-----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, C6dqB/FSKPwrlbcfCLAtqFU8gCPq18T0Q+mGehzOhhc1tUxS2lsL1fQwDZ4lmaxf JBtR5sOGY3Hs0y8nCHkqBg== 0000950134-02-014280.txt : 20021114 0000950134-02-014280.hdr.sgml : 20021114 20021114104054 ACCESSION NUMBER: 0000950134-02-014280 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERPHASE CORP CENTRAL INDEX KEY: 0000728249 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 751549797 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13071 FILM NUMBER: 02822422 BUSINESS ADDRESS: STREET 1: 13800 SENLAC DR CITY: DALLAS STATE: TX ZIP: 75234 BUSINESS PHONE: 2146545000 MAIL ADDRESS: STREET 1: 13800 SENLAC DR STREET 2: 13800 SENLAC DR CITY: DALLAS STATE: TX ZIP: 75234 10-Q 1 d01067e10vq.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 2002 Commission File Number 0-13071 INTERPHASE CORPORATION (Exact name of registrant as specified in its charter) TEXAS 75-1549797 (State of incorporation) (IRS Employer Identification No.) PARKWAY CENTRE I 2901 NORTH DALLAS PARKWAY, SUITE 200 PLANO, TEXAS 75093 (Address of principal executive offices) (214)-654-5000 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for a much shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- - -------------------------------------------------------------------------------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 11, 2002 ----- -------------------------------- Common Stock, $.10 par value 5,514,276 ================================================================================ INTERPHASE CORPORATION INDEX PART I -FINANCIAL INFORMATION Item 1. Consolidated Interim Financial Statements Consolidated Balance Sheets as of September 30, 2002 (unaudited) and December 31, 2001 3 Consolidated Statements of Operations for the three months and nine months ended September 30, 2002 and 2001 (unaudited) 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 (unaudited) 5 Notes to Consolidated Interim Financial Statements 6-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Item 4. Controls and Procedures 19 PART II - OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities and Use of Proceeds 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Report on Form 8-K 20 Signature 21 Certifications Pursuant to Rule 13a-14(b) 22-23
2 INTERPHASE CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except number of share data)
(unaudited) Sept. 30, Dec. 31, ASSETS 2002 2001 ------------------------------------ Cash and cash equivalents $ 12,355 $ 10,415 Marketable securities 5,440 5,216 Restricted cash 3,500 3,500 Trade accounts receivable, less allowances for uncollectible accounts and returns of $260 and $370, respectively 4,420 5,046 Inventories 4,096 6,655 Prepaid expenses and other current assets 486 480 Income taxes receivable -- 2,476 Deferred income taxes 1,604 1,636 ------------------------------------ Total current assets 31,901 35,424 Machinery and equipment 6,311 6,117 Leasehold improvements 2,947 2,936 Furniture and fixtures 633 543 ------------------------------------ 9,891 9,596 Less-accumulated depreciation and amortization (9,231) (8,653) ------------------------------------ Total property and equipment, net 660 943 Capitalized software, net 239 335 Deferred income taxes, net 3,296 2,373 Other assets 270 168 ------------------------------------ Total assets $ 36,366 $ 39,243 ==================================== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Accounts payable $ 1,369 $ 921 Deferred revenue 346 110 Accrued liabilities 1,553 1,615 Accrued compensation 1,137 1,177 ------------------------------------ Total current liabilities 4,405 3,823 Long term debt 3,500 3,500 ------------------------------------ Total liabilities 7,905 7,323 COMMITMENTS AND CONTINGENCIES Common stock redeemable; zero and 121,996 shares, respectively -- 762 SHAREHOLDERS' EQUITY Common stock, $.10 par value; 100,000,000 shares authorized; 5,514,276 and 5,518,476 shares issued and outstanding, respectively 551 552 Additional paid in capital 37,304 37,324 Retained deficit (9,174) (6,394) Cumulative other comprehensive loss (220) (324) ------------------------------------ Total shareholders' equity 28,461 31,158 ------------------------------------ Total liabilities and shareholders' equity $ 36,366 $ 39,243 ====================================
The accompanying notes are an integral part of these consolidated financial statements. 3 INTERPHASE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) (unaudited)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, - ---------------------------- ------------------------------ 2002 2001 2002 2001 - ---------------------------- ------------------------------ $ 6,022 $ 4,603 Revenues $ 18,338 $ 21,662 3,414 2,833 Cost of sales 11,676 16,127 - ---------------------------- ------------------------------ 2,608 1,770 Gross margin 6,662 5,535 1,836 1,818 Research and development 5,198 6,118 1,433 1,320 Sales and marketing 4,414 5,542 846 795 General and administrative 2,415 2,921 Restructuring costs and other -- -- special charges -- 2,091 - ---------------------------- ------------------------------ 4,115 3,933 Total operating expenses 12,027 16,672 - ---------------------------- ------------------------------ (1,507) (2,163) Operating loss (5,365) (11,137) - ---------------------------- ------------------------------ 100 231 Interest, net 427 417 23 (395) Other, net 24 (616) - ---------------------------- ------------------------------ (1,384) (2,327) Loss before income taxes (4,914) (11,336) (663) (871) Benefit for income taxes (2,134) (3,686) - ---------------------------- ------------------------------ $ (721) $ (1,456) Net loss $ (2,780) $ (7,650) ============================ ============================== Loss per share $ (0.13) $ (0.26) Basic EPS (0.50) $ (1.34) - ---------------------------- ------------------------------ $ (0.13) $ (0.26) Diluted EPS $ (0.50) $ (1.34) - ---------------------------- ------------------------------ 5,521 5,689 Weighted average common shares 5,564 5,724 - ---------------------------- ------------------------------ Weighted average common and 5,521 5,689 dilutive shares 5,564 5,724 - ---------------------------- ------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 4 INTERPHASE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine Months ended Sept. 30, ---------------------------------------- 2002 2001 ---------------------------------------- CASH FLOW FROM OPERATING ACTIVITIES: Net loss $ (2,780) $ (7,650) Adjustments to reconcile net loss to net cash provided by operating activities: Noncash realized holding period loss on marketable securities -- 334 Provision for uncollectible accounts and returns (76) 30 Provision for excess and obsolete inventory 1,649 4,794 Depreciation and amortization 628 1,503 Deferred income taxes (891) 115 Tax benefit from stock option exercises -- 94 Non-cash restructuring costs and other special charges -- 1,608 Change in assets and liabilities: Trade accounts receivable 701 11,360 Inventories 910 793 Prepaid expenses and other current assets (2) 351 Income taxes receivable 2,476 (3,785) Other assets (90) 13 Accounts payable, deferred revenue and accrued liabilities 596 (2,667) Accrued compensation (102) (993) Income tax payable -- (78) ---------------------------------------- Net adjustments 5,799 13,472 ---------------------------------------- Net cash provided by operating activities 3,019 5,822 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, equipment, capitalized software and leasehold improvements (233) (469) Proceeds from sale of marketable securities 1,014 5,929 Purchases of marketable securities (1,187) (3,922) ---------------------------------------- Net cash used by investing activities (406) 1,538 CASH FLOWS FROM FINANCING ACTIVITIES: Payments on debt -- (1,683) Purchase of redeemable common stock (762) (763) Purchase of common stock (21) -- Proceeds from the exercise of stock options -- 154 ---------------------------------------- Net cash used by financing activities (783) (2,292) ---------------------------------------- Effect of exchange rate changes on cash and cash equivalents 110 (84) ---------------------------------------- Net increase in cash and cash equivalents 1,940 4,984 ---------------------------------------- Cash and cash equivalents at beginning of period 10,415 10,587 ---------------------------------------- Cash and cash equivalents at end of period $ 12,355 $ 15,571 ========================================
The accompanying notes are an integral part of these consolidated financial statements. 5 NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Interphase Corporation and subsidiaries ("Interphase" or the "Company") enables rapid platform design and integration for the global voice and data communications markets through custom and off-the-shelf communications equipment, embedded software development suites, and systems integration and consulting services for telecom and enterprise networks. The Company's products connect computer and telecommunication servers to Wide Area Networks (WANs), Local Area Networks (LANs) and Storage Area Networks (SANs) using Asynchronous Transfer Mode (ATM), Ethernet, Signaling System 7 (SS7), IP, Fibre Channel, HDLC, Frame Relay and Integrated Services Digital Network (ISDN) technologies. The accompanying consolidated interim financial statements include the accounts of Interphase Corporation and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. While the accompanying interim financial statements are unaudited, they have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, all material adjustments and disclosures necessary to fairly present the results of such periods have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2001. Certain prior period amounts within the Statements of Cash Flows have been reclassified to conform with the 2002 presentation. The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires Company management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas involving significant estimates are the allowance for bad debts, warranty reserves, allowance for returns and inventory valuation. 6 2. RESTRUCTURING COSTS AND OTHER SPECIAL CHARGES In the second quarter 2001, the Company announced a restructuring program designed to allow the Company to continue aggressive funding of its development organizations, while preserving cash levels and securing new design-ins. As a result of the restructuring program, continued decline in predicted revenue and customers' cautious expectations regarding market recovery, the Company recorded restructuring costs and other special charges of $2.1 million, classified as operating expenses, and an additional excess and obsolete inventory charge of $4.4 million, classified as cost of sales. The restructuring program resulted in the reduction of approximately 22% of the Company's workforce, impacting all business functions in North America. As a result, the Company recorded a workforce reduction charge of $483,000 relating to severance and fringe benefits. In addition, the Company wrote off $123,000 of nonutilized fixed assets. Due to the decline in business conditions, decline in legacy product revenues and the diminished expected future benefits from the purchased intangibles related to the acquisition of Synaptel, S.A. in 1996, the Company recorded a charge of $1.5 million related to the impairment of developed technology and assembled workforce during the second quarter 2001. These intangible assets, purchased in the acquisition of Synaptel, S.A., relate to the Company's legacy product lines. In the second quarter 2000, the Company developed a strategy to end-of-life many of its legacy products in an effort to focus its resources on its new product lines. This strategy resulted in increased sales of legacy products in 2000; however, legacy product revenues declined in the first quarter of 2001, and continued to decline through the second quarter of 2001. Management did not expect significant revenues from its legacy product lines in future periods. The Company wrote off $5.9 million of excess and obsolete inventory during the second quarter of 2001, resulting in an additional charge to cost of sales of $4.4 million. Approximately 74% of the write-off relates to the Company's legacy product lines. The remaining $1.5 million of excess and obsolete inventory written off was charged against the already established reserve. This additional excess and obsolete inventory charge was due to a sudden and significant decrease in predicted revenue and was calculated in accordance with the Company's established policy. 7 Only the severance and fringe benefit payments relating to the workforce reduction impacted cash flow. A summary of the restructuring costs and other special charges is outlined as follows (in thousands):
Second Quarter Cash Payments Third Fourth Accrual Total and Noncash Quarter Cash Quarter Cash Balance at Charge Charges Payments Payments Dec. 31, 2001 ---------------------------------------------------------------------------- Workforce reduction $ 483 $ 17 $ 384 $ 82 $ -- Fixed asset write-off 123 123 -- -- -- Impairment of purchased intangibles 1,485 1,485 -- -- -- Excess and obsolete inventory charge 4,394 4,394 -- -- -- ---------------------------------------------------------------------------- $6,485 $6,019 $ 384 $ 82 $ -- ============================================================================
3. INVENTORIES Inventories are valued as the lower of cost or market and include material, labor and manufacturing overhead. Cost is determined on a first-in, first-out basis (in thousands):
Sept. 30, 2002 Dec. 31, 2001 ----------------------------------- Raw Materials $ 2,896 $ 4,740 Work-in-Process 837 1,397 Finished Goods 363 518 ----------------------------------- Total $ 4,096 $ 6,655 ===================================
Valuing inventory at the lower of cost or market involves an inherent level of risk and uncertainty due to technology trends in the industry and customer demand for our products. Future events may cause significant fluctuations in our operating results. 4. DEFERRED TAXES As of September 30, 2002, the Company had net deferred tax assets of $4.9 million, reflecting net operating loss carryforwards and temporary differences which will reduce taxable income in future years. Management is required to assess the realization of the deferred tax assets. Significant changes in circumstances may require adjustments during interim periods. The future tax benefits related to the domestic deferred tax assets are not reserved as it has been more likely than not that they will be realized due to their relatively long carryforward periods. Although realization is not assured, management has concluded at this point that it is more likely than not that the net deferred tax assets will be realized. However, the Company has incurred significant losses from operations over recent quarters and due to uncertain market conditions and the difficulty in determining reliable forecasts, management's long and short-term forecasts will require 8 frequent reassessment. As a result, the Company may need to establish valuation allowances for all or a portion of the net deferred tax assets. 5. CREDIT FACILITY The Company has a $5 million revolving credit facility with a bank. The revolving credit facility was extended during the quarter and now matures on June 30, 2004 and is secured throughout the term of the credit facility by a ninety-day certificate of deposit issued by the bank in the principal amount equal to the stated principal amount of the promissory note. The certificate of deposit is reflected as restricted cash on the accompanying balance sheet. The credit facility bears interest at the rate of approximately 1% per annum above the certificate of deposit rate, which was 1.39% at September 30, 2002, and includes certain restrictive covenants including, among others, a tangible net worth restriction. As of September 30, 2002, the Company was in compliance with all restrictive covenants included in the revolving credit facility. At September 30, 2002, the Company had borrowings of $3.5 million and availability under the revolving credit facility was $1.5 million. 6. COMPREHENSIVE INCOME The following table shows the Company's comprehensive income (in thousands):
Three months ended Sept. 30, Nine months ended Sept. 30, 2002 2001 2002 2001 ------------------------------------------------------------- Net loss $ (721) $ (1,456) $ (2,780) $ (7,650) Other comprehensive income: Unrealized holding (loss) gain arising during period, net of tax 66 161 51 212 Foreign currency translation adjustment (17) 154 53 (52) ------------------------------------------------------------- Comprehensive loss $ (672) $ (1,141) $ (2,676) $ (7,490) =============================================================
7. NET INCOME PER COMMON AND COMMON DILUTIVE SHARE Diluted earnings per share consist only of the dilutive impact of stock options, using the treasury stock method. Due to the Company's net losses for the periods presented, the effect of dilutive securities would have been antidilutive. Options that would have otherwise been included in the calculation of diluted earnings per common share were 123 and 3,893 stock options for the three-month periods ended September 30, 2002 and 2001 and 13,889 and 66,181 stock options for the nine-month periods ended September 30, 2002 and 2001, respectively. 9 8. SEGMENT INFORMATION The Company is principally engaged in the business of enabling rapid platform design and integration for the global voice and data communications markets through custom and off-the-shelf communications equipment, embedded software development suites, and systems integration and consulting services for telecom and enterprise networks. Except for revenue performance, which is monitored by product line, the chief operating decision-makers review financial information presented on a consolidated basis, for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in a single industry segment. Geographic revenue and long-lived assets related to North America and other foreign countries as of and for the three-month periods and nine-month periods ended September 30, 2002 and 2001 are as follows: (in thousands)
Three months ended Sept. 30: Nine months ended Sept. 30: Revenue 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------- North America $ 4,842 $3,303 $ 13,501 $17,307 Europe 582 1,300 3,122 3,865 Pac Rim 598 -- 1,715 490 -------------------------------------------------------------------------- Total $ 6,022 $ 4,603 $ 18,338 $ 21,662 =========================================================================
Geographic long-lived assets consist of property and equipment and capitalized software, net of the related accumulated depreciation and amortization. (in thousands)
Long-lived assets Sept. 30, 2002 Dec. 31, 2001 - ----------------------------------------------------------------------- North America $ 749 $ 1,116 Europe 149 160 Pacific Rim 1 2 ------------------------------ Total $ 899 $ 1,278 ==============================
Additional information regarding revenue by product line is as follows: (in thousands)
Three months ended Sept. 30: Nine months ended Sept. 30: Revenue 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------- Telecom $ 3,441 $1,307 $ 8,429 $ 5,230 Combo 1,856 1,649 6,593 4,877 LAN 208 894 1,490 4,828 Storage 262 568 1,013 5,398 WAN 35 19 147 545 Other 220 166 666 784 -------------------------------------------------------------------------- Total $ 6,022 $ 4,603 $ 18,338 $ 21,662 =========================================================================
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The most significant changes made by SFAS No. 141 are: 1) requiring that the purchase method of accounting be used for all business combinations initiated after June 30, 2001; and 2) establishing specific criteria for the recognition of intangible assets separately from goodwill. SFAS No. 142 primarily addresses the accounting for acquired goodwill and intangible assets. The provisions of 10 SFAS No. 142 are effective for fiscal years beginning after December 15, 2001. The most significant changes made by SFAS No. 142 are: 1) goodwill and indefinite-lived intangible assets are no longer amortized; 2) goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired; and 3) the amortization period of intangible assets with finite lives will no longer be limited to forty years. The Company adopted SFAS No. 141 effective July 1, 2001, and SFAS No. 142 effective January 1, 2002, however, as the Company's goodwill was determined to be impaired and was written off in the fourth quarter of 2001, the adoption of these standards did not have a material effect on the Company's financial position or results of operations for the periods ended September 30, 2002. The following tables show the impact that SFAS No. 142 would have had if adopted as of January 1, 2001: (in thousands)
Three months ended Sept. 30, Nine months ended Sept. 30, 2002 2001 2002 2001 ------------------------------------------------------------------ Reported net loss $ (721) $(1,456) $(2,780) $(7,650) Goodwill amortization - 60 - 180 ------------------------------------------------------------------ Adjusted net loss $ (721) $(1,396) $(2,780) $(7,470) ================================================================== Three months ended Sept. 30, Nine months ended Sept. 30, Basic loss per share: 2002 2001 2002 2001 ------------------------------------------------------------------ Reported net loss $(0.13) $ (0.26) $ (0.50) $ (1.34) Goodwill amortization -- 0.01 -- 0.03 ------------------------------------------------------------------ Adjusted basic net loss per share $(0.13) $ (0.25) $ (0.50) $ (1.31) ================================================================== Three months ended Sept. 30, Nine months ended Sept. 30, Diluted loss per share: 2002 2001 2002 2001 ------------------------------------------------------------------ Reported net loss $(0.13) $ (0.26) $ (0.50) $ (1.34) Goodwill amortization -- 0.01 -- 0.03 ------------------------------------------------------------------ Adjusted diluted net loss per share $(0.13) $ (0.25) $ (0.50) $(1.31) ==================================================================
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period that it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material impact on the Company's results of operations, financial position or cash flows. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of;" however, this statement retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used, and (b) measurement of long-lived assets to be disposed of by sale. This statement also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for segments of a business to be 11 disposed of. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted this standard effective January 1, 2002. The adoption of this standard did not have a material effect on the Company's financial position or results of operations for the periods ended September 30, 2002. In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002," which rescinded or amended various existing standards. One change addressed by this standard pertains to treatment of extinguishments of debt as an extraordinary item. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt" and states that an extinguishment of debt cannot be classified as an extraordinary item unless it meets the unusual or infrequent criteria outlined in Accounting Principles Board Opinion No. 30 "Reporting the Unusual and Infrequently Occurring Events and Transactions." The provisions of this statement are effective for fiscal years beginning after May 15, 2002 and extinguishments of debt that were previously classified as an extraordinary item in prior periods that do not meet the criteria in Opinion 30 for classification as an extraordinary item shall be reclassified. The adoption of SFAS No. 145 is not expected to have a material impact on the Company's results of operations, financial position or cash flows. In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities," which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of this statement are effective for exit or disposal activities initiated after December 31, 2002 and are not expected to have a material impact on the Company's results of operations, financial position or cash flows. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements about the business, financial condition and prospects of the Company. These statements are made under the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including without limitation, changes in product demand, the availability of products, changes in competition, economic conditions, various inventory risks due to changes in market conditions and other risks indicated in the Company's filings and reports with the Securities and Exchange Commission. All the foregoing risks and uncertainties are beyond the ability of the Company to control, and in many cases, the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this report, the words "believes," "plans," "expects," "intends" and "anticipates" and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. 12 APPLICATION OF CRITICAL ACCOUNTING POLICIES The Company's consolidated financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that the following are some of the more critical judgment areas in the application of the Company's accounting policies that affect the Company's financial condition and results of operations. REVENUE RECOGNITION: Revenues consist of product and service revenues and are recognized in accordance with SEC Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition." Product revenues are recognized upon shipment, provided fees are fixed and determinable, a customer purchase order is obtained, and collection is probable. Revenues from reseller agreements are recognized when the product is sold through to the end customer unless an established return history supports recognizing revenue upon shipment, less a provision for estimated sales returns. The Company maintains its allowance for returns as a reduction to accounts receivable. Deferred revenue consists of revenue from reseller arrangements and certain arrangements with extended payment terms. Revenue from extended payment terms is recognized in the period the payment becomes due if all other revenue recognition criteria have been met. Service revenue is recognized as the services are performed. The Company offers to its customers a limited warranty that its products will be free from defect in the materials and workmanship for a specified period. The Company has established a warranty reserve, as a component of accrued liabilities, for any potential claims. ALLOWANCE FOR DOUBTFUL ACCOUNTS: Management is required to estimate the collectibility of the Company's trade receivables. A considerable amount of judgment is required in assessing the realization of these receivables, including the current creditworthiness of each customer and related aging of the past due balances. Management evaluates specific accounts when they become aware of a situation where a customer may not be able to meet its financial obligations due to a deterioration of its financial viability, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to management and reevaluated and adjusted as additional information is received. The reserves also are determined by using percentages applied to certain aged receivable categories based on historical results. INVENTORIES: Inventories are valued at the lower of cost or market and include material, labor and manufacturing overhead. Cost is determined on a first-in, first-out basis. Valuing inventory at the lower of cost or market involves an inherent level of risk and uncertainty due to technology trends in the industry and customer demand for our products. In assessing the ultimate realization of inventories, management is required to make judgments as to future demand requirements and compare that with the current or committed inventory levels. Reserve requirements generally increase as projected demand requirements decrease due to market conditions, technological and product life cycle changes as well as longer than previously expected usage periods. The Company has experienced significant changes in required reserves in recent periods due to changes 13 in strategic direction, such as discontinuances of product lines as well as declining market conditions. It is possible that significant changes in required inventory reserves may continue to occur in the future if there is a further decline in market conditions. DEFERRED TAXES: As of September 30, 2002, the Company had net deferred tax assets of $4.9 million, reflecting net operating loss carryforwards and temporary differences which will reduce taxable income in future years. Management is required to assess the realization of the deferred tax assets. Significant changes in circumstances may require adjustments during interim periods. The future tax benefits related to the domestic deferred tax assets are not reserved as it has been more likely than not that they will be realized due to their relatively long carryforward periods. Although realization is not assured, management has concluded at this point that it is more likely than not that the net deferred tax assets will be realized. However, the Company has incurred significant losses from operations over recent quarters and due to uncertain market conditions and the difficulty in determining reliable forecasts, management's long and short-term forecasts will require frequent reassessment. As a result, the Company may need to establish valuation allowances for all or a portion of the net deferred tax assets. Management has discussed the application of these critical accounting policies with the Board of Directors and Audit Committee. There was no adoption of any accounting policies during the three months ended September 30, 2002. RESULTS OF OPERATIONS REVENUES: Total revenues for the three months ended September 30, 2002 were $6 million. Revenues for the same period in 2001 ("comparative period") were $4.6 million. Telecom product revenues increased to $3.4 million for the three months ended September 30, 2002, from $1.3 million in the comparative period. Telecom product revenues have been growing steadily throughout 2002, as some of the Company's design wins have been moving into production. However, the telecommunications equipment market continues to struggle through a prolonged contraction. Combo product revenues also increased reaching $1.9 million for the three months ended September 30, 2002 compared to $1.6 million in the comparative period. These increases were partially offset by the anticipated decline in revenues from the Company's legacy product lines. Legacy product revenues decreased from $1.3 million in the comparative period to $257,000 for the three months ended September 30, 2002. Two customers individually accounted for 43% and 28% of the Company's third quarter 2002 revenue. In the comparative period, one customer individually accounted for 42% of the Company's revenue. Total revenues for the nine months ended September 30, 2002 were $18.3 million. Revenues for the nine months ended September 30, 2001 were $21.7 million. The reduction in revenues was generally due to the continued market slowdown, which has significantly reduced computer and communications equipment purchasing by key customers, as well as the discontinuance of several lines of legacy technologies. Legacy revenues decreased from $6.5 million for the nine months ended September 30, 2001 to $1.7 million for the nine months ended September 30, 2002. In addition to the decrease in legacy technologies, revenues from Fibre Channel products decreased from $4.2 14 million for the nine months ended September 30, 2001 to $980,000 for the nine months ended September 30, 2002. The decrease in legacy and Fibre Channel revenues was partially offset by revenue growth in combo technologies and the telecom product line. Combo technologies revenue increased to $6.6 million for the nine months ended September 30, 2002 from $4.9 million for the nine months ended September 30, 2001. Telecom product revenues increased to $8.4 million for the nine months ended September 30, 2002 from $5.2 million for the nine months ended September 30, 2001. GROSS MARGIN: Gross margin as a percentage of revenues was 43% for the third quarter 2002 and 38% for the comparative period. The increase in the gross margin percentage primarily relates to cost improvement strategies implemented in certain product lines as well as improved operating efficiency in the Company's repair organization. These increases in gross margin were partially offset by a larger reserve for inventory obsolescence charge for the three months ended September 30, 2002 relative to the comparative period. The gross margin percentage for the nine months ended September 30, 2002 and 2001 was 36% and 26%, respectively. The increase in the gross margin percentage primarily relates to an excess and obsolete inventory charge of $4.4 million incurred during the second quarter 2001 compared to an excess and obsolete inventory charge of $1.1 million incurred during the second quarter 2002. This increase was partially offset by the change in product mix. Gross margin as a percentage of revenues, before considering the excess and obsolete inventory charges, was 42% and 46% for the nine months ended September 30, 2002 and 2001, respectively. RESEARCH AND DEVELOPMENT: The Company's investment in the development of new products through research and development was $1.8 million for both the three months ended September 30, 2002 and the comparative period. As a percentage of revenue, research and development expenses were 30% in the third quarter 2002 and 39% in the comparative period. Research and development expenses decreased as a percentage of revenue due to the increase in revenue from the comparative period. The Company's investment in the development of new products through research and development was $5.2 million and $6.1 million for the nine months ended September 30, 2002 and 2001, respectively. As a percentage of revenue, research and development expenses were 28% for the nine months ended September 30, 2002 and 28% for the nine months ended September 30, 2001. Approximately 57% of the decrease in research and development expenses for the nine months ended September 30, 2002 was due to a reduction in headcount associated with the Company's restructuring program and other cost reduction initiatives implemented at the end of the second quarter 2001. The remaining portion of the decrease primarily related to decreased spending on legacy sustaining engineering, partially offset by an increase in telecommunications development spending. SALES AND MARKETING: Sales and marketing expenses were $1.4 million in the third quarter 2002 and $1.3 million in the comparative period. As a percentage of revenue, sales and marketing expenses were 24% in the third quarter 2002 and 29% in the comparative period. Sales and marketing expenses decreased as a percentage of revenue due to the increase in revenue from the comparative period. 15 Sales and marketing expenses were $4.4 million and $5.5 million for the nine months ended September 30, 2002 and 2001, respectively. As a percentage of revenue, sales and marketing expenses were 24% for the nine months ended September 30, 2002 and 26% for the nine months ended September 30, 2001. The decrease in sales and marketing expenses for the nine months ended September 30, 2002 was primarily due to a reduction in headcount associated with the Company's restructuring program and other cost reduction initiatives implemented at the end of the second quarter 2001. In addition, commission and sales bonus expense was down approximately 12%, period over period, due to lower revenue levels. Sales and Marketing expenses were relatively flat as a percentage of revenues. GENERAL AND ADMINISTRATIVE: General and administrative expenses were $846,000 in the third quarter 2002 and $795,000 in the comparative period. As a percentage of revenue, general and administrative expenses were 14% in the third quarter 2002 and 17% in the comparative period. General and administrative expenses decreased as a percentage of revenues due to the increase in revenues. General and administrative expenses were $2.4 million and $2.9 million for the nine months ended September 30, 2002 and 2001, respectively. As a percentage of revenue, general and administrative expenses were 13% for both the nine months ended September 30, 2002 and 2001. The decrease in general and administrative expenses for the nine months ended September 30, 2002 is primarily the result of a reduction in headcount associated with the Company's restructuring program and cost reduction initiatives implemented at the end of the second quarter 2001. RESTRUCTURING COSTS AND OTHER SPECIAL CHARGES: In the second quarter 2001, the Company announced a restructuring program designed to allow the Company to continue aggressive funding of its development organizations, while preserving cash levels and securing new design-ins. As a result of the restructuring program, continued decline in predicted revenue and customers' cautious expectations regarding market recovery, the Company recorded restructuring costs and other special charges of $2.1 million, classified as operating expenses, and an additional excess and obsolete inventory charge of $4.4 million, classified as cost of sales. The restructuring program resulted in the reduction of approximately 22% of the Company's workforce, impacting all business functions in North America. As a result, the Company recorded a workforce reduction charge of $483,000 relating to severance and fringe benefits. In addition, the Company wrote off $123,000 of nonutilized fixed assets. Due to the decline in business conditions, decline in legacy product revenues and the diminished expected future benefits from the purchased intangibles related to the acquisition of Synaptel, S.A. in 1996, the Company recorded a charge of $1.5 million related to the impairment of developed technology and assembled workforce during the second quarter 2001. These intangible assets, purchased in the acquisition of Synaptel, S.A., relate to the Company's legacy product lines. In the second quarter 2000, the Company developed a strategy to end-of-life many of its legacy products in an effort to focus its resources on its new product lines. This strategy resulted in increased sales of legacy products in 2000; however, legacy product revenues declined in the first quarter of 16 2001, and continued to decline through the second quarter of 2001. Management did not expect significant revenues from its legacy product lines in future periods. INTEREST INCOME, NET: Interest income, net of interest expense, was $100,000 in the third quarter 2002 and $231,000 in the comparative period. The decrease primarily relates to lower investment rates of return. Interest income, net of interest expense, was $427,000 and $417,000 for the nine months ended September 30, 2002 and 2001, respectively. OTHER INCOME (EXPENSE), NET: Other income (expense), net, was $23,000 in the third quarter 2002 and ($395,000) in the comparative period. Other income (expense), net in the comparative period includes charges related to the amortization of goodwill of $60,000 and a charge of $334,000 due to the other than temporary impairment of certain marketable securities received in the sale of the Company's VOIP business. As the carrying value of the Company's goodwill exceeded its fair value, the Company wrote off the carrying amount of its goodwill in the fourth quarter of 2001. Additionally, there were no charges related to impairment of marketable securities during the three months ended September 30, 2002. Other income (expense), net was $24,000 and ($616,000) for the nine months ended September 30, 2002 and 2001, respectively. Other income (expense), net in the nine months ended September 30, 2001, included charges for the amortization of goodwill of $180,000 and purchased intangibles of $330,000. As the carrying value of the Company's goodwill and purchased intangibles exceeded its fair value, the Company wrote off the carrying amount of its goodwill in the fourth quarter of 2001 and its purchased intangibles in the second quarter of 2001. In addition to the elimination of amortization expense related to goodwill and purchased intangibles during the third quarter 2001, the Company recorded a charge of $334,000 due to the other than temporary impairment of certain marketable securities received in the sale of the Company's VOIP business. INCOME TAXES: The Company's effective income tax rate was (43%) for the nine months ended September 30, 2002, and (33%) for the nine months ended September 30, 2001. The effective rate for the nine months ended September 30, 2002, differed from the statutory rate due to foreign income, which is offset by foreign loss carryforwards. The effective rate for the nine months ended September 30, 2001 included the impact of nondeductible goodwill and purchased intangibles amortization. NET LOSS: The Company reported a net loss of $721,000 in the third quarter 2002 and a net loss of $1.5 million in the comparative period. The Company reported a net loss of $2.8 million for the nine months ended September 30, 2002 and a net loss of $7.7 million for the nine months ended September 30, 2001. 17 LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2002, cash and cash equivalents totaled $12.4 million, an increase of $1.9 million from the December 31, 2001 balance of $10.4 million. The increase was attributable to cash provided by operating activities of $3 million and the effect of exchange rate changes of $110,000, partially offset by cash used by investing activities of $406,000 and cash used by financing activities of $783,000. Cash provided by operating activities was primarily comprised of a decrease in income taxes receivable of $2.5 million due to an income tax refund received in the second quarter, a decrease in inventories of $910,000 and a decrease in accounts receivable of $701,000, partially offset by cash used to fund operations of $2.8 million. Cash used by investing activities was primarily comprised of purchases of marketable securities of $1.2 million and fixed asset additions of $233,000, partially offset by proceeds from the sale of marketable securities of $1 million. Cash used by financing activities was primarily comprised of the purchase of redeemable common stock of $762,000. At September 30, 2002, the Company had no material commitments to purchase capital assets. The Company's significant long-term obligations are its operating leases on its facilities and future debt payments. The Company has not paid any dividends since its inception and does not anticipate paying any dividends in 2002. In October 2001, the Company announced that its Board of Directors had authorized the repurchase of up to $5 million of its common stock. Purchases are authorized to be made from time to time during a twenty-four month period in the open market or in privately negotiated transactions depending on market conditions. The Company will cancel all shares that it repurchases. The repurchase plan does not obligate the Company to repurchase any specific number of shares and may be suspended at any time. As of September 30, 2002, the Company had repurchased and cancelled shares at a combined purchase price of approximately $25,000 during the program. The Company has a $5 million revolving credit facility with a financial institution. The revolving credit facility expires in June 2004. As of September 30, 2002, the Company had borrowings of $3.5 million under the facility classified as long-term debt on its balance sheet. These borrowings are fully collateralized by a certificate of deposit. Effective October 1998, the Company approved a stock repurchase agreement with Motorola, Inc. to purchase ratably from October 1998 to July 2002, all of the shares owned by Motorola for $4.1 million at $6.25 per share. Under the terms of the agreement, Motorola retained the right as an equity owner and had assigned its voting rights to the Company. The Company canceled the stock upon each repurchase. Prior to the repurchase agreement, Motorola owned approximately 12% of the Company's outstanding common stock. In July 2002, the Company made its final repurchase of stock from Motorola and therefore has no further obligation under the agreement. The Company expects that its cash, cash equivalents, marketable securities and proceeds from its credit facility will be adequate to meet foreseeable cash needs for the next twelve months. However, it is possible that the Company may require additional sources of financing earlier than anticipated, as a result of unexpected cash needs or opportunities, an expanded growth strategy or disappointing operating results. Additional funds may 18 not be available on satisfactory terms when needed, whether within the next twelve to eighteen months or thereafter. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency Risk Due to the fact that the Company conducts business on a global basis in various foreign currencies, it is exposed to adverse movements in foreign currency exchange rates. The Company's operations in France are measured in the local currency converted to the U.S. dollar equivalent based on published exchange rates for the periods reported and are therefore subject to risk of exchange rate fluctuations. Foreign currency translation and transaction gains and losses were not significant. Market Price Risk The Company maintains a minority equity investment in a publicly traded Company and recorded a $334,000 net after tax loss during 2001 on this investment. The Company has no equity hedge contracts outstanding as of September 30, 2002 or December 31, 2001. Interest Rate Risk The Company's investments are subject to interest rate risk. Interest rate risk is the risk that the Company's financial condition and results of operations could be adversely affected due to movements in interest rates. The Company invests its cash in a variety of interest-earning financial instruments, including bank time deposits, money market funds, and variable rate and fixed rate obligations of corporations and national governmental entities and agencies. Due to the demand nature of the Company's money market funds and the short-term nature of the Company's time deposits and debt securities portfolio, these assets are particularly sensitive to changes in interest rates. The Company manages this risk through investments with shorter-term maturities and varying maturity dates. If the Company's short-term assets are reinvested in a declining interest rate environment, the Company would experience an immediate negative impact on other income. The opposite holds true in a rising interest rate environment. ITEM 4. CONTROLS AND PROCEDURES The Company's management, under the supervision of our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), performed an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures within 90 days before the filing date of this quarterly report. Based on that evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures are effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect disclosure controls subsequent to the date of this evaluation. 19 PART II ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORT ON FORM 8-K EXHIBITS 99.1 Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 10.1 Lease on facility at Parkway Center, Phase I, Plano, Texas 10.2 Lease on facility at 2105 Luna Road, Carrollton, Texas REPORTS ON FORM 8-K None 20 SIGNATURE 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. INTERPHASE CORPORATION (Registrant) Date: November 14, 2002 /s/ Steven P. Kovac --------------------------- Steven P. Kovac Chief Financial Officer, Vice President of Finance and Treasurer (Principal Financial and Accounting Officer) 21 CERTIFICATION PURSUANT TO RULE 13a-14(b) I, Gregory B. Kalush, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Interphase Corporation (the Company); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14) for the Company and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the Audit Committee of the Company's Board of Directors: (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 Signature: /s/ Gregory B. Kalush ----------------------- ------------------------ Chief Executive Officer 22 CERTIFICATION PURSUANT TO RULE 13a-14(b) I, Steven P. Kovac, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Interphase Corporation (the Company); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14) for the Company and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the Audit Committee of the Company's Board of Directors: (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 Signature: /s/ Steven P. Kovac ------------------------ ------------------------ Chief Financial Officer 23 EXHIBIT INDEX EXHIBITS DESCRIPTION -------- ----------- 99.1 Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 10.1 Lease on facility at Parkway Center, Phase I, Plano, Texas 10.2 Lease on facility at 2105 Luna Road, Carrollton, Texas EX-10.1 3 d01067exv10w1.txt OFFICE LEASE AGREEMENT EXHIBIT 10.1 OFFICE LEASE AGREEMENT BY AND BETWEEN WEDGEWOOD DRIVE PARTNERS, LTD. AND INTERPHASE CORPORATION PARKWAY CENTRE, PHASE I 2901 NORTH DALLAS PARKWAY PIANO, TEXAS 75093 TABLE OF CONTENTS 1. DEFINITIONS .................................................. 1 2. LEASE GRANT .................................................. 5 3. LEASE TERM ................................................... 5 4. USE .......................................................... 6 5. BASE RENTAL .................................................. 6 6. OPERATING EXPENSE PAYMENT .................................... 7 7. ELECTRIC SERVICE BILLING ..................................... 8 8. SERVICES TO BE FURNISHED BY LANDLORD ......................... 9 9. IMPROVEMENTS TO BE MADE BY LANDLORD .......................... 10 10. MAINTENANCE AND REPAIR OF PREMISES BY LANDLORD ............... 10 11. GRAPHICS; SIGNAGE ............................................ 11 12. CARE OF THE PREMISES BY TENANT ............................... 11 13. REPAIRS AND ALTERATIONS BY TENANT ............................ 11 14. PARKING ...................................................... 11 15. LAWS AND REGULATIONS ......................................... 12 16. BUILDING RULES ............................................... 12 17. ENTRY BY LANDLORD ............................................ 12 18. ASSIGNMENT AND SUBLETTING .................................... 12 19. MECHANIC'S LIEN .............................................. 13 20. PROPERTY INSURANCE ........................................... 13 21. LIABILITY INSURANCE .......................................... 14 22. INDEMNITY .................................................... 14 23. WAIVER OF SUBROGATION RIGHTS ................................. 15 24. CASUALTY DAMAGE .............................................. 15 25. CONDEMNATION ................................................. 16 26. DAMAGES FROM CERTAIN CAUSES .................................. 16 27. EVENTS OF DEFAULT ............................................ 16 28. RIGHTS OF LANDLORD UPON DEFAULT BY TENANT .................... 17 29. EXPENSE OF REPOSSESSION ...................................... 21 30. CUMULATIVE REMEDIES; WAIVER OR RELEASE ....................... 21 31. HAZARDOUS WASTE .............................................. 21
i 32. ATTORNEY'S FEES .............................................. 22 33. DEFAULT BY LANDLORD .......................................... 22 34. PEACEFUL ENJOYMENT ........................................... 22 35. HOLDING OVER ................................................. 23 36. SUBORDINATION TO MORTGAGE .................................... 23 37. LANDLORD'S CONTRACTUAL SECURITY INTEREST ..................... 24 38. USE AND STORAGE OF PERSONAL PROPERTY ......................... 24 39. SUBORDINATION OF LANDLORD'S LIEN ............................. 25 40. NO IMPLIED WAIVER ............................................ 25 41. PERSONAL LIABILITY ........................................... 26 42. SECURITY DEPOSIT ............................................. 26 43. NOTICE ....................................................... 26 44. SEVERABILITY ................................................. 27 45. AMERICANS WITH DISABILITIES ACT AND TEXAS ARCHITECTURAL BARRIERS ACT ................................... 27 46. RECORDATION .................................................. 28 47. GOVERNING LAW ................................................ 28 48. FORCE MAJEURE ................................................ 28 49. TIME OF PERFORMANCE .......................................... 28 50. TRANSFERS BY LANDLORD ........................................ 28 51. BROKER ....................................................... 28 52. EFFECT OF DELIVERY OF THIS LEASE ............................. 29 53. ENTIRE AGREEMENT ............................................. 29 54. AMENDMENT .................................................... 29 55. LIMITATION OF WARRANTIES ..................................... 29 56. MAIL ......................................................... 29 57. EXHIBITS ..................................................... 29
ii OFFICE LEASE AGREEMENT THIS LEASE AGREEMENT (the "Lease") made and entered into on this the 2nd day of August 2002, between the "Landlord" and "Tenant" hereafter set forth. WITNESSETH: 1. DEFINITIONS: For the purpose of this Lease, the following definitions shall govern: (a) "Landlord": WEDGEWOOD DRIVE PARTNERS, LTD., a Texas limited partnership. (b) "Tenant": Interphase Corporation (c) The "Property": The real property described in Exhibit A attached hereto and incorporated herein, the improvements constructed thereon. (d) "Premises": Suite number: 200 (approximately 22,228 square feet of Rentable Area), being the suite outlined on the floor plan attached to this Lease as Exhibit B and incorporated herein. At Tenant's request, Landlord shall provide Tenant with an architect's certificate stating the actual number of square feet contained within the Premises according to BOMA standards. The Base Rental and Tenant's Pro Rata Share (as below defined) shall be adjusted based on the actual number of square feet in the Premises, if necessary. The Premises are located in the office building known as Parkway Centre, Phase I (the "Building") located on the Property known as 2901 North Dallas Parkway, Plano, Texas 75093. (e) "Base Rental": The sum of thirty-one thousand four hundred and eighty nine dollars and sixty-seven cents ($31,489.67) per month or $17.00 per square foot per year as Base Rental in accordance with Paragraph 5 hereof, as same may be adjusted pursuant to an architect's certificate delivered in accordance with Paragraph 1(d); provided, however, that no rent shall be due and payable for the first three (3) months following the Commencement Date. The Base Rental due for the first month during the Lease Term (as below defined) has been deposited with Landlord by Tenant contemporaneously with the execution hereof Initials: SK ------ GB ------ Page 1 (f) "Commencement Date": The later of 10/01/02 or the date specified in Paragraph 3(c) hereof. In the event Commencement Date is not delayed pursuant to Paragraph 3(c), this Lease shall expire on 12/31/05. (g) "Rent Commencement Date": The date that is three (3) calendar months after the Commencement Date, upon which Base Rental shall become due and payable. (h) "Lease Term": A term commencing on the Commencement Date and continuing until Thirty-nine (39) months after the first day of the first full month following Commencement Date. (i) "Base Year": Calendar year 2002. (j) "Security Deposit": The sum of thirty-one thousand four hundred and eighty nine dollars and sixty-seven cents ($31,489.67). (k) "Additional Security Deposit": The sum of thirty-one thousand four hundred and eighty nine dollars and sixty-seven cents ($31,489.67) to be deposited with Landlord pursuant to Section 42(B). (1) "Tenant's Prorata Share": 25.52% being a fraction the numerator of which is the number of square feet of Rentable Area in the Premises and the denominator of which is the number of square feet of Rentable Area in the Building (87,112), as same may be adjusted pursuant to an architect's certificate delivered in accordance with Paragraph 1(d). (m) "Permitted Use": General office use and engineering labs. (n) "Common Areas": Those areas of the Building devoted to corridors, elevator foyers, atria, restrooms, mechanical rooms, janitorial closets, electrical and telephone closets, vending areas and other facilities provided for the common use or benefit of tenants generally and/or the public. (o) "Service Areas": Those areas of the Building within the outside walls used for elevator mechanical rooms, building stairs, fire towers, elevator shafts, flues, vents, stacks, pipe shafts and vertical ducts (but shall not include any such areas for the exclusive use of the particular Tenant). (p) "Rentable Area" of the Premises: The gross area within the inside surface of the outer glass of the exterior walls, to the mid-point of any walls separating portions of the Premises from Common Areas and Service Areas, subject to the following: Initials: SK ------ GB ------ Page 2 1) Rentable Area shall include any Service Areas. 2) Rentable Area shall include a prorata part of the Common Areas in the Building, such proration based upon the ratio of the Rentable Area within the Premises to the total Rentable Area in the Building, both determined without regard to the Common Areas. 3) Rentable Area shall include any columns and/or projection(s) which protrude into the Premises and/or the Common Areas. (o) "Operating Expenses": All expenses incurred by Landlord with respect to the maintenance and operation of the Property or the Building of which the Premises are a part, including, but not limited to: 1) Maintenance and repair costs; 2) Security; 3) Management fees, wages and fringe benefits payable to employees of Landlord whose duties are directly connected with the operation and maintenance of the Building; 4) All services, utilities, supplies, repairs, replacement or other expenses for maintaining and operating the Common Areas and parking areas; 5) The cost, including interest, amortized over its useful life as determined in accordance with generally accepted accounting principles, of any capital improvement made to the Building by Landlord after the date of this Lease which is required under any governmental law or regulation that was not applicable to the Building at the time it was constructed; 6) The cost, including interest, amortized over its useful life as determined in accordance with generally accepted accounting principles, of installation of any device or other equipment which improves the operating efficiency of any system within the Premises and which thereby reduces Operating Expenses; 7) All other current expenses or amortization of capital improvements amortized over their useful life as determined in accordance with generally accepted accounting principles, which would generally be regarded as operating and maintenance expenses or expenditures to improve operating efficiency, but excluding the exclusions from Operating Expenses provided herein; Initials: SK ------ GB ------ Page 3 8) All real property taxes and annual installments of special assessments, including dues and assessments by means of deed restrictions and/or owners' associations which accrue against the Property or the Building of which the Premises are a part during the term of this Lease; and 9) All insurance premiums Landlord is required to pay or deems necessary to pay, including public liability insurance, with respect to the Building. The term "Operating Expense" does not include the following: 10) Repairs, restoration or other work occasioned by fire, windstorm or other casualty; 11) Income and franchise taxes of Landlord; 12) Expenses incurred in leasing to or procuring of tenants, leasing commissions, advertising expenses and expenses for the renovating of space for new tenants; 13) Interest or principal payments on any mortgage or other indebtedness of Landlord; 14) Compensation paid to any employee of Landlord above the grade of property manager; 15) Any depreciation allowance or expense; or 16) Other operating expenses or Electrical Service Billings, which are the responsibility of tenants of the Building for their premises. (p) "Controllable Operating Expenses": All Operating Expenses other than taxes, insurance costs, utilities, and the amortization of the cost of installation of capital improvements to improve operating efficiency. (q) "Exterior Common Areas": Those areas which are not located within the Building and which are provided and maintained for the common use and benefit of Landlord and Tenants of the Building generally and the employees, invitees and licensees of Landlord and such Tenants; including without limitation all parking areas, enclosed or otherwise, and all streets, sidewalks and landscaped areas located on the Property. Initials: SK ------ GB ------ Page 4 (q) "Building Standard Improvements": When used herein, this term shall mean those improvements to the Tenant-occupied spaces within the Building which Landlord shall agree to provide according to the Work Letter attached hereto as Exhibit D and incorporated herein for all purposes. "Building Grade" shall mean the type, brand and/or quality of materials designated on Exhibit D to be the minimum quality to be used in the Building. (r) "Tenant's Address": For purposes of this Lease, Tenant's address for notice prior to the Commencement Date shall be: 13800 Senlac Drive Dallas, Texas 75234 Tenant's address for notice after the Commencement Date shall be the address of the Leased Premises. (s) "Landlord's Address": For purposes of this Lease, Landlord's address for notice shall be: 501 Elm Street, Suite 375, Dallas, Texas 75202, facsimile: 214-741-3477. 2. LEASE GRANT: Subject to and upon the terms herein set forth, Landlord leases to Tenant and Tenant leases from Landlord the Premises, as defined in Paragraph 1(d). 3. LEASE TERM: (a) This Lease shall continue in force during a period beginning on the Commencement Date and continuing until the expiration of the Lease Term, unless this Lease is sooner terminated or extended to a later date under any other term or provision hereof. (b) If by the first date specified in Paragraph 1(f) the Premises have not been substantially completed pursuant to the Work Letter, due to omission, delay or default by Tenant or anyone acting under or for Tenant (hereinafter collectively, a "Tenant's Delay"), Landlord shall have no liability, and the obligations of the Lease (including without limitation, the obligation to pay rent) shall nonetheless commence as of the Commencement Date. (c) It however, the Premises are not substantially completed, other than as a result of Tenant's Delay, by October 1, 2002, the Commencement Date shall be delayed until the earlier of actual occupancy by Tenant or substantial completion of the work which Landlord has agreed to perform and the Rent Commencement Date will be delayed accordingly. Initials: SK ------ GB ------ Page 5 (d) In the event the Commencement Date has not occurred prior to November 15, 2002, Tenant shall have the option to terminate this Lease upon ten (10) days prior written notice to Landlord, unless Landlord shall deliver the Premises substantially complete in accordance with the terms of the Work Letter within such ten (10) day period. Tenant's right to terminate shall expire on November 30, 2002. If Tenant elects to terminate the Lease as provided herein, Tenant shall be released from all obligations under this Lease. For purposes of this Lease, the terms "substantially complete" or "substantial completion" shall mean that a certificate of occupancy has been issued for the Premises and all major "punch list" items have been resolved to Tenant's reasonable satisfaction, except for minor items, which would not have a material effect on Tenant's use, enjoyment, and occupancy of the Premises. 4. USE: The Premises shall be used for the Permitted Use and for no other purpose. The Tenant agrees not to use or permit the use of the Premises for any purpose which is illegal, or which, in Landlord's reasonable opinion, creates a nuisance or which would increase the cost of insurance coverage with respect to the Building. 5. BASE RENTAL: (a) Tenant agrees to pay during the Lease Term, to Landlord, without any setoff or deductions whatsoever, the Base Rental, and all other such sums of money as shall become due hereunder as additional rent, including, without limitation, any estimated Operating Expense payments pursuant to Paragraph 6 hereof then in effect, the Electric Service Billings pursuant to Paragraph 7 hereof, and the rent for the reserved parking spaces pursuant to Paragraph 14, all of which are sometimes herein collectively called "rent" for the nonpayment of which Landlord shall be entitled to exercise all such rights and remedies as are herein provided in the case of the nonpayment of Base Rental. The Base Rental, together with any estimated Operating Expense payments pursuant to Paragraph 6 hereof, the Electric Service Billings pursuant to Paragraph 7 hereof, and the rent for the reserved parking spaces pursuant to Paragraph 14, shall be due and payable in advance monthly on the first day of each calendar month during the initial term of this Lease and any extensions or renewals thereof; provided, however that Base Rental shall not commence until the Rent Commencement Date, and Tenant hereby agrees to pay such Base Rental and any adjustments and billings thereto to Landlord at Landlord's address provided herein (or such other address as may be designated by Landlord in writing from time to time) monthly, in advance, and without demand. If the term of this Lease commences on a day other than the first day of a month or terminates on a day other the day other than the last day of a month, then the installments of Base Rental and any adjustments and Initials: SK ------ GB ------ Page 6 billings thereto for such month or months shall be prorated, based on the number of days in such month. (b) If Tenant shall fail to pay the Base Rental on or before the tenth (10th) day of the calendar month in which such Base Rental is due, Tenant shall be deemed to be "late", and Tenant shall pay to Landlord on demand a late charge equal to five percent (5%) of such Base Rental. 6. OPERATING EXPENSE PAYMENT: Operating Expenses. In addition to Base Rental, Tenant shall also pay Tenant's Prorata Share of the amount, if any, by which Operating Expenses during any calendar year of the Lease Term after the Base Year of 2002 exceed the Operating Expenses of the Base Year; provided, however, that Tenant shall not pay additional rent for excess Operating Expenses for the calendar year 2003. Notwithstanding anything to the contrary, Tenant's obligation for the payment of Controllable Operating Expenses shall be capped so as not to exceed an annual increase from the immediately preceding year in excess of 8% per annum cumulatively; provided that such increase for the year 2004 shall be based on an increase over the Base Year. Landlord shall, within nine (9) months following the close of any calendar year provide a statement to Tenant showing in reasonable detail the computations of the additional rent due for Operating Expenses, if any (the "Statement"), which shall be due thirty (30) days after the receipt of such Statement. If this Lease shall terminate on a day other than the last day of the calendar year, the amount of any additional rental payable by Tenant applicable to the year in which such termination shall occur shall be prorated based on the ratio that the number of days from the commencement of such calendar year to and including such termination date bears to 365. If at any time after calendar year 2003, Landlord has reason to believe the per square foot Operating Expenses for the calendar year will exceed the Operating Expenses for the Base Year, Landlord may by invoice direct Tenant to prepay monthly one-twelfth of an amount equal to (i) an estimate of the additional rent due under this paragraph for the current year, or (ii) the amount paid in the previous calendar year. If the Statement shows an amount owing by Tenant that is less than the sum of the monthly payments made by Tenant in the previous calendar year, the Statement shall be accompanied by a refund of the excess from Landlord to Tenant (or, at Landlord's option, Landlord may apply such overpayment against rentals due hereunder). During the year in which this Lease terminates, Landlord shall have the option to invoice Tenant for Tenant's Prorata Share of the excess Operating Expenses based upon the previous year's excess Operating Expenses; Landlord shall invoice Tenant under this option either prior to the termination of this Lease or within thirty (30) days thereafter. Landlord shall refund to Tenant, within thirty (30) days after the termination of this Lease, any excess amounts paid by Tenant during the final year or partial year of the Lease Term, as the case may be. Initials: SK ------ GB ------ Page 7 Audit Rights. Tenant, at any time within one (1) year after receipt of any Statement, and upon no less than thirty (30) days prior written notice to Landlord, may cause an audit to be made of Landlord's books and records relating to Operating Expenses. Landlord shall make available for the audit at Landlord's office in Dallas, Texas, all applicable books and records. If the audit discloses an overcharge of Operating Expenses by Landlord, Landlord shall within thirty (30) days pay to Tenant the amount of the overpayment. If the audit discloses an overpayment in excess of five percent (5%) of the Operating Expenses actually paid by Tenant, then Landlord shall also immediately pay to Tenant all reasonable costs and expenses incurred in the audit. If the audit discloses an underpayment of Operating Expenses actually paid by Tenant, then Tenant shall, within thirty (30) days after the conclusion of such audit, pay to Landlord the amount of such underpayment. 7. ELECTRIC SERVICE BILLING: Tenant agrees to pay to Landlord, within ten (10) business days of the date Tenant is billed by Landlord each month, as additional rent, Tenant's Prorata Share of all electricity to be consumed in the Building during each month, or portion of a month during the Lease Term. Landlord shall bill Tenant monthly in advance for such utilities' cost for the current month. Tenant's utilities' cost shall be adjusted for a partial month of occupancy on a per diem basis. Landlord shall make a good faith estimate of charges for all electricity to be consumed in the Building for purposes of electrical service billings. Any amounts paid based on such estimate shall be subject to adjustment on an annual basis if actual utility costs for any calendar year are not equal to Landlord's estimate. Landlord shall refund to Tenant any overpayment of such costs (or, at Landlord's option, apply such overpayment against rentals due hereunder). Likewise, Tenant shall pay to Landlord, on demand, any underpayment with respect to utility costs for prior year. Landlord shall not be obligated to provide dedicated circuits or electrical power in excess of Building Standard (4 watts per square foot for Tenant's use plus 4 watts per square foot for Tenant's HVAC). If the installation of said electrical equipment requires additional air conditioning capacity above that provided by the Building Standard systems, then the additional air conditioning installation and operating costs will be the obligation of the Tenant. Landlord, at its option, may cause an electric current meter or such similar device to be installed on the Premises so as to measure the amount of electric current consumed by Tenant. The cost of any such meters and of the installation, maintenance and repair thereof shall be paid for by Tenant and Tenant agrees to pay to Landlord, promptly upon demand by Landlord, for all such electricity used or consumed. Initials: SK ------ GB ------ Page 8 8. SERVICES TO BE FURNISHED BY LANDLORD: (a) Hot and cold water at those points of supply provided for general use of other tenants in the Building, central heat and air conditioning in season, at such temperatures and in such amounts as are considered by Landlord to be provided in first class office buildings within the North Dallas Tollway/Plano submarket or as required by governmental authority, provided, however, heating and air conditioning service at times other than for "Normal Business Hours" for the Building (which are 7:30 a.m. through 6:00 p.m. on Mondays through Fridays, and 7:30 a.m. to 1:00 p.m. on Saturdays, exclusive of normal business holidays) shall be furnished only upon the written request of Tenant delivered to Landlord prior to 3:00 pm. Tenant shall bear the entire estimated cost of such additional service for the floor of the Premises requiring additional services, which cost to Tenant is currently billed at $35.00 per hour. Such amount shall be invoiced by Landlord with the monthly Electric Service Billing. Normal business holidays shall, for purposes of this Lease, be deemed to be New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Good Friday, Christmas Day, and any other holidays commonly observed by landlords of comparable buildings. (b) Routine maintenance and repair, including, without limitation, window washing, plumbing repairs, carpet cleaning, touch up painting, and electric lighting service for all Common Areas and Service Areas of the Building in the manner and to the extent customary for first class buildings in the Dallas North Tollway/Plano sub-market. (c) Janitor service, five (5) times weekly, exclusive of normal business holidays; provided, however, if Tenant's floor covering or other improvements require special treatment, Tenant shall pay the additional cleaning cost attributable thereto as additional rent upon presentation of a statement therefor by Landlord. (d) Subject to the provisions of Paragraph 7, facilities to provide all electrical current required by Tenant in its use and occupancy of the Premises. (e) All Building Standard fluorescent bulb replacement in the Premises and incandescent bulb replacement in the Common Areas and Service Areas. (f) Elevator Service twenty-four (24) hours a day, seven (7) days a week. (g) Security in the form of limiting the general public's access to the Building during other than Normal Business Hours shall be provided in such form as Landlord deems appropriate, which will include a controlled access entry Initials: SK ------ GB ------ Page 9 system, such as a "cardex," keypad or similar system. Landlord, however, shall have no liability to Tenant, its employees, agents, invitees or licensees for losses due to theft or burglary, or for damages done by unauthorized persons on the Premises, the Building or the Property, except in the event of liabilities or damage arising solely as a result of Landlord's gross negligence or willful misconduct in connection with providing security, and neither shall Landlord be required to insure against any such losses. Tenant shall cooperate fully in Landlord's efforts to maintain security in the Building and shall follow all regulations promulgated by Landlord with respect thereto. The failure by Landlord to any extent to furnish or the interruption or termination of these defined services in whole or in part, resulting from causes beyond the reasonable control of Landlord shall not render Landlord liable in any respect nor be construed as an eviction of Tenant, nor work an abatement of rent, nor relieve Tenant from the obligation to fulfill any covenant or agreement hereof; provided, however, Base Rental and any additional rent due for Operating Expenses and Electrical Service shall be abated pro rata, if any failure to furnish or interruption or termination of such major services that renders the Premises untenantable shall continue for a period of five (5) business days or longer. Should any of the equipment or machinery used in the provision of such services for any cause cease to function properly for any cause, Tenant shall have no claim for offset or abatement of rent or damages on account of an interruption in service occasioned thereby or resulting there from. 9. IMPROVEMENTS TO BE MADE BY LANDLORD: Except as otherwise provided in the Special Provisions attached hereto as Exhibit C and the Work Letter attached hereto as Exhibit D, all installations and improvements now or hereafter placed on the Premises other than Building Standard Improvements shall be for Tenant's account and at Tenant's cost. 10. MAINTENANCE AND REPAIR OF PREMISES BY LANDLORD: Landlord, at Landlord's sole cost and expense, shall be responsible for the maintenance and repair of the heating, ventilation and air conditioning system, plumbing systems, electrical system and sprinkler system for the Building, the exterior of the Building, including, without limitation, the roof of the Building, the structural elements of the Building, the Common Areas, the Service Areas, the Exterior Common Areas and the repairs and replacements set forth on Exhibit D attached hereto. At least ten (10) days prior to the Commencement Date, Tenant will conduct a walkthrough of the Premises with Landlord to ensure that everything is in working order and cosmetically presentable. Landlord agrees to make repairs reasonably requested by Tenant prior to the Commencement Date or within a reasonable period of time thereafter. Except as otherwise expressly provided herein, Landlord shall not be required to make any repairs to the Premises. Initials: SK ------ GB ------ Page 10 11. GRAPHICS; SIGNAGE: Landlord shall provide and install, at Tenant's cost, all letters or numerals or signs at or near the corridor entry leading to the Premises. All such letters and numerals shall be in the standard graphics for the Building and no others shall be used or permitted on the Premises without Landlord's prior written consent. Tenant, at Tenant's sole cost and expense, may place signage identifying Tenant on the monument sign for the Building and on the first floor directory. In addition, Tenant may, at Tenant's sole cost and expense, place a sign on the exterior of the Building and in the second floor lobby of the Building where the "Xalted" signs are currently located. 12. CARE OF THE PREMISES BY TENANT: Tenant agrees not to commit or allow any waste to be committed on any portion of the Premises, and at the termination of this Lease to deliver up the Premises to Landlord in as good condition as the same existed on the Commencement Date, ordinary wear and tear excepted, consistent with a first-class office building. 13. REPAIRS AND ALTERATIONS BY TENANT: Tenant covenants and agrees with Landlord, at Tenant's own cost and expense, to repair or replace any damage done to the Building or any part thereof, caused by Tenant or Tenant's agents, employees, invitees, or visitors, and such repairs shall restore the Building to as good a condition as it was in prior to such damage, ordinary wear and tear excepted, consistent with a first-class office building, and shall be affected in compliance with all applicable laws: provided, however, if Tenant fails to make such repairs or replacements promptly, Landlord may, at its option, make such repairs or replacements, and Tenant shall pay the cost thereof (plus a reasonable fee for Landlord's supervision) to the Landlord on demand as additional rent. Tenant agrees with Landlord not to make or allow to be made any alterations to the Premises, or place signs on the Premises which are visible from outside the Premises, without first obtaining the written consent of Landlord in each such instance, which consent may be given on such conditions as Landlord may elect. Any and all alterations to the Premises shall become the property of Landlord upon termination of this Lease (except for moveable equipment or furniture owned by Tenant). Landlord may, nonetheless, require Tenant to remove any and all fixtures, equipment and other improvements installed on the Premises. In the event that Landlord so elects, and Tenant fails to remove such improvements, Landlord may remove such improvements at Tenant's cost, and Tenant shall pay Landlord on demand the cost of restoring the Premises to Building Standard. 14. PARKING: During the Lease Term, Tenant shall have free of charge the non-exclusive use in common with Landlord, other tenants of the Building, their guests and invitees, of the non-reserved common automobile parking areas, driveways, and footways, subject to rules and regulations for the use thereof as prescribed from time to time by Landlord. In addition, Tenant shall be entitled to the use of ten (10) designated covered parking spaces at a rate of $35.00 per space Initials: SK ------ GB ------ Page 11 per month, subject to adjustment during the option term based on the then-current market rate. 15. LAWS AND REGULATIONS: Tenant agrees to comply with all applicable laws, ordinances, rules, and regulations of any governmental entity or agency having jurisdiction over the Premises. 16. BUILDING RULES: Tenant will comply with the rules of the Building and the Property attached hereto as Exhibit E, as amended and altered by Landlord from time to time, and will cause all of its agents, employees, invitees and visitors to so comply; all changes to such rules will be sent by Landlord to Tenant in writing. 17. ENTRY BY LANDLORD: Tenant agrees to permit Landlord or its agents or representatives to enter and upon any part of the Premises during ordinary business hours, or at such other times as Landlord deems appropriate to inspect the same, or to show the Premises to prospective purchasers, mortgages, or insurers, to clean or make repairs, alterations or additions thereto, and Tenant shall not be entitled to any abatement or reduction of rent by reason thereof. 18. ASSIGNMENT AND SUBLETTING: (a) Tenant shall not assign, sublease, transfer or encumber this Lease or any interest therein without Landlord's prior written consent, which, except as provided in Paragraphs 18(b), may be withheld or given upon such conditions as Landlord may elect. Any attempted assignment or sublease by Tenant in violation of the terms and covenants of this paragraph shall be void. If Landlord should fail to notify Tenant in writing of its decision within a fifteen (15) day period after Landlord is notified in writing of any proposed assignment or sublease, Landlord shall be deemed to have refused to consent to any such assignment or subleasing, and to have elected to keep this Lease in full force and effect. (b) Landlord will not unreasonably withhold its consent to a subsequent sublease of part or all of the Premises to a subsequent subtenant of financial and other qualifications reasonably satisfactory to Landlord. Any such sublease shall call for all rent to be payable on a monthly basis. If the rent and other sums received by Tenant on account of a sublease of all or any portion of the Premises exceeds the Base Rental and other rent due hereunder allocable to the space subject to the sublease (in the proportion of the area of such space to the entire Premises), then Tenant shall pay to Landlord, as an additional charge, one hundred percent (100%) of the net proceeds of such excess, monthly as received by Tenant, after Tenant has recouped its leasing commissions, advertising costs and all other costs associated with such assignment or sublease. No consent by Landlord to an assignment or Initials: SK ------ GB ------ Page 12 subletting shall be construed to relieve Tenant or any successor from obtaining the express consent in writing of Landlord to any further assignment or subletting. Neither shall any consent by Landlord to an assignment or subletting relieve Tenant of any of its liability hereunder. It shall be a condition of Landlord's approval to any sublease of the Premises that the subtenant agree in writing satisfactory to Landlord, to be bound to Landlord with respect to all of the obligations of Tenant hereunder, including, without limitation, the covenant against further subletting or assignment, and agree to reimburse Landlord for its out-of-pocket expenses incurred in connection with such subleasing and an administrative fee to Landlord of $1,000.00. (c) Except as provided in Paragraph 18(b), all cash or other proceeds of any assignment, sale or sublease of Tenant's interest in this Lease, whether consented to by Landlord or not, shall be paid to Landlord notwithstanding the fact that such proceeds exceed the rentals called for hereunder, unless Landlord agrees to the contrary in writing and Tenant hereby assigns all rights it might have or ever acquire in any such proceeds to Landlord. This covenant and assignment shall run with the land and shall bind Tenant and Tenant's heirs, executors, administrators, personal representatives, successors and assigns. Any assignee, sublessee or purchaser of Tenant's interest in the Lease (all such assignees, sublessee and purchasers being hereinafter referred to as "Successors"), by occupying the Premises and/or assuming Tenant's obligations hereunder shall assume liability to Landlord for all amounts paid to persons other than Landlord by such successor in consideration of any such sale, assignment or subletting, in violation of the provisions hereof. 19. MECHANIC'S LIEN: Tenant will not permit any mechanic's lien or liens to be placed upon the Premises or the Building and nothing in this Lease shall be deemed or construed in any way as constituting the consent or request of Landlord, express or implied, by interference or otherwise, to any person for the performance of any labor or the furnishing of any materials to the Premises, or any part thereof, nor as giving Tenant any right, power, or authority to contract for or permit the rendering of any services or the furnishing of any materials that would give rise to any mechanic's or other liens against the Premises. In the event any such lien is attached to the Premises, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to discharge the same, upon thirty (30) days prior written notice to Tenant with an opportunity to cure. Any amount paid by Landlord for any of the aforesaid purposes shall be paid by Tenant to Landlord within ten (10) days of receipt of written demand as additional rent. 20. PROPERTY INSURANCE: Landlord shall maintain fire and extended coverage insurance on the Building and the Premises in such amounts as Landlord mortgagees shall require, but in no event less than 90% of replacement cost. Such Initials SK ----------- GB ----------- Page 13 insurance shall be maintained at the expense of Landlord (as a part of the Operating Expenses) and payments for losses thereunder shall be made solely to Landlord or the mortgagees of Landlord, as their interests shall appear. Tenant shall maintain at its expense, in an amount equal to 90% of replacement cost, fire and extended coverage insurance on all of its personal property, including removable trade fixtures, located in the Premises and in such additional amount as are required to meet Tenant's obligations pursuant to Paragraph 24 hereof. In addition, Tenant shall be required at its expense to procure rental loss insurance naming Landlord as beneficiary. Tenant shall, at Landlord's request from time to time, provide Landlord with current certificates of insurance evidencing Tenant's compliance with this Paragraph 20 and Paragraph 21. Tenant shall obtain the agreement of Tenant's insurers to notify Landlord that a policy is due to expire at least ten (10) days prior to such expiration. 21. LIABILITY INSURANCE: Tenant and Landlord shall, each at its own expense, maintain a policy or policies of comprehensive general liability insurance with respect to the respective activities of each on the Property with the premiums thereon fully paid on or before due date, issued by and binding upon some insurance company approved by Landlord, such insurance to afford minimum protection of not less than $1,000,000 combined single limit coverage of bodily injury, property damage or combination thereof. Landlord shall not be required to maintain insurance against thefts within the Premises, the Building or Property generally. 22. INDEMNITY: (a) Landlord shall not be liable to Tenant, or to Tenant's agents, servants, employees, customers, or invitees for any injury to person or damage to property caused by any act, omission, or neglect of Tenant, its agents, servants, or employees, invitees, licensees or any other person entering the Property under the invitation of Tenant or arising out of the use of the Premises by Tenant and the conduct of its business or out of a default by Tenant in the performance of its obligations hereunder. Tenant hereby indemnifies and holds Landlord harmless from all liability and claims for any such damage or injury. (b) Tenant shall not be liable to Landlord, or to Landlord's agents, servants, employees, customers, or invitees for any injury to person or damage to property caused by any act, omission, or neglect of Landlord, its agents, servants, or employees, invitees, licensees or any other person entering the Property under the invitation of Landlord or arising out of the ownership of the Property by Landlord or out of a default by Landlord in the performance of its obligations hereunder. Landlord hereby indemnifies and holds Tenant harmless from all liability and claims for any such damage or injury; provided the person causing such damage or injury is under the control of Landlord, which the parties hereby agree Initials: SK ------------- GB ------------- Page 14 specifically excludes damage or injury caused by other tenants of the Building and the employees, agents, contractors, guests, invitees or customers of such tenants. 23. WAIVER OF SUBROGATION RIGHTS: Anything in this Lease to the contrary notwithstanding, Landlord and Tenant each hereby waives any and all rights of recovery, claim, action, or cause of action, against the other, its agents, officers, or employees, for any loss or damage that may occur to the Premises, or any improvements thereto, or the Building of which the Premises are a part, or any improvements thereto, or any personal property of such party therein, by reason of fire, the elements, or any other cause(s) which are insured against under the terms of the standard fire and extended coverage insurance policies referred to in Paragraph 20 hereof, regardless of cause or origin, including negligence of the other party hereto, its agents, officers, or employees. Each of Landlord and Tenant also agrees that no right of recovery, claim, action or cause of action hereby waived shall ever be assigned to its insurance carriers. 24. CASUALTY DAMAGE: If the Premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give prompt written notice thereof to Landlord. In case the Building shall be so damaged that substantial alteration or reconstruction of the Building shall, in Landlord's sole opinion, be required (whether or not the Premises shall have been damaged by such casualty) or in the event any mortgagee of Landlord's should require that the insurance proceeds payable as a result of a casualty be applied in reduction of the mortgage debt or in the event of any material uninsured loss to the Building, Landlord may, at its option, terminate this Lease by notifying Tenant in writing of such termination within ninety (90) days after the date of such damage. If Landlord is not entitled to, or does not thus elect to terminate this Lease, Landlord shall commence and proceed with reasonable diligence to restore the Building to substantially the same condition in which it was immediately prior to the happening of the casualty. Landlord's obligation to restore shall not require Landlord to expend more than the insurance proceeds actually received by Landlord as a result of the casualty. Except for such insurance proceeds, all cost and expense of reconstructing the Premises shall be borne by Tenant, and Tenant shall present Landlord with evidence satisfactory to Landlord, of Tenant's ability to pay such costs prior to Landlord's commencement of reconstruction of the Premises. Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from such damage or the repair thereof, except that, subject to the provisions of the next sentence, Landlord shall allow Tenant a fair diminution of rent during the time and to the extent the Premises are unfit for occupancy. If the Premises or any other portion of the Building be damaged by fire or other casualty resulting from the fault or negligence of Tenant or any of Tenant's agents, employees, or invitees, the rent hereunder shall not be diminished during the repair of such damage and Tenant shall be liable to Initials: SK ----------- GB ----------- Page 15 Landlord for the cost of the repair and restoration of the Building caused thereby to the extent such cost and expense is not covered by insurance proceeds. 25. CONDEMNATION: If the whole or substantially the whole of the Building or the Premises should be taken for any public or quasi public use, by right of eminent domain or otherwise, or should be sold in lieu of condemnation, then this Lease shall terminate as of the date when physical possession of the Building or the Premises is taken by the condemning authority. If less than the whole or substantially the whole of the Building or the Premises is thus taken or sold, (whether or not the Premises are affected thereby) Landlord may terminate this Lease by giving written notice thereof to the other, in which event this Lease shall terminate as of the date when physical possession of such portion of the Building or Premises is taken by the condemning authority. If this Lease is not so terminated upon any such taking or sale, the Base Rental payable hereunder shall be diminished by an equitable amount, and Landlord shall, to the extent Landlord deems feasible, restore the Building and the Premises to substantially their former condition, but such work shall not exceed the scope of the work done by Landlord in originally constructing the Building and installing Building Standard Improvements in the Premises, nor shall Landlord in any event be required to spend for such work an amount in excess of the amount received by Landlord as compensation for such damage. All amounts awarded upon a taking of any part of all the Building or the Premises shall belong to Landlord and Tenant shall not be entitled to and expressly waives all claim to any such compensation; provided, however that Tenant shall be entitled to pursue compensation for loss of business and for the taking of Tenant's fixtures and improvements in an independent action. 26. DAMAGES FROM CERTAIN CAUSES: Neither party shall be liable to the other for any loss or damage to any property or person occasioned by theft, fire, act of God, public enemy, injunction, riot, strike, insurrection, war, court order, requisition, or order of governmental body or authority or by any other cause beyond the control of such party. Nor shall either party be liable to the other for any damage or inconvenience which may arise through repair or alteration of any part of the Property, Building or Premises. 27. EVENTS OF DEFAULT: The following events shall be deemed to be events of default by Tenant under this Lease: (a) The failure of Tenant to pay the Base Rental, any other installment of rent or any part thereof within five (5) business days of Landlord's written notice of said failure to pay, provided however, that such failure to pay does not occur twice in any consecutive twelve (12) month period, in which case no notice shall be required; or Initials: SK ----------- GB ----------- Page 16 (b) Tenant shall fail to fulfill or perform, in whole or in part, any of its obligations under this Lease (other than the payment of Rent) and such failure or non-performance shall continue for a period of thirty (30) days after written notice thereof has been given by Landlord to Tenant; provided, however, that if such cure cannot be completed within thirty (30) days, so long as Tenant has commenced to cure within the thirty (30) day cure period and diligently pursues such cure to completion within thirty (30) days thereafter, Tenant shall not be in default hereunder; or (c) The entry of a decree or order by a court having jurisdiction adjudging Tenant to be bankrupt or insolvent or approving as properly filed a petition seeking reorganization of Tenant under the National Bankruptcy Act, or any other similar applicable Federal or State law, or a decree or order of a court having jurisdiction for the appointment of a receiver or liquidator or a trustee or assignee in bankruptcy or insolvency of Tenant or its property or for the winding up or liquidation of its affairs; or Tenant shall institute proceedings to be adjudicated a voluntary bankruptcy or shall consent to the filing of any bankruptcy, reorganization, receivership or other proceeding against Tenant, or any such proceedings shall be instituted against Tenant and the same shall not be vacated within thirty (30) days after the same are commenced; or (d) Tenant shall make an assignment for the benefit of Tenant's creditors or admit in writing Tenant's inability to pay the debts of Tenant generally as they may become due; or (e) Tenant shall desert or vacate or shall commence to desert or vacate the Premises or any substantial portion of the Premises or shall remove or attempt to remove all or a substantial value of Tenant's personal property from the Premises without the prior written consent of Landlord; or (f) Tenant shall do or permit to be done anything which creates a lien upon the Premises or any portion of the Premises, and fails to discharge such lien within ten (10) days of receipt of written notice thereof; or (g) Tenant shall fail to take possession of the Premises within thirty (30) days after Landlord notifies Tenant that the same are ready for occupancy; or (h) Tenant shall fail to vacate the Premises upon the expiration of the Lease Term. 28. RIGHTS OF LANDLORD UPON DEFAULT BY TENANT: (a) Remedies: Upon the occurrence of any event or events of default by Tenant, whether enumerated in this Paragraph or not, Landlord shall have the option to pursue any one or more of the following remedies without any notice or Initials: SK --------- GB --------- Page 17 demand for possession whatsoever (and without limiting the generality of the foregoing. Tenant hereby specifically waives notice and demand for payment of rent or other obligations due and waives any and all other notices or demand requirements imposed by applicable law): (1) Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord; (2) Terminate Tenant's right to occupy the Premises and re-enter and take possession of the Premises (without terminating this Lease); (3) Enter upon and take possession of the premises and expel or remove Tenant any other occupant therefrom, with or without having terminated this Lease; (4) Alter locks and other security devices at the Premises so that Tenant will have access to the Premises with or without having terminated this Lease or Tenant's right to possession under the Lease; or (5) Apply all or any portion of the Security Deposit to cure such event of Default. (b) Tenant's Obligation Continues; Alteration of Locks: It is hereby expressly stipulated by Landlord and Tenant that any of the above listed actions including without limitation, termination of this Lease, termination of Tenant's right to possession, and re-entry by Landlord, will not affect the obligations of Tenant under the Lease, including the obligations to pay unaccrued monthly rentals and other charges provided in this Lease for the remaining portion of the Lease. The following provisions shall override and control any conflicting provisions of Section 93.002 of the Texas Property Code. If an event of default occurs, Landlord is entitled and is hereby authorized, without any notice to Tenant whatsoever, to enter upon the Premises by use of a master key, a duplicated key, or other peaceable means, and to change, alter, and/or modify the door locks on all entry doors of the Premises, thereby permanently excluding Tenant, and its officers, principals, agents, employees, and representatives therefrom. In the event that the Landlord has either terminated Tenant's right to possession of the Premises pursuant to the foregoing provisions of this Lease, or has terminated the Lease by reason of Tenant's default, Landlord shall not thereafter be obligated to provide Tenant with a key to the Premises at any time; provided, however, that in any such instance, during Landlord's normal business hours and at the convenience of Landlord, and upon the written request of Tenant accompanied by such written waivers and releases as the Landlord may require, Landlord will escort Tenant or its authorized personnel to the Initials: SK ---------- GB ---------- Page 18 Premises to retrieve any personal belongings or other property of Tenant. If Landlord elects to exclude Tenant from the Premises without permanently repossessing the Premises or terminating the Lease pursuant to the forgoing provisions of this Lease, then Landlord (at any time prior to actual permanent repossession or termination) shall not be obligated to provide Tenant a key to re-enter the Premises until such time as all delinquent Rent and other amounts due under this Lease have been paid in full (and all other defaults, if any, have been completely cured to Landlord's satisfaction), and Landlord has been given assurance reasonably satisfactory to Landlord evidencing Tenant's ability to satisfy its remaining obligations under this Lease. During any such temporary period of exclusion, Landlord will, during Landlord's regular business hours and at Landlord's convenience, upon written request by Tenant accompanied by such waivers and releases as the Landlord may require, escort Tenant or its authorized personnel to the Premises to retrieve personal belongings of Tenant or its employees, and such other property of Tenant as is not subject to the Landlord's lien and security interest described in Paragraph 37 below. This remedy of Landlord shall be in addition to and not in lieu of, any of its other remedies set forth in this Lease, or otherwise available to Landlord at law or in equity. (c) No Acceptance of Surrender; Waiver of Damages: Exercise by Landlord of any one or more remedies hereunder granted or otherwise available shall not be deemed to be an acceptance of surrender of the Premises by Tenant, whether by agreement or by operation of law, it being understood that such surrender can be effected only by the written agreement of Landlord. No such alteration of locks or other security devises and no removal or other exercise of dominion by Landlord over the property of Tenant or others at the Premises shall be deemed unauthorized or constitute a conversation, Tenant hereby consenting, after any event of default, to the aforesaid exercise of dominion over Tenant's property within the Premises. All claims for damages by reason of such re-entry and/or repossession and/or alteration of locks or other security devices are hereby waived, as are all claims for damages by reason of any distress warrant, forcible detainer proceedings, sequestration proceeding or other legal process, except for claims arising solely out of Landlord's gross negligence or willful misconduct. Tenant agrees that any re-entry by Landlord may be pursuant to a judgment obtained in forcible detainer proceedings or other legal proceedings or without the necessity for any legal proceedings, as Landlord may elect, and Landlord shall not be liable in trespass or otherwise, except for claims arising solely out of Landlord's gross negligence or willful misconduct. (d) Damages on Termination: In the event Landlord elects to terminate this Lease by reason of an event of default, then notwithstanding such termination, the Tenant shall be liable for and shall pay to the Landlord, at the address Initials: SK -------- GB -------- Page 19 specified in Paragraph 1(d) above, the sum of all Rent accrued to the date of such termination, plus, as damages, (i) the cost of recovering, reletting the Premises and the sum of the unamortized portion of the initial Landlord's costs (including but not limited to, Tenant improvement costs, commissions and architectural and engineering fees), and (ii) an amount equal to the total of the Rent provided in this Lease for the remaining portion of the Lease Term (had such Lease Term not been terminated by Landlord), less the reasonable rental value of the Premises for such period, discounted to present value at the rate of six percent (6%) per annum. (e) Alternate Measure of Damages on Termination: In the event Landlord elects to terminate this Lease by reason of an event of Default, in lieu of exercising the right of Landlord under the preceding Paragraph 28(d), Landlord may instead hold Tenant liable for all Rent accrued to the date of such termination, plus such Rent as would otherwise have been required to be paid by Tenant to Landlord during the period following termination of the Lease Term measured from the date of such termination by Landlord until the expiration of the Lease Term (had Landlord not elected to terminate the Lease on account of such event of default), diminished by any net sums thereafter received by Landlord through reletting the Premises during said period (after deducting expenses incurred by Landlord as provided in Paragraph 29 hereof). Actions to collect amounts due by Tenant as provided for in this paragraph may be brought from time to time by Landlord during the aforesaid period, on one or more occasions, without the necessity of Landlord's waiting until the expiration of such period; and in no event shall Tenant be entitled to any excess of rent obtained by reletting over and above the Rent provided for in this Lease. If Landlord elects to exercise the remedy prescribed in this Paragraph 28(e), this election shall in no way prejudice Landlord's right at anytime hereafter to cancel said election in favor of the remedy prescribed in the foregoing Paragraph 28(d). (f) Damages If Lease Not Terminated: In the event that Landlord elects to repossess the Premises without terminating the Lease, then Tenant shall be liable for and shall pay to Landlord at the address specified in Paragraph 1(d) above, all Rent accrued to the date of such repossession, plus Rent as it becomes due required to be paid by Tenant to Landlord during the remainder of the Lease Term as stated in Paragraph 1(g), diminished by any net sums thereafter received by Landlord through reletting the Premises during said period (after deducting expenses incurred by Landlord as provided in Paragraph 29). Actions to collect amounts due by Tenant as provided in this paragraph may be brought from time to time by Landlord during the aforesaid period, on one or more occasions, without the necessity of Landlord's waiting until the expiration of such period; and in no event shall Tenant be entitled to Initials: SK -------- GB -------- Page 20 any excess of rent obtained by reletting over and above the Rent provided for in this Lease. (g) Recovery of Concessions. In the event of a default in the payment of Rent, Tenant shall in addition to all other sums owed to Landlord, pay to Landlord an amount equal to the dollar amount of all unamortized "concessions" provided to Tenant in connection with this Lease, which Landlord and Tenant hereby agree shall be an amount equal to three months Base Rent and any unamortized leasing commissions incurred in connection with this Lease. The foregoing shall not, however, act to limit in any manner the damages or remedies to which Landlord may be entitled under this Lease by law, but shall act only as a reimbursement of such concessions as may have been provided to Tenant as an incentive to enter into this Lease. 29. EXPENSE OF REPOSSESSION: It is further agreed that, in addition to payments required pursuant Paragraph 28 above, Tenant shall compensate Landlord for all expenses incurred by Landlord in repossession (including among other expenses, repairs, the sum of the unamortized portion of the initial Landlord costs including, but not limited to, Tenant Improvement costs, commissions and architectural and engineering fees, replacements, advertisements and brokerage fees), and all losses incurred by Landlord as a direct result of Tenant's default. 30. CUMULATIVE REMEDIES; WAIVER OR RELEASE: Landlord may restrain or enjoin any breach or threatened breach of any covenant, duty or obligation of Tenant herein contained without the necessity of providing the inadequacy of any legal remedy or irreparable harm. The remedies of Landlord hereunder shall be deemed cumulative and not exclusive of each other. No action, omission or commission by Landlord, including specifically, the failure to exercise any right, remedy or recourse, shall be deemed a waiver or release of the same. A waiver or release shall exist and be effective only as set forth in written document executed by Landlord, and then only to the extent recited therein. A waiver or release with reference to any one event shall not be construed as continuing as to, or as a bar to, or as a waiver or a release of, any right, remedy or recourse as to any other or subsequent event. 31. HAZARDOUS WASTE: (a) Tenant agrees that no toxic or hazardous substances or wastes, pollutants or contaminants, or any hazardous substance as defined in the Comprehensive Environment Response, Compensation and Liability Act of 1980, 42 USC 9601-9657, as amended ("CERCLA") (collectively, "Environmental Pollutants") will be generated, treated, stored, released or disposed of, or otherwise placed, deposited in or located on the Premises or Building by Tenant, its agents, contractors or employees, and no activity shall be Initials: SK ----------- GB ----------- Page 21 undertaken on the Premises or Building by Tenant, its agents, contractors or employees that would cause or contribute to (i) the Premises to become a generation, treatment, storage or disposal facility within the meaning of, or otherwise bring the Premises within the ambit of the Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 USC 6901 et. seq., or any similar state law or local ordinance, (ii) a release or threatened release of toxic or hazardous wastes or substances, pollutants or contaminants, from the Premises or Building within the meaning of, or otherwise result in a liability in connection with the Premises or Building within the meaning of, or otherwise result in liability in connection with the Premises within the ambit of CERCLA, or any similar state law or local ordinance, or (iii) the discharge of pollutants or effluents into any water source or system, the dredging or filling of any waters, or the discharge into the air of any emissions, that would require a permit under the Federal Water Pollution Control Act, 33 USC 1251 et. seq., or the Clean Air Act, 42 USC 7401 et. seq., or any similar state law or local ordinance, except in each case for de minimis amounts of cleaning supplies used in the Premises. (b) Tenant agrees to indemnify and hold Landlord harmless from and against and to reimburse Landlord with respect to, any and all claims, demands, causes of action, loss, damage, liabilities, costs and expenses (including attorney's fees and court costs) of any and every kind and character, known or unknown, fixed or contingent, asserted against or incurred by Landlord at any time and from time to time by reason of or arising out the breach of its obligations contained in Paragraph 31(a) above. Tenant's indemnification of Landlord shall be limited to claims, reasonable demands, causes of action, loss, damage liabilities, costs and expenses (including attorney's fees and court costs) of any and every kind and character, known or unknown, fixed or contingent, caused by Tenant's use of the Premises, Building, or any other structure on the Property during the Lease. 32. ATTORNEY'S FEES: If, on account of any breach or default by one party (the "Defaulting Party") in its obligations hereunder, the other party (the "Non-Defaulting Party") shall employ an attorney or attorneys to present, enforce or defend any of the such party's rights or remedies hereunder, the Defaulting Party agrees to pay any reasonable attorneys' fees incurred by the Non-Defaulting Party in such connection. 33. DEFAULT BY LANDLORD: In the event of a default or breach by Landlord under this Lease, then Tenant shall be entitled to such rights and remedies as may be available to Tenant at law or in equity. 34. PEACEFUL ENJOYMENT: Tenant shall, and may peacefully have, hold, and enjoy the Premises, subject to the other terms hereof, provided that Tenant pays Initials: SK ----------- GB ----------- Page 22 the Rent and other sums herein recited to be paid by Tenant and performs all of Tenant's covenants and agreements herein contained. This covenant and any and all other covenants of Landlord shall be binding upon Landlord and its successors only with respect to breaches occurring during its or their respective periods of ownership of the Landlord's interest hereunder. 35. HOLDING OVER: In the event of holding over by Tenant after expiration or other termination of this Lease or in the event Tenant continues to occupy the Premises after the termination of Tenant's right of possession pursuant to Paragraph 28 hereof, Tenant shall, throughout the entire holdover period, pay rent equal to twice the Base Rental and additional rent which would have been applicable had the term of this Lease continued though the period of such holding over by Tenant. No holding over by Tenant after the expiration of the term of this Lease shall be construed to extend the term of this Lease. 36. SUBORDINATION TO MORTGAGE: Tenant accepts this Lease subject and subordinate to any first mortgage, first deed of trust or other first lien presently existing or hereafter arising upon the Premises, upon the Building or upon the Property as a whole, and to any renewals, refinancing and extensions thereof, provided that such mortgagee or lienholder enters into an agreement not to disturb Tenant's use and occupancy of the Premises so long as Tenant is not in default, but Tenant agrees that any such first mortgagee shall have the right at any time to subordinate such first mortgage, first deed of trust or other first lien on such terms and subject to such conditions as such mortgagee may deem appropriate in its discretion. Landlord hereby agrees to use commercially reasonable efforts to obtain a non-disturbance agreement from any existing mortgagee or lienholder in form reasonably acceptable to Tenant within 60 days of the date of this Lease. Tenant agrees to execute such further instruments subordinating this Lease (or such mortgage to this Lease) or attorning to the holder of any such liens as Landlord may request in writing; provided such instruments include non-disturbance language reasonably acceptable to Tenant. In the event that Tenant should fail to execute any such instrument within fifteen (15) days of such request, Tenant hereby irrevocably constitutes Landlord as its attorney-in-fact to execute such instrument in Tenant's name, place and stead, it being agreed that such power is one coupled with an interest. Tenant agrees that it will from time to time within fifteen (15) days of receipt of written request by Landlord execute and deliver to such persons as Landlord shall request a statement in recordable form certifying that this Lease is unmodified and in full force and effect (or if there have been Modifications, that the same is in full force and effect as so modified), stating the dates to which rent and any other charges payable under this Lease have been paid, stating that Landlord is not in default hereunder (or if Tenant alleges a default stating the nature of such alleged default) and further stating such other matters as Landlord shall reasonably require. Initials: SK ----------- GB ----------- Page 23 37. LANDLORD'S CONTRACTUAL SECURITY INTEREST: In addition to the statutory Landlord's lien, Tenant hereby grants to Landlord and Landlord shall have at all times, a valid security interest to secure payment of all Rent and other sums of money becoming due hereunder from Tenant, and to secure payment of any damages or loss which Landlord may suffer by reason of the breach by Tenant of any covenant, agreement or condition contained herein, upon all goods, wares, equipment, fixtures, furniture, improvements and other personal property of Tenant presently, or which may hereafter may be, situated on the Premises, and all proceeds therefrom, and such property shall not be removed without the written consent of Landlord, except in the ordinary course of Tenant's business. Landlord shall have the rights and remedies of a secured party as set forth in the Texas Uniform Commercial Code. Upon the occurrence of an event of default by Tenant, Landlord may, in addition to any other remedies provided herein, enter upon the Premises and take possession of any and all goods, wares, equipment, fixtures, furniture, improvements and other personal property of Tenant situated on the Premises, without liability for trespass or conversion, and sell the same at public or private sale, with or without having such property at the sale, after giving Tenant reasonable notice, the requirement of reasonable notice of the time and place of any public sale or of the time after which any private sale is to be made, at which sale the Landlord or its assigns may purchase unless otherwise prohibited by law. Unless otherwise provided by law, and without intending to exclude any other manner of giving Tenant reasonable notice, the requirement of reasonable notice shall be met if such notice is given in the manner prescribed in this Lease at least seven (7) days before the time of sale. Any sale made pursuant to the provision of this Paragraph 37 shall be deemed to have been a public sale conducted in a commercially reasonable manner if held on the Premises or where the property is located after the time, place, and method of sale and a general description of the types of property to be sold have been advertised in a daily newspaper published in the county in which the property is located for five (5) consecutive days before the date of the sale. The proceeds from any such disposition, less any and all expenses connected with the taking possession, holding and selling of the property (including reasonable attorney's fees and legal expenses), shall be applied as a credit against the indebtedness secured by the security interest granted in this Paragraph. Any surplus shall be paid to Tenant or as otherwise required by law; the Tenant shall pay any deficiencies forthwith. 38. USE AND STORAGE OF PERSONAL PROPERTY: In the event that Landlord shall have taken possession of the Premises pursuant to the authority herein granted, then Landlord shall have the right to keep in place and use all of the furniture, fixtures and equipment at the Premises, including that which is owned by or leased to Tenant, at all times prior to any foreclosure thereon by Landlord or repossession thereof by any Lessor thereof or third party having a lien thereon. Landlord shall remove from the Premises (without the necessity of obtaining a distress warrant, writ of sequestration or other legal process) all or any portion of Initials: SK ----------- GB ----------- Page 24 such furniture, fixtures, equipment and other property located thereon and place same in storage at any premises within the county where the Building is located, including premises owned by Landlord or an affiliate of Landlord; and in such event, Tenant shall be liable to Landlord for costs incurred by Landlord in connection with such removal and storage. Landlord shall relinquish possession of all or any portion of such furniture, fixtures, equipment and other property to any person ("Claimant") claiming to be entitled to possession thereof who presents to Landlord a copy of any instrument represented to Landlord by Claimant to have been executed by Tenant (or any predecessor of Tenant) granting Claimant the right under various circumstances to take possession of such furniture, fixtures, equipment or other property, without the necessity on the part of Landlord to inquire into the authenticity of said instrument or copy of Tenant's (or Tenant's predecessor's) signature thereon and without the necessity of Landlord's making any nature of investigation or inquiry as to the validity of the factual or legal basis upon which Claimant purports to act; and Tenant agrees to indemnify and hold Landlord harmless from all cost, expense, loss, damage and liability incident to Landlord's relinquishment of possession of all or any portion of such furniture, fixtures, equipment or other property to Claimant. The rights of Landlord herein stated shall be in addition to any and all other rights which Landlord has or may hereafter have at law or in equity; and Tenant stipulates and agrees that the rights herein granted Landlord are commercially reasonable. 39. SUBORDINATION OF LANDLORD'S LIEN: Landlord hereby agrees to subordinate all statutory and contractual landlord's liens (and, provided Tenant is not in default at the time, agrees to sign documents so indicating [on terms and conditions reasonably acceptable to Landlord], within ten (10) days after Tenant's request) to any liens or security interests covering Tenant's inventory, or fixtures, furniture or equipment of Tenant in favor of third-party lenders providing financing to Tenant (including purchase-money financing). Additionally, notwithstanding anything to the contrary contained herein, Tenant shall be permitted to remove contents from the Premises without Landlord's consent (free and clear of any landlord's liens) whenever Tenant has not previously received from Landlord a written notice of default, which remains uncured. 40. NO IMPLIED WAIVER: The failure of either party to insist at any time upon the strict performance of any covenant or agreement herein, or to exercise any option, right, power or remedy contained in this Lease shall not be construed as a waiver or a relinquishment thereof for the future. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly installment of rent due under this lease shall be deemed to be other than the earliest rent due hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this Lease provided. Initials: SK ----------- GB ----------- Page 25 41. PERSONAL LIABILITY: The liability of Landlord to Tenant for any default by Landlord under the terms of this Lease shall be limited to Landlord's interest in the Building and the Property and Tenant agrees to look solely to Landlord's interest in the Building and the Property for recovery of any judgment from Landlord, it being intended that Landlord shall not be personally liable for any judgment or deficiency. 42. SECURITY DEPOSIT: (a) SECURITY DEPOSIT. Tenant shall deliver the Security Deposit to Landlord upon the date of full execution of this lease. The Security Deposit shall be held by Landlord without liability for interest and as security for the performance by Tenant of Tenant's covenants and obligations under this Lease, it being expressly understood that the Security Deposit shall not be considered an advance payment of rental or a measure of Tenant's damages in case of default by Tenant. Landlord may commingle the Security Deposit with Landlord's other funds. Landlord may, from time to time, without prejudice to any other remedy, use the Security Deposit to the extent necessary to make any arrearages of rent or to satisfy any other covenant or obligation of Tenant hereunder. Following any such application of the Security Deposit, Tenant shall pay to Landlord on demand the amount so applied in order to restore the Security Deposit to its original amount. If Tenant is not in default at the termination of this Lease, the balance of the Security Deposit remaining after any such application shall be returned by Landlord to Tenant. If Landlord transfers its interest in the Premises during the term of this Lease, Landlord may assign the Security Deposit to the transferee and thereafter shall have no further liability for the return of such Security Deposit. (b) CREDIT ENHANCEMENT. Upon execution of the Lease, Tenant shall pay to Landlord the Additional Security Deposit (equal to one month's Base Rental) to be held in escrow. If (i) Tenant fails to show a profit for three (3) successive quarters and (ii) Tenant's cash falls below $10,000,000 at the end of any quarter during the Lease Term, Tenant will be required to pay an amount equal to one (1) month's Base Rental to Landlord to be held in escrow and added to the Additional Security Deposit. If Tenant (i) has three (3) consecutive quarters of profitability, (ii) has never been in default under the Lease, and (iii) has never been "late" in making any Base Rental or other payments under the Lease, then Landlord will return the Additional Security Deposit (whether one month's Base Rental or two month's Base Rental) within thirty (30) days of written request by Tenant. 43. NOTICE: All notices or other communications required or permitted to be given pursuant to this Lease shall be in writing and shall be considered as properly given (i) mailed by first class United States mail, postage prepaid, registered or certified with return receipt requested, (ii) by delivering same in person to the Initials: SK ----------- GB ----------- Page 26 intended addressee, (iii) by delivery to an independent third party commercial delivery service for same day or next day delivery and providing for evidence of receipt at the office of the intended addressee; or (iv) by facsimile or similar transmission with confirmation of transmission by sender. Notice so mailed shall be effective two (2) days after its deposit with the United States Postal Service or any successor thereto; notice sent by such a commercial delivery service shall be effective upon delivery to such commercial delivery service; notice given by personal delivery shall be effective only if and when received by the addressee; and notice given by other means shall be effective only if and when received at the designated address of the intended addressee. For purposes of notice, the addresses and facsimile numbers of the parties shall be as set forth on Paragraph I of this Agreement; provided, however, that either party shall have the right to change its address and facsimile numbers for notice hereunder to any other location within the continental United States by the giving of thirty (30) days notice to the other party in the manner set forth herein. 44. SEVERABILITY: If any term or provision of this Lease, or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 45. AMERICANS WITH DISABILITIES ACT AND TEXAS ARCHITECTURAL BARRIERS ACT: From and after the Commencement Date, Tenant agrees to comply with all requirements of the Americans with Disabilities Act (42 USC 12101 to 12213) and the Texas Architectural Barriers Act (Article 9102, Tex. Rev. Civ. St., 1991) (collectively, the "Acts") applicable to the Premises. Tenant agrees to indemnify and hold Landlord harmless from any and all expenses, liabilities, costs or damages suffered by Landlord as result of additional obligations which may be imposed on the Building or the Property after the Commencement Date, under either of such Acts by virtue of Tenant's operations and/or occupancy. Tenant acknowledges that from and after the Commencement Date, it will be wholly responsible for any accommodations or alterations, which need to be made to the Premises to accommodate disabled employees, customers and invitees of Tenant. No provision in this Lease should be construed in any manner as permitting, consenting to or authorizing Tenant to violate requirements under either such Act and any provision of the Lease which could arguably be construed as authorizing a violation of either Act shall be interpreted in a manner which permits compliance with such Act and is hereby amended to permit such compliance. Landlord hereby represents and warrants that, to the best of Landlord's knowledge, the Building and the Premises are in compliance with the Acts as of the Commencement Date. Notwithstanding anything to the contrary contained herein, to the extent that the Building and the Premises are not in Initials: SK ----------- GB ----------- Page 27 compliance with the Acts as of the Commencement Date, any accommodations or alterations necessary to comply or to accommodate disabled employees, customers and invitees of Tenant shall be the responsibility of Landlord. 46. RECORDATION: Tenant agrees not to record this Lease, or any memorandum hereof. In the event Landlord's first mortgagee may so require Tenant and Landlord agree to execute a short form of this Lease for recordation. 47. GOVERNING LAW: This Lease and the rights and obligations of the Parties hereto shall be interpreted, construed, and enforced in accordance with the laws of the State of Texas. 48. FORCE MAJEURE: Whenever a period of time is herein prescribed for the taking of any action by Landlord, Landlord shall not be liable or responsible for, and there shall be excluded from the computation of such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions, or any other cause whatsoever beyond the control of Landlord. 49. TIME OF PERFORMANCE: Except as expressly otherwise herein provided, with respect to all required acts of Tenant time is of the essence of this Lease. 50. TRANSFERS BY LANDLORD: Landlord shall have the right to transfer and assign, in whole or in part, all its rights and obligations hereunder and in the Building and Property, and in such event and upon such transfer Landlord shall be released from any further obligations hereunder, and Tenant agrees to look solely to such successor in interest of Landlord for the performance of such obligations. This Lease shall not be affected by any such transfer. 51. BROKER: Tenant and Landlord each represents and warrants to the other that Tenant and Landlord, respectively, have dealt with, and only with: Landlord's representative: Jan Rhea, International Capital, Inc. Tenant's representative: Bob Steinweg, RES Enterprises, Inc. as brokers in connection with this Lease, and that, insofar as Tenant and Landlord, respectively knows, no other broker negotiated this Lease or is entitled to any commission in connection herewith and Tenant and Landlord, respectively, shall indemnify and hold harmless the other from and against all claims and costs (and costs of defending against and such claims) of any broker or similar parties claiming by, through, or under Tenant and Landlord respectively, in connection with this Lease. Initials: SK ----------- GB ----------- Page 28 52. EFFECT OF DELIVERY OF THIS LEASE: Landlord has delivered a copy of this Lease to Tenant for Tenant's review only, and the delivery hereof does not constitute an offer to Tenant or option. This Lease shall not be effective until a copy executed by both Landlord and Tenant is delivered to and accepted by Landlord. 53. ENTIRE AGREEMENT: It is expressly agreed by Tenant, as a material consideration for the execution of this Lease, that this Lease, with the specific references to written extrinsic documents, is the entire agreement of the parties; that there are, and were, no verbal representations, warranties, understandings, stipulations, agreements or promises pertaining to this Lease or the expressly mentioned written extrinsic documents not incorporated in writing in this Lease. 54. AMENDMENT: This Lease may not be altered, waived, amended or extended except by an instrument in writing signed by Tenant and Landlord. 55. LIMITATION OF WARRANTIES: LANDLORD AND TENANT EXPRESSLY AGREE THAT THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY, HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE AND THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS LEASE. 56. MAIL: Tenant understands and agrees that mail delivery in the Building shall be only to boxes contained in the mailroom provided by Landlord. 57. EXHIBITS: In addition to Exhibits A, B, C, D and E, the following exhibits are attached hereto and incorporated herein and made a part of this Lease for all purposes: Initials: SK ----------- GB ----------- Page 29 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease in multiple original counterparts as of the day and year first above written. LANDLORD: TENANT WEDGEWOOD DRIVE PARTNERS, LTD. INTERPHASE CORPORATION a Texas limited partnership By: Collinternational II, Inc. Its: General Partner By: /s/ GARY BRIEL By: /s/ STEVE KOVAC ------------------------------ ------------------------- Gary Briel Its: Vice President Its: Chief Financial Officer Initials: SK ----------- GB ----------- Page 30 EXHIBIT A PARKWAY CENTRE, PHASE I 2901 NORTH DALLAS PARKWAY PLANO, TEXAS LEGAL DESCRIPTION BEING all of that tract of land in the City of Plano, Collin County, Texas, a part of the JOHN H. MOUNTS SURVEY, ABSTRACT NO. 610, and being a part of Lot 1, Bock C, Carrington Park Addition, an addition to the City of Plano as recorded in Cabinet 1, Page 328, Collin County Plat Records, and being further described as follows: BEGINNING at a "X" found in concrete at the northwest corner of said Lot 1, said point being the intersection of the east line of Communications Parkway (a 110 foot wide right-of-way) with the south line of Wedgewood Drive (a 60 foot wide right-of-way); THENCE along the north line of said Lot 1 and along the south line of Wedgewood Drive as follows: Northeasterly, 125.10 feet along a curve to the right which has a central angle of 17 degrees 03 minutes 58 seconds, a radius of 420.00 feet, a tangent of 63.02 feet, and whose chord bears North 81 degrees 09 minutes 48 seconds East, 124.64 feet to a 1-inch iron rod found for corner; North 89 degrees 41 minutes 47 seconds East, 551.53 feet to a "X", found in the concrete at the northeast corner of said Lot 1, said point being in the west line of Dallas North Tollway (a variable width right-of-way); THENCE along the east line of said Lot 1 and along the west line of Dallas North Tollway as follows: South 00 degrees 18 minutes 13 seconds East, 299.35 feet to a 1-inch iron rod found for corner; Southeasterly, 4.65 feet along a curve to the left which has a central angle of 00 degrees 08 minutes 20 seconds, a radius of 1919.86 feet, a tangent of 2.33 feet, and whose chord bears South 00 degrees 22 minutes 23 seconds East, 4.65 feet to a 1-inch iron rod set for corner; THENCE South 89 degrees 41 minutes 47 seconds West, 340.58 feet to a 1-inch iron rod set for corner; THENCE North 00 degrees 18 minutes 13 seconds West, 38.00 feet to a 1-inch iron rod set for corner; THENCE South 89 degrees 41 minutes 47 seconds West, 310.00 feet to a 1-inch iron rod set for corner in the west line of said Lot 1, said point being in the east line of Communications Parkway; THENCE along the west line of said Lot 1 and along the east line of Communications Parkway as follows: North 00 degrees 06 minutes 00 seconds West, 56.14 feet to a 1-inch iron rod found for corner; Northwesterly, 193.46 feet along a curve to the left which has a central angle of 14 degrees 56 minutes 59 seconds, a radius of 741.46 feet, a tangent of 97.28 feet, and whose chord bears North 07 degrees 34 minutes 30 seconds West, 192.92 feet to the POINT OF BEGINNING and containing 187,170 square feet or 4.2968 acres of land. Initials: SK ----------- GB ----------- EXHIBIT B PARKWAY CENTRE, PHASE I 2901 NORTH DALLAS PARKWAY PLANO, TEXAS DEMISED PREMISES [ATTACHED] Initials: SK ----------- GB ----------- [SECOND FLOOR PLAN] EXHIBIT C PARKWAY CENTRE, PHASE I 2901 NORTH DALLAS PARKWAY PLANO, TEXAS SPECIAL PROVISIONS Landlord agrees that (i) there will be no additional rent charged to Tenant for Operating Expenses for the year 2003, (ii) the additional rent for Tenant's Prorata Share of the 2004 Controllable Operating Expenses will be capped at 8% over the Base Year and (iii) the additional rent for Tenant's Prorata Share of the 2005 Controllable Operating Expenses will be capped at 8% over the amount paid by Tenant in the year 2004. Landlord agrees that Tenant will be entitled to ten (10) designated covered parking spaces @ $35/month subject to adjustment during the option term based on the then-current market rate. Tenant, at Tenant's sole cost and expense, shall place signage identifying Tenant on the monument sign for the Building and on the first floor directory. In addition, Tenant may, at Tenant's sole cost and expense, place a sign on the exterior of the Building and in the second floor lobby of the Building where the "Xalted" signs are currently located. The design and size of these signs is to be comparable to the existing Xalted signs and will be subject to Landlord's approval, which shall not be unreasonably withheld, conditioned or delayed. Landlord grants tenant Right of First Offer on any additional vacant space currently occupied by Xalted. If during the Lease Term, all or any part of the space currently occupied by Xalted (the "Offer Space") shall become available for lease, Tenant shall have an initial right of first offer (the "Right of First Offer") to lease all or any portion of the Offer Space that Landlord elects to lease to bona fide third parties (the "Subject Space"). Prior to Landlord leasing the Subject Space to third parties, Landlord shall first offer the Subject Space to Tenant by written notice (the "Offer"). The Offer shall contain all of the material terms and conditions upon which Landlord would be willing to lease the Subject Space, including, without limitation, rental rate, allowances and concessions, term and date of occupancy. Tenant shall have fifteen (15) days from receipt of the Offer to accept the Offer in writing. The failure of Tenant to accept the Offer within such fifteen (15) day period shall constitute rejection of the Offer. If Tenant accepts the Offer, Landlord and Tenant shall promptly enter into an amendment to the Lease adding Subject Space the Premises and otherwise incorporating the terms and conditions of the Offer. If the Subject Space constitutes less than the Offer Space, the Right of First Offer shall continue with respect to the balance of the Offer Space. Initials: SK ----------- GB ----------- Notwithstanding anything to the contrary in this Lease, Landlord will use its best efforts to grant access to the Premises to Tenant by August 15, 2002, but in no event later than September 1, 2002, in order to begin making improvements to the Premises. After Tenant completes its improvements to the Premises, Landlord will then complete the improvements required by Landlord under this Lease prior to October 1, 2002. Initials: SK ----------- GB ----------- EXHIBIT D PARKWAY CENTRE, PHASE I 2901 NORTH DALLAS PARKWAY PLANO, TEXAS WORK LETTER Tenant takes the demised premises in an "as is" condition except Landlord will replace the carpet with Building Standard grade (as defined below), repaint, strip and wax VCT flooring, repair light fixtures and replace damaged or soiled ceiling tiles. Tenant may select the carpet and paint color from samples supplied by the Landlord. The Building Standard grade carpet is 26 to 28 ounces. Initials: SK ----------- GB ----------- EXHIBIT E PARKWAY CENTRE, PHASE I 2901 NORTH DALLAS PARKWAY PLANO, TEXAS RULES AND REGULATIONS 1. Sidewalks, doorways, vestibules, halls, stairways, and similar areas shall not be obstructed nor shall refuse, furniture, boxes or other items be placed therein by Tenant or its officers, agents, servants, and employees, or used for any purpose other than ingress and egress to and from the leased premises, or for going from one part of the Building to another part of the Building. Canvassing, soliciting and peddling in the Building is prohibited. 2. Plumbing fixtures and appliances shall be used only for the purposes for which constructed, and no unsuitable material shall be placed therein. 3. No signs, directories, posters, advertisements, or notices shall be painted or affixed on or to any of the windows or doors, or in corridors or other parts of the Building, except in such color, size, and style, and in such places, as shall be first approved in writing by Landlord at Tenant's expense. Landlord shall have the right to remove all unapproved signs without notice to Tenant, at the expense of Tenant. 4. Tenants shall not do, or permit anything to be done in or about the Building, or bring or keep anything therein, that will in any way increase the rate of fire or other insurance on the Building, or on property kept therein or otherwise increase the possibility of fire or other casualty. 5. Landlord shall have the power to prescribe the weight and position of heavy equipment or objects, which may over stress any portion of the floor. All damage done to the Building by the improper placing of such heavy items will be repaired at the sole expense of the responsible Tenant. 6. Tenants shall notify the Building Manager when safes or other heavy equipment are to be taken in or out of the Building, and the moving shall be done after written permission is obtained from Landlord on such conditions as Landlord shall require. 7. Corridor doors, when not in use, shall be kept closed. 8. All deliveries must be made via the service entrance and service elevator, when provided, during normal working hours. Landlord's written approval must be obtained for any delivery after normal working hours. Landlord will provide Initials: SK ----------- GB ----------- Tenants with a list of restricted types of deliveries which will be performed only during certain hours. 9. Tenants shall cooperate with Landlord's employees in keeping the leased premises neat and clean. 10. Tenants shall not cause or permit any improper noises in the Building, or allow any unpleasant odors to emanate from the leased premises, or otherwise interfere, injure or annoy in any way other tenants, or persons having business with them. 11. No animals shall be brought into or kept in or about the Building, except for "seeing eye" or lead dogs. 12. When conditions are such that Tenant must dispose of crates, boxes, etc., on the sidewalk, it will be the responsibility of Tenant to dispose of same prior to, or after the hours of 7:30 a.m. and 5:30 p.m., respectively. Crates and construction debris shall be removed from the project by Tenant at Tenant's expense and shall not be placed in ordinary trash removal receptacles. 13. No machinery of any kind, other than ordinary office machines such as typewriters, computers, and printers, shall be operated on the leased premises without the prior written consent of Landlord, nor shall Tenants use or keep in the Building any inflammable or explosive fluid or substance (including Christmas trees and ornaments), or any illuminating materials, except candles. No space heaters or fans shall be operated in the Building, without Landlord's prior consent. 14. No bicycles, motorcycles or similar vehicles will be allowed in the Building. 15. No nails, hooks, or screws shall be driven into or inserted in any part of the Building except as approved by Building maintenance personnel; provided, however, that Tenant may use nails, hooks and screws to hang pictures, shelves and other items within the Premises, as necessary, without prior approval. Tenant will repair any resulting holes prior to move-out. 16. Landlord has the right to evacuate the Building in the event of such an emergency or catastrophe, and Tenant shall cooperate in such an evacuation. 17. No food and/or beverages shall be distributed from Tenant's office without the prior written approval of the Building Manager, except that food and drinks may be served to Tenant's employees, agents, guests, customers, and invitees within the Premises without prior approval. 18. No additional locks shall be placed upon any doors without the prior written consent of Landlord. All necessary keys shall be furnished by Landlord, and the same shall be surrendered upon termination of this Lease, and Tenant shall initially be given two (2) keys to the Premises by Landlord. No duplicates of such Initials: SK ----------- GB ----------- keys shall be made by Tenants. Additional keys shall be obtained only from Landlord, at a fee to be determined by Landlord. 19. Tenants will not locate furnishings or cabinets adjacent to mechanical or electrical access panels or over air conditioning outlets so as to prevent operating personnel from servicing such units as routine or emergency access may require. Cost of moving such furnishings for Landlord's access will be for Tenant's account. The lighting and air conditioning equipment of the Building will remain the exclusive charge of the Building designated personnel. 20. Tenant shall comply with such parking rules and regulations as may be posted and distributed from time to time. 21. No portion of the Building shall be used for the purpose of lodging rooms. 22. Prior written approval, which shall be at Landlord's sole discretion, must be obtained for installation of window shades, blinds, drapes, or any other window treatment of any kind whatsoever. Landlord will control all internal lighting that may be visible from the exterior of the Building and shall have the right to change any unapproved lighting, without notice to Tenant, at Tenant's expense. 23. No Tenant shall make any changes or alterations to any portion of the Building without Landlord's prior written approval, which may be given on such conditions as Landlord may elect. All such work shall be done by Landlord or by contractors and/or workmen approved by Landlord, working under Landlord's supervision. 24. Landlord reserves the right to rescind any of these rules and make such other reasonable and further rules and regulations as in its reasonable judgment shall from time to time be needful for the operation of the Building, which rules shall be binding upon each Tenant upon delivery to such Tenant of notice thereof in writing. Initials: SK ----------- GB ----------- EXHIBIT F PARKWAY CENTRE, PHASE I 2901 NORTH DALLAS PARKWAY PLANO, TEXAS RENEWAL OPTION Tenant (but not any assignee or subtenant of Tenant, even if Landlord's consent is obtained as required under Article XIX of this lease) is granted the option(s) to extend the term of this lease for one (1) consecutive extended term of three (3) years, provided (a) Tenant is not in default at the time of exercise of the option, and (b) Tenant gives written notice of its exercise of the respective option at least one hundred eighty (180) days prior to the expiration of the original term or the expiration of the then existing term. Each extension term shall be upon the same terms, condition and rentals, except (i) Tenant shall have no further right of renewal after the last extension term prescribed above, and (ii) the monthly Minimum Guaranteed Rental will be at a then Market Rate but not to exceed $19.50 psf in year 1, $20.50 psf in year 2 and $21.50 psf in year 3, and (iii) the additional rent for Tenant's Prorata Share of the Controllable Operating Expenses will be prorata over the Base Year expense. Notwithstanding the above provisions to the contrary: (A) in no event will the adjusted monthly Base Rental for any option period be lower than the monthly Base Rental for the immediately preceding period; and (B) in the event Tenant has not agreed in writing to accept the monthly Base Rental before ninety (90) days prior to the expiration of the then existing Lease Term, Landlord at its option may terminate this Lease as of the expiration of the then existing Lease Term. For purposes of this Lease, the term "Market Rate" shall mean the rent actually received for properties of equivalent size, quality and utility within a two (2) mile radius of the Property from tenants of similar size and creditworthiness. Initials: SK ----------- GB ----------- EX-10.2 4 d01067exv10w2.txt LEASE AGREEMENT EXHIBIT 10.2 LEASE AGREEMENT THIS LEASE AGREEMENT (the "Lease") is dated this 6th day of August, 2002, between CROW FAMILY HOLDINGS INDUSTRIAL TEXAS LIMITED PARTNERSHIP ("Landlord") and the Tenant named below (ALL CAPITALIZED TERMS IDENTIFIED BELOW SHALL HAVE THE MEANING GIVEN TO THEM HEREIN). TENANT: Interphase Corporation TENANT'S REPRESENTATIVE: Steve Kovac ADDRESS AND PHONE NO: 13800 Senlac Dallas, Texas 75234-8823 214-654-5220 PREMISES: That portion of the Building, containing approximately 24,270 rentable square feet, as determined by Landlord, as shown on EXHIBIT A, situated on a portion of that certain real property legally described in EXHIBIT A-1 attached hereto (the "Property"). PROJECT: The Building and that portion of the Property directly benefiting the Building known as Luna Place. BUILDING: 2105 Luna Road #320, Carrollton, Texas 75006 TENANT'S PROPORTIONATE SHARE OF PROJECT: 26.9% TENANT'S PROPORTIONATE SHARE OF BUILDING: 69.6% LEASE TERM: Beginning on the Commencement Date and ending on the last day of the thirty-ninth (39th) full calendar month thereafter, AS SUCH TERM MAY BE EXTENDED AND RENEWED IN ACCORDANCE WITH EXHIBIT D. COMMENCEMENT DATE: October 1, 2002
BASE RENT: MONTHS ANNUAL RATE PER SQ. FT. MONTHLY BASE RENT ------ ----------------------- ----------------- 1-3 $0.00 $0.00 4-39 $6.00 $12,135
INITIAL ESTIMATED MONTHLY 1. Utilities: To be paid separately in OPERATING EXPENSE PAYMENTS: accordance with Paragraph (estimates only and subject 7 herein. to adjustment to actual 2. Common Area Charges $ 1,181.14 costs and expenses according 3. Taxes: $ 2,892.18 to the provisions of this 4. Insurance: $ 91.01 Lease) 5. Others $ N/A INITIAL ESTIMATED MONTHLY OPERATING EXPENSE PAYMENTS: $ 4,164.33 INITIAL MONTHLY BASE RENT AND OPERATING EXPENSE PAYMENTS: $16,299.33 SECURITY DEPOSIT: $16,299.33 BROKER: Bob Steinweg, RLS Enterprises, Inc. ADDENDA: Rules and Regulations; Addendum; Exhibit A (Premises); Exhibit A-1 (Legal Description of Real Property); Exhibit B (UCC-1 Financing Statement); Exhibit C (Tenant Finish Work); Exhibit D (Hazardous Material); Exhibit E (Tenant Equipment) 1. GRANTING CLAUSE. In consideration of the obligation of Tenant to pay rent as herein provided and in consideration of the other terms, covenants, and conditions hereof, Landlord leases to Tenant, and Tenant leases from Landlord, the Premises, to have and to hold for the Lease Term, subject to the terms, covenants and conditions of this Lease. 2. ACCEPTANCE OF PREMISES. Except as may otherwise be expressly provided in EXHIBIT C attached hereto, Tenant shall accept the Premises on the Commencement Date in its "AS-IS" condition, subject to all applicable laws, ordinances, regulations, covenants and restrictions, and Landlord shall have no obligation to perform or pay for any repair or other work therein. Landlord has made no representation or warranty as to the suitability of the Premises for the conduct of Tenant's business, and Tenant waives any implied warranty that the Premises are suitable for Tenant's intended purposes. TENANT ACKNOWLEDGES THAT (1) IT HAS INSPECTED AND ACCEPTS THE PREMISES IN AN "AS IS, WHERE IS" CONDITION (UNLESS OTHERWISE EXPRESSLY PROVIDED IN EXHIBIT C ATTACHED HERETO, (2) THE BUILDINGS AND IMPROVEMENTS COMPRISING THE SAME ARE SUITABLE FOR THE PURPOSE FOR WHICH THE PREMISES ARE LEASED AND LANDLORD HAS MADE NO WARRANTY, REPRESENTATION, COVENANT, OR AGREEMENT WITH RESPECT TO THE MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF THE PREMISES, (3) THE PREMISES ARE IN GOOD AND SATISFACTORY CONDITION, (4) NO REPRESENTATIONS AS TO THE REPAIR OF THE PREMISES, NOR PROMISES TO ALTER, REMODEL OR IMPROVE THE PREMISES HAVE BEEN MADE BY LANDLORD (UNLESS OTHERWISE EXPRESSLY PROVIDED IN EXHIBIT C ATTACHED HERETO, AND (5) THERE ARE NO REPRESENTATIONS OR WARRANTIES, EXPRESSED, IMPLIED OR STATUTORY, THAT EXTEND BEYOND THE DESCRIPTION OF THE PREMISES. Except as provided in Paragraph 10, in no event shall Landlord have any obligation for any defects in the Premises or any limitation on its use. The taking of possession of the Premises shall be conclusive evidence that Tenant accepts the Premises and that the Premises were in good condition at the time possession was taken except for items that are Landlord's responsibility under Paragraph 10 and any punchlist items agreed to in writing by Landlord and Tenant IN ACCORDANCE WITH EXHIBIT C INCLUDING ANY LATENT DEFECTS. 3. USE. (a) Subject to Tenant's compliance with all zoning ordinances and Legal Requirements (as hereinafter defined), the Premises shall be used only for the purpose of MANUFACTURING, receiving, storing, shipping and selling (but limited to wholesale sales) products, materials and merchandise made and/or distributed by Tenant and for such other lawful purposes as may be incidental thereto; however, no retail sales may be made from the Premises. Tenant shall not conduct or give notice of any auction, liquidation, or going out of business sale on the Premises. Tenant will use the Premises in a careful, safe and proper manner and will not commit waste, overload the floor or structure of the Premises or subject the Premises to use that would damage the Premises. Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise, or vibrations to emanate from the Premises, or take any other action that would constitute a nuisance or would disturb, unreasonably interfere with, or endanger Landlord or any tenants of the Project. Outside storage, including without limitation, storage of trucks and other vehicles, is prohibited without Landlord's prior written consent. (b) Tenant, at its sole expense, shall use and occupy the Premises in compliance with all laws, including, without limitation, the Americans With Disabilities Act, orders, judgments, ordinances, regulations, codes, directives, permits, licenses, covenants and restrictions now or hereafter applicable to the Premises (collectively, "Legal Requirements"). The Premises shall not be used as a place of public accommodation under the Americans With Disabilities Act or similar state statutes or local ordinances or any regulations promulgated thereunder, all as may be amended from time to time. Tenant shall, at its expense, make any alterations or modifications, within or without the Premises, that are required by Legal 2 Requirements related to Tenant's specific use or occupation of the Premises. Tenant will not use or permit the Premises to be used for any purpose or in any manner that would void Tenant's or Landlord's insurance, increase the insurance risk, or cause the disallowance of any sprinkler credits. If any increase in the cost of any insurance on the Premises or the Project is caused by Tenant's use or occupation of the Premises, or because Tenant vacates the Premises, then Tenant shall pay the amount of such increase to Landlord. Any entrance into or occupation of the Premises by Tenant prior to the Commencement Date shall be subject to all obligations of Tenant under this Lease. (c) Tenant and its employees and invitees shall have the non-exclusive right to use, in common with others, any areas designated by Landlord from time to time as common areas for the use and enjoyment of all tenants and occupants of the Project (THE "COMMON AREAS"), subject to THE Rules and Regulations (as HEREAFTER DEFINED IN PARAGRAPH 31). 4. BASE RENT. Tenant shall pay Base Rent in the amount set forth on the first page of this Lease. The first month's Base Rent, the Security Deposit, and the first monthly installment of estimated Operating Expenses (as hereafter defined) shall be due and payable on the date hereof, and Tenant promises to pay to Landlord in advance, without demand, deduction or set-off, monthly installments of Base Rent on or before the first day of each calendar month succeeding the Commencement Date. Payments of Base Rent for any fractional calendar month shall be prorated. All payments required to be made by Tenant to Landlord hereunder shall be payable at such address as Landlord may specify from time to time by written notice delivered in accordance herewith. The obligation of Tenant to pay Base Rent and other sums to Landlord and the obligations of Landlord under this Lease are independent obligations. Tenant shall have no right at any time to abate, reduce, or set-off any rent due hereunder except where expressly provided in this Lease. Tenant acknowledges that late payment by Tenant to Landlord of any rent due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impractical to determine. Therefore, if Tenant is delinquent in any monthly installment of Base Rent, estimated Operating Expenses or other sums due and payable hereunder for more than TEN (10) days, Tenant shall pay to Landlord on demand a late charge equal to five percent (5%) of such delinquent sum. The parties agree that such late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of such late payment by Tenant. The provision for such late charge shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as a penalty. 5. SECURITY DEPOSIT. The Security Deposit shall be held by Landlord as security for the performance of Tenant's obligations under this Lease. The Security Deposit is not an advance rental deposit or a measure of Landlord's damages in case of Tenant's default. Upon each occurrence of an Event of Default (hereinafter defined), Landlord may use all or part of the Security Deposit to pay delinquent payments due under this Lease, and the cost of any damage, injury, expense or liability caused by such Event of Default, without prejudice to any other remedy provided herein or provided by law. Tenant shall pay Landlord on demand the amount that Will restore the Security Deposit to its original amount. Landlord's obligation respecting the Security Deposit is that of a debtor, not a trustee; no interest shall accrue thereon. Subject to the requirements of, and conditions imposed by, laws applicable to security deposits under commercial leases, Landlord shall within the time required by applicable law (BUT IN NO EVENT LATER THAN THIRTY (30) DAYS AFTER THE FINAL WALK-THROUGH AND COMPLETION OF THE FINAL WALK-THROUGH PUNCH-LIST ITEMS OR AN EARLIER, MUTUALLY AGREEABLE, TERMINATION OF THIS LEASE), return to Tenant the portion of the Security Deposit remaining after deducting all damages, charges and other amounts permitted by law. Landlord and Tenant agree that such deductions shall include, without limitation, all damages and losses that Landlord has suffered or that Landlord reasonably estimates that it will suffer as a result of any breach of this Lease by Tenant. If Landlord transfers its interest in the Premises Landlord may assign the Security Deposit to the transferee and, upon such transfer and the delivery to Tenant of an acknowledgement of the transferee's responsibility for the Security Deposit as provided by law, Landlord thereafter shall have no further liability for the return of the Security Deposit. 3 6. OPERATING EXPENSE PAYMENTS. (a) During each month of the Lease Term, on the same date that Base Rent is due, Tenant shall pay Landlord an amount equal to 1/12 of the annual cost, as estimated by Landlord from time to time, of Tenant's Proportionate Share (as defined ON THE FIRST PAGE OF THIS LEASE) of Operating Expenses for the Project. Payments thereof for any fractional calendar month shall be prorated. (b) The term "Operating Expenses" means all costs and expenses incurred by Landlord with respect to the ownership, maintenance, and operation of the Project including, but not limited to costs of: Common Area utilities; maintenance, repair and replacement of all portions of the Project, including without limitation, paving and parking areas, roads, roofs (except that Landlord is responsible for replacement of the roof as provided in Paragraph 10, Tenant being responsible only for Tenant's Proportionate Share of the cost of roof repairs), roof membrane, alleys, and driveways; mowing, snow removal, landscaping, and exterior painting; the cost of maintaining utility lines, fire sprinklers and fire protection systems, exterior lighting and mechanical and building systems serving the Building or Project; amounts paid to contractors and subcontractors for work or services performed in connection with any of the foregoing; charges or assessments of any association to which the Project is subject; fees payable to tax consultants and attorneys for consultation and contesting taxes; environmental insurance or environmental management fees; the cost of any insurance deductibles for insurance required to be maintained by Landlord hereunder; property management fees payable to a property manager (NOT TO EXCEED 6% OF GROSS REVENUES), including any affiliate of Landlord, or if there is no property manager, an administration fee of ten percent (10%) of Operating Expenses payable to Landlord; security services, if any; trash collection, sweeping and removal; and additions or alterations made by Landlord to the Project or the Building in order to comply with Legal Requirements (other than those expressly required herein to be made by Tenant) or that are appropriate to the continued operation of the Project or the Building as a bulk warehouse/industrial or service center facility in the market area, provided that the cost of such additions or alterations that are required to be capitalized for federal income tax purposes shall be amortized on a straight line basis over a period equal to the lesser of the useful life thereof for federal income tax purposes or ten (10) years and included in Operating Expenses only to the extent of the amortized amount for the respective calendar year. In addition, Operating Expenses shall include (i) Taxes (hereinafter defined) for each calendar year during the Lease term, and (ii) the cost of insurance maintained by Landlord for the Project for each calendar year during the Lease Term. (c) Notwithstanding ANYTHING TO THE CONTRARY CONTAINED IN the foregoing PARAGRAPH, Operating Expenses do not include (i) costs, expenses, depreciation or amortization for capital repairs and capital replacements required to be made by Landlord under Paragraph 10 of this Lease; (ii) debt service under ANY LOAN OR mortgages or ground rent under ground leases; (iii) costs of restoration to the extent of net insurance proceeds received by Landlord with respect thereto; (iv) leasing commissions or the costs of renovating space for tenants; (v) any costs or legal fees incurred in connection with any particular tenant; (vi) CAPITAL EXPENDITURES OTHER THAN THOSE ADDITIONS OR ALTERATIONS SPECIFICALLY DESCRIBED IN PARAGRAPH 6(b) ABOVE; (vii) ANY COSTS OR FEES IN CONNECTION WITH ANY WORK IDENTIFIED IN EXHIBIT C AND/OR IN CONNECTION WITH RESPECT TO THE HVAC WARRANTY ON EXHIBIT D; (viii) TAXES ON INCOME AND FRANCHISE TAXES; (ix) LANDLORD'S OVERHEAD COSTS, INCLUDING SALARIES, EQUIPMENT, SUPPLIES, ACCOUNTING AND LEGAL FEES, RENT AND OTHER OCCUPANCY COSTS, OR ANY OTHER COSTS ASSOCIATED WITH THE OPERATION AND INTERNAL ORGANIZATION AND FUNCTION OF LANDLORD AS A BUSINESS ENTITY; (x) WAGES AND SALARIES (INCLUDING EMPLOYEE BENEFITS) OF THE BUILDING MANAGER, WHICH SHALL BE INCLUDED IN THE BUILDING MANAGEMENT FEE, OF EXECUTIVE OR OTHER PERSONNEL ABOVE THE GRADE OF BUILDING MANAGER, OR OF EMPLOYEES WHO DO NOT DEVOTE THE MAJORITY OF THEIR TIME TO THE BUILDING; (xi) FEES OR OTHER COSTS FOR PROFESSIONAL SERVICES PROVIDED BY LAWYERS, SPACE PLANNERS, ARCHITECTS, ENGINEERS, AND OTHER SIMILAR PROFESSIONAL CONSULTANTS, REAL ESTATE COMMISSIONS AND MARKETING AND ADVERTISING EXPENSES; (xii) COSTS OF DEFENDING OR PROSECUTING LITIGATION WITH ANY PARTY, INCLUDING TENANTS, MORTGAGES, OR OTHERS, UNLESS A FAVORABLE JUDGMENT WOULD REDUCE OR AVOID AN INCREASE IN OPERATING EXPENSES, OR UNLESS THE LITIGATION IS TO ENFORCE COMPLIANCE WITH THE BUILDING RULES OR OTHER STANDARDS OR REQUIREMENTS FOR THE GENERAL BENEFIT OF THE TENANTS IN THE BUILDING; (xiii) COSTS INCURRED AS THE RESULT OF LANDLORD'S VIOLATION OF ANY LEASE, CONTRACT, LAW OR ORDINANCE, INCLUDING FINES AND PENALTIES; (xiv) LATE CHARGES, INTEREST OR PENALTIES OF ANY KIND FOR LATE OR OTHER IMPROPER PAYMENT OF ANY PUBLIC OR 4 PRIVATE OBLIGATION, INCLUDING AD VALOREM TAXES; (xv) COSTS OF REMOVING HAZARDOUS WASTES OR ASBESTOS OR OF CORRECTING ANY OTHER CONDITIONS IN ORDER TO COMPLY WITH ANY ENVIRONMENTAL LAW OR ORDINANCE, UNLESS CAUSED BY TENANT'S OCCUPANCY; (xvi) COSTS FOR WHICH LANDLORD IS ENTITLED TO REIMBURSEMENT FROM ANY SOURCE, INCLUDING COSTS COVERED BY PROCEEDS OF INSURANCE, CONDEMNATION AWARDS, OR COURT JUDGMENTS, AMOUNTS SPECIFICALLY BILLED TO OR PAYABLE BY INDIVIDUAL TENANTS, COSTS COVERED BY ANY MANUFACTURER'S, CONTRACTOR'S, OR OTHER WARRANTY, OR ANY OTHER COST FOR WHICH LANDLORD IS ENTITLED TO REIMBURSEMENT; (xvii) COSTS, INCLUDING AD VALOREM TAXES AND INSURANCE PREMIUMS FOR IMPROVEMENTS, OTHER MATERIALS, WORK, OR SERVICES FURNISHED FOR ANY TENANT OTHER THAN TENANT TO A MATERIALLY GREATER EXTENT OR IN A MATERIALLY MORE FAVORABLE MANNER THAN FURNISHED TO TENANTS GENERALLY, OR THAT ARE FURNISHED ON AN EXCLUSIVE BASIS TO ANY ONE TENANT OR GROUP OF TENANTS; (xviii) COSTS RELATED TO ANY BUILDING OR LAND NOT INCLUDED IN THE PROJECTS INCLUDING ANY ALLOCATION OF COSTS INCURRED ON A SHARED BASIS, SUCH AS CENTRALIZED ACCOUNTING COSTS, UNLESS THE ALLOCATION IS MADE ON A REASONABLE AND CONSISTENT BASIS THAT FAIRLY REFLECTS THE SHARE OF SUCH COSTS ACTUALLY ATTRIBUTABLE TO THE BUILDING, AND UNLESS SUCH SHARING OF COSTS ACTUALLY REDUCES OPERATING EXPENSES; AND (xix) THE PART OF ANY COST OR OTHER SUM PAID TO ANY AFFILIATE OF LANDLORD OR TO ANY OTHER PARTY THAT MAY EXCEED THE FAIR MARKET PRICE OR COSTS GENERALLY PAYABLE FOR COMPARABLE GOODS OR SERVICES IN THE AREA OF THE PROJECT. The cost of any repairs or replacements which are classified as capital improvements under generally accepted accounting principles shall be amortized with interest over the lesser of the useful life of the improvement or ten (10) years and included in Operating Expenses only to the extent of the amortized amount for the respective calendar year. (d) If Tenant's total payments of Operating Expenses for any year are less than Tenant's Proportionate Share of actual Operating Expenses for such year, then Tenant shall pay the difference to Landlord within thirty (30) days after demand, and if more, then Landlord shall retain such excess and credit it against Tenant's next payments, OR, IF NO SUCH PAYMENTS ARE DUE (AS A RESULT OF THE EXPIRATION OR TERMINATION OF THIS LEASE), THEN LANDLORD SHALL REIMBURSE THE FULL AMOUNT OF THE OVERPAYMENT TO TENANT WITHIN 180 DAYS AFTER THE END OF THE CALENDAR YEAR IN WHICH PAYMENT WAS DUE OR THE LEASE EXPIRED OR WAS TERMINATED. For purposes of calculating Tenant's Proportionate Share of Operating Expenses, a year shall mean a calendar year except the first year, which shall begin on the Commencement Date, and the last year, which shall end on the expiration of this Lease. (e) With respect to Operating Expenses which Landlord allocates to the entire Project, Tenant's "Proportionate Share" shall be the percentage set forth on the first page of this Lease as Tenant's Proportionate Share of the Project as reasonably adjusted by Landlord in the future for changes in the physical size of the Premises or the Project (PROVIDED, HOWEVER, ANY SUCH ADJUSTMENT SHALL NOT HAVE THE EFFECT OF INCREASING THE ACTUAL AMOUNT OF OPERATING EXPENSES PAID BY TENANT; PROVIDED, FARTHER, HOWEVER, THAT SUCH LIMITATION SHALL HAVE NO EFFECT ON LANDLORD'S RIGHT TO INCREASE CONTROLLABLE OPERATING EXPENSES IN ACCORDANCE WITH SECTION 6(f) BELOW); and, with respect to Operating Expenses which Landlord allocates only to the Building, Tenant's "Proportionate Share" shall be the percentage set forth on the first page of this Lease as Tenant's Proportionate Share of the Building as reasonably adjusted by Landlord in the future for changes in the physical size of the Premises or the Building (PROVIDED, HOWEVER, ANY SUCH ADJUSTMENT SHALL NOT HAVE THE EFFECT OF INCREASING THE ACTUAL AMOUNT OF OPERATING EXPENSES PAID BY TENANT; PROVIDED, FURTHER, HOWEVER, THAT SUCH LIMITATION SHALL HAVE NO EFFECT ON LANDLORD'S RIGHT TO INCREASE CONTROLLABLE OPERATING EXPENSES IN ACCORDANCE WITH SECTION 6(f) BELOW). Landlord may equitably increase Tenant's Proportionate Share for any item of expense or cost reimbursable by Tenant that relates to a repair, replacement, or service that benefits only the Premises or only a portion of the Project or Building that includes the Premises or that varies with occupancy or use. The estimated Operating Expenses for the Premises set forth on the first page of this Lease are only estimates, and Landlord makes no guaranty or warranty that such estimates will be accurate. (f) OPERATING EXPENSE CAP. For purposes of calculating additional rent under Section 6(b), the maximum increase in the amount of Controllable Operating Expenses (defined below) that may be included in calculating such additional rent for each calendar year after 2003 shall be limited to eight percent (8%) per calendar year on a cumulative, compounded basis; for example, the maximum amount of Controllable Operating Expenses that may be included in calculation of such additional rent for each 5 calendar year after 2003 shall equal the product of the 2002 Controllable Operating Expenses and the following percentages for the following calendar years: 108% for 2004; 116.64% for 2005; 125.97% for 2006; etc. "CONTROLLABLE OPERATING EXPENSES" shall mean all Operating Expenses, which are within the reasonable control of Landlord; thus, excluding Taxes, insurance, utilities, and other costs beyond the reasonable control of Landlord. The limit on the increases in Controllable Operating Expense shall continue during any renewal or extended Term, using the 2003 as the base year to calculate the applicable limit. (g) AUDIT. Tenant or its representative shall have the right to examine such records upon reasonable prior notice specifying such records Tenant desires to examine, during normal business hours at the place or places where such records are normally kept by sending such notice no later than forty-five (45) days following the furnishing of the Statement. Tenant may take exception to matters included in Taxes or Operating Expenses, or Landlord's computation of Tenant's Prorata share of either, by sending notice specifying such exception and the reasons therefore to Landlord no later than thirty (30) days after Landlord makes such records available for examination. Such statement shall be considered final, except as to matters to which exception is taken after examination of Landlord's records in the foregoing manner and within the foregoing times. Tenant acknowledges that Landlord's ability to budget and incur expenses depends on the finality of such Statement, and accordingly agrees that time is of the essence of this Paragraph. If Tenant takes exception to any matter contained in the Statement as provided herein, Tenant shall refer the matter to an independent certified public accountant approved by Landlord, whose certification as to the proper amount shall be final and conclusive as between Landlord and Tenant. Tenant shall promptly pay the cost of such certification unless such certification determines that Tenant was overbilled by more than 2% in which case Landlord shall pay for the certification up to a limit of $3,000. Pending resolution of any such exceptions in the foregoing manner, Tenant shall continue paying Tenant's Prorata Share of Taxes and Operating Expenses in the amounts determined by Landlord, subject to adjustment after any such exceptions are so resolved. IF A DISCREPANCY IS FOUND PER PARAGRAPH 6(g), OPERATING EXPENSES SHALL BE ADJUSTED REFLECTING EITHER THE UNDER- OR OVER-PAYMENT OF OPERATING EXPENSES. LANDLORD'S AND TENANT'S RIGHTS AND OBLIGATIONS UNDER THIS SECTION SHALL SURVIVE THE END OF THE LEASE TERMS OR ANY EARLIER TERMINATION OF THE LEASE PER TERMS AND CONDITIONS STATED IN THIS PARAGRAPH 6(g). 7. UTILITIES. Tenant shall pay for all water, gas, electricity, heat, light, power, telephone, sewer, sprinkler services, refuse and trash collection, and other utilities and services used on the Premises, all maintenance charges for utilities, and any storm sewer charges or other similar charges for utilities imposed by any governmental entity or utility provider, together with any taxes, penalties, surcharges or the like pertaining to Tenant's use of the Premises, PROVIDED, HOWEVER TENANT SHALL NOT BE RESPONSIBLE FOR ANY PENALTIES ON SURCHARGES UNLESS DIRECTLY ATTRIBUTABLE TO TENANT'S FAILURE TO MAKE TIMELY PAYMENTS TO THE UTILITY PROVIDER. Landlord may cause at Tenant's expense any utilities to be separately metered or charged directly to Tenant by the provider. Tenant shall pay its share of all charges for jointly metered utilities based upon consumption, as reasonably determined by Landlord. Tenant agrees to limit use of water and sewer for normal restroom use. No interruption or failure of utilities shall result in the termination of this Lease or the abatement of rent, UNLESS SUCH INTERRUPTION OR FAILURE IS WITHIN LANDLORD'S CONTROL AND CONTINUES FOR A PERIOD OF THREE (3) CONSECUTIVE BUSINESS DAYS AFTER NOTICE TO LANDLORD FROM TENANT. IN SUCH EVENT, THE TENANT'S SOLE REMEDY SHALL BE TO ABATE RENT IN THE PROPORTION TO WHICH THE PREMISES ARE RENDERED UNUSABLE BY THE INTERRUPTION OR FAILURE OF UTILITIES. 8. TAXES. Landlord shall pay all taxes, assessments and governmental charges (collectively referred to as "Taxes") that either (a) accrue against the Project during the Lease Term if such Taxes are payable in advance, or (b) are assessed against the Project during the Lease Term if such Taxes are payable in arrears. Taxes shall be included as part of the Operating Expenses charged to Tenant pursuant to Paragraph 6 hereof during each year of the Lease Term, based upon Landlord's reasonable estimate of the amount of Taxes, and shall be subject to reconciliation and adjustment pursuant to Paragraph 6 once the actual amount of Taxes is known. Landlord may contest by appropriate legal proceedings the amount, validity, or application of any Taxes or liens thereof and any costs incurred in such contest may be included as part of Taxes. SUCH COSTS WILL NOT EXCEED $1,000 IN THE EVENT THE PROTEST IS NOT SUCCESSFUL. All 6 capital levies or other taxes assessed or imposed on Landlord upon the rents payable to Landlord under this Lease and any franchise tax, any excise, transaction, sales or privilege tax, assessment, levy or charge measured by or based, in whole or in part, upon such rents from the Premises and/or the Project or any portion thereof shall be paid by Tenant to Landlord monthly in estimated installments or upon demand, at the option of Landlord, as additional rent; provided, however, in no event shall Tenant be liable for any net income taxes imposed on Landlord unless such net income taxes are in substitution for any Taxes payable hereunder. If any such tax or excise is levied or assessed directly against Tenant, then Tenant shall be responsible for and shall pay the same at such times and in such manner as the taxing authority shall require. Tenant shall be liable for all taxes levied or assessed against any personal property or fixtures placed in the Premises, whether levied or assessed against Landlord or Tenant, and if any such taxes are levied or assessed against Landlord or Landlord's property and (a) Landlord pays them or (b) the assessed value of Landlord's property is increased thereby and Landlord pays the increased taxes, then Tenant shall pay to Landlord such taxes within ten (10) days after Landlord's request therefor. For property tax purposes, Tenant waives all rights to protest or appeal the appraised value of the Premises, as well as the Project, and all rights to receive notices of reappraisement as set forth in Sections 41.413 and 42.015 of the Texas Tax Code. 9. INSURANCE. (a) Landlord shall maintain all risk property insurance covering the full replacement cost of the Building (excluding foundations), less a commercially reasonable deductible if Landlord so chooses. Landlord may, but is not obligated to, maintain such other insurance and additional coverages as it may deem necessary, including, but not limited to, commercial liability insurance, flood insurance, and rent loss insurance. All such insurance shall be included as part of the Operating Expenses charged to Tenant pursuant to Paragraph 6 hereof. The Project or Building may be included in a blanket policy (in which case the cost of such insurance allocable to the Project or Building will be determined by Landlord based upon the insurer's cost calculations). Tenant shall also reimburse Landlord for any increased premiums or additional insurance THAT Landlord reasonably deems necessary as a result of Tenant's use of the Premises. (b) Effective as of the earlier of: (1) the date Tenant enters or occupies the Premises; or (2) the Commencement Date, and continuing during the Lease Term, Tenant, at its expense, shall obtain and maintain in full force the following insurance coverage: (i) all risk property insurance covering the full replacement cost of all property and improvements installed or placed in the Premises by Tenant or for Tenant's benefit; (ii) worker's compensation insurance with no less than the minimum limits required by law; (iii) employer's liability insurance with such limits as required by law; and (iv) commercial liability insurance, with a minimum limit of $1,000,000 per occurrence and a minimum umbrella limit of $2,000,000, for a total minimum combined general liability and umbrella limit of $3,000,000 for property damage, personal injuries, or deaths of persons occurring in or about the Premises. Landlord may from time to time require reasonable increases in any such limits. The commercial liability policies shall name Landlord and Landlord's agents as additional insureds, insure on an occurrence and not a claims-made basis, be issued by insurance companies which are reasonably acceptable to Landlord, not be cancelable unless thirty (30) days prior written notice shall have been given to Landlord, contain a hostile fire endorsement or amended pollution endorsement, and a contractual liability endorsement and provide primary coverage to Landlord (any policy issued to Landlord providing duplicate or similar coverage shall be deemed excess over Tenant's policies). Such certificates, or at Landlord's option, copies of the policies evidencing coverage shall be delivered to Landlord by Tenant at least ten (10) days prior to the Commencement Date and at least fifteen (15) days prior to each renewal of said insurance. If Tenant fails to comply with the foregoing insurance requirements or to deliver to Landlord copies of such policies and certificates evidencing the coverage required herein, Landlord, in addition to any remedy available pursuant to this Lease or otherwise, may UPON WRITTEN NOTICE TO TENANT, but shall not be obligated to, obtain such insurance and Tenant shall pay to Landlord on demand the premium costs thereof, plus an administrative fee of TEN percent (10%) of the cost. 7 (c) The all risk property insurance obtained by Landlord and Tenant shall include a waiver of subrogation by the insurers and all rights based upon an assignment from its insured, against Landlord or Tenant, their officers, directors, employees, managers, agents, invitees and contractors, in connection with any loss or damage thereby insured against. The failure of a party to insure its property shall not void this waiver. Notwithstanding anything to the contrary contained herein, Tenant hereby waives any claims against Landlord, and its officers, directors, employees, managers, agents, invitees and contractors for any loss or damage insured against or required to be insured against hereunder (whether by self-insurance or otherwise), regardless of whether the negligence or fault of Landlord caused such loss. Landlord hereby waives any claims against Tenant, and its officers, directors, employees, managers, agents, invitees and contractors for any loss or damage insured against or required to be insured against hereunder to the extent insurance proceeds are received therefor, regardless of whether the negligence or fault of Tenant caused such loss; however, Landlord's waiver shall not apply to any deductible amounts maintained by Landlord under its insurance. 10. LANDLORD'S REPAIRS. This Lease is intended to be a net lease; accordingly, Landlord's maintenance and repair obligations are limited to the replacement of the Building's roof and maintenance of the foundation piers and structural members of the exterior walls, reasonable wear and tear and uninsured losses and damages caused by Tenant, its agents, employees and contractors excluded. The term "walls" as used in this Paragraph 10 shall not include windows, glass or plate glass, doors or overhead doors, special store fronts, dock bumpers, dock plates or levelers, or office entries, all of which shall be maintained by Tenant. Tenant shall promptly give Landlord written notice of any repair required by Landlord pursuant to this Paragraph 10, after which Landlord shall have a reasonable opportunity to repair such item. Landlord shall also maintain in good repair and condition the parking areas and other common areas of the Building, including, but not limited to driveways, alleys, landscape and grounds surrounding the Premises, the cost of such maintenance, repair and replacement to be paid in accordance with Paragraph 6 hereof. TENANT SHALL HAVE ACCESS TO THE PREMISES TWENTY-FOUR (24) HOURS PER DAY, SEVEN (7) DAYS PER WEEK. PER SECTION 6, LANDLORD SHALL BE RESPONSIBLE FOR (i) MOWING AND IRRIGATION OF LANDSCAPING, AND SWEEPING AND REMOVAL OF LITTER AND DEBRIS FROM THE EXTERIOR COMMON AREAS, AND (ii) ELECTRICAL LIGHTING FOR EXTERIOR AREAS OF THE PROPERTY FOR BUILDINGS OF SIMILAR SIZE AND IN SIMILAR LOCATIONS, AND (iii) REPLACEMENT OF BUILDING STANDARD LIGHT BULBS AND TUBES IN EXTERIOR AREAS OF THE PROPERTY. 11. TENANT'S REPAIRS. (a) Subject to Landlord's obligation in Paragraph 10, Tenant, at its sole expense, shall repair, replace and maintain in good condition all portions of the Premises and all areas, improvements and systems exclusively serving the Premises including, without limitation, dock, dock equipment and loading areas, dock doors, plumbing, water, and sewer lines up to points of common connection, entries, doors, ceilings, windows, interior walls, and the interior side of demising walls, and heating, ventilation and air conditioning systems, and other building and mechanical systems serving the Premises. Such repair and replacements include capital expenditures and repairs whose benefit may extend beyond the Term. Maintenance and repair of the heating, ventilation and air conditioning systems and other mechanical and building systems serving the Premises, and any repairs to the roof, shall be at Tenant's expense pursuant to maintenance service contracts entered into by Tenant or, at Landlord's written election, by Landlord (but at Tenant's expense). The scope of services and contractors under such maintenance contracts shall be subject to Landlord's prior written approval. (b) In the event that any repair or maintenance obligation required to be performed by Tenant hereunder may affect the structural integrity of the Building (e.g., roof, foundation, structural members of the exterior walls), prior to commencing any such repair, Tenant shall provide Landlord with written notice of the necessary repair or maintenance and a brief summary of the structural component or components of the Building that may be affected by such repair or maintenance. Within ten (10) business days after Landlord's receipt of Tenant's written notice, Landlord shall have the right, but not the obligation, 8 to elect to cause such repair or maintenance to be performed by Landlord, or a contractor selected and engaged by Landlord, but at Tenant's sole cost and expense. The foregoing sentence is not intended to obligate Tenant to pay for repairs or maintenance to those structural items which are Landlord's responsibility pursuant to Paragraph 10 above, but shall only require Tenant to pay for the repair and maintenance to such structural components to the extent such repair or maintenance is necessitated due to the performance of Tenant's repair and maintenance obligations pursuant to this Paragraph 11. (c) Within the fifteen (15) day period prior to the expiration or termination of this Lease, Tenant shall deliver to Landlord a certificate from an engineer reasonably acceptable to Landlord certifying that the hot water equipment and the HVAC system are then in good repair and working order. If Tenant fails to perform any repair or replacement for which it is responsible, Landlord may perform such work and be reimbursed by Tenant within ten (10) days after demand therefor Subject to Paragraphs 9 and 15, Tenant shall bear the full cost of any repair or replacement to any part of the Building or Project that results from damage caused by Tenant, its agents, contractors, or invitees and any repair that benefits only the Premises. 12. TENANT-MADE ALTERATIONS AND TRADE FIXTURES. (a) Any alterations additions, or improvements made by or on behalf of Tenant to the Premises ("Tenant-Made Alterations") shall be subject to Landlord's prior written consent Tenant shall cause, at its expense, all Tenant-Made Alterations to comply with insurance requirements and with Legal Requirements and shall construct at its expense any alteration or modification required by Legal Requirements as a result of any Tenant-Made Alterations. (b) All Tenant-Made Alterations shall be constructed in a good and workmanlike manner by contractors reasonably acceptable to Landlord and only good grades of materials shall be used. All plans and specifications for any Tenant-Made Alterations shall be submitted to Landlord for its approval. Landlord may monitor construction of the Tenant-Made Alterations. Tenant shall reimburse Landlord for its OUT-OF-POCKET costs in reviewing plans and specifications and in monitoring construction not to exceed THREE percent (3%) of the total cost of such Tenant-Made Alterations. Landlord's right to review plans and specifications and to monitor construction shall be solely for its own benefit, and Landlord shall have no duty to see that such plans and specifications or construction comply with applicable laws, codes, rules and regulations. (c) Tenant shall provide Landlord with the identities and mailing addresses of all persons performing work or supplying materials, prior to beginning such construction, and Landlord may post on and about the Premises notices of non-responsibility pursuant to applicable law. Tenant shall furnish security or make other arrangements satisfactory to Landlord to assure payment for the completion of all work free and clear of liens and shall provide certificates of insurance for worker's compensation and other coverage in amounts and from an insurance company satisfactory to Landlord protecting Landlord against liability for personal injury or property damage during construction. Upon completion of any Tenant-Made Alterations, Tenant shall deliver to Landlord sworn statements setting forth the names of all contractors and subcontractors who did work on the Tenant-Made Alterations and final lien waivers from all such contractors and subcontractors. (d) Upon surrender of the Premises, all Tenant-Made Alterations and any leasehold improvements constructed by Landlord or Tenant shall remain on the Premises as Landlord's property, except to the extent Landlord's requires removal at Tenant's expense of any such items or Landlord and Tenant have otherwise agreed in writing in connection with Landlord's consent to any Tenant-Made Alterations. Prior to the expiration or termination of this Lease, Tenant, at its sole expense, shall repair any and all damage caused by such removal, ORDINARY WEAR AND TEAR EXCEPTED. (e) Tenant, at its own cost and expense and without Landlord's prior approval, may erect such shelves, bins, machinery and trade fixtures (collectively "Trade Fixtures") in the ordinary course of its business provided that such items do not alter the basic character of the Premises, do not overload or 9 damage the Premises, and may be removed without injury to the Premises, and the construction, erection, and installation thereof complies with all Legal Requirements and with Landlord's requirements set forth above. Prior to the expiration or termination of this Lease, Tenant, at its sole expense, shall remove its Trade Fixtures and shall repair any and all damage caused by such removal. (f) NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, TENANT SHALL HAVE THE RIGHT TO INSTALL IN THE PREMISES, AT NO COST TO LANDLORD, THE EQUIPMENT (THE "EQUIPMENT') IDENTIFIED ON EXHIBIT F ATTACHED HERETO. UPON SURRENDER OR VACATION OF THE PREMISES, TENANT SHALL REMOVE ALL EQUIPMENT FROM THE PREMISES. 13. SIGNS. All signs, decorations, advertising media, blinds, draperies and other window treatment or bars or other security installations visible from outside the Premises shall be subject to Landlord's prior written approval and shall conform in all respects to Landlord's requirements, WHICH APPROVAL SHALL NOT BE UNREASONABLE WITHHELD OR DELAYED. Tenant shall not make any changes to the exterior of the Premises, install any exterior lights, decorations, balloons, flags, pennants, banners, or painting, or erect or install any signs, windows or door lettering, placards, decorations, or advertising media of any type which can be viewed from the exterior of the Premises, without Landlord's prior written consent. Landlord shall not be required to notify Tenant of whether it consents to any sign until it (a) has received detailed, to-scale drawings thereof specifying design, material composition, color scheme, and method of installation, and (b) has had a reasonable opportunity to review them. Upon surrender or vacation of the Premises, Tenant shall have removed all signs and repair, paint, and/or replace the building facia surface to which its signs are attached ORDINARY WEAR AND TEAR EXCEPTED. Tenant shall obtain all applicable governmental permits and approvals for sign and exterior treatments. NOTWITHSTANDING THE FOREGOING, LANDLORD AGREES TO PERMIT TENANT, AT TENANT'S EXPENSE AND SUBJECT TO ALL APPLICABLE LAWS, CODES, RULES AND REGULATIONS, TO ERECT EXTERIOR SIGNAGE IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO LANDLORD. TENANT SHALL SUBMIT ITS SIGNAGE CRITERIA AND PLANS TO LANDLORD FOR LANDLORD'S APPROVAL, WHICH APPROVAL SHALL NOT BE UNREASONABLY WITHHELD OR DELAYED. 14. PARKING. Tenant shall be entitled to park in common with other tenants of the Project in those areas designated for nonreserved parking. Landlord may allocate parking spaces among Tenant and other tenants in the Project at Landlord's sole discretion. Landlord shall not be responsible for enforcing Tenant's parking rights against any third parties. TENANT ACKNOWLEDGES THAT THERE IS NO RESERVED PARKING, PROVIDED, HOWEVER, IN NO EVENT SHALL FEWER THAN FIFTY (50) PARKING SPACES BE MADE AVAILABLE FOR TENANT'S USE. 15. RESTORATION. (a) If at any time during the Lease Term the Premises are damaged by a fire or other casualty, Landlord shall notify Tenant within FIFTY (50) days after such damage as to the amount of time Landlord reasonably estimates it will take to restore the Premises. If the restoration time is estimated to exceed OR EXCEEDS 210 days from the date OF THE CASUALTY, either Landlord or Tenant may elect to terminate this Lease upon notice to the other party given no later than thirty (30) days after Landlord's notice OR AFTER EXPIRATION OF THE 210 DAY TIME PERIOD. If neither party elects to terminate this Lease or if Landlord estimates that restoration will take 180 days or less, then, subject to receipt of sufficient insurance proceeds, Landlord shall promptly restore the Premises excluding the improvements installed by Tenant or by Landlord and paid by Tenant, subject to delays arising from the collection of insurance proceeds or from Force Majeure events. Tenant at Tenant's expense shall promptly perform, subject to delays arising from the collection of insurance proceeds, or from Force Majeure events, all repairs or restoration not required to be done by Landlord and shall promptly re-enter the Premises and commence doing business in accordance with this Lease. NOTWITHSTANDING THE FOREGOING, EITHER PARTY MAY TERMINATE THIS LEASE UPON THIRTY (30) DAYS WRITTEN NOTICE TO THE OTHER IF THE PREMISES ARE DAMAGED DURING THE LAST YEAR OF THE LEASE TERM AND LANDLORD REASONABLY ESTIMATES THAT IT WILL TAKE MORE THAN THIRTY (30) DAYS TO REPAIR SUCH DAMAGE. (b) If the Premises are destroyed or substantially damaged by any peril not covered by the insurance maintained by Landlord or any Landlord's mortgagee requires that insurance proceeds be 10 applied to the indebtedness secured by its mortgage (defined hereinafter), Landlord may terminate this Lease by delivering written notice of termination to Tenant within thirty (30) days after such destruction or damage or such requirement is made known by any such Landlord's mortgagee, as applicable, whereupon all rights and obligations hereunder shall cease and terminate, except for any liabilities of LANDLORD AND Tenant which accrued prior to Lease termination. (c) If such damage or destruction is caused by the act(s) or omission(s) of Tenant, its employees, agents or contractors, Tenant shall pay to Landlord with respect to any damage to the Premises and/or Project the amount of the commercially reasonable deductible under Landlord's insurance policy within ten (10) days after presentment of Landlord's invoice. Base Rent and Operating Expenses shall be abated for the period of repair and restoration in the proportion which the area of the Premises, if any, which is not usable by Tenant bears to the total area of the Premises. Such abatement shall be the sole remedy of Tenant, and except as provided herein, Tenant waives any right to terminate the Lease by reason of damage or casualty loss. 16. CONDEMNATION. If any part of the Premises or the Project should be taken for any public or quasi-public use under governmental law, ordinance, or regulation, or by right of eminent domain, or by private purchase in lieu thereof (a "Taking" or "Taken"), and (a) the Taking would prevent or materially interfere with Tenant's use of the Premises, (b) in Landlord's judgment would materially interfere with or impair its ownership or operation of the Project or (c) as a result of such Taking, Landlord's mortgagee accelerates the payment of any indebtedness securing all or a portion of the Project, then upon written notice by Landlord this Lease shall terminate and Base Rent shall be apportioned as of said date. If part of the Premises shall be Taken, and this Lease is not terminated as provided above, the Base Rent payable hereunder during the unexpired Lease Term shall be reduced to such extent as may be fair and reasonable under the circumstances, and Landlord shall restore the Premises to its condition prior to the Taking; provided, however, Landlord's obligation to so restore the Premises shall be limited to the award Landlord receives in respect of such Taking that is not required to be applied to the indebtedness secured by a mortgage. In the event of any such Taking, Landlord shall be entitled to receive the entire price or award from any such Taking without any payment to Tenant, and Tenant hereby assigns to Landlord Tenant's interest, if any, in such award. Tenant shall have the right, to the extent that same shall not diminish Landlord's award, to make a separate claim against the condemning authority (but not Landlord) for such compensation as may be separately awarded or recoverable by Tenant for moving expenses and damage to Tenant's Trade Fixtures, if a separate award for such items is made to Tenant 17. ASSIGNMENT AND SUBLETTING. (a) Without Landlord's prior written consent (NOT TO BE UNREASONABLY WITHHELD OR DELAYED), Tenant shall not assign this Lease or sublease the Premises or any part thereof or mortgage, pledge, or hypothecate its leasehold interest or grant any concession or license within the Premises (each being a "Transfer") and any attempt to do any of the foregoing shall be void and of no effect. For purposes of this Paragraph 17, a transfer of the ownership interests controlling Tenant shall be deemed a Transfer of this Lease unless such ownership interests are publicly traded. Notwithstanding the above, Tenant may assign or sublet the Premises, or any part thereof, to any entity controlling Tenant, controlled by Tenant or under common control with Tenant (a "Tenant Affiliate"), without the prior written consent of Landlord; provided, however, Tenant shall provide at least ten (10) days written notice prior to assigning this Lease to, or entering into any sublease with, any Tenant Affiliate. Tenant shall reimburse Landlord for all of Landlord's reasonable out-of-pocket expenses in connection with any Transfer, other than to a Tenant Affiliate. Upon Landlord's receipt of Tenant's written notice of a desire to assign or sublet the Premises, or any part thereof (other than to a Tenant Affiliate), Landlord may, by giving written notice to Tenant within thirty (30) days after receipt of Tenant's notice, terminate this Lease with respect to the space described in Tenant's notice, as of the date specified in Tenant's notice for the commencement of the proposed assignment or sublease. (b) Notwithstanding any Transfer, Tenant and any guarantor or surety of Tenant's obligations under this Lease shall at all times remain fully responsible and liable for the payment of the rent and for compliance with all of Tenant's other obligations under this Lease (regardless of whether Landlord's 11 approval has been obtained for any such Transfer). In the event that the rent due and payable by a sublessee or assignee (or a combination of the rental payable under such sublease or assignment plus any bonus or other consideration therefor or incident thereto) exceeds the rental payable under this Lease, then Tenant shall be bound and obligated to pay Landlord as additional rent hereunder FIFTY PERCENT (50%) OF such excess rental and other excess consideration within ten (10) days following receipt thereof by Tenant. (c) If this Lease is assigned or if the Premises is subleased (whether in whole or in part) or in the event of the mortgage, pledge, or hypothecation of Tenant's leasehold interest or grant of any concession or license within the Premises or if the Premises be occupied in whole or in part by anyone other than Tenant, then upon a default by Tenant hereunder Landlord may collect rent from the assignee, sublessee, mortgagee, pledgee, party to whom the leasehold interest was hypothecated, concessionee or licensee or other occupant and, except to the extent set forth in the preceding subparagraph, apply the amount collected to the next rent payable hereunder; and all such rentals collected by Tenant shall be held in trust for Landlord and immediately forwarded to Landlord. No such transaction or collection of rent or application thereof by Landlord, however, shall be deemed a waiver of these provisions or a release of Tenant from the further performance by Tenant of its covenants, duties, or obligations hereunder. Any approved assignment or sublease shall be expressly subject to the terms and conditions of this Lease. Landlord's consent to any Transfer shall not waive Landlord's rights as to any subsequent Transfers. 18. INDEMNIFICATION. (a) Tenant agrees to indemnify, defend (with counsel reasonably acceptable to Landlord) and hold harmless Landlord, and Landlord's agents, employees and contractors, from and against any and all claims, demands, losses, liabilities, causes of action, suits, judgments, damages, costs and expenses (including attorneys' fees) arising from any occurrence on the Premises, the use and occupancy of the Premises, or from any activity, work, or thing done, permitted or suffered by Tenant in or about the Premises or due to any other act or omission of Tenant, its subtenants, assignees, invitees, employees, contractors and agents, or from Tenant's failure to perform its obligations under this Lease (other than any loss arising from the sole or gross negligence of Landlord or its agents), EVEN THOUGH CAUSED OR ALLEGED TO BE CAUSED BY THE JOINT, COMPARATIVE, OR CONCURRENT NEGLIGENCE OR FAULT OF LANDLORD OR ITS AGENTS, AND EVEN THOUGH ANY SUCH CLAIM, CAUSE OF ACTION, OR SUIT IS BASED UPON OR ALLEGED TO BE BASED UPON THE STRICT LIABILITY OF LANDLORD OR ITS AGENTS. THIS INDEMNITY PROVISION IS INTENDED TO INDEMNIFY LANDLORD AND ITS AGENTS AGAINST THE CONSEQUENCES OF THEIR OWN NEGLIGENCE OR FAULT AS PROVIDED ABOVE WHEN LANDLORD OR ITS AGENTS ARE JOINTLY, COMPARATIVELY, OR CONCURRENTLY NEGLIGENT WITH TENANT. This indemnity provision shall survive termination or expiration of this Lease. The furnishing of insurance required hereunder shall not be deemed to limit Tenant's obligations under this Paragraph 18. (b) LANDLORD AGREES TO INDEMNIFY, DEFEND AND HOLD HARMLESS TENANT, AND TENANT'S AGENTS, EMPLOYEES AND CONTRACTORS, FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, LOSSES, LIABILITIES, CAUSES OF ACTION, SUITS, JUDGMENT, DAMAGES, COST AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) RESULTING FROM CLAIMS BY THIRD PARTIES FOR INJURIES TO ANY PERSON AND DAMAGE TO OR LOSS OF PROPERTY OCCURRING IN OR ABOUT THE PROJECT AND ARISING SOLELY FROM THE NEGLIGENCE OR INTENTIONAL MISCONDUCT OF LANDLORD, ITS EMPLOYEES, CONTRACTORS, OR AGENTS. 19. INSPECTION AND ACCESS. Landlord and its agents, representatives, and contractors may, UPON PRIOR NOTICE TO TENANT EXCEPT IN THE EVENT OF EMERGENCY, enter the Premises at any reasonable time to inspect the Premises and to make such repairs as may be required or permitted pursuant to this Lease. Landlord and Landlord's representatives may, UPON NOTICE TO TENANT, enter the Premises during business hours for the purpose of showing the Premises to prospective purchasers or, during the last year of the Lease Term, to prospective tenants. Landlord may erect a suitable sign on the Premises stating the Premises are available to let or that the Project is available for sale. Landlord may grant easements, make public dedications, designate Common Areas and create restrictions on or about the Premises, provided that no such easement, dedication, designation or restriction materially interferes with 12 Tenant's use or occupancy of the Premises. At Landlord's request, Tenant shall execute such instruments as may be necessary for such easements, dedications or restrictions. 20. QUIET ENJOYMENT. If Tenant shall perform all of the covenants and agreements herein required to be performed by Tenant, Tenant shall, subject to the terms of this Lease, at all times during the Lease Term, have peaceful and quiet enjoyment of the Premises against any person claiming by, Landlord REPRESENTS AND WARRANTS TO TENANT THAT IT HAS GOOD AND INDEFEASIBLE FEE SIMPLE TITLE TO THE PROPERTY AND THE FULL RIGHT, POWER, AND AUTHORITY TO ENTER INTO AND PERFORM THIS LEASE. LANDLORD COVENANTS THAT IF AND SO LONG AS TENANT IS ENTITLED TO POSSESSION OF THE PREMISES, TENANT SHALL PEACEABLY AND QUIETLY HAVE, HOLD AND ENJOY THE PREMISES FOR THE LEASE TERM WITHOUT HINDRANCE, CLAIM OR INTERFERENCE BY LANDLORD OR ANY OTHER PERSON, SUBJECT TO THE PROVISIONS OF THIS LEASE, AND LANDLORD SHALL TAKE ALL NECESSARY STEPS TO SECURE AND MAINTAIN SUCH QUIET AND PEACEFUL ENJOYMENT BY TENANT 21. SURRENDER. No act by Landlord shall be an acceptance of a surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless it is in writing and signed by Landlord. Upon termination of the Lease Term or earlier termination of Tenant's right of possession, Tenant shall surrender the Premises to Landlord in the same condition as received, ordinary wear and tear and casualty loss and condemnation covered by Paragraphs 15 and 16 excepted. Any Trade Fixtures, Tenant-Made Alterations, EQUIPMENT and property not so removed by Tenant as permitted or required herein shall be deemed abandoned and may be stored, removed, and disposed of by Landlord at Tenant's expense, and Tenant waives all claims against Landlord for any damages resulting from Landlord's retention and disposition of such property. All obligations of Tenant hereunder not fully performed as of the termination of the Lease Term shall survive the termination of the Lease Term, including without limitation, indemnity obligations, payment obligations with respect to Operating Expenses and all obligations concerning the condition and repair of the Premises. 22. HOLDING OVER. If Tenant fails to vacate the Premises after the termination of the Lease Term, Tenant shall be a tenant at will or at sufferance, and Tenant shall pay, in addition to any other rent or other sums then due Landlord, a daily Base Rental equal to 150% of the Base Rent in effect on the expiration or termination date, even if Landlord consents to such holdover (which consent shall be effective only if in writing). Tenant shall also be liable for all Operating Expenses incurred during such holdover period. In addition, Tenant shall be liable for all damages (including attorneys' fees and expenses) of whatever type (EXCLUDING consequential damages) incurred by Landlord as a result of such holding over. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend this Lease except as otherwise expressly provided, and this Paragraph 22 shall not be construed as consent for Tenant to retain possession of the Premises. 23. EVENTS OF DEFAULT. Each of the following events shall be an event of default ("Event of Default") by Tenant under this Lease: (i) Tenant shall fail to pay any installment of Base Rent or any other payment required herein when due, and such failure shall continue for a period of TEN (10) days from the date OF LANDLORD'S WRITTEN NOTICE OF SUCH FAILURE TO PAY, PROVIDED, HOWEVER, THAT LANDLORD SHALL NOT BE OBLIGATED TO DELIVER WRITTEN NOTICE MORE THAN ONCE IN ANY LEASE YEAR, IN WHICH CASE THE TEN (10) DAY PERIOD SHALL RUN FROM THE DATE WHEN SUCH PAYMENT WAS DUE. (ii) Tenant or any guarantor or surety of Tenant's obligations hereunder shall (A) make a general assignment for the benefit of creditors; (B) commence any case, proceeding or other action seeking to have an order for relief entered on its behalf as a debtor or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or of any substantial part of its property (collectively a "proceeding for relief"); (C) become the subject of any proceeding for relief which is not dismissed within sixty (60) days of its filing or entry; 13 or (D) die or suffer a legal disability (if Tenant, guarantor, or surety is an individual) or be dissolved or otherwise fail to maintain its legal existence (if Tenant, guarantor or surety is a corporation, partnership or other entity). (iii) Any insurance required to be maintained by Tenant pursuant to this Lease shall be cancelled or terminated or shall expire or shall be reduced or materially changed, except, in each case, as permitted in this Lease. (iv) Tenant shall fail to occupy or shall vacate the Premises or shall fail to continuously operate its business at the Premises for the permitted use set forth herein, whether or not Tenant is in monetary or other default under this Lease. (v) Tenant shall ASSIGN, SUBLEASE OR OTHERWISE transfer Tenant's interest in or with respect to this Lease except as otherwise permitted in this Lease. (vi) Tenant shall fail to discharge or bond over any lien placed upon the Premises in violation of this Lease within thirty (30) days after WRITTEN NOTICE FROM LANDLORD. (vii) Tenant shall fail to execute any instrument of subordination or attornment or any estoppel certificate within the time periods set forth in Paragraphs 27 and 29 respectively following Landlord's request for the same. (viii) Tenant shall breach any of the requirements of Paragraph 30 and such failure shall continue for a period of THIRTY (30) days or more after notice from Landlord to Tenant, PROVIDED, HOWEVER, SUCH 30 DAY TIME PERIOD MAY BE EXTENDED FOR AN ADDITIONAL PERIOD NOT TO EXCEED SIXTY (60) DAYS IF TENANT IS DILIGENTLY AND CONTINUOUSLY WORKING TO REMEDIATE ANY SUCH BREACH. (ix) Tenant shall fail to comply with any provision of this Lease other than those specifically referred to in this Paragraph 23, and except as otherwise expressly provided herein, such default shall continue for more than thirty (30) days after Landlord shall have given Tenant written notice of such default. 24. LANDLORD'S REMEDIES. (a) Upon each occurrence of an Event of Default and so long as such Event of Default shall be continuing, Landlord may at any time thereafter at its election (UPON WRITTEN NOTICE TO TENANT): terminate this Lease or Tenant's right of possession, (but Tenant shall remain liable as hereinafter provided) and/or pursue any other remedies at law or in equity. Upon the termination of this Lease or termination of Tenant's right of possession, it shall be lawful for Landlord, without formal demand or notice of any kind, to re-enter the Premises by summary dispossession proceedings or any other action or proceeding authorized by law and to remove Tenant and all persons and property therefrom. If Landlord re-enters the Premises, Landlord shall have the right to keep in place and use, or remove and store, all of the furniture, fixtures and equipment at the Premises. (b) If Landlord terminates this Lease, Landlord may recover from Tenant the sum of: all Base Rent and all other amounts accrued hereunder to the date of such termination; the cost of reletting the whole or any part of the Premises, including without limitation brokerage fees and/or leasing commissions incurred by Landlord, and costs of removing and storing Tenant's or any other occupant's property, repairing, altering DUE TO EXISTING TENANT SPECIFIC CONFIGURATIONS, or otherwise putting the Premises into condition acceptable to a new tenant or tenants, and all reasonable expenses incurred by Landlord in pursuing its remedies, including reasonable attorneys' fees and court costs; and an amount in cash equal to (A) the then present value of the Base Rent and other amounts payable by Tenant under this Lease as would otherwise have been required to be paid by Tenant to Landlord during the period following the termination 14 of this Lease measured from the date of such termination to the expiration date stated in this Lease minus (B) the then present fair rental value of the Premises for such period. Such present values shall be calculated at a discount rate equal to the 90-day U.S. Treasury bill rate at the date of such termination. (c) If Landlord terminates Tenant's right of possession (but not this Lease), then without releasing Tenant from any liability hereunder and without demand or notice of any kind to Tenant Landlord shall use reasonable efforts to relet the Premises on such terms as Landlord in its sole discretion may determine (including a term different from the Lease Term, rental concessions, and alterations to, and improvement of, the Premises); however, Landlord shall not be obligated to relet the Premises before leasing other portions of the Building and Landlord shall not be obligated to accept any prospective tenant proposed by Tenant unless such proposed tenant meets all of Landlord's leasing criteria. Landlord shall not be liable for, nor shall Tenant's obligations hereunder be diminished because of, Landlord's failure to relet the Premises or to collect rent due for such reletting. Tenant shall not be entitled to the excess of any consideration obtained by reletting over the Base Rent due hereunder. For the purpose of such reletting Landlord is authorized to make any repairs, changes, alterations, or additions in or to the Premises as Landlord deems reasonably necessary or desirable. If the Premises are not relet, then Tenant shall pay to Landlord as damages a sum equal to the amount of the rental reserved in this Lease for such period or periods, plus the cost of recovering possession of the Premises (including attorneys' fees and costs of suit), the unpaid Base Rent and other amounts accrued hereunder at the time of repossession, and the costs incurred in any attempt by Landlord to relet the Premises. If the Premises are relet and a sufficient sum shall not be realized from such reletting [after first deducting therefrom, for retention by Landlord, the unpaid Base Rent and other amounts accrued hereunder at the time of reletting, the cost of recovering possession (including attorneys' fees and costs of suit), all of the costs and expense of repairs, changes, alterations, and additions, the expense of such reletting (including without limitation brokerage fees and leasing commissions) and the cost of collection of the rent accruing therefrom] to satisfy the rent provided for in this Lease to be paid, then Tenant shall immediately satisfy and pay any such deficiency. Any such payments due Landlord shall be made upon demand therefor from time to time and Tenant agrees that Landlord may file suit to recover any sums falling due from time to time. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect in writing to terminate this Lease for such previous breach. (d) Exercise by Landlord of any one or more remedies hereunder granted or otherwise available shall not be deemed to be an acceptance of surrender of the Premises and/or a termination of this Lease by Landlord, whether by agreement or by operation of law. Any law, usage, or custom to the contrary notwithstanding, Landlord shall have the right at all times to enforce the provisions of this Lease in strict accordance with the terms hereof; and the failure of Landlord at any time to enforce its rights under this Lease strictly in accordance with same shall not be construed as having created a custom in any way or manner contrary to the specific terms, provisions, and covenants of this Lease or as having modified the same. Tenant and Landlord further agree that forbearance or waiver by Landlord to enforce its rights pursuant to this Lease or at law or in equity, shall not be a waiver of Landlord's right to enforce one or more of its rights in connection with any subsequent default. A receipt by Landlord of rent or other payment with knowledge of the breach of any covenant hereof shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision of this Lease shall be deemed to have been made unless expressed in writing and signed by Landlord. To the greatest extent permitted by law, Tenant waives the service of notice of Landlord's intention to re-enter as provided for in any statute, or to institute legal proceedings to that end, and also waives all right of redemption in case Tenant shall be dispossessed by a judgment or by warrant of any court or judge. The terms "enter," "re-enter," "entry" or "re-entry," as used in this Lease, are not restricted to their technical legal meanings. Any reletting of the Premises shall be on such terms and conditions as Landlord in its sole discretion may determine (including without limitation a term different than the remaining Lease Term, rental concessions, alterations and repair of the Premises, lease of less than the entire Premises to any tenant and leasing any or all other portions of the Project before reletting the Premises). Landlord shall not be liable, nor shall Tenant's obligations hereunder be diminished because of, Landlord's failure to relet the Premises or collect rent due in respect of such reletting. 15 25. TENANT'S REMEDIES/LIMITATION OF LIABILITY. Landlord shall not be in default hereunder unless Landlord fails to perform any of its obligations hereunder within thirty (30) days after written notice from Tenant specifying such failure (unless such performance will, due to the nature of the obligation, require a period of time in excess of thirty (30) days, then after such period of time as is reasonably necessary). All obligations of Landlord hereunder shall be construed as covenants, not conditions; and Tenant may not terminate this Lease for breach of Landlord's obligations hereunder. All obligations of Landlord under this Lease will be binding upon Landlord only during the period of its ownership of the Premises and not thereafter. The term "Landlord" in this Lease shall mean only the owner, for the time being of the Premises, and in the event of the transfer by such owner of its interest in the Premises, such owner shall thereupon be released and discharged from all obligations of Landlord thereafter accruing, but such obligations shall be binding during the Lease Term upon each new owner for the duration of such owner's ownership. Any liability of Landlord under this Lease or arising out of the relationship between Landlord and Tenant shall be limited solely to Landlord's interest in the Building, and in no event shall any personal liability be asserted against Landlord in connection with this Lease nor shall any recourse be had to any other property or assets of Landlord. Additionally, Tenant hereby waives it statutory lien under Section 91.004 of the Texas Property Code. 26. WAIVER OF JURY TRIAL. TENANT AND LANDLORD WAIVE ANY RIGHT TO TRIAL BY JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN LANDLORD AND TENANT ARISING OUT OF THIS LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO. 27. SUBORDINATION. (a) This Lease and Tenant's interest and rights hereunder are and shall be subject and subordinate at all times to the lien of any first mortgage, now existing or hereafter created on or against the Project or the Premises, and all amendments, restatements, renewals, modifications, consolidations, refinancing, assignments and extensions thereof, without the necessity of any further instrument or act on the part of Tenant. Tenant agrees, at the election of the holder of any such mortgage, to attorn to any such holder. The provisions of this Paragraph 27 shall be self-operative and no further instrument shall be required to effect such subordination or attornment; however, Tenant agrees to execute, acknowledge and deliver such instruments, confirming such subordination and such instruments of attornment as shall be requested by any such holder within ten (10) days of such request. Tenant's obligation to furnish each such instrument requested hereunder in the time period provided is a material inducement for Landlord's execution of this Lease and any failure of Tenant to timely deliver each instrument shall be deemed an Event of Default. IN CONNECTION WITH TENANT'S EXECUTION OF ANY SUBORDINATION AGREEMENT, LANDLORD AGREES TO USE REASONABLE EFFORTS TO SECURE A NON-DISTURBANCE AGREEMENT IN FAVOR OF TENANT AT TENANT'S SOLE COST & EXPENSE. (b) Notwithstanding the foregoing, any such holder may at any time subordinate its mortgage to this Lease, without Tenant's consent, by notice in writing to Tenant, and thereupon this Lease shall be deemed prior to such mortgage without regard to their respective dates of execution, delivery or recording and in that event such holder shall have the same rights with respect to this Lease as though this Lease had been executed prior to the execution, delivery and recording of such mortgage and had been assigned to such holder. The term "mortgage" whenever used in this Lease shall be deemed to include deeds of trust, security assignments and any other encumbrances, and any reference to the "holder" of a mortgage shall be deemed to include the beneficiary under a deed of trust (c) Tenant shall not seek to enforce any remedy it may have for any default on the part of Landlord without first giving written notice by certified mail, return receipt requested, specifying the default in reasonable detail to any mortgage holder whose address has been given to Tenant, and 16 affording such mortgage holder a reasonable opportunity to perform Landlord's obligations hereunder. Notwithstanding any such attornment or subordination of a mortgage to this Lease, the holder of any mortgage shall not be liable for any acts of any previous landlord, shall not be obligated to install any tenant improvements, and shall not be bound by any amendment to which it did not consent in writing nor any payment of rent made more than one month in advance. 28. MECHANIC'S LIENS. Tenant has no express or implied authority to create or place any lien or encumbrance of any kind upon, or in any manner to bind the interest of Landlord or Tenant in, the Premises or to charge the rentals payable hereunder for any claim in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs. Tenant covenants and agrees that it will pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Premises and that it will save and hold Landlord harmless from all loss, cost or expense based on or arising out of asserted claims or liens against the leasehold estate or against the interest of Landlord in the Premises or under this Lease. Tenant shall give Landlord immediate written notice of the placing of any lien or encumbrance against the Premises and cause such lien or encumbrance to be discharged within thirty (30) days AFTER RECEIPT OF WRITTEN NOTICE FROM LANDLORD; provided, however, Tenant may contest such liens or encumbrances as long as such contest prevents foreclosure of the lien or encumbrance and Tenant causes such lien or encumbrance to be bonded or insured over in a manner satisfactory to Landlord within such thirty (30) day period. 29. ESTOPPEL CERTIFICATES. Tenant agrees, from time to time, within ten (10) days after request of Landlord, to execute and deliver to Landlord, or Landlord's designee, any estoppel certificate requested by Landlord, stating that this Lease is in full force and effect, the date to which rent has been paid, that Landlord is not in default hereunder (or specifying in detail the nature of Landlord's default), the termination date of this Lease and such other matters pertaining to this Lease as may be requested by Landlord. Tenant's obligation to furnish each estoppel certificate in a timely fashion is a material inducement for Landlord's execution of this Lease and any failure of Tenant to timely deliver each estoppel certificate shall be deemed an Event of Default. No cure or grace period provided in this Lease shall apply to Tenant's obligation to timely deliver an estoppel certificate. 30. ENVIRONMENTAL REQUIREMENTS. (a) Except for Hazardous Material IDENTIFIED ON EXHIBIT F AND contained in products used by Tenant in de minimis quantities for ordinary cleaning and office purposes, Tenant shall not permit or cause any party to bring any Hazardous Material upon the Premises or transport, store, use, generate, manufacture, dispose, or release any Hazardous Material on or from the Premises without Landlord's prior written consent. Tenant, at its sole cost and expense, shall operate its business in the Premises in strict compliance with all Environmental Requirements and all requirements of this Lease. Tenant shall complete and certify to disclosure statements as requested by Landlord from time to time relating to Tenant's transportation, storage, use, generation, manufacture, or release of Hazardous Materials on the Premises, and Tenant shall promptly deliver to Landlord a copy of any notice of violation relating to the Premises or Project of any Environmental Requirement. (b) The term "Environmental Requirements" means all applicable present and future statutes, regulations, ordinances, rules, codes, judgments, permits, authorizations, orders, policies or other similar requirements of any governmental authority, agency or court regulating or relating to health, safety, or environmental conditions on, under, or about the Premises or the environment, including without limitation, the following: the Comprehensive Environmental Response, Compensation and Liability Act; the Resource Conservation and Recovery Act; the Clean Air Act; the Clean Water Act; the Toxic Substances Control Act and all state and local counterparts thereto, and any common or civil law obligations including, without limitation, nuisance or trespass, and any other requirements of Paragraphs 3 and 31 of this Lease. The term "Hazardous Materials" means and includes any substance, material, waste, pollutant, 17 or contaminant that is or AT ANY TIME IN THE FUTURE BECOMES regulated under any Environmental Requirement or that may adversely affect human health or the environment, including, without limitation, any solid or hazardous waste, hazardous substance, asbestos, petroleum (including crude oil or any fraction thereof, natural gas, synthetic gas, polychlorinated biphenyls (PCBs), and radioactive material). For purposes of Environmental Requirements, to the extent authorized by law, Tenant is and shall be deemed to be the responsible party, including without limitation, the "owner" and "operator" of Tenant's "facility" and the "owner" of all Hazardous Materials brought on the Premises by Tenant, its agents, employees, contractors or invitees, and the wastes, by-products, or residues generated, resulting, or produced therefrom. (c) Tenant, at its sole cost and expense, shall remove all Hazardous Materials stored, disposed of or otherwise released by Tenant, its assignees, subtenants, agents, employees, contractors or invitees onto or from the Premises, in a manner and to a level satisfactory to Landlord in its REASONABLE discretion, but in no event to a level and in a manner less than that which complies with all Environmental Requirements and does not limit any future uses of the Premises or require the recording of any deed restriction or notice regarding the Premises. Tenant shall perform such work at any time during the period of the Lease upon written request by Landlord or, in the absence of a specific request by Landlord, before Tenant's right to possession of the Premises terminates or expires. If Tenant fails to perform such work within the time period specified by Landlord or before Tenant's right to possession terminates or expires (whichever is earlier), Landlord may at its discretion, and without waiving any other remedy available under this Lease or at law or equity (including without limitation an action to compel Tenant to perform such work), perform such work at Tenant's cost. Tenant shall pay all costs incurred by Landlord in performing such work within ten (10) days after Landlord's request therefor. Such work performed by Landlord is on behalf of Tenant and Tenant remains the owner, generator, operator, transporter, and/or arranger of the Hazardous Materials for purposes of Environmental Requirements. Tenant agrees not to enter into any agreement with any person, including without limitation any governmental authority, regarding the removal of Hazardous Materials that have been disposed of or otherwise released onto or from the Premises without the written approval of the Landlord. (d) Tenant shall indemnify, defend, and hold Landlord harmless from and against any and all losses (including, without limitation, diminution in value of the Premises or the Project and loss of rental income from the Project), claims, demands, actions, suits, damages (including, without limitation, punitive damages), expenses (including, without limitation, remediation, removal, repair, corrective action, or cleanup expenses), and costs (including, without limitation, actual attorneys' fees, consultant fees or expert fees and including, without limitation, removal or management of any asbestos brought into the Premises or disturbed in breach of the requirements of this Paragraph 30, regardless of whether such removal or management is required by law) which are brought or recoverable against, or suffered or incurred by Landlord as a result of any release of Hazardous Materials or any breach of the requirements under this Paragraph 30 by Tenant, its agents, employees, contractors, subtenants, assignees or invitees, regardless of whether Tenant had knowledge of such noncompliance. The obligations of Tenant under this Paragraph 30 shall survive any termination of this Lease. (e) Landlord shall have access to, and a right to perform inspections and tests of, the Premises to determine Tenant's compliance with Environmental Requirements, its obligations under this Paragraph 30, or the environmental condition of the Premises. Access shall be granted to Landlord upon Landlord's prior notice to Tenant and at such times so as to minimize, so far as may be reasonable under the circumstances, any disturbance to Tenant's operations. Such inspections and tests shall be conducted at Landlord's expense, unless such inspections or tests reveal that Tenant has not complied with any Environmental Requirement, in which case Tenant shall reimburse Landlord for the reasonable cost of such inspection and tests. Landlord's receipt of or satisfaction with any environmental assessment in no way waives any rights that Landlord holds against Tenant. Tenant shall promptly notify Landlord of any communication or report that Tenant makes to any governmental authority regarding any possible violation of Environmental Requirements or release or threat of release of any Hazardous Materials onto or from the Premises. Tenant shall, within five (5) days of receipt thereof, provide Landlord with a copy of any documents or correspondence received from any governmental agency or other party relating to a possible 18 violation of Environmental Requirements or claim or liability associated with the release or threat of release of any Hazardous Materials onto or from the Premises. (f) In addition to all other rights and remedies available to Landlord under this Lease or otherwise, Landlord may, in the event of a breach of the requirements of this Paragraph 30 that is not cured within thirty (30) days following notice of such breach by Landlord (UNLESS TENANT IS DILIGENTLY AND CONTINUOUSLY WORKING TO REMEDIATE SUCH BREACH IN WHICH EVENT, THE 30-DAY LIME PERIOD SET FORTH HEREIN SHALL BE EXTENDED FOR AN ADDITIONAL PERIOD NOT TO EXCEED SIXTY (60) DAYS), require Tenant to provide financial assurance (such as insurance, escrow of funds or third party guarantee) in an amount and form satisfactory to Landlord. The requirements of this Paragraph 30 are in addition to and not in lieu of any other provision in the Lease. 31. RULES AND REGULATIONS. Tenant shall, at all times during the Lease Term and any extension thereof, comply with all reasonable rules and regulations at any time or from time to time established by Landlord covering use of the Premises and the Project (THE "RULES AND REGULATIONS"). The current Rules and Regulations are attached hereto. LANDLORD SHALL AT ALL TIMES HAVE THE RIGHT TO CHANGE THE RULES AND REGULATIONS OR TO AMEND THEM IN ANY REASONABLE MANNER AS MAY BE DEEMED ADVISABLE BY LANDLORD FOR THE SAFETY, EFFICIENCY, CARE AND CLEANLINESS OF THE BUILDING AND FOR PRESERVATION OF GOOD ORDER THEREIN, PROVIDED SUCH CHANGES ARE (i) SENT BY LANDLORD TO TENANT IN WRITING, (ii) REASONABLE AND IN CONFORMITY WITH THE COMMON PRACTICE AND USAGE IN SIMILAR BUILDINGS IN THE DFW METROPLEX (iii) NOT INCONSISTENT WITH THE PROVISIONS OF THIS LEASE, AND (iv) APPLIED UNIFORMLY TO ALL TENANTS AND OCCUPANTS OF THE BUILDING. In the event of any conflict between said Rules and Regulations and other provisions of this Lease, the other terms and provisions of this Lease shall control. Landlord shall not have any liability or obligation for the breach of any OF THE RULES AND REGULATIONS by other tenants in the Project. 32. SECURITY SERVICE. Tenant acknowledges and agrees that, while Landlord may (but shall not be obligated to) patrol the Project, Landlord is not providing any security services with respect to the Premises and that Landlord shall not be liable to Tenant for, and Tenant waives any claim against Landlord with respect to, any loss by theft or any other damage suffered or incurred by Tenant in connection with any unauthorized entry into the Premises or any other breach of security with respect to the Premises, UNLESS CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF LANDLORD, OR ANY OF ITS AGENTS, EMPLOYEES, CONTRACTORS, ASSIGNEES OR INVITEES. 33. FORCE MAJEURE. Landlord shall not be held responsible for delays in the performance of its obligations hereunder when caused by strikes, lockouts, labor disputes, acts of God, inability to obtain labor or materials or reasonable substitutes therefor, governmental restrictions, governmental regulations, governmental controls, delay in issuance of permits, enemy or hostile governmental action, civil commotion, fire or other casualty, and other causes beyond the reasonable control of Landlord ("Force Majeure"). 34. ENTIRE AGREEMENT. This Lease constitutes the complete and entire agreement of Landlord and Tenant with respect to the subject matter hereof. No representations, inducements, promises or agreements, oral or written, have been made by Landlord or Tenant, or anyone acting on behalf of Landlord or Tenant, which are not contained herein, and any prior agreements, promises, negotiations, or representations are superseded by this Lease. This Lease may not be amended except by an instrument in writing signed by both parties hereto. 35. SEVERABILITY. If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby. It is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid or unenforceable, there be added, as a part of this Lease, a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. 19 36. BROKERS. Tenant represents and warrants that it has dealt with no broker, agent or other person in connection with this transaction and that no broker, agent or other person brought about this transaction, other than the broker, if any, set forth on the first page of this Lease, and Tenant agrees to indemnify' and hold Landlord harmless from and against any claims by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant with regard to this leasing transaction. LANDLORD REPRESENTS AND WARRANTS THAT IT HAS DEALT WITH NO BROKER, AGENT OR OTHER PERSON IN CONNECTION WITH THIS TRANSACTION EXCEPT TRAMMELL CROW COMPANY AND RLS ENTERPRISES, INC. AND THAT NO BROKER, AGENT OR OTHER PERSON BROUGHT ABOUT THIS TRANSACTION, OTHER THAN THE BROKER, IF ANY, SET FORTH ON THE FIRST PAGE OF THIS LEASE, AND LANDLORD AGREES TO INDEMNIFY AND HOLD TENANT HARMLESS FROM AND AGAINST ANY CLAIMS BY ANY OTHER BROKER, AGENT OR OTHER PERSON CLAIMING A COMMISSION OR OTHER FORM OF COMPENSATION BY VIRTUE OF HAVING DEALT WITH LANDLORD WITH REGARD TO THIS LEASING TRANSACTION. 37. MISCELLANEOUS. (a) Any payments or charges due from Tenant to Landlord hereunder shall be considered rent for all purposes of this Lease. (b) If and when included within the term "Tenant," as used in this instrument, there is more than one person, firm or corporation, each shall be jointly and severally liable for the obligations of Tenant. (c) All notices required or permitted to be given under this Lease shall be in writing and shall be sent by FACSIMILE TRANSMISSION registered or certified mail, return receipt requested, or by a reputable national overnight courier service, postage prepaid, or by hand delivery and, if to Tenant, addressed to Tenant at the address for Tenant noted on the first page of this Lease, and if to Landlord, addressed to Landlord at c/o Crow Holdings Industrial Trust, 2100 McKinney Avenue, Suite 700, Dallas, Texas 75201, Attention: James C. Hendricks, with a copy to Lewis and Roca LLP, 40 North Central Avenue, Suite 1800, Phoenix, Arizona 85004-4429, Attention: Andy Carper/Tracy Durchslag. Either party may by notice given aforesaid change its address for all subsequent notices. Except where otherwise expressly provided to the contrary, notice shall be deemed given upon delivery. (d) Except as otherwise expressly provided in this Lease or as otherwise required by law, Landlord retains the absolute right to withhold any consent or approval. (e) IF NO LONGER A PUBLICLY TRADED COMPANY, at Landlord's request from time to time Tenant shall furnish Landlord with true and complete copies of its most recent annual and quarterly financial statements prepared by Tenant or Tenant's accountants and any other financial information or summaries that Tenant typically provides to its lenders or shareholders. Such annual statements shall be audited by an independent certified public accountant at Tenant's sole cost and expense. Landlord shall hold such financial statements and information in confidence, and shall not disclose the same except: (i) to Landlord's lenders or potential lenders, (ii) to potential purchasers of all or a portion of the Project, (iii) otherwise as reasonably necessary for the operation of the Project or administration of Landlord's business or (iv) if disclosure is required by any judicial or administrative order or ruling. (f) UNLESS REQUIRED BY FEDERAL OR STATE LAW neither this Lease nor a memorandum of lease shall be filed by or on behalf of Tenant in any public record. Landlord may prepare and file, and upon request by Landlord, Tenant will execute a memorandum of lease. (g) Each party acknowledges that it has had the opportunity to consult counsel with respect to this Lease, and therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Lease or any exhibits or amendments hereto. 20 (h) The submission by Landlord to Tenant of this Lease shall have no binding force or effect, shall not constitute an option for the leasing of the Premises, nor confer any right or impose any obligations upon either party until execution of this Lease by both parties. (i) Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. The captions inserted in this Lease are for convenience only and in no way define, limit or otherwise describe the scope or intent of this Lease, or any provision hereof, or in any way affect the interpretation of this Lease. (j) Any amount not paid by Tenant within TEN (10) days after its due date in accordance with the terms of this Lease shall bear interest from such due date until paid in full at the lesser of the highest rate permitted by applicable law or TEN PERCENT (10%) per year. It is expressly the intent of Landlord and Tenant at all times to comply with applicable law governing the maximum rate or amount of any interest payable on or in connection with this Lease. If applicable law is ever judicially interpreted so as to render usurious any interest called for under this Lease, or contracted for, charged, taken, reserved, or received with respect to this Lease, then it is Landlord's and Tenant's express intent that all excess amounts theretofore collected by Landlord be credited on the applicable obligation (or, if the obligation has been or would thereby be paid in full, refunded to Tenant), and the provisions of this Lease immediately shall be deemed reformed and the amounts thereafter collectible hereunder reduced, without the necessity of the execution of any new document, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder. (k) Construction and interpretation of this Lease shall be governed by the laws of the state in which the Project is located, excluding any principles of conflicts of laws. (1) Time is of the essence as to the performance of Tenant AND LANDLORD'S RESPECTIVE obligations under this Lease. (m) All exhibits and addenda attached hereto are hereby incorporated into this Lease and made a part hereof. In the event of any conflict between such exhibits or addenda (other than the Rules and Regulations) and the terms of this Lease, such exhibits or addenda shall control. In the event of a conflict between the Rules and Regulations attached hereto and the terms of this Lease, the terms of this Lease shall control. (n) If either party should prevail in any litigation instituted by or against the other related to this Lease, the prevailing party, as determined by the court, shall receive from the non-prevailing party all costs and reasonable attorneys' fees (payable at standard hourly rates) incurred in such litigation, including costs on appeal, as determined by the court. 38. LANDLORD'S LIEN/SECURITY INTEREST. Tenant hereby grants Landlord a security interest, and this Lease constitutes a security agreement, within the meaning of and pursuant to the Uniform Commercial Code of the state in which the Premises are situated as to all of Tenant's property situate in, or upon, or used in connection with the Premises (except merchandise sold in the ordinary course of business) (collectively, the "Collateral") as security for all of Tenant's obligations hereunder, including without limitation, the obligation to pay rent. Such personalty thus encumbered includes specifically all trade and other fixtures for the purpose of this Paragraph 38 and inventory, equipment, contract rights, accounts receivable and the proceeds thereof. In order to perfect such security interest simultaneously with the execution of this Lease, Tenant shall execute two (2) original financing statements in the form attached hereto as EXHIBIT B and Landlord may file the same at Tenant's expense at the state and county Uniform Commercial Code filing offices. Tenant further agrees to execute such other financing statements as reasonably requested by Landlord to further secure Landlord's interest under this Paragraph 38 as often as Landlord in its discretion shall require; and Tenant hereby irrevocably appoints Landlord its agent for the purpose of executing and filing such financing statements on Tenant's behalf as Landlord shall deem 21 necessary. NOTWITHSTANDING THE FOREGOING, LANDLORD HEREBY SUBORDINATES THE STATUTORY LIEN, AS WELL AS THE SECURITY INTEREST GRANTED TO IT UNDER THIS PARAGRAPH 38, TO ALL LOANS MADE BY A THIRD PARTY IN THE COLLATERAL, AND LANDLORD SHALL, AT TENANT'S EXPENSE, EXECUTE SUCH DOCUMENTATION TO EVIDENCE SUCH SUBORDINATION AS THE OWNER OF ANY THIRD PARTY LENDER UNDER ANY SUCH LOAN MAY REASONABLY REQUEST. 39. LANDLORD'S LIABILITY. The liability of Landlord (and its partners, shareholders or members) to Tenant (or any person or entity claiming by, through or under Tenant) for any default by Landlord under the terms of this Lease or any matter relating to or arising out of the occupancy or use of the Premises and/or other areas of the Building shall be limited to Tenant's actual direct, but not consequential, damages therefor and shall be recoverable only from the interest of Landlord in the Building, and Landlord (and its partners, shareholders or members) shall not be personally liable for any deficiency. Additionally, Tenant hereby waives it statutory lien under Section 91.004 of the Texas Property Code. 40. RELOCATION. Landlord shall have the right at any time, upon giving Tenant not less than thirty (30) days written notice (the "Relocation Notice"), to provide and furnish Tenant with space elsewhere in the Project of approximately the same size as the Premises (the "Relocation Space") and to relocate Tenant to such space. In the event of any such relocation, (a) Landlord shall pay for Tenant's reasonable actual relocation costs; (b) this Lease and each and all of its terms, covenants and conditions shall remain in full force and effect, except that Base Rent shall be adjusted to reflect the same per square foot rate multiplied by the square footage of the Relocation Space, but in no event shall Tenant's adjusted Base Rent be greater than the Base Rent set forth in this Lease; and (c) such Relocation Space shall thereafter be deemed to be the "Premises" as such term is used in this Lease. At Landlord's request, Tenant shall execute an amendment to this Lease acknowledging the Relocation Space as the Premises and any adjustment in Base Rent, if applicable. [SIGNATURES ON FOLLOWING PAGE] 22 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written. TENANT: INTERPHASE CORPORATION By: /s/ STEVE KOVAC ---------------------------------------- Name: STEVE KOVAC -------------------------------------- Title: C.F.O. ------------------------------------- LANDLORD: CROW FAMILY HOLDINGS INDUSTRIAL TEXAS LIMITED PARTNERSHIP, a Delaware limited partnership By: CFH-FTGP, L.L.C., a Delaware limited liability company, its general partner By: Crow Family Holdings Industrial Limited Partnership, a Delaware limited partnership, its sole member By: CFH Industrial Trust, Inc., a Maryland corporation, its sole general partner By: /s/ ANDREW S. COMB -------------------------------- Name: ANDREW S. COMB ------------------------------ Title: VICE PRESIDENT ----------------------------- 23 RULES AND REGULATIONS In the event of a conflict between the following Rules and Regulations and the terms of the Lease to which this Addendum is attached, the terms of the Lease shall control. 1. The sidewalk, entries, and driveways of the Project shall not be obstructed by Tenant, or its agents, or used by them for any purpose other than ingress and egress to and from the Premises. 2. Tenant shall not place any objects, including antennas, outdoor furniture, etc., in the parking areas, landscaped areas or other areas outside of its Premises, or on the roof of the Project. 3. Except for seeing-eye dogs, no animals shall be allowed in the offices, halls, or corridors in the Project 4. Tenant shall not disturb the occupants of the Project or adjoining buildings by the use of any radio or musical instrument or by the making of loud or improper noises. 5. If Tenant desires telegraphic, telephonic or other electric connections in the Premises, Landlord or its agent will direct the electrician as to where and how the wires may be introduced; and, without such direction, no boring or cutting of wires will be permitted. Any such installation or connection shall be made at Tenant's expense. 6. Tenant shall not install or operate any steam or gas engine or boiler, or other mechanical apparatus in the Premises, except as specifically approved in the Lease. The use of oil, gas or inflammable liquids for heating, lighting or any other purpose is expressly prohibited. Explosives or other articles deemed extra hazardous shall not be brought into the Project. 7. Parking any type of recreational vehicles is specifically prohibited on or about the Project. Except for the overnight parking of operative vehicles or as expressly permitted in the Lease, no vehicle of any type shall be stored in the parking areas at any time. In the event that a vehicle is disabled, it shall be removed within 48 hours. There shall be no "For Sale" or other advertising signs on or about any parked vehicle. All vehicles shall be parked in the designated parking areas in conformity with all signs and other markings. All parking will be open parking, and no reserved parking, numbering or lettering of individual spaces will be permitted except as specified by Landlord. 8. Tenant shall maintain the Premises free from rodents, insects and other pests. 9. Landlord reserves the right to exclude or expel from the Project any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs or who shall in any manner do any act in violation of the Rules and Regulations of the Project. 10. Tenant shall not cause any unnecessary labor by reason of Tenant's carelessness or indifference in the preservation of good order and cleanliness. Landlord shall not be responsible to Tenant for any loss of property on the Premises, however occurring, or for any damage done to the effects of Tenant by the janitors or any other employee or person, UNLESS CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF LANDLORD, OR ANY OF ITS AGENTS, EMPLOYEES, CONTRACTORS, ASSIGNEES OR INVITEES. 11. Tenant shall give Landlord prompt notice of any defects in the water, lawn sprinkler, sewage, gas pipes, electrical lights and fixtures, heating apparatus, or any other service equipment affecting the Premises. 12. Tenant shall not permit storage outside the Premises, including without limitation, outside storage of trucks and other vehicles, or dumping of waste or refuse or permit any harmful materials to be placed in any drainage system or sanitary system in or about the Premises. 13. All moveable trash receptacles provided by the trash disposal firm for the Premises must be kept in the trash enclosure areas, if any, provided for that purpose. 14. No auction, public or private, will be permitted on the Premises or the Project. 15. No awnings shall be placed over the windows in the Premises except with the prior written consent of Landlord. 16. The Premises shall not be used for lodging, sleeping or cooking or for any immoral or illegal purposes or for any purpose other than that specified in the Lease. No gaming devices shall he operated in the Premises. 17. Tenant shall ascertain from Landlord the maximum amount of electrical current which can safely be used in the Premises, taking into account the capacity of the electrical wiring in the Project and the Premises and the needs of other tenants, and shall not use more than such safe capacity. Landlord's consent to the installation of electric equipment shall not relieve Tenant from the obligation not to use more electricity than such safe capacity. 18. Tenant assumes full responsibility for protecting the Premises from theft, robbery and pilferage. 19. Tenant shall not install or operate on the Premises any machinery or mechanical devices of a nature not directly related to Tenant's ordinary use of the Premises and shall keep all such machinery free of vibration, noise and air waves which may be transmitted beyond the Premises. 20. Tenant shall not introduce, or release asbestos or PCBs onto or from the Premises. 21. Tenant shall at all times conduct its operations in a good and workmanlike manner, employing best management practices to minimize the threat of any violation of Environmental Requirements. -2- ADDENDUM 41. FREE RENT. 1. Upon commencement of the above referenced Lease Agreement, the parties agree that no base rent or additional rent under Paragraph 6 shall be payable for the first three (3) months of the primary term thereof. Notwithstanding anything to the contrary contained in the prior sentence, Tenant shall be obligated from the commencement date of the Lease to pay Tenant's proportionate share of utility charges. 2. Landlord agrees to forebear collection of Base Rent and additional rent under Paragraph 6 of the lease during the period set forth elsewhere in this Agreement ("the Rent Waiver Period") and shall waive all rights to such Rent upon Tenant timely performing all of its covenants and obligations under the Lease during the term thereof. In the event that Tenant defaults on any of its covenants or obligations under the Lease DURING THE FIRST TWELVE (12) MONTHS OF THE LEASE TERM, the Rent owed during the Rent Waiver Period shall become automatically due together with any other due but unpaid monetary obligations of Tenant. 42. RENEWAL OPTION. (a) Provided that Tenant is not THEN in default (BEYOND ANY APPLICABLE CURE PERIOD) of any of the terms, covenants and conditions hereof, and this Lease has not been assigned or the premises (or a part thereof) sublet, Tenant shall have the right and option to extend the original Lease TERM for one RENEWAL PERIOD OF 39 MONTHS (THE "RENEWAL PERIOD"). Such extension of the original LEASE TERM shall be on the same terms, covenants, and conditions as provided for in the original LEASE TERM except for this paragraph and except that the rental during the extended term shall be at the fair market rental then in effect on equivalent properties, of equivalent size, in equivalent areas. Tenant shall deliver written notice to Landlord of Tenant's intent to exercise the renewal option granted herein not more than twelve (12) months nor less than six (6) months prior to the expiration of the original Lease TERM (THE "RENEWAL NOTICE"). In the event Tenant fails to deliver such written notice within the time period set forth above, Tenant's right to extend the term hereof shall expire and be of no further force and effect. (b) WITHIN THIRTY (30) DAYS OF THE RENEWAL NOTICE, LANDLORD SHALL NOTIFY TENANT OF THE MONTHLY BASE RENT FOR SUCH RENEWAL PERIOD (THE "RENTAL NOTICE"). TENANT MAY ACCEPT THE TERMS SET FORTH IN THE RENTAL NOTICE BY WRITTEN NOTICE (THE "ACCEPTANCE NOTICE") TO LANDLORD GIVEN WITHIN THIRTY (30) DAYS AFTER RECEIPT OF THE RENTAL NOTICE. IF TENANT TIMELY DELIVERS THE ACCEPTANCE NOTICE, THE LEASE TERM SHALL BE DEEMED EXTENDED FOR THE RENEWAL PERIOD. 43. HVAC WARRANTY. UPON COMMENCEMENT OF THIS LEASE, notwithstanding Paragraph 11 of the Lease Agreement, Landlord shall warranty the operation of the heating, ventilation, and air conditioning system for the first one hundred eighty (180) days of the Lease term. This warranty shall apply to the all major components, (e.g., compressor, heater coil, etc.) of the system, and shall remain intact only as long as Tenant provides regular maintenance to the system as provided in the Lease. For the purposes of this paragraph, major component work shall constitute an expense in excess of $250.00 per occurrence. 44. EARLY ACCESS. Landlord shall allow Tenant early access to the Premises beginning August 1, 2002, FOR THE PURPOSE OF COMPLETING MODIFICATIONS TO THE SPACE AS OUTLINED IN EXHIBIT C, provided that this Lease is fully executed by Landlord and Tenant, Tenant has paid the Security Deposit and Tenant has complied with the provisions of Paragraph 9 of the Lease. Effective upon Tenant's occupancy, Tenant agrees to be bound by and comply with all terms and conditions of the Lease including Tenant's obligation to pay for all utilities furnished to the Premises as provided in Paragraph 7 of the Lease, except that no amount of rent and escrow payments shall be due for the early access period. EXHIBIT A PREMISES [EXISTING FLOOR PLAN] EXHIBIT A-1 LEGAL DESCRIPTION OF REAL PROPERTY BEING 24,270 rentable square feet in a larger facility containing 90,206 total square feet, located at 2105 Luna Road, Carrollton, Dallas County, Texas 75006, and situated on a tract of land more particularly described as follows: Being a tract of land situated in the Moses G. Shipman Survey, Abstract No. 1385, and the Levi Nobles Survey Abstract No. 1097, Dallas County, Texas, and being a part of Block 6, Cotton Belt, West Industrial Park, an addition to the City of Carrollton, Texas, as recorded by a plat in Volume 80208, Page 154 of the Deed Records of Dallas County, Texas, and being more particularly described as follows: BEGINNING at a point lying on the intersection of the east line of Luna Road (100 feet wide) and the south line of Cotton Belt West Industrial Park as record on said plat, said south line also being the north line of the W.H. Pulliam Survey, Abstract No. 1171; thence North 00 degrees 11'03" East, with the said east line of Luna Road, 471.06 feet; thence in a Northeasterly direction along a curve to the right of a distance of 46.67 feet, a long chord that bears North 44 degrees 44'58" East, 42.10 feet; thence North 89 degrees 18'52" East, along the south line of Champion Drive (60 feet wide), 393.82 feet to a point in the center line of 30-foot wide drill track right-of-way as described in deed dated August 13, 1980, from the Southwestern Town Lot Corporation to the St. Louis Southwestern Railway Company of Texas, recorded August 21, 1980, in Volume 80165, pages 1201 to 1210 inclusive, Dallas County Deed Records; thence along said center line of said drill tract right-of-way the following four (4) courses: 1. South 00 degrees, 41'08" East, 41.48 feet; 2. South 07 degrees, 03'08" East, 85.62 feet; 3. In a Southeasterly direction along a curve to the left a distance of 535.39 feet, said curve having a central angle of 80 degrees, 18'33", a radius of 381.97 feet and a long chord that bears South 47 degrees 12'25" East, 492.63 feet; and 4. South 87 degrees 21'41" East, 39.61 feet to a point in the west line of McDaniel Drive; thence South 00 degrees 41'08" East 34.76 feet to said south line of Cotton Belt West Industrial Park; thence South 89 degrees 27'19" West, 837.48 feet to the PLACE OF BEGINNING containing 6.027 acres of land more or less (262,6536.836 square feet). RESERVING from the above described 6.02 acre parcel of land an easement for railroad, transportation, and communication purposes together with the right to grant same to others, over the easterly 153 feet of the southerly 15.0 feet of the above described 6.027 acre parcel of land. A-1 EXHIBIT B B-1 B-2 EXHIBIT C TENANT FINISH WORK Landlord shall provide a Tenant Improvement Allowance of $5.00 per square foot, or $121,350 total, for the construction of improvements to the leased Premises. The Tenant Improvement Allowance shall include all expenses associated with construction including architectural drawings and construction management fees. Said management fees shall not exceed three percent (3%) of total construction costs. Such improvements shall be constructed by a contractor selected by Tenant and managed by Trammell Crow Company in accordance with such plans and specifications as may be prepared by Tenant and approved by Landlord. The agreed Tenant Improvements and allowance for such improvements shall be completed by June 30, 2003. In the event the actual costs and expenses of completing the construction of such improvements to the leased Premises exceed $121,350, Tenant shall pay all such excess costs and expenses to Landlord or, at Landlord's direction, to such contractor, upon demand. If Tenant contracts the construction for the agreed Tenant Improvements directly, with a mutually agreed contractor, Landlord shall reimburse Tenant within thirty (30) days after receipt of paid invoices by Tenant. C-1 EXHIBIT D HAZARDOUS MATERIAL LIST Solder Dross -- Powdered lead oxide; a byproduct of the melted bar solder. Hazards with this material are from inhalation and absorption through the skin. Handling requirements are a particle respirator and gloves MUST be worn. Storage within the building is sealed 5-gallon metal cans collected for removal. Removal and reclamation is handled by solder products vendor. The maximum number of 5-gallon cans to be stored in the building is ten (10). Liquid Flux -- Lonco SLS -- 65C (MSDS #P086) A flammable liquid containing IPA. Handling requirements are eye protection. Storage within the building is in 5-gallon plastic drums in Chemical storage cabinet. Delivery of flux to the product is in atomized forming a heated environment, which burn off the IPA content. Material is used in a contained, well-vented area. The maximum number of 5-gallon drums to be stored in the building is two (2). Isopropyl Alcohol / 425 Thinner -- (MSDS #HCR000126, #199) A flammable liquid. Handling requirements are eye protection. Storage within the building is in 5-gallon metal drums within a chemical storage cabinet. Collection of waste alcohol is in a labeled 55-gallon drum. A hazardous material disposal company handles disposal. The maximum number of 5-gallon drums to be stored in the building is two (2). Biral T & D Spray Lubricant -- A highly flammable liquid. Handling requirements are product will not be used near open flames. Storage within the building is in small spray cans. The maximum number of 16-ounce spray cans to be stored in the building is two (2). Kleenox Solder Oxide Reducing Powder -- (MSDS #1472) A corrosive, inorganic, solid; N.O.S. Handling requirements are protective gloves and eye wear. Storage within the building are small plastic jars in a well-ventilated area. Waste powder is disposed of within the solder dross. The maximum number of 12-ounce jars to be stored in the building is twelve (12). Loctite 7360 Clean-up Solvent -- A flammable, explosive liquid containing Nitromethane and Toluene. Handling requirements are protective gloves, eye wear and no-use near open flames. Storage within the building is within small metal cans. The maximum number of 16-ounce metal cans to be stored in the building is two (2). D-1 EXHIBIT E TENANT EQUIPMENT Equipment List with Power Requirements BTU VIP70A Convection Reflow Ovens (2 each) 208V 72A 3 phase 27 KVA27 50/60 Hz Zevatech FS-730/740/X Placement Machines (4 each) 200V 50/60 Hz V 3.0K Electrovert Ultrapak 445 18/F Wave Solder Machine 440V 3phase 20A Air-Vac PCBRM-12 Solder Fountain 208V HTI Screen Printers (2 each) 120V White Vertical Carousel Series 2400A/B (ICT & Stockroom) (2 each) 240V 30A Remstar HPS-251 Vertical Carousel (3 each) 240V 30A Champion NRA 20-12 Air Compressor 460V Busch R5 Series Vacuum Pump 230V Zeks Model 75HSBA100 Air Dryer 120V Craft 25 SMT Rework Station 120V Air-Vac DRS-22 SMT Rework Station 120V E-1 Teredyne Z1800 In-Circuit Tester (2 each) 120V Horizontal Carousel 240V Blue M Bake Oven 240V Various workbenches with Personal/Test computers and Solder stations (approximately 40) 120V E-2 EX-99.1 5 d01067exv99w1.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Interphase Corporation (the Company) on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the Report), I Gregory B. Kalush, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Gregory B. Kalush Gregory B. Kalush Chief Executive Officer November 14, 2002 EX-99.2 6 d01067exv99w2.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Interphase Corporation (the Company) on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the Report), I Steven P. Kovac, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Steven P. Kovac Steven P. Kovac Chief Financial Officer November 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----