-----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, OHPduW4ZaBnpR2LohWh57FCbF9O0lrX9Pfcu/2Q00uVRARkVuKME8/JVUJD+rgKJ 42/N5ywl/Kvdt2f3Z/30vA== 0000730255-03-000029.txt : 20030711 0000730255-03-000029.hdr.sgml : 20030711 20030710200358 ACCESSION NUMBER: 0000730255-03-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030531 FILED AS OF DATE: 20030711 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA AMPLIFIER INC CENTRAL INDEX KEY: 0000730255 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 953647070 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12182 FILM NUMBER: 03782708 BUSINESS ADDRESS: STREET 1: 460 CALLE SAN PABLO CITY: CAMARILLO STATE: CA ZIP: 93012 BUSINESS PHONE: 8059879000 MAIL ADDRESS: STREET 1: 460 CALLE SAN PABLO CITY: CAMARILLO STATE: CA ZIP: 93012 10-Q 1 fy04-10q_q1.txt FORM 10-Q FOR QUARTER ENDED 5/31/03 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - Q (Mark One) [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: May 31, 2003 _________________ [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to __________ ____________ Commission File Number: 0-12182 Exact Name of Registrant as Specified in Its Charter: CALIFORNIA AMPLIFIER, INC. ______________________________ DELAWARE 95-3647070 _______________________________ _______________ State or Other Jurisdiction of I.R.S. Employer Incorporation or Organization: Identification No. Address of Principal Executive Offices: 460 Calle San Pablo Camarillo, CA 93012 Registrant's Telephone Number: (805) 987-9000 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The registrant had 14,745,812 shares of Common Stock outstanding as of July 10, 2003. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands except par value amounts) May 31, February 28, 2003 2003 -------- -------- Assets Current assets: Cash and cash equivalents $ 21,899 $ 21,947 Accounts receivable, less allowance for doubtful accounts of $250 and $273, respectively 6,680 16,053 Inventories, net 14,103 12,862 Deferred income tax assets 1,454 1,130 Prepaid expenses and other current assets 1,330 1,100 -------- -------- Total current assets 45,466 53,092 Property and equipment, at cost, net of accumulated depreciation and amortization 7,929 9,322 Deferred income tax assets, less current portion 5,400 5,400 Goodwill 20,938 20,938 Other assets 747 845 -------- -------- $ 80,480 $ 89,597 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 3,425 $ 3,005 Accounts payable 4,558 11,553 Accrued payroll and employee benefits 798 1,649 Other accrued liabilities 2,275 2,198 -------- -------- Total current liabilities 11,056 18,405 -------- -------- Long-term debt, less current portion 11,899 12,569 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value; 3,000 shares authorized; no shares issued or outstanding - - Common stock, $.01 par value; 30,000 shares authorized; 14,746 and 14,745 shares issued and outstanding, respectively 147 147 Additional paid-in capital 43,444 43,441 Retained earnings 14,734 15,836 Accumulated other comprehensive loss (800) (801) -------- -------- Total stockholders' equity 57,525 58,623 -------- -------- $ 80,480 $ 89,597 ======== ======== See notes to unaudited consolidated financial statements. CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands except per share amounts) Three Months Ended May 31, ------------------ 2003 2002 ------- ------- Sales $18,566 $22,482 Cost of goods sold 17,260 16,638 ------- ------- Gross profit 1,306 5,844 ------- ------- Operating expenses: Research and development 1,362 1,701 Selling 494 730 General and administrative 844 1,050 ------- ------- Total operating expenses 2,700 3,481 ------- ------- Operating income (loss) (1,394) 2,363 Non-operating expense (53) (1) ------- ------- Income (loss) before income taxes (1,447) 2,362 Income tax benefit (provision) 345 (896) ------- ------- Net income (loss) $(1,102) $ 1,466 ======= ======= Net income (loss) per share: Basic $ (0.07) $ 0.10 Diluted $ (0.07) $ 0.10 Shares used in per share calculations: Basic 14,745 14,373 Diluted 14,745 14,756 See notes to unaudited consolidated financial statements. CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three Months Ended May 31, --------------------- 2003 2002 ------- ------- Cash flows from operating activities: Net income (loss) $(1,102) $ 1,466 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 870 862 Equipment impairment writedowns 586 - Gain on sale of equipment (80) (148) Increase in equity associated with tax benefit from exercise of stock options - 1,591 Deferred tax assets, net (324) (855) Changes in operating assets and liabilities: Accounts receivable 9,373 (2,036) Inventories (1,241) 257 Prepaid expenses and other assets 162 (4) Accounts payable (6,995) 844 Accrued payroll and other accrued liabilities (774) (947) ------- ------- Net cash provided by operating activities 475 1,030 ------- ------- Cash flows from investing activities: Capital expenditures (376) (135) Proceeds from sale of property and equipment 100 281 Acquisition of Kaul-Tronics - (16,588) ------- ------- Net cash used in investing activities (276) (16,442) ------- ------- Cash flows from financing activities: Proceeds from long-term debt - 12,000 Repayments of long-term debt (250) (243) Proceeds from exercise of stock options 3 103 ------- ------- Net cash provided by (used in) financing activities (247) 11,860 ------- ------- Net change in cash and cash equivalents (48) (3,552) Cash and cash equivalents at beginning of period 21,947 23,156 ------- ------- Cash and cash equivalents at end of period $21,899 $19,604 ======= ======= Supplemental cash flow information: Interest paid $ 145 $ 88 Income taxes paid $ 4 $ 3 Non-cash investing and financing activities: Issuance of common stock as partial consideration for acquisition of Kaul-Tronics $ - $ 6,054 See notes to unaudited consolidated financial statements. CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended May 31, 2003 Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION California Amplifier, Inc. (the "Company") designs, manufactures and markets microwave equipment used in the reception of television programming transmitted from satellites and wireless terrestrial transmission sites, and two-way transceivers used for wireless high-speed Internet (broadband) service. The Company's Satellite business unit designs and markets reception products principally for the Direct Broadcast Satellite ("DBS") subscription television market in the United States. The Wireless Access business unit designs and markets integrated reception and two-way transmission fixed wireless equipment for terrestrial broadband data and video applications, the latter sometimes referred to as "Wireless Cable". On April 5, 2002, the Company acquired substantially all of the assets, properties and business of Kaul-Tronics, Inc., a Wisconsin corporation, and two affiliated companies (collectively, "Kaul-Tronics"). The results of Kaul-Tronics' operations have been included in the Company's consolidated financial statements since that date. The operations acquired by the Company involve primarily the design and manufacture of satellite antenna dishes used in the DBS industry. The satellite antenna dishes of the type produced by Kaul-Tronics, and the downconverter/amplifier devices ("LNBFs") of the type produced by the Company, together comprise the outdoor portion of customer premise equipment for DBS television reception. All intercompany transactions and accounts have been eliminated in consolidation. In the opinion of the Company's management, the accompanying consolidated financial statements reflect all adjustments necessary to present fairly the Company's financial position at May 31, 2003 and its results of operations for the three months ended May 31, 2003 and 2002. The results of operations for such periods are not necessarily indicative of results to be expected for the full fiscal year. The Company uses a 52-53 week fiscal year ending on the Saturday closest to February 28, which for fiscal year 2003 fell on March 1, 2003. The actual interim periods ended on May 31, 2003 and June 1, 2002. In the accompanying consolidated financial statements, the 2003 fiscal year end is shown as February 28 and the interim period end for both years is shown as May 31 for clarity of presentation. Certain notes and other information are condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10- Q. Therefore, these financial statements should be read in conjunction with the Company's 2002 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on May 30, 2003. Note 2 - INVENTORIES Inventories include the cost of material, labor and manufacturing overhead, are stated at the lower of cost (determined on the first-in, first-out method) or market, and consist of the following (in thousands): May 31, February 28, 2003 2003 ------ ------ Raw materials and subassemblies $ 9,425 $ 9,627 Finished goods 4,678 3,235 ------ ------ $14,103 $12,862 ====== ====== Note 3 - GOODWILL AND OTHER INTANGIBLE ASSETS As a result of adopting Statement of Financial Accounting Standards No. 142, "Accounting for Goodwill and Intangible Assets", at the beginning of fiscal 2003, the Company no longer records amortization on goodwill. There was no change in the carrying amount of goodwill during the three months ended May 31, 2003. All goodwill is associated with the Company's Satellite business segment. The first annual goodwill impairment test was conducted as of December 31, 2002. This test indicated that there was no impairment of goodwill. Because of the write-down of certain assets in the Satellite segment, the Company conducted an interim impairment test as of May 31, 2003. This test also indicated that there was no impairment of goodwill. The Company used a discounted cash flow approach to estimate the fair value of its Satellite reporting unit in these impairment tests. At May 31, 2003, the gross carrying amount and accumulated amortization of covenants not to compete acquired in conjunction with the Kaul-Tronics acquisition (Note 1) was $400,000 and $122,000, respectively. The covenants not to compete, which are included in Other Assets in the accompanying consolidated balance sheet, are being amortized on a straight-line basis over a weighted average life of approximately 4.1 years. Note 4 - FINANCING ARRANGEMENTS At February 28, 2003, the Company had a $13 million working capital revolving line of credit with a commercial bank. Borrowings under this line of credit bear interest at LIBOR plus 2.0% or the bank's prime rate, and are secured by substantially all of the Company's assets. At May 31, 2003 and February 28, 2003, no amounts were outstanding under the line of credit. At May 31, 2003, $1,582,000 of the line of credit amount was reserved for two outstanding irrevocable stand-by letters of credit. The Company also has two bank term loans which had an aggregate outstanding principal balance of $15,324,000 at May 31, 2003. The bank credit agreement which encompasses the Company's working capital revolving line of credit and two bank term loans contains certain financial covenants and ratios that the Company is required to maintain, including a fixed charge coverage ratio of not less than 1.25, with which compliance is measured at the end of each fiscal quarter on an annualized fiscal year-to-date basis. For the quarter ended May 31, 2003, the Company was not in compliance with this covenant. In June 2003 the Company obtained a waiver from the bank for this covenant violation. The bank also agreed to amend the fixed charge coverage ratio requirement and the Company expects to be in compliance in future quarters with this covenant as amended. As a condition of obtaining the waiver and the changes to fixed charge coverage ratio covenant, the Company agreed to a reduction of the working capital revolver from $13 million to $10 million. The Company also agreed to make a $1 million principal reduction in the primary bank term loan by October 31, 2003, which amount is in addition to the scheduled principal payments on this loan of $200,000 per month. The Company plans to fund the $1 million term loan principal reduction by a drawdown on the working capital revolver, which matures on August 3, 2005. Accordingly, that portion of the primary term loan which will be repaid by the $1 million principal reduction is included in the non-current portion of long- term debt at May 31, 2003. The Company also agreed to apply the net proceeds from sales of certain real estate in Wisconsin to pay down the principal of the primary bank term loan. Note 5 - INCOME TAXES Deferred income tax assets reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A deferred income tax asset is recognized if realization of such asset is more likely than not, based upon the weight of available evidence which includes historical operating performance and the Company's forecast of future operating performance. The Company evaluates the realizability of its deferred income tax assets on a quarterly basis, and a valuation allowance is provided, as necessary, in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". During this evaluation, the Company reviews its forecasts of future operating performance in conjunction with the positive and negative evidence surrounding the realizability of its deferred income tax asset to determine if a valuation allowance is needed. At February 28, 2003, the deferred tax asset valuation allowance was $3,335,000. Based on profitable operations in the three year period ended February 28, 2003, and on management's internal forecast of future operating results, management believes it is more likely than not that the Company will generate sufficient taxable income in the future to utilize deferred tax assets of $6,854,000. As a result of this analysis, the deferred tax asset valuation allowance was reduced to $3,269,000 at May 31, 2003. The effective income tax rate was 23.8% and 37.9% in the three months ended May 31, 2003 and 2002, respectively. The decrease in effective tax rate is attributable primarily to the fact that, beginning in fiscal 2004, adjustments to the deferred tax asset valuation allowance have a corresponding impact on the income tax provision or benefit reported in the consolidated statement of operations. Prior to fiscal 2004, reductions of the deferred tax asset valuation allowance were offset by increases in additional paid-in capital, and accordingly the effective income tax rate in fiscal 2003 was not impacted by adjustments to the valuation allowance. Note 6 - EARNINGS PER SHARE Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution, using the treasury stock method, that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the earnings of the Company. In computing diluted earnings per share, the treasury stock method assumes that outstanding options are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options will have a dilutive effect under the treasury stock method only when the Company reports income and the average market price of the common stock during the period exceeds the exercise price of the options. The following is a summary of the calculation of weighted average shares used in the computation of basic and diluted earnings per share (in thousands): Three months ended May 31, ---------------- 2003 2002 ------ ------ Basic weighted average number of common shares outstanding 14,745 14,373 Effect of dilutive securities: Stock options - 383 ------ ------ Diluted weighted average number of common shares outstanding 14,745 14,756 ====== ====== Options outstanding at May 31, 2002 to purchase approximately 774,000 shares of Common Stock at prices ranging from $6.53 to $50.56 were excluded from the computation of diluted earnings per share for the three months then ended. Because the Company had a net loss for the three months ended May 31, 2003, outstanding stock options to purchase approximately 2,583,000 shares of common stock at exercise prices ranging from $2.76 to $50.56 would be anti- dilutive and were therefore not included in the computation of diluted earnings per share. Note 7 - COMPREHENSIVE INCOME Comprehensive income is defined as the total of net income and all non- owner changes in equity. The following table details the components of comprehensive income for the three months ended May 31, 2003 and 2002 (in thousands): Three months ended May 31, ---------------- 2003 2002 ------ ------ Net income (loss) $(1,102) $1,466 Unrealized holding gain (loss) on available-for-sale investments 1 (174) ------ ------ Comprehensive income (loss) $(1,101) $1,292 ====== ====== Note 8 - STOCK OPTIONS In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure" ("FAS No. 148"). FAS No. 148 amends Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS No. 123"), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based employee compensation. In addition, FAS No. 148 amends the disclosure requirements of FAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As allowed by Statement of FAS No. 123, the Company has elected to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Under APB No. 25, compensation expense is measured on the first date at which both the number of shares and the exercise price are known. Under the Company's stock option plans, this would typically be the grant date. To the extent that the exercise price equals or exceeds the market value of the stock on the grant date, no compensation expense is recognized. Because all of the options granted by the Company are at exercise prices not less than the market value on the date of grant, no compensation expense is recognized under this accounting treatment in the accompanying unaudited consolidated statements of operations. The fair value of options at date of grant was estimated using the Black-Scholes option pricing model with the following assumptions: Options granted during the three months ended May 31, Options granted ------------------- before 2003 2002 March 1, 2002 ------ ------ ----------- Expected life (years) 5 5 5 to 10 Dividend yield 0% 0% 0% The range for interest rates is 2.58% to 6.82%, and the range for volatility is 49% to 147%. The estimated stock-based compensation cost calculated using the assumptions indicated totaled $1,078,000 and $973,000 in the three months ended May 31, 2003 and 2002, respectively. The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation (in thousands except per share amounts): Three months ended May 31, ---------------- 2003 2002 ------ ------ Net income (loss) as reported $(1,102) $1,466 Less total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (653) (600) ----- ----- Pro forma net income (loss) $(1,755) $ 866 ===== ===== Earnings (loss) per share: Basic - As reported $(.07) $.10 Pro forma $(.12) $.06 Diluted - As reported $(.07) $.10 Pro forma $(.12) $.06 Note 9 - CONCENTRATION OF RISK Because the Company sells into markets dominated by a few large service providers, a significant percentage of consolidated sales and consolidated accounts receivable relate to a small number of customers. Sales to customers which accounted for 10% or more of consolidated sales for the three months ended May 31, 2003 or 2003, as a percent of consolidated sales, are as follows: Three months ended May 31, ----------------- Customer 2003 2002 -------- ------ ------ A 32.1% 50.6% B 19.3% 5.4% C 17.1% 2.0% Accounts receivable from these customers as a percent of consolidated net accounts receivable are as follows: May 31, Feb. 28, 2003 2003 ------ ------ A 19.6% 58.0% B 23.1% 15.1% C 20.9% 5.5% Customers A, B and C are customers of the Satellite segment. No customer of the Wireless Access segment accounted for 10% or more of consolidated sales during the periods shown above. Note 10 - PRODUCT WARRANTIES The Company generally warrants its products against defects over periods ranging from 3 to 24 months. An accrual for estimated future costs relating to products returned under warranty is recorded as an expense when products are shipped. At the end of each quarter, the Company adjusts its liability for warranty claims based on its actual warranty claims experience as a percentage of sales for the preceding three years. In addition, during the fourth quarter of fiscal 2003, the Company accrued warranty cost of $250,000 in connection with a product replacement program, as further described in Note 12. Such amount is included in the warranty liability at May 31, 2003. Increases in and reductions of the warranty liability for the three months ended May 31, 2003 and 2002 is as follows (in thousands): Three months ended May 31, ----------------- 2003 2002 ------ ------ Balance at beginning of period $491 $376 Charged (credited) to costs and expenses (4) 39 Deductions (22) (49) ---- ---- Balance at end of period $465 $366 ==== ==== Note 11 - SEGMENT INFORMATION The Company currently manages its business under two identifiable business segments: Satellite products and Wireless Access products. Segment information for the three months ended May 31, 2003 and 2002 is as follows (in thousands): Three months ended May 31, 2003: Wireless General Satellite Access Corporate Total ------- ------ ------- ----- Sales $16,621 $ 1,945 $18,566 Gross profit $ 860 $ 446 $ 1,306 Gross margin 5.2% 22.9% 7.0% Income (loss) before income taxes $ (8) $ (542) $ (897) $(1,447) Three months ended May 31, 2002: Wireless General Satellite Access Corporate Total ------- ------ ------- ----- Sales $19,474 $ 3,008 $22,482 Gross profit $ 4,828 $ 1,016 $ 5,844 Gross margin 24.8% 33.8% 26.0% Income (loss) before income taxes $ 3,731 $ (318) $(1,051) $ 2,362 Included in cost of sales for Satellite products during the three months ended May 31, 2003 was impairment writedowns of $586,000 on surface mount equipment which had become underutilized due to increased outsourcing of printed circuit board subassemblies to contract manufacturers and certain other manufacturing equipment which was taken out of service and abandoned as of May 31, 2003. Also included in Satellite product cost of sales was a lower of cost or market inventory writedown of $242,000. The foregoing items had an aggregate adverse impact of 5.1% on Satellite gross margin in the latest quarter. The Company considers income (loss) before income taxes to be the primary measure of profit or loss of its business segments. The amount shown for each period in the "Corporate" column above for income (loss) before income taxes consists of general and administrative expenses not allocated to the business segments, and non-operating income (expense). General and administrative expense includes salaries and wages for the CEO, the CFO, all finance and accounting personnel, human resource personnel, information services personnel, and corporate expenses such as audit fees, director and officer liability insurance, and director fees and expenses. Non-operating income (expense) includes interest income, interest expense and foreign currency gains and losses. Note 12 - COMMITMENTS AND CONTINGENCIES During the fourth quarter of fiscal 2003, the Company became aware that one of its new multi-satellite television reception products that it began selling in the fiscal 2003 third quarter exhibited a loss of signal from one satellite under a particular combination of field-specific conditions which include subfreezing temperatures. In January 2003, the product performance issue was resolved by making a minor change in product configuration. Approximately 33,000 units which were in the distribution channels were replaced during the fourth quarter, while substantially all of the remaining 38,000 units shipped prior to the discovery of the product performance issue are still installed at the premises of satellite television subscribers. In connection with this product replacement program, one of the satellite television system operators made a written demand on the Company in the amount of approximately $1.6 million for that operator's expected service call costs to replace 23,000 installed units in the future. The Company has requested data from the system operator to support its estimate of the number of units that will ultimately need to be replaced. Based on all information available to the Company up to the present time, Company management estimates that to date less than 1% of the installed units have required replacement as a result of this signal loss condition. In the absence of objective evidence that the problem is more extensive than the Company's estimate, the Company believes that the claim of the system operator as to the number of units that may ultimately need to be replaced is unreasonable. The Company is in discussions with the system operator in an effort to resolve the matter. The Company accrued $250,000 at February 28, 2003 as its best estimate of the costs to complete the product replacement program and to resolve the claim of the system operator. The total cost of the product replacement program, including this $250,000 accrued cost, amounted to approximately $450,000, and was included in cost of goods sold in the quarter ended February 28, 2003. During the quarter ended May 31, 2003, there was no change in the $250,000 accrued liability amount, which is included in other accrued liabilities of the accompanying consolidated balance sheet. The Company can give no assurance that the actual costs to complete the product replacement program and to resolve the claim of the system operator will not exceed the $250,000 accrued liability at May 31, 2003. The Company's existing leases on its facilities in Camarillo, California, consisting of two manufacturing facilities, a warehouse and the corporate offices, all expire on February 28, 2004, and will not be renewed. To replace and consolidate these separate facilities, the Company has entered into a new facility lease for a 98,000 square foot facility in Oxnard, California. The new lease, entered into on June 10, 2003, has a seven year term beginning July 1, 2004, and provides for initial monthly base rent of approximately $53,000 beginning on that date. The lease also provides for a seven month early occupancy period beginning December 1, 2003 during which time no base rent is payable. The lease includes a $1 million allowance for tenant improvements to be paid for by the lessor. The Company believes this amount will be sufficient to cover the necessary leasehold improvements to prepare the building for occupancy. Note 13 - LEGAL MATTERS In May 2001, the Company announced that it had received notice from the Securities and Exchange Commission (SEC) that the SEC was conducting an informal inquiry into the circumstances that caused the Company to restate earnings for fiscal year 2000 and first three quarters of fiscal year 2001. Subsequently, the Company learned that the SEC adopted an order directing a formal investigation and designating certain officers to take testimony. The Company has provided the SEC with documents and testimony, and management believes that it has fully cooperated, and will continue to fully cooperate, with the SEC in connection with its investigation. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Areas where significant judgments are made include, but are not limited to: allowance for doubtful accounts, inventory valuation, product warranties and the deferred tax asset valuation allowance. Actual results could differ materially from these estimates. Allowance for Doubtful Accounts The Company establishes an allowance for estimated bad debts based upon a review and evaluation of specific customer accounts identified as known and expected collection problems, based on historical experience, due to insolvency, disputes or other collection issues. As further described in Note 9 to the accompanying unaudited consolidated financial statements, the Company's customer base is quite concentrated, with three customers accounting for approximately 64% of accounts receivable at May 31, 2003 and approximately 68% of the Company's sales in the three months then ended. Changes in either a key customer's financial position, or the economy as a whole, could cause actual write-offs to be materially different from the recorded allowance amount. Inventories The Company evaluates the carrying value of inventory on a quarterly basis to determine if the carrying value is recoverable at estimated selling prices. To the extent that estimated selling prices do not exceed the associated carrying values, inventory carrying amounts are written down. In addition, the Company generally treats inventory on hand or committed with suppliers, which is not expected to be sold within the next 12 months, as excess and thus appropriate write-downs of the inventory carrying amounts are established through a charge to cost of sales. Estimated usage in the next 12 months is based on firm demand represented by orders in backlog at the end of the quarter and management's estimate of sales beyond existing backlog, giving consideration to customers' forecasted demand, ordering patterns and product life cycles. Significant reductions in product pricing, or changes in technology and/or demand may necessitate additional write-downs of inventory carrying value in the future. Deferred Income Tax Asset Valuation Allowance Deferred income tax assets reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and for income tax purposes. A deferred income tax asset is recognized if realization of such asset is more likely than not, based upon the weight of available evidence which includes historical operating performance and the Company's forecast of future operating performance. The Company evaluates the realizability of its deferred income tax asset on a quarterly basis, and a valuation allowance is provided, as necessary. During this evaluation, the Company reviews its forecasts of income in conjunction with the positive and negative evidence surrounding the realizability of its deferred income tax asset to determine if a valuation allowance is needed, and the valuation allowance is adjusted accordingly. If in the future the Company were unable to support the recovery of its net deferred income tax asset, it would be required to provide an additional valuation allowance for all or a portion of the net deferred income tax asset, which would increase the income tax provision. At May 31, 2003, the Company's net deferred income tax asset was $6,854,000, which amount is net of a valuation allowance of $3,269,000. During fiscal years 2003 and 2002, the valuation allowance was reduced by an aggregate amount of $9,173,000, substantially all of which related to tax benefits associated with exercises of non-qualified stock options in prior years and was therefore recognized by increasing additional paid-in capital. That portion of the valuation allowance that related to these tax benefits on stock option deductions was fully eliminated as of the end of fiscal 2003. Therefore, beginning in fiscal 2004, reductions of the deferred tax asset valuation allowance have a corresponding impact on the income tax provision or benefit reported in the consolidated statement of operations. During the quarter ended May 31, 2003, the deferred tax asset valuation allowance was reduced by $66,000, which had the effect of lowering the estimated effective income tax rate for fiscal 2004. Valuation of Long-lived Assets and Goodwill The Company accounts for long-lived assets other than goodwill in accordance with the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment and Disposal of Long Lived Assets" ("FAS 144"), which supersedes Statement of Financial Accounting Standards No. 121 and certain sections of Accounting Principles Board Opinion No. 30 specific to discontinued operations. FAS 144 classifies long-lived assets as either: (1) to be held and used; (2) to be disposed of by other than sale; or (3) to be disposed of by sale. This standard introduces a probability-weighted cash flow estimation approach to deal with situations in which alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range is estimated for the amount of possible future cash flows. This statement, which the Company adopted in fiscal 2003, did not have a material impact on the Company's financial position or results of operations prior to fiscal 2004. FAS 144 requires, among other things, that an entity review its long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. During the quarter ended May 31, 2003, the Company recorded an impairment writedown of $492,000 on certain surface mount manufacturing equipment used in the Satellite business unit which had become underutilized due to increased outsourcing of printed circuit board subassemblies to contract manufacturers. This equipment has been classified as held for sale, and the estimated realizable value of $153,000, which amount gives effect to the impairment writedown, is included in Prepaid Expenses and Other Current Assets in the accompanying unaudited consolidated balance sheet at May 31, 2003. The Company also adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", in fiscal 2003. As a result, goodwill is no longer amortized, but is subject to annual impairment testing, or more frequently as impairment indicators arise. The test for impairment involves the use of estimates related to the fair values of the business operations with which goodwill is associated and is usually based on projected cash flows or a market value approach. The first annual goodwill impairment test was conducted as of December 31, 2002. This test indicated that there was no impairment of goodwill, all of which relates to the Company's Satellite business unit. Because of the writedown of certain assets in the Satellite segment under FAS No. 144, the Company conducted an interim impairment test as of May 31, 2003. This test also indicated that there was no impairment of goodwill. The Company used a discounted cash flow approach to estimate the fair value of its Satellite business unit in these impairment tests. The Company believes the estimate of its valuation of long-lived assets and goodwill is a "critical accounting estimate" because if circumstances arose that led to a decrease in the valuation it could have a material impact on the Company's results of operations. Product Warranties The Company provides for the estimated cost of product warranties at the time revenue is recognized. While it engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company's warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from management's estimates, revisions to the estimated warranty liability would be required. RESULTS OF OPERATIONS The Company's sales and gross profit by business segment for the last three years are as follows: SALES BY SEGMENT Three months ended May 31, ------------------------------------ 2003 2002 --------------- --------------- % of % of Segment $000s Total $000s Total ----------- ------- ----- ------- ----- Satellite $16,621 89.5% $19,474 86.6% Wireless Access 1,945 10.5% 3,008 13.4% ------- ----- ------- ----- Total $18,566 100.0% $22,482 100.0% ======= ===== ======= ===== GROSS PROFIT BY SEGMENT Three months ended May 31, ----------------------------------- 2003 2002 -------------- -------------- % of % of Segment $000s Total $000s Total ----------- ------ ----- ------ ----- Satellite $ 860 65.8% $4,828 82.6% Wireless Access 446 34.2% 1,016 17.4% ------ ----- ------ ----- Total $1,306 100.0% $5,844 100.0% ====== ===== ====== ===== Sales Sales of Satellite products decreased $2,853,000, or 14.7% in the three months ended May 31, 2003 from the same period in the previous fiscal year. This decline resulted primarily from reduced customer orders in the latest quarter due to customers' overstocked inventories of certain satellite television reception products. The Satellite products impacted by this order slowdown are predominantly the more technologically advanced products that have higher selling prices. The Company believes that this decline in orders from key Satellite customers is a temporary situation, and that sales of Satellite products will return to more normal levels once these customers work down their existing inventory quantities. Sales of Wireless Access products in the three months ended May 31, 2003 declined by $1,063,000, or 35%, from the same period in the prior year. This decline results primarily from the fact that the last year's amount includes sales to two customers totaling approximately $1.1 million which did not recur in the latest quarter. One of these two customers, Worldcom, accounted for sales of approximately $500,000 in the three months ended May 31, 2002, but WorldCom recently agreed to divest the assets of its wireless broadband business as part of its bankruptcy reorganization, and hence is not expected to be a significant customer of the Company's Wireless Access business unit in the foreseeable future. The other customer is a Wireless Cable subscription television system operator in the Caribbean region which accounted for sales of approximately $600,000 in the three months ended May 31, 2002 for a nonrecurring system upgrade. Sales in the latest three month period to this customer were approximately $30,000. Gross Profit and Gross Margins Satellite gross profit decreased $3,968,000, or 82%, and gross margin for Satellite products declined from 24.8% in the three months ended May 31, 2002 to 5.2% in the latest quarter. Included in cost of sales for Satellite products during the latest quarter were impairment writedowns of $586,000 on surface mount equipment which had become underutilized due to increased outsourcing of printed circuit board subassemblies to contract manufacturers, and on certain manufacturing equipment taken out of service and abandoned as of May 31, 2003. Also included in Satellite product cost of sales was a lower of cost or market inventory writedown of $242,000. The foregoing items had an aggregate adverse impact of 5.1% on Satellite gross margin in the latest quarter. The remainder of the decline in Satellite gross margin is attributable to the lower sales volume in the latest quarter and the effect of competitive pricing pressures on certain Satellite products. Wireless Access gross profit decreased $570,000, or 56%, while gross margin for Wireless Access products declined to 22.9% in the first quarter of fiscal 2004 from 33.8% in the first quarter of fiscal 2003. These declines are primarily attributable to the 35% decrease in Wireless sales and lower absorption of fixed overhead costs. See also Note 11 to the accompanying unaudited consolidated financial statements for additional operating data by business segment. Operating Expenses Research and development expense decreased to $1,362,000 in the latest quarter from $1,701,000 last year. This 20% decline was due primarily to the cancellation, in the second quarter of last fiscal year, of a product development contract for broadband wireless application specific integrated circuits (ASICs) because the market timing for large scale deployment of this technology was uncertain in the near-term future. Expense associated with this contract was $200,000 in the first quarter of last fiscal year. Also contributing to the decline in research and development expense were lower salaries expense due to staffing reductions ($90,000) and lower incentive compensation expense ($86,000), partially offset by higher consulting expense ($55,000). Selling expenses decreased by $236,000 from $730,000 in the first quarter of last year to $494,000 in the three months ended May 31, 2003. This decrease is primarily attributable to lower incentive compensation expense ($114,000), lower bad debts expense ($28,000), reduced travel and entertainment expenses ($30,000), and lower recruiting expense ($25,000). General and administrative expense of $844,000 in the latest quarter decreased 20% from $1,050,000 in the first quarter of last year. This decrease was due primarily to lower incentive compensation expense ($189,000). Non-operating Expense, Net Net non-operating expense, which is comprised of interest expense, interest income, and foreign currency gains and losses, increased from $1,000 in the first quarter of last year to $53,000 in the first quarter of this year. This increase is due primarily to the higher level of outstanding debt during the latest quarter. The $12 million bank loan, which was entered into last year to partially finance the acquisition of Kaul-Tronics, was outstanding for a little less than two months in the first quarter of last year. This loan was outstanding for all three months of the latest quarter. Income (loss) before income taxes For the reasons outlined above, the Company had pretax income of $2,362,000 in the first quarter of last year, compared to a pretax loss of $1,447,000 in the latest quarter. Income Tax Provision The effective income tax rate was 23.8% and 37.9% in the three months ended May 31, 2003 and 2002, respectively. The decline in effective tax rate is attributable primarily to the fact that, beginning in fiscal 2004, adjustments to the deferred tax asset valuation allowance have a corresponding impact on the income tax provision or benefit reported in the consolidated statement of operations. Prior to fiscal 2004, reductions of the deferred tax asset valuation allowance were offset by increases in additional paid-in capital, and accordingly the effective income tax rate in fiscal 2003 was not impacted by adjustments to the valuation allowance. See further discussion of the deferred tax asset valuation allowance in Note 5 to the accompanying unaudited financial statements. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are its cash and cash equivalents, which amounted to $21,899,000 at May 31, 2003, and its working capital line of credit with a bank. During the three months ended May 31, 2003, cash and cash equivalents decreased by $48,000. This decrease consisted of cash used for capital expenditures of $376,000 and debt repayments of $250,000, substantially offset by cash provided by operating activities of $475,000 and proceeds from the sale of equipment of $100,000. Components of operating working capital increased by $525,000 during the three months ended May 31, 2003, comprised of a decrease of $9,373,000 in accounts receivable, a decrease of $162,000 in prepaid expenses and other assets, an increase of $1,241,000 in inventory, a decrease of $6,995,000 in accounts payable, and a decrease of $774,000 in accrued payroll and other accrued liabilities. The Company believes that inflation and foreign currency exchange rates have not had a material effect on its operations. The Company believes that fiscal year 2004 will not be impacted significantly by foreign exchange since a significant portion of the Company's sales are to U.S. markets, or to international markets where its sales are denominated in U.S. dollars. At February 28, 2003, the Company had a $13 million working capital revolving line of credit with a commercial bank. Borrowings under this line of credit bear interest at LIBOR plus 2.0% or the bank's prime rate, and are secured by substantially all of the Company's assets. At May 31, 2003 and February 28, 2003, no amounts were outstanding under the line of credit. At May 31, 2003, $1,582,000 of the line of credit amount was reserved for two outstanding irrevocable stand-by letters of credit. The Company also has two bank term loans which had an aggregate outstanding principal balance of $15,324,000 at May 31, 2003. The bank credit agreement which encompasses the Company's working capital revolving line of credit and two bank term loans contains certain financial covenants and ratios that the Company is required to maintain, including a fixed charge coverage ratio of not less than 1.25, with which compliance is measured at the end of each fiscal quarter on an annualized fiscal year-to-date basis. For the quarter ended May 31, 2003, the Company was not in compliance with this covenant. In June 2003 the Company obtained a waiver from the bank for this covenant violation. The bank also agreed to amend the fixed charge coverage ratio requirement and the Company expects to be in compliance in future quarters with this covenant as amended. As a condition of obtaining the waiver and the changes to fixed charge coverage ratio covenant, the Company agreed to a reduction of the working capital revolver from $13 million to $10 million. The Company also agreed to make a $1 million principal reduction in the primary bank term loan by October 31, 2003, which amount is in addition to the scheduled principal payments on this loan of $200,000 per month. The Company plans to fund the $1 million term loan principal reduction by a drawdown on the working capital revolver, which matures on August 3, 2005. Accordingly, that portion of the primary term loan which will be repaid by the $1 million principal reduction is included in the non-current portion of long- term debt at May 31, 2003. The Company also agreed to apply the net proceeds from sales of certain real estate in Wisconsin to pay down the principal of the primary bank term loan. Following is a summary of the Company's contractual cash obligations as of May 31, 2003 (in thousands): Future Cash Payments Due by Fiscal Year --------------------------------------- Contractual 2004 There- Obligations (Remainder) 2005 2006 2007 2008 after Total - ------------- ------ ------ ------ ------ ------ ------ ------ Debt principal $2,755 $3,435 $4,423 $2,911 $1,800 $ - $15,324 Operating leases 589 433 681 699 699 2,328 5,429 ------ ------ ------ ------ ------ ------ ------ Total contractual cash obligations $3,344 $3,868 $5,104 $3,610 $2,499 $2,328 $20,753 ====== ====== ====== ====== ====== ====== ====== The Company believes that cash flow from operations, together with amounts available under its working capital line of credit, are sufficient to support operations, fund capital equipment requirements and discharge contractual cash obligations over the next twelve months. SAFE HARBOR STATEMENT Forward looking statements in this 10-Q which include, without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions, projections and other information regarding future performance, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "believes," "anticipates," "expects," and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect the Company's current views with respect to future events and financial performance and are subject to certain risks and uncertainties, including, without limitation, lack of product diversification, dependence upon a small number of customers, highly competitive markets, rapid technology changes affecting the Company's wireless access business, and other risks and uncertainties that are described under the heading "Risk Factors" in the Company's Annual Report on Form 10-K as filed with the SEC on May 30, 2003, copies of which may be obtained from the Company upon request, or directly from the SEC's website at http://www.sec.gov/. Such risks and uncertainties could cause future results to differ materially from historical results or from results presently anticipated. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be attained. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments include cash equivalents, accounts receivable, accounts payable and bank term loans payable. At May 31, 2003, the carrying values of cash equivalents, accounts receivable and accounts payable approximate fair values given the short maturity of these instruments. The carrying value of bank term loans payable approximates fair value since the interest rates on these loans approximate the interest rates which are currently available to the Company for the issuance of debt with similar provisions and maturities. Based on the amount of bank debt outstanding at May 31, 2003, a change in interest rates of one percent would result in an annual impact of approximately $100,000, net of tax, on the Company's consolidated statement of income. A portion of the Company's operations consists of investments in foreign subsidiaries. As a result, the consolidated financial results have been and could continue to be affected by changes in foreign currency exchange rates. However, the Company believes that it does not have material foreign currency exchange rate risk since a significant portion of the Company's sales are to U.S. markets, or to international markets where its sales are denominated in U.S. dollars, and material purchases from foreign suppliers are typically also denominated in U.S. dollars. Additionally, the functional currency of the Company's foreign subsidiaries is the U.S. dollar. It is the Company's policy not to enter into derivative financial instruments for speculative purposes. Furthermore, the Company generally does not enter into foreign currency forward exchange contracts. There are no foreign currency forward exchange contracts outstanding at May 31, 2003. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rules 13a-14(c) and 15(d)-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiary) required to be included in the Company's periodic SEC filings. (b) Changes in internal controls. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date that the evaluation was conducted. Additionally, no significant deficiencies or material weaknesses in such internal controls requiring corrective actions were identified. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 13 to the accompanying consolidated financial statements for a description of pending legal proceedings. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits Exhibit 10-1 - Building lease dated June 10, 2003 between the Registrant and Sunbelt Enterprises for facility in Oxnard, California Exhibit 10-2 - Amendment No. 1 to the Loan and Security Agreement by and between the Company and U.S. Bank National Association dated as of April 3, 2003 Exhibit 10-3 - Amendment No. 2 to the Loan and Security Agreement by and between the Company and U.S. Bank National Association dated as of July 3, 2003 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 b. Reports on Form 8-K: On April 25, 2003, the Company filed a report on Form 8-K which furnished a copy of its press release which announced the financial results for the Company's fourth quarter and fiscal year ended February 28, 2003. 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. July 10, 2003 /s/ Richard K. Vitelle - --------------------------------- ----------------------------------- Date Richard K. Vitelle Vice President Finance & CFO (Principal Financial Officer and Chief Accounting Officer) CERTIFICATIONS CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Fred M. Sturm, Chief Executive Officer of California Amplifier, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of California Amplifier, Inc. (the "registrant"); 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 registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, 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 registrant'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 registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant'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 registrant's internal controls; and 6. The registrant'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. July 10, 2003 /s/ Fred M. Sturm ------------------------ ----------------------------- Date Fred M. Sturm Chief Executive Officer CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Richard K. Vitelle, Chief Financial Officer of California Amplifier, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of California Amplifier, Inc. (the "registrant"); 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 registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, 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 registrant'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 registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant'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 registrant's internal controls; and 6. The registrant'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. July 10, 2003 /s/ Richard K. Vitelle ------------------------ ----------------------------- Date Richard K. Vitelle Chief Financial Officer EX-10 3 exhibit_10-1.txt EXHIBIT 10-1 - FACILITY LEASE EXHIBIT 10-1 STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET 1. Basic Provisions ("Basic Provisions"): 1.1 Parties: This Lease ("Lease"), dated for reference purposes only, March 31, 2003 is made by and between SUNBELT ENTERPRISE ("Lessor") and CALIFORNIA AMPLIFIER, A DELAWARE CORPORATION ("Lessee"), (collectively the "Parties," or individually a "Party"). 1.2 Premises: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known as 1401 Rice Ave. Oxnard 93030, located in the County of Ventura, State of California and generally described as an approximately 98,005 square foot concrete tilt-up building, situated on an ML zoned (City of Oxnard) lot. ("Premises") (See also Paragraph 2) 1.3 Term: Seven (7) years and zero (0) months ("Original Term") commencing July 1, 2004 ("Commencement Date") and ending June 30, 2011 ("Expiration Date"). (See also Paragraph 3.) 1.4 Early Possession: December 1, 2003 ("Early Possession Date"). (See also Paragraphs 3.2 and 3.3) 1.5 Base Rent: Fifty Three Thousand Three Hundred Fifteen and 70/100 ($53,315.70) Dollars per month ("Base Rent"), payable on the 1st day of each month commencing July 1, 2004 (See also Paragraph 4.) [X] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. (See Paragraph #51) 1.6 Base Rent Paid Upon Execution: Fifty Three Thousand Three Hundred Fifteen and 70/100 ($53,315.70) Dollars as Base Rent for the period July 1, 2004 through July 31, 2004 1.7 NNN Charges: The initial estimated NNN Charges are Nine Thousand Eight Hundred and 50/100 ($9,800.50) per month (capped at $0.10 per sq. ft. per month for the first year) payable on the first day of each month. NNN charges for the period of July 1, 2004 through July 31, 2004 shall be paid upon execution of this Lease. (See also Paragraph 4) 1.8 Security Deposit: Fifty Three Thousand Three Hundred Fifteen and 70/100 ($53,315.70) Dollars ("Security Deposit"). (See also Paragraph 5.) 1.9 Agreed Use: Sales, administration and manufacturing of microwave components for satellite television, cable and wireless cable (See also Paragraph 6.) 1.10 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated herein. (See also Paragraph 8.) 1.11 Real Estate Brokers: (See also Paragraph 15) (a) Representation: The following real estate brokers (collectively, the "Brokers") and brokerage relationships exist in this transaction (check applicable boxes): [X] Colliers Seeley represents Lessor exclusively ("Lessor's Broker"): [X] CB Richard Ellis represents Lessee exclusively ("Lessee's Broker"), or [ ] represents both Lessor and Lessee ("Dual Agency"), (b) Payment to Brokers. Upon execution of this Lease by both Parties, Lessor shall pay to the Broker, the fee agreed to in their separate written agreement. No commissions will be paid for options, lease renewals nor for additions to Lessee's Premises after commencement of the Lease. 1.12 Guarantor: of the Lessee under this Lease are to be guaranteed by N/A ("Guarantor"). (See also Paragraph 37.) 1.13 Addendum and Exhibits: Attached hereto is the Addendum to Lease and Exhibits A, B, C,, D, F and G all of which constitute a part of this Lease. 2. Premises: (See Paragraph #57) 2.1 Letting: Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth is this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating rental, is an approximation which the Parties agree is reasonable. 2.2 Condition: (See Exhibit B) Lessor shall deliver the Premises to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs ("Start Date"), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee within thirty (30) days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors, if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and that the structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the "Building") shall be free of material defects. If a non-compliance with said warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If, after the Start Date, Lessee does not give Lessor written notice of any non- compliance with this warranty within: (i) one year as to the surface of the roof and the structural portions of the roof, foundations and bearing walls, (ii) six (6) months as to the HVAC systems, (iii) sixty (60) days as to the remaining systems and other elements of the Building, correction of such non-compliance shall be the obligation of Lessee at Lessees sole cost and expense. 2.3 Compliance: Lessor warrants that the improvements on the Premises comply with all applicable laws, covenants or restrictions of record, building codes, regulations and ordinances ("Applicable Requirements") in effect on the Start Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the zoning is appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed (as opposed to being in existence at the Start Date, which is addressed in Paragraph 6.2(e) below) so as to require during the term of this Lease the construction of an addition to or an alteration of the Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Building ("Capital Expenditure"), Lessor and Lessee shall allocate the cost of such work as follows: (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last two (2) years of this Lease or the cost thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within ten (10) days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to six (6) months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least ninety (90) days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for such costs pursuant to the provisions of Paragraph 7.1(a); provided, however, that if such Capital Expenditure is required during the last two years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor in writing, within ten (10) days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon thirty (30) days written notice to Lessor. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use or modification to the Premises then, and in that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease. 2.4 Acknowledgements: Lessee acknowledges that: (a) that is has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with the Applicable Requirements), and their suitability for Lessee's intended use; (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefore as the same relate to its occupancy of the Premises and; (c) neither Lessor, Lessor's agents, nor any Broker has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that; (a) Broker has made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Premises, and (b) it is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 3. Term: 3.1 Term: The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession: If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Real Property Taxes and Insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.3 Delay in Possession: Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If despite said efforts, Lessor is unable to deliver possession as agreed, Lessor shall not be subject to any liability therefore, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until it receives possession of the Premises. If possession is not delivered within sixty (60) days after the Commencement Date Lessee may, at its option, by notice in writing within ten (10) days after the end of such sixty (60) day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said ten (10) day period, Lessee's right to cancel shall terminate. Except as otherwise provided, if possession is not tendered to Lessee when required and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession of the Premises is not delivered within four (4) months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing. 3.4 Lessee Compliance: Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. Rent/NNN Charges: 4.1 Rent Defined: All monetary obligations of Lessee to Lessor under the terms of this Lease, including NNN Charges, defined below, (except for the Security Deposit) are deemed to be rent ("Rent"). 4.2 Payment: Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due. Rent for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. 4.3 NNN Charges: Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, any and all costs incurred by Lessor relating to the Premises including, but not limited to maintenance and repairs per Paragraph 7, insurance per Paragraph 8, taxes per Paragraph 10, property management costs, association dues and assessments. Lessor shall provide Lessee with a statement at the end of each calendar year setting forth all expenses actually incurred and shall make any appropriate adjustments with respect thereto. 5. Security Deposit: Lessee shall deposit with Lessor upon Lessee's execution hereof the Security Deposit as security for Lessee's faithful performance of obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on said change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within fourteen (14) days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within thirty (30) days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. 6. Use: 6.1 Use: Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to the neighboring properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within five (5) business days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in use. 6.2 Hazardous Substances: (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by- products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary material reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (b) Duty to Inform Lessor: If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give Lessor written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. (c) Lessee Remediation: Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and or the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. (d) Lessee Indemnification: Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substance, unless specifically so agreed by Lessor in writing at the time of such agreement. (e) Lessor Indemnification: Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages which existed as a result of Hazardous Substances on the Premises prior to the Start Date or which are caused by the gross negligence, or intentional acts of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. (f) Investigations and Remediations: Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities. (g) Lessor Termination Option: If a Hazardous Substance Condition occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within ten (10) days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. 6.3 Lessee's Compliance with Requirements: Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all "Applicable Requirements," the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. 6.4 Inspection; Compliance: Lessor, Lessor's Lender and consultants shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements or a contamination is found to exist or be imminent, or the inspection is requested by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspections, so long as such inspection is reasonably related to the violation or contamination. 7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations: 7.1 Lessee's Obligations: (a) In General: Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises, Utility Installations, and Alterations in good order, condition and repair (whether or not such portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing , HVAC, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls, (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee's obligation shall include restorations, replacements or renewals when necessary from the result of Lessee's occupancy or failure to notify Lessor of a failure or problem and to keep all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting of the Building. (b) Service Contracts: Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, ("Basic Elements"), if any, as and when installed in the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire protection systems, (iv) clarifiers and (v) any other equipment, if reasonably required by Lessor. 7.2 Lessor's Obligations: Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction), and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statue now or hereafter in effect to the extent it is inconsistent with the terms of this Lease. Lessor shall, at its option, maintain the landscaping and irrigation systems, roof covering and drains and asphalt and parking lot and Lessee shall reimburse Lessor for these costs and any other costs incurred by Lessor in the maintenance of the Premises in monthly payments as part of the NNN costs. 7.3 Utility Installations, Trade Fixtures, Alterations: (a) Definitions; Consent Required: The term "Utility Installations" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communications systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee-Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed $50,000 in the aggregate or $10,000 in any one year. (b) Consent: Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits; (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work; and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount equal to the greater of one month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee providing a lien and a completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor. (c) Indemnification: Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish to Lessor a surety bond in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs. 7.4 Ownership, Removal, Surrender, and Restoration: (a) Ownership: Subject to Lessor's right to require their removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee-Owned Alterations and Utility Installations. Unless otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. (b) Removal: By delivery to Lessee of written notice from Lessor not later than ninety (90) days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent. (c) Surrender/Restoration: Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear "shall not include any damage or deterioration that would have been prevented by good maintenance practice. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, furnishings and equipment, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or groundwater contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below. 8. Insurance; Indemnity: 8.1 Payment of Insurance: Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $5,000,000 per occurrence. Premiums for policy periods commencing prior to, or extending beyond, the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor in monthly installments as part of the NNN charges. 8.2 Liability Insurance: (a) Carried by Lessee: Lessee shall obtain and keep in force a Commercial General Liability Policy of Insurance protecting Lessee and Lessor against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried by Lessor: Lessor shall also maintain liability insurance described in Paragraph 8.2(a) above, in addition to and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance-Building, Improvements and Rental Value: (a) Building and Improvements: The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor and to any Lender, insuring against loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lender, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage including earthquake, coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any co-insurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss. (b) Rental Value: The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor and any Lender, insuring the loss of the full Rent for (1) one year. Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of Rent from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any co-insurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) Adjacent Premises: If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. 8.4 Lessee's Property/Business Interruption Insurance: (a) Property Damage: Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) Business Interruption: If reasonably available, and if Lessor requests Lessee to do so in writing, Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) No Representation of Adequate Coverage: Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5 Insurance Policies: Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after thirty (30) days' prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. Insurance Policies and Certificates of Insurance required of Lessee shall name Fred Kavli, dba Sunbelt Enterprises as an additional insured. Lessor may satisfy its insurance requirements with blanket policies insuring multiple properties. 8.6 Waiver of Subrogation: Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to their property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable thereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 Indemnity: Except for Lessor's sole negligence, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. 8.8 Exemption of Lessor from Liability: Lessor shall not be liable for injury or damage to the person or goods, wares, merchandize or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 8.9 Lessor may satisfy its insurance requirements with blanket policies covering multiple properties. 9. Damage or Destruction: 9.1 Definitions: (a) "Premises Partial Damage": shall mean damage or destruction to the improvements on the Premises, other than Lessee-Owned Alterations and Utility Installations, which can reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is partial or total. (b) Premises Total Destruction": shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, which cannot reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is partial or total. (c) "Insured Loss": shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" : shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation. (e) "Hazardous Substance Condition" : shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 Premises Partial Damage - Insured Loss: If Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefore. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 Partial Damage - Uninsured Loss: If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lessee by giving written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective sixty (60) days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within ten (10) days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice. 9.4 Total Destruction: Notwithstanding any other provision hereof, if Premises Total Destruction occurs, this Lease shall terminate sixty (60) days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as provided in Paragraph 8.6. 9.5 Damage Near End of Term: If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written termination notice to Lessee within thirty (30) days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by (a) exercising such option, and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten (10) days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished. 9.6 Abatement of Rent; Lessee's Remedies: (a) Abatement: In the event of Premises Partial Damage or Premises Total Destruction or Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent, payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair, or restoration except as provided herein. (b) Remedies: If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within thirty (30) days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within said thirty (30) days, this Lease shall continue in full force and effect. "Commence" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 Termination - Advance Payments: Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payment made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor. 9.8 Waiver of Statutes: Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. Real Property Taxes: 10.1 Definition of "Real Property Taxes" : As used herein, the term "Real Property Taxes" shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Premises. 10.2 Property Tax Payments: (a) Payment of Taxes: Lessee shall pay the Real Property Taxes applicable to the Premises during the term of this Lease. If any such taxes shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee's share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment. (b) Advance Payment: Lessor shall estimate the current Real Property Taxes, and require that such taxes be paid monthly in advance as part of the NNN costs with the payment of the Base Rent. The monthly payment shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of its obligations under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may at the option of Lessor, be treated as an additional Security Deposit. 10.3 Joint Assessment: If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. 10.4 Personal Property Taxes: Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee-Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause such property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement. 11. Utilities: Lessee shall pay for all water, gas, heat, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor, of all charges jointly metered. 12. Assignment and Subletting: 12.1 Lessor's Consent Required: (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "assign or assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent. (b) A change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of fifty one percent (51%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than fifty one percent (51%) of such Net Worth of Lessee as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. "Net Worth of Lessee" shall mean the net worth of Lessee (excluding any Guarantors) established under generally accepted accounting principles. (d) An assignment or subletting without consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a non-curable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a non-curable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice, increase the monthly Base Rent to one hundred ten percent (110%) of the Base Rent then in effect Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to one hundred ten percent (110%) of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent. (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 Terms and Conditions Applicable to Assignment and Subletting: (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. (b) Lessor may accept Rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of the Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $500 as consideration for Lessor's considering and processing said request Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing. 12.3 Additional Terms and Conditions Applicable to Subletting: The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. (b) In the event of a Breach by Lessee, Lessor may, at its option require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior defaults or breaches of such sublessor or for any prior defaults or breaches of such sublessor. (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies: 13.1 Default; Breach: A "Default" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under this Lease. A "Breach" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within the applicable grace period. (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent, or any other monetary payment required to be made by Lessee hereunder whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) business days following written notice to Lessee. (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements,(ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting , (iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in Subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "debtor" as defined in 11 U.S. Code Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days; (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery that any financial statement of Lessee or of any Guarantor, given to Lessor was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 Remedies: If Lessee fails to perform any of its affirmative duty or obligations within ten (10) days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefore. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its own option, may require all future payments to be made by Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statue. (b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interest, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture: Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions" shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease . Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges: Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one time late charge equal to ten percent (10%) of each such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Interest: Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due shall bear interest from the thirty-first (31st) day after it was due. The interest ("Interest") charged shall be equal to the prime rate charged by the largest state chartered bank in the state in which the Premises are located plus 4%, but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4. 13.6 Breach by Lessor: (a) Notice of Breach: Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. (b) Performance by Lessee on Behalf of Lessor: In the event that neither Lessor nor Lender cures said breach within thirty (30) days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor. 14. Condemnation: If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "Condemnation"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of any building, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purpose of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefore. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation. 15. Brokers' Fees: 15.1 Representations and Indemnities of Broker Relationships. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder's fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees incurred with respect thereto. 16. Tenancy Statements/Estoppel Certificate: 16.1 Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party an estoppel certificate in writing, in form similar to the then most current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Definition of Lessor: The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above. 18. Severability: The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Days: Unless otherwise specifically indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days. 20. Limitation on Liability: Except with respect to Lessor's fraud, gross negligence or willful misconduct, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers, shareholders, employees or agents, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors, officers shareholders, employees or agents, or any of their personal assets for such satisfaction. 21. Time of Essence: Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 22. No Prior or other Agreements/Broker Disclaimer: This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and Attorneys' fees), of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker. 23. Notices: 23.1 Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 23.2 Date of Notice: Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail, the notice shall be deemed given forty- eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday or a Sunday or a legal holiday, it shall be deemed received on the next business day. 24. Waivers: No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or any other term, covenant or condition hereof. Lessor's consent to or approval of, any such act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording: Neither Lessor or Lessee shall cause this Lease or a "short form" memorandum of this Lease to be recorded. 26. No Right To Holdover: Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to one hundred fifty percent (150%) of the Base Rent applicable during the month immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee. 27. Cumulative Remedies: No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions; Construction of Agreement: All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the parties, but rather according to its fair meaning as a whole, as if both parties had prepared it. 29. Binding Effect; Choice of Law: This Lease shall be binding upon the Parties, their personal representatives, successors and assignees and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance: 30.1 Subordination: This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Device shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment: Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 30.3 Non-Disturbance: With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non- disturbance agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within sixty (60) days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre- existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at Lessee's option, directly contact Lessor's lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement. 30.4 Self-Executing: The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or non-disturbance agreement provided for herein. 31. Attorneys' Fees: If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. Lessor's Access; Showing Premises; Repairs: Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises, as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "For Sale" signs and Lessor may during the last six (6) months of the term hereof place on the Premises any ordinary "For Lease" signs. Lessee may at any time place on or about the Premises any ordinary "For Sublease" sign. 33. Auctions: Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction. 34. Signs: Except for ordinary "For Sublease" signs, Lessee shall not place any sign upon the Premises without Lessor's prior written consent. All signs must comply with all applicable governmental requirements. 35. Termination; Merger: Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within ten (10) days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents: Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the impositions by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within ten (10) business days following such request. 37. Guarantor: 37.1 Execution: The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease. 37.2 Default: It shall constitute a Default of the Lessee if any such Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession: Subject to payment by Lessee of the Rent and the performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof. 39. Options: 39.1 Definition: "Option" shall mean the right to extend the term of or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor. 39.2 Options Personal to Original Lessee: Each Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting. 39.3 Multiple Options: In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised. 39.4 Effect of Default on Options: (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given three (3) or more notices of Default, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of thirty (30) days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee three (3) or more notices of separate Default during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Multiple Buildings: If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. Security Measures: Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. Reservations: Lessor reserves to itself the right, from time to time, to grant, without the consent of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. Performance Under Protest: If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. 44. Authority: If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each party shall, within thirty (30) days after request, deliver to the other party satisfactory evidence of such authority. 45. Conflict: Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Offer: Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. Amendments: This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises. 48. Not Used. 49. Mediation and Arbitration of Disputes: An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease [ ] is [x] is not attached to this Lease. 50. Abandoned Personal Property: If Lessee shall fail to remove all of its personal property and effects from said premises upon termination of this Lease for any cause whatsoever, Lessor may, at its option, remove the same in any manner that Lessor shall choose, and store said personal property and effects without liability to Lessor for loss thereof, and Lessee agrees to pay Lessor upon demand any and all expenses incurred in such removal, including court costs and attorney's fees and storage charges on such personal property and effects for any length of time that the same shall be in Lessor's possession, or Lessor may, at its option, without notice, sell said effects, or any of the same, at private sale and without legal process, for such prices as Lessor may obtain and apply the proceeds of such sale upon any amounts due under this Lease from Lessee to Lessor and upon the expenses incident to the removal and sale of said personal property and effects. 51. Base Rent Increase: The Base Rent shall be adjusted as follows: July 1, 2005 through June 30, 2006 $58,215.95 per month Thereafter, on July 1st of each Lease year the Base Rent shall increase annually in accordance with the change in the Consumer Price Index 1982- 84=100 (C.P.I.) plus 2%, if any, for the Los Angeles-Riverside-Orange Co., CA area. Said increase shall not be more than 3% per annum. 52. Option: Lessor grants Lessee two (2) five (5) year option (the "Option") to extend the Term of the Lease (the "Extended Term"). The Option is granted subject to the terms of Paragraph #39 and the following terms and conditions. (a) Lessee shall exercise the Option by delivering written notice to Lessor of such exercise no more than two hundred seventy days (270) nor later than one hundred eighty days (180) prior to the expiration of the Term. (b) All terms and conditions of the Lease shall remain in full force and effect, except as follows: (1) Monthly Base Rent for the first year of the Extended Term shall be at fair market value but in no event shall the Base Rent be less than three percent (3%) more than the previous Month's Base Rent. (2) The Base Rent during the Extended Term shall be adjusted every twelve (12) months. Said increase shall be no less than three percent (3%) per annum. (3) The Security Deposit shall be increased annually in accordance with Paragraph 5 of the Lease. (4) Tenant shall have no further option to extend the Lease Term. 53. Leasehold Improvements: Lessee's Base Rent under this Lease includes a Leasehold Improvement Allowance of $1,000,000.00 (One Million Dollars) (hereinafter referred to as "L.H. Allowance"). The L.H. Allowance shall be used exclusively for those improvements that become a part of the permanent improvements of the Premises and architectural and engineering fees, and shall not be used for Lessee's personal property and equipment. The L.H. Allowance is subject to the conditions of Exhibit "B" of this Lease. 54. Confidentiality Clause: Lessee agrees not to discuss the terms and conditions of this lease with any prospective or existing Lessees of Sunbelt Enterprises or with anyone other than Lessee's owners, employees and consultants at any time during the term of this Lease. 55. Mold: To minimize the occurrence and growth of mold in the Lease Premises, Lessee hereby agrees to the following: 55.1 Moisture Accumulation. Lessee shall remove any visible moisture accumulation in or on the Premises, including on walls, windows, floors, ceilings, and bathroom fixtures; mop up spills and thoroughly dry affected area as soon as possible after occurrence; use exhaust fans in kitchen and bathroom when necessary; and keep climate and moisture in the Premises at reasonable levels. 55.2 Notification of Lessor. Lessee shall promptly notify Lessor in writing of the presence of any of the following conditions: (a) A water leak, excessive moisture, or standing water inside the Premises; (b) A water leak, excessive moisture, or standing water in any common area; (c) Mold growth in or on the Premises that persists after Lessee has tried several times to remove it with cleaning solution, such as Lysol or Pine-sol disinfectants, Tilex Mildew Remover, or Clorox, or a combination of water and bleach; (d) A malfunction in any part of the heating, air-conditioning, or ventilation system in the Premises. 55.3 Liability. Lessee shall be liable to Lessor for damages sustained to the Premises or to Lessee's person or property as a result of Lessee's failure to comply with the terms of this Paragraph. 55.4 Violation of Paragraph. Violation of this Paragraph shall be deemed a material breach under the terms of the Lease, and Lessor shall be entitled to exercise all rights and remedies it possesses against Lessee at law or in equity. In case of a conflict between the provisions of this Paragraph and any other provision of the Lease, the provisions of this Paragraph shall govern. 56. Contingency: This Lease is contingent upon the full execution of the Lease Termination with Somera Communication and vacating the Premises no later than August 1, 2003. 57. Condition: Lessor will be responsible for all structural defects to the roof, structural portions of the roof, foundations and bearing walls no matter when in the Lease Term these arise. Lessor at Lessor's expense shall slurry and stripe the existing parking lot within the first twelve (12) months of Lease Term. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY SUNBELT ENTERPRISES OR ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCE OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: Oxnard, CA Executed at: Camarillo, CA On: June 13, 2003 on: June 10, 2003 LESSOR: LESSEE: SUNBELT ENTERPRISES CALIFORNIA AMPLIFIER, A DELAWARE CORPORATION By: /s/Bonnie Mooney By: /s/Fred M. Sturm ---------------------- ----------------------- Bonnie Mooney Fred M. Sturm Authorized Agent for President & CEO Sunbelt Enterprises By: /s/Ken Bauman By: /s/Patrick Hutchins ---------------------- ----------------------- Ken Bauman Patrick Hutchins Director of Real Estate Vice President Operations Address: 1801 Solar Drive, Suite 250 Address: 460 Calle San Pablo Oxnard, CA 93031-9031 Camarillo, CA 93012 Telephone:(805)604-0700 Telephone:(805)987-9000 Fax(805)485-3899 Fax:(805)482-5842 ADDENDUM TO LEASE This ADDENDUM TO LEASE ("Addendum") dated as of June 10, 2003, is attached to and made a part of that certain Standard Industrial/Commercial Single- Tenant Lease-Net by and between SUNBELT ENTERPRISES, ("Lessor"), and CALIFORNIA AMPLIFIER, a Delaware corporation ("Lessee"), as the same may be amended from time to time ("Lease"). This Addendum shall supplant and amend the Lease, and the provisions set forth below shall supersede any inconsistent provisions set forth in the Lease. Capitalized terms used below which are defined in the Lease shall have the respective meanings as set forth in the Lease, unless expressly superseded by the terms and conditions of this Addendum. Section 1.7. The following language shall be added to the end of the text: "; provided, however, that all NNN charges relating to taxes shall be paid before such taxes are due and insurance shall be billed no more than once per calendar quarter (no more often than in three-month intervals)." Section 1.9. At the end of text of this Section, the words "and related uses" are deemed to be inserted. Section 2.3(b). In addition, if, in conformity with this Section, Lessor does not contribute its share for any Capital Expenditures and Lessee elects to advance the same, the applicable interest rate on such funds shall be calculated as set forth in Section 13.5 of the Lease. Section 4.3. The following will not be considered NNN Charges: (a) Expenses paid by Lessee directly to third parties, or as to which Lessor is otherwise entitled to be reimbursed by any third party, other than Lessee; (b) Lessor's federal or state income, franchise, inheritance or state taxes; (c) Costs incurred by Lessor for the repair of damage to the Premises to the extent Lessor is reimbursed by insurance or condemnation proceeds or by tenants, warrantors or other third parties; (d) Depreciation; (e) Brokerage commissions, finder's fees, attorney's fees, space planning costs and other costs incurred by Lessor in leasing or attempting to lease space (provided however that Lessee continue to be responsible for all costs and fees, including Lessor's reasonable attorney's fees, incurred by Lessor in the event of Lessee's breach of this Lease); (f) Interest, principal, points and fees on debt or amortization of any mortgage, deed of trust or other indebtedness; (g) Any ground lease rental; (h) Attorney's fees and other costs and expenses incurred in connection with negotiations or disputes with present or prospective tenants; (i) Costs associated with correction of construction defects; (j) Late charges or fees accruing as a result of the non-payment or late payment by Lessor or its agents of any item of costs for which Lessor is responsible; (k) Costs associated with any structural maintenance and design of the Building; (l) The costs of Lessor's general corporate overhead (other than Lessor's management fee); and (m) Costs arising from Lessor's charitable or political contributions. In addition, any property management fee charged by Lessor shall be capped at Two Thousand Dollars ($2,000.00) in any twelve (12)-month period and Lessee will only have to pay increased real estate taxes due to a reassessment of property taxes assessed pursuant to a change of ownership of the Premises only once during the Term. Lessee has a right to audit the triple-net charges with an accounting firm of Lessee's choice. In the event that Lessee overpaid any such charges, such charges will be refunded to Lessee, plus interest and, in the event Lessor's calculations are off by more than two percent (2%) in Lessor's favor, all costs of the audit will be promptly reimbursed to Lessee with interest calculated in accordance with Section 13.5. Section 5. Lessee may, at its sole option, obtain a Letter of Credit to satisfy the Security Deposit. Section 6.2(e). The word "gross" at the end of the third line of this Section is deemed deleted. In addition, in the event Lessor provides Lessee with a commercially reasonable Phase I Environmental Report prior to Lessee's occupancy of the Premises, this indemnity shall expire at the end of the Term. In addition, if Lessee provides to Lessor a commercially reasonable Phase I Environmental Report (including, without limitation, an update to the Phase I Report provided by Lessor to Lessee, if any) at the end or after the expiration of the Term, the indemnity provided by Lessee to Lessor pursuant to Section 6.2(d) of the Lease shall be deemed terminated at the end of the Term or earlier termination of this Lease. Section 6.2(g). Lessor shall not have the right to terminate the Lease pursuant to this Section unless the estimated cost to remediate a hazardous condition for which it is responsible exceeds at least six (6) months' Base Rent. Section 7.3(a). The provisions of this Section shall only apply in the event that Building Permits are necessary and the threshold levels of $50,000 in the aggregate and $10,000 per year set forth on the bottom of this subsection shall be revised to $100,000 and $20,000, respectively. Section 7.4(a). The following language is deleted. "Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee-Owned Alterations and Utility Installations." Section 8.3(a). The deductible for the insurance referenced in this Section shall be $10,000. Section 8.4(a). The deductible for the insurance referenced in this Section shall be $10,000. Section 8.7. The word "sole" in the first sentence of this Section is deleted. Section 9.5. In the event of an occurrence meeting the criteria to terminate the Lease as set forth in this Section, both Lessor and Lessee shall have the option of terminating the Lease early. Section 10. Notwithstanding any language in the Lease to the contrary, Lessee's responsibility to pay for any increase in real property taxes shall only apply to one (1) change of ownership during the term of the Lease or any extensions thereof. Section 12.1(a). Lessor's consent shall not be unreasonably withheld or delayed. Section 12.1(c). These provisions shall not be applicable as long as the shares of Lessee are publicly traded in any exchange or over the counter; provided, however, that if the equity ownership of Lessee become held by less than fifty (50) individuals or entities and not traded on a public exchange or over the counter, all of the terms of these Sections shall be reinstated. Section 13.3. If Lessor accepts cure of any alleged breach of the Lease by Lessee, all of the "Inducement Provisions" shall automatically be restored. Section 13.6. Provided that Lessee makes a reasonable attempt under the circumstances to give notice to Landlord in an emergency situation (which is defined as a present danger to Lessee's employees, invitees, the public, Premises and/or any alterations and equipment on the Premises), Lessee will have the right to immediately remediate the same and set off all costs against next installment of rent. Section 14. In the event that there is a condemnation of any portion of the Premises, in addition to the minimum thresholds which can trigger a termination of the Lease irrespective of the percentage of the land and/or building ultimately taken, if such taking materially effects the ability of Lessee to undertake its business of the Premises, Lessee shall have the option to terminate the Lease. Section 20. The word "gross" on the first line is deleted. Section 48. This Section is deleted. Section 54. The words "To the best of Lessee's ability" shall be added to the beginning of this Section. Section 56. The date for Somera Communication to execute the Lease Termination is adjusted to July 1, 2003 and if such notice from Somera Communication terminating its current tenancy at the Premises is not received prior to such date, Lessee may, in its sole election, deem this Lease of no force and effect. Exhibit "D". In the event of any conflict and/or ambiguity between the terms of Sections 6.2 of the Lease and Exhibit "D", the terms of Section 6.2, as the same may be modified an/or clarified in this Addendum, shall control. LESSOR: LESSEE: SUNBELT ENTERPRISES CALIFORNIA AMPLIFIER, A DELAWARE CORPORATION By: /s/Bonnie Mooney By: /s/Fred M. Sturm ---------------------- ----------------------- Bonnie Mooney Fred M. Sturm Authorized Agent for President & CEO Sunbelt Enterprises By: /s/Ken Bauman By: /s/Patrick Hutchins ---------------------- ----------------------- Ken Bauman Patrick Hutchins Director of Real Estate Vice President Operations EX-10 4 exhibit_10-2.txt EXHIBIT 10-2 - AMENDMENT NO. 1 TO BANK CREDIT AGREEMENT EXHIBIT 10-2 AMENDMENT AGREEMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT THIS AMENDMENT AGREEMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT (this "Amendment"), dated as of April 3, 2003, is entered into between U.S. BANK NATIONAL ASSOCIATION ("Bank") and CALIFORNIA AMPLIFIER, INC., a Delaware corporation ("Borrower"), and amends that certain Loan and Security Agreement, dated as of May 2, 2002, between Bank and Borrower (the "Agreement"). This Amendment is entered into in light of the following facts: RECITALS WHEREAS, Borrower has requested that Bank increase the maximum amount of Letter of Credit Usage permitted at any one time from $2,000,000 to $4,000,000 and to include the issuance of bankers acceptances as part of Letter of Credit facility under the Agreement. WHEREAS, Bank has agreed to Borrower's requests subject to the terms and conditions contained in this Amendment. NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS. All terms which are defined in the Agreement shall have the same definition when used herein unless a different definition is ascribed to such term under this Amendment, in which case, the definition contained herein shall govern. 2. AMENDMENTS. The Agreement is amended as follows: 2.1 The following definitions are added to Section 1.1: "Bankers Acceptance" means the creation of a trade acceptance and/or the discount thereof arising out of the Drafts drawn under the terms of a Letter of Credit. "Draft" means a draft, as that term is defined in the Code, issued by the beneficiary of a Letter of Credit. 2.2 The definition of "Letter of Credit Usage" contained in Section 1.1 is deleted in its entirety and is replaced with the following definition: "Letter of Credit Usage" means, as of any date of determination, the aggregate undrawn amount of all outstanding Letters of Credit plus 100% of the amount of outstanding Bankers Acceptances. 2.3 The definition of "Obligations" contained in Section 1.1 is deleted in its entirety and is replaced with the following definition: "Obligations" means all loans (including the Term Loans), Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), reimbursement obligations in connection with outstanding Bankers Acceptances, contingent reimbursement obligations with respect to outstanding Letters of Credit, premiums, liabilities (including all amounts charged to Borrower's Loan Account pursuant hereto), obligations, fees, charges, costs, Bank Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and duties of any kind and description owing by Borrower to Bank pursuant to or evidenced by the Loan Documents and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all interest not paid when due and all Bank Expenses that Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. Any reference in this Agreement or in the Loan Documents to the Obligations shall include all amendments, changes, extensions, modifications, renewals replacements, substitutions, and supplements, thereto and thereof, as applicable, both prior and subsequent to any Insolvency Proceeding. 2.4 The caption to Section 2.3 is deleted and is replaced with the following: 2.3 Letters of Credit and Bankers Acceptances. 2.5 The subparts (i) and (ii) of Section 2.3(a) are deleted in their entirety and are replaced with the following: (i) the outstanding Letter of Credit Usage would exceed $4,000,000; or (ii) the outstanding Advances, plus the outstanding Letter of Credit Usage, plus the amount of the reserve, if any, under Section 2.1(b) would exceed the Maximum Revolving Amount. 2.6 A new Section 2.3(aa) is added to the Agreement as follows: (aa) Subject to the terms and conditions of this Agreement, upon presentation to Bank of a Draft for acceptance by Bank and/or for the discounting thereof, Bank may agree to accept and/or discount the Draft thereby creating a Bankers Acceptance. The creation of Bankers Acceptances is subject to the following provisions: (i) Bank shall have no obligation to accept a Draft thereby creating a Bankers Acceptance if any of the following would result: (1) the outstanding Letter of Credit Usage would exceed $4,000,000; or (2) the outstanding Advances, plus the outstanding Letter of Credit Usage, plus the amount of the reserve, if any, under Section 2.1(b) would exceed the Maximum Revolving Amount. (ii) If Bank agrees to accept a Draft thereby creating a Bankers Acceptance, Bank shall use the acceptance commission as set forth in the current fee schedule issued by Bank's International Banking Department (the fee schedule is changed from time to time) and in the event Bank agrees to discount a Draft, Bank shall use the discount rate as determined by the Bank's Investment Department on the day the Draft is discounted by Bank. (iii) No Draft which is the subject of a Bankers Acceptance shall have a tenor longer than sixty (60) days, provided, however, in no case shall a Draft have a maturity date after October 3, 2005. Borrower shall reimburse Bank for the amount of each Draft on the maturity thereof. (iv) Subject to the terms and conditions of Section 2.1, Borrower may request an Advance to reimburse Bank for amount owing to Bank under Section 2.3(aa)(iii). (v) Borrower hereby agrees to indemnify, save, defend, and hold Bank harmless from any losses, costs, liabilities, expenses, and reasonable attorneys fees incurred by Bank arising out of or in connection with any Bankers Acceptance; provided, however, that Borrower shall not be obligated hereunder to indemnify for any loss, cost, expense or liability that is caused solely by the gross negligence or willful misconduct of Bank. Borrower agrees to be bound by Bank's standard regulations and operating procedures in connection with each Bankers Acceptance, unless such liability was caused solely by the gross negligence or willful misconduct of Bank. (vi) Immediately upon the termination of this Agreement, Borrower agrees to either (y) provide cash collateral to be held by Bank in an amount equal to 105% of the maximum amount of Bank's obligations under outstanding Bankers Acceptances, or (z) cause the issuance of a letter of credit for the benefit of Bank, in an amount equal to 105% of the maximum amount of Bank's obligations under outstanding Bankers Acceptances, issued by a financial institution acceptable to Bank in its reasonable discretion and containing conditions for making a draw acceptable to Bank in its reasonable discretion. At Bank's discretion, any proceeds of Collateral received by Bank after the occurrence and during the continuation of an Event of Default may be held as the cash collateral required by this Section 2.3(aa)(vi). 3. REPRESENTATIONS AND WARRANTIES. Borrower hereby affirms to Bank that all of Borrower's representations and warranties set forth in the Agreement are true, complete and accurate in all respects as of the date hereof. 4. COSTS AND EXPENSES. Borrower shall pay to Bank all of Bank's out-of- pocket costs and expenses arising in connection with the preparation, execution, and delivery of this Amendment and all related documents. 5. LIMITED EFFECT. Except for the specific amendments contained in this Amendment, the Agreement shall remain unchanged and in full force and effect. 6. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed and delivered shall be deemed to be an original. All such counterparts, taken together, shall constitute but one and the same Amendment. This Amendment shall become effective upon the execution of a counterpart of this Amendment by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. CALIFORNIA AMPLIFIER, INC., a Delaware corporation By: /s/ Richard K. Vitelle -------------------------- Title: VP Finance & CFO U.S. BANK NATIONAL ASSOCIATION By: /s/ John Stipanov -------------------------- Title: Vice President EX-10 5 exhibit_10-3.txt EXHIBIT 10-3 - AMENDMENT NO. 2 TO BANK CREDIT AGREEMENT EXHIBIT 10-3 AMENDMENT AGREEMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT THIS AMENDMENT AGREEMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT (this "Amendment"), dated as of July 3, 2003, is entered into between U.S. BANK NATIONAL ASSOCIATION ("Bank") and CALIFORNIA AMPLIFIER, INC., a Delaware corporation ("Borrower"), and amends that certain Loan and Security Agreement, dated as of May 2, 2002, between Bank and Borrower, as amended by that certain Amendment Agreement Number One to Loan and Security Agreement, dated as of April 3 2003, between Bank and Borrower (collectively, the "Agreement"). All terms which are defined in the Agreement shall have the same definition when used herein unless a different definition is ascribed to such term under this Amendment, in which case, the definition contained herein shall govern. This Amendment is entered into in light of the following facts: RECITALS WHEREAS, as of May 31, 2003, Borrower was not in compliance with the Fixed Charge Coverage Ratio; WHEREAS, Borrower has requested that Bank waive the Event of Default arising from such non-compliance and amend the Agreement (i) by changing the definition of Fixed Charge Coverage Ratio so that it is calculated on a rolling four fiscal quarter basis and (ii) by changing the level required for compliance; WHEREAS, Bank has agreed to the requested amendments to the Fixed Charge Coverage Ratio on the condition that Borrower agree, among other things, to a $3,000,000 reduction in the Maximum Revolving Amount, a $3,000,000 increase in the minimum amount of Cash and Cash Equivalents that Borrower must maintain as of the end of each fiscal quarter (unless and until Borrower achieves a required Fixed Charge Coverage Ratio for two consecutive fiscal quarters), and to make certain mandatory prepayments of Term Loan B. WHEREAS, Bank and Borrower have agreed to amend the Agreement in accordance with the terms and conditions contained in this Amendment. NOW, THEREFORE, the parties agree as follows: 1. Amendments. The Agreement is amended as follows: 1.1 The definition of "Fixed Charge Coverage Ratio" contained in Section 1.1 is deleted in its entirety and is replaced with the following definition: "Fixed Charge Coverage Ratio" means, as of the end of the most recently concluded fiscal quarter of Borrower, the ratio of (i) EBITDA for the four previous fiscal quarters, minus all income taxes paid during such period, minus all distributions to shareholders made during such period, plus all shareholder investments in Borrower (whether in the form of Subordinated Debt, capital contributions or otherwise) during such period, minus unfinanced capital expenditures made during such period; to (ii) the aggregate amount of all principal payments due and payable in respect of long term debt by Borrower during such period, plus all interest payments due and payable by Borrower during such period. For the purposes of this definition, mandatory prepayments of principal on Term Loan B which are required under Section 2.2(b) shall not be deemed to be "principal payments due and payable in respect of long term debt." 1.2 The definition of "Maximum Revolving Amount" contained in Section 1.1 is deleted in its entirety and is replaced with the following definition: "Maximum Revolving Amount" means $10,000,000. 1.3 Effective as of the fiscal quarter of Borrower ending on August 31, 2003, Section 7.20(a) is deleted in its entirety and is replaced with the following: (a) Fixed Charge Coverage Ratio. (1) For the fiscal quarters ending August 31, 2003, and November 30, 2003, a Fixed Charge Coverage Ratio of not less than 1.10:1.0, measured on a fiscal quarter-end basis, (2) for the fiscal quarter ending February 29, 2004, a Fixed Charge Coverage Ratio of not less than 1.20:1.0, measured on a fiscal quarter-end basis, and (3) for the fiscal quarter ending May 31, 2004, and for each fiscal quarter ending thereafter, a Fixed Charge Coverage Ratio of not less than 1.25:1.0; 1.4 Effective as of the fiscal quarter of Borrower ending on August 31, 2003, Section 7.20(e) is deleted in its entirety and is replaced with the following: (e) Liquidity. Cash and Cash Equivalents of not less than $11,000,000, measured on a fiscal quarter-end basis during the term of this Agreement; provided, however, that if Borrower, subsequent to May 31, 2003, has a Fixed Charge Coverage Ratio for two consecutive fiscal quarters equal to or in excess of 1.25:1.0, then the amount of Cash and Cash Equivalents required under the Section 7.20(e) shall be reduced to $8,000,000; and 2. Waiver. Bank hereby waives the Event of Default caused by Borrower's non-compliance with the Fixed Charge Coverage Ratio covenant set forth in Section 7.20(a) as of the fiscal quarter ending May 31, 2003. 3. Condition Subsequent. As a condition subsequent to the effectiveness of this Amendment (the failure by Borrower to so perform shall constitute an Event of Default), within one hundred twenty (120) days following the date of this Amendment, Borrower shall make a mandatory prepayment of principal in connection with Term Loan B in an amount equal to $1,000,000. The mandatory prepayment of principal hereunder shall be applied to the installments of principal due on Term Loan B in their inverse order of maturity. The mandatory prepayment hereunder shall not be deemed to be a "principal payment due and payable in respect of a long term debt" for the purposes of calculating the Fixed Charge Coverage Ratio pursuant to Section 7.20(a) of the Agreement. 4. Consent to Sale of Real Property. Bank hereby consents to the sale by Borrower of the Real Property Collateral located at (i) 351 South Peterson Street, Spring Green, Wisconsin 53588, and (ii) 33100 US Highway, Lone Rock, Wisconsin 53556, each on the condition that promptly upon closing of each such sale Borrower shall deliver to Bank all of the proceeds from such sale, net of closing costs, commissions, title insurance premium and other costs and expenses incurred by Borrower in connection with such sale. The proceeds of the each sale received by Bank shall be treated as a prepayment of principal due on Term Loan B and shall be applied to the installments of principal due on Term Loan B in their inverse order of maturity. The amount prepaid under this Section 3.2 shall not be deemed to be a "principal payment due and payable in respect of a long term debt" for the purposes of calculating the Fixed Charge Coverage Ratio pursuant to Section 7.20(a) of the Agreement. 5. Representations and Warranties. Borrower hereby affirms to Bank that all of Borrower's representations and warranties set forth in the Agreement are true, complete and accurate in all respects as of the date hereof. 6. Costs and Expenses. Borrower shall pay to Bank all of Bank's out-of- pocket costs and expenses arising in connection with the preparation, execution, and delivery of this Amendment and all related documents. 7. Limited Effect. Except for the specific amendments contained in this Amendment, the Agreement shall remain unchanged and in full force and effect. 8. Counterparts; Effectiveness. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed and delivered shall be deemed to be an original. All such counterparts, taken together, shall constitute but one and the same Amendment. This Amendment shall become effective upon the execution of a counterpart of this Amendment by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. CALIFORNIA AMPLIFIER, INC., a Delaware corporation By: /s/ Richard K. Vitelle -------------------------- Title: VP Finance & CFO U.S. BANK NATIONAL ASSOCIATION By: /s/ John Stipanov -------------------------- Title: Vice President EX-99 6 exhibit_99-1.txt EXHIBIT 99-1 - OFFICERS' CERTIFICATION 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 California Amplifier, Inc. (the "Company") on Form 10-Q for the period ended May 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Fred M. Sturm, President and Chief Executive Officer of the Company, and Richard K. Vitelle, Vice President and 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 to the best of our knowledge: (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/ Fred M. Sturm ----------------------------- Fred M. Sturm President and Chief Executive Officer /s/ Richard K. Vitelle ----------------------------- Richard K. Vitelle Vice President and Chief Financial Officer July 10, 2003 -----END PRIVACY-ENHANCED MESSAGE-----