcontractors. Based on theses responses we are not aware of any significant issues relating to third parties compliance with the Year 2000 date change. We have also engaged in discussions with other significant third parties, such as our bank and payroll service, and have received written assurances regarding Year 2000 compliance from such service providers. Although our client base is diverse, with no one client making up more than 10% of our gross revenue, we have had discussions with our major clients regarding their readiness for the Year 2000 date change and are not aware of any significant issues. Contingency plan. We have completed our testing and assessment procedures. Plans for likely scenarios involving Year 2000 failures currently cover only manual remediation of workstation and/or server computers. Where cost effective and appropriate, we have performed internal tests on mission critical and operational production systems to validate Year 2000 compliance, and all either passed Year 2000 testing or require minor manual intervention on or after the January 1, 2000 date. Appropriate plans to deal with identified failures are being developed. If we are unsuccessful in developing or implementing a plan to correct possible Year 2000 failure, either in our information technology (software) or non-information technology (microcontrollers in equipment), we may experience disruptions in operations. Our projection of most serious disruptions which could occur include: . the loss of approximately two months' net revenues, an amount of approximately $7,500,000, if our accounting systems fail and we are unable to utilize backup information. We would, however, expect eventually to be able to recover a significant portion of this revenue by recreating time and cost entries from hard copies of such data. . the loss of engineering and project data if we are unable to utilize backup information, resulting in the need to re-input printed data. This effort could increase operating costs and reduce margins in the first two quarters of 2000 and might cause the loss of some projects if we are unable to fulfill our time commitments. . the loss of the services of subcontractors who are experiencing disruptions due to Year 2000 risks, resulting in the loss of contracts because of failure to meet deadlines. . the loss of net revenues if any of the accounting systems of our clients experience a Year 2000 failure. 16 Item 3: Quantitative and Qualitative Disclosures About Market Risk We are exposed to interest rate changes primarily as a result of our line of credit, long-term debt and capital leases which are used to maintain liquidity and to fund capital expenditures and our expansion. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve our objectives, we have borrowed at fixed rates and may enter into derivative financial instruments to mitigate our interest rate risk on variable rate debt. We do not enter into derivative or interest rate transactions for speculative purposes. The table below presents the principal amounts, weighted average interest rates, fair values and other items required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes. Dollars are expressed in thousands. 1999 2000 2001 2002 2003 Total Fair Value/(1)/ Fixed rate debt /(2)/ $ 33 $ 164 $1,501 $ 136 $ 37 $1,871 $1,871 Average interest rate 8.50% 8.40% 9.80% 8.30% 8.00% 9.50% 9.50% Variable rate debt -- $ 438 -- -- -- $ 438 $ 438 Average interest rate -- 8.25% -- -- -- 8.25% 8.25%
- ---------------------------- /(1)/ The fair value of fixed rate debt and variable rate debt was determined based on current rates offered for debt instruments with similar risks and maturities. /(2)/ Fixed rate debt excludes notes payable with an aggregate principal amount of $350,000 as there is no established market for these notes. As the table incorporates only those exposures that existed as of September 30, 1999, it does not consider those exposures or positions which could arise after that date. Moreover, because firm commitments are not presented in the table above, the information presented in the table has limited predictive value. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on those exposures or positions that arise during the period and interest rates. 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings On August 13, 1999, a complaint was filed in the Stanislaus County, California Superior Court against Thompson-Hysell, Inc. ("Thompson-Hysell"), four shareholders of Thompson-Hysell (the "Defendant Shareholders"), Thompson-Hysell Liquidation Corporation, Thompson-Hysell Engineers, Inc. and us. This complaint was filed by Phillip Kirk Delamare and his wife Catherine A. Delamare who are shareholders of a corporation named Thompson-Hysell Engineers, Inc. ("T-H Engineers"), in which the Defendant Shareholders were majority shareholders and directors. The complaint alleges, among other things, that Thompson-Hysell was an alter ego of T-H Engineers and as such, when we acquired substantially all of the assets and assumed substantially all of the liabilities of Thompson-Hysell (the "Acquisition"), the plaintiffs were fraudulently deprived of any benefit derived from their ownership interest in the shares of T-H Engineers. The complaint further alleges that the Defendant Shareholders breached their fiduciary duties as directors and majority shareholders of T-H Engineers and that they conspired with Thompson-Hysell and us to defraud T-H Engineers of its assets and to exclude plaintiffs from any benefit derived from the Acquisition. The plaintiffs in this action are seeking injunctive relief and general monetary damages in an unspecified amount, special damages in the amount of $600,000, interest, costs and punitive and exemplary damages. We believe that the claim made against us is completely without merit and intend to vigorously defend ourselves in this action. Item 2. Changes In Securities and Use of Proceeds On July 12, 1999, our Registration Statement on Form S-1 (333-77273) pertaining to our initial public offering of 1,500,000 shares of our common stock, par value $0.001 per share, was declared effective by the Securities and Exchange Commission. The managing underwriters in the offering were Wedbush Morgan Securities. The offering commenced on July 12, 1999 and closed on July 15, 1999. The initial public offering price was $9 per share for an aggregate initial public offering price of $13,500,000. Of the $13,500,000 in gross proceeds raised in connection with the offering, (i) $1,080,000 was paid to the managing underwriter in connection with underwriting discounts and expenses and (ii) approximately $747,000 was paid by us in connection with expenses, including legal, accounting, printing, filing and other fees, in connection with the offering. Of the remaining net proceeds, we have paid cash of $3,333,000 in connection with the acquisition of substantially all of the assets and assumption of substantially all of the liabilities of Thompson-Hysell; paid off the outstanding line of credit balance of $4,731,000; and repaid debts to related parties of $1,407,000 to Aram Keith, our Chief Executive Officer and Chairman of the Board, $703,000 to Walter Cruttenden III, one of our directors, $165,000 to Floyd Reid, a former director and executive officer, and an aggregate of $372,000 to various other related parties. There were no other direct or indirect payments to any of our officers or directors, their associates, ten- percent shareholders or any other affiliate of ours. We are currently investing the remaining net proceeds from the offering for future use as additional working capital and/or to repay other debt. Our investments are currently in a government cash fund which invests substantially all of its assets in high-quality obligations of the U.S. Government, its agencies and instrumentalities and in repurchase agreements, backed by these obligations. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to A Vote of Security Holders None Item 5. Other Information None 18 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibits Number Description ------ ----------- 10.35 Wells Fargo Bank Line of Credit Note dated September 1, 1999 between The Keith Companies, Inc., John M. Tettemer and Associated, LTD., and ESI, Engineering Services, Inc. and Wells Fargo Bank, National Association. 10.36 Wells Fargo Bank Credit Agreement dated September 1, 1999 between The Keith Companies, Inc., John M. Tettemer and Associated, LTD., and ESI, Engineering Services, Inc. and Wells Fargo Bank, National Association. 10.37 Facility Lease dated July 29, 1999 between ASP Scripps, L.L.C. and the Keith Companies, Inc. 10.38 Addendum to Facility Lease dated July 29, 1999 between ASP Scripps, L.L.C. and the Keith Companies, Inc. 10.39 Sublease Agreement dated July 29, 1999 between Cannon Computer Systems, Inc. and The Keith Companies, Inc. 10.40 Agreement of non-disturbance and attornment dated July 28, 1999 between ASP Scripps, L.L.C. and The Keith Companies, Inc. 10.41 Consent to Sublease Agreement dated July 28, 1999 between ASP Scripps, L.L.C., Canon Computer Systems, Inc. and The Keith Companies, Inc. 27 Financial Data Schedule (b) Reports on Form 8-K None 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 12, 1999 THE KEITH COMPANIES, INC. AND SUBSIDIARIES By: /s/ ARAM H. KEITH ----------------------------------- Aram H. Keith Chairman of the Board of Directors and Chief Executive Officer By: /s/ GARY C. CAMPANARO ----------------------------------- Gary C. Campanaro Chief Financial Officer and Secretary 20 EX-10.35 2 LINE OF CREDIT NOTE DATED SEPTEMBER 1, 1999 EXHIBIT 10.35 LINE OF CREDIT NOTE $8,500,000.00 Irvine, California September 1, 1999 FOR VALUE RECEIVED, the undersigned The Keith Companies, Inc., John M. Tettemer & Associates, Ltd., and ESI, Engineering Services, Inc. ("Borrower") promises to pay to the order of Wells Fargo Bank, National Association ("Bank") at its Orange Coast Regional Commercial Banking Office at 2030 Main Street, Suite 900, Irvine, California 90071, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Eight Million Five Hundred Thousand Dollars ($8,500,000.00), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein. DEFINITIONS: As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined: (a) "Business Day" means any day except a Saturday, Sunday or any other day on which commercial banks in California are authorized or required by law to close. (b) "Fixed Rate Term" means a period commencing on a Business Day and continuing for 1, 2, 3, or 6 months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR; provided however, that no Fixed Rate Term may be selected for a principal amount less than $100,000.00 with respect to Working Capital Advances or $100,000.00 with respect to Equipment Advances; and provided further, that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term would end on a day which is not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day. (c) "LIBOR" means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the following formula: LIBOR = Base LIBOR ------------------------------- 100% - LIBOR Reserve Percentage (i) "Base LIBOR" means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for 1 the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies. Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market. (ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable Fixed Rate Term. (d) "Prime Rate" means at any time the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate. INTEREST: (a) Interest. The outstanding principal balance of this Note shall bear -------- interest (computed on the basis of a 360-day year, actual days elapsed) either (i) at a fluctuating rate per annum equal to the Prime Rate in effect from time to time, or (ii) with respect to Working Capital Advances, at a fixed rate per annum determined by Bank to be one and three-quarters percent (1.75%) above LIBOR in effect on the first day of the applicable Fixed Rate Term, and (iii) with respect to Equipment Advances, at a fixed rate per annum determined by Bank to be two percent (2.00%) above LIBOR in effect on the first day of the applicable Fixed Rate Term. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. With respect to each LIBOR selection hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and Fixed Rate Term applicable thereto and any payments made thereon on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted. (b) Selection of Interest Rate Options. At any time any portion of this ---------------------------------- Note bears interest determined in relation to 2 LIBOR, it may be continued by Borrower at the end of the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or to LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as Borrower requests an advance hereunder or wishes to select a LIBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the interest rate option selected by Borrower; (ii) the principal amount subject thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed Rate Term. Any such notice may be given by telephone so long as, with respect to each LIBOR selection, (A) Bank receives written confirmation from Borrower not later than three (3) Business Days after such telephone notice is given, and (B) such notice is given to Bank prior to 10:00 a.m., California time, on the first day of the Fixed Rate Term. For each LIBOR option requested hereunder, Bank will quote the applicable fixed rate to Borrower at approximately 10:00 a.m., California time, on the first day of the Fixed Rate Term. If Borrower does not immediately accept the rate quoted by Bank, any subsequent acceptance by Borrower shall be subject to a redetermination by Bank of the applicable fixed rate; provided however, that if Borrower fails to accept any such rate by 11:00 a.m., California time, on the Business Day such quotation is given, then the quoted rate shall expire and Bank shall have no obligation to permit a LIBOR option to be selected on such day. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such Fixed Rate Term applied. (c) Additional LIBOR Provisions. --------------------------- (i) If Bank at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining LIBOR, then Bank shall promptly give notice thereof to Borrower. If such notice is given and until such notice has been withdrawn by Bank, then (A) no new LIBOR option may be selected by Borrower, and (B) any portion of the outstanding principal balance hereof which bears interest determined in relation to LIBOR, subsequent to the end of the Fixed Rate Term applicable thereto, shall bear interest determined in relation to the Prime Rate. (ii) If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a "Change in Law") shall make it unlawful for Bank (A) to make LIBOR options 3 available hereunder, or (B) to maintain interest rates based on LIBOR, then in the former event, any obligation of Bank to make available such unlawful LIBOR options shall immediately be cancelled, and in the latter event, any such unlawful LIBOR-based interest rates then outstanding shall be converted, at Bank's option, so that interest on the portion of the outstanding principal balance subject thereto is determined in relation to the Prime Rate; provided however, that if any such Change in Law shall permit any LIBOR-based interest rates to remain in effect until the expiration of the Fixed Rate Term applicable thereto, then such permitted LIBOR-based interest rates shall continue in effect until the expiration of such Fixed Rate Term. Upon the occurrence of any of the foregoing events, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any fines, fees, charges, penalties or other costs incurred or payable by Bank as a result thereof and which are attributable to any LIBOR options made available to Borrower hereunder, and any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. (iii) If any Change in Law or compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall: (A) subject Bank to any tax, duty or other charge with respect to any LIBOR options, or change the basis of taxation of payments to Bank of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of Bank); or (B) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition of funds by any office of Bank; or (C) impose on Bank any other condition; and the result of any of the foregoing is to increase the cost to Bank of making, renewing or maintaining any LIBOR options hereunder and/or to reduce any amount receivable by Bank in connection therewith, then in any such case, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any additional costs incurred by Bank and/or reductions in amounts received by Bank which are attributable to such LIBOR options. In determining which costs incurred by Bank and/or reductions in amounts received by Bank are attributable to any LIBOR options made available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. 4 (d) Payment of Interest. Interest accrued on this Note shall be payable ------------------- on the third day of each month, commencing October 3, 1999. (e) Default Interest. From and after the maturity date of this Note, or ---------------- such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to two percent (2%) above the rate of interest from time to time applicable to this Note. BORROWING AND REPAYMENT: (a) Borrowing and Repayment. Borrower may from time to time during the ----------------------- term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow Working Capital Advances, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of Equipment Advances on September 3, 2000 shall be due and payable on the third day of each month in 60 equal consecutive installments, each equal to 1/60th of such outstanding principal balance, commencing on October 3, 2000 to and including September 3, 2005. The outstanding principal balance of Working Capital Advances shall be due and payable in full on September 3, 2001. (b) Advances. Working Capital Advances, to the total amount of the -------- principal sum set forth in the Credit Agreement (defined below), may be made by the holder at the oral or written request of (i) Aram Keith, CEO or Gary --------------- ---- Campanaro, CFO, any one acting alone, who are authorized to request advances and - -------------- direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any account of any Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of each Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by any Borrower. Equipment Advances shall be available in the manner set forth in the Credit Agreement. 5 (c) Application of Payments. Each payment made on this Note shall be ----------------------- credited first, to any interest then due and second, to the outstanding principal balance hereof. All payments credited to principal shall be applied to Working Capital Advances and/or Equipment Advances as described in the Credit Agreement, and shall be so applied first, to the outstanding principal balance of applicable advances which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of the advances which bears interest determined in relation to LIBOR, with such payments applied to the oldest Fixed Rate Term first. PREPAYMENT: (a) Prime Rate. Borrower may prepay principal on any portion of this Note ---------- which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty. (b) LIBOR. Borrower may prepay principal on any portion of this Note ----- which bears interest determined in relation to LIBOR at any time and in the minimum amount of $500,000.00; provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Fixed Rate Term matures, calculated as follows for each such month: (i) Determine the amount of interest which would have accrued each month --------- on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto. (ii) Subtract from the amount determined in (i) above the amount of -------- interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid. (iii) If the result obtained in (ii) for any month is greater than zero, discount that difference by LIBOR used in (ii) above. Each Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or 6 liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Each Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum 2.00% above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed). Each change in the rate of interest on any such past due prepayment fee shall become effective on the date each Prime Rate change is announced within Bank. Prepayments of principal applied to Equipment Advances after September 3, 2000 shall be applied to the scheduled installments in inverse order of maturity. EVENTS OF DEFAULT: This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of September 1, 1999, as amended from time to time (the "Credit Agreement"). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note. MISCELLANEOUS: (a) Remedies. Upon the occurrence of any Event of Default, the holder of -------- this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. 7 (b) Obligations Joint and Several. Should more than one person or entity ----------------------------- sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. (c) Governing Law. This Note shall be governed by and construed in ------------- accordance with the laws of the State of California. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. THE KEITH COMPANIES, INC. By: /s/ Gary C. Campanaro --------------------------------- Title: CFO ------------------------------ JOHN M. TETTEMER & ASSOCIATES, LTD. By: /s/ Gary C. Campanaro --------------------------------- Title: CFO ------------------------------ ESI, ENGINEERING SERVICES, INC. By: /s/ Gary C. Campanaro --------------------------------- Title: CFO ------------------------------ 8 EX-10.36 3 CREDIT AGREEMENT DATED SEPTEMBER 1, 1999 EXHIBIT 10.36 CREDIT AGREEMENT THIS AGREEMENT is entered into as of September 1, 1999, by and among The Keith Companies, Inc., a California corporation, John M. Tettemer & Associates, Ltd., a California corporation, ESI, Engineering Services, Inc. a California corporation (individually and collectively "Borrower"), and Wells Fargo Bank, National Association ("Bank"). Each reference herein to "Borrower" shall mean each and every party, collectively and individually, defined above as a Borrower. RECITAL ------- Borrower has requested from Bank the credit accommodation described below, and Bank has agreed to provide said credit accommodation to Borrower on the terms and conditions contained herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows: ARTICLE I --------- THE CREDIT ---------- SECTION 1.1. LINE OF CREDIT. (a) Line of Credit. Subject to the terms and conditions of this Agreement, -------------- Bank hereby agrees to make advances to Borrower from time to time (the "Line of Credit"), the proceeds of which up to a maximum outstanding principal balance of $6,000,000.00 shall be used to finance working capital requirements (the "Working Capital Advances", which shall be available until September 3, 2001), and which up to a maximum outstanding principal balance of $3,500,000.00 (less the amount of Lease Obligations) shall be used for equipment purchases ("Equipment Advances", which shall be available until September 3, 2000), provided, however, that the aggregate outstanding principal balance of Working - ----------------- Capital Advances and Equipment Advances shall not at any time exceed $8,500,000.00. Borrower's obligation to repay Working Capital Advances and Equipment Advances shall be evidenced by a promissory note substantially in the form of Exhibit A attached hereto ("Line of Credit Note"), all terms of which are incorporated herein by this reference. The term "Lease Obligations" means ----------------- the aggregate amount of all lease obligations under leases entered into between Bank's equipment leasing affiliate or division as lessor and Borrower as lessee during the period when Equipment Advances are available. (b) Borrowing and Repayment. Borrower may from time to time during the ----------------------- term of the Line of Credit with respect to Working Capital Advances borrow, partially or wholly repay its outstanding borrowings, and reborrow, and, with respect to Equipment Advances, borrow, partially or wholly repay its outstanding borrowings, but not reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above. As of and after September 3, 2000, (i) no new Equipment Advances shall be available, and (ii) the availability for Working Capital Advances shall be limited to the lesser of (I) $6,000,000.00, or (II) an amount equal to $8,500,000.00 less the outstanding principal balance of Equipment Advances from time to time. Repayments of principal received by Bank shall be applied, prior to September 3, 2000 (unless Bank receives written instructions to the contrary prior to each payment), first to outstanding Working Capital Advances and then to outstanding Equipment Advances, and after September 3, 2000, first to the scheduled installment of the Equipment Advances if such an installment is then due and payable, second to outstanding Working Capital Advances and then as a prepayment of Equipment Advances (subject to the prepayment provisions set forth in the Line of Credit Note). (c) Advances. Each request for an Equipment Advance shall be in writing, -------- shall specify the amount and date of the requested advance and shall be accompanied by an invoice or appraisal (as required below) in form and content acceptable to Bank. The principal amount of each Equipment Advance shall not exceed 90% of the purchase price of the applicable equipment (if such equipment is new or has been acquired within 90 days preceding the date of the requested advance) as evidenced by invoice delivered to Bank, or 80% of the value of the applicable equipment (if such equipment is used or has been acquired more than 90 days prior to the date of the requested advance) as evidenced by appraisal delivered to Bank. Working capital advances shall be available in the manner set forth in the Line of Credit Note. Bank is hereby authorized to note the original principal amount of and any payments made on Working capital Advances and equipment Advances on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Agreement or to the Line of Credit Note, which notations shall be prima facie evidence of the accuracy of the information noted. SECTION 1.2. INTEREST/FEES. (a) Interest. The outstanding principal balance of the Line of Credit -------- shall bear interest at the rate of interest set forth in the Line of Credit Note. -2- (b) Computation and Payment. Interest shall be computed on the basis of a ----------------------- 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in the Line of Credit Note. (c) Unused Commitment Fee. Borrower shall pay to Bank a fee equal to one- --------------------- eighth percent (0.125%) per annum (computed on the basis of a 360-day year, actual days elapsed) on the average daily unused amount of the Line of Credit, which fee shall be calculated on a quarterly basis by Bank and shall be due and payable by Borrower in arrears on the first day of each March, June, September and December. SECTION 1.3. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all interest and fees due under the Line of Credit by charging Borrower's demand deposit account number 4269-912520 with Bank, or any other demand deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. SECTION 1.4. COLLATERAL. As security for all indebtedness of Borrower to Bank subject hereto, Borrower hereby grants to Bank, and shall cause the other Borrowers to grant to Bank, security interests of first priority in all such Borrower's accounts receivable and other rights to payment, general intangibles and equipment. All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements, deeds of trust and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including without limitation, filing and recording fees and costs of appraisals, audits and title insurance. ARTICLE II ---------- REPRESENTATIONS AND WARRANTIES ------------------------------ Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement. -3- SECTION 2.1. LEGAL STATUS. The Keith Companies, Inc. is a corporation, duly organized and existing and in good standing under the laws of the state of California, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. John M. Tettemer & Associates, Ltd. is a corporation, duly organized and existing and in good standing under the laws of the state of California, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. ESI, Engineering Services, Inc. is a corporation, duly organized and existing and in good standing under the laws of the state of California, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Line of Credit Note, and each other document, contract and instrument required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms. SECTION 2.3. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of Borrower, or result in any breach of or default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. SECTION 2.4. LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof. -4- SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of Borrower dated March 31, 1999, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the financial condition of Borrower, (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statement there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing. SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year. SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any other obligation of Borrower. SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. SECTION 2.9. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles. SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. -5- SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment. ARTICLE III ----------- CONDITIONS ---------- SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to extend any credit contemplated by this Agreement is subject to the fulfillment to Bank's satisfaction of all of the following conditions: (a) Approval of Bank Counsel. All legal matters incidental to the ------------------------ extension of credit by Bank shall be satisfactory to Bank's counsel. (b) Documentation. Bank shall have received, in form and substance ------------- satisfactory to Bank, each of the following, duly executed: (i) This Agreement and the Line of Credit Note. (ii) Certificate of Incumbency. (iii) Corporate Resolution: Borrowing. (iv) Security Agreements: Accounts Receivable and Equipment. (v) Third Party Security Agreements (vi) UCC Financing Statement. (viii) Schedule 1 - UCC Financing Statements. (ix) Such other documents as Bank may require under any other Section of this Agreement. (c) Financial Condition. There shall have been no material adverse change, ------------------- as determined by Bank, in the financial condition or business of Borrower, nor any material decline, as determined -6- by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower. (d) Insurance. Borrower shall have delivered to Bank evidence of insurance --------- coverage on all Borrower's property, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank, with loss payable endorsements in favor of Bank. SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: (a) Compliance. The representations and warranties contained herein and in ---------- each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist. (b) Documentation. Bank shall have received all additional documents which ------------- may be required in connection with such extension of credit. ARTICLE IV ---------- AFFIRMATIVE COVENANTS --------------------- Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing: SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein. SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower. -7- SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank: (a) not later than 90 days after and as of the end of each fiscal year, a consolidated copy of 10K report filed with the Securities Exchange Commission, prepared by a certified public accountant acceptable to Bank; (b) not later than 45 days after and as of the end of each fiscal quarter, a consolidated copy of 10Q report filed with the Securities Exchange Commission, reviewed by a certified public accountant acceptable to Bank; (c) not later than 30 days after and as of the end of each fiscal quarter, a work-in-progress or job status report and an aged listing of accounts receivable; (d) from time to time such other information as Bank may reasonably request. SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business. SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. SECTION 4.6. FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except such (a) as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision, to Bank's -8- satisfaction, for eventual payment thereof in the event Borrower is obligated to make such payment. SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower with a claim in excess of $100,000.00. SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's consolidated financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein): (a) Current Ratio not less than 1.30 to 1.0 determined as of the end of each fiscal quarter, with "Current Ratio" defined as total current assets divided by total current liabilities. (b) Total Liabilities divided by Tangible Net Worth not greater than 1.75 to 1.0 determined as of the end of each fiscal quarter, with "Total Liabilities" defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. (c) Net income after taxes not less than $1.00 on a quarterly basis, determined as of each fiscal quarter end. (d) EBITDA Coverage Ratio not less than 1.50 to 1.0 determined as of the end of each fiscal quarter on a rolling four-quarter basis, with "EBITDA" defined as net profit before tax plus interest expense (net of capitalized interest expense), depreciation expense and amortization expense, and with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of total interest expense plus the prior period current maturity of long-term debt and the prior period current maturity of subordinated debt. "Current maturity of long-term debt" shall not include Working Capital Advances under the Line of Credit notwithstanding the fact that the maturity date thereof may extend more than 1 year beyond the date of computation. SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower is required to maintain, -9- or any uninsured or partially uninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower's property. SECTION 4.11. YEAR 2000 COMPLIANCE. Perform all acts reasonably necessary to ensure that (a) Borrower and any business in which Borrower holds a substantial interest, and (b) all customers, suppliers and vendors that are material to Borrower's business, become Year 2000 Compliant in a timely manner. Such acts shall include, without limitation, performing a comprehensive review and assessment of all of Borrower's systems and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. As used herein, "Year 2000 Compliant" shall mean, in regard to any entity, that all software, hardware, firmware, equipment, goods or systems utilized by or material to the business operations or financial condition of such entity, will properly perform date sensitive functions before, during and after the year 2000. Borrower shall, immediately upon request, provide to Bank such certifications or other evidence of Borrower's compliance with the terms hereof as Bank may from time to time require. ARTICLE V --------- NEGATIVE COVENANTS ------------------ Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not without Bank's prior written consent: SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any credit extended hereunder except for the purposes stated in Article I hereof. SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in fixed assets in any fiscal year in excess of an aggregate of $2,750,000.00. SECTION 5.3. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof, (c) leases permitted under Section 5.6 below. -10- SECTION 5.4 MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity; make any substantial change in the nature of Borrower's business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business. SECTION 5.5 LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to or investments in any person or entity, except (a)any of the foregoing existing as of, and disclosed to Bank prior to, the date hereof, and (b) loans and advances to, and/or investments in, any Borrower consistent with Borrowers' prior practices. SECTION 5.6. LEASE EXPENDITURES. Incur new lease expense in any fiscal year in excess of an aggregate of $1,400,000.00, of which no more than $550,000.00 shall be under vehicle leases. SECTION 5.7. GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other person or entity, except any of the foregoing in favor of Bank. SECTION 5.8. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or distribution either in cash, stock or any other property on Borrower's stock now or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire any shares of any class of Borrower's stock now or hereafter outstanding. SECTION 5.9. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower's assets now owned or hereafter acquired, except any of the foregoing in favor of Bank or which is existing as of, and disclosed to Bank in writing prior to, the date hereof. ARTICLE VI ---------- EVENTS OF DEFAULT ----------------- SECTION 6.1. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents. -11- (b) Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made. (c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue for a period of twenty (20) days from its occurrence. (d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower has incurred any debt or other liability to any person or entity, including Bank, and, if the debt or other liability is owed to a party other than Bank, the amount thereof exceeds $50,000.00. (e) The filing of a notice of judgment lien against Borrower; or the recording of any abstract of judgment against Borrower in any county in which Borrower has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower; or the entry of a judgment against Borrower. (f) Borrower shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower, or Borrower shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors. -12- (g) The dissolution or liquidation of Borrower; or Borrower, or any of their directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of Borrower. (h) Aram Keith shall for any reason own less than an aggregate of twenty- five percent (25%) of the common stock of Borrower. SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit accommodation from Bank subject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. ARTICLE VII ----------- MISCELLANEOUS ------------- SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. SECTION 7.2. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address: -13- BORROWER: The Keith Companies, Inc., John M. Tettemer & Associates, Ltd. and ESI, Engineering Services, Inc. 2955 Red Hill Avenue Costa Mesa, CA 92626 BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION Orange Coast RCBO 2030 Main Street, Suite 900 Irvine, CA 92614 or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and the other Loan Documents (to a maximum of $2,000.00), Bank's continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter -14- acquire relating to any credit extended by Bank to Borrower, Borrower or its business, or any collateral required hereunder. SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to any extension of credit by Bank subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only in writing signed by each party hereto. SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. SECTION 7.7. TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents. SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement. SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. SECTION 7.11 JOINT AND SEVERAL LIABILITY. (a) Each Borrower has determined and represents to Bank that it is in its best interests and in pursuance of its legitimate business purposes to induce Bank to extend credit pursuant to this Agreement. Each Borrower acknowledges and represents that its business is related to the business of the other Borrower, the availability of the commitments provided for herein benefits each Borrower, and advances made hereunder will inure to the benefit of Borrowers, individually and as a group. (b) Each Borrower has determined and represents to Bank that it has, and after giving effect to the transactions -15- contemplated by this Agreement will have, assets having a fair saleable value in excess of its debts, after giving effect to any rights of contribution or subrogation which may ultimately be available to such Borrower, and each Borrower has, and will have, access to adequate capital for the conduct of its business and the ability to pay its debts as such debts mature. (c) Each Borrower agrees that it is jointly and severally liable to Bank for, and each Borrower agrees to pay to Bank when due the full amount of, all indebtedness of Borrowers to Bank arising under or in connection with this Agreement, including without limitation all advances disbursed to any or all Borrowers under the Line of Credit, all interest which accrues thereon and all fees, costs and expenses chargeable to Borrowers hereunder. Each Borrower waives any right to require Bank to (1) proceed against any person, including any other Borrower; (2) proceed against or exhaust any security hold from any Borrower or any other person, or (3) disclose any information about any Borrower. Each Borrower waives any defense against its liability to Bank hereunder based upon (1) any defense of any other Borrower, (2) the cessation or limitation from any cause of any indebtedness of any other Borrower to Bank, (3) the lack of authority of any officer, director, agent or other person acting or purporting to act on behalf of any other Borrower or Guarantor, (4) the release of any security for any indebtedness of any Borrower to Bank, (5) the application of payments received by Bank from any other Borrower to indebtedness of such Borrower to Bank unrelated to the Line of Credit, (6) the release of any other Borrower of any liability to Bank, (7) the compromise or modification with any other Borrower of Bank's claims against such Borrower or of such Borrower's indebtedness to Bank, (8) any breach by any other Borrower of any agreement herein or in the other Loan Documents, (9) the invalidity, unenforceability or illegality of this Agreement or any of other Loan Documents as to any other Borrower, or (10) any election of remedies by Bank which adversely affects, impairs or destroys a Borrower's subrogation rights or rights to proceed against any other Borrower for reimbursement. Each Borrower agrees that it will not seek to exercise any rights of contribution which it may have as a matter of law or otherwise as against the other Borrowers hereunder or under any of the other Loan Documents until all indebtedness arising under or in connection herewith shall have been indefeasibly paid in full, and if by law any right of contribution may not be postponed, then such right shall be subordinate to the rights of Bank under this Agreement and the other Loan Documents. Until all indebtedness arising under or in connection with this Agreement shall have been indefeasibly paid in full, no Borrower shall be subrogated in whole or in part to the rights of Bank, and if by law any Borrower is so subrogated, such right shall be subordinate and junior to the rights of Bank hereunder and under the other Loan Documents until the indefeasible payment of all indebtedness arising under or in connection with this Agreement. -16- (d) It is the position of the Borrowers that each Borrower derives significant, substantial and direct benefits from the credit accommodations that have been made available by Bank under this Agreement and from each extension of credit hereunder, regardless of whether such credit is disbursed to a joint account of Borrowers or to or for the account of any Borrower. (e) To the extent Borrowers, or any of them, make a payment or payments to Bank, or Bank receives any collateral proceeds, and such payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, voided or otherwise required to be repaid to Borrowers or any of them, or to their estate, trustee, receiver or any other party, including without limitation, under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of the payment or repayment that has been so set aside, the obligation or indebtedness which had been paid, reduced or satisfied by such payment or repayment shall be reinstated and continue in full force and effect as of the date such payment, reduction or satisfaction occurred. SECTION 7.12. ARBITRATION. (a) Arbitration. Upon the demand of any party, any Dispute shall be ----------- resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) Governing Rules. Arbitration proceedings shall be administered by the --------------- American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Loan Documents. The arbitration shall be conducted at a location in California selected by the AAA or other administrator. If there is any inconsistency between the terms -17- hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. (S)91 or any similar applicable state law. (c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No ---------------------------------------------------------- provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration or reference hereunder. (d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be -------------------------------------------- active members of the California State Bar or retired judges of the state or federal judiciary of California, with expertise (to the extent reasonably practicable, of 10 years or more) in the substantive laws applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of California, (ii) may grant any remedy or relief that a court of the state of California could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. -18- (e) Judicial Review. Notwithstanding anything herein to the contrary, in --------------- any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (i) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of California, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (A) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (B) whether the conclusions of law are erroneous under the substantive law of the state of California. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of California. (f) Real Property Collateral; Judicial Reference. Notwithstanding anything -------------------------------------------- herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (g) Miscellaneous. To the maximum extent practicable, the AAA, the ------------- arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its -19- business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. WELLS FARGO BANK, THE KEITH COMPANIES, INC. NATIONAL ASSOCIATION By: GARY C. CAMPANARO By: STEPHANIE JUNEAU ---------------------- ----------------------------- Title: CFO Title: Assistant Vice President ------------------- -------------------------- JOHN M. TETTEMER & ASSOCIATES, LTD. By: GARY C. CAMPANARO ---------------------- Title: CFO ------------------- ESI, ENGINEERING SERVICES, INC. By: GARY C. CAMPANARO ---------------------- Title: CFO ------------------- -20- EX-10.37 4 FACILITY LEASE DATED JULY 29, 1999 EXHIBIT 10.37 STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--MODIFIED NET AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION [LOGO APPEARS HERE] 1. Basic Provisions ("Basic Provisions"). 1.1 Parties: This Lease ("Lease") dated for reference purposes only, July 29, 1999 is made by and between ASP Scripps, L.L.C. ("Lessor") and The Keith Companies, Inc., a California corporation ("Lessee"), (collectively the "Parties," or individually a "Party"). 1.2(a) Premises: That certain portion of the Building, including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of 2955 Red Hill Avenue, located in the City of Costa Mesa, County of Orange, State of California, with zip code 92626, as outlined on Exhibit __ attached hereto ("Premises"). The "Building" is that certain building containing the Premises and generally described as 16,419 Rentable Square Feet of a larger building commonly known as Suite 100. In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior wells or utility raceways of the Building or to any other buildings in the Industrial Center. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referral to as the "Industrial Center." (Also see Paragraph 2.) See Addendum Paragraph 62. 1.2(b) Parking: 62 unreserved vehicle parking spaces ("Unreserved Parking Spaces"); and 4 reserved vehicle parking spaces ("Reserved Parking Spaces"). (Also see Paragraph 2.6.) See Exhibit B. 1.3 Term: 2 years and 57 days ("Original Term") commencing August 1, 1999 ("Commencement Date") and ending September 26, 2001 ("Expiration Date). (Also see Paragraph 3.) See Addendum Paragraph 49. 1.4 Early Possession: N/A ("Early Possession Date"). (Also see Paragraphs 3.2 and 3.3.) 1.5 Base Rent: $22,165.65 per month ("Base Rent"), payable on the 1st day of each month commencing August 1 , 1999 (Also see Paragraph 4.) [_] If this box is checked, this Lease provides for the Base Rent to be adjusted per Addendum __ attached hereto. 1.6(a) Base Rent Paid Upon Execution: $22,165.65 as Base Rent for the period August 1 through 31, 1999. 1.6(b) Lessee's Share of Common Area Operating Expenses: Seven point two percent (7.2%) ("Lessee's Share") as determined by [_] prorata square footage of the Premises as compared to the total square footage of the Building or [X] other criteria as described in Addendum Paragraph 54. 1.7 Security Deposit: $24,382.22 ("Security Deposit"). (Also see Paragraph 5.) 1.8 Permitted Use: General office ("Permitted Use") (Also see Paragraph 6.) 1.9 Insuring Party: Lessor is the "Insuring Party." (Also see Paragraph 8.) 1.10(a) Real Estate Broker: The following real estate broker(s) (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): [_] _____________________ represents Lessor exclusively ("Lessor's Broker"); [_] _____________________ represents Losses exclusively ("Lessee's Broker"); or [X] CB Richard Ellis, Inc. represents both Lessor and Lessee ("Dual Agency"). (Also see Paragraph 15.) 1.10(b) Payment to Brokers. Upon the execution of this Lease by both Parties, Lessor shall pay to said Broker(s) jointly or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Broker(s) (or in the event there is no separate written agreement between Lessor and said Broker(s), the sum of $______ (per separate agreement) for brokerage services rendered by said Broker(s) in connection with this transaction. 1.11 Guarantor: The obligations of the Lessee under this Lease are to be guaranteed ("Guarantor"). (Also see Paragraph 37.) 1.12 Addenda and Exhibits: Attached hereto is an Addendum or Addenda consisting of Paragraphs 49 through 63 and Exhibits A through C, all of which constitute a part of this Lease. 2. Premises Parking and Common Areas. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the forms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental and/or Common Area Operating Expenses, is an approximation which Lessor and Lessee agree is reasonable and the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, electrical systems, fire sprinkler system, lighting. air conditioning and Page 1 heating systems and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition at the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee, setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. It Lessee does not give Lessor written notice of a non-compliance with this warranty within thirty (30) days after the Commencement Date. Correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 Compliance with Covenants, Restrictions and Building Code. Lessor warrants that any improvements (other than those constructed by Lessee or at Lessee's direction) on or in the Premises which have been constructed or installed by Lessor or with Lessor's consent or at Lessor's direction shall comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Lessor further warrants to Lessee that Lessor has no knowledge of any claim having been made by any governmental agency that a violation or violations of applicable building codes, regulations, or ordinances exist with regard to the Premises as of the Commencement Date. Said warranties shall not apply to any Alterations or Utility Installations (defined in Paragraph 7.3(a)) made at to be made by Lessee. If the Premises do not comply with said warranties, Lessor shall. except as otherwise Provided in this Lease, promptly after receipt of written notice from Lessee given within six (6) months following the Commencement Date and setting forth with specificity this nature and extent of such non-compliance, take such action, at Lessor's expense, as may be reasonable or appropriate to rectify trio non-compliance. Lessor makes no warranty that the Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable Laws (as defined in Paragraph 2.4). 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by the Broker(s) to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, seismic and earthquake requirements, and Compliance with the Americans with Disabilities Act and applicable zoning, municipal, county, state and federal laws, ordinances and regulations and any covenants or restrictions of record (collectively, "Applicable Laws") and the present and future suitability of the Premises for Lessee's intended use: (b) that Lessee has made such investigation as it deems necessary with reference to such matters, is satisfied with reference thereto, and assumes all responsibility therefore as the same relate to Lessee's occupancy of the Premises and/or the terms of this Lease; and (c) that neither Lessor. nor any of Lessor's agents, has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. See Addendum Paragraph 50. 2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in this Paragraph 2 shall be of no force or affect if immediately prior to the date set forth in Paragraph 1.1. Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense correct any non- compliance of the Premises with said warranties. See Addendum Paragraph 53. 2.6 Vehicle Parking. Lessee shall be entitled to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full- size passenger automobiles or pick-up trucks, herein called "Permitted Size Vehicles," Vehicles other than Permitted Size Vehicles shall be parked and loaded or unloaded as directed by Lessor in the Rules and Regulations (as defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.) (a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded unloaded, or parked in areas other than those designated by Lessor for such activities. (b) If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6. then Lessor shall have the right without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. (c) Lessor shall at the Commencement Dale of this Lease, provide the parking facilities required by Applicable Law. 2.7 Common Areas - Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center and interior utility raceways within the Premises that are provided and designated by the Lessor from time to time for the general non- exclusive use of Lessor, Lessee and other lessees of the Industrial Center and their respective employees, suppliers, shippers, customers, contractors and invitees including parking areas, loading and unloading areas, trash, roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.8 Common Areas - Lessee's Rights. Lessor hereby grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease. The non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions Page 2 governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9 Common Areas - Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable Rules and Regulations with respect thereto in accordance with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center. 2.10 Common Areas - Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways: (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available: (c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. If an Early Possession Date is specified in Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the Early Possession Date but prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early occupancy. All other terms of this Lease, however, (including but not limited to the obligations to pay Lessee's Share of Common Area Operating Expenses and to carry the insurance required by Paragraph 8) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 Delay In Possession. If for any reason Lessor cannot deliver possession of the Promises to Lessee by the Early Possession Date, if one is specified in Paragraph 1.4, or if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Promises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date. Lessee may, at its option, by notice in writing to Lessor within ten (10) days after the end of said sixty (60) day period, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the Original Term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to the period during which the Lessee would have otherwise enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent. 4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as the same may be adjusted from time to time, to Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. Page 3 4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share (as specified in Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: (a) "Common Area Operating Expenses" are defined, for purposes of this Lease, as all costs incurred by Lessor relating to the ownership and operation of the Industrial Center, including, but not limited to, the following: (i) The operation, repair and maintenance, in neat, clean, good order and condition, of the following: (aa) The Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities, fences and gates, elevators and root. (bb) Exterior signs and any tenant directories. (cc) Fire detection and sprinkler systems. (ii) The cost of water, gas, electricity and telephone to service the Common Areas. (iii) Trash disposal, property management and security services and the costs of any environmental inspections. (iv) Reserves set aside for maintenance and repair of Common Areas. (v) Real Property Taxes (as defined in Paragraph 10.2) to be paid by Lessor for the Building and the Common Areas under Paragraph 10 hereof. (vi) The cost of the premiums for the insurance policies maintained by Lessor under Paragraph 8 hereof. (vii) Any deductible portion of an insured loss concerning the Building or the Common Areas. (viii) Any other services to be provided by Lessor that are stated elsewhere in this Lease to be a Common Area Operating Expense. See Addendum Paragraph 56 (b) Any Common Area Operating Expenses and Real Property Taxes that are specifically attributable to the Building or to any other building in the Industrial Center or to the operation, repair and maintenance thereof, shall be allocated entirely to the Building or to such other building. However, any Common Area Operating Expenses and Real Property Taxes that are not specifically attributable to the Building or to any other building or to the operation, repair and maintenance thereof, shall be equitably allocated by Lessor to all buildings in the Industrial Center. (c) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Industrial Center already has the same, Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them. (d) Lessee's Share of Common Area Operating Expenses shall be payable by Lessee within ten (10) days after a reasonably detailed statement (the "Statement") of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time of Lessee's Share of annual Common Area Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each 12-month period of the Lease term. On the same day as the Base Rent is due hereunder (the "Estimated Statement"), Lessor shall deliver to Lessee within sixty (60) days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the Common Area Operating Expenses incurred during the preceding year. If Lessee's payments under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as indicated on said statement, Lessee shall be credited the amount of such over payment against Lessee's Share of Common Area Operating Expenses next becoming due. If Lessee's payments under this Paragraph 4.2(d) during said preceding year were less than Lessee's Share as indicated on said statement. Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. (e) See Addendum Paragraph 57 5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefore deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor as an addition to the Security Deposit so that the total amount of the Security Deposit shall at all times bear the same proportion to the then current Base Rent as the initial Security Deposit bears to the initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise Page 4 expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any monies to be paid by Lessee under this Lease. 6. Use. 6.1 Permitted Use. (a) Lessee shall use and occupy the Premises only for the Permitted Use set forth in Paragraph 1.8, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to the Premises or neighboring premises or properties. (b) Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request, by Lessee. Lessee's assignees or subtenants, and by prospective assignees and subtenants of Lessee, its assignees and subtenants, for a modification of said Permitted Use, so long as the same will not impair the structural integrity of the improvements on the Premises or in the Building or the mechanical or electrical systems therein, does not conflict with uses by other lessees, is not significantly more burdensome to the Premises or the Building and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days after such request give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory, Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee shall not engage in any activity in or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Requirements (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and (iii) the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Laws require that a notice be given to persons entering or occupying the Premises or neighboring properties, Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but upon notice to Lessor and in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of the Permitted Use, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to any Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefor, including but not limited to the installation (and, at Lessor's option, removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises or the Building, other than as previously consented to by Lessor, Lessee shall immediately give Lessor written notice thereof, together with a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action, or proceeding given to, or received from, any governmental authority or private party concerning the presence, spill, release, discharge of, or exposure to, such Hazardous Substance including but not limited to all such documents as may be involved in any Reportable Use involving the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including, without limitation, through the plumbing or sanitary sewer system). (c) Indemnification. Lessee shall indemnity, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultants' and attorneys' fees Page 5 and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Requirements," which term is used in this Lease to mean all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill, or release of any Hazardous Substance), now in effect or which may hereafter come into effect. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including but not limited to permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Requirements. 6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees, contractors and designated representatives, and the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to employ experts and/or consultants in connection therewith to advise Lessor with respect to Lessee's activities, including but not limited to Lessee's installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease by Lessee or a violation of Applicable Requirements or a contamination, caused or materially contributed to by Lessee, is found to exist or to be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities specifically serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire hose connections if within the Premises, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights, but excluding any items which are the responsibility of Lessor, pursuant to Paragraph 7.2 below. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain a contract, with copies to Lessor, in customary form and substance for and with a contractor specializing and experienced in the inspection, maintenance and service of the heating, air conditioning and ventilation system for the Premises. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain the contract for the heating, air conditioning and ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the cost thereof. (c) If Lessee fails to perform Lessee's obligations under this Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf, and put the Premises in good order, condition and repair, in accordance with Paragraph 13.2 below. 7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good Page 6 order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (if located in the Common Areas) or other automatic fire extinguishing system including fire alarm and/or smoke detection systems and equipment, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace windows, doors or plate glass of the Premises. Lessee expressly waives the benefit of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessors expense or to terminate this Lease because of Lessor's failure to keep the Building, Industrial Center or Common Areas in good order, condition and repair. 7.3 Utility Installations, Trade Fixtures, Alterations. (a) Definitions; Consent Required. The term "Utility Installations" is used in this Lease to refer to all air lines, power panels, electrical distribution, security, tire protection systems, communications systems, lighting fixtures, heating, ventilating and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment which can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification, of the improvements on the Premises which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures. "Lessee-Owned Alterations end/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be made any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non- structural Utility Installations to the interior of the Premises (excluding the roof) without Lessor's consent but upon notice to Lessor, so long as they are not visible from the outside of the Premises, do not involve puncturing, relocating or removing the roof or any existing walls, or changing or interfering with the fire sprinkler or fire detection Systems and the cumulative cost thereof during the term of this Lease as extended does not exceed $15,000.00. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities; (ii) the furnishing of copies of such permits together (with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon; and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and be in compliance with all Applicable Requirements. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may, (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000.00 or more upon Lessee providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration Utility Installation. See Addendum Paragraph 58. (c) Lien Protection. Lessee shall pay when due all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on, or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense, defend and protect itself. Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 Ownership, Removal, Surrender, and Restoration. (a) Ownership. Subject to Lessor's right to require their removal and to cause Lessee to become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Installations made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee-Owned Alterations and Utility Installations. Unless otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon the Premises and be surrendered with the Premises by Lessee. Page 7 (b) Removal. Unless otherwise agreed in writing, Lessor may require that any or all Lessee-Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding that their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Alterations or Utility Installations made without the required consent of Lessor. (c) Surrender/Restoration. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. Ordinary wear and tear shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified herein, the Premises, as surrendered, shall include the Alterations and Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Lessee-Owned Alterations and Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Requirements and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance; Indemnity. 8.1 Payment of Premiums. The cost of the premiums for the insurance policies maintained by Lessor under this Paragraph 8 shall be a Common Area Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement Date or Expiration Date. 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in writing (as additional insureds) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" endorsement and contain the "Amendment of the Pollution Exclusion" endorsement for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "Insured Contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried by Lessor. Lessor shall also maintain liability insurance described in Paragraph 8.2(a) above, in addition to and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance-Building, Improvements and Rental Value. (a) Building and Improvements. Lessor shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to any Lender(s), insuring against loss or damage to the Premises. Such insurance shall be for full replacement cost, as the same shall exist from time to time, or the amount required by any Lender(s), but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Lessee-Owned Alterations and Utility Installations, Trade Fixtures and Lessee's personal property shall be insured by Lessee pursuant to Paragraph 8.4, if the coverage is available and commercially appropriate, Lessor's policy or policies shall insure against all risks of direct physical loss of damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Building required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered loss, but not including plate glass insurance. Said policy or policies shall also contain an agreed valuation provision in lieu of any co-insurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. (b) Rental Value. Lessor shall also obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor with, loss payable to Lessor and any Lender(s), insuring the loss of the full rental and other charges payable by all lessees of the Building to Lessor for one year including all Real Property Taxes, insurance costs, all Common Area Operating Expenses and any scheduled rental increases). Said insurance may provide that in the event the Lease is Page 8 terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs of replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any co-insurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income. Real Property Taxes, insurance premium costs and other expenses, if any, otherwise payable, for the next 12-month period. Common Area Operating Expenses shall include any deductible amount in the event of such loss. (c) Adjacent Premises. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas of other buildings in the Industrial Center if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee-Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and Utility installations in, on, or about the Premises similar in coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance shall be full replacement cost coverage with a deductible not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property and the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility installations. Upon request from Lessor, Lessee shall provide Lessor with written evidence that such insurance is in force. 8.5 Insurance Policies. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7) days after the earlier of the Early Possession Date or the Commencement Date, certified copies of, or certificates evidencing the existence and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to modification except after thirty (30) days' prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss or damage to their property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. Lessor and Lessee agree to have their respective insurance companies issuing property damage insurance waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 Indemnity. Except for Lessor's negligence breach of this Lease and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, loss of permits, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or fighting fixtures, or from any other cause, whether said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Page 9 Lessor shall not be liable for any damages arising from any act or neglect of any other lessee of Lessor nor from the failure by Lessor to enforce the provisions of any other lease in the Industrial Center. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than fifty percent (50%) of the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. In addition, damage or destruction to the Building, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building, the cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building) of the Building shall, at the option of Lessor, be deemed to be Premises Total Destruction. (c) "Insured Loss" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 Premises Partial Damage - Insured Loss. If Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. In the event, however, that there is a shortage of insurance proceeds and such shortage is due to the fact that, by reason of the unique nature of the improvements in the Premises, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, Lessor shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within such ten (10) day period, and if Lessor does not so elect to restore and repair, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 Partial Damage - Uninsured Loss. If Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect), Lessor may at Lessor's option, either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following such commitment from Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after Page 10 the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, if Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 9.7. 9.5 Damage Near End of Term. If at any time during the last three (3) months of the term of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by (a) exercising such option, and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten (10) days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate as of the date set forth in the first sentence of this Paragraph 9.5. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of (i) Promises Partial Damage or (ii) Hazardous Substance Condition for which Lessee is not legally responsible, the Base Rent, Common Area Operating Expenses and other charges, if any, payable by Lessee hereunder for the period during which such damage or condition, its repair, remediation or restoration continues, shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not in excess of proceeds from insurance required to be carried under Paragraph 8.3(b). Except for abatement of Base Rent, Common Area Operating Expenses and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair, remediation or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after the receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph 9.6 shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever occurs first. 9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(c) and Paragraph 13). Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000 whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the excess costs of (a) investigation and remediation of such Hazardous Substance Condition to the extent required by Applicable Requirements, over (b) an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee of satisfactory assurance thereof within thirty (30) days following said commitment by Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required Page 11 funds or assurance thereof within the time period specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.8 Termination - Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment made by Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Promises and the Building with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent it is inconsistent herewith. 10. Real Property Taxes. 10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Industrial Center, and except as otherwise provided in Paragraph 10.3, any such amounts shall be included in the calculation of Common Area Operating Expenses in accordance with the provisions of Paragraph 4.2. 10.2 Real Property Tax Definition. As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Industrial Center by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage, or other improvement district thereof, levied against any "at or equitable interest of Lessor in the Industrial Center or any portion thereof, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in Applicable Law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Industrial Center or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common. 10.3 Additional Improvements. Common Area Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial Center by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to Lessor at the time Common Area Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Promises by Lessee or at Lessee's request. 10.4 Joint Assessment. If the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or stored within the Industrial Center. When possible, Lessee shall cause its Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. Utilities. Lessee shall pay directly for all utilities and services supplied to the Premises, including but not limited to electricity, telephone, security, gas and cleaning of the Premises, together with any taxes thereon. If any such utilities or services are not separately metered to the Premises or separately billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be determined by Lessor of all such charges jointly metered or billed with other premises in the Building, in the manner and within the time periods set forth in Paragraph 4.2(d). 12. Assignment and Subletting. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. Page 12 (c) See Addendum Paragraph 59 (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1, or a non-curable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a non-curable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days' written notice ("Lessor's Notice"), increase the monthly Base Rent for the Premises to the greater of the then fair market rental value of the Premises, as reasonably determined by Lessor, or one hundred ten percent (110%) of the Base Rent then in effect. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value as reasonably determined by Lessor (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition) or one hundred ten percent (110%) of the price previously in effect, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the now rental bears to the Base Rent in effect immediately prior to the adjustment specified in Lessor's Notice. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment or subletting shall not (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, nor (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent for performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to Any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the assignee or sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable under this Lease or the sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or the sublease. (d) In the event of any Default or Breach of Lessee's obligation under this Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of the Lessee's obligations under this Lease, including any sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment of sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) See Addendum Paragraph 51 (h) See Addendum Paragraph 51 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: Page 13 (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease, Lessor shall not, by reason of the foregoing provision or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against such sublessee, or, until the Breach has been cured against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior defaults or breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee under a sublease approved by Lessor shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 13.1 Default; Breach. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default for Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said default. A "Default" by Lessee is defined as a failure by Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" by Lessee is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.1 (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent, Lessee's Share of Common Area Operating Expenses, or any other monetary payment required to be made by Lessee hereunder as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of seven (7) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that are to be observed, complied with or performed by Lessee, other than those described in Subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that it the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Page 14 Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events; (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a debtor, as defined in 11 U.S. Code Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this Subparagraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect, and shall not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement of Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed; (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurances of security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its own option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided: and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District in which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph 13.2. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under Subparagraph 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by Subparagraph 13.1(b), (c) or (d). In such case, the applicable grace period under the unlawful detainer statue shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two (2) such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. Page 15 (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. Lessor and Lessee agree that the limitations on assignment and subletting in this Lease are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under this Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture In Event of Breach. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions" shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor, as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or deed of trust covering the Premises. Accordingly, if any installment of rent or other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. See Addendum Paragraph 60. 13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by any Lender(s) whose name and address shall have been furnished to Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. See Addendum Paragraph 61. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the portion of the Common Areas designated for Lessee's parking, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice, of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the Premises. No reduction of Base Rent shall occur if the condemnation does not apply to any portion of the Premises. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as Page 16 compensation for diminution of value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above Lessee's Share of the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. Brokers' Fees. 15.1 (Paragraph Deleted) 15.2 (Paragraph Deleted) 15.3 (Paragraph Deleted) 15.4 Representations and Warranties. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder other than as named in Paragraph 1.10(a) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Broker(s) is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, and/or attorneys' fees reasonably incurred with respect thereto. 16. Tenancy and Financial Statements. 16.1 Tenancy Statement. Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in a form similar to the then most current "Tenancy Statement" form Published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 Financial Statement. If Lessor desires to finance, refinance, or sell the Premises or the Building, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15.3, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within ten (10) days following the date on which it was due, shall bear interest from the date due at the prime rate charged by the largest State chartered bank in the state in which the Premises are located plus four percent (4%) per annum, but not exceeding the maximum rate allowed by law, in addition to the potential late charge provided for in Paragraph 13.4. 20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease 21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. No Prior or other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. Each Broker shall be an intended third party beneficiary of the provisions of this Paragraph 22. 23. Notices. Page 17 23.1 Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission during normal business hours, and shall be deemed sufficiently given it served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises. The Premises shall constitute Lessee's address to, the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such Party or Parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail, the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone or facsimile confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday or a Sunday or a legal holiday, it shall be deemed received on the next business day, 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or any other term, covenant or condition hereof. Lessor's consent to, or approval of, any such act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of any provision hereof. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or affect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. In the event that Lessee holds over in violation of this Paragraph 26 then the Base Rent payable from and after the time of the expiration or earlier termination of this Lease shall be increased to one hundred fifty (150%) percent of the Base Rent applicable during the month immediately preceding such expiration or earlier termination. Nothing contained herein shall be construed as a consent by Lessor to any holding over by Lessee. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. See Addendum Paragraph 55. 30.1 (Paragraph Deleted) 30.2 (Paragraph Deleted) 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "non-disturbance agreement") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. Page 18 31. Attorneys' Fees. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. Lessor shall be entitled to attorneys' fees, costs and expenses incurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. Broker(s) shall be intended third party beneficiaries of this Paragraph 31. 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable time upon reasonably prior written notice for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, and/or repairs, improvements or additions to the Premises or to the Building, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Building any ordinary "For Sale" and/or "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. See Addendum Paragraph 60 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. Signs. Lessee shall not place any sign upon the exterior of the Premises or the Building, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business so long as such signs are in a location designated by Lessor and comply with Applicable Requirements and the signage criteria established for the Industrial Center by Lessor. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof of the Building, and the right to install advertising signs on the Building, including the roof, which do not unreasonably interfere with the conduct of Lessee's business; Lessor shall be entitled to all revenues from such advertising signs. See Addendum Paragraph 52 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other party, such consent shall not be unreasonably withhold or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent Pertaining to this Lease or the Premises, including but not limited to consents to an assignment a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. In addition to the deposit described in Paragraph 12.2(e), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the impositions by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. Guarantor. Page 19 37.1 Form of Guaranty. If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this lease, including but not limited to the obligation to provide the Tenancy Statement and information required in Paragraph 16. 37.2 Additional Obligations of Guarantor. It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and the performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. Options - (section deleted). See Addendum Paragraph 63. 40. Rules and Regulations. Lessee agrees that it will abide by, and keep and observe all reasonable rules and regulations ("Rules and Regulations") which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Industrial Center and their invitees. 41. Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises. Lessee, its agents and invitees and their property from the acts of third parties. 42. Reserved. Lessor reserves the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights of way, utility raceways, and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights of way, utility raceways, dedications, main and restrictions do not reasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably, requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. Authority. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents, and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, if (30) days after request by Lessor, deliver to Lessee evidence satisfactory to Lessor of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's agent or Lessee's agent and submission of same to Lessee or Lessor shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The Parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder. Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional insurance company or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. Multiple Parties. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligation of such parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO, THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS Page 20 OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES: THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the Place and on the dates specified above their respective signatures. Executed at: Executed at: ------------------------- ---------------------------- on: on: ---------------------------------- ------------------------------------- By LESSOR: By LESSEE: ASC Scripps, L.L.C. The Keith Companies - ------------------------------------- ---------------------------------------- By: /s/ SCOTT R. FITZGERALD By: /s/ ERIC C. NIELSEN ---------------------------------- ------------------------------------- Name Printed: Scott R. Fitzgerald Name Printed: Eric C. Nielsen ------------------------ --------------------------- Title: Vice President Title: President ------------------------------- ---------------------------------- By: By: /s/ GARY CAMPANARO ---------------------------------- ------------------------------------- Name Printed: Name Printed: Gary Campanaro ------------------------ --------------------------- Title: Title: Secretary ------------------------------- ---------------------------------- Address: Address: 2955 Red Hill Avenue, Suite 200 ----------------------------- -------------------------------- Costa Mesa, CA 92626 - ------------------------------------- ---------------------------------------- Page 21 EX-10.38 5 ADDENDUM TO FACILITY LEASE DATED JULY 29, 1999 EXHIBIT 10.38 ADDENDUM TO THAT CERTAIN CERTAIN LEASE DATED JULY 29, 1999 BY AND BETWEEN ASP SCRIPPS, L.L.C. ("LESSOR") AND THE KEITH COMPANIES, INC. ("LESSEE") Any language contained within this Addendum shall supersede any conflicting language within the body of the Lease. 49. Notwithstanding Paragraph 1.3 of the Lease, the Lessor retains the right to cancel this Lease by providing Lessee with at least six months written notice prior to the effective date of said cancellation (the "Cancellation Date"). Said right of cancellation may be exercised if and only if the lessee under that certain lease between Canon Computer System, Inc., a California corporation, as lessee (the "Expansion Lessee"), and Lessor. as lessor, dated May 21, 1993 (the "Expansion Lease"), validly exercises its right to lease the Premises pursuant to the Expansion Lease. Lessor hereby agrees that the Cancellation Date shall be within the period which is thirty (30) days prior to the date that Lessor is to deliver the Premises to the Expansion Lessee. In any event, the earliest date for the Cancellation Date is August 27, 2000. 50. Notwithstanding Paragraph 2.4, Acceptance of Premises, Lessee acknowledges to Lessor that it accepts the Premises in its "as-is" condition, except as specifically provided otherwise in this Lease. Lessor acknowledges that Lessee currently has an amount equal to Eighteen Thousand Eight Hundred Sixty-Three and 59/100 Dollars ($18,863.59) (the "Allowance") in the aggregate available for the costs incurred by Lessee to construct Lessee- Owned Alterations and/or Utility Installations in the Premises. Lessor shall disburse the Allowance in accordance with Lessor's standard disbursement procedure, which procedure includes, without limitation, the requirements that (a) Lessee deliver to Lessor (i) invoices marked as having been paid for work performed and materials delivered in connection with the Lessee-Owned Alterations and/or Utility Installations, and (ii) properly executed mechanics lien releases in compliance with California Civil Code Section 3262(d)(2) and either Section 3262(d)(3) or Section 3262(d)(4), (b) Lessor has determined that no substandard work exists which adversely affects the mechanical, electrical, plumbing, heating, ventilating and air conditioning, life-safety or other systems of the Building, the curtain wall of the Building, the structure or exterior appearance of the Building, or any other lessee's use of such other lessee's leased premises in the Building and (c) Lessee's architect, if applicable, delivers to Lessor a certificate, in a form reasonably acceptable to Lessor, certifying that the construction of the Lessee-Owned Alterations and/or Utility Installations in the Premises has been completed, and (d) any other documentation reasonably requested by Lessor. Any Lessee-Owned Alterations and/or Utility Installations proposed by Lessee shall be subject to Paragraph 7.3 of the Lease. 51. Notwithstanding Paragraph 12 of the Lease, as a condition to giving Lessor's consent to an assignment or sublease, which condition the parties hereby agree is reasonable, Lessee shall pay to Lessor any "Transfer Premium," as that term is defined hereinbelow, received by Lessee in connection with any such assignment or sublease. "Transfer Premium" shall mean all base rent, additional rent or other consideration payable by such assignee, sublessee or other transferee in excess of the Base Rent and all other rent and charges, including but not limited to Common Area Operating Expenses and Real Property Taxes, payable by Lessee under this Lease on a per rentable square foot basis if less than all of the Premises is transferred, after deducting the reasonable expenses incurred by Lessee for (i) changes, alterations and improvements to the Premises in connection with such transfer (ii) brokerage commissions in connection with such transfer, and (iii) free base rent reasonably provided in connection with the transfer. The Transfer Premium shall also include, but not be limited to, key money, bonus money or other cash consideration paid by such assignee, sublessee or other transferee to Lessee in connection with such transfer, and any payment in excess of fair market value for services rendered by Lessee to such assignee, sublessee or other transferee or for assets, fixtures, inventory, equipment or furniture transferred by Lessee to such assignee, sublessee, or other transferee in connection with such transfer. The determination of the amount of the Transfer Premium shall be made on a monthly basis as rent or other consideration is received by Lessee in connection with the transfer. 52. Pursuant to Paragraph 34 of the Lease, Lessee shall be entitled to keep its current building signage, provided the Lease is not cancelled pursuant to the terms of this Lease and Lessee remains in possession of at least 45,000 square feet of the 2955 Red Hill Building. In any event, Lessee shall be responsible to remove said sign(s) and repair any and all damage to the Building caused by such removal, when vacating the Premises. 53. Notwithstanding Paragraph 2.3 of the Lease to the contrary, Lessor shall comply with all laws, statutes, ordinances or other governmental rules, regulations or requirements in force as of the Commencement Date (collectively, "Applicable Laws") relating to the "Base Building," as that term is defined hereinbelow, and the Common Areas, provided such compliance is not the responsibility of the Lessee under this Lease, and further provided that Lessor's failure to comply therewith would (a) prohibit Lessee from (i) obtaining or maintaining a certificate of occupancy for the Premises, or (ii) obtaining a building permit from the City of Costa Mesa Department of Building and Safety for Alterations proposed by Lessee, which Alterations have otherwise been approved by Lessor and are for general office use (not for Lessee's particular use of the Premises for non-general office use), or would unreasonably and materially affect the safety of Lessee's employees or create a significant health hazard for Lessee's employees. Lessee, at its sole cost and expense, shall comply with all such Applicable Laws in force as of the Commencement Date which relate to (i) Lessee's use of the Premises for non-general office use, (ii) the Alterations, Utility Installations, or presently existing tenant improvements in the Premises, or (iii) the Base Building, but as to the Base Building, only to the extent such obligations are triggered by Lessee's Alterations, Utility Installations, or tenant improvements which are related to Lessee's particular use of the Premises for other than general office use, or Lessee's use of the Premises for non-general office use. Lessor shall be permitted to include in Common Area Operating Expenses any costs or expenses incurred by Lessor hereunder, but only to the extent consistent with the terms of Paragraph 4.2 of this Lease. The "Base Building" shall include the structural portions of the Building and the public restrooms and the systems and equipment located in the internal core of the Building on the floor or floors on which the Premises are located. 54. Pursuant to Paragraph 1.6(b) the project, commonly known as Scripps Center consists, of three (3) freestanding buildings totaling 229,226 square feet. 55. Paragraph 30 (30.1 and 30.2) shall be replaced by the following: SUBORDINATION AND ATTORNMENT: Lessee acknowledges that this Lease is subject and subordinate to all leases in which Lessor is lessee and to any mortgage or deed of trust now in force against the Building and to all advances made or hereafter to be made thereunder, or any amendments or modifications thereof, and shall be subordinate to any future leases in which Lessor is lessee and to any future mortgage or deed of trust hereafter in force against the Building and to all advances made or hereafter to be made thereunder (all such existing and future leases, mortgages and deeds of trust referred to collectively as "Superior Instruments"). Lessee also agrees that if the holder of any Superior Instrument -2- elects to have this Lease superior to its Superior Instrument and gives notice of its election to Lessee, then this Lease shall be superior to the lien of any such lease, mortgage or deed of trust and all renewals, replacements and extensions thereof, whether this Lease is dated before or after such lease, mortgage or deed of trust. If requested in writing by Lessor or any first mortgagee or ground lessor of Lessor, Lessee agrees to execute a subordination agreement required to further affect the provisions of this paragraph. Lessor shall provide Lessee with a subordination, non- disturbance and attornment agreement in substantially the form attached hereto as Exhibit C from Lessor's presently existing lender holding a first deed of trust on the Building. In the event of any transfer in lieu of foreclosure or termination of a lease in which Lessor is lessee or the foreclosure of any Superior Instrument, or sale of the Property pursuant to any Superior Instrument, Lessee shall attorn to such purchaser, transferee or lessor and recognize such party as Lessor under this Lease, provided such party acquires and accepts the Premises subject to this Lease. The agreement of Lessee attorn contained in the immediately preceding sentence shall survive any such foreclosure sale or transfer. 56. 4.2(a)(ix) The cost of any capital improvements or other costs (I) which are intended as a labor-saving device or to effect other economies in the operation or maintenance of the Building or any portion thereof to the extent of the reduction in Common Area Operating Expenses reasonably anticipated by the Lessor at the time of such expenditure to be incurred in connection therewith, or (II) made to the Building after the Commencement Date that are required under any governmental law or regulation, except for capital improvements or costs to remedy a condition existing as of the Commencement Date which a federal, state or municipal governmental authority, if it had knowledge of such condition as of the Commencement Date, would have then required to be remedied pursuant to governmental laws or regulations in their form existing as of the Commencement Date; provided, however, that any such capital expenditure shall be amortized (including interest on the unamortized cost) over its reasonable useful life. Notwithstanding the foregoing, except as set forth in item (ix), above, the costs of capital repairs and alterations shall not, for purposes of this Lease, be included in Operating Expenses. 57. 4.2(e) Within one (1) year after receipt of a Statement by Lessee, if Lessee disputes the amount of Common Area Operating Expenses set forth in the Statement, an independent certified public accountant (which accountant is a member of a regionally recognized accounting firm, has previous experience in reviewing financial operating records of lessors of office buildings, and is retained by Lessee on a non-contingency fee basis), designated and paid for by Lessee, may, after reasonable notice to Lessor and at reasonable times, inspect Lessor's records with respect to the Statement at Lessor's offices, provided that Lessee is not then in default under this Lease and Lessee has paid all amounts required to be paid under the applicable Estimated Statement and Statement, as the case may be. In connection with such inspection, Lessee and Lessee's agents must agree in advance to follow Lessor's reasonable rules and procedures regarding inspections of Lessor's records, and shall execute a commercially reasonable confidentiality agreement regarding such inspection. Lessee's failure to dispute the amount of Common Area Operating Expenses set forth in any Statement within one (1) year following Lessee's receipt of such Statement shall be deemed to be Lessee's approval of such Statement and Lessee, thereafter, waives the right or ability to dispute the amounts set forth in such Statement. If after such inspections, Lessee still disputes such Common Area Operating Expenses, a determination as to the proper amount shall be made, at Lessee's expense, by an independent certified public accountant (the "Accountant") selected by Lessor and subject to Lessee's reasonable approval; provided that if such certification by the Accountant proves that Common Area Operating Expenses were overstated by more than five percent -3- (5.0%), then the cost of the Accountant and the cost of such determination certification shall be paid for by Lessor. Any reimbursement amounts determined to be owing by Lessor to Lessee or by Lessee to Lessor shall be (i) in the case of amounts owing from Lessee to Lessor, paid within thirty (30) days following such determination, and (ii) in the case of amounts owing from Lessor to Lessee, credited against the next payments of Base Rent due Lessor under the terms of this Lease, or if the Term has expired, paid to Lessee within thirty (30) days following such determination. In no event shall this Paragraph 57 be deemed to allow any review of any of Lessor's records by any sublessee of Lessee. Lessee agrees that this Paragraph 57 shall be the sole method to be used by Lessee to dispute the amount of any Common Area Operating Expenses payable or not payable by Lessee pursuant to the terms of this Lease, and Lessee hereby waives any other rights at law or in equity relating thereto. 58. Notwithstanding anything in Paragraph 7.3(b) to the contrary, for purposes of the original Lessee named in this Lease (the "Original Lessee") only, Lessor may (but without the obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $25,000.00 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation. 59. 12.1(c) Notwithstanding the provisions of this Paragraph 12 or elsewhere in the Lease, Lessee may assign or sublet the Premises without Lessor's consent, to any entity which controls, is controlled by, or is under common control with Lessee, or to any corporation or entity resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all or substantially all of the assets of Lessee as a going concern of the business that is being conducted on the Premises, or in connection with an initial public offering of Lessee or Lessee's subsequently going private (collectively, "Affiliates"); provided that (i) said assignee or sublessee shall assume in full the obligations of Lessee under this Lease, (ii) Lessor shall be given a minimum of ten (10) days prior written notice of such transaction, (iii) Lessee promptly supplies to Lessor any documents or information reasonably requested by Lessor regarding such assignment or sublease or such affiliate (excluding any documentation regarding the economic terms of the merger or sale transaction, but including documentation regarding the assignment or subletting), and (iv) such assignment or sublease is not a subterfuge by Lessee to avoid its obligations under this Lease. Any such assignment, subletting or transfer shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease, unless Lessor specifically releases the original named Lessee from said liability. "Control," as used in this Paragraph 12.1(c), shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person or entity, whether by ownership of voting securities, by contract, or otherwise. 60. Notwithstanding anything in this Paragraph 13.4 to the contrary, with regards to the first late payment only, if any, by Lessee during the Term, Lessor shall provide to Lessee a one time written notice (the "Late Notice") that the installment of rent or other sum due from Lessee has not been received by Lessor, and if such sum is not received by Lessor from Lessee within five (5) business days of such Late Notice, then, without any requirement for any further notice to Lessee, Lessee shall pay to Lessor a late charge as set forth in Paragraph 13.4. 61. Rent Abatement. Notwithstanding anything in this Lease to the contrary, in -------------- the event that Lessee is prevented from using, and does not use, the Premises or any portion thereof, as a result of (i) any repair, maintenance or alteration performed by Lessor, or which Lessor failed to perform after the Lease Commencement Date and required by this Lease, which substantially interferes with Lessee's use of the Premises, or (ii) any failure of Lessor to provide any services, utilities or access to the Premises, or (ii) any failure of Lessor to provide an services, utilities or access to the Premises (either such set of circumstances set forth in items (i) or (ii) above, to be known as an "Abatement Event"), then Lessee shall give Lessor notice of -4- such Abatement Event, and if such Abatement Event continues for three (3) consecutive business days after Lessor's receipt of any such notice (the "Eligibility Period"), then the Base Rent and Lessee's Share of Common Area Operating Expenses and Lessee's obligation to pay for parking shall be abated or reduced, as the case may be, after expiration of the Eligibility Period for such time that Lessee continues to be so prevented from using, and does not use, the Premises or a portion thereof, in the proportion that the rentable area of the portion of the Premises that Lessee is prevented from using, and does not use, bears to the total rentable area of the Premises. If, however, Lessee reoccupies any portion of the Premises during such period, the rent allocable to such reoccupied portion, based on the proportion that the rentable area of such reoccupied portion of the Premises bears to the total rentable area of the Premises, shall be payable by Lessee from the date Lessee reoccupies such portion of the Premises. Such right to abate Base Rent and Lessee's Share of Common Area Operating Expenses shall be Lessee's sole and exclusive remedy at law or in equity for an Abatement Event. Except as provided in this Paragraph 61, nothing contained herein shall be interpreted to mean that Lessee is excused from paying rent due hereunder. 62. Right of First Offer. Lessor hereby grants to the Original Lessee and its -------------------- Affiliates an ongoing right of first offer with respect to any space located on the ground floor of the Building which is not part of the Premises (the "First Offer Space"). Notwithstanding the foregoing, such first offer right of Lessee shall be subordinate to the expansion rights of the Expansion Lessee set forth in the Expansion Lease (the "Expansion Rights"), regardless of whether such expansion rights are executed strictly in accordance with their terms, or pursuant to a lease amendment or a new lease (the "Superior Right Holder") with respect to such First Offer Space. Lessee's right of first offer shall be on the terms and conditions set forth in this Paragraph 62. ------------ 62.1 Procedure for Offer. Lessor shall notify Lessee (the "First Offer ------------------- Notice") from time to time when the First Offer Space or any portion thereof becomes available for lease to third parties, subject to the rights of the Superior Right Holder. Pursuant to such First Offer Notice, Lessor shall offer to lease to Lessee the then available First Offer Space. The First Offer Notice shall describe the space so offered to Lessee and shall set forth the "First Offer Rent," as that term is defined in Paragraph 62.3 ---- below, and the other economic terms upon which Lessor is willing to lease such space to Lessee. 62.2 Procedure for Acceptance. If Lessee wishes to exercise Lessee's right ------------------------ of first offer with respect to the space described in the First Offer Notice, then within five (5) business days of delivery of the First Offer Notice to Lessee, Lessee shall deliver notice to Lessor of Lessee's intention to exercise its right of first offer with respect to the entire space described in the First Offer Notice on the terms contained in such notice. If Lessee does not so notify Lessor within the five (5) business day period, then Lessor shall be free to lease the space described in the First Offer Notice to anyone to whom Lessor desires on any terms Lessor desires. Notwithstanding anything to the contrary contained herein, Lessee must elect to exercise its right of first offer, if at all, with respect to all of the space offered by Lessor to Lessee at any particular time, and Lessee may not elect to lease only a portion thereof. 62.3 First Offer Space Rent. The rent payable by Lessee for the First Offer ---------------------- Space (the "First Offer Rent") shall be equal to the rent (including additional rent), including all escalations, at which lessees, as of the "First Offer Commencement Date," as that term is defined in Paragraph 62.5, ---- below, are leasing non-sublease, non-encumbered, non-equity, non-renewal space comparable in size, location and quality to the First Offer Space for a similar lease term, which comparable space is located in the Industrial center, taking into consideration the following concessions (the "First Offer Concessions"): (a) rental abatement concessions, if -5- any, being granted such lessees in connection with such comparable space, (b) tenant improvements or allowances provided or to be provided for such comparable space, taking into account, and deducting the value of, the existing improvements in the First Offer Space, such value to be based upon the age, quality and layout of the improvements and the extent to which the same could be utilized by a general office user, and (c) any period of rental abatement, if any, granted to lessees in comparable transactions in connection with the design, permitting and construction of tenant improvements in such comparable spaces; provided, however, that in calculating the First Offer Rent, no consideration shall be given to the fact that Lessor is or is not required to pay a real estate brokerage commission in connection with Lessee's lease of the First Offer Space or the fact that Lessor is or is not paying real estate brokerage commissions in connection with such comparable space. If there are not a sufficient number of deals with a comparable lease term at which lessees as of the First Offer Commencement Date are leasing comparable space in the Industrial Center, then Lessor shall look at deals in the Industrial Center at which lessees as of the First Offer Commencement Date are leasing comparable space for a period of five (5) years, and the Concessions shall be prorated on a fractional basis, with the numerator being the number of months of the term of Lessee's lease of the First Offer Space, and the denominator being the number of months in the term of those leases upon which the determination of the First Offer Rent is being based. 62.4 Construction In First Offer Space. Lessee shall take the First Offer --------------------------------- Space in its "as is" condition, and the construction of improvements in the First Offer Space shall comply with the terms of Paragraph 7 of this Lease. 62.5 Amendment to Lease. If Lessee timely exercises Lessee's right to lease ------------------ the First Offer Space as set forth herein, Lessee shall within fifteen (15) days after receipt of an amendment to this Lease from Lessor, execute the same, which amendment shall be upon the terms and conditions as set forth in the First Offer Notice and this Paragraph 62. Lessee shall commence ------------ payment of rent for the First Offer Space, and the term of Lessee's lease of the First Offer Space shall commence upon the date of delivery of the First Offer Space to Lessee (the "First Offer Commencement Date") and shall expire coterminously with the expiration or earlier termination of this Lease. 62.6 Termination of Right of First Offer. The rights contained in this ----------------------------------- Paragraph 62 shall be personal to the Original Lessee and its Affiliates, ------------ and may only be exercised by the Original Lessee and/or its Affiliates (and not any other assignee, sublessee or transferee of the Original Lessee's interest in the Lease) if the Original Lessee and/or its Affiliates occupies the entire Premises. Lessee shall not have the right to lease First Offer Space, as provided in this Paragraph 62, if, as of the date of the attempted exercise of any right of first offer by Lessee, or, at Lessor's option, as of the scheduled date of delivery of such First Offer Space to Lessee, Lessee is in default under this Lease beyond the applicable cure period provided in the Lease or Lessee has previously been in default under this Lease beyond the applicable cure period provided in this Lease more than once. 63. Option Term. ----------- 63.1 Option Right. Lessor hereby grants to the Original Lessee and/or its ------------ Affiliates one (1) option to extend the Original Term for this Lease through October 30, 2003 (the "Option Term"), which option shall be exercisable only by written notice delivered by Lessee to Lessor as provided below, provided that, as of the date of delivery of such notice, Lessee is not in default under this Lease beyond any applicable cure period set forth in the Lease, and Lessee has not previously been in default under this Lease beyond any applicable cure period set forth in the Lease more than once. Notwithstanding the foregoing, this option right shall be subordinate to the Expansion Rights of the Superior Right Holder, regardless of whether such rights are executed strictly in accordance with their -6- terms, or pursuant to a lease amendment or a new lease. Upon the proper exercise of such option to extend, and provided that, at Lessor's option, as of the end of the Original Term, Lessee is not in default under the Lease beyond any applicable cure period set forth in the Lease, and Lessee has not previously been in default under the Lease beyond any applicable cure period set forth in the Lease more than once, the Original Term, as it applies to the Premises, shall be extended through October 30, 2003. The rights contained in this Paragraph 63 shall be personal to the Original Lessee and its Affiliates and may only be exercised by the Original Lessee and/or its Affiliates (and not any other assignee, sublessee or transferee of the Original Lessee's interest in the Lease) if the Original Lessee and/or its Affiliates occupies the entire Premises. 63.2 Option Rent. The rent payable by Lessee during the Option Term (the ----------- "Option Rent") shall be equal to the rent, including all escalations, at which lessees, as of the commencement of the Option Term, are leasing non- sublease, non-encumbered, non-equity, non-renewal space comparable in size, location and quality to the Premises for a similar lease term, which comparable space is located in the Industrial Center, taking into consideration the following concessions (the "Concessions"): (a) rental abatement concessions, if any, being granted such lessees in connection with such comparable space, (b) tenant improvements or allowances provided or to be provided for such comparable space, taking into account, and deducting the value of, the existing improvements in the Premises, such value to be based upon the age, quality and layout of the improvements and the extent to which the same could be utilized by a general office user, and (c) all other reasonable monetary concessions being granted such lessees in connection with such comparable space; provided, however, that in calculating the Option Rent, no consideration shall be given to (i) the fact that Lessor is or is not required to pay a real estate brokerage commission in connection with Lessee's exercise of its right to lease the Premises during the Option Term or the fact that landlords are or are not paying real estate brokerage commissions in connection with such comparable space, and (ii) any period of rental abatement, if any, granted to lessees in connection with such comparable transactions in connection with the design, permitting and construction of tenant improvements in such comparable spaces. If there are not a sufficient number of deals with a comparable lease term at which lessees as of the commencement date of the Option Term are leasing comparable space in the Industrial Center, then Lessor shall look at deals in the Industrial Center at which lessees as of the commencement date of the Option Term are leasing comparable space for a period of five (5) years, and the Concessions shall be prorated on a fractional basis, with the numerator being the number of months of the Option Term, and the denominator being the number of months in the term of those leases upon which the determination of the Option Rent is being based. [The remainder of this page intentionally left blank] -7- 63.3 Exercise of Options. The option contained in this Paragraph 63 shall ------------------- be exercised by Lessee, if at all, only in the following manner: Lessee shall deliver written notice to Lessor not more than ten (10) months nor less than nine (9) months prior to the expiration of the Original Term, stating that Lessee is interested in exercising its option; (ii) Lessor, after receipt of Lessee's notice, shall deliver notice (the "Option Rent Notice") to Lessee not less than seven (7) months prior to the expiration of the Original Term, setting forth the Option Rent; and (iii) if Lessee wishes to exercise such option, Lessee shall, on or before the earlier of (A) the date occurring six (6) months prior to the expiration of the Original Term, and (B) the date occurring thirty (30) days after Lessee's receipt of the Option Rent Notice, exercise the option by delivering written notice thereof to Lessor. The Lease and this Addendum may be executed in counterparts, each of which shall be deemed an original, but all of which, together, shall constitute one and the same instrument. AGREED & ACCEPTED: "LESSOR" "LESSEE" ASP SCRIPPS, L.L.C. THE KEITH COMPANIES, INC. By: /s/ SCOTT R. FITZGERALD By: /s/ ERIC C. NIELSEN ------------------------- ---------------------- Its: Vice President Its: President ------------------------- ---------------------- By: /s/ GARY CAMPANARO ---------------------- Its: Secretary ---------------------- -8- EX-10.39 6 SUBLEASE AGREEMENT DATED JULY 29, 1999 EXHIBIT 10.39 SUBLEASE THIS SUBLEASE (the "Sublease") is made as of July 29, 1999, by CANON COMPUTER SYSTEM, INC., a California corporation (the "Sublandlord") and THE KEITH COMPANIES, INC., a California corporation ("the Subtenant"). BACKGROUND: A. ASP SCRIPPS, LLC, a California limited liability company as Landlord ("Landlord"), and Sublandlord, as Tenant, have entered into that certain Lease dated as of May 21, 1993, as amended, (the "Prime Lease"), regarding certain premises ("Prime Lease Premises") in the building known as 2955 Red Hill Avenue, Costa Mesa, California 92626 (the "Building"), all as described in the Prime Lease. B. Sublandlord and Subtenant have agreed to enter into a sublease for 32,994 rentable square feet of the Prime Lease Premises on the Second Floor of the Building as described on attached Exhibit A ("Sublease Premises"), upon the terms and conditions set forth below. AGREEMENT: 1. Sublease. Subtenant agrees to sublease from Sublandlord, and Sublandlord agrees to sublease to Subtenant, the Sublease Premises upon the terms and conditions set forth below. 2. Sublease Term. The term of this Sublease ("Sublease Term") will commence on August 1, 1999 (the "Commencement Date"), and will continue until October 30, 2003. 3. Use. Subtenant shall use the Sublease Premises for general office and other permitted purposes under the Prime Lease, and for no other purpose. 4. "As Is" Sublease; Alterations; Construction Allowance. Subtenant agrees to accept the Sublease Premises in "as is" condition, "with all faults". Sublandlord and Subtenant acknowledge that Subtenant is currently occupying the Sublease Premises pursuant to a lease between Subtenant and Landlord set to expire July 31, 1999. Subtenant shall be responsible for the installation and cost of any and all improvements, alterations or other work (the "Subtenant Improvements") required in order to accommodate Subtenant's use of the Subleased Premises or required on or to the Sublease Premises by the Americans With Disabilities Act of 1990 or any other applicable law, rule or regulation as a result of Subtenant's use of the Sublease Premises. Subtenant shall directly employ the general contractor and shall oversee the construction of the Subtenant Improvements. Prior to the commencement of construction of the Subtenant Improvements, Subtenant shall secure the written approval of the plans for the Subtenant Improvements from both Landlord and Sublandlord, which consent shall not be unreasonably withheld or delayed by either Landlord or Sublandlord. All construction work, including the selection of the space planner, general contractor and subcontractors, shall be subject to Landlord's prior approval, which approval shall not be unreasonably withheld or delayed. Subtenant shall make or install no other improvements, alterations or work on or to the Sublease Premises or on or to the property and/or Building of which the Sublease Premises are a part without the prior written consent of Sublandlord and Landlord, which consent shall withheld by either Landlord or Sublandlord in the reasonable discretion of Landlord or Sublandlord; provided, however, that Subtenant may make any nonstructural improvement costing less than Fifty Thousand Dollars ($50,000.00) and no consent shall be required, but Subtenant shall give Sublandlord and Landlord at least twenty (20) days prior written notice of Subtenant's intention to make any such improvement, which notice shall include a reasonable description of the improvement, including marked floor plans where appropriate. Sublandlord shall provide Subtenant with a tenant improvement allowance (the "Tenant improvement Allowance") a maximum of $164,970.00 as a contribution towards the costs incurred by Subtenant in the completion of the build out of the Sublease Premises. Subtenant shall be entitled to apply the Tenant Improvement Allowance toward reimbursement of its architectural fees, engineering and design fees, demolition costs, city permits and construction costs. The Tenant Improvement Allowance shall be disbursed by Sublandlord to Subtenant in accordance with the terms and schedule set forth on the Work Letter attached as Exhibit B to the First Amendment to Lease between Landlord and Sublandlord dated July 30, 1999. Sublandlord shall not be allowed to charge Subtenant for profit, overhead expenses, supervisory expenses, plan review fees or any similar charge in connection with the construction of the Subtenant Improvements, nor shall Subtenant be charged by Landlord for parking, elevator use, or staging areas required by Subtenant's contractor or subcontractors for completion of the Subtenant Improvements. Within fifteen (15) business days after Sublandlord receives compensation or reimbursement from Landlord in accordance with Section 13.15(ii) of the Prime Lease, Sublandlord shall reimburse Subtenant for costs incurred by Subtenant to correct disintegrating and/or debonding floor fill for the Sublease Premises and the "Expansion Space II" pursuant to the provisions of Paragraph 14 below. 5. Rent. Subtenant will pay monthly base rent ("Subrent") for the Sublease Premises in advance, without abatement, deduction or setoff, on the Commencement Date and on the first day of each calendar month thereafter during the Sublease Term, in accordance with the terms set forth on Exhibit B attached hereto (the "Subrent Schedule"). Subtenant will also pay, as additional rent, Subtenant's Proportionate Share of the Building and Subtenant's Proportionate Share of the Project (as defined below) of all other payments due the Landlord under the Prime Lease, including, without limitation, insurance, real estate taxes, and all other Project Operating Costs and Building Operating Costs (the "Triple Net Expenses"), as and when they shall become due in accordance with Section 3.2 of the Prime Lease. For purposes of this Sublease, "Subtenant's Proportionate Share of the Building" means the ratio of the rentable area (determined by Sublandlord's architect in accordance with BOMA standards) of the Sublease Premises to the 2 rentable area of the Building, expressed as a percentage rounded to the second decimal point. "Subtenant's Proportionate Share of the Project" means the ratio of the rentable area (32,994 square feet) of the Sublease Premises to the rentable area of the Project, expressed as a percentage rounded to the second decimal point. 6. Building Real Estate Taxes. In addition to Subtenant's obligation to pay Subtenant's share of Subtenant's Proportionate Share of real estate taxes, and in accordance with Section 3.2(a) of the Prime Lease, Subtenant agrees that it will pay to Sublandlord fifty percent (50%) of the increase in any real estate taxes which result from the sale or transfer of the Building or the Project (as defined in the Prime Lease) during the term of this Sublease. 7. Parking. Subtenant shall be entitled to four (4) parking spaces for every 1000 rentable square feet of space subleased by Subtenant. All parking shall remain free of charge during the Sublease Term. 8. Performance of Prime Lease by Subtenant. Except as otherwise set forth in this Sublease, Subtenant assumes and agrees to keep, obey and perform all of the terms, covenants and conditions of Sublandlord as Tenant under the Prime Lease with respect to the Sublease Premises, and except for Sections 13.17, 13.18, 13.19, and 13.21 of the Prime Lease, and as otherwise provided herein, shall enjoy all of the rights and privileges of Sublandlord under the Prime Lease. 9. Subtenant's Rights as to Prime Landlord. Sublandlord shall not be liable for any nonperformance of or noncompliance with or breach or failure to observe any term, covenant or condition of the Prime Lease upon Landlord's part to be kept, observed, performed or complied with, or for any delay or interruption in Landlord's performing its obligations thereunder, provided that Sublandlord shall cooperate with Subtenant in assisting Subtenant in enforcing the terms of the Prime Lease, to the extent provided below. Sublandlord agrees to exercise commercially reasonable diligence in attempting to cause Landlord to perform its obligations under the Prime Lease for the benefit of Subtenant. 10. Insurance; Waivers. Subtenant will, during the Sublease Term, continuously maintain commercial general liability insurance as required under the Prime Lease, which insurance policy shall name Sublandlord as an additional insured party, and a certificate thereof acceptable to Sublandlord shall be delivered to Sublandlord prior to the delivery of the Sublease Premises to Subtenant. Subtenant hereby agrees to indemnify and hold harmless Sublandlord from, and shall reimburse Sublandlord for, all costs and expenses, including reasonable attorneys' fees, incurred by Sublandlord in connection with the defense of all claims and demands of third persons, including but not limited to those for death, personal injuries, or property damage, arising out of any default of Subtenant in performing or observing any term, covenant, condition or provision of this Sublease, or out of the use or occupancy of the Sublease Premises by Subtenant, or out of any of the acts or omissions of the Subtenant, its agents, representatives, employees, customers, guests, invitees or other persons who are doing business with Subtenant or who are at the 3 Sublease Premises with Subtenant's consent. Subtenant, for itself and its insurers, hereby further expressly waives all claims against Sublandlord for any and all damages to persons or property caused by or resulting from any thing or circumstance, excepting any claims arising due to the willful misconduct of Sublandlord, its agents, representatives, employees, contractors or invitees. 11. Assignment and Subletting. Subtenant shall be allowed to assign or sublease all or a part of the Sublease Premises subject to and in accordance with the terms set forth in Section 6.4 of the Prime Lease. In the event Subtenant assigns or sublets the Sublease Premises for a rental rate which exceeds the Subrent Schedule set forth on Schedule B, in accordance with the terms and conditions set forth in Section 6.4 of the Prime Lease Landlord and Sublandlord shall share equally any rental profit resulting from such further sublease. Subtenant may not, without the prior written consent of Sublandlord (which may be withheld in Sublandlord's sole discretion), allow any liens to be placed on this Sublease or the Sublease Premises, or suffer this Sublease or the Sublease Premises or any portion thereof to be attached or taken upon execution without posting a bond in the statutory amount required to remove the lien or otherwise providing adequate security to Sublandlord and Landlord if Subtenant disputes or contests the amount or validity of such lien. Sublandlord may assign its interest under this Sublease at any time, and in such case Sublandlord shall be released from any liability arising under this Sublease after the effective date of such assignment. 12. Termination. This Sublease shall terminate at the end of the Sublease Term hereof. Subtenant will peacefully and quietly vacate and surrender the Sublease Premises to Sublandlord at the expiration of the Sublease Term, in the condition called for under the Prime Lease. The existence of this Sublease is dependent and conditioned upon the continued existence of the Prime Lease, and in the event of the cancellation or termination of the Prime Lease, this Sublease automatically shall be terminated, except to the extent provided in the Agreement of NonDisturbance and Attornment attached hereto, if any; provided, however, that this provision shall not be deemed to release Sublandlord of liability if the Prime Lease is canceled or terminated due to a default by Sublandlord as Tenant under the Prime Lease, which default did not result, in whole or in part, from a default by Subtenant under this Sublease. Sublandlord agrees not to amend, alter or modify any of the provisions of the Prime Lease affecting Subtenant, or to surrender the Prime Lease, without Subtenant's consent, which consent will not be unreasonably withheld or delayed. Sublandlord shall have no liability to Subtenant due to the termination of the Prime Lease by reason of any default by Subtenant under this Lease, or by reason of any condemnation or destruction of the Prime Lease Premises, unless such destruction is due to the gross negligence or willful misconduct of Sublandlord, its agents, representatives, employees, contractors or invitees. In accordance with the terms set forth in the Prime Lease, in the event Subtenant fails to surrender possession of the Sublease Premises at the end of the Sublease Term, Subtenant shall at Sublandlord's option, be deemed to occupy the Sublease Premises as a tenant from month to month, which tenancy may be terminated by one month's written notice. During such tenancy, Subtenant agrees to pay to Sublandlord, monthly in advance, an amount equal to 200% of all Subrent (based on the Subrent and Subtenant's pro rata share of Operating Costs payable for the last month of the Sublease Term, 4 together with all other amounts payable by Subtenant to Sublandlord under this Sublease), and to be bound by all of the terms, covenants and conditions herein specified. 13. Default. If Subtenant defaults in its obligations under this Sublease, Sublandlord shall have all of the same rights and remedies against Subtenant as would be available to the Landlord against Sublandlord if Sublandlord were in default under the Prime Lease, as fully as if such rights and remedies were set forth in this Sublease. 14. Future Expansion Rights. Subtenant acknowledges that Landlord has granted Sublandlord an option to expand (the "Option to Expand") onto the first floor of Building (the "Expansion Space II") in accordance with Section 13.16 of the Prime Lease. In the event that Sublandlord exercises the Option to Expand but does not intend to occupy the Expansion Space II, Sublandlord shall notify Subtenant as soon thereafter as is practicable and in no event later that one hundred twenty (120) days prior to Landlord's projected availability date for Expansion Space II of its intention not to occupy the Expansion Space II and Subtenant agrees to enter into a sublease (the "First Floor Sublease") with Sublandlord for the entire Expansion Space II. The terms and conditions of the First Floor Sublease shall be substantially the same as this Sublease, including, without limitation, the identical base rent per square foot and scheduled rent increases as set forth in Exhibit B attached hereto. In the event that Landlord agrees to provide Sublandlord with a Tenant Improvement Allowance for the Expansion Space 11, and Sublandlord agrees to pass through any Tenant Improvement Allowance it receives from the Landlord directly to Subtenant up to an amount equal to $0.098 cents per Subleased square foot multiplied by the term (measured in number of months) of the First Floor Sublease. Other than the obligation to enter into the First Floor Sublease as provided above, Subtenant shall have no rights or obligations with respect to the Expansion Space H. Subtenant further acknowledges that the commencement date for the First Floor Sublease shall be some time during the period between September 27, 2000 and September 26, 2001 as designated by the Sublandlord; provided, however, that the First Floor Sublease shall commence only after Sublandlord. has exercised the Option to Expand and notified Subtenant in writing of Subtenant's obligation to enter into the First Floor Sublease. 15. Notices. Any notice or demand permitted or required hereunder shall be deemed given or made if, and shall not be deemed to have been given or made unless, it is in writing and deposited in the United States mails certified, return receipt requested, postage prepaid, addressed as follows: If to Sublandlord: Canon Computer Systems, Inc. 2995 Redhill Avenue Costa Mesa, California 92626 Attn: General Counsel With a copy to: Dorsey & Whitney LLP 37017 1h Street, Suite 4400 Denver, Colorado 80202 Attn: Kevin P. Hein, Esq. 5 If to Subtenant: 2955 Redhill Avenue Costa Mesa, California 92626 With a copy to: Rutan & Tucker, LLP 611 Anton Boulevard Suite 1400 Costa Mesa, California 92626 Attn: Adam N. Volkert, Esq. The foregoing addresses may be changed from time to time by notice as above provided, which change shall be effective 10 days after notice is given. 16. Security Deposit; Submission of Subtenant's Financials. Upon execution of this Sublease, Subtenant shall pay to Sublandlord the first month's Subrent and a security deposit equal to the last month's Subrent. Within five business days of the execution of this Sublease, Subtenant shall submit current audited financials for review by Landlord and Sublandlord. In the event that Subtenant enters into the First Floor Sublease, upon execution of the First Floor Sublease Subtenant shall pay to Sublandlord an additional security deposit equal to $41,212.50. 17. Directory Board Listing. Subject to Landlord's prior approval, as provided in the Prime Lease, Subtenant shall be allowed to place an appropriate listing in the Building directory board. 18. Entire Agreement. This Sublease contains the entire agreement between Sublandlord and Subtenant regarding the Sublease Premises. Subtenant agrees that it has not relied on any statement, representation or warranty of any person except as set out in this Sublease. This Sublease may be modified only by an agreement in writing signed by Sublandlord and Subtenant. No surrender of the Sublease Premises, or of the remainder of the Sublease Term, will be valid unless accepted by Sublandlord in writing. 19. Successors and Assigns. All provisions of this Sublease will be binding on and for the benefit of the successors and assigns of Sublandlord and Subtenant, except that no person or entity holding under or through Subtenant in violation of any provision of this Sublease will have any right or interest in this Sublease or the Sublease Premises. 20. Commissions. Sublandlord shall pay any commissions due CB Richard Ellis, Inc. regarding this Sublease and the commission attributable to Expansion Space II upon the execution of the sublease for the first floor. Sublandlord and Subtenant shall each indemnify and hold the other harmless from and against any claims, losses, costs or liability arising from any other parties who may claim a brokerage commission as a result of the indemnifying party's actions or agreements in connection with this Sublease. 6 21. Ground Floor Lease. The execution of this Sublease and Subtenant's obligations hereunder are expressly conditioned upon Subtenant entering into a lease with the Landlord for the ground floor of the Building (the "Ground Floor Lease"). If Subtenant and Landlord have not executed the Ground Floor Lease within forty-five (45) days after the mutual execution of this Sublease, Subtenant shall have the right to cancel this Sublease, all monies previously paid to Sublandlord shall be returned, and the parties shall have no further rights or obligations hereunder. The remainder of this page has been intentionally left blank 7 EXECUTION: Sublandlord and Subtenant have executed this Sublease as of the date first stated above. SUBLANDLORD: CANNON COMPUTER SYSTEMS, INC., a California corporation By: /s/ ^^ILLEGIBLE SIGNATURE ^^ ----------------------------- Its: Vice President, Operations ----------------------------- SUBTENANT: THE KEITH COMPANIES, INC., a California corporation By: /s/ ERIC C. NIELSEN ----------------------------- Its: President ----------------------------- 8 EXHIBIT A Sublease Premises Drawing ------------------------- EXHIBIT B Subrent Schedule ----------------
Months Rate per RSF per Month, NNN Monthly Subrent - --------- --------------------------- --------------- 1-12 $1.30 $42,892.20 13-24 $1.35 $44,541.90 25-36 $1.40 $46,191.60 37-48 $1.45 $47,841.30 49-51 $1.50 $49,491.00
EX-10.40 7 AGREEMENT OF NON-DISTURBANCE AND ATTORNMENT EXHIBIT 10.40 AGREEMENT OF ------------ NON-DISTURBANCE AND ATTORNMENT ------------------------------ This Agreement (the "Agreement") is made is made as of July 28, 1999, by and among ASP SCRIPPS, L.L.C., a Delaware limited liability company ("Landlord"), and The Keith Companies, Inc., a California corporation ("Subtenant"). RECITALS -------- WHEREAS, under that certain Lease, dated May 21, 1993, between Scripps Center Associates, a California general partnership, predecessor-in-interest to Landlord, and Canon Computer Systems, Inc., a California corporation ("Tenant"), as amended by that certain First Amendment to Lease, dated July 30, 1999 (collectively, the "Lease"), regarding space in the buildings located at 2995 and 2955 Red Hill Avenue, Costa Mesa, California (collectively, the "Premises"), as more particularly described in the Lease, Landlord does lease, let, and demise the Premises to Tenant for the period of time and upon the covenants, terms, and conditions therein stated; and WHEREAS, under that certain Sublease dated July 29, 1999, between Tenant and Subtenant (hereinafter referred to as the "Sublease"), Tenant did sublease, let, and demise a portion of the Premises (the "Sublease Premises") located in the 2955 Red Hill Avenue building, to Subtenant for the period of time and upon the covenants, terms, and conditions therein stated; and WHEREAS, Landlord has consented to the Sublease; and WHEREAS, Landlord is willing to agree that in the event Landlord elects to terminate the Lease due to a default by Tenant, Landlord will succeed to Tenant's interest in the Sublease, and Subtenant is willing to agree to attorn to Landlord in that event upon the covenants, terms, and conditions set forth hereinbelow. AGREEMENT --------- NOW, THEREFORE, in consideration of the covenants, terms, conditions and agreements herein contained, and in consideration of other good and valuable consideration, each to the other, the sufficiency and receipt of which are hereby acknowledged, the parties hereto agree, covenant, and warrant as follows: 1. Subject to the observance and performance by Subtenant of all of the covenants, terms and conditions of the Sublease and in any modification or amendment specified herein or subsequently approved by Landlord on the part of Subtenant to be observed and performed, in the event the Lease is terminated due to a default by Tenant, Landlord hereby covenants that. provided that Subtenant is not then in default of the Sublease beyond any applicable notice and cure period provided in the Sublease, the Sublease and any modifications or amendments specified herein or hereafter approved by Landlord will continue in full force and effect, and Landlord shall recognize the Sublease and any modifications or amendments specified herein or subsequently approved by Landlord and Subtenant's rights thereunder, and will thereby establish direct privity of estate and contract between Landlord and Subtenant with the same force and effect and with the same relative priority in time and right as though the Sublease and any modification or amendment specified herein or subsequently approved by Landlord were directly made from Landlord in favor of Subtenant; provided, however, that notwithstanding anything in this Agreement to the contrary, in the event of a termination of the Sublease and the recognition of the Sublease as set forth herein, the terms of Section 14 of the Sublease have no applicability as between Landlord and Subtenant. 2. Subtenant agrees that in the event of any act or omission by Tenant under the Sublease which would give Subtenant the right, either immediately or after a period of time, to terminate the Sublease, whether or not set forth in the Sublease, Subtenant will not exercise any such right to terminate until (i) it shall have given written notice of the act or omission to Landlord, and (ii) if the default by Tenant is of a nature which can be cured by the Landlord, and if the Landlord is proceeding with diligence to cure such default, Subtenant shall have given the Landlord the time periods set forth in the Lease for Landlord's cure of such default, in order to cure such default, provided that any such cure period shall not commence to run until Landlord's receipt of written notice from Subtenant of such default. 3. That in the event the Lease is terminated due to a default by Tenant, Subtenant hereby covenants and agrees to make full and complete attornment to Landlord as substitute sublessor upon the same terms, covenants and conditions as provided in the Sublease and all extensions or renewals thereof, so as to establish direct privity of estate and contract between the Landlord and Subtenant with the same force and effect as though the Sublease and all modifications and amendments thereof specified herein or hereafter consented to by Landlord, together with all guarantees of Subtenant's obligations under the Sublease, were originally made directly between Landlord and Subtenant (except as specifically set forth in this Agreement). Subtenant will thereafter make all payments directly to Landlord. Subtenant waives all joinder and/or service of any and all actions at law by Landlord to gain possession of the Premises. It shall not be necessary, except as required by law, for Landlord to name Subtenant as a party prosecute any action at law to gain possession of the Premises, and unless required by law Landlord agrees not to name Subtenant in any such proceeding. 4. Notwithstanding anything contained herein to the contrary, or anything to the contrary in the Sublease or in any modifications or amendments thereto (except as set forth below), in the event the Lease is terminated due to a default by Tenant, then Landlord and Subtenant hereby covenant and agree that Landlord and its respective assignees shall not be: (a) Liable for any act or omission of Tenant, or its successors or assigns, except in the event that Landlord recognizes the Sublease pursuant to the non-disturbance provisions of Paragraph I of this Agreement, then Landlord shall be liable for the performance of the obligations of the Sublandlord under the Sublease from and after the effective date of such recognition. -2- (b) Subject to any offsets or defenses which Subtenant might have as to Tenant, or its successors or assigns, or to any claim for damages against Tenant, or its successors or assigns. (c) Required or obligated to credit Subtenant with any rent or additional rent paid by Subtenant to Tenant more than thirty (30) days in advance. (d) Bound by any amendments or modifications of the Sublease made at any time (whether before or after the Lease is terminated) without Landlord's consent. (e) Bound to or liable for refund of all or any part of any security deposit deposited by Subtenant with Tenant for any purpose unless and until such security deposit shall have been delivered by Tenant to and actually received by Landlord. In the event of receipt of any such security deposit, Landlord's obligations with respect thereto shall be limited to the amount of such security deposit actually received by Landlord, and Landlord shall be entitled to all rights, privileges and benefits of Tenant set forth in the Sublease with respect thereto. (f) Liable to Subtenant under the Sublease or otherwise from and after such time as the Landlord ceases to be the owner of the Building. Nothing in this Paragraph 4 shall be intended to waive or impair any liability Landlord may have to Subtenant pursuant to the non-disturbance provisions of Paragraph 1 above. In addition, Subtenant reserves its rights to any and all claims or causes of action against Canon Computer Systems, Inc., a California corporation, for prior losses or damages. 5. Subtenant covenants and agrees as follows for the benefit and reliance of Landlord: that it will not, without the express written consent of Landlord: (i) Cancel, terminate, modify, alter, amend or surrender the Sublease, except as may be consented to by Landlord; or (ii) Enter into any agreement with Tenant, its successors or assigns, which grants any concession with respect to the Sublease or which reduces the rent called for thereunder; or (iii) Make any offset or claim against rents, or prepay rent more than one (1) month in advance. 6. Landlord and Subtenant hereby agree as follows: (a) That neither this Agreement, nor anything to the contrary in the aforesaid Sublease or in any modifications or amendments thereto shall, prior to Landlord succeeding to the interest of Tenant, its successors or assigns, under the Sublease, operate to give rise to or create any responsibility or liability for the control, care, management or repair of the Sublease -3- Premises upon Landlord, or impose responsibility for the carrying out by Landlord of any of the covenants, terms and conditions of the Sublease or of any modification or amendment specified herein or hereafter consented to by Landlord. Notwithstanding anything to the contrary in the Sublease, Landlord, its successors and assigns, shall be responsible for performance of only those covenants and obligations of the Sublease accruing after the Lease is terminated due to a default by Tenant, and Landlord's obligations to Subtenant shall be further limited as provided in this Agreement. Notwithstanding anything in this Agreement to the contrary, Landlord acknowledges and agrees that prior to termination of the Lease by Landlord and the recognition and attornment provided for herein, Subtenant shall have no right pursuant to the Sublease or this Agreement to take direct action under any circumstances against Landlord in the name of Tenant. (b) That in the event Landlord succeeds to the interest of Tenant, its successors or assigns, under the Sublease and becomes the substitute sublessor, it is agreed that Landlord may assign its interest as substitute sublessor without the consent of Subtenant. (c) Subtenant hereby acknowledges and agrees that in the event Landlord succeeds to the interest of Tenant, its successors or assigns, under the Sublease, that any liability or obligation of the Landlord as sublessor under the Sublease shall be limited to Landlord's equity interest in the building in which the Subleased Premises are located and no recourse shall be had to any other assets of Landlord. (d) It is specifically agreed that Subtenant shall not, as to Landlord, require cure of any such default which is personal to Tenant, its successors or assigns, and therefore not susceptible of cure by Landlord. (e) Upon Landlord's written request of Subtenant given at any time after the termination of the Lease by Landlord, Subtenant (as tenant) agrees to execute a lease of the Sublease Premises with Landlord or its successor (as landlord) upon the same terms and conditions as the Sublease between Tenant and Subtenant (except with respect to any provisions eliminated therefrom pursuant to the terms of this Agreement, which lease shall cover any unexpired term of the Sublease existing at the time of such termination. 7. Any notices to Subtenant or Landlord hereunder shall be sent by United States certified or registered mail, postage prepaid, return. receipt requested, or delivered personally, addressed as follows: Subtenant: The Keith Companies, Inc. 2955 Redhill Avenue Costa Mesa, California 92626 With a copy to: Rutan & Tucker, LLP 611 Anton Boulevard, Suite 1400 Costa Mesa, California 92626 Attention: Adam N. Volkert, Esq. -4- Landlord: Amresco, Inc. 700 North Pearl Street, Suite 1700 Dallas, Texas 75201 Attention: Mr. Andy Doughtie With a copy to: Allen, Matkins, Leck, Gamble & Mallory 1999 Avenue of the Stars, Suite 1800 Los Angeles, California 90067 Attn: Cheryl S. Prell, Esq. or as to each party, to such other address as the party may designate by a notice given in accordance with the requirements contained in this Section 7. 8. This Agreement contains the entire agreement between the parties hereto. No variations, modifications or changes herein or hereof shall be binding upon any party hereto unless set forth in a document duly executed by or on behalf of such party. 9. This instrument may be executed in multiple counterparts, all of which shall be deemed originals and with the same effect as if all parties hereto had signed the same document All of such counterparts shall be construed together and shall constitute one instrument, but in making proof, it shall only be necessary to produce one such counterpart executed by the party against whom it is being enforced. 10. Whenever used herein, the singular number shall include the plural, the plural the singular, and the use of any gender shall include all genders. The words, "Landlord" and "Subtenant" shall include their heirs, executors, administrators, beneficiaries, successors and assigns. 11. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, and all such counterparts, when taken together, shall constitute one and the same agreement. -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed, sealed and delivered in their respective names and in their behalf; and if a corporation, by its officers duly authorized, as of the 28th day of July, 1999. "Landlord": ASP SCRIPPS, L.L.C., a Delaware limited liability company By: /s/ SCOTT R. FITZGERALD -------------------------------- Its: Vice President -------------------------------- "Subtenant": The Keith Companies, Inc., A California corporation By: /s/ ERIC C. NIELSEN -------------------------------- Its: President -------------------------------- By: /s/ GARY CAMPANARO -------------------------------- Its: Secretary -------------------------------- -6- EX-10.41 8 CONSENT TO SUBLEASE AGREEMENT EXHIBIT 10.41 CONSENT TO SUBLEASE AGREEMENT ----------------------------- THIS CONSENT TO SUBLEASE AGREEMENT (this "Agreement") is made as of July 28, 1999, by and among ASP SCRIPPS, L.L.C., a Delaware limited liability company ("Landlord"), CANON COMPUTER SYSTEMS, INC., a California corporation ("Tenant"), and The Keith Companies, Inc., a California corporation ("Subtenant"). RECITALS -------- A. Reference is hereby made to that certain Lease, dated May 21, 1993, between Scripps Center Associates, a California general partnership, predecessor in interest to Landlord, and Tenant, as amended by that certain First Amendment to Lease dated July 30, 1999 (collectively, the "Lease"), for space in the buildings located at 2995 and 2955 Red Hill Avenue, Costa Mesa, California (collectively, the "Premises"), as more particularly described in the Lease. B. Pursuant to the terms of Article 6.4 of the Lease, Tenant has requested Landlord's consent to that certain Sublease, dated July 29, 1999, between Tenant and Subtenant (the "Sublease"), with respect to a subletting by Subtenant of a portion of the Premises, as more particularly described in the Sublease (the "Sublet Premises"). The Sublet Premises are located in the building located at 2955 Red Hill Avenue, Costa Mesa, California. A copy of the Sublease is attached hereto as Exhibit A. Landlord is willing to consent to the Sublease on the terms and conditions contained herein. C. All defined terms not otherwise expressly defined herein shall have the respective meanings given in the Lease. AGREEMENT --------- 1. Landlord's Consent. Landlord hereby consents to the Sublease; provided ------------------ however, notwithstanding anything contained in the Sublease to the contrary, such consent is granted by Landlord only upon the terms and conditions set forth in this Agreement. The Sublease is subject and subordinate to the Lease. Landlord shall not be bound by any of the terms, covenants, conditions, provisions or agreements of the Sublease, including, without limitation, the terms and conditions of Section 4 of the Sublease. The Sublease shall not be amended or modified without the prior written consent of Landlord, which consent shall not be unreasonably withheld except in the event of an amendment or modification of the "Subrent," as that term is defined in Section 5 of the Sublease, or any other economic term of the Sublease, which shall be subject to Landlord's prior written consent in Landlord's sole and absolute discretion. 2. Non-Release of Tenant; Further Transfers. Neither the Sublease nor this ---------------------------------------- consent thereto shall release or discharge Tenant from any liability, whether past, present or future, under the Lease or alter the primary liability of the Tenant to pay the rent and perform and comply with all of the obligations of Tenant to be performed under the Lease (including the payment of all -1- bills rendered by Landlord for charges incurred by the Subtenant for services and materials supplied to the Sublet Premises). Neither the Sublease, including, without limitation, the terms and conditions of Section 14 of the Sublease, nor this consent thereto shall be construed as a waiver of Landlord's right to consent to any further subletting either by Tenant or by the Subtenant or to any assignment by Tenant of the Lease or assignment by the Subtenant of the Sublease, or as a consent to any portion of the Sublet Premises being used or occupied by any other party. Landlord may consent to subsequent sublettings and assignments of the Sublease or any amendments or modifications thereto without notifying Tenant nor anyone else liable under the Lease and without obtaining their consent. No such action by Landlord shall relieve such persons from any liability to Landlord or otherwise with regard to the Sublet Premises. 3. Relationship With Landlord. Tenant hereby assigns and transfers to -------------------------- Landlord the Tenant's interest in the Sublease and all rentals and income arising therefrom, subject to the terms of this Section 3. Landlord, by --------- consenting to the Sublease agrees that until a default shall occur in the performance of Tenant's obligations under the Lease, Tenant may receive, collect and enjoy the rents accruing under the Sublease. In the event Tenant shall default in the performance of its obligations to Landlord under Section 11.1 of ------------ the Lease (whether or not Landlord terminates the Lease), subject to the terms of that certain Agreement of Non-Disturbance and Attornment (the "Recognition Agreement"), dated as of the date hereof, between Landlord and Subtenant, Landlord may, at its option by notice to Tenant, either (i) terminate the. Sublease, (ii) elect to receive and collect, directly from Subtenant, all rent and any other sums owing and to be owed under the Sublease, as further set forth in Section 4, below, or (iii) elect to succeed to Tenant's interest in the --------- Sublease and cause Subtenant to attorn to Landlord, as further set forth in the Recognition Agreement. Nothing in the preceding election shall diminish or alter Subtenant's non-disturbance protections set forth in Section I of the Recognition Agreement. 4. Landlord's Election to Receive Rents. Landlord shall not, by reason of ------------------------------------ the Sublease, nor by reason of the collection of rents or any other sums from the Subtenant pursuant to Section 3(ii), above, be deemed liable to Subtenant ------------- for any failure of Tenant to perform and comply with any obligation of Tenant, and Tenant hereby irrevocably authorizes and directs Subtenant, upon receipt of any written notice from Landlord stating that a default exists in the performance of Tenant's obligations under the Lease, to pay to Landlord the rents and any other sums due and to become due under the Sublease. Tenant agrees that Subtenant shall have the right to rely upon any such statement and request from Landlord, and that Subtenant shall pay any such rents and any other sums to Landlord without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Tenant to the contrary. Tenant shall not have any right or claim against Subtenant for any such rents or any other sums so paid by Subtenant to Landlord. Landlord shall credit Tenant with any rent received by Landlord under such assignment but the acceptance of any payment on account of rent from the Subtenant as the result of any such default shall in no manner whatsoever be deemed an attornment by the Landlord to Subtenant or by Subtenant to Landlord, be deemed a waiver by Landlord of any provision of the Lease or serve to release Tenant from any liability under the terms, covenants, conditions, provisions or agreements under the Lease. Notwithstanding the foregoing, any other payment of rent from the Subtenant directly to -2- Landlord, regardless of the circumstances or reasons therefor, shall in no manner whatsoever be deemed an attornment by the Subtenant to Landlord in the absence of a specific written agreement signed by Landlord to such an effect. 5. General Provisions. ------------------ 5.1 Consideration for Sublease. Tenant and Subtenant represent -------------------------- and warrant that there are no additional payments of rent or any other consideration of any type payable by Subtenant to Tenant with regard to the Sublet Premises other than as disclosed in the Sublease. 5.2 Brokerage Commission. Tenant and Subtenant covenant and agree -------------------- that under no circumstances shall Landlord be liable for any brokerage commission or other charge or expense in connection with the Sublease and Tenant and Subtenant agree to protect, defend, indemnify and hold Landlord harmless from the same and from any cost or expense (including but not limited to attorneys' fees) incurred by Landlord in resisting any claim for any such brokerage commission. 5.3 Controlling Law. The terms and provisions of this Agreement --------------- shall be construed in accordance with and governed by the laws of the State of California. 5.4 Binding Effect. This Agreement shall be binding upon and -------------- inure to the benefit of the parties hereto, their heirs, successors and assigns. As used herein, the singular number includes the plural and the masculine gender includes the feminine and neuter. 5.5 Captions. The paragraph captions utilized herein are in no -------- way intended to interpret or limit the terms and conditions hereof; rather, they are intended for purposes of convenience only. 5.6 Partial Invalidity. If any term, provision or condition ------------------ contained in this Agreement shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term, provision or condition to persons or circumstances other than those with respect to which it is invalid or unenforceable, shall not be affected thereby, and each and every other term, provision and condition of this Agreement shall be valid and enforceable to the fullest extent possible permitted by law. 5.7 Attorneys' Fees. If any party to this Agreement commences --------------- litigation against any other party or parties to this Agreement for the specific performance of this Agreement, for damages for the breach hereof or otherwise for enforcement of any remedy hereunder, the parties hereto agree to and hereby do waive any right to a trial by jury and, in the event of any such commencement of litigation, the prevailing party shall be entitled to recover from the non- prevailing party or parties such costs and reasonable attorneys' fees as may have been incurred. 6. Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed an original, and all such counterparts, when taken together, shall constitute one and the same agreement. -3- IN WITNESS WHEREOF, the parties have executed this Consent to Sublease Agreement as of the day and year first above written. "Landlord": ASP SCRIPPS, L.L.C., a Delaware limited liability company By: /s/ SCOTT R. FITZGERALD ---------------------------------- Its: Vice President ------------------------------ By: ---------------------------------- Its: ------------------------------ "Tenant": CANON COMPUTER SYSTEMS, INC., a California corporation By: /s/ ^^ILLEGIBLE SIGNATURE^^ ---------------------------------- Its: Vice President and Treasurer --------------------------------- By: /s/ ^^ILLEGIBLE SIGNATURE^^ ---------------------------------- Its: Vice President, Operations ------------------------------ "Subtenant": The Keith Companies, Inc., a California corporation By: /s/ ERIC C. NIELSEN ---------------------------------- Its: President --------------------------------- By: /s/ GARY CAMPANARO ---------------------------------- Its: Secretary ------------------------------ -4- EXHIBIT A --------- THE SUBLEASE ------------ [attached] EXHIBIT A EX-27 9 FINANCIAL DATA SCHEDULE
5 9-MOS 9-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 SEP-30-1999 SEP-30-1998 1,346,000 457,000 0 0 7,271,000 5,582,000 (829,000) (364,000) 0 0 14,785,000 10,917,000 4,508,000 2,862,000 0 0 24,167,000 14,530,000 8,552,000 5,737,000 0 0 0 0 0 0 5,000 3,000 12,327,000 652,000 12,332,000 14,530,000 28,271,000 20,913,000 0 0 19,051,000 13,770,000 0 0 5,904,000 4,227,000 0 0 678,000 714,000 2,536,000 2,195,000 1,076,000 986,000 1,460,000 1,209,000 0 0 0 0 0 0 1,460,000 1,209,000 0.43 0.30 0.40 0.29
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