-----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, K/M3uIObMGctTBNFzufb36Q3YJRWi4342NxsGUP0CIbdsspqRpvac7N20rctknj/ SesA6fcwzJm5gBuL4gB8lw== 0000912057-97-019189.txt : 19970602 0000912057-97-019189.hdr.sgml : 19970602 ACCESSION NUMBER: 0000912057-97-019189 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970301 FILED AS OF DATE: 19970530 SROS: NASD 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-12182 FILM NUMBER: 97617501 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-K405 1 FORM 10-K405 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934) FOR THE FISCAL YEAR ENDED MARCH 1, 1997 COMMISSION FILE NUMBER 0-12182 CALIFORNIA AMPLIFIER, INC. (Exact name of Registrant as specified in its Charter) DELAWARE 95-3647070 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 460 CALLE SAN PABLO, CAMARILLO, CALIFORNIA 93012 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 987-9000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Title of each class Name of each exchange - ------------------- --------------------- None None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: $.01 PAR VALUE COMMON STOCK (Title of Class) 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, and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [/X/] The aggregate market value of the voting stock of the Registrant held by non-affiliates of the Registrant as of May 23, 1997 was approximately $50,381,000. There were 11,717,222 shares of the Registrant's Common Stock outstanding as of May 23, 1997. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on July 18, 1997 is incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Form 10-K. This Proxy Statement will be filed within 120 days after the end of the fiscal year covered by this report. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS THE COMPANY California Amplifier, Inc. (the "Company") was incorporated in 1981. Since its inception, the Company has been involved in the design, manufacture and marketing of microwave components used in conjunction with the delivery of multichannel pay television. The Company currently operates in two product segments: Wireless Cable Television and Satellite Television products. WIRELESS CABLE TELEVISION Wireless Cable Television uses well established technologies, in many ways similar to coaxial cable multichannel television transmission. The key difference is that Wireless Cable does not have cable connecting the headend/transmission site to each home, but instead uses a microwave frequency band to transmit programming to subscribers. A wireless system is composed of a headend/transmission site, a transmission tower, and at each subscriber's home, a reception antenna, downconverter and a decoder or set-top converter. The headend equipment receives programming from satellites and other programming sources such as local VHF and UHF television stations and sends them to a transmission tower for transmission to subscribers via microwave signals. The signal can generally be received by subscribers within a 25-35 mile radius of the transmission tower depending on the transmitter power; however, the subscriber must have a direct line-of-sight or "view" between the tower and the receive antenna. Typically, 65%-80% of the homes within the service area will be able to receive the wireless signal, with the remainder shadowed from the transmitter. The percentage of line-of-sight homes is affected by the tower elevation, local topography and antenna height. The history of Wireless Cable in the United States and traditional hardwire cable are intertwined. Wireless Cable was initially used to provide educational or premium video programming in cities where cable was not available. In 1974, the Federal Communications Commission (FCC) authorized the use of spectrum in the 2150-2162 MHz frequency range for transmission of two video signals in the 50 largest markets. In 1983, the 2500-2686 MHz frequency range was reallocated and commercial Wireless Cable was given eight of the 31 resulting channels. At the same time, however, various FCC regulations made it very difficult to aggregate channels with the 2500-2686 MHz bandwidth, thereby limiting the number of channels Wireless Cable operators were able to offer. In addition, because subscriber numbers were low at most Wireless Cable operations, program networks, often owned by cable operators, charged higher programming fees to Wireless operators or simply refused to provide programming. These factors, accompanied by the fact that most Wireless Cable operators had limited capital, made it difficult for Wireless Cable to be a viable delivery alternative to hardwire cable In the late 1980's and early 1990's, as public dissatisfaction with cable's monopoly status grew, the FCC and Congress gave further attention to ways in which they could foster competition. In 1990 and 1991, the FCC made a series of rulings which made it easier for the Wireless Cable operators to consolidate channel frequency licenses, thereby increasing the channel capacity to 33 channels. In addition, the Cable Television Consumer Protection and Competition Act of 1992 was passed into law on October 5, 1992. Industry experts believe this legislation was the single biggest boost for the Wireless Cable industry. It essentially requires that programmers must make their service available to all at fair and reasonable prices, and that cable operators cannot price their services differently in various areas of their system. This prevents larger cable companies from pricing differently in regional areas where Wireless Cable is attracting customers. In February 1996, Congress passed the 1996 Telecommunications Act which the Company expects also should significantly benefit the Wireless Cable industry generally. One key provision of the legislation was in removing cross-ownership restrictions for telecommunications companies, allowing them to directly compete in the video distribution market, and vice versa for cable companies to provide voice and data communication services. This legislative development allows the telecommunications companies, such as Bell South, and Pacific Telesis, to use Wireless Cable technology as a deployment tool in delivering digital video programming to selected major 2 markets. Additionally, Section 303 of the 1996 Telecommunications Act has authorized the FCC to issue a Notice of Proposed Rule Making (NPRM), calling for the preemption of state, local, and non-governmental restrictions (such as homeowners associations) on DBS satellite antennas, and Wireless Cable antennas under one meter in diameter, except in reasonable cases involving public safety or historical heritage. This provision is intended to foster full and fair competition among different types of video programming services. If enacted, the proposed rule would expand the marketability of Wireless Cable service to households which were subject to zoning codes, covenants, and homeowners association restrictions. No assurances can be made, however, as to whether the FCC will issue such a rule. In the United States there are approximately 100 million television households, of which approximately 60% receive its programming from cable companies. Currently there are approximately 200 Wireless Cable operations in the United States, serving approximately 1.0 million subscribers, with line-of-sight access to approximately 30 million television households. Industry analysts estimate that a fully-financed wireless system could reach penetration levels of 10%-15% of line-of-sight homes due to inherent cost advantages of the technology, compared to cable. These penetration levels can be achieved by addressing various factors: additional capital availability to finance growth, the adoption of digital compression which would eliminate constraints with respect to channel capacity. In 1995 the Wireless Cable industry in the United States generated a great deal of interest with Tele-TV, a consortium comprised of Bell Atlantic, NYNEX and Pacific Telesis, which announced its intention to deliver video to customers using Wireless Cable digital technology. Initial projections for a digital subscriber rollout by Tele-TV were 2.0 million within three years of introduction. In late 1996, the Tele-TV consortium announced that certain members (Bell Atlantic and NYNEX) had changed their strategic emphasis and were not going forward with their Wireless Cable plans. Pacific Telesis has remained committed to Wireless Cable, but on a slower rollout than previously planned. The Tele-TV participation in Wireless Cable television was viewed by many industry experts as the beginning of well financed companies entering the Wireless Cable market through acquisition or alliances with existing domestic, multiple system operators. The decision by the Tele-TV partners to re-access their video delivery strategy, combined with other factors, has resulted in a significant slowdown in the domestic market. Operators are confronted with limited financing alternatives, negative cash flow from operations with current subscriber levels, and the decision of whether to expand subscriber counts using analog equipment prior to the availability of digital equipment. The decision to switch from analog to digital is a costly one, both from a system architecture, and per subscriber standpoint. As a result of the current capital constraints confronting the independent system operators, the conversion from analog to digital is no longer an equipment availability issue. Until the Wireless Cable industry in the United States can attract financial resources to introduce digital Wireless Cable television through alliances, acquisitions or the equity/debt markets, the industry will continue to be an insignificant participant in the delivery of multichannel pay television to consumers. Internationally, the Wireless Cable industry has experienced significant growth in response to increasing worldwide demand for multichannel television and the increased availability of a variety of programming such as HBO, CNN, MTV, ESPN and Disney. The Company believes that Wireless Cable technology, in many instances, is better suited than traditional cable to provide multichannel television to the consumer, especially in less developed countries and in areas that are not densely populated. The lack of a need for a cable network allows Wireless Cable operators to commence broadcasting more quickly, with less of an initial investment than for traditional cable, and to quickly expand throughout a service area. To date, Wireless Cable systems have been launched throughout the world, including major systems in Mexico, Venezuela, Brazil, Argentina, Paraguay, Chile, Qatar, Thailand, Malaysia, Nigeria, Australia, Czech Republic, Russia and Ireland. Similar launches in these countries, and other geographical areas, are expected to continue as programming is made available to these areas. Because the international markets do not have a high percentage of pay television subscribers to television households, and are not dominated by a single method of delivery, as cable is in the United States, the potential 3 for Wireless Cable as a programming delivery method internationally, is significant. SATELLITE TELEVISION Satellite dishes are used for the reception of video, audio and data transmitted from orbiting satellites. The Company's products are used both in commercial satellite dish applications and home satellite dishes. The Company's Satellite Television product sales, however, are primarily generated from sales of downconverters, amplifiers and integrated feedhorns and amplifiers used in home satellite dish applications. The satellite dish is a parabolic reflector antenna. Microwaves are transmitted from orbiting satellites toward the earth's surface. The dish reflects the microwaves back to a focal point where a feedhorn collects the microwaves transferring the signals into an amplifier/downconverter. The microwave amplifier literally amplifies the microwave signal millions of times for further processing. The downconverter changes the frequency into an intermediate frequency so that the receiver and television can process the signal and create a picture. The home satellite industry has undergone substantial changes over the past several years. During the early 1980's, home satellite systems in the United States were capable of receiving a wide variety of television broadcast signals, including those delivered to pay television and cable television operators, without charge since the transmitted signals were not scrambled. In 1986, certain broadcasters began to scramble their signal, and today virtually all premium programmers in the U.S. scramble their programming. To view scrambled programs, the viewer is required to purchase a decoder and pay a periodic fee to the programmer or program reseller. In 1994, the Direct Broadcast System (DBS) was introduced in the United States. The DBS system uses high powered satellites and Ku-Band to transmit programming to subscribers digitally. As a result of the satellite transmission power and the Ku frequency, the satellite dish required for signal reception is only eighteen inches in diameter. This compares to C-Band dishes that range from five to twelve feet in diameter. The Ku-DBS system has been very well accepted since its introduction and installations total over 4.5 million television households, while C-Band installations approximate 2.3 million. A small dish with the capability of receiving a significant number of channels, primarily because the DBS satellite transmits digital signals at high power levels, offers a consumer an alternative to the big, C-Band backyard dish. As a result, since the DBS launch C-band installations have reduced dramatically to less than 100,00 per year. This trend is likely to continue in the United States as more DBS satellites and providers enter the DBS market. The international market for Satellite Television exists primarily in Europe, the Middle East, Asia and Latin America where cable penetration is substantially less than in the United States. The Company believes the international market for Satellite Television, which has an installed base of over 20 million dishes, will continue to grow in response to increased worldwide demand for television spurred, in part, by an increase in the availability and variety of programming. Certain United States cable television networks have expanded their programming coverage internationally. The availability of highly desirable programming such as HBO, CNN, MTV, ESPN and Disney has led to the growth of the various methods of multichannel television delivery in the many international markets. As previously stated, both C-Band and Ku-Band dishes will be used by consumers depending upon how the programmers choose to transmit such signals. Both Ku-Band and C-Band satellite launches are scheduled over the next several years, however the Ku-DBS alternative is becoming increasingly more popular to programmers as a means of delivery directly to subscribers. Because DBS, Ku-Band products are becoming a more significant market, the Company is focusing some of its research and development resources on the development of Ku-DBS products to sustain its position in the Satellite Television market. 4 INVESTMENT IN MICRO PULSE, INC. In January 1993, the Company purchased a 50% ownership interest in Micro Pulse, Inc. ("Micro Pulse") for $100,000 in cash and a $400,000 convertible promissory note. In April 1995, the note was converted into 100,000 shares of the Company's common stock. Micro Pulse designs, manufactures and markets antennas and amplifiers used principally in global positioning systems ("GPS"). Such products are used in surveying applications, vehicle tracking and marine and airborne navigation. In March 1997, the Company acquired additional shares resulting in a 50.5% controlling interest. See Note 3 of Notes to Consolidated Financial Statements. PRODUCTS The Company designs a broad line of amplifiers, downconverters, antennas and integrated products used in the reception, conversion and amplification of microwave signals used in conjunction with the reception of video, audio, and data transmitted from satellites or earth-based transmitters using microwave signals. Products serve both the Wireless Cable (S-Band) industry and the Satellite Television industry (C-Band and Ku-Band). In addition, the Company manufactures and markets a broadband scrambling system called MultiCipher-Registered Trademark-, used by Wireless Cable operators to protect their signals from unauthorized viewing. Because MultiCipher is a broadband scrambling system, it decodes all channels transmitted simultaneously. This allows a "whole-house" solution for the Wireless Cable operator and eliminates the requirement of installing a conventional set-top box on each television in the subscribers' home. The Company most recently has introduced MultiCipher Plus-TM-, a broadband, whole-house scrambling system with the additional feature of tiering. Tiering allows the operator to offer premium or pay per view programming to individual subscribers, a feature the initial MultiCipher system did not have. During fiscal years 1997, 1996 and 1995, Wireless Cable products, which include MultiCipher products, accounted for 69.9%, 70.0% and 45.9% of the Company's sales, respectively, and Satellite Television products accounted for 29.9%, 29.3% and 53.4% of the Company's sales, respectively. For additional information regarding the Company's sales by geographical areas, see Note 10 of Notes to Consolidated Financial Statements. MANUFACTURING The Company manufactures and assembles its products in its Camarillo, California, USA, facility and in a contract labor facility in Mexico. Manufacturing operations consist principally of assembling of components built from fabricated parts, printed circuit boards and electronic devices, and microwave tuning and testing of assembled products. The Company is currently evaluating other manufacturing operations in other countries. Electronic devices, components and raw materials used in the Company's products are generally obtained from a number of suppliers, although certain materials are obtained from a limited number of sources. Some devices or components are standard items while others are manufactured to the Company's specifications by its suppliers. The Company attempts to operate without substantial levels of raw materials by depending on certain key suppliers to provide material on a "just-in-time'' basis. The Company believes that most raw materials are available from alternative suppliers. However, any significant interruption in the delivery of such items could have an adverse effect on the Company's operations. ISO 9001 INTERNATIONAL CERTIFICATION In August 1995, the Company became registered to ISO 9001, the international standard for conformance to quality excellence in meeting market needs in all areas including product design, manufacturing, quality assurance and marketing. The registration assessment was performed by Underwriter's Laboratory, Inc., according to the ISO 9001:1994 International Standard. Continuous assessments to maintain certification will be performed semi-annually by Underwriter's Laboratory, Inc. 5 RESEARCH AND DEVELOPMENT The Wireless Cable and Satellite Television markets are characterized by technological change, evolving industry standards, and new product requirements to meet market growth. During the last three years, the Company has focused its research and development resources on three primary areas: digital Wireless Cable reception products, the MultiCipher "whole-house" broadband scrambling system, and Ku-DBS products. In addition, development resources were allocated to broaden existing product lines, reducing product costs and improving performance by product redesign efforts. Research and development costs have increased significantly over the past three fiscal years consistent with this strategy. Research and development expenses were $5,789,000, $4,376,000, and $3,155,000 during fiscal years 1997, 1996 and 1995, respectively. SALES AND MARKETING The Company sells its Wireless Cable products directly to Wireless Cable operators, but will occasionally utilize a distributor for certain geographical regions. The Company sells its Satellite Television products through satellite equipment distributors, but, from time to time, sells certain products to manufacturers for incorporation into complete satellite dish systems, or directly to DBS operators. The Company's sales and marketing functions are centralized in its Camarillo, California, U.S.A., corporate headquarters. In addition, the Company has sales offices and personnel in Paris, France; Sao Paulo, Brazil; and Bangkok, Thailand. The Company may add additional sales offices and employees as market conditions warrant, in market areas that require additional sales and customer support not adequately served by a major distributor or reseller. See also Note 10 of Notes to Consolidated Financial Statements for major customer and geographical sales information. COMPETITION The markets in which the Company participates are highly competitive. In addition, if the markets for the Company's products continue to grow, the Company anticipates increased competition from new companies entering such markets, some of whom may have financial and technical resources substantially greater than those of the Company. Furthermore, because some of the Company's products may not be proprietary, they may be duplicated by low-cost producers, resulting in price and margin pressures. The Company believes that competition in its markets is based primarily on price, performance, reputation, product reliability and technical support. In the Wireless Cable market, the Company has supplier relationships with major Wireless Cable operators in various regions of the world, and believes that its pricing, accompanied by product performance, reliability, low field failure rate, and its ongoing technical support, are currently competitive advantages to the Company. In the Satellite Television market, where the Company has participated since its inception in 1981, its reputation for performance and quality allows the Company a competitive advantage if pricing of its products is comparable to its competitors. The Company's continued success in these markets, however, will depend upon its ability to continue to design and manufacture quality products at competitive prices. BACKLOG The Company's products are sold to customers that do not usually enter into long-term purchase agreements, and as a result, the Company's backlog at any date is not significant. As the Company's sales shift from Satellite Television products to Wireless Cable products, however, the Company is emphasizing long-term arrangements with Wireless Operators to increase backlog and sales visibility. Because of customer order modifications, cancellations, or orders requiring wire transfers or letters of credit from international customers, the Company's backlog as of any particular date, may not be indicative of sales for any future period. PATENTS, TRADEMARKS AND LICENSES The Company's timely application of its technology and its design, development and marketing capabilities have been of substantially greater importance to its business than patents or licenses. 6 The Company currently has nine patents ranging from design features for downconverter and antenna products, to its MultiCipher broadband scrambling system. Those that relate to its downconverter products do not give the Company any significant advantage since other manufacturers using different design approaches can offer similar microwave products in the marketplace. The Company does believe, however, that certain Wireless Cable antenna patented designs, and the broadband scrambling technology for encoding and decoding multi-channel television signals used in the MultiCipher systen are significant and may result in a competitive advantage for the Company. In May, 1997, the Company filed suit in the U.S. District Court for the Central District of California against Pacific Monolithics, Inc., for patent infringement of the Company's MultiCipher patent. The Company currently has 15 other patents pending. California Amplifier-Registered Trademark- and MultiCipher-Registered Trademark- are federally registered trademarks of the Company. The Company has also filed for trademark protection for its MultiCipher Plus product line. EMPLOYEES At March 1, 1997, the Company had 348 employees. None of the Company's employees are represented by a labor union. ITEM 2. PROPERTIES The Company's corporate headquarters and manufacturing facility is located in Camarillo, California (approximately 60 miles north of Los Angeles) and consists of approximately 64,000 square feet located on approximately four acres of land. In addition, the Company leases an aggregate of approximately 30,000 square feet of space across and adjacent to its headquarters facility which is used for shipping, finished goods and a tool and die operation. These leases expire in 2004. The Company also leases offices in Paris, France; Sao Paulo, Brazil; and Bangkok, Thailand. See also Note 9 to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS In May, 1997, in response to the Company's suit filed against it (see Patents, Trademarks and Licenses above), Pacific Monolithics filed suit against the Company for infringing on a design patent for a Wireless Cable antenna. The Company believes the claim is frivolous and without merit, and will aggressively defend its broadband scrambling patent on which Pacific Monolithics has infringed. The Company is currently not a defendant in any legal proceeding. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the three months ended March 1, 1997, no matters were submitted to a vote of the Company's security holders. 7 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market ("NNM") under the trading symbol "CAMP." The following table sets forth for each fiscal period indicated the high and low closing sale prices for the Company's Common Stock, as reported by the NNM: LOW HIGH FISCAL YEAR ENDED MARCH 1, 1997: 1st Quarter 22-1/8 46 2nd Quarter 6-1/2 48-3/4 3rd Quarter 6-1/8 14-1/4 4th Quarter 4-7/8 9-1/2 FISCAL YEAR ENDED MARCH 2, 1996: 1st Quarter 3-1/8 5-3/8 2nd Quarter 4-3/4 7-1/2 3rd Quarter 7-3/16 14-11/16 4th Quarter 12-1/8 24-3/16 On March 22, 1996, the Company effected a two-for-one stock split. All per share amounts contained herein have been retroactively adjusted to reflect the stock split. At May 23, 1997 the number of stockholders of record of the Company's Common Stock was 342. The number of stockholders of record does not include the number of persons having beneficial ownership held in "street name" which are estimated to approximate 7,000. The Company has never paid a cash dividend and has no current plans to pay cash dividends on its Common Stock. 8 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth certain selected financial data which has been derived from the audited financial statements of the Company for each of the respective years. The selected financial data should be read in conjunction with the consolidated financial statements and related notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained herein. CONSOLIDATED STATEMENT OF INCOME DATA: (in thousands, except per share data)
YEARS ENDED - ----------------------------------------------------------------------------------------------- MAR. 1, MAR 2, MAR 4, FEB 26, FEB 27, 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------- Sales $ 49,290 $ 61,590 $ 45,656 $ 40,664 $ 35,785 Income before taxes 1,037 7,638 3,770 2,279 4,204 Net income 633 4,958 2,451 1,556 3,050 Net income per share .05 .41 .22 .14 .30 - ----------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET DATA: (in thousands) AS OF EACH YEAR END - ------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------- Total assets $ 29,536 $ 32,573 $ 22,087 $ 19,599 $ 16,037 Working capital 15,001 15,743 8,552 6,093 2,472 Long-term debt 525 767 782 773 400 Stockholders' equity 24,148 22,924 14,899 12,163 7,288 - -------------------------------------------------------------------------------------------------
9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of sales represented by items included in the Company's Consolidated Statements of Income: YEARS ENDED - ------------------------------------------------------------------------------- MARCH 1, MARCH 2, MARCH 4, 1997 1996 1995 - ------------------------------------------------------------------------------- Sales: Wireless Cable 69.9% 70.0% 45.9% Satellite Television 30.0 29.3 53.4 Other .1 .7 .7 - ------------------------------------------------------------------------------- Total sales 100.0 100.0 100.0 Gross profit 29.4 34.0 31.2 Research and development 11.8 7.1 6.9 Selling 9.7 8.1 8.1 General and administrative 6.5 6.6 7.9 - ------------------------------------------------------------------------------- Income from operations 1.4 12.2 8.3 Interest and other, net .7 - - - ------------------------------------------------------------------------------- Income before provision for income taxes 2.1 12.2 8.3 Provision for income taxes .8 4.3 2.9 - ------------------------------------------------------------------------------- Net income 1.3% 7.9% 5.4% - ------------------------------------------------------------------------------- FISCAL YEARS 1997 AND 1996 Sales decreased by $12.3 million, or 20.0%, from $61.6 million in fiscal year 1996 to $49.3 million in fiscal year 1997. The fiscal year 1997 sales decrease resulted from declines in both Wireless Cable and Satellite Television product sales. Sales of Wireless Cable products decreased $8.7 million, or 20.2%, from $43.2 million to $34.4 million. Sales of Satellite Television products decreased $3.3 million, or 18.3%, from $18.1 million to $14.8 million. Domestic sales from both product lines decreased $66,000 to $17.1 million. Decreases in domestic sales of Satellite Television products and Wireless Cable reception products were offset by increases in MultiCipher product sales. Foreign sales decreased $12.2 million, or 27.5%, from $44.4 million to $32.2 million. The primary geographical areas of decrease were Asia for Wireless Cable products, and Europe and Australia for Satellite Television products. The decrease in Wireless Cable sales was a result of two major factors. First, international markets, which had been expanding subscriber growth through new system additions as well as the growth of existing systems, saw a decrease in the number of new system additions in calendar 1996, as compared to prior years. This impacted overall subscriber growth in markets where the Company has significant market share. Second, the U.S. domestic market, which was expected to begin a digital rollout in calendar 1996, delayed this technology shift as certain regional Bell operating companies re-evaluated their video delivery strategy. This caused uncertainty in the market and resulted in several independent operators having less access to capital which limited their expansion strategies for analog installations and conversion to systems using digital technologies. As a result, sales of Wireless reception products decreased from prior year amounts. However, sales of the Company's MultiCipher products to analog wireless systems offset the Wireless reception product shortfall. 10 The decrease in Satellite Television product sales resulted from continued softness in the domestic C-band market and continued pricing pressures internationally. The Company offset the decrease in C-band sales with increased sales of its Ku-band products, primarily to international markets where the Ku-band product offerings are much broader than the current United States Ku-band DBS market. Gross profits decreased by $6.5 million, or 30.9%, from $21.0 million to $14.5 million. Gross margins decreased from 34% to 29.4%. The decrease in gross profit resulted from a 20% decrease in sales, a decline in gross margins, and under-utilization of factory overhead. The gross margin pressures resulted from competitive pricing pressures, to which the Company responded by lowering unit sales prices, delays in cost reduction programs because development resources were allocated to the development of digital products, the introduction of "MultiCipher Plus" during fiscal year 1997 at gross margins lower than expected margins, and higher than anticipated product returns on initial shipments of MultiCipher Plus. Also included in cost of sales, which negatively impacted gross profits and gross margins, were amounts relating to under-utilization of the Company's manufacturing infrastructure as sales volumes decreased during the second half of fiscal year 1997. Research and development expenses increased by $1.4 million, from $4.4 million to $5.8 million. As a percentage of sales, research and development increased from 7.1% to 11.8%. The increases resulted from the need for additional resources, primarily personnel and equipment, to focus on the design and development of a digital line of Wireless Cable reception products; the MultiCipher "whole-house" scrambling system; and Ku-DBS products for Satellite Television. Selling expenses decreased by $201,000, from $5.0 million to $4.8 million, but as a percentage of sales, increased from 8.1% to 9.7%. The Company closely monitored selling and marketing expenses during the third and fourth quarters in response to the decrease in sales volumes. Because the Company utilizes a direct sales force, a significant percentage of costs are fixed in nature, excluding variable sales commission programs. General and administrative expenses decreased by $876,000, from $4.1 million to $3.2 million, and decreased as a percentage of sales, from 6.6% to 6.5%. The decrease in general and administrative expenses resulted primarily from a reduction in incentive bonuses in fiscal year 1997 due to the decline in operating performance as compared to fiscal year 1996. Income from operations decreased by $6.8 million, or 91%, from $7.5 million to $688,000. The principal reasons for the decline were decreased sales and gross margins, and increases in research and development expenses. The $140,000 income attributable to non-consolidated subsidiary relates to the Company's 50% equity investment in Micro Pulse. The Company recognized $275,000 in income which represented 50% of Micro Pulse's fiscal year 1997 net income of $550,000, offset by $135,000 in amortization expense relating to the Company's initial investment in excess of 50% of Micro Pulse's net equity. The provision for income taxes decreased by $2.3 million, from $2.7 million to $404,000. Income taxes as a percentage of income before taxes were 39.0% in fiscal year 1997 and 35.0% in fiscal year 1996. The tax rates are a result of taxes, based upon a statutory rate, offset by benefits relating to the Company's foreign sales corporation, and research and development tax credits. Net income decreased $4.3 million, or 87%, from $5.0 million to $633,000. FISCAL YEARS 1996 AND 1995 Sales increased by $15.9 million, or 34.8%, from $45.7 million in fiscal year 1995 to $61.6 million in fiscal year 1996. The fiscal year 1996 sales increase was primarily a result of increases in Wireless Cable sales offset by decreases in Satellite Television sales. Sales of Wireless Cable products increased $22.2 million, or 105.8%, from $21.0 million to $43.2 million, while sales of Satellite Television products decreased $6.3 million, or 25.9%, from $24.4 million to $18.1 million. 11 The increase in Wireless Cable sales resulted from strong international demand for the Company's Wireless Cable reception products and the introduction of the Company's broadband scrambling system, MultiCipher. Wireless Cable sales in the United States remained relatively flat with the sales of the prior year. This is a result of ordering patterns by domestic operators as they more closely monitor inventory levels to growth projections; increased competition; and the decision by some operators to limit their growth plans awaiting the availability of digital equipment. The decrease in Satellite Television product sales resulted from continued pressure domestically on C-Band satellite dish sales as the market shifts to the Ku-DBS alternative, and increased competition in Latin America for C-Band products. The Company has recently introduced a Ku-Band, DBS type downconverter and feedhorn. Gross profits increased by $6.7 million, or 47.3%, from $14.2 million to $21.0 million. Gross margins increased from 31.2% to 34%. The increase in gross profit resulted from increased sales volumes of Wireless Cable products and an increase in gross margins over the prior year. In a focused effort to increase gross margins, the Company emphasized the following: a sales shift from Satellite Television products to Wireless Cable products, lower cost designs, new product introductions and manufacturing process improvement and cost reduction programs. Research and development expenses increased by $1.2 million, from $3.2 million to $4.4 million. As a percentage of sales, research and development increased from 6.9% to 7.1%. The increases resulted from the need for additional resources, primarily personnel and equipment, to focus on the design and development of a broader line of Wireless Cable reception products; the MultiCipher "whole-house" scrambling system; and Ku-DBS products for Satellite Television. Selling expenses increased by $1.3 million, from $3.7 million to $5.0 million, but as a percentage of sales remained constant at 8.1%. Selling expenses increased due to increased sales to foreign markets and the Company's focus on expanding its sales and marketing presence in these markets. General and administrative expenses increased by $494,000, from $3.6 million to $4.1 million, but decreased as a percentage of sales, from 7.9% to 6.6%. The increase in expenses resulted primarily from increased personnel in administration and information services, and increased incentive bonuses based upon fiscal year 1996 operating performance. Income from operations increased by $3.7 million, or 98.6%, from $3.8 million to $7.5 million. The principal reasons for the growth were increased sales and gross margins, offset by increases in operating expenses. The $100,000 loss attributable to non-consolidated subsidiary relates to the Company's 50% equity investment in Micro Pulse. The Company recognized $125,000 in income which represented 50% of Micro Pulse's fiscal year 1996 net income of $250,000, offset by $225,000 in amortization expense relating to the Company's initial investment in excess of 50% of Micro Pulse's net equity. The provision for income taxes increased by $1.4 million, from $1.3 million to $2.7 million. Income taxes as a percentage of income before taxes were 35% in fiscal years 1996 and 1995. The 35% rate is a result of taxes based upon a statutory rate offset by benefits relating to the Company's foreign sales corporation and research and development tax credits. Net income increased $2.5 million, or 102%, from $2.5 million to $5.0 million. LIQUIDITY AND CAPITAL RESOURCES As of March 1, 1997 the Company had cash on hand of $3.2 million and working capital of $15.0 million. In addition, the Company has a $6.0 million working capital facility with California United Bank, a $2.0 million capital equipment facility with NationsBank and California Amplifier s.a.r.l., its foreign subsidiary, has an informal arrangement with a French Bank to borrow up to $600,000. As of March 1, 1997, no amounts were outstanding under any of these arrangements, except for approximately $1.3 million in term debt due to NationsBank, borrowed under prior capital equipment agreements. The $6.0 million credit facility with California United Bank 12 expires on August 4, 1997, however, the Company has verbal assurances from the Bank that the agreement will be renewed for an additional year at similar or more favorable terms. The equipment facility with NationsBank expires in December 1997, at which time the Company will decide whether to renew such arrangement. The Company believes that cash flow from operations, together with the funds available under its credit facilities, are sufficient to support operations and capital equipment requirements over the next twelve months. The Company believes that inflation has not had a material effect on its operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and related financial information required to be filed hereunder are indexed on page 18 of this report and are incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are as follows: Name Age Position ------------------------ --- --------------------------------------- Ira Coron 68 Chairman, Chief Executive Officer and Director Michael R. Ferron 42 Vice President, Finance, Chief Financial Officer and Corporate Secretary Kris Kelkar 33 Vice President, Marketing Arthur H. Hausman (1) 73 Director William E. McKenna (1)(2) 77 Director Thomas L. Ringer (2) 65 Director - ------------------- (1) Member of Compensation Committee. (2) Member of Audit Committee. Ira Coron joined the Company as Chairman and Chief Executive Officer in March 1994. From 1989 to 1994 he was an independent management consultant to several companies and venture capital firms. He retired from TRW, Inc., after serving in numerous senior management positions from June 1967 to July 1989 among which was Vice President and General Manager of TRW's Electronic Components Group. He also serves on the Board of Directors of the Wireless Cable Association, Made 2 Manage Systems, Inc., and CMC Industries, Inc. Michael R. Ferron joined the Company as Vice President, Finance and Chief Financial Officer in October 1990 and was appointed Corporate Secretary in March 1991. Prior to October 1990, Mr. Ferron was employed by the accounting firms of Deloitte & Touche and Arthur Young & Company, respectively. 13 Kris Kelkar was appointed Senior Vice President of Sales and Marketing in April 1995 and Vice President, Marketing in April 1997. Since 1988 he held various positions with General Instrument Corporation, more recently he held the position of Vice President of International Marketing for General Instrument's Communications Division. Arthur H. Hausman has been a director of the Company since 1987. Mr. Hausman is Chairman Emeritus of the Board of Ampex Corporation. He served as Chairman of the Board of Directors and Chief Executive Officer of Ampex, having been with Ampex for 27 years until his retirement in 1988. He currently serves as a director of Drexler Technology Corporation, California Microwave, Inc., and director emeritus of TCI, Inc. He was appointed by President Reagan to the President's Export Council, to the Council's Executive Committee and to the Chairmanship of the Export Administration Subordinate Committee of the Council for the period 1985 to 1989. William E. McKenna has been a director of the Company since October 1983. Since December 1977, Mr. McKenna has been general partner of MCK Investment Company, a private investment company. Mr. McKenna was Chairman of the Board of Directors of Technicolor, Inc. from 1970 to 1976 and was formerly Chairman of the Board of Directors and Chief Executive Officer of Hunt Foods & Industries, Inc. and its successor, Norton Simon, Inc. From 1960 to 1967, Mr. McKenna was associated with Litton Industries, Inc. as a Director and in various executive capacities. He is currently a director of Midway Games, Inc., Drexler Technology Company, WMS Industries, Inc. and Williams Hospitality Group, Inc. Thomas Ringer has been a director of the Company since August 1996. Mr. Ringer is Chairman of the Board of E*Capital Corporation (formally Wedbush Corp.), the holding company for Wedbush Morgan Securities, Inc. Mr. Ringer has served as Chairman, President and Chief Executive Officer for Recognition Equipment, Inc., President and Chief Executive Officer of Fujitsu Systems of America, Inc., and President and Chief Executive Officer of Computer Machinery Corporation. In addition, Mr. Ringer currently serves on the Board of Directors of Document Sciences Corporation, M.S. Aerospace, Inc., Public Safety Equipment, Inc., and the Center for Innovation and Entrepreneurship. Officers are appointed by and serve at the discretion of the Board of Directors. Each director holds office until the next annual meeting of stockholders or until his successor has been duly elected and qualified. Each non-employee director receives an annual stock option grant to purchase 8,000 shares at the fair-market-value at time of grant which vest over a one-year period, a monthly fee of $1,250, and reimbursement of out-of-pocket expenses in attending the Company's Board of Directors meetings. There are no family relationships among any directors or executive officers of the Company. The Company has a Compensation Committee which reviews and makes recommendations to the Board of Directors with respect to the compensation of the Company's officers and to administer the Company's Key Employee Stock Option Plan. The Company also has an Audit Committee which reviews the scope of audit procedures employed by the Company's independent auditors, reviews the audit reports rendered by the Company's independent auditors and approves the audit fee charged by the independent auditors. The Audit Committee reports to the Board of Directors with respect to such matters and recommends the selection of independent auditors. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the information under the captions "Executive Compensation" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on July 18, 1997. 14 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the information under the caption "Stock Ownership" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on July 18, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the information contained under the caption "Certain Relationships and Related Transactions" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on July 18, 1997. 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) FINANCIAL STATEMENTS. Reference is made to the Index to Consolidated Financial Statements on page 18 of this report. (b) FORM 8-K. The Company made no filings on Form 8-K during the three months ended March 1, 1997. (c) EXHIBITS. Reference is made to the Index to Exhibits on pages 33-35 of this report. 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CALIFORNIA AMPLIFIER, INC. By: /s/ Ira Coron ----------------------------- Ira Coron Chairman of the Board and Chief Executive Officer Dated: May 30, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. CAPACITIES SIGNATURES IN WHICH SERVED DATES - ----------------------- ------------------------- ---------------- /s/ Ira Coron Chairman, Chief Executive May 30, 1997 - ----------------------- Officer and Director Ira Coron (Principal Executive Officer) /s/ William E. McKenna Director May 30, 1997 - ----------------------- William E. McKenna /s/ Arthur H. Hausman Director May 30, 1997 - ----------------------- Arthur H. Hausman /s/ Thomas L. Ringer Director May 30, 1997 - ----------------------- Thomas L. Ringer /s/ Michael R. Ferron Vice President, Finance May 30, 1997 - ----------------------- Chief Financial Michael R. Ferron Officer (Principal Accounting Officer) and Corporate Secretary 17 CALIFORNIA AMPLIFIER, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 19 FINANCIAL STATEMENTS: Consolidated Balance Sheets 20 Consolidated Statements of Income 21 Consolidated Statements of Stockholders' Equity 22 Consolidated Statements of Cash Flows 23 Notes to Consolidated Financial Statements 24-32 18 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of California Amplifier, Inc.: We have audited the accompanying consolidated balance sheets of California Amplifier, Inc. (a Delaware corporation) and subsidiaries as of March 1, 1997, and March 2, 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended March 1, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of California Amplifier, Inc. and subsidiaries as of March 1, 1997, and March 2, 1996, and the results of their operations and their cash flows for each of the three years in the period ended March 1, 1997 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Los Angeles, California April 9, 1997 19 CALIFORNIA AMPLIFIER, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE) MARCH 1, MARCH 2, 1997 1996 - ------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 3,165 $11,637 Accounts receivable 6,510 4,645 Income tax receivable 806 --- Inventories 8,200 6,744 Deferred tax asset 800 1,200 Prepaid expenses and other current assets 383 399 - ------------------------------------------------------------------------------- Total current assets 19,864 24,625 Property and equipment -- at cost, net of accumulated depreciation and amortization 7,407 6,160 Investment in non-consolidated subsidiary 1,000 852 Other assets 1,265 936 - ------------------------------------------------------------------------------- $29,536 $32,573 - ------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,136 $ 3,230 Accrued liabilities 1,928 4,659 Current portion of long-term debt 799 993 - ------------------------------------------------------------------------------- Total current liabilities 4,863 8,882 Long-term debt 525 767 Commitments --- --- Stockholders' equity: Preferred stock, 3,000 shares authorized; no shares outstanding --- --- Common stock, $.01 par value; 30,000 shares authorized; 11,713 shares outstanding in March 1997 and 11,519 shares outstanding in March 1996 117 115 Additional paid-in capital 13,990 13,255 Foreign currency translation adjustment (127) 19 Retained earnings 10,168 9,535 - ------------------------------------------------------------------------------- Total stockholders' equity 24,148 22,924 - ------------------------------------------------------------------------------- $29,536 $32,573 - ------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 20 CALIFORNIA AMPLIFIER, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT NET INCOME PER SHARE) YEARS ENDED - ------------------------------------------------------------------------------- MARCH 1, MARCH 2, MARCH 4, 1997 1996 1995 - ------------------------------------------------------------------------------- Sales $ 49,290 $ 61,590 $ 45,656 Cost of sales 34,810 40,637 31,432 - ------------------------------------------------------------------------------- Gross profit 14,480 20,953 14,224 Research and development 5,789 4,376 3,155 Selling 4,802 5,003 3,712 General and administrative 3,201 4,077 3,583 - ------------------------------------------------------------------------------- Income from operations 688 7,497 3,774 Interest and other income, net 327 460 247 Interest expense (118) (219) (201) Income (loss) attributable to non-consolidated subsidiary 140 (100) (50) - ------------------------------------------------------------------------------- Income before provision for income taxes 1,037 7,638 3,770 Provision for income taxes 404 2,680 1,319 - ------------------------------------------------------------------------------- Net income $ 633 $ 4,958 $ 2,451 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Net income per share $ .05 $ .41 $ .22 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Weighted average shares outstanding 12,551 12,182 11,182 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 21 CALIFORNIA AMPLIFIER, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
Cumulative Foreign Common Stock Additional Currency ------------------- Paid-in Translation Retained Shares Amount Capital Adjustment Earnings Total - ----------------------------------------------------------------------------------------------------------- Balances at February 26, 1994 10,576 $106 $9,931 $ --- $2,126 $12,163 Exercise of stock options 240 2 283 --- --- 285 Net income --- --- --- --- 2,451 2,451 - ----------------------------------------------------------------------------------------------------------- Balances at March 4, 1995 10,816 108 10,214 --- 4,577 14,899 Conversion of debt 100 1 399 --- --- 400 Exercise of stock options 603 6 2,642 --- --- 2,648 Currency translation adjustment --- --- --- 19 --- 19 Net income --- --- --- --- 4,958 4,958 - ----------------------------------------------------------------------------------------------------------- Balances at March 2, 1996 11,519 115 13,255 19 9,535 22,924 Exercise of stock options and warrants 194 2 735 --- --- 737 Currency translation adjustment --- --- --- (146) --- (146) Net income --- --- --- --- 633 633 - ----------------------------------------------------------------------------------------------------------- Balances at March 1, 1997 11,713 $117 $13,990 $ (127) $10,168 $24,148 - -----------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 22 CALIFORNIA AMPLIFIER, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED - ---------------------------------------------------------------------------------------------------- MARCH 1, MARCH 2, MARCH 4, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 633 $ 4,958 $ 2,451 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,016 2,693 2,363 Loss on sale of property and equipment 12 12 19 (Income)/loss attributable to non-consolidated subsidiary (140) 100 50 (Increase) decrease in: Accounts receivable (1,865) 1,394 (773) Inventories (1,456) (715) (389) Income tax receivable (806) --- --- Deferred tax asset 400 (400) (200) Prepaid expenses and other assets (313) (229) 284 Increase (decrease) in: Accounts payable (1,094) 755 (1,329) Accrued liabilities (2,731) 1,719 972 - ---------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (5,344) 10,287 3,448 - ---------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of property and equipment (3,420) (3,408) (3,005) Proceeds from note receivable --- 25 105 Payments from (advances to) non-consolidated subsidiary (8) 25 (27) - ---------------------------------------------------------------------------------------------------- Net cash used in investing activities (3,428) (3,358) (2,927) - ---------------------------------------------------------------------------------------------------- Cash flows from financing activities: Repayments under line of credit arrangements --- --- (666) Debt borrowings 608 1,304 1,273 Debt repayments (1,044) (917) (498) Issuances of common stock, net of retirements 736 2,667 285 - ---------------------------------------------------------------------------------------------------- Net cash provided by financing activities 300 3,054 394 - ---------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (8,472) 9,983 915 Cash and cash equivalents at beginning of year 11,637 1,654 739 - ---------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 3,165 $11,637 $ 1,654 - ---------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL California Amplifier, Inc. (the "Company") designs, manufactures and markets a broad line of amplifiers, downconverters, antennas and integrated products for the reception of microwave signals used primarily in conjunction with the delivery of multichannel television. The Company also has a 50% ownership interest in Micro Pulse, Inc. ("Micro Pulse"), a company that designs, manufactures and markets antennas and amplifiers used principally in global positioning systems. Such products are used in surveying applications, vehicle tracking, and marine and airborne navigation. Subsequent to March 1, 1997, the Company acquired additional shares resulting in a 50.5% controlling interest in Micro Pulse. As a result, beginning in fiscal year 1998, the Company's current method of accounting for Micro Pulse using the equity method as presented in the accompanying financial statements will be changed to the consolidation method of accounting. (See Notes 2 and 3). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, California Amplifier s.a.r.l., the Company's subsidiary in France, and Cal Amp FSC, Inc., a foreign sales corporation established for tax purposes. All significant intercompany transactions have been eliminated. The Company's 50% ownership interest in Micro Pulse is accounted for using the equity method. FISCAL YEAR The Company reports results on the basis of a 52/53 week accounting calendar ending on the last Saturday of February or the first Saturday of March. STOCK SPLIT On February 16, 1996, the Board of Directors approved a two-for-one stock split distributed in the form of a stock dividend on March 22, 1996. All per share amounts have been retroactively adjusted to reflect this stock split. REVENUE RECOGNITION Revenue on product sales is recognized at the time of shipment. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF RISK As of March 1, 1997, the Company had cash and cash equivalent balances of $3,165,000 at financial institutions (primarily California United Bank and Smith Barney) which were in excess of federally insured amounts. 24 ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company has established a reserve for potential write-offs relating to noncollectibility of accounts receivable. As of March 1, 1997, and March 2, 1996, the allowance for doubtful accounts was $560,000 and $1,217,000, respectively. In fiscal year 1997, 1996 and 1995, $14,000, $473,000 and $601,000 was charged to expense, respectively. Amounts charged to the allowance account for bad debt write-offs and costs relating to product returns were $671,000, $12,000 and $153,000 in fiscal years 1997, 1996 and 1995, respectively. WARRANTY The Company warrants its products against defects over periods ranging from one to five years. An accrual for estimated future costs relating to products returned under warranty is recorded as an expense when products are shipped. Warranty expense was $206,000, $969,000 and $578,000 in fiscal years 1997, 1996 and 1995, respectively. Amounts charged to accrued warranty for the actual costs of maintaining the Company's warranty program were $806,000, $469,000 and $578,000, in fiscal years 1997, 1996 and 1995, respectively. INVENTORIES Inventories include costs of materials, labor and manufacturing overhead and are stated at the lower of cost (first-in, first-out) or market, and consist of the following (in 000's): March 1, March 2, 1997 1996 - ------------------------------------------------------------------------------- Raw materials $ 2,510 $ 2,480 Work in process 1,568 562 Finished goods 4,122 3,702 - ------------------------------------------------------------------------------- $ 8,200 $ 6,744 - ------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT Property and equipment is stated at cost and consists of the following (in 000's): March 1, March 2, 1997 1996 - ------------------------------------------------------------------------------- Land $ 706 $ - Machinery and equipment 9,125 7,516 Furniture and computers 4,271 3,731 Tooling 3,201 2,620 Leasehold improvements 1,084 580 - ------------------------------------------------------------------------------- 18,387 14,447 Less accumulated depreciation and amortization (10,980) (8,287) - ------------------------------------------------------------------------------- $ 7,407 $ 6,160 - ------------------------------------------------------------------------------- The Company follows the policy of capitalizing expenditures which materially increase asset lives, and charging ordinary maintenance and repairs to operations, as incurred. When assets are sold or disposed of, the cost and related depreciation are removed from the accounts and any resulting gain or loss is included in income. Depreciation and amortization is based upon the estimated useful lives of the related assets using the straight-line method. Useful lives range from two to five years. 25 STATEMENTS OF CASH FLOWS The Company considers all liquid investments with an original maturity of less than three months to be cash equivalents. The Company paid interest of $118,000, $219,000 and $196,000 in fiscal years 1997, 1996 and 1995, respectively. The Company paid income taxes of $839,000, $1,103,000 and $780,000 in fiscal years 1997, 1996 and 1995, respectively. In fiscal year 1996, the Company excluded from the consolidated statements of cash flows the following non-cash transactions: issuance of 100,000 shares of its common stock as part of a $400,000 convertible debt arrangement (see Note 3). NET INCOME PER SHARE Net income per share is based upon the weighted average number of shares outstanding during each of the respective years, including the dilutive effects of stock options and warrants using the treasury stock method. The number of shares used in the computation of net income per share for fiscal years 1997, 1996 and 1995 were increased by 913,000, 996,000 and 466,000 shares, respectively, for the dilutive effects of stock options and warrants. Primary earnings per share were not materially different from fully diluted earnings per share. ACCOUNTING FOR STOCK OPTION STOCK BASED COMPENSATION The Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123) in fiscal 1997. As allowed by SFAS 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 25) and comply with the pro forma disclosure requirements of the new standard (see Note 8). NEW AUTHORITATIVE PRONOUNCEMENTS In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128) and Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" (SFAS 129). SFAS 128 revises and simplifies the computation for earnings per share and requires certain additional disclosures. SFAS 129 requires additional disclosures regarding the Company's capital structure. Both standards will be adopted in fiscal year 1998. Management does not expect the adoption of these standards to have a material effect on the Company's financial position or results of operations. 3. INVESTMENT IN NON-CONSOLIDATED SUBSIDIARY In January 1993, the Company purchased a 50% ownership interest in Micro Pulse for $500,000. Under the terms of the agreement, the Company paid $100,000 in cash to the principal stockholders of Micro Pulse and issued a $400,000 convertible subordinated note bearing interest at 8% due in January 1996. In April 1995, the holders of the note chose to convert the note, and received 100,000 shares of the Company's common stock. Subsequent to March 1, 1997, the Company acquired additional shares resulting in a 50.5% controlling interest in Micro Pulse for forgiveness of $100,000 of debt due from Micro Pulse. 26 The investment in Micro Pulse is accounted for using the equity method of accounting. The investment is increased (reduced) by a credit (charge) to income for 50% of the Micro Pulse income (loss). In addition, the portion of the investment that exceeds 50% of Micro Pulse's net equity is being amortized over ten years. For financial statement presentation purposes, the Company considers all amounts advanced to Micro Pulse as part of its investment. A summary of the activity in the investment for fiscal years 1997, 1996 and 1995 is as follows (in 000's): 1997 1996 1995 - ------------------------------------------------------------------------------- Beginning balance $ 852 $977 $1,000 Net advances (payments) to/from Micro Pulse 8 (25) 27 Amortization of investment in excess of 50% of Micro Pulse net equity (39) (225) (100) 50% of Micro Pulse income 179 125 50 - ------------------------------------------------------------------------------- Ending balance $1,000 $852 $977 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Summary information relating to the results of operations and the financial condition of Micro Pulse for fiscal years 1997, 1996 and 1995 is as follows (in 000's): 1997 1996 1995 - ------------------------------------------------------------------------------- Sales $5,540 3,500 $2,400 Net income 358 250 100 Total assets 2,031 1,100 600 Stockholders' Equity (Deficit) 152 (145) (395) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The Company recognized sales to Micro Pulse of $93,000, $377,000, and $302,000 in fiscal years 1997, 1996, and 1995, respectively. The Company recognized interest income relating to the receivable due from Micro Pulse of $68,000, $75,000 and $78,000 in fiscal years 1997, 1996, and 1995 respectively. The Company recognized interest expense relating to the $400,000 note payable prior to its conversion in April 1995 of $5,000 in fiscal year 1996 and $33,000 in fiscal year 1995. 4. ACCRUED LIABILITIES Accrued liabilities consist of the following (in 000's): March 1, March 2, 1997 1996 - ------------------------------------------------------------------------------- Payroll and related expenses $ 744 $1,547 Warranty 500 1,100 Income taxes --- 987 Other accrued liabilities 684 1,025 - ------------------------------------------------------------------------------- $1,928 $4,659 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 27 5. SHORT-TERM BORROWINGS The Company has a $6.0 million working capital credit facility with a bank. Borrowings outstanding bear interest at the bank's prime rate (8.25% at March 1, 1997) and are secured by substantially all of the Company's assets, excluding the assets secured by other debt arrangements. The credit facility expires on August 4, 1997. At March 1, 1997, no amounts were outstanding under this credit facility, and $6.0 million was available for borrowing. The Company's foreign subsidiary has a $600,000 borrowing facility with a French bank. The borrowings are unsecured and bear interest at rates ranging from 6% to 8%. At March 1, 1997, no amounts were outstanding under the credit arrangement, and $600,000 was available for borrowing. The facility can be withdrawn by the bank at any time. Selected information regarding short-term borrowings for fiscal years 1997, 1996 and 1995 is as follows (in 000's, except percentages): 1997 1996 1995 - ------------------------------------------------------------------------------- Average amount outstanding $ - $ - $ 339 Maximum amount outstanding - - 800 Weighted average interest rate during the period - - 7.75% - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 6. LONG-TERM DEBT Long-term debt consists of the following (in 000's): March 1, March 2, 1997 1996 - ------------------------------------------------------------------------------- Note payable to a bank, secured by equipment, bearing interest at rates ranging from 6.76% to 7.96% payable monthly through November 2000 $1,324 $1,760 Less portion due within one year (799) (993) - ------------------------------------------------------------------------------- $ 525 $ 767 - ------------------------------------------------------------------------------- Annual maturities on long-term debt as of March 1, 1997, are as follows (in 000's): 1998 $ 799 1999 290 2000 134 2001 101 - ------------------------------------------------------------------------------- $1,324 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 28 7. INCOME TAXES The Company accounts for income taxes in accordance with the provisions of the Financial Accounting Standards Board Statement No. 109 "Accounting for Income Taxes" (SFAS No. 109). Under SFAS No. 109, deferred income tax assets or liabilities are computed based on the temporary difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal income tax rate in effect for the year in which the differences are expected to reverse. Deferred income tax expenses or credits are based on changes in the deferred income tax assets or liabilities from period to period. The provision for income taxes for fiscal years 1997, 1996 and 1995 are as follows (in 000's): 1997 1996 1995 - ------------------------------------------------------------------------------- Current - Federal $(175) $2,512 $1,211 - State (31) 443 214 - Foreign 210 125 94 Deferred - Federal 340 (340) (170) - State 60 (60) (30) - ------------------------------------------------------------------------------- $ 404 $2,680 $1,319 - ------------------------------------------------------------------------------- Differences between the provision for income taxes and income taxes computed using the statutory federal income tax rate for fiscal years 1997, 1996 and 1995 are as follows (in 000's): 1997 1996 1995 - ------------------------------------------------------------------------------- Income tax at statutory federal rate (34%) $353 $2,597 $1,282 State income taxes (9.3%), net of federal 62 income tax effect 62 458 226 Foreign taxes 210 125 94 Research and development credit --- (102) (418) Alternative Minimum Tax credit --- (83) --- - ------------------------------------------------------------------------------- Other, net (221) (315) 135 - ------------------------------------------------------------------------------- $404 $2,680 $1,319 The components of the net deferred income tax asset are as follows (in 000's): March 1, March 2, 1997 1996 - ------------------------------------------------------------------------------- Depreciation $ 95 $ (280) Warranties 200 430 Inventory valuation 440 325 Allowance for doubtful accounts 160 420 Other, net (95) 305 - ------------------------------------------------------------------------------- $ 800 $1,200 - ------------------------------------------------------------------------------- 29 8. COMMON STOCK STOCK OPTIONS The Company has one stock option plan for its employees, the 1989 Key Employee Stock Option Plan ("1989 Plan''). Under the 1989 Plan, stock options can be granted at prices not less than 100% of the fair market value at the date of grant. Option grants are exercisable at the discretion of the Compensation Committee, but usually over a four year vesting period. The following table summarizes the option activity for fiscal years 1997, 1996 and 1995 (in 000's except dollar amounts): Weighted Number Average Shares Option Price - ------------------------------------------------------------------------------ Outstanding at February 26, 1994 1,298 $ 1.95 Granted 458 2.32 Exercised (240) .74 Canceled (152) 2.63 - ------------------------------------------------------------------------------ Outstanding at March 4, 1995 1,464 2.24 Granted 562 7.09 Exercised (603) 2.27 Canceled (109) 4.15 - ------------------------------------------------------------------------------ Outstanding at March 2, 1996 1,314 4.83 Granted 330 18.19 Exercised (109) 3.08 Canceled (147) 11.00 - ------------------------------------------------------------------------------ Outstanding at March 1, 1997 1,388 $ 7.49 - ------------------------------------------------------------------------------ The weighted average theoretical value for options granted during the year was $15.01 and $5.66 for fiscal year 1997 and 1996, respectively. The number of common stock options available for grant as of each fiscal year were 912,650 for 1997, 299,400 for 1996, and 381,000 for 1995. On July 19, 1996, the Stockholders approved the proposal to increase the number of shares available to grant by 800,000 shares. Options outstanding at March 1, 1997 and related weighted average price and life information is as follows:
Weighted Total Total Average Weighted Options Weighted Range of Options Remaining Life Average Exercisable Average Exercise Prices Outstanding (Years) Exercise Price (000's) Exercise Price - ---------------------------------------------------------------------------------------------------------- $ 0.69 - $ 0.82 147,300 6.5 $ 0.74 147,300 $ 0.74 $ 1.69 - $ 2.57 268,000 7.3 $ 2.32 85,000 2.35 $ 3.50 - $ 4.88 275,900 7.4 $ 3.72 142,900 3.62 $ 5.53 - $ 9.00 478,850 8.5 $ 7.12 101,150 6.98 $13.60 - $16.25 48,000 8.8 $14.78 8,000 14.05 $21.88 - $26.97 170,000 9.1 $26.97 6,576 21.88 - ---------------------------------------------------------------------------------------------------------- $0.69 - $26.97 1,388,000 7.9 $ 7.49 490,926 $ 3.64
As permitted by SFAS 123, the Company continues to apply the accounting rules of APB 25 governing the recognition of compensation expense from its Stock Option Plans. Such accounting rules measure compensation expense on the first date at which both the number of shares and the exercise price are known. Under the 30 Company's 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 expense is recognized. As options are generally granted at exercise prices not less than the fair market value on the date of grant, no compensation expense is recognized under this accounting treatment in the accompanying statements of operations. The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions: 1997 1996 ----- ----- Expected life (years) 10 10 Dividend yield -- -- The range for interest rates is 5.63% - 7.14%, range for volatility is 70.95% - -77.17%. The estimated stock-based compensation cost calculated using the assumptions indicated totaled $1,863,000 and $404,000 in fiscal year 1997 and fiscal year 1996, respectively. This would result in a pro forma net loss resulting from the increased compensation cost of $485,000 $0.04 per share and pro forma net income of $4,716,000, or $0.39 per share in fiscal year 1997 and fiscal year 1996, respectively. The effect of stock-based compensation on net income for fiscal 1997 and 1996 may not be representative of the effect on pro forma net income in future years because compensation expense related to grants made prior to fiscal 1996 is not considered. 9. COMMITMENTS The Company leases its corporate and manufacturing facility as part of an operating lease through February 2004. The Company pays annual rents of $461,000 through July 2001, at which time the annual rent will increase to $480,000 until February 2004 when the lease expires. The lease agreement also requires the Company to pay all property taxes and any insurance premiums associated with the coverage of the facility. In addition, the Company leases a shipping, finished goods and storage facility as part of an operating lease through February 2004. The Company pays annual rents of $30,000 through October 1998 at which time the annual rent will increase to $32,000. The Company also leases offices in Paris, France; Sao Paulo, Brazil; and Bangkok, Thailand, under certain lease arrangements. In addition, the Company leases equipment used in the manufacturing operation. The following table represents the future minimum rent payments required under all operating leases with terms in excess of one year as of March 1, 1997 (in 000's): Fiscal Year: 1998 $ 598 1999 602 2000 607 2001 610 2002 590 Thereafter 1,205 - ------------------------------------------------------------------------------- $4,212 - ------------------------------------------------------------------------------- Rent expense for fiscal years 1997, 1996 and 1995 was $1,013,000, $1,200,000 and $1,186,000, respectively. 10. MAJOR CUSTOMERS AND FOREIGN SALES INFORMATION The Company operates in a single business segment: the design, manufacture and sale of microwave components and subsystems. In fiscal year 1997, one customer accounted for 11.1% of the Company's sales. In fiscal year 1996, one customer accounted for 13% of the Company's sales, and in fiscal year 1995, no customer accounted for more than 10% of the Company's sales. 31 Sales information by product line, by domestic and foreign sales, and by geographical area are as follows (unaudited in 000's): 1997 1996 1995 - -------------------------------------------------------------------------------- Wireless Cable $ 34,438 $ 43,155 $ 20,965 Satellite Television 14,758 18,058 24,389 - -------------------------------------------------------------------------------- Other 94 377 302 - -------------------------------------------------------------------------------- $ 49,290 $ 61,590 $ 45,656 - -------------------------------------------------------------------------------- Domestic $ 17,070 $ 17,136 $ 20,565 Foreign 32,220 44,454 25,091 - -------------------------------------------------------------------------------- $ 49,290 $ 61,590 $ 45,656 - -------------------------------------------------------------------------------- U.S. & Canada $ 19,025 $ 18,113 $ 20,822 Latin America 8,495 9,673 13,544 Europe 5,265 10,871 2,064 Middle East 2,267 245 2,331 Africa 4,637 3,085 4,546 Asia 8,921 17,343 2,223 Australia 680 2,260 126 - -------------------------------------------------------------------------------- $ 49,290 $ 61,590 $ 45,656 - -------------------------------------------------------------------------------- 11. QUARTERLY FINANCIAL INFORMATION The following summarizes certain quarterly statement of income data for each of the quarters in fiscal years 1997 and 1996 (unaudited in 000's, except percentages and per share data):
First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal 1997 - ------------------------------------------------------------------------------------------------ Sales $ 17,275 $ 11,463 $ 11,702 $ 8,850 $ 49,290 Gross profits 6,043 3,430 3,406 1,601 14,480 Gross margins 35% 29.9% 29.1% 18.1% 29.4% Net income (loss) 1,623 (209) 127 (908) 633 Income (loss) per share $ 0.13 $ (0.02) $ 0.01 $ (0.08) $ 0.05 - ------------------------------------------------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal 1996 - ------------------------------------------------------------------------------------------------ Sales $ 12,665 $ 14,505 $ 16,314 $ 18,106 $ 61,590 Gross profits 4,204 4,876 5,562 6,311 20,953 Gross margins 33.2% 33.6% 34.1% 34.9% 34.0% Net income 852 1,071 1,357 1,678 4,958 Income per share $ .07 $ .09 $ .11 $ .14 $ .41 - ------------------------------------------------------------------------------------------------
32 INDEX TO EXHIBITS 3.1 Certificate of Incorporation of the Registrant, as amended, filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (33-59702) and by this reference is incorporated herein and made a part hereof. 3.1.1 Amendment to Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on September 19, 1996, filed as Exhibit 3.1.1 to the Registrant's Interim Report on Form 10-Q for the period ended August 31, 1996. 3.2 Bylaws of the Registrant, as amended, filed as Exhibit 3.2 to the Registrant's Form 8-K dated February 27, 1992 and by this reference is incorporated herein and made a part hereof. 10.1 1984 Key Employee Stock Option Plan filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (2-87042) and by this reference is incorporated herein and made a part hereof. 10.2 Form of Incentive Stock Option Agreement filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (2-87042) and by this reference is incorporated herein and made a part hereof. 10.3 Form of Nonqualified Stock Option Agreement filed as Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (2-87042) and by this reference is incorporated herein and made a part hereof. 10.4 1989 Key Employee Stock Option Plan filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-8 (33-31427) and by this reference is incorporated herein and made a part hereof. 10.4.1 Amendment No. 1 to the 1989 Key Employee Stock Option Plan filed as Exhibit 4.7 to the Registrant's Registration Statement on Form S-8 (33-36944) and by this reference is incorporated herein and made a part hereof. 10.4.2 Amendment No. 2 to the 1989 Key Employee Stock Option Plan filed as Exhibit 4.8 to the Registrant's Registration Statement on Form S-8 (33-72704) and by this reference is incorporated herein and made a part hereof. 10.4.3 Amendment No. 3 to the 1989 Key Employee Stock Option Plan filed as Exhibit 4.10 to the Registrant's Registration Statement on Form S-8 (33-60879) and by this reference is incorporated herein and made a part hereof. 10.5 Form of Incentive Stock Option Agreement filed as Exhibit 4.6 to the Registrant's Registration Statement on Form S-8 (33-31427) and by this reference is incorporated herein and made a part hereof. 10.6 Form of Nonqualified Stock Option Agreement filed as Exhibit 4.6 to the Registrant's Registration Statement on Form S-8 (33-31427) and by this reference is incorporated herein and made a part hereof. 10.7 Form of Option Agreement for Non-Employee Directors filed as Exhibit 4.9 to the Registrant's Registration Statement on Form S-8 (33-36944) and by this reference is incorporated herein and made a part hereof. 10.8 Letter Agreements regarding sale of the building dated July 18, 1988, filed as an exhibit to Form 8-K, dated February 27, 1989, filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1989 and by this reference is incorporated herein and made a part hereof. 33 10.9 Building Lease and Rider on building between the Registrant and Calle San Pablo Property Co. dated January 31, 1989, filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1989 and by this reference is incorporated herein and made a part hereof. 10.9.1 Amendment of Lease on building between the Registrant and Calle San Pablo Property Co. dated February 9, 1995, filed as an exhibit to this Annual Report on Form 10-K for the fiscal year ended March 4, 1995. 10.10 Form of Indemnity Agreement filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 29, 1988 and by this reference is incorporated herein and made a part hereof. 10.11 Stockholder Rights Plan filed as an exhibit to the Registrant's Form 8-K dated September 5, 1991 and by this reference is incorporated herein and made a part hereof. 10.12 Distribution Agreement between Registrant and Pan Asian Systems, Ltd., dated July 3, 1992 filed as Exhibit 10.17 to the Company's Registration Statement on Form S-1 (33-59702) and by this reference is incorporated herein and made a part hereof. 10.13 Stock Purchase Agreement dated December 31, 1992 by and among Registrant, Peter J. Connolly, Steven G. Ow and Toni Ow, and The Peter J. Connolly Charitable Remainder Unitrust dated June 15, 1992 filed as Exhibit 10.20 to the Company's Registration Statement on Form S-1 (33-59702) and by this reference is incorporated herein and made a part hereof. 10.14 8% Convertible Subordinated Note dated January 20, 1993 by Registrant payable to The Peter J. Connolly Charitable Remainder Unitrust dated June 15, 1992 filed as Exhibit 10.21 to the Registrant's Registration Statement on Form S-1 (33-59702) and by this reference is incorporated herein and made a part hereof. 10.15 8% Convertible Subordinated Note dated January 20, 1993 by Registrant payable to Steven G. Ow and Toni Ow dated June 15, 1992 filed as Exhibit 10.22 to the Registrant's Registration Statement on Form S-1 (33-59702) and by this reference is incorporated herein and made a part hereof. 10.16 Promissory Note dated January 20, 1993 by Micro Pulse Incorporated, payable to Registrant filed as Exhibit 10.23 to the Registrant's Registration statement on Form S-1 (33-59702) and by this reference is incorporated herein and made a part hereof. 10.17 Option Agreement entered into as of February 4, 1993 by and among CAMP Acquisition Corp., Mr. Charles W. Ergen and the Registrant filed as Exhibit 10.24 to the Registrant's Registration Statement on Form S-1 (33-59702) and by this reference is incorporated herein and made a part hereof. 10.18 Promissory Note Agreement between Registrant and California United Bank dated April 5, 1993, filed as Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 27, 1993 and by this reference is incorporated herein and made part hereof. 34 10.19 Change in Terms Agreement between Registrant and California United Bank, dated July 22, 1994, and filed as Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 4, 1995. 10.20 First Amendment to Business Loan Agreement between Registrant and California United Bank, dated July 22, 1994, filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 4, 1995. 10.21 Second Amendment to Business Loan Agreement between Registrant and California United Bank, dated September 13, 1994, filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 4, 1995. 10.22 Business Loan Agreement between Registrant and California United Bank, dated July 26, 1995, filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 2, 1996. 10.23 Promissory Note between Registrant and California United Bank dated July 26, 1995, filed as Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 2, 1996. 10.24 Commercial Security Agreement between Registrant and California United Bank dated July 26, 1995, filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 2, 1996. 10.25 First Amendment to Business Loan Agreement between Registrant and California United Bank, dated July 26, 1995, filed as Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 2, 1996. *10.26 Promissory Note between Registrant and California United Bank dated August 6, 1996, filed as an exhibit to this Annual Report on Form 10-K for the fiscal year ended March 1, 1997. *10.27 Second Amendment to Business Loan Agreement between Registrant and California United Bank, dated August 6, 1996, filed as an exhibit to this Annual Report on Form 10-K for the fiscal year ended March 1, 1997. *10.28 Building Lease on building between the Registrant and The Jennings Bypass Trust, dated September 11, 1996, filed as an exhibit to this Annual Report on Form 10-K for the fiscal year ended March 1, 1997. *10.29 Land Purchase Agreement on land between the Registrant and Rhoda-May A. Dallas Trust, dated February 13, 1996, filed as an exhibit to this Annual Report on Form 10-K for the fiscal year ended March 1, 1997. *27 Financial Data Schedule - ------------------- *Filed herewith 35 EX-10.26 2 PROMISSORY NOTE PROMISSORY NOTE Borrower: California Amplifier, Inc. 460 Calle San Pablo Camarillo, CA 93012 Lender: California United Bank Encino Main Office 16030 Ventura Boulevard Encino, CA 91436 Principal Amount: $6,000,000.00 Initial Rate: 8.250% Date of Note: August 6, 1996 PROMISE TO PAY. California Amplifier, Inc. ("Borrower") promises to pay to California United Bank ("Lender"), or order, in lawful money of the United States of America, the principal amount of Six Million & 00/100 Dollars ($6,000,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in one payment of all outstanding principal plus all accrued unpaid interest on August 4, 1997. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning September 1, 1996, and all subsequent interest payments are due on the same day of each month after that. Interest on this Note is computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs and any late charges, then to any unpaid interest, and any remaining amount to principal. The receipt of any wire transfer of funds, check or other item of payment by the bank shall be immediately applied to conditionally reduce Borrower's obligations, but shall not be considered a payment on account unless such wire transfer is of immediately available federal funds and is made to the appropriate deposit account of Bank or unless and until such check or other item of payment is honored when presented for payment. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the prime rate published on a daily basis in the "Money Rates" Section of the Western Edition of the Wall Street Journal (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day. The Index currently is 8.250% per annum. The interest rate to be applied to the unpaid principal balance of this Note will be at a rate equal to the Index, resulting in an initial rate of 8.250% per annum. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum interest charge of $250.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. (i) Lender in good faith deems itself insecure. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, do one or both of the following: (a) increase the variable interest rate on this Note to 5.000 percentage points over the Index, and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any increased rate). Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. This Note has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, the State of California. Subject to the provisions on arbitration, this Note shall be governed by and construed in accordance with the laws of the State of California. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note may be requested orally by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following party or parties are authorized to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority: Ira Coron, Chairman of the Board; Michael Ferron, Vice President/Finance; and Glenda Blum, Controller. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. PROMISSORY NOTE Page 2 (Continued) ================================================================= Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (e) Lender in good faith deems itself insecure under this Note or any other agreement between Lender and Borrower. ARBITRATION. Lender and Borrower agree that all disputes, claims and controversies between them, whether individual, joint, or class in nature, arising from this Note or otherwise, including without limitation contract and tort disputes, shall be arbitrated pursuant to the Rules of the American Arbitration Association, upon request of either party. No act to take or dispose of any collateral securing this Note shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; invoking a power of sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any collateral securing this Note, including any claim to rescind, reform, or otherwise modify any agreement relating to the collateral securing this Note, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Lender and Borrower agree that in the event of an action for judicial foreclosure pursuant to California Code of Civil Procedure Section 726, or any similar provision in any other state, the commencement of such an action will not constitute a waiver of the right to arbitrate and the court shall refer to arbitration as much of such action, including counterclaims, as lawfully may be referred to arbitration. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this Note shall preclude any party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. BUSINESS LOAN AGREEMENT. Reference is hereby made to that certain Business Loan Agreement, dated as of July 26, 1995, as it may be amended, modified, or replaced, from time to time, for additional terms and conditions. COLLATERAL. This loan is secured by the Collateral as described in that certain Commercial Security Agreement, dated as of July 26, 1995, as it may be amended, modified, or replaced, from time to time, executed by Grantor in favor of Lender. BORROWER'S ACKNOWLEDGMENT. Borrower hereby acknowledges that this Note is an increased renewal of Note numbered 4707 as evidenced by that certain Promissory Note, dated as of July 26, 1995, in the original principal amount of $5,000,000.00, executed by Borrower in favor of Lender. ADDITIONAL MATTERS. Lender reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in Lender's rights and benefits hereunder. In connection therewith, Lender may disclose all documents and information which Lender now or hereafter may have relating to Borrower. GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific default provisions or rights of Lender shall not preclude Lender's right to declare payment of this Note on its demand. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. INTEGRATION; AMENDMENT. This Note and the other written documents and instruments between Borrower and Lender set forth in full the terms of agreement between the parties and are intended as the full, complete and exclusive agreement governing the relationship between the parties. This Note supersedes all prior discussions, promises, representations, warranties, agreements and understandings between the parties. This Note may not be modified or amended, nor may any rights hereunder be waived, except in a writing signed by the party against whom enforcement of the modification, amendment or waiver is sought. No course of dealing between the parties, no usage of trade, and no parol or extrinsic evidence of any nature shall be used or be relevant to supplement, explain or modify any term or provision of this Note or any supplement or amendment hereto. There are no oral agreements or understandings between Borrower and Lender regarding any extension of the maturity of this Note or making any modifications to this Note, or regarding any other matter. MUTUAL WAIVER OF RIGHT TO JURY TRIAL. Lender and Borrower each hereby waive the right to trial by jury in any action or proceeding based upon, arising out of, or in any way relating to: (i) this Note; or (ii) any other present or future instrument or agreement between Lender and Borrower; or (iii) any conduct, acts or omissions of Lender or Borrower or any of their directors, officers, employees, agents, attorneys or any other persons affiliated with Lender or Borrower; in each of the foregoing cases, whether sounding in contract or tort or otherwise. PROMISSORY NOTE Page 3 (Continued) ================================================================= PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: California Amplifier, Inc. X___________________________________________________________ Authorized Officer LENDER: California United Bank By:_________________________________________________________ Authorized Officer ================================================================= Variable Rate. Line of Credit. LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.23 (c) 1996 CFI ProServices, Inc. All rights reserved. [CA-D20 CALAMP.LN C10.OVL] EX-10.27 3 SECOND AMENDMENT TO BUSINESS LOAN AGREEMENT SECOND AMENDMENT TO BUSINESS LOAN AGREEMENT THIS AGREEMENT, dated as of August 6, 1996, is entered into by and between CALIFORNIA AMPLIFIER, INC., a Delaware corporation ("Borrower") and CALIFORNIA UNITED BANK, N.A., a national banking association ("Lender"). RECITALS: A. The Borrower and Lender are parties to a Business Loan Agreement, dated as of July 26, 1995, as amended dated as of March 11, 1996 (collectively the "Agreement"). B. Borrower and Lender have agreed to amend certain terms and conditions of the Agreement in certain respects. C. Borrower and Lender are contemporaneously with this Agreement entering into a Promissory Note which may also amend certain terms of the Business Loan Agreement. AGREEMENT: Borrower and Lender agree as follows: 1. Each of the terms defined in the Agreement, unless defined herein, shall have the same meaning when used herein. 2. The Financial Covenants and Ratios (a) and (f) section of the Agreement is hereby amended in full to read as follows: (a) Effective Tangible Net Worth. (defined as net worth plus subordinated debt, less any intangible assets, and less any amounts due from shareholders, officers and affiliates of Borrower) not at any time less than $18,000,000.00. (f) Capital Expenditures. Borrower shall not, without the prior written consent of Lender, make any new investment in fixed assets in any fiscal year in excess of aggregate of $5,000,000.00 3. The subsection titled Change in Ownership of the Agreement is hereby deleted in full without substitution therefor. 4. Except as specifically amended above, the Agreement shall remain in full force and effect and is hereby ratified and confirmed. This Amendment and the Amendment shall be read together, as one document. 1 5. Borrower represents and warrants as follows: (a) Each of the representations and warranties contained in the Agreement, as amended hereby, is hereby reaffirmed as of the date hereof; (b) The execution, delivery and performance of the Amendment and any note required hereunder are within the Borrower's powers, have been duly authorized by all necessary action, have received all necessary governmental approvals, if any, and do note contravene any law or any contractual restriction binding on Borrower; and (c) No event has occurred and is continuing or would result from this Amendment that constitutes an Event of Default under the Agreement, or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. WITNESS the due execution hereof as of the date first above written. CALIFORNIA AMPLIFIER, INC. By:______________________________________ Michael Ferron, Vice President/Finance CALIFORNIA UNITED BANK, N.A. By:______________________________________ Karen Brown, Vice President 2 EX-10.28 4 BUILDING LEASE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET (Do not use this form for Multi-Tenant Property) 1. Basic Provisions ("Basic Provisions") 1.1 Parties: This Lease (Lease"), dated for reference purposes only, September 11, 1996, is made by and between The Jennings Bypass Trust (''Lessor") and California Amplifier, Inc., 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 by the street address of 461 Calle San Pablo located in the County of Ventura, State of California and generally described as (describe briefly the nature of the property) an approximate 24,844 sq. ft. CTU industrial building on approximately 39,639 sq. ft. of MI zoned land. ("Premises"). (See Paragraph 2 for further provisions.) 1.3 Term Seven (7) years and Four (4)months("Original Term") commencing November 1, 1996 ("Commencement Date") and ending February 28, 2004 ("Expiration Date"). (See Paragraph 3 for further provisions.) 1.4 Early Possession: Upon lease execution ("Early Possession Date"). See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 Base Rent: $ 8, 898 .00 per month ("Base Rent"), payable on the 1st. day of each month commencing November 1, 1996 (See Paragraph 4 for further provisions.) X If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 Base Rent Paid upon Execution $ 8,898.00 as Base Rent for the period November 1 to November 30, 1996 1.7 Security Deposit: $9,000.00 (''Security Deposit"). (See Paragraph 5 for further provisions.) 1.8 Permitted Use: microwave telecommunications manufacturing and warehousing and related administrative uses. (See Paragraph 6 for further provisions.) 1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated herein. (See Paragraph 8 for further provisions) 1.10 Real Estate Brokers: The following real estate brokers (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): CB Commercial Real Estate Group, Inc. represents__ Lessor exclusively ("Lessor's Broker"); __ both lessor and Lessee, and represents ___ Lessee exclusively ("Lessee's Broker"); __both Lessee and Lessor. (See Paragraph 15 for further provisions.) 1.11 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by ("Guarantor"). (See Paragraph 37 for further provisions.) 1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of Paragraphs 1.6 through 52 and Exhibits "A" Building site plan all of which constitute a part of this Lease 2. Premises. 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 in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 Condition. Lessor shall deliver the Premises to Lessee clean and tree of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating, and loading doors, it any, in the Premises, other than those constructed by Lessee, shall be in good operating condition PAGE 17 on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessors expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within thirty (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 Compliance with Covenants, Restrictions and Building Code. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement 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. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify me 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 Commencement Date, correction of that non compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems security, environmental aspects, compliance with Applicable Law as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 Lessee Prior Owner/Occupant. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 3. Term. 3.1 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, however, (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 Delay In Possession. If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date, if one is specified in Paragraph 14, or, if no Early Possession Date is specified by the Commencement Date Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within PAGE 18 ten (10) days thereafter, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder; provided, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, it any, 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 haw enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent. 4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, 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 under the terms of this Lease Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 17 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 131), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys fees) which Lessor may utter 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 moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, or Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. Use. 6.1 Use. Lessee shall use and occupy the Premises only for the purpose set forth in Paragraph 1 8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical material or waste whose presence, nature, quantity and/or PAGE 19 intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor s prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee s giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises {such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement report, notice, registration, application, permit business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (c) Indemnification. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and an loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or PAGE 20 earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substance's or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 Lessee's Compliance with Law. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Law", which term is used in this Lease to include all laws, rules, regulations, ordinances, directives. covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and Information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a) 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 be Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. Maintenance; Repairs; Utility Installation: Trade Fixtures and Alterations. 7.1 Lessee's Obligations (a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to compliance with covenants, etc.), 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation), Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, structural and non-structural (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing. All equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic PAGE 21 fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, 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, about, or adjacent to the Premises. 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 for the maintenance, security and/or monitoring of, the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. If Lessee occupies the Premises for seven (7) years or more, Lessor may require Lessee to repaint the exterior of the buildings on the Premises as reasonably required, but not more frequently than once every seven (7) years. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain any, contracts with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) tire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. 7.2 Lessors Obligations. Except for the warranties and agreements of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (relating to condemnation of the Premises), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, whether structural or non structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. 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. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of, any needed repairs. 7.3 Utility Installation; Trade Fixtures; Alterations. (a) Definitions; Consent Required. The term "Utility Installation" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, 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 as defined in Paragraph 74(a). Lessee shall not make any PAGE 22 Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent Lessee may, however, make nonstructural Utility Installations to the interior of the Premises (excluding the roof), 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 the term of this Lease as extended does not exceed S25,000. (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 proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent. shall be deemed conditioned upon: (i) Lessee s acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications thereof. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 36 hereof. (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, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. It Lessor shall require, Lessee shall furnish to Lessor a security bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 Ownership; Removal; Surrender; and Restoration. (a) Ownership. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) Removal. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of PAGE 23 this Lease, notwithstanding their installation may have been consented to by Lessor. 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 of Lessor. (c) Surrender/Restoration. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered shall include the Utility installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore me Premises per this Lease. 8. Insurance' Indemnity. 8.1 Payment For Insurance. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $1,000,000 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 within ten (10) days following receipt of an invoice for any amount due. 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injure, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried By Lessor. In the event Lessor is the Insuring Party, Lessor shall also maintain liability insurance described in Paragraph 8.21a), 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 during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ( Lender(s) "), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of PAGE 24 the Premises, as the same shall exist from time to time, or the amount required by Lenders but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations 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 (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance 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 deducible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1 (c) (b) Rental Value. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). 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 rental revenues from the date of any such loss. Said insurance shall1 contain as agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee for the next twelve (12) month period. Lessee shall be liable for any deducible amount in the event of such loss (c) Adjacent Premises. If the Premises are part of a larger building, or if the Premises are part 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. (d) Tenant's Improvements. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility installations unless me item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessors option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property. Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. 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 or the restoration of Lessee Owned Alterations and Utility Installations Lessee shall be the in insuring Party with respect PAGE 25 to the insurance required by this Paragraph 8.4 and shall provide Lessor wit written evidence that such insurance is in force. 8.5 Insurance Policies. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide". Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the evidence and amounts of such insurance with the insiders and loss payable clauses as required by this Lease. No such policy shall be cancelable or subject to modification except after Thirty (30) days upon 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. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor ( "Waiving Party" ) each hereby release and relieve the other and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 Indemnity. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or 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, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act PAGE 26 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. 9. Damage and 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, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "Insured Loss" shall mean damage or destruction to improvements on the Premises other than Lessee Owned Alterations and Utility Installations, 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 re-build the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence of discovery or a condition involving the presence of, or a combination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 Partial Damage-Insured Loss. If a 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 the 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, the shortage in proceeds 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 therefor. 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 Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such PAGE 27 case Lessor does not so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 Partial Damage-Uninsured Loss. If 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 and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement5 from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said 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 and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, it a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 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, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of me time provided in such option for its exercise, whichever is ear1ier ("Exercise Period"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) PAGE 28 days after the expiration of The Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of damage described in Paragraph 9.2 (Partial Damage-Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b) ), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement or Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may at any time prior to the commencement of such repair or restoration give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice this Lease shall continue in full force and effect. "Commence" as used in this Paragraph 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 Hazardous Substance Conditions. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000 whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000 whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed twelve months. PAGE 29 9.8 Termination-Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments 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 under the terms of this Lease. 9.9 Waive 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 (a) Payment of Taxes. Lessee shall pay the Real Property Taxes as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to The delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of The term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) Advance Payment. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either (i) in a lump sum amount equal to the installment due at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of The Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due Lessee shall pay to Lessor, upon lessor's 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 the obligations of Lessee under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 10.1 (a), at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5. 10.2 Definition of "Real Property Taxes". As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state of federal government or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom. and/or PAGE 30 Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, to execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 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 determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 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 contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1 (b). 11. Utilities. Lessee shall pay for all water gas heat, light, 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 a11 charges jointly metered with other premises. 12. Assignment and Subletting 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and sublet to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger sale acquisition, financing, refinancing, 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 as hereinafter defined by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of the execution by Lessor 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, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net Worth of Lessor purposes of this Lease shall be the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1 (c), or a non-curable Breach without the necessity of any notice and grace period. PAGE 31 If Lessor elects to treat such unconsented to assignment or subletting as a non-curable Breach, Lessor shall have the right to either: (i) terminate this Lease or (ii) upon thirty (30) days written notice (Lessor's Notice ), increase the monthly Base Rent to his market rental value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further in the event of such Breach and market value adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lessee being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition),or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. 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 Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease w any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the current monthly Base Rent, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. PAGE 32 (f) Any assignee of, or sublessee under this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment 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 in writing. (g) The occurrence of a transaction described in Paragraph 12.1 ( C) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased to an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the amount required to establish such Security Deposit a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or working may require that the amount and adjustment structure of the rent payable under this Lease be adjusted to what is then the market value and/or adjustment structure for property similar to the Premises as then constituted. 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 rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee s obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sub ease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublease, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee. upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee 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. PAGE 33 13.1 Default; Breach. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost o such services and costs in said notice as rent due and payable to cure said Default. A "Default" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3 (a) The vacating of the Premises without the intention to reoccupy same. or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, it applicable) of (i) compliance with applicable law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a),(b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee, provided, however, that 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 of this Lease by Lessee if Lessee commence such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. 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 PAGE 34 applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a guarantor. (ii) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative 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 affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys fees, and that portion of the leasing commission paid by Lessor 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 prior sentence shall be computed by discounting such amount at the discount rate of the federal Reserve Bank of San Francisco at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee s Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. 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 therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not PAGE 35 previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, 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 statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee s right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture in Event of Breach. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions", shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor of the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the forms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In PAGE 36 the event that a late charge is payable hereunder whether or not collected, for more (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises 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 after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the 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 the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be me property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages, provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority Lessee shall be responsible for the payment of any amount in excess of which net severance damages required to complete such repair 15. Broker's Fee. 15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this Lease. 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written, agreement between Lessor and said Brokers (or in the event there is no separate written agreement between Lessor and said Brokers, the sum of $42, 669.92) for brokerage services rendered by said Brokers to Lessor in this transaction. PAGE 37 15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor further agrees that (a) if Lessee exercises any Option (as defined in Paragraph 391) or any Option subsequently granted which is substantially similar to an Option granted to Lessee in this Lease, or (b) if Lessee acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired had an Option herein granted to Lessee been exercised, or (c) if Lessee remains in Possession of the Premises, with the consent of Lessor, after the expiration of the term of this Lease after having failed to exercise an Option, or (d) if said Brokers are the procuring cause of any other lease or sale entered into between the Parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, or (e) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then as to any of said transactions, Lessor shall pay said Brokers a fee in accordance with the schedule of said Brokers in effect at the time of the execution of this Lease. 15.4 Any buyer or transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a third party beneficiary of the provisions of this Paragraph 15 to the extent of its interest in any commission arising from this Lease and may enforce that right directly against Lessor and its successors. 15.5 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses attorney's fees reasonably incurred with respect thereto. 15.6 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10. 16. Tenancy Statement. 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 a statement 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, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchase in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, 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 in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in PAGE 38 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. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Interest on Past Due Obligations. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13 4. 20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. No Prior or Other Agreement; 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. 23. Notices 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail. with postage prepaid, or by facsimile transmission, 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 notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given Twenty-tour (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If PAGE 39 notice is received on a Sunday or 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 of any other term, covenant or condition hereof. Lessors consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions 29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties. their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 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 by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor s default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for which purpose notice of Lessor s default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee. this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the document on or recordation thereof. PAGE 40 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 of sets 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 assurance (a "non-disturbance agreement) from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents: provided however, that, upon written request from Lessor or a Lender in connection with a sale, financing or re-financing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein 31. Attorney's 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) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's 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 attorney's fee award shall not be computed in accordance with any court tee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney s tees, costs and expenses incurred in the 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 or to the building of which they are a part, as Lessor may reasonably deem necessary Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent 34. Signs. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not PAGE 41 on the roof such signs as are reasonably required to advertise Lessee's own business The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance Repairs. Utility Installations, Trade Fixtures and Alterations) Unless otherwise expressly agreed herein Lessor reserves all rights to the use of the root and the right to install, and all revenues from the installation of, such advertising signs on the Premises Including the root, as do not unreasonably interfere with the conduct of Lessee's business 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate In the Premises. provided, however, Lessor shall, In the event of any such surrender. termination or cancellation. have the option to continue any one of all of any existing sub-tenancies Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest shall constitute Lessor's election to have such event constitute the termination of such interest 36. Consents. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party's 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, attorney's' engineers' or other consultants fees) incurred in the consideration of, or response to. a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request Except as otherwise provided, any unused portion of said deposit shall be refunded to Lessee without interest Lessor's consent to any act. assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default o Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the lime of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. Guarantor. 37.1 If there are to be any Guarantors of this Lease per paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as Lessee under this Lease. including but not limited to the obligation to provide the Tenancy Statement and information called for by Paragraph 16. 37.2 It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the PAGE 42 party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and including in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or /d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, condition and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. Options. 39.1 Definition. As used in this Paragraph 39 the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase 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 named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 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 to extend or renew this Lease have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option notwithstanding any provision in the grant of Option to the contrary (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee) or (iii) during the time Lessee is in Breach of this Lease or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1 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) All rights of Lessee under the provisions of 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 during the term of this Lease (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee) or (ii) Lessor gives b Lessee three or more notices of Default under Paragraph 13.1 during any twelve month period whether PAGE 43 or not the Defaults are cured or (iii) if Lessee commits a Breach of this Lease. 40. Multiple Buildings. If the Premises are part of a group of buildings controlled by Lessor Lessee agrees that it will abide by keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management safety care and cleanliness of the grounds the parking and unloading of vehicles and the preservation of good order as well as for the convenience other occupants or tenants of such other buildings and their invitees, 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 or joinder 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 any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. Authority. If either Party hereto is a corporation trust or general or limited partnership each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lease is a corporation trust or partnership Lessee shall within thirty (30) days after request by Lessor deliver to Lessor evidence satisfactory to Lessor of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Offer. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee this Lease is not intended to be binding until executed by all Parties hereto. 47. Amendments. This Lease may be modified only in writing signed by the parties in interest at the time of the modification The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional insurance company or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which me Premises are a part. PAGE 44 48. Multiple Parties. Except as otherwise expressly provided herein if more than one person or entity is named herein as either Lessor or Lessee the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO THE PARTIES HEREBY AGREE THAT AT THE TIME THIS LEASE IS EXECUTED THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL FURTHER EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS STORAGE TANKS OR HAZARDOUS SUBSTANCES NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY LEGAL EFFECT OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. Executed at Camarillo, CA Executed at Camarillo, CA on 9/17/96 on 9/16/96 by LESSOR: The Jennings Bypass Trust by LESSEE: California Amplifier, Inc. By Christine Olson By Michael R. Ferron Name Printed: Christine Olson Name Printed: Michael R. Ferron Title Trustee of the Jennings Bypass Trust Title C.F.O. Address 2368 Solano Dr. Address 460 Calle San Pablo Camarillo, CA 93012 Camarillo, CA 93012 Tel. No. 805-987-6394 Fax 805/484-8174 Tel. No. 805-987-9000 Fax 805/987-2655 NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213)687-6777. Fax No. (213)687-8616 Copyright 1990- By American Industrial Real Estate Association. All rights reserved. No part of these works may be reproduced in any form without permission in writing. Form 204N-3/90 ADDENDUM TO THAT STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET DATED SEPTEMBER 11, 1996 BY AND BETWEEN THE JENNINGS BYPASS TRUST AS LESSOR AND CALIFORNIA AMPLIFIER, INC., A DELAWARE CORPORATION AS LESSEE FOR THAT CERTAIN PROPERTY COMMONLY KNOWN AS 461 CALLE SAN PABLO, CAMARILLO, CALIFORNIA. 1.6 BASE RENT: The Base Rent for the initial lease term shall be adjusted on the following schedule: PAGE 45 November 1, 1996 - October 31, 1998 - $ 8,898/month. November 1, 1998 - October 31, 2000 - $ 9,378/month. November 1, 2000 - October 31, 2002 - $ 9,885/month. November 1, 2002 - February 29, 2004 - $10,419/month. 49. RENT ABATEMENT: If Lessee is not then in default of any of its obligations under this Lease, Lessee shall be conditionally excused from paying rent for the months of December 1996, December 1997, and December 1998. If at any time thereafter Lessee is in default of any of the provisions of this lease, Lessee shall forthwith pay the rental conditionally excused prior to the date of such default. 50. CONDITIONS OF PREMISES: Lessor, at Lessor's sole cost and expense, shall be responsible for maintenance of roof, foundation, and structure for the initial thirty-six (36) months of the lease term. Lessee shall receive premises in "As Is" condition and shall be responsible for building cleanup, at Lessee's sole cost of expense. Paragraph 2.2 titled CONDITION, shall not apply at the commencement date of this lease. 51. HAZARDOUS MATERIALS: As in any real estate transaction, it is recommended that you consult with a professional such as a civil engineer, industrial hygienist or other person, with experience in evaluating the condition of the property including the possible presence of asbestos, hazardous materials and underground storage tanks. Owner agrees to disclose to Broker and to prospective purchasers and tenants any and all information which Owner actually has regarding present and future zoning and environmental matters affecting the Property and regarding the condition of the Property including, but not limited to, structural, mechanical, and soils conditions, the presence and location of contaminated substances, and underground storage tanks, in, on or about the Property. Broker is authorized to disclose any such information to prospective purchasers or tenants. 52. ADA: Lessee shall, at Lessee's sole expense, take such steps as may be necessary to comply with the Americans With Disabilities Act (the ADA), a Federal law codified at 42 USC Section 1210 et seq. INITIALS INITIALS EXHIBIT A [FLOOR PLAN OF BUILDING AND PARKING AREA] INITIALS PAGE 46 EX-10.29 5 LAND PURCHASE AGREEMENT STANDARD OFFER, AGREEMENT AND ESCROW INSTRUCTIONS FOR PURCHASE OF REAL ESTATE (Non-Residential) American Industrial Real Estate Association February 13, 1996 (Date for Reference Purposes) 1. BUYER. 1.1 California Amplifier, Inc., a California Corporation (the "Buyer")hereby offers to purchase the real property, hereinafter described, from the owner thereof (the "Seller") (collectively, the "Parties" or individually, a "Party"), through an escrow (the "Escrow") to close on 45 days from the Date of Agreement (the "Expected Closing Date") to be held by: Continental Lawyers Title Company (the "Escrow Holder") whose address is 751 Daily Drive, Suite 100, Camarillo, CA 93010. Phone No. (805) 484-2701, Facsimile No.(805) 388-3993, upon the terms and conditions set forth in this agreement (the "Agreement"). Buyer shall have the right to assign Buyer's rights hereunder, but any such assignment shall not relieve Buyer of Buyer's obligations herein unless the Seller expressly releases Buyer. 1.2 The term "Date of Agreement as used herein shall be the date when by execution and delivery (as defined in paragraph 20.2) of this document or a subsequent counter-offer thereto, Buyer and Seller have reached agreement in writing whereby Seller agrees to sell, and Buyer agrees to purchase, the Property upon terms accepted by both Parties. 2. PROPERTY. 2.1 The real property (the "Property") that is the subject of this offer consists of (insert a brief physical description) an approximately 3.05 acre parcel zoned M1 is located in the City of Camarillo County of Ventura, State of California, is commonly known by the street address of NE corner of Calle San Pablo and Pleasant Valley Road and is legally described as: to be supplied in escrow. 2.2 If the legal description of the Property is not complete or is inaccurate, this Agreement shall not be invalid and the legal description shall be completed or corrected to meet the requirements of Continental Lawyers Title Company (the "Title Company") which Title Company shall issue the title policy hereinafter described. 2.3 The Property includes, at no additional cost to Buyer, the permanent improvements thereon, including those items which the law of the state in which the Property is located provides is part of the Property, as well as the following items, if any, owned by Seller and presently located in the Property: electrical distribution systems (power panels, buss ducting, conduits, disconnects, lighting fixtures), telephone distribution systems (lines, jacks and connections), space heaters, air conditioning equipment, air lines, fire sprinkler systems, security systems, carpets, window coverings, wall coverings and (collectively, the "Improvements"). 2.4 If the Property is located in the State of California, the Broker(s) is/are required under the Alquist-Priolo Special Studies Zones Act, to disclose to a prospective purchaser of real property whether the property being purchased is located within a delineated special studies zone (a zone that encompasses a potentially or recently active trace of an earthquake fault that is deemed by the State Geologist to be sufficiently active and well defined enough to constitute a potential hazard to structures from surface faulting or fault (creep). If the Property is located within such a special studies zone, its development may require a geologic report from a state registered geologist. In accordance with such law, the Broker(s) hereby inform(s) Buyer that the Property: X (a) Is not within such a special studies zone (b) Is within such a special studies zone. 2.5 If (1) the Property is located in the State of California, (2) the Improvements were constructed prior to 1975, and (3) the PAGE 1 Improvements include structures with (i) pre-cast (e.g., tilt-up) concrete or reinforced masonry walls together with wood frame floors or roofs or (ii) unreinforced masonry walls, California law requires that Seller or Seller's Broker provide Buyer with a copy of The Commercial Property Owner's Guide to Earthquake Safety (the "Booklet") published by the California Seismic Safety Commission. Seller and Seller's Broker hereby inform Buyer that the Property: (a) meets the foregoing requirements, and Seller and Seller's Broker are required to provide Buyer with a copy of the Booklet. Seller or Seller's Broker shall, within five (5) business days of the Date of Agreement, deliver to Buyer a copy of the Booklet and a completed "Commercial Property Earthquake Weakness. Disclosure Report" contained in the Booklet duly executed by Seller. Within five (5) business days of Buyer's receipt of said Disclosure Report, Buyer shall deliver a duly countersigned copy of the same to Escrow Holder, with a copy to Seller and Seller's Broker. Escrow Holder is hereby instructed that the Escrow shall not close unless and until Escrow Holder has received the Disclosure Report duly signed by both Seller and Buyer. X (b) does not meet the foregoing requirements requiring the delivery of the Booklet 3. PURCHASE PRICE. 3.1 The purchase price (the "Purchase Price") to be paid by Buyer to Seller for the Property shall be $ 697, 500.00, payable as follows: -------- -------- Initials Initials (a) Cash down payment, including the Deposit as defined in paragraph 4.3 $697,500.00 (or if an all cash transaction, the Purchase Price) Total Purchase Price: $697,500.00 3.2 If an Existing Deed of Trust permits the beneficiary thereof to require payment of a transfer fee as a condition to the transfer of the Property subject to such Existing Deed of Trust, Buyer agrees to pay transfer fees and costs of up to one and one-half percent (1-1/2%) of the unpaid principal balance of the applicable Existing Note. 4. DEPOSITS. 4.1 Buyer hereby delivers a check in the sum of $10,000.00 payable to Continental Lawyers Title Company to be (check applicable box) forthwith deposited in the payee's trust account, X held uncashed until the Date of Agreement. When cashed, the check shall be deposited into the payee's trust account to be applied toward the Purchase Price of the Property at the Closing, as defined in paragraph 8.3. Should Buyer and Seller not enter into an agreement for purchase and sale, Buyer's check or funds shall, upon request by Buyer, be promptly returned to Buyer. 4.2 Within five (5) business days after the Day of Agreement, Buyer shall deposit with Escrow Holder the additional sum of $ -0- to be applied to the Purchase Price at the Closing. 4.3 The funds deposited with Escrow Holder by or on behalf of Buyer under paragraphs 4.1 and 4.2, above (collectively the "Deposit"), shall be deposited by Escrow Holder in such State or Federally chartered PAGE 2 bank as Buyer may select and in such interest-bearing account or accounts as Escrow Holder or Broker(s) deem appropriate and consistent with the timing requirements of this transaction. The interest therefrom shall accrue to the benefit of Buyer, who hereby acknowledges that there may be penalties or interest forfeitures if the applicable instrument is redeemed prior to its specified maturity. Buyer's Federal Tax Identification Number is: to be supplied 7. REAL ESTATE BROKERS. 7.1 The following real estate broker(s) (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the parties (check applicable boxes): X Equity Com'l R . E . Services represents Seller exclusively ("SELLER'S BROKER") X DAUM Com'l R . E . Services represents Buyer exclusively ("BUYER'S BROKER"); or represents both Seller and Buyer ("DUAL AGENCY"). (Also see Paragraph 26 ) (the "Broker(s)"), all such named Broker(s) being the procuring cause(s) of this Agreement. See paragraph 26 for Disclosures Regarding the Nature of a Real Estate Agency Relationship. Buyer shall use the services of Buyer's Broker exclusively in connection with any and all negotiations and offers with respect to the property described in paragraph 2.1 for a period of one year from the date above. 7.2 Buyer and Seller each represent and warrant to the other that he/she/it has had no dealings with any person, firm, broker or finder in connection with the negotiation of this Agreement and/or the consummation of the purchase and sale contemplated herein, other than the Broker(s) named in paragraph 7.1, and no broker or other person, firm or entity, other than said Broker(s) is/are entitled to any commission or finder's fee in connection with this transaction as the result of any dealings or acts of such Party. Buyer and Seller do each hereby agree to indemnify, defend, protect and hold the other harmless from and against any costs, expenses or liability for compensation, commission or charges which may be claimed by any broker, finder or other similar party, other than said named Broker(s) by reason of any dealings or act of the indemnifying Party. 8. ESCROW AND CLOSING. 8.1 Upon acceptance hereof by Seller, this Agreement, including any counter-offers incorporated herein by the Parties, shall constitute not only the agreement of purchase and sale between Buyer and Seller, but also instructions to Escrow Holder for the consummation of the Agreement through the Escrow. Escrow Holder shall not prepare any further escrow instructions restating or amending this Agreement unless specifically so instructed by the Parties of a Broker herein. 8.2 Escrow Holder is hereby authorized and instructed to conduct the Escrow in accordance with this Agreement, applicable law, custom and practice of the community in which Escrow Holder is located, including any reporting requirements of the Internal Revenue Code. In the event of a conflict between the law of the state where the Property is located and the law of the state where the Escrow Holder is located, the law of the state where the Property is located shall prevail. 8.3 Subject to satisfaction of the contingencies herein described, Escrow Holder shall close this escrow (the "Closing") by recording the grant deed and other documents required to be recorded and by disbursing the funds and documents in accordance with this Agreement. 8.4 If this transaction is terminated for non-satisfaction and non-waiver of a Buyer's Contingency, as defined in paragraph 9.4, then neither of the Parties shall thereafter have any liability to the other under this Agreement, except to the extent of the breach of any affirmative covenant or warranty in this Agreement that may have been involved. In the event of such termination, Buyer shall be promptly refunded all funds deposited by or on behalf of Buyer with a Broker, Escrow Holder or Seller, less only Title Company and Escrow Holder cancellation fees and costs, all of which shall be Buyer's obligation. PAGE 3 8.5 The Closing shall occur on the Expected Closing Date, or as soon thereafter as the Escrow is in condition for Closing; provided, however, that if the Closing does not occur by the Expected Closing Date and the Expected Closing Date is not extended by mutual instructions of the Parties, a Party hereto not then in default under this Agreement may notify the other Party, Escrow Holder, and Broker(s), in writing that, unless the Closing occurs within five (5) business days following said notice, the Escrow and this Agreement shall be deemed terminated without further notice or instructions. -------- -------- Initials Initials 8.6 Should the Closing not occur during said five (5) day period, this Agreement and Escrow shall be deemed terminated and Escrow Holder shall forthwith return all monies and documents, less only Escrow Holder's reasonable fees and expenses, to the Party who deposited them. Such Party shall indemnify and hold Escrow Holder harmless in connection with such return. However, no refunds or documents shall be returned to a party claimed by written notice to Escrow Holder to be in default under this Agreement. 8.7 Except as otherwise provided herein, the termination of Escrow and this Agreement and/or the return of deposited funds or documents shall not relieve or release either Buyer or Seller from any obligation to pay Escrow Holder's fees and costs or constitute a waiver, release or discharge of any breach or default that has occurred in the performance of the obligations, agreements, covenants or warranties contained herein. 8.8 If this Agreement terminates for any reason other than Seller's breach or default, then at Seller's request, and as a condition to the return of Buyer's deposit, Buyer shall within five (5) days after written request deliver to Seller, at no charge, copies of all surveys, engineering studies, soil reports, maps, master plans, feasibility studies and other similar items prepared by or for Buyer that pertain to the Property. 9. CONTINGENCIES TO CLOSING. 9.1 The Closing of this transaction is contingent upon the satisfaction or waiver of the following contingencies: (a) Disclosure. Buyer's receipt and written approval, within ten (10) days after delivery to Buyer, of a completed Property Information Sheet (the "Property Information Sheet"), concerning the Property, duly executed by or on behalf of Seller in the current form or equivalent to that published by the American Industrial Real Estate Association (the "A. I .R.") . Seller shall provide Buyer with the Property Information Sheet within ten (10) days following the Date of Agreement. See also paragraph 2.5 for possible additional disclosure and contingency regarding a "Commercial Property Earthquake Weakness Disclosure Report." (b) Physical Inspection. Buyer's written approval, within ten (10) days following the later of the Date of Agreement or receipt by Buyer of the Property Information Sheet, of an inspection by Buyer, at Buyer's expense. of the physical aspects of the Property. (c) Hazardous Substance Conditions Report. Buyer's written approval, within thirty (30) days following the later of the Date of Agreement or receipt by Buyer of the Property Information Sheet, of a Hazardous Substance Conditions Report concerning the Property and relevant adjoining properties. Such report will be obtained at Buyer's direction and expense. A "Hazardous Substance" for purposes of this Agreement is defined as any substance whose nature and/or quantity of existence, use, manufacture, disposal or effect, render it subject to PAGE 4 Federal, state or local regulation investigation, remediation or removal as potentially injurious to public health or welfare. A "Hazardous Substance Condition" for purposes of this Agreement is defined as the existence on, under or relevantly adjacent to the Property of a Hazardous Substance that would require remediation and/or removal under applicable Federal, state or local law. (d) Soil Inspection. Buyer's written approval, within thirty (30) days after the later of the Date of Agreement or receipt by Buyer of the Property Information Sheet, of a soil test report concerning the Property. Said report shall be obtained at Buyer's direction and expense. Seller shall promptly provide to Buyer copies of any existing soils reports that Seller may have. (e) Governmental Approvals. Buyer's receipt, within fifteen (15) days of the Date of Agreement, of all approvals and permits from governmental agencies or departments which have or may have jurisdiction over the Property which Buyer deems necessary or desirable in connection with its intended use of the Property, including, but not limited to, permits and approvals required with respect to zoning, planning! building and safety, fire, police, handicapped access, transportation and environmental matters. Buyer's failure to deliver to Escrow Holder and Seller written notice terminating this Agreement prior to the expiration of said fifteen (15) day period as a result of Buyer's failure to obtain such approvals and permits shall be conclusively deemed to be Buyer's waiver of this condition to Buyer's obligations under this Agreement. (f) Condition of Title. Buyer's written approval of a current preliminary title report concerning the Property (the "PTR") issued by the Title Company, as well as all documents (the "Underlying Documents") referred to in the PTR, and the issuance by the Title Company of the title policy described in 10.1. Seller shall cause the PTR and all Underlying Documents to be delivered to Buyer promptly after the Date of Agreement. Buyer's approval is to be given within ten (10) days after receipt of said PTR and legible copies of all Underlying Documents. The disapproval by Buyer of any monetary encumbrance, which by the terms of this Agreement is not to remain against the Property after the Closing, shall not be considered a failure of this condition, as Seller shall have the obligation, at Seller's expense, to satisfy and remove such disapproved monetary encumbrance at or before the Closing. (g) Survey. Buyer's written approval, within thirty (30) days after receipt of the PTR and Underlying Documents, of an ALTA title supplement based upon a survey prepared to American Land Title Association (the "ALTA") standards for an owner's policy by a licensed surveyor, showing the legal description and boundary lines of the Property, any easements of record, and any improvements, poles structures and things located within ten (10) feet either side of the Property boundary lines. The survey shall be prepared at Buyer's direction and expense. If Buyer has obtained a survey and approved the ALTA title supplement, Buyer may elect within the period allowed for Buyer's approval of a survey to have an ALTA extended coverage owner's form of title policy, in which event Buyer shall pay any additional premium attributable thereto. (h) Existing Leases and Tenancy Statements. Buyer's written approval, within ten (10) days after receipt of legible copies of all leases, subleases or rental arrangements ((collectively the "Existing Leases") affecting the Property, and a statement (the "Tenancy Statement") in the latest form or equivalent to that published by the A.L.R., executed by Seller and each tenant and subtenant of the Property. Seller shall use its best efforts to provide Buyer with said Existing Leases and Tenancy Statements promptly after the Date of Agreement. -------- -------- Initials Initials PAGE 5 (i) Other Agreements. Buyer's written approval, within ten (10) days after receipt, of a copy of any other agreements ("Other Agreements") known to Seller that will affect the Property beyond the Closing. Seller shall cause said copies to be delivered to Buyer promptly after the Date of Agreement. (j) Financing. If paragraph 5 hereof dealing with a financing contingency has not been stricken, the satisfaction or waiver of such New Loan contingency. (k) Existing Notes. If paragraph 3.1 (c) has not been stricken, Buyer's written approval, within ten (10) days after receipt of conformed and legible copies of the Existing Notes, Existing Deeds of Trust and related agreements (collectively the "Loan Documents") to which the Property will remain subject after the Closing, including a beneficiary statement (the "Beneficiary Statement") executed by the holders of the Existing Notes confirming: (1) the amount of the unpaid principal balance, the current interest rate, and the date to which interest is paid, and (2) the nature and amount of any impounds held by the beneficiary in connection with said loan. Seller shall use its best efforts to provide Buyer with said Loan Documents and Beneficiary Statement promptly after the Date of Agreement. Buyer's obligation to close is further conditioned upon Buyer's being able to purchase the Property without acceleration or change in the terms of any Existing Notes o charges to Buyer except as otherwise provided in this Agreement or approved by Buyer, provided, however, Buyer shall pay the transfer fee referred to in paragraph 3.2 hereof. (l) Destruction, Damage or Loss. There shall not have occurred prior to the Closing, a destruction of, or damage or loss to, the Property or any portion thereof, from any cause whatsoever, which would cost more than $10,000.00 to repair or cure. If the cost of repair or cure is $10,000.00 or less, Seller shall repair or cure the loss prior to the Closing. Buyer shall have the option, within ten (10) days after receipt of written notice of a loss costing more than $10,000.00 to repair or cure, to either terminate this transaction or to purchase the Property notwithstanding such loss, but without deduction or offset against the Purchase Price. If the cost to repair or cure is more than $10,000.00, and Buyer does not elect to terminate this transaction, Buyer shall be entitled to any insurance proceeds applicable to such loss. Unless otherwise notified in writing by either Party or Broker, Escrow Holder shall assume no destruction damage or loss costing more than $10,000.00 to repair or cure has occurred prior to Closing. (m) Material Change. No Material Change, as hereinafter defined, shall have occurred with respect to the Property that has not been approved in writing by Buyer. For purposes of this Agreement, a "Material Change" shall be a change in the status of the use, occupancy tenants or condition of the Property as reasonably expected by the Buyer, that occurs after the date of this offer and prior to the Closing. Buyer shall have ten (10) days following receipt of written notice from any source of any such Material Change within which to approve or disapprove same. Unless otherwise notified in writing by either Party or Broker, Escrow Holder shall assume that no Material Change has occurred prior to the Closing. (n) Seller Performance. The delivery of all documents and the due performance by Seller of each and every undertaking and agreement to be performed by Seller under this Agreement. (o) Breach of Warranty. That each representation and warranty of Seller herein be true and correct as of the Closing. Escrow Holder shall assume that this condition has been satisfied unless notified to the contrary in writing by Buyer or Broker(s) prior to the Closing. (p) Broker's Fee. Payment at the Closing of such Broker's Fee as is specified in this Agreement or later written instructions to Escrow Holder executed by Seller and Broker(s). It is agreed by Buyer, Seller and Escrow Holder that Broker(s) is/are a third party beneficiary of this Agreement insofar as the Broker's fee is concerned, and that no change shall be made by Buyer, Seller or Escrow Holder with respect to PAGE 6 the time of payment, amount of payment, or the conditions to payment of the Broker's fee specified in this Agreement, without the written consent of Broker(s). 9.2 All of the contingencies specified in sub-paragraphs (a) through (p) of paragraph 9.1 are for the benefit of, and may be waived by, Buyer, and may be elsewhere herein referred to as "Buyer Contingencies." 9.3 If Buyer shall fail, within the applicable time specified, to approve or disapprove in writing to Escrow Holder, Seller and the other Party's Broker, any item matter or document subject to Buyer's approval under the terms of this Agreement, it shall be conclusively presumed that Buyer has approved such item, matter or document. Buyer's conditional approval shall constitute a disapproval, unless provision is made by the Seller within the time specified therefor by the Buyer in the conditional approval or by this Agreement, whichever is later, for the satisfaction of the condition imposed by the Buyer. 9.4 If any Buyer's Contingency is not satisfied or if Buyer disapproves any matter subject to its approval within the time period applicable thereto ("Disapproved Item"), Seller shall have the right within ten (10) days following the expiration of the time period applicable to such Buyer Contingency or receipt of notice of Buyer's disapproval, as the case may be, to elect to cure such Disapproved Item prior to the Expected Closing Date ("Seller's Election"). Seller's failure to give to Buyer within said ten (10) day period, written notice of Seller's commitment to cure such Disapproved Item on or before the Expected Closing Date shall be conclusively presumed to be Seller's Election not to cure such Disapproved Item. If Seller elects, either by written notice or failure to give written notice, not to cure a Disapproved Item, Buyer shall have the election, within ten (10) days after Seller's Election to either accept title to the Property subject to that Disapproved Item, or to terminate this transaction. Buyer's failure to elect termination by written notice to Seller within said ten (10) day period shall constitute Buyer's election to accept title to the Property subject to that Disapproved Item without deduction or offset. Unless expressly provided otherwise herein, Sellers right to cure shall not apply to Hazardous Substance Conditions referenced in paragraph 9.1 (c) or to the Financing Contingency set forth in paragraph 5. Unless the parties mutually instruct otherwise, if the time periods for the satisfaction of contingencies or for Seller's and Buyer's said Elections would expire on a date after the Expected Closing Date, the Expected Closing Date shall be deemed extended to coincide with the expiration of three (3) business days following the expiration of: (a) the applicable contingency period(s), (b) the period within which the Seller may elect to cure the Disapproved Item, or (c) if Seller elects not to cure, the period within which Buyer may elect to terminate this transaction, whichever is later. -------- -------- Initials Initials 9.5 Buyer understands and agrees that until such time as all Buyer's Contingencies have been satisfied or waived, Seller and/or its agents may solicit, entertain and/or accept back-up offers to purchase the subject Property in the event the transaction covered by this Agreement is not consummated. 9.6 As defined in subparagraph 9.1 (c), Buyer and Seller acknowledge that extensive local state and Federal legislation establish broad liability upon owners and/or users of real property for the investigation and remediation of a Hazardous Substance Condition. The determination of the existence of a Hazardous Substance Condition and the evaluation of the impact of such a condition are highly technical PAGE 7 and beyond the expertise of Broker(s). Buyer and Seller acknowledge that they have been advised by Broker(s) to consult their own technical and legal experts with respect to the possible Hazardous Substance Condition aspects of this Property or adjoining properties, and Buyer and Seller are not relying upon any investigation by or statement of Broker(s) with respect thereto. Buyer and Seller hereby assume all responsibility for the impact of such Hazardous Substance Conditions upon their respective interests herein. 10. DOCUMENTS REQUIRED AT CLOSING. 10.1 Escrow Holder shall cause to be issued to Buyer a standard coverage (or ALTA extended, if so elected under paragraph 9.1(f) owner's form policy of title insurance effective as of the Closing, issued by the Title Company in the full amount of the Purchase Price, insuring title to the Property vested in Buyer, subject only to the exceptions approved by Buyer. In the event there is a Purchase Money Deed of Trust in this transaction, the policy of title insurance shall be a joint protection policy insuring both Buyer and Seller. "IMPORTANT: IN A PURCHASE OR EXCHANGE OF REAL PROPERTY, IT MAY BE ADVISABLE TO OBTAIN TITLE INSURANCE IN CONNECTION WITH THE CLOSE OF ESCROW SINCE THERE MAY BE PRIOR RECORDED LIENS AND ENCUMBRANCES WHICH AFFECT YOUR INTEREST IN THE PROPERTY BEING ACQUIRED. A NEW POLICY OF TITLE INSURANCE SHOULD BE OBTAINED IN ORDER TO ENSURE YOUR INTEREST IN THE PROPERTY THAT YOU ARE ACQUIRING". 10.2 Seller shall deliver or cause to be delivered to Escrow Holder in time for delivery to Buyer at the Closing, an original ink signed: (a) Grant deed (or equivalent), duly executed and in recordable form, conveying fee title to the Property to Buyer. (b) If paragraph 3.1 (c) has not been stricken, the Beneficiary Statements concerning Existing Note(s) (c) If applicable, the Existing Leases and Other Agreements together with duly executed assignments thereof by Seller and Buyer. The assignment of Existing Leases shall be on the most recent Assignment and Assumption of Lessor's Interest in Lease form published by the A.l.R. or its equivalent. (d) If applicable, the Tenancy Statements executed by Seller and the Tenant(s) of the Property. (e) An affidavit executed by Seller to the effect that Seller is not a "foreign person" with in the meaning of Internal Revenue Code Section 1445 or successor statutes. If Seller does not provide such affidavit in form reasonably satisfactory to Buyer at least three (3) business days prior to the Closing Escrow Holder shall at the Closing deduct from Seller's proceeds and remit to Internal Revenue Service such sum as is required by applicable Federal law with respect to purchases from foreign sellers. 10.3 Buyer shall deliver or cause to be delivered to Seller through escrow: (a) The cash portion of the Purchase Price and such additional sums as are required of Buyer under this Agreement for prorations, expenses and adjustments. The balance of the cash portion of the Purchase Price, including Buyer's escrow charges and other cash charges, if any, shall be deposited by Buyer with Escrow Holder, by cashier's check drawn upon a local major banking institution, federal funds wire transfer, or any other method acceptable to Escrow Holder as immediately collectable funds, no later than 11:00 o'clock A.M. on the business day prior to the Expected Closing Date. (b) If a Purchase Money Note and Purchase Money Deed of Trust are called for by this Agreement, the duly executed originals of those documents, the Purchase Money Deed of Trust being in recordable form, together with evidence of fire insurance on the improvements in the amount of the full replacement cost naming Seller as a mortgage loss payee, and a real estate tax service contract (at Buyer's expense), assuring Seller of notice of the status of payment of real property taxes during the life of the Purchase Money Note. PAGE 8 (c) The assumption portion of the Assignment and Assumption of Lessor's Interest in Lease form specified in paragraph 10.2(c), above, duly executed by Buyer with respect to the obligations of the Lessor accruing after the Closing as to each Existing Lease. (d) Assumptions duly executed by Buyer of the obligations of Seller that accrue after Closing under any Other Agreements. (e) If applicable, a written assumption duly executed by Buyer of the loan documents with respect to Existing Notes. 11. PRORATIONS, EXPENSES AND ADJUSTMENTS. 11.1 Taxes. Real property taxes payable by the owner of the Property shall be prorated through Escrow as of the date of the Closing, based upon the latest tax bill available. The Parties agree to prorate as of the Closing any taxes assessed against the Property by supplemental bill levied by reason of events occurring prior to the Closing. Payment shall be made promptly in cash upon receipt of a copy of any such supplemental bill of the amount necessary to accomplish such proration. Seller shall pay and discharge in full at or before the Closing the unpaid balance of any special assessment bonds. 11.2 Insurance. If Buyer elects to take an assignment of the existing casualty and/or liability insurance that is maintained by Seller, the current premium therefor shall be prorated through Escrow as of the date of Closing. -------- -------- Initials Initials 11.3 Rentals, Interest and Expenses. Collected rentals, interest on Existing Notes, utilities, and operating expenses shall be prorated as of the date of Closing. The Parties agree to promptly adjust between themselves outside of Escrow any rents received after the Closing. 11.4 Security Deposit. Security Deposits held by Seller shall be given to Buyer by a credit to the cash required of Buyer at the Closing. 11.5 Post Closing Matters. Any item to be prorated that is not determined or determinable at the Closing shall be promptly adjusted by the Parties by appropriate cash payment outside of the Escrow when the amount due is determined. 11.6 Variations In Existing Note Balances. In the event that Buyer is taking title to the Property subject to an Existing Deed of Trust(s), and in the event that a Beneficiary Statement as to the applicable Existing Note(s) discloses that the unpaid principal balance of such Existing Note(s) at the Closing will be more or less than the amount set forth in paragraph 3.1 (c) hereof (the "Existing Note Variation"), then the Purchase Money Note(s) shall be reduced or increased by an amount equal to such Existing Note Variation. If there is to be no Purchase Money Note, the cash required at the Closing per Paragraph 3.1 (a) shall be reduced or increased by the amount of such Existing Note Variation. 11.7 Variations In New Loan Balance. In the event Buyer is obtaining a New Loan and in the event that the amount of the New Loan actually obtained is greater than the amount set forth in Paragraph 5.1 hereof, the Purchase Money Note, if one is called for in this transaction, shall be reduced by the excess of the actual face amount of the New Loan over such amount as designated in Paragraph 5.1 hereof. 11.8 Buyer and Seller shall each pay one-half of the Escrow Holder's charges and Seller shall pay the usual recording fees and any required documentary transfer taxes. Seller shall pay the premium for a standard coverage owner's or joint protection policy of title insurance. PAGE 9 12. REPRESENTATIONS AND WARRANTIES OF SELLER AND DISCLAIMER. 12.1 Seller's warranties and representations shall survive the Closing and delivery of the deed, and, unless otherwise noted herein, are true, material and relied upon by Buyer and Broker(s) in all respects, both as of the Date of Agreement, and as of the date of Closing. Seller hereby makes the following warranties and representations to Buyer and Broker(s): (a) Authority of Seller. Seller is the owner of the Property and/or has the full right, power and authority to sell, convey and transfer the Property to Buyer as provided herein, and to perform Seller's obligations hereunder. (b) Maintenance During Escrow and Equipment Condition At Closing. Except as otherwise provided in paragraph 9.1(1) hereof dealing with destruction, damage or loss, Seller shall maintain the Property until the Closing in its present condition, ordinary wear and tear excepted. The heating, ventilating, air conditioning, plumbing, elevators, loading doors and electrical systems shall be in good operating order and condition at the time of Closing. (c) Hazardous Substances/Storage Tanks. Seller has no knowledge, except as otherwise disclosed to Buyer in writing, of the existence or prior existence on the Property of any Hazardous Substance (as defined in paragraph 9.1 (c)), nor of the existence or prior existence of any above or below ground storage tank or tanks. (d) Compliance. Seller has no knowledge of any aspect or condition of the Property which violates applicable laws, rules, regulations, codes, or covenants, conditions or restrictions, or of improvements or alterations made to the Property without a permit where one was required, or of any unfulfilled order or directive of any applicable governmental agency or casualty insurance company that any work of investigation, remediation, repair, maintenance or improvement is to be performed on the Property. (e) Changes in Agreements. Prior to the Closing, Seller will not violate or modify, orally or in writing, any Existing Lease or Other Agreement or create any new leases or other agreements affecting the Property, without Buyer's written approval, which approval will not be unreasonably withheld. (f) Possessory Rights. Seller has no knowledge that anyone will, at the Closing, have any right to possession of the Property, except as disclosed by this Agreement or otherwise in writing to Buyer. (g) Mechanics' Liens. There are no unsatisfied mechanic's or materialman's lien rights concerning the Property. (h) Actions, Suits or Proceedings. Seller has no knowledge of any actions, suits or proceedings pending or threatened before any commission board, bureau. agency, instrumentality, arbitrator(s) court or tribunal that would affect the Property or the right to occupy or utilize same. (i) Notice of Changes. Seller will promptly notify Buyer and Broker(s) in writing of any Material Change (as defined in paragraph 9.1 (m)) affecting the Property that becomes known to Seller prior to the Closing. (j) No Tenant Bankruptcy Proceedings. Seller has no notice or knowledge that any tenant of the Property is the subject of a bankruptcy or insolvency proceeding. (k) No Seller Bankruptcy Proceedings. Seller is not the subject of a bankruptcy, insolvency or probate proceeding. 12.2 Buyer hereby acknowledges that, except as otherwise stated in this Agreement, Buyer is purchasing the Property in its existing condition and will by the time called for herein, make or have waived all inspections of the Property Buyer believes are necessary to protect its own interest in and its contemplated use of, the Property The Parties acknowledge that, except as otherwise stated in this Agreement, no representations, inducements, promises, agreements, assurances, oral or written, concerning the Property, or any aspect of the Occupational Safety and Health Act, hazardous substance laws, or any other act, ordinance or law, have been made by either Party or Broker, or relied upon by either Party hereto. PAGE 10 13. POSSESSION. 13.1 Possession of the Property shall be given to Buyer at the Closing subject to the rights of tenants under Existing Leases. -------- -------- Initials Initials 14. BUYER'S ENTRY. 14.1 At any time during the Escrow period, Buyer, and its agents and representatives, shall have the right at reasonable times and subject to rights of tenants under Existing Leases, to enter upon the Property for the purpose of making inspections and tests specified in this Agreement. Following any such entry or work, unless otherwise directed in writing by Seller, Buyer shall return the Property to the condition it was in prior to such entry or work, including the recompaction or removal of any disrupted soil or material as Seller may reasonably direct. All such inspections and tests and any other work conducted or materials furnished with respect to the Property by or for Buyer shall be paid for by Buyer as and when due and Buyer shall indemnify, defend, protect and hold harmless Seller and the Property of and from any and all claims, liabilities, demands losses, costs, expenses (including reasonable attorney's fees), damages or recoveries, including those for injury to person or property, arising out of or relating to any such work or materials or the acts or omissions of Buyer, its agents or employees in connection therewith. 15. FURTHER DOCUMENTS AND ASSURANCES. 15.1 Buyer and Seller shall each, diligently and in good faith, undertake all actions and procedures reasonably required to place the Escrow in condition for Closing as and when required by this Agreement. Buyer and Seller agree to provide all further information, and to execute and deliver all further documents and instruments, reasonably required by Escrow Holder or the Title Company. 16. ATTORNEY'S FEES. 16.1 In the event of any litigation or arbitration between the Buyer, Seller, and Broker(s), or any of them, concerning this transaction, the prevailing party shall be entitled to reasonable attorney's fees and costs. 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 good faith. 17. PRIOR AGREEMENTS/AMENDMENTS. 17.1 The contract in effect as of the Date of Agreement supersedes any and all prior agreements between Seller and Buyer regarding the Property. 17.2 Amendments to this Agreement are effective only if made in writing and executed by Buyer and Seller. 18. BROKER'S RIGHTS. 18.1 If this sale shall not be consummated due to the default of either the Buyer or Seller, the defaulting party shall be liable to and shall pay to Broker(s) the commission that Broker(s) would have received had the sale been consummated. This obligation of Buyer, if Buyer is the defaulting party, is in addition to any obligation with respect to liquidated damages. 18.2 Upon the Closing, Broker(s) is/are authorized to publicize the facts of this transaction. 19. NOTICES. PAGE 11 19.1 Whenever any Party hereto, Escrow Holder or Broker(s) herein shall desire to give or serve any notice, demand, request, approval or other communication, each such communication shall be in writing and shall be delivered personally, by messenger or by mail, postage prepaid, addressed as set forth adjacent to that party's or Broker's signature on this Agreement or by telecopy with receipt confirmed by telephone. Service of any such communication shall be deemed made on the date of actual receipt at such address. 19.2 Any Party or Broker hereto may from time to time, by notice in writing served upon the other Party as aforesaid, designate a different address to which, or a different person or additional persons to whom, all communications are thereafter to be made. 20. DURATION OF OFFER. 20.1 If this offer shall not be accepted by Seller on or before 5:00 P.M. according to the time standard applicable to the city of on the date of February 21, 1996 , it shall be deemed automatically revoked. 20.2 The acceptance of this offer, or of any subsequent counter-offer hereto, that creates an agreement between the Parties as described in paragraph 1.2, shall be deemed made upon delivery to the other Party or either Broker herein of a duly executed writing unconditionally accepting the last outstanding offer or counter-offer. 21. LIQUIDATED DAMAGES. (This Liquidated Damages paragraph is applicable only if initialed by both parties.) 21.1 THE PARTIES AGREE THAT IT WOULD BE IMPRACTICABLE OR EXTREMELY DIFFICULT TO FIX, PRIOR TO SIGNING THIS AGREEMENT, THE ACTUAL DAMAGES WHICH WOULD BE SUFFERED BY SELLER IF BUYER FAILS TO PERFORM ITS OBLIGATIONS UNDER THIS AGREEMENT. THEREFORE, IF, AFTER THE SATISFACTION OR WAIVER OF ALL CONTINGENCIES PROVIDED FOR THE BUYER'S BENEFIT, BUYERS BREACHES THIS AGREEMENT, SELLER SHALL BE ENTITLED TO LIQUIDATED DAMAGES IN THE AMOUNT OF $10,000 PLUS INTEREST, IF ANY, ACCRUED THEREON. UPON PAYMENT OF SAID SUM TO SELLER, BUYER SHALL BE RELEASED FROM ANY FURTHER LIABILITY TO SELLER, AND ANY ESCROW CANCELLATION FEES AND TITLE COMPANY CHARGES SHALL BE PAID BY SELLER. -------------- --------------- Buyer Initials Seller Initials 22. ARBITRATION OF DISPUTES. (This Arbitration of Disputes paragraph is applicable only if initialed by both parties and is subject to paragraph 23, below.) 22.1 ANY CONTROVERSY AS TO WHETHER SELLER IS ENTITLED TO THE LIQUIDATED DAMAGES AND/OR BUYER IS ENTITLED TO THE RETURN OF DEPOSIT MONEY, SHALL BE DETERMINED BY BINDING ARBITRATION BY, AND UNDER THE COMMERCIAL RULES (the "COMMERCIAL RULES") OF, THE AMERICAN ARBITRATION ASSOCIATION. HEARINGS ON SUCH ARBITRATION SHALL BE HELD IN THE COUNTY WHERE THE -------- -------- Initials Initials PROPERTY IS LOCATED. ANY SUCH CONTROVERSY SHALL BE ARBITRATED BY THREE (3) ARBITRATORS WHO SHALL BE IMPARTIAL REAL ESTATE BROKERS WITH AT LEAST FIVE (5) FULL TIME YEARS OF EXPERIENCE IN THE AREA WHERE THE PROPERTY IS LOCATED, IN THE TYPE OF REAL ESTATE THAT IS THE SUBJECT OF THIS AGREEMENT AND SHALL BE APPOINTED UNDER THE COMMERCIAL RULES. THE ARBITRATORS SHALL HEAR AND DETERMINE SAID CONTROVERSY IN ACCORDANCE WITH APPLICABLE LAW AND THE INTENTION OF THE PARTIES AS EXPRESSED IN THIS PAGE 12 AGREEMENT AS THE SAME MAY HAVE BEEN DULY MODIFIED IN WRITING BY THE PARTIES PRIOR TO THE ARBITRATION, UPON THE EVIDENCE PRODUCED AT AN ARBITRATION HEARING SCHEDULED AT THE REQUEST OF EITHER PARTY. SUCH PREARBITRATION DISCOVERY SHALL BE PERMITTED AS IS AUTHORIZED UNDER THE COMMERCIAL RULES OR STATE LAW APPLICABLE TO ARBITRATION PROCEEDINGS. THE AWARD SHALL BE EXECUTED BY AT LEAST TWO (2) OF THE THREE (3) ARBITRATORS, BE RENDERED WITHIN THIRTY (30) DAYS AFTER THE CONCLUSION OF THE HEARING, AND MAY INCLUDE ATTORNEYS' FEES AND COSTS TO THE PREVAILING PARTY PER PARAGRAPH 16 HEREOF. JUDGMENT MAY BE ENTERED ON THE AWARD IN ANY COURT OF COMPETENT JURISDICTION NOTWITHSTANDING THE FAILURE OF A PARTY DULY NOTIFIED OF THE ARBITRATION HEARING TO APPEAR THEREAT. 22.2 BUYER'S RESORT TO OR PARTICIPATION IN SUCH ARBITRATION PROCEEDINGS SHALL NOT BAR SUIT IN A COURT OF COMPETENT JURISDICTION BY THE BUYER FOR DAMAGES AND/OR SPECIFIC PERFORMANCE UNLESS AND UNTIL THE ARBITRATION RESULTS IN AN AWARD TO THE SELLER OF LIQUIDATION DAMAGES, IN WHICH EVENT SUCH AWARD SHALL ACT AS A BAR AGAINST ANY ACTION BY BUYER FOR DAMAGES AND/OR SPECIFIC PERFORMANCE. 22.3 NOTICE: BY INITIALLING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALLING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY. WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION TO NEUTRAL ARBITRATION. -------------- --------------- Buyer Initials Seller Initials 23. APPLICABLE LAW. 23.1 This Agreement shall be governed by, and paragraph 22.3 amended to refer to, the laws of the state in which the Property is located. 24. TIME OF ESSENCE. 24.1 Time is of the essence of this Agreement. 25. COUNTERPARTS. 25.1 This Agreement may be executed by Buyer and Seller in counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. Escrow Holder, after verifying that the counterparts are identical except for the signatures, is authorized and instructed to combine the signed signature pages on one of the counterparts, which shall then constitute the Agreement. 26. DISCLOSURES REGARDING THE NATURE OF A REAL ESTATE AGENCY RELATIONSHIP. 26.1 The Parties and Broker(s) agree that their relationship(s) shall be governed by the principles set forth in California Civil Code, Section 2375, as summarized in the following paragraph 26.2. 26.2 When entering into a discussion with a real estate agent regarding a real estate transaction, a Buyer or Seller should from the outset understand what type of agency relationship or representation it has with the agent or agents in the transaction. Buyer and Seller acknowledge being advised by the Broker(s) in this transaction, as follows: (a) Seller's Agent. A Seller's agent under a listing agreement with the Seller acts as the agent for the Seller only. A Seller's agent or subagent has the following affirmative obligations: (1) To the Seller: A fiduciary duty of utmost care, integrity, honesty, and loyalty PAGE 13 in dealings with the Seller. (2) To the Buyer and the Seller: a. Diligent exercise of reasonable skill and care in performance of the agent's duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above. (b) Buyer's Agent. A selling agent can, with a Buyer's consent, agree to act as agent for the Buyer only. In these situations, the agent is not the Seller's agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Seller. An agent acting only for a Buyer has the following affirmative obligations. (1 ) To the Buyer: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Buyer. (2) To the Buyer and the Seller: a. Diligent exercise of reasonable skill and care in performance of the agent's duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above. -------- -------- Initials Initials (c) Agent Representing Both Seller and Buyer. A real estate agent, either acting directly or through one or more associate licenses, can legally be the agent of both the Seller and the Buyer in a transaction, but only with the knowledge and consent of both the Seller and the Buyer. (t) In a dual agency situation, the agent has the following affirmative obligations to both the Seller and the Buyer: a. A fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either Seller or the Buyer. b. Other duties to the Seller and the Buyer as stated above in their respective sections (a) or (b) of this paragraph 26.2. (2) In representing both Seller and Buyer, the agent may not without the express permission of the respective Party, disclose to the other Party that the Seller will accept a price less than the listing price or that the Buyer will pay a price greater than the price offered. (3) The above duties of the agent in a real estate transaction do not relieve a Seller or Buyer from the responsibility to protect their own interests. Buyer and Seller should carefully read all agreements to assure that they adequately express their understanding of the transaction. A real estate agent is a person qualified to advise about real estate. If legal or tax advise is desired, consult a competent professional. (d) Further Disclosures. Throughout this transaction Buyer and Seller may receive more than one disclosure. depending upon the number of agents assisting in the transaction. Buyer and Seller should each read its contents each time it is presented, considering the relationship between them and the real estate agent in this transaction and that disclosure. 26.3 Confidential Information: Buyer and Seller agree to identify to Broker(s) as "Confidential" any communication or information given Broker(s) that is considered by such Party to be confidential. 27. ADDITIONAL PROVISIONS: Additional provisions of this offer, if any, are as follows or are attached hereto by an addendum consisting of paragraphs____________ PAGE 14 through _______________(It will be presumed no other provisions are included unless specified here.): Notwithstanding the foregoing, the Buyer shall have 30 days from the Date of Agree for all the contingencies listed in Paragraph 9, including a Buyer's feasibility study to determine if the purchase of the property is economically feasible. BUYER AND SELLER HEREBY ACKNOWLEDGE THAT THEY HAVE BEEN AND ARE NOW ADVISED BY THE BROKER(S) TO CONSULT AND RETAIN THEIR OWN EXPERTS TO ADVISE AND REPRESENT THEM CONCERNING THE LEGAL AND INCOME TAX EFFECTS OF THIS AGREEMENT, AS WELL AS THE CONDITION AND/OR LEGALITY OF THE PROPERTY, THE IMPROVEMENTS AND EQUIPMENT THEREIN, THE SOIL THEREOF, THE CONDITION OF TITLE THERETO THE SURVEY THEREOF , THE ENVIRONMENTAL ASPECTS THEREOF, THE INTENDED AND/OR PERMITTED USAGE THEREOF, THE EXISTENCE AND NATURE OF TENANCIES THERIN, THE OUTSTANDING OTHER AGREEMENTS, IF ANY, WITH RESPECT THERETO, AND THE EXISTING OR CONTEMPLATED FINANCING THEREOF, AND THAT THE BROKER(S) IS/ARE NOT TO BE RESPONSIBLE FOR PURSUING THE INVESTIGATION OF ANY SUCH MATTERS UNLESS EXPRESSLY OTHERWISE AGREED TO IN WRITING BY BROKER(S) AND BUYER OR SELLER. THIS FORM IS NOT FOR USE IN CONNECTION WITH THE SALE OF RESIDENTIAL PROPERTY. If this Agreement has been filled in, it has been prepared for submission to your attorney for his approval. No representation or recommendation is made by the real estate Broker(s) or their agents or employees as to the legal sufficiency, legal effect, or tax consequences or this Agreement or the transaction Involved herein. The undersigned Buyer offers and agrees to buy the property on the terms and conditions stated and acknowledges receipt of a copy hereof. BROKER: BUYER: DAUM Commercial Real Estate Services California Amplifier, Inc., a Calif. Corp. By By /Date /Date Name Printed: George H. Eales Name Printed: Michael Ferron Scott Owens Title: Mkg. Consultant Title: CFO, Vice President Sr. Mkg. Consultant Address Address 711 Daily Drive, Suite 100 460 Calle San Pablo Camarillo, CA 93010 Camarillo, CA 93012 Telephone Facsimile No. Telephone Facsimile No. (805) 987-8866 (805) 987-7645 (805) 987-9000 (805) 987-2655 28. ACCEPTANCE. 28.1 Seller accepts the foregoing offer to purchase the Property and hereby agrees to sell the Property to Buyer on the terms and conditions therein specified. PAGE 15 -------- -------- Initials Initials 28.2 Seller acknowledges that Broker(s) has/have been retained to locate a Buyer and is/are the procuring cause of the purchase and sale of the Property set forth in this Agreement. In consideration of real estate brokerage service rendered by Broker(s), Seller agrees to pay Broker(s) a real estate brokerage fee in a sum equal to 6 % of the Purchase Price (the "Broker(s) Fee") divided equally in such shares as said Broker(s) shall direct in writing. As is provided in paragraph 9.1 (p), this Agreement shall serve as an irrevocable instruction to Escrow Holder to pay such brokerage fee to Broker(s) out of the proceeds accruing to the account of Seller at the Closing. 28.3 Seller acknowledges receipt of a copy hereof and authorizes the Broker(s) to deliver a signed copy to Buyer. NOTE: A PROPERTY INFORMATION SHEET IS REQUIRED TO BE DELIVERED TO BUYER BY SELLER UNDER THIS AGREEMENT. BROKER: SELLER: Equity Commercial Real Estate Services Rhoda-May A. Dallas Trust 9/11/89 By By /Date /Date Name Printed: Kent Pierce Name Printed: Rhoda-May A. Dallas Title: Title: Trustee Address Address 1459 Thousand Oaks Blvd Thousand Oaks, CA 91362 Telephone Facsimile No. Telephone Facsimile No. (805) 497-2866 (805) 497-0145 These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association. 345 So. Figueroa Street Suite M-1, Los Angeles CA 90071. (213) 687-8777. Copyright 1989-By American Industrial Real Estate Association. All rights reserved. No part of these works may be reproduced in any form without permission in writing. FORM 729-R-3-1/94 PAGE 16 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET ON PAGE 19, AND THE CONSOLIDATED STATEMENTS OF INCOME ON PAGE 20 OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED MARCH 1, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR MAR-01-1997 MAR-03-1996 MAR-01-1997 3,165 0 7,070 560 8,200 19,864 18,387 10,980 29,536 4,863 0 0 0 14,107 10,041 29,536 49,290 49,290 34,810 13,792 (467) 0 118 1,037 404 0 0 0 0 633 .05 0
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